23930 September 1988 Trade, Aid, and Policy Reform Proceedings of the Eighth Agriculture Sector Symposium Colleen Roberts, editor L_ ~'71 , _ 5 ,_ 1i ;1';CE~~~A Trade, Aid, and Policy Reforn Proceedings of the Eighth Agriculture Sector Symposium Colleen Roberts, editor The World Bank Washington, D.C. Copyright ©) 1988 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C 20433, U.SA All rights reserved Manufactured in the United States of America First printing September 1988 This is a working paper published informally by the World Bank To present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to Director, Publications Department, at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to photocopy portions for classroom use is not required, though notification of such use having been made will be appreciated. The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabetical title list and indexes of subjects, authors, and countries and regions; it is of value principally to libraries and institutional purchasers. The latest edition is available free of charge from the Publications Sales Unit, Department F, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.SA, or from Publications, The World Bank, 66 avenue d'lena, 75116 Paris, France. Colleen Roberts is a consultant to the World Bank's Agriculture and Rural Development Department. Library of Congress Cataloging-in-Publication Data Agriculture Sector Symposium (8th 1988: World Bank) Trade, aid, and policy reform proceedings of the Eighth Agriculture Sector Symposium / Colleen Roberts, editor. P. cm. Includes bibliographical references. ISBN 0-8213-1125-5 1. Produce trade--Government policy--Congresses. 2. Agriculture and state--Congresses. 3. Agricultural assistance--Congresses. I. Roberts, Colleen, 1954- . II. Title. HD9000.6.A53 1988 338.1'8--dcl9 88-26105 CIP - iii - TABLE OF CONTENTS PREFACE v CONTRIBUTORS lx OPENING REMARKS...W.D. Hopper 1 SESSION I: AGRICULTURAL TRADE ISSUES Some Neglected Agricultural Policy Issues In the Uruguay Round of Multilateral Trade Negotiations ... G.E. Schuh 5 Depressed Agricultural Prices and World Bank Operations ... A. Braverman 13 Agriculture In the Uruguay Round ... W. Siebeck 25 The EC Perspective on Agriculture In the Uruguay Round ... S. Tangerman 33 Developing Country Perspectives on the Multilateral Trade Negotlations ... C. Vidali 45 SESSION II: AGRICULTURE DEVELOPMENT STRATEGIES: POLICY REFORM AND NATURAL RESOURCE ISSUES Lending Strategies for Agricultural Development ... M. Qureshi 51 World Bank Extension: Policy and Issues ... J. Hayward 59 Research and Extension: Lending Strategies ... 0. Lafourcade 65 Irrigation: Issues, Policies and Lending Strategles...H. Frederiksen, C. Perry and S. Barghouti 71 Pricing and Trade: Issues, Policies and Lending Strategles ... R. Picciotto 79 The Use of Price Policy to Stimulate Agricultural Growth in Sub-Saharan Africa ..K. . Cleaver 81 Agricultural Performance and Policy In India: A Brief Overview and Some Lessons ... D. Greene 93 Sustainable Natural Resource Management: Implications for World Bank Agriculture Operations ... J. Spears 101 - iv - SESSION III: FOREIGN ASSISTANCE AND AGRICULTURAL DEVELOPMENT Agricultural Growth, Domestic Policies, The External Environment and Assistance to Africa: Lessons of a Quarter Century ... U. Lele 119 Commodity Aid for Agricultural Development ... R. Chase 199 Food Security and Structural Adjustment ... P. Pinstrup-Andersen 205 PREFACE These proceedings are the eighth in a series of records of Agricultural Symposia presented at the World Bank beginning in 1980. The themes chosen for this year's Symposium held on January 6-9, 1988 "Trade, Aid and Policy Reform', reflect the importance of the international environment and the need for global integration of policy for agricultural development. These issues have special relevance today when both the industrial and developing countries are in the midst of the Uruguay Round of GATT negotiations which may -- depending on the outcome -- significantly alter global patterns of agricultural trade and production for the better. The symposium was opened by W. David Hopper, Senior Vice President of the Policy, Planning and Research complex of the World Bank, who emphasized the impact of a changing world on agricultural development and the new problems and opportunities we are facing as a result. For the Trade theme of the first day, G. Edward Schuh laid out the significant policy issues for the GATT negotiations on agriculture, followed by Avishay Braverman, who then discussed depressed international commodity prices and their implications for agricultural lending. A panel discussion composed of Braverman, Ronald Duncan and Johannes Linn debated the prospects for prices and various investment options for developing countries. Wolfgang Siebeck brought the audience up-to-date on the current status of the GATT negotiations. Robert Thompson,* Stefan Tangerman, and Carlos Vidali gave, respectively, the perspectives of the US, the EC and Mexico on the negotiations. Vijay Vyas, Acting Director of the Agriculture and Rural Development Department, chaired the panel discussion on this topic, which included G. Edward Schuh as well as the three speakers. The second day's theme, 'Agricultural Development Strategies: Policy Reform and Natural Resource Issues' was introduced by Moeen Qureshi, Senior Vice President, Operations, who spoke about agricultural lending in the reorganized Bank. Three smaller simultaneous sessions followed to explore policy and strategy issues for 1) Research and Extension, 2) Irrigation and 3) Pricing and Trade. The chairmen of these sessions were, respectively, Hans Wyss, Bilsel Alisbah, and Robert Picciotto. They regrouped for a panel discussion of the conclusions from the smaller groups. *Due to time constraints, Dean Thompson was unable to submit a written paper. - vi - Presenting the topic 'Agriculture, Resource Use and the Environment: Implications for World Bank Operations" was John Spears. A panel discussion followed with D. Jane Pratt, Environmental Operations and Strategy Division, Leif Christoffersen, Environmental Division, Africa Technical Department, Guy LeMoigne, Agricultural Production Services Division and Dirk Leeuwirk, Agricultural Operations, Asia Country Department V. On the third day, "Foreign Assistance and Agricultural Development", Uma Lele discussed findings from her research on Managing Agricultural Development in Africa. Stephen O'Brien, Office of the Vice President, Africa Region and Avishay Braverman (for Francis Idachaba, University of Ibadan, Nigeria) then offered their comments before the floor was opened for a lively discussion. The second part of the session was devoted to the topic of Food Security and Structural Adjustment. A paper was presented by Per Pinstrup- Andersen. Owen Cylke, U.S. Bureau Food for Peace and Voluntary Assistance, USAID, then commented and gave some insights into the operation of the U.S. food aid system in combination with policy reform efforts in developing countries. Robert Chase was unable to attend the session but his paper on Commodity Aid has been included in the Proceedings. The planning of the symposium was the responsibility of a Working Group1 composed of departments of the Bank dealing with agriculture. This working group met numerous times during the planning process, and was responsible for not only the theme of the Symposium, but also the development of the main subjects within the theme and the choice of speakers to develop the papers and presentations at the Symposium. The Symposium was sponsored by the Agricultural and Rural Development Department. This volume is the work of that department and the Publications Department. It contains the papers presented by the speakers M/ Hessrs./Mmes. G.E. Schuh,Chairman Agriculture and Rural A. Braverman, G. LeMoigne, V. Vyas Development Deparment 0. Knudsen, C. Roberts, Organizers H. Binswanger, M. McGarry Latin America and the Caribbean Region C. Blanchi, T. Yoon Europe, Middle East and North Africa Region D.Pickering, J. Shivakumar Africa Region M. Dowsett-Coirolo, R. Grimshaw Asia Region N. Wallis Economic Development Institute R. Duncan International Economics Department - vli - for both the full sessions and the small sessions. It is designed to be a permanent record to further enhance the knowledge of the Bank staff working in agriculture and rural development and as a means of exchanging knowledge with other leaders working in agricultural development. * * * * * 0 * 0 Grateful thanks are offered to Cheryl Johnson and Patricia Planer for their accurate typing of the manuscript as well as their patience and good humor throughout its preparation. Thanks are also due to Cicely Spooner and Pelicitas Doroteo-Gomez who most ably assisted in the organizational work of the Symposium, as well as Carol Best and Arlene Elcock who made sure that everything ran smoothly. -ix- CONTRIBUTORS * Shawki Barghouti - Irrigated Crops Adviser, Agricultural Production Services Division, Agriculture and Rural Development Department, World Bank. * Claude Blanchi - Chief, Agricultural Division, EMENA Technical Department, World Bank. * Avishay Braverman - Chief, Agricultural Policies Division, Agriculture and Rural Development Department, World Bank. * Robert Chase - Director of Operations, World Food Programme, Rome, Italy. * Kevin M. Cleaver - Chief, Agriculture Operations Division, Occidental and Central Africa Department, World Bank. * Harold Frederiksen - Agriculture Division, Asia Technical Department, World Bank. * David Greene - Lead Economist, India Department, World Bank. * John Hayward - Rainfed Crops Adviser, Agricultural Production Services Division, Agriculture and Rural Development Department, World Bank. * V. David Hopper - Senior Vice President, Policy Planning and Research, World Bank. * Olivier LaFourcade - Director, European office, External Affairs Deptartment, World Bank, Paris. * Uma Lele - Chief, Special Studies Division, Country Economics Department, World Bank. * Christopher Perry - Agriculture Operations, India Department, World Bank. * Robert Picciotto - Director, Planning and Budgeting Department, World Bank. * Per Pinstrup-Andersen - Director of Food and Nutrition Policy Program, Cornell University, Ithaca, N.Y. * Hoeen Qureshi - Senior Vice President, Operations, World Bank. -x- G. Edward Schuh - Dean, Hubert H. Humphrey Institute for Public Affairs, University of Minnesota, Minneapolis, MN. Wolfgang E. Siebeck - Special Representative to the U.N. Organizations, Geneva, Strategic Planning and Review Department, World Bank. John Spears - Chief, Environmental Systems and Technology Division, Environment Department, World Bank. Stefan Tangermann - Professor of Agricultural Economics, University of Gottingen, Germany. Carlos Vidali - Director-General of International Relations, Ministry of Agriculture and Irrigation, Mexico City. OPENING REMARKS W. David Hopper If we'd held this Symposium 20 years ago, we would have been almost totally focused on food production that is, how to increase it? If we'd held it 10 years ago, we would have added that great collection of second and third generation problems that economists were talking about in light of "the green revolution'--questions of food distribution, and the problems of handling both factor markets and product markets, the inputs to agriculture as well as the output. If we had done it even five years ago, we would have likely added the issues of integrated agricultural development within countries. I think it has been the remarkable expansion of agricultural production worldwide which has opened up a set of both new opportunities and new problems for the international conduct of agriculture. It seems to me that it is these factors that are making agriculture one of the important components of GATT. It is these factors that are now beginning to raise questions about sustaining agricultural development in the face of growing environmental problems. It is these questions that are very real to the Bank and the kind of lending the Bank does, the kind of project appraisal the Bank undertakes, and the kind of policy advice which the Bank gives to governments. Twenty years ago there were three or four exporters of agricultural commodities, dominated by the United States. Canada and Australia were not large producers, but small consumers relative to their output. Argentina occasionally came in and went out, Brazil was kind of nipping at the fringes but wasn't yet a major agricultural power and the Europeans were among the great importers of food, particularly feedgrains. It looked to the writers of that time--the late sixties--that that was going to be the state of world agriculture in the future. There were books predicting famines in 1975 and an array of gloomy prognostications that the world was running out of food. Those prognostications still are with us: I was in Canada recently for a discussion on feeding the world's hungry peoples. It was not focused on the poverty question, but on the genuine fear that we were going to run out of food. Today the picture is very, very different. I'm not sure the Bank is very, very different from the Bank we saw in the late sixties or the Bank that became a major agricultural lender in the seventies. We can take pride in the work of the Bank through that period because I think the Bank was instrumental in changing the outlook for agriculture. But today, in the Bank, we have to take account of both our past successes and the successes of those countries who were our partners in this development effort, particularly, the farmers of those countries. And begin to ask, what does the future herald? -2- I'm delighted to see a symposium that is going to touch on as many issues and is as broadly focused as this one is. I am sure that the results of your deliberations will bring opportunities to alter the Bank's approach, change the fundamental thrusts of the institution to develop new concepts of lending and new ways of looking at agriculture. Above all, I hope that, as you reflect on the proceedings of the Symposium, you will begin to understand a new and different world agricultural picture in the process of undergoing major changes. SESSION 1: AGRICULTURAL TRADE ISSUES SOME NEGLECTED AGRICULTURAL POLICY ISSUES IN THE URUGUAY ROUND OF MULTILATERAL TRADE NEGOTIATIONS G. Edward Schuh The title of my paper reads as if I were going to provide an all- encompassing inventory of the agricultural issues to be treated in the current round of multilateral trade negotiations. The truth of the matter, I suspect, is that the organizers of the Symposium tried to give me liberty to discuss whatever issues I wanted to address. Whatever the case may be, I have interpreted my assignment in this latter way. This round of agricultural trade negotiations promises to be unique in a number of important respects. First, trade negotiations typically tend to focus on problems of access to market, communicated rather effectively, I believe, by the common concern with protectionism. In contrast, it appears that a major share of the current negotiations will focus on finding ways to discipline the use of export subsidies. These, too, have to do with access, but from the perspective of developed exporting countries taking advantage of relatively open markets that cannot be accessed because of self-imposed protectionist policies in their own countries--policies which restrict their own competitiveness in these markets. Second, developing countries have participated only marginally in previous MTN negotiations, especially on agricultural issues. This time however, they have a major stake in the outcome of the negotiations. Their participation should thus be more extensive in this round. Finally, the tendency in previous multilateral trade negotiations has been to neglect agricultural issues, focusing instead on issues involving trade in manufactured products. In the current round, although agriculture may not be at center stage, it at least promises to receive significant attention. In my remarks today, rather than provide an inventory, I have chosen instead to focus on four issues that I expect to be rather neglected in the current round, but which in my view should receive a great deal more attention.1 These issues include: (1) the consequences of developed country export subsidies for the developing countries; (2) developing country policies which discriminate against their own agriculture; (3) barriers to movement in genetic materials and intellectual capital; and (4) the exchange rate as a distortion to international trade. At the end I will have some concluding comments. Develoried Country Export Subsidies and the Developing Countries Agricultural interest groups in the United States have complained a great deal these past two years about foreign aid to assist agriculture I/ For a more comprehensive discussion of the agricultural issues in the current round, see my earlier paper, I Some Issues Involving Agriculture in the Coming MTN,' presented at a seminar sponsored by the World Bank in Geneva, Switzerland, February 6, 1987. - 6 - by their own government, and about World Bank lending for agricultural commodities that are in so-called "excess' supply. They have had a lot less to say about the consequences to farmers in developing countries of commodity dumping by their own government--dumping which is a logical consequence of policies designed to support their own incomes by means of policies which support prices above market-clearing levels. US export subsidies tend to take three forms. The first is the extensive use of deficiency payments as the means to provide income transfers to farmers. In one sense this form of income transfer does less damage from a trade standpoint than other forms of income transfer since it lets consumers benefit from the increased production that results from target prices that are set above what otherwise would be market-clearing levels. Thus some share of the increased production is absorbed domestically and there is less to dump abroad. On the other hand, given that the United States tends to be a large producer, the increased production tends to drive world market prices below what they otherwise would be. In this sense the deficiency payments constitute implicit export subsidies. The second form of export subsidy used by the United States is the generic market certificate. With these certificates, farmers are paid in kind from commodities in government stocks rather than in cash. The descriptive term "generic" refers to the fact that the producer can be paid in any commodity that is available rather than the one he or she produced. These certificates are cashed out by the farmers. As they do this collectively, they tend to drive market prices down. Thus, these certificates constitute an implicit export subsidy also. They have the added advantage that they reduce the stocks of commodities in government hands, and do it without increasing cash expenditures by the government. Third, the US government provides some export subsidies in cash form. These have not been used extensively. Instead, they have been used strategically to recover lost market share in individual countries. Nevertheless, they are a significant factor in international markets. The EEC, for its part, has relied almost exclusively on explicit export subsidies. These have been fairly large and extensively used--a necessity in light of the EEC's use of variable levies to protect its agriculture. The unfortunate aspect to the use of export subsidies by the US and the EEC is that they have been caught up in what is literally an export subsidy war--each side increasing their subsidies--explicit or implicit-- in an attempt to increase market share. The reaction to this war on the part of some observers has in my view been rather naive. This view is that this export subsidy war is good for other countries, since their consumers benefit as a consequence of the lower prices, and the exporting countries bear the costs in terms of government expenditure and/or higher prices to their consumers. It is true that consumers in other countries benefit, if their governments in fact let the lower prices be passed through to them. But -7- that is not the whole story by any stretch. The usual policy prescription is that an importing country should accept these subsidies as long as the subsidies can be expected to continue. Any careful look at the historical record of either the US or the EC will show that the levels of export subsidies have fluctuated widely over time. Hence, in general it may not be sound policy to accept these subsidies without more careful analysis. Second, other exporting countries obviously are net losers from such subsidies. This point should be obvious, although it is worth noting that there are some important developing country exporters such as Argentina and Thailand. Third, a distinction needs to be made between national welfare and balance of payments problems. The balance of payments consequences of the export subsidies can be quite serious to importing countries, and not always in the direction one might expect. Since most countries are only marginal importers of food, the presumption is that their import demand elasticity is fairly large. If the elasticity is greater than -1, the importing country's import bill will be larger as international prices decline. It is elastic demand curves such as these which exporting countries exploit with their export subsidies. Moreover, it is this increase in import bills which also eventually gives rise to protectionist measures. Fourth, adjustment costs in developing countries can be quite large as a consequence of these policies. Labor markets are imperfect in developing countries and open unemployment tends in many cases to be rather large. Lower prices tend to push labor out of agriculture and the employment alternatives of this labor are limited. The result is a loss in employment and a reduction in national income. Finally, whether one likes it or not, export subsidies on the part of the developed countries in effect prohibit the developing countries-- and some developed countries as well--from realizing their underlying comparative advantage. The result is a loss in global resource efficiency since the subsidies result in a larger share of global output being produced in the high cost developed countries and a smaller share being produced in the low cost countries. That loss in global efficiency is a cost to everyone. The export subsidy issue is often viewed as if it were an issue between the competing export subsidizers alone. This obviously is not the case. Developing countries in particular have a vital stake in resolving this problem, and this is one of the important reasons they should become involved in this round of multilateral trade negotiations. Discriminatory Policies by the Developing Countries Developing countries are prone to complain about the protectionist policies of the developed countries, and about the perceived decline in their external terms of trade. As a general rule, they also tend to be pessimistic about their own potential to compete in international markets. However, the fact is that many of the barriers to their own export performance are self-imposed. They over-value their currencies by wide -8- margins as part of import-substituting industrialization policies. They impose explicit export taxes on their primary commodities. They impose embargoes on exports of agricultural commodities so as to keep domestic prices of such commodities low. And they impose complicated export licensing schemes to the same end. The net effect of these policies, especially when combined with high levels of protection for their manufactured sector, is to shift the domestic terms of trade severely against agriculture, thus making it a socially unprofitable sector. Empirically, these self-imposed distortions tend to be as important, or more important, as externally imposed barriers to trade. It is worth noting in passing that the elimination of such distortionary policies is an important means of defense against the predatory export policies of the United States and the EEC. Devaluations to establish more realistic exchange rates in particular would be an important means of defense, while at the same time imposing larger export subsidy costs on countries using such subsidies. The use of implicit import subsidies by importing countries--which is what overvalued currencies are--has to be the best of all possible worlds for countries trying to dump the consequences of their own misguided policies abroad. There is really no reason why developing countries--or any other country, for that matter--should so abet these policies of the developed countries. My main point in this section is a rather different one, however. My main point is that these self-imposed policies which discriminate against agriculture in their own countries are every bit as important as barriers to international trade as are policies which limit access to markets. However, as a general rule they are not part of international trade negotiations, and in the particular case of the current round of trade negotiations, they are not part of the agenda. I believe this is a serious mistake. Such policies involve externalities in the same sense as do protectionist measures and export subsidies by the developed countries. They play a significant role in causing an important share of global agricultural output to be produced in the wrong places. And in particular, they contribute importantly to shifting a larger share of global agricultural output to high-cost developed countries and away from low-cost developing countries. The consequence is a significant loss in global welfare. The objective of the trade negotiations should be to increase global economic welfare by a general reduction in trade barriers. Hence, these distortions to trade should receive attention. The problem with trying to get this issue on the trade negotiating agenda is that there is virtually no political incentive to do so. The developed countries obviously benefit from such policies, for they cause the exports from these countries to be larger. The developing countries favor such policies for they make it easier for them to supply food to their politically volatile urban consumers at lower prices. This, of course, has been the motivation for such policies in the first place. The international debt crisis should provide strong incentives for developing countries to move in the direction of reducing and ultimately eliminating these discriminatory policies. However, so far reforms in this -9- direction have been rather slow and modest, in part because policy-makers have not implemented complementary policies which would deal with the impact of higher prices on urban consumers, and in part because they have been able to continue their borrowing without undertaking needed policy reforms. The banks that hold the debt of the developing countries could be an important pressure group, but they too have shown little alacrity for mounting such pressures, perhaps out of fear of agricultural interest groups in their own countries. In conclusion, I want to emphasize the significance of these distortionary policies as barriers to the efficient use of the world's agricultural resources. These policies limit the response on the part of both consumers and producers to changes in the conditions in commodity markets, thus contributing to the instability in these markets. Despite their significance, however, they are not likely to receive significant attention in global negotiations until there is a significant global commitment to making more efficient use of the world's agricultural resources, and until there is a significant commitment to making global commodity markets perform more efficiently. We obviously are some years away from such commitments on both counts. Barriers to Movement in Genetic Materials and Intellectual Capital Another serious omission from the current round of trade negotiations is the failure to provide for serious discussion of means to facilitate the international movement of genetic material and intellectual capital. To the extent that economic growth is based importantly on the ability to adopt new technology from abroad and to produce one's own technology, the failure to address this issue can have serious longer-term consequences for the developing countries. The efforts of the International Agricultural Research Centers to assemble pools of germ plasm and other genetic materials have evoked strong nationalistic responses from many developing countries. These countries have in turn created barriers to the transfer of this material from their countries. Similarly, the general failure of these countries to protect the rights of plant and animal breeders is leading to a significant under- investment in breeding work by the private sector in these countries. The extent to which the discourse surrounding these issues is uninformed borders on the tragic. Neil McMullen has produced a marvelous little book 2 on the world's seed industry which should be required reading for Bank staff, as well as for policy makers in the developed and developing countries alike. Part of the problem is that a legitimate seed industry is of fairly recent vintage--having emerged only in the last 50 years. Well-managed and well-capitalized firms working across international barriers are of even more recent vintage--a product of the last decade or so. The significance of this issue is that the world's collection of germ plasm and genetic material is disappearing at a rapid rate as plant 2/ McMullen, Neil. Seeds and World Agricultural Progress, National Planning Association, Washington, D.C. 1987. - 10 - and animal breeding leads to more specialized material, and to the elimination and eventual destruction of material that cannot compete on its own. In addition, the destruction of plants and fauna as civilization spreads geographically as a consequence of rapid population growth is eliminating genetic material that has never been tested or incorporated into breeding programs. To avoid this loss of genetic material the International Agricultural Research Centers have undertaken to assemble and preserve large collections of germ plasm. The FAO, for its part, is trying to help individual countries to assemble their own collections of such material. Regrettably, the FAO and the CGIAR system became entangled in a turf squabble over this issue, which has only exacerbated the problems between the developing countries and external agencies trying to salvage the rapidly disappearing material. An important part of the controversy has to do with who is the ultimate owner of this material. The developing countries assert that they are the owners of material assembled from their respective habitats. The problem is exacerbated by a prevailing view in these countries that taking modest amounts of genetic material to other countries in effect robs the originating country of its natural heritage. The implication is that no material is left behind, which is obviously not the case. McMullen also cogently notes that germ plasm and plant material have been circulating for centuries, and thus the identity of the original owner is not at all clear. For example, coffee originated in Ethiopia and was spread to Brazil and other countries; maize originated in the Americas; and so forth. Collecting and preserving genetic material is a costly business. Barriers to the exchange and collection of such material only further raise these costs. Countries which impede the assembly and exchange of such material are ultimately imposing serious costs on themselves. The need for rules and a discipline that promote the freer movement of such material is an imperative. The only thing more tragic than the uninformed discussion of these issues globally is the failure of the international community to make this an important part of the current round of trade negotiations. If nothing else, serious negotiations on these issues would be an important means of bringing the developing countries more effectively into the negotiations. The Exchange Rate as a Distortion to International Trade I realize that World Bank staff are not supposed to talk about exchange rates since they are an IMF subject. However, since I am no longer an employee of the Bank, perhaps I can get away with it. As most of you already know, the exchange rate is one of the most important, if not the most important price in an economy. It influences the allocation of resources between the traded and nontraded sectors, and it establishes the rate at which domestic resources are exchanged for resources from the international economy. The point I want to address here is that distortions in a country's real exchange rate constitute distortions to trade, yet seldom are distortions in exchange rates the subject of trade negotiations. The current round of trade negotiations promises to be no exception, although there is at least provision for discussion of the issues. The simple part of distortions in exchange rates as distortions to trade is fairly well known. An over-valued currency is equivalent to a subsidy on imports and to a tax on exports. An undervalued currency is just the opposite--equivalent to a tariff on imports and to a subsidy for exports. These distortions to trade are neither rare nor insignificant. Probably the most significant distortion to trade in the global economy is the widespread tendency of developing countries to over-value their currencies. And they don't over-value them by modest amounts; the distortions often are quite large. Similarly, we are gradually coming to recognize that Japan's unusual export performance is not due just to their growth in productivity. The yen has been grossly under-valued for quite some time, and Japan has benefitted as a competitor in international markets. The significance of distortions in exchange rates as a distortion to trade should thus be obvious. It is part of my concern expressed earlier about the discriminatory policies of the developing countries towards their own agriculture. Another reason I believe this issue is so important is that I expect there to be a tendency in the future to under- value national currencies in foreign exchange markets. My suspicion is that many countries will find this an increasingly attractive means of earning the foreign exchange to deal with their debt crisis. There is still another reason why distortions in exchange rates are so important as barriers to trade. The real exchange rate, defined as the ratio of the price of tradeables to nontradeables, is the means by which macromanagement of the economy affects agriculture. In today's world, with its well-integrated international capital market, the mix of monetary and fiscal policies affects capital flows and these flows in turn tend to dominate foreign exchange markets. Thus the large budget deficit and the relatively tight monetary policies of the United States in the first half of the 1980's resulted in a very strong US dollar. This affected not only US agriculture, but the agriculture of other countries as well. The extent to which particular mixes of monetary and fiscal policies constitute distortions to trade, however, has not been sorted out as a practical matter. Similarly, there is a linkage between the level of protection of the industrial or manufacturing sector and the real exchange rate. The exchange rate that maintains a balance in the external accounts at a "higher" rate of protection to industry is below the rate at lower rates of protection. Moreover, Valdes3 has noted in a very perceptive paper that industrialization through protection causes the real exchange rate to tend to fall consistently through time. As an economy becomes more closed with increased restrictions on trade, the real exchange rate thus undergoes a 3/ Valdes, Alberto. 'Exchange Rates and Trade Policy: Help or Hindrance to Agricultural Growth?", International Food Policy Institute, mimeo, Washington, D.C. 1985. - 12 - significant and persistent decline, reducing the profitability of producing tradeables vis-a-vis non-tradeables. Thus we see a link among protection of the manufacturing sector, the real exchange rate, and discriminatory policies against agriculture. Negotiating agricultural trade distortions alone thus makes very little sense. Removal of barriers to trade requires consideration of distortions across the economy, and in the real exchange rate as well. It is worth noting in passing that these issues have important implications for establishing agricultural policy as well. What is generally viewed as a relatively simple process of devaluing a nation's currency and getting domestic prices to border price levels is not sufficient. The problem is far more complex. Finally, there is the problem of monetary unions such as those in the European Community and the French franc zone in Central Africa, plus the green currencies of the EEC. The monetary unions, especially when they involve national governments pursuing independent monetary policies, almost inevitably involve distortions in exchange rates. Green currencies, for their part, reflect multiple exchange rate systems. As used in the European Common Market, they, too, constitute barriers to trade. To conclude, taking account of distortions in exchange rates as barriers to trade is obviously a complex process. However, in practice, distortions in real exchange rates are important empirically, and should not be neglected as barriers to trade just because sorting them out analytically and empirically is difficult. Concluding Comments I would like to conclude with three sets of remarks. First, it is encouraging that agriculture is receiving the attention in the Uruguay Round that it now appears likely to receive. However, to the extent these negotiations proceed in isolation of negotiations on barriers to trade in manufactured products, services, and other issues, I am not optimistic that much progress will be made, either in the negotiations themselves or in improving global resource efficiency. The potential for trade-offs likely is across sectors and not within agriculture alone. Moreover, such isolated negotiations tend to neglect the linkages among protection of manufactured sectors, real exchange rate, and policies that discriminate against agriculture. Second, the developing countries have much to gain from the current round of negotiations--or much to lose. In either case, the potential is so great that they should not fail to participate. We in the Bank have a responsibility to encourage them to participate, and to help them develop the analytical capacity to sort out and effectively pursue their own interests. There is still time to assist them to these ends. Third, as noted earlier, barriers to trade create instability in international commodity markets. This instability is often the motivation for additional intervention by national governments. It is also the topic of the next paper on our program. This is thus a good place for me to end my remarks. - 13 - DEPRESSED AGRICULTURAL PRICES AND WORLD BANK OPERATIONS' Avishay Braverman International prices of agricultural primary commodities have been in a trough during the last two years. After last peaking in 1980, prices fell sharply during the 1981-82 recession, but rose again with world recovery in 1983-84. The years 1985 and 1986 and the early part of 1987 witnessed another significant decline in most prices. For many commodities, prices in real terms reached a post-war low during 1987. In fact, the post-war period has witnessed a slow downtrend in agricultural commodity prices in real terms and a continuation of the high variability of prices so characteristic of these markets. The 1985-87 slump has been surprisingly severe--given that there has been continued growth in the industrial countries. The low levels reached appear to have taken real prices below their long-run trend. However, prices in many markets have been rising in recent months. As tends to happen, short-run trends exert a biased influence over economic forecasters and there is a danger that the recent period of high stocks of nonfuel primary commodities and low prices could lead to the development of a 'surplus mentality' analogous to the 'shortage mentality' which developed in the 1970s when commodity prices rose sharply--as a result of largely short-run, reversible influences. Similarly, in the 1980s the decline in prices has resulted largely from short- to medium-term reversible factors. Nevertheless, the mild downtrend and volatility of international commodity markets pose major challenges to the Bank's borrowers. Many developing countries have found their export earnings adversely affected by the recent low trade volumes and price levels. While consumers in these countries may benefit from lower prices, especially for foodstuffs, government revenues and external debt servicing have been hard hit, and pressure has been placed on labor and other resources to move out of primary production. Pressures for rural-urban migration are increasing and the nonprimary sectors (especially urban centers) face adjustment costs in absorbing these migrants. International price volatility thus exacts a toll of adjustment costs every time the pendulum swings one way or the other. This is especially disturbing when much of the price volatility in many markets, particularly grains and sugar, is due to the interventionist policies of the industrial countries. It is important to recall, however, that the long-term downtrend in prices is due in part to productivity increases, and as such, does not necessarily imply reductions in producers' income, but instead the replacement of inefficient producers with more efficient ones. The mild downtrend and volatility of commodity prices also pose challenges to the Bank as a lender and development institution. As a consequence of the recent sharp declines there have been significant 1/ Based on a paper prepared by Avishay Braverman and Ronald C. Duncan, Chief, International Commodity Markets Division. -14 - pressures from industrialized country primary producers to curtail lending for projects which are claimed to be in "surplus" supply. The Bank is in an invidious position, relying as it does on funds for development aid for the poorest countries--which are primary commodity-dependent--from industrial countries where competing primary producers have a strong political voice. This is not a new phenomenon; moreover, it is likely to be a continuing and growing problem as developing countries become more competitive in a wider range of commodities. Recent low prices also have implications for Bank project evaluation and policy dialogue with developing countries. An important part of the Bank's project evaluation is the use of forecasts of international prices in establishing the value of tradeable outputs and inputs, since project outputs tend to accrue in the future. Questions have been raised as to whether international prices which are distorted by government intervention should be considered in selecting a 'border" price. An important aspect of the Bank's policy advice to developing countries has been to encourage them to shift towards more outward-looking policies, including moving domestic prices in line with international prices. The sharpness and depth of the recent downturn in commodity prices, together with the fact that a major reason for this market behavior was the dumping of agricultural commodities by the United States and the EEC, raised the question of the adjustment costs if a country is asked to adjust to such extreme variations in international prices. In this context, careful policy analysis is needed which takes into account not only the production and consumption effects but also the effects on government revenue, foreign exchange, income distribution and adjustment costs. This paper sets out the reasons for the current low levels of commodity prices making a distinction between volatility and the mild downward trend. It discusses the notion of commodities in 'surplus supply". Two categories of commodities are identified: (i) those facing inelastic demand and slow demand growth on which many low-income countries rely heavily for export earnings (e.g., cocoa, coffee and tea). This is the group of commodities which has long been the focus of the Bank's lending restrictions; and (ii) commodities which are also produced by industrial countries and which therefore become the subject of attention by producers in industrial countries when prices are low and stocks are high (e.g., palm oil, sugar, soybeans). The paper also reviews past Bank practice in lending for primary commodity investment. Commodity Markets: Recent Behavior and ProsDects Causes of Recent Price Declines. Between March 1985 and March 1987, nonfuel primary commodity prices, as measured by the Bank's commodity price index, fell by 22.4 percent. Since March 1987, prices have recovered and the index for October 1987 stood at 85.9 (1979/81=100). Measured in real terms (as deflated by the Manufacturing Unit Value Index), nonfuel commodity prices fell by 12 percent in 1985 and 15 percent in 1986. It is anticipated that real prices could fall by a further 12-13 percent in 1987. Developing country export revenues from nonfuel primary commodities for 1987 are estimated to be about 37 percent lower in purchasing power than the 1979-81 average. -15 - The accompanying Chart 1 shows various nonfuel commodity price indices in constant U.S. dollars from 1950 onwards. There is a clear downtrend during this period and some have argued that this trend extends well before the 1950s. This downturn, which holds true for most commodities in the post-war period, has been accompanied by large variations--occurring with peaks at intervals of about four years. In view of this historical pattern, caution should be used in interpreting the downturns in the 1980s as reflecting a major shift in trend. Moreover, it can be argued that the sharp downturns of the 1980s were due to factors which may well be reversed. Therefore, we should be wary of basing major policy shifts on current conditions. The 1980s have seen the worst global recession since the 1930s, a sharp rise in the value of the US dollar from 1980 to 1985 (which was reflected in a sharp fall in commodity prices measured in U.S. dollars) and changes in U.S. agricultural policy which led to the export subsidy war between the United States and the EEC in 1986 and 1987. Growth in industrial production in the OECD countries has declined from a peak of 7.7 percent per annum in 1984 to 3.1 percent per annum in 1985 to 1.3 percent per annum in 1986 and at a 1.7 percent per annum rate for the first half of 1987. A joint Bank/Fund study notes that economic activity in the industrial countries is the factor most consistently confirmed by empirical studies as having a major influence on commodity prices, particularly raw materials, since these countries account for the bulk of world imports of raw materials. 2 Not surprisingly, commodity prices have tended to follow the global business cycle. In addition to the depression in industrial countries' demand for raw materials, there has been a sharp curtailment of imports of foodstuffs by many developing countries. Restrictions on imports and sharp devaluations have been the major response of many of these countries to their difficulties in financing their burgeoning external debt. Technical change towards more efficient use of raw materials and substitution towards synthetics has continued to impact on demand for raw materials. However, Bank research has shown that this factor has not been as important as some have believed. Nor has been the shift in resources in the industrial countries towards the tertiary sector. More important has been the slow growth worldwide in fixed investment over the past decade. Fixed investment is a highly materials-intensive activity; and the pressures on government budgets in all countries and reduced private investment opportunities have had an important impact on fixed-investment demand for raw materials. Alongside the demand factors have been several supply-side factors which have contributed to forcing prices down. Good weather conditions for the past several years, combined with policy reforms which increased production incentives in the developing countries (such as exchange rate depreciation, increases in producer prices and reduction in export taxes), together with price-supporting policies in the industrial countries, have increased agricultural production and quantities available for export. 2/ Market Prospects of Raw Materials, paper prepared by the staffs of the World Bank and the International Monetary Fund for the Development Committee, No. 15, September 1987. CHART 1: WEIGHTED INDICES OF COMMODITY PRICES. 1060 - 2000 CONSTANT US DOLARS I 1579 - 81-100 250- 200 - METALS A MINERALS 15050N 0 100 TOTAL FOOD 50 PETROLEUM I 0- .... ,,,,,,,,....,.. W ..,... 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 S 19116-2000 ARE PROJECTIONS. SOURCE: THE WORLD BANK , INTERNATIONAL ECONOMICS DEPARTMENT . - 17 - Policies in the United States, EEC and Japan, in particular, have contributed to the decline in international commodity prices in the 1980s. For example, U.S. Government outlays for agriculture grew from an annual average rate of about US$12 billion in the early 1980s to an estimated $26 billion in 1986. In 1986 about 30 percent of net farm income in the United States was estimated to have come from government transfers (compared to only 6 percent at the beginning of the 1980s). EEC subsidies and other farm support measures are costing around US$23 billion in 1986-87, more than double the level of five years ago. The disposal of products surplus to the domestic market are estimated to cost the EEC states another US$2-3 billion to subsidize these onto world markets. In Japan, the aggregate cost of agricultural protection to taxpayers in 1985 was estimated at US$10.5 billion, and domestic food prices are now some 60 percent higher than they would have been if the yen appreciation since 1982 had been allowed to be reflected in agricultural prices. Ironically, in light of criticism of Bank policies, production in the developing countries is precisely on the trend lines which prevailed in the 1970s; a period which many observers of the international scene described as a period of Malthusian crisis. Outlook for Commodity Prices. Some of the factors contributing to the recent sharp decline in prices should be reversed in the short to medium term and cause declines in stocks and increased prices. In fact, several of the markets in recent months have experienced such a response and have shown improved market balance and increasing prices. All agricultural raw materials' prices are substantially higher than they were a year ago. Most grains, fats and oils prices have also begun to increase as stocks have fallen and with the poor monsoon season in Asia. Only the beverage group price index is at a lower level than a year ago. This is in large part due to the collapse of a temporary boom in coffee prices, but also to the fact that tea and cocoa output has been growing faster than consumption. For many commodities, growth in capacity should continue to decline for some time in response to the recent period of low prices. Demand can also be expected to increase in response to current low prices. This has been happening for grains. Reductions in agricultural price support in the industrial countries, particularly the United States and the EEC, would do a great deal to reduce the stocks held in those countries and ease their depressing effects on world prices. Land set-asides in the U.S.--expected to equal 25 percent of cropland in the next crop year--will also contribute to strong prices. Faster economic growth in the OECD countries, in particular, greater emphasis on capital investment is needed to increase sharply the demand for industrial raw materials. The resulting beneficial impact on developing countries' per capita incomes would lead to increases in their import of foodstuffs and feedstuffs. Commodities in "Surplus Supply". The notion of a commodity in 'surplus" is not amenable to easy definition. In a market situation, stock levels over and above working inventories and trading and speculative stocks will only persist as a result of government intervention which raises producer or consumer prices above market-clearing levels or otherwise restricts disposal of such stocks as through export. The high grain stock levels of the 1980s can be largely explained in this way. Otherwise, temporary market imbalances, where supplies are in excess of demand, do arise because of the slowness of response of supplies to reductions in demand and prices. This situation has been common in commodity markets during the 1980s. Demand slowed down sharply in the 1981-82 recession and except during 1983-84 has grown slowly since. Capacity has had to be reduced and this has taken some time, in part because producers keep operating for some time in the hope that demand will recover. But as described above, market balance does result even after substantial shocks. It is both of the above situations which have triggered the concerns of industrial country producers so that they have urged a reduction of Bank lending for commodities in surplus. It should be noted that it is only those commodities which are in competition with industrial country production which are of concern. The commodities which have been so pinpointed include palm oil (because it competes with soybean oil), citrus fruit, copper, iron ore and steel. Sugar would be included on this list except for the fact that sugar producers in the EEC and United States already receive high to prohibitive protection against imports. No doubt, Japanese rice growers would be vocal if the restraints on rice imports into Japan were relaxed. It should be noted that such pressure does not come only from producers in industrial countries. Some developing countries also have complained of Bank lending for investment in primary production. The Bank's historical concern over excessive lending for commodities which face price-inelastic demand hinges on the notion that increases in supply may lead to reductions in world prices, and if they do, this will reduce total revenue so that all producing countries will suffer a loss. For this condition to apply in the longer term, aggregate supply has to increase faster than demand. The three commodities which have received most attention in this context are cocoa, coffee and tea. The prices of all these crops fell substantially in the post-war period to the mid-1960s. Since that time the price trends for cocoa and coffee have been positive. However, tea prices have continued their downward trend. All three crops have experienced substantial improvements in productivity--resulting both from improved varieties as well as from the development of low-cost producing areas. Coffee and cocoa exports have been subject to strong constraints through international agreements as well as high levels of export tax in the major producing countries. There is no international agreement for tea and export taxes are generally lower. Bank Policy and Practice for Lending for Primary Commodity Production For most projects involving primary commodities, the Bank uses its own international price forecasts. From its inception, however, the Bank has recognized that overall demand for primary commodities was bound to increase more slowly than world income and population. For most developing countries, therefore, diversified growth away from dependence on primary commodities was a necessary part of development. The Bank has not sought to limit the production of primary commodities in general, and it has not - 19 - taken any strong position for or against commodity price stabilization or price support agreements. 3 Nevertheless, the Bank has observed in its lending the terms and conditions of international agreements that enjoy the widespread support and participation of its borrowers. The Bank has also maintained consultations with all international commodity organizations on its project lending. So far, however, the small number of broadly-based commodity agreements in operation has posed few questions about the compatibility of Bank lending with the objectives of such agreements.4 Application of Lending Restrictions. Since 1973 there has been a restriction on lending for tea production except for (a) increases in output for countries that do not have investment alternatives and (b) rehabilitation of existing productive capacity involving no increase in output. In the period 1974-86 there were four tea projects funded by Bank/IDA funds. They were estimated to increase black tea production as follows: Kenya--1,000 tons, Papua New Guinea--1,700 tons and Sri Lanka- -31,400 tons. The Papua New Guinea project was cleared on the grounds that there was no alternative investment in the remote, highland area. The Sri Lanka investments were justified on the basis of a program of rehabilitating tea in the face of the long-standing decline in production. The production level benchmark to be used as a reference for approval of projects on the basis of the rehabilitation criterion was taken to be the previous highest output level. Application of the lending restriction on cocoa since 1982 resulted in funding of eight projects over the 1983-86 period for a total estimated incremental production of 21,400 tons. By comparison, over the 1974-82 period an estimated incremental production of 162,600 tons was funded. Cocoa projects for Cameroon, Equitorial Guinea, Haiti, Papua New Guinea and Solomon Islands were allowed through the screening process on the basis of the low per capita incomes of the country or region and the lack of investment alternatives. Over one half of the increased production was in two projects in Papua New Guinea. There were 15 projects approved in the 1983-86 period which were expected to lead to increased coffee production. These projects covered 13 countries and were expected to lead to 43,300 tons of extra output. By comparison, there was funding of an estimated incremental production of 176,500 tons of coffee over the 1974-82 period. One third of the incremental production funded in the 1983-86 period was for rehabilitation of the Ugandan coffee following its devastation in earlier years of civil unrest. Nine other small projects were implemented for low-income African countries. As well, there were two projects (amounting to 11,600 tons) approved in Brazil. These were justified on the basis that they were intended for developing the low-income northern regions of Brazil. It was argued that as coffee growing in Brazil is being pushed north, to avoid 3/ IBRD. Stabilization of Prices of Primary Products; Report of the Executive Board of Directors of IBRD, Washington, D.C. 1969. 4/ International agreements with economic provisions are currently in force for cocoa, coffee and natural rubber. - 20 - damaging frosts and to provide farming opportunities for this low-income region, eventually output in the southern coffee-growing regions will decline. Where there is concern about project impact on other developing country producers because of the low price elasticity of demand for the product, the impact is evaluated using the Bank's its global commodity models. Because the impact of small projects on supply is cumulative, the development of each industry in all producing countries has to be monitored. The Bank has also carried out global impact studies for large projects in markets for which no lending restrictions have applied. Impact of Bank Lending on Primary Commodity Production. What has been the impact of Bank lending restrictions on tea, coffee and cocoa? How valid are the complaints about Bank lending for commodities in competition with producers in industrial producers? With World Bank lending for tea production highly restricted for the past 14 years, world tea production has continued to grow strongly (at 3.8 percent per annum over the 1970-84 period). During this period, Kenyan tea output grew at 4.8 percent per annum--mostly without financing from the Bank. Coffee and cocoa output have also grown, though less so. Unfortunately, the trend in coffee and cocoa output in Africa has been downward while growth in Asia and Latin America has gone ahead strongly. It has to be recognized that external finance is not the sine qua non for production growth. For example, the long-term decline in Ghana's cocoa production had a remarkable about-face in 1986 only after sensible exchange rate and producer price policies were adopted. Reforms including exchange rate depreciations, export tax reductions and improved marketing infrastructure in developing countries have had an impact on production in several other countries. Commodities Facing Inelastic Demand and Poor Growth Prospects. In its concern that Bank lending should not lead to income reductions in developing countries as a result of financing commodities facing inelastic demand, several characteristics of these markets have been seen as important in deciding on whether to fimit Bank lending. First, import demand should be both price- and income-inelastic over the long run. Second, production should be mainly in developing countries and be the main export-earner for many of the low-income countries. Third, import demand should be mainly confined to industrial countries. Otherwise, efforts to support prices would mean that developing country consumers would not be able to benefit from lower prices. Coffee, cocoa, tea and natural rubber are the only primary commodities which are exported by the developing countries exclusively. Sugar (65 percent) and cotton (63 percent) are other commodities in which the developing countries held a dominant share of exports in 1985. Coffee, with 10 percent of imports by developing countries in 1985, cocoa (8 percent of imports), and natural rubber (26 percent) are the commodities which fit the criterion of developing country dominance of exports and a low developing country share of imports. In the short-run, the income responses of all these commodities are likely to be inelastic and their price response is also inelastic. In the long run, it is likely that the response to price changes for bauxite, natural rubber and tin are elastic, facing as they do strong competition from other naturals, including - 21 - synthetics. This leaves coffee and cocoa as the only two commodities which appear to meet the criteria set by the Bank. The import demand prospects for these commodities are poor. The Bank forecasts import demand growth of 1.3 percent annually to 2000 for coffee, and 2 percent for cocoa. Tea no longer meets the criteria as developing countries now take 46 percent of imports and 62 percent of total consumption and these shares are expected to grow strongly. Nor does sugar meet the criteria since developing countries have a 65 percent share of exports, a 49 percent share of imports and a 56 percent share of consumption. Suggestions for Future Lending Policies For most developing countries, investment in their primary sectors, particularly agriculture, remains the major building block for growth, diversification and improved living standards. For the least developed countries, agricultural lending will continue to be the main Bank activity in those countries. Primary commodity prices will remain highly variable and prices measured in real terms may well continue on a mild downtrend over the long term. The Bank has to be cognizant of this situation in its lending program; in particular, one of its main preoccupations must be to assist developing countries to manage their economies in the recognition that they will continue to experience terms- of-trade shocks from commodity price fluctuations. There are three distinct areas of Bank lending for which the behavior of international commodity prices has implications. These are: * Project lending. * Policy-based lending: where much of the conditionality deals with adopting a more 'outward-oriented' approach to pricing. * Non-commodity lending: that is, projects which are not directly related to commodity production, but upon which the trend and variability of commodity prices nevertheless has a bearing. For commodity project loans there needs to be allowance for changes in comparative advantage within countries and changes in international competitiveness between countries. Also, consideration should continue be given to the financing needs of the low-income countries to retain or increase their market shares. The Bank should continue to employ the ERR criteria using border prices. But there are cases where it may be important to consider other government objectives: e.g. poverty alleviation, raising government revenue and risk management. There are serious theoretical and practical problems in trying to incorporate these other objectives into a full social cost-benefit analysis, which makes the social rate of return (SRR) approach unsuitable for the Bank's operations. Where these objectives are important, quantifying the tradeoffs involved between competing objectives should be attempted. In countries where lack of administrative capacity limits the number of instruments that can be used to raise revenue, considerations - 22 - other than the value of the project at border prices will be relevant. In particular, certain projects will increase output of taxed commodities and will thereby increase government revenue. If institutional constraints mean that the government cannot raise revenue easily through other means, the output from the project will have a value beyond that which is indicated by the border price rule. Thus, if the government taxes an export commodity to raise revenue, and this revenue cannot be raised elsewhere, it is likely that the economic price for the output of this commodity should exceed the border price--the project is even more worthwhile than the standard border price evaluation rule will indicate. In this situation, if international prices fall the border price rule will put a lower value on the project; but the decreased government revenue as a result of the reduction in international price is likely to increase the value of incremental output to the government. The government could recoup its revenue by increasing taxation of this commodity further, but this will conflict with its foreign exchange and distributional objectives if producers are a poor segment of society. In the absence of revenue-raising instruments, more attention should be paid to government revenue. It is sometimes argued--either on the basis of 'fairness' or global efficiency criteria--that since some commodity prices are lower than they would be without the interventions (e.g., protection, dumping) of industrial countries, the Bank should not use border prices but prices which would rule if such protection did not exist. This is clearly an incorrect argument for evaluating opportunity costs. International prices and their forecasts do, and should, reflect the realities of international markets and the actual opportunities for trade, and therefore must be used in project evaluation. Thus, such international price forecasts take into account the possibilities for changes in the policies of industrial countries which affect commodity prices. The role of international prices and forecasts in project evaluation is to measure current and future opportunity costs irrespective of their underlying causes. For example, if dumping is regarded as a permanent phenomenon, then its consequences--low prices--should be treated in the same way as a technological change that would result in similar price declines. On the other hand, if dumping practices are halted, many currently low prices will be reversed. This is an issue of timing and thus forecasting, not 'fairness'. Of course, forecasts are always uncertain and sensitivity analysis should be part of the price forecasting and project appraisal. Because of their adverse impact on developing countries, the World Bank should continue to support reduction of trade interventions. If the impact of Bank lending is large enough to have international repercussions (through one large project, cumulative effects of small projects or policy lending), it must follow that any project appraisal methodology should do its best to take these into account. The existing Bank guidelines on coffee, cocoa and tea essentially allow a case- by-case approach and specifically pay attention to income differences between countries, stating preferences for IDA countries. There seems little reason to constrain financing for a project which is feasible, efficient from the perspective of global comparative advantage, and will make poor countries and their poor citizens better off. - 23 - Turning now to the Bank's policy-based lending and dialogue, the major thrust has been to adopt pricing which reflects international prices. International prices should continue to be the benchmark prices from which any departure, e.g., due to government revenue consideration, foreign exchange constraints and poverty alleviation, should be justified on a case-by-case basis. However, in an environment of unstable international prices, adoption of international pricing effectively means translating this instability to the domestic economy. In addition, most governments, especially in Africa, use the wedge between international and domestic prices to raise revenue and to pursue other objectives in the areas of foreign exchange and income distribution. If these governments had other adequate instruments to achieve these goals, and if the economy were one which could easily cope with adjustments in the face of international volatility, then a strong argument could be made for transmitting international prices fully to the domestic economy. Hence policy dialogue would concentrate on fully removing all differences between domestic and international prices. But in the real world of limited instruments and revenue requirements, a careful analysis of objectives and existing constraints is needed. There now exists an operational methodology for analyzing these implications of price reform. This 'multi-market' methodology takes into account substitution effects in consumption and production, and also emphasizes the consequences of policy reform for government revenue and for the foreign exchange position of the country and the real incomes of different groups, including the poor. The methodology has been applied in the Bank.5 How should Bank and developing countries react to the expectation of a continuing mild downtrend in primary commodity prices? The downtrend in prices reflects the income inelasticity of demand and the continuing advances in technology. These can be expected to persevere, although fixed natural resources raise questions about the long-term trend in these commodities. Because prices are on a mildly declining trend, this does not necessarily mean that producers are being squeezed. In fact, the line of causation runs mainly in the opposite direction--prices decline because of productivity improvements which yield greater profits. However, some producers will be squeezed if they cannot keep up with the productivity improvements taking place. Some should leave the industry as their comparative advantage declines. Other countries in which the industry may have a comparative advantage are in a more difficult situation. For them, policy reforms--correct exchange rates and producer pricing--together with infrastructural development and research to improve productivity will be the only answer. The Bank's role is to assist in this with good advice. Controls over lending are not an appropriate response. As international prices fluctuate, developing countries are forced to adjust by changing the structure of consumption and production. This adjustment is not costless. Even in industrial countries, it is now recognized that rigidities in factor and commodity markets make adjustments 5/ A. Braverman and J. Hammer. 'Evaluating Agricultural Price and Tax Reform": An Operational Method of Agricultural Policy Analysis', World Bank, Washington, D.C. April, 1987. - 24 - slow and painful. In developing countries, the problem can be much worse. Sudden changes in relative prices can, because of the lack of smoothly functioning capital and labor markets, lead to unemployment of resources and wastage of output that poor economies can ill afford. The exact nature and extent of adjustment costs, at the individual and at the economy-wide level, is an important area for detailed empirical and policy-oriented work. Much will depend on the specifics of the case (the capacity of many African countries to switch easily out of agriculture is clearly more limited than that of Asian countries which already have a significant industrial base). Generalizations are apt to be misleading. In the face of volatility in the international environment, attention must focus on the capacity of the economy to adjust smoothly and improve its ability to handle risk. Since many of the commodities are agricultural products, attention should be paid to investments which allow farmers to diversify their production base and also allow the economy to shift risk across sectors. This leads us to the implications of the mild downward trend in international prices and their volatility for noncommodity lending. The implications of the above arguments for the nature of Bank lending are clear. Investment in human capital and rural infrastructure will increase the responsiveness and production diversification in the rural sector. In addition it will facilitate the transition to industrialization which represents the long-run trend of development out of agriculture. The current downturn in agricultural prices should not be allowed to greatly influence projects which support agricultural research or the maintenance of irrigation and rural road systems. These facilities, if allowed to run down below a critical level, will require large fixed costs and time to be made operational again once prices pick up. On the human side, a continued emphasis on education, health and nutrition projects--particularly at the basic level and in rural areas--is indicated. Increasing flexibility of the rural economy simply adds strength to other arguments which support such projects in the rural sector. Even if the sort of adjustment costs described above did not exist, that is, if individuals and groups adjusted smoothly to changes in the international environment, real incomes of producers and consumers would still fluctuate with international and domestic prices. This would impose another type of cost on the economy unless it had sufficiently well-developed stabilization and insurance mechanisms to insulate its members from the vagaries of real income uncertainty. These mechanisms include commodities future markets in the formal sector and credit and family insurance in the traditional sector. It is an empirical matter to arrive at a judgment on whether or not these mechanisms are indeed present in today's developing countries. Even a casual survey would suggest that formal commodities futures markets and credit markets are not as highly developed in developing countries as they are in industrial countries, certainly not in many remote rural areas where much of the production takes place. There is thus plenty of scope for serious institution-building which will enable developing countries to cope with the instability in the international environment. - 25 - AGRICULTURE IN THE URUGUAY ROUND Wolfgang E. Siebeck Past Treatment of Agriculture in GATT Since the GATT was established in 1947, there have been seven rounds of multilateral trade negotiations. They successfully reduced tariffs on the import of manufactures but left trade in agriculture largely untouched. Major trading nations obtained waivers from GATT obligations for agricultural imports, most notable the United States, in 1955. The Tokyo Round (1973 to 1979) made an attempt to reduce barriers to trade in agriculture but largely failed. Agreement was only reached on codes for beef and dairy products which provide for periodic market review and, in the case of certain dairy products, for an obligation not to export below a minimum price as revised from time to time. A relatively small number of countries have subscribed to these two codes. After a 1982 Ministerial GATT meeting, a Committee on Trade in Agriculture reviewed how such trade can be brought under GATT rules and discipline. At their regular Fall meeting in 1985, the Contracting Parties agreed to set up a Preparatory Committee to work out the modalities for a new trade round. Agriculture was included. But it was the coming together of several developments which in the end generated sufficient political will to include agriculture trade as a key subject in the new round launched in Punta del Este (Uruguay) in September 1986; (i) US exports in agriculture increasingly suffered from the growing competition of subsidized European Community exports and forced the US to step up its own export subsidization (ii) resistance grew within the EC to an ever- burgeoning subsidy bill; and (iii) several countries which increasingly felt the pinch of declining agricultural world market prices as a result of the subsidies war formed an alliance. This group, set up in July 1986 in the Australian seaside resort Cairns and very much spearheaded by Australia, also includes New Zealand and Canada, together with ten developing countries (four ASEAN countries: Indonesia, Malaysia, Philippines, and Thailand; five Latin American countries: Argentina, Brazil, Chile, Colombia and Uruguay; and Hungary). This first alliance in the GATT which cuts across the North-South divide, based on a clearly defined common interest and the powerful notion of common enemies, has proved remarkably durable so far. The negotiating mandate for trade in agriculture (attached) negotiated in Punta del Este is indeed sweeping. It envisages to bring "all measures affecting import access and export competition" under GATT rules, and singles out "all direct and indirect subsidies and other measures affecting directly or indirectly agricultural trade" for a phased reduction of their negative effects. It was the result of an eleventh-hour compromise which for once did not settle on the lowest common denominator but rather assembled a larger number of elements to allow each side to declare victory. - 26 - Would this compromise among countries and trading blocks pursuing rather dissimilar trading goals allow effective negotiations? Doubts appeared but were overcome when the EC at one point during the subsequent discussions in Geneva of a negotiating plan for the agricultural group stalled agreement on an early beginning of negotiations and instead insisted on an extended period of "problem identification' while the US, largely supported by the Cairns Group, argued for fast-track negotiations leading to early agreements (later termed 'early harvest"). The Uruxuary Round Negotiations: The First Year Gaining Momentum. The first year of the Uruguay Round negotiations certainly surprised many who expected resistance to progress in the Negotiating Group on Agriculture which was set up as one of the 14 negotiating groups under the Punta del Este Declaration. It is indeed not without irony that the agriculture group not only has moved faster than many of the other 13 negotiating groups in its fact-finding efforts, but today has received more or less detailed negotiating proposals from a large number of agriculture producing and trading countries. The group has so far held five formal meetings (in February, May, July, October and December of 1987) and one informal meeting in September to discuss the basic concepts underlying the consumer subsidy equivalent (PSE). The Bank is not admitted as an observer to this group. Proceedings are, however, covered by GATT Secretariat notes, and important statements by delegations as well as their formal proposals have been circulated as working documents. Proposals Tabled to Date. To date proposals have been tabled by the US, the Cairns Group, the EC and the Nordic countries. Switzerland, and to some extent Japan, have outlined their proposals. Japan has promised a detailed proposal before the end of December. One can distinguish basically three kinds of proposals: (i) the true reformers who want to return trade in agriculture to GATT rules and principles, i.e. the 13-country Cairns Group and the US; (ii) the marginalists who like to call themselves realists and are ready to reduce but not to do away with export subsidies while shying away from opening their markets to more imports (EC, Nordics, Switzerland, Japan); and (iii) the net food importers among developing countries led by Jamaica and Mexico which are primarily concerned about the consequences of dismantling export subsidies on their food import bill. The True Reformers The US proposal, the first to be tabled, would over a period of ten years (a) make domestic agricultural policies trade neutral. All price support measures, import quotas, variable levies, minimum import prices, even tariffs and all income support schemes, such as deficiency payments, stabilization payments, acreage reduction schemes, and subsidized farm credit would be discontinued. Only direct income support 'decoupled' from production and marketing as well as foreign and domestic food aid programmes with no or inconsequential tariff effects would be permitted. (b) It would freeze and phase out export subsidies. (c) It would open - 27 - access to imports by doing away with all import barriers, and (d) it would introduce non-discriminatory standardized health and sanitary regulations. The proposal would be implemented in two tiers. First, agreement would be reached on how to measure support. The proposals to use the OECD concept of producer subsidy equivalent (PSE) which would measure all income benefits a farmer derives from government budget and through consumer transfer payments. Such a measuring rod would allow implementation to be monitored. The second tier would provide for implementation modalities. Countries would design their own implementation plans provided they phase out support measures over ten years. Such plans would be monitored annually. The proposal is said to have the support of some US law makers and farm lobbyists. While considerably more specific in details, the Cairns Group proposal basically builds on the US proposal. It goes beyond it in two aspects: (i) It calls for "early relief measures", including a freeze on new import restrictions, subsidies and health regulations, combined with an immediate cutback on all export and production subsidies. (ii) Not surprisingly, because of its developing country membership, the proposal calls for special and differential treatment of developing countries, and would allow these countries a time-frame for implementation longer than ten years and the right to introduce domestic support measures (but not export subsidies) to promote social and economic development. The Marginalists Throughout the preparatory discussions for the new round the EC never left doubt that its common agricultural policy (CAP) was sacred and not on the negotiating table. This has now been corroborated by its negotiating proposal which, far from proposing to do away with managed trade in agriculture, rather proposes to improve such management and to do so in concert with all trading partners who would have to observe the same rules and disciplines. The EC would maintain a dual pricing system, effectively shielding its internal market from price and exchange rate fluctuations in the world markets. To this end, it would continue applying such time-honored instruments of the common agricultural policy as price support, variable border protection and export compensation. However, the intention would be to 're-balance and correct' the deficiencies that have played havoc with the CAP in the past, and to agree on, and bind, maximum support levels in the GATT. While primarily attaining supply management through administrative means, the proposal pays lip service to a market approach (allow 'an increase in the sensitivity of agriculture to market signals") and somewhat timidly accepts the possibility of 'decoupling' farm support from prices and production by proposing some direct income support for "farmers making, as appropriate, greater use of direct aids not linked to output'. In his verbal introduction of the EC proposal, the EC delegate incidentally, described the concept of 'decoupling' as ambiguous. The negotiating plan proposed by the EC is complex, consisting as it does of several stages and tiers. Stage 1 would include short-term actions to arrest growing supply-demand imbalances. This would include as emergency measures yearly renewable marketing agreements for cereals, sugar - 28 - and dairy products and, additionally, 'other measures, which remain unspecified for rice, oil seeds, beef and veal. Stage 2 would aim at a reversal of supply-demand balances through a 'significant, concerted reduction in support and readjustment of border protection'. It would not phase out such measures. The short-term measures under stage 1 would be implemented in a 'relatively short period' whilst stage 2 would have no time frame. Stages 1 and 2 would form part of a single package. Like the other two proposals, the EC also favors an international framework of rules for health regulations, and the use of the PSE to measure and monitor implementation of reductions in farm support. It also allows, and this was warmly welcomed by developing countries, for special and differential treatment according to the needs of developing countries. The Nordic proposal basically is a variation on the EC proposal whose philosophy and approach it shares. It is less vague in many respects, clearly due to the fact that it is easier to agree among four member countries with similar economic structures than among 12 of a disparate kind. Under the Nordic proposal, immediate measures to curb excess supply and correct imbalances would be agreed by the end of 1988 and take whatever form is preferred by a country such as price and subsidy reductions and production quotas. And, somewhat more realistically than the EC proposals, it suggests binding in the GATT the volume of subsidized exports in addition to levels of and ceilings on subsidies which will probably be difficult to define and monitor. In further contrast to the EC proposal, it suggests steps to improve market access through reducing import protection. Switzerland has so far only outlined its position. Indications are, however, that it will espouse a philosophy similar to that of the EC and the Nordic proposals. The Japanese proposal, long promised and tabled only in early January, emphasizes the social linkages of agriculture. It proposes to phase out export subsidies over a fixed (but not specified) period of time while allowing other subsidies to continue under certain conditions, and to improve market access through tariff reductions (through request-and-offer procedures). In addition, there will be more discipline applied to quantitative restrictions. Interestingly, the proposal rejects the PSE because it would not allow an appropriate comparison of protection levels in any two countries. The Net Importers This group is primarily concerned that a reduction in production levels and world market supplies would lead to an increase international prices of agricultural produce for them. Among the few specific elements of this proposal is the suggestion that developing countries, under special and preferential treatment, be allowed to use production incentives for development purposes. This would be complemented by a commitment of developed countries not to raise international prices above their domestic prices (historically not a very serious risk) and to provide food aid under _ 29 - multilaterally agreed rules. It remains to be seen whether this group shows cohesion and develops into a negotiating force of consequence. At this point it is not. A Tentative Assessment The gap between the major groups is wide, certainly in terms of philosophy and approach. Yet some areas of possible convergence can be seen: Adopting a Common Measuring Rod. There seems a broad recognition that agricultural trade barriers cannot be reduced or removed by traditional ways of tariff cutting. Because of the variety of restrictions applied and their diverse trade effects, it would be difficult, if not impossible, to exchange concessions on the basis of a request-and-offer procedure or through linear cuts in restrictions. Therefore, negotiators have been searching for a proxy which would allow negotiating aggregate protection levels. While there still are many doubts that the PSE concept can be used for this purpose, the concept is likely to be accepted for want of something better. Doubts refer to (i) data collection: the only systematically assembled data available are for OECD countries covering 1983 to 1985. Data on developing countries have to be prepared. (ii) The reference period: can the current time-lag of three years be shortened to permit defining negotiating targets and allow monitoring? (iii) The policy coverage: should all measures, even with marginal trade effects, be quantified and included? Canada has proposed a modified concept called ,trade and distortion equivalent' (TDE) which excludes trade neutral measures. It will probably be necessary to negotiate in detail what measures (including *decoupled" measures) to take into account so as to make the otherwise formidable computing efforts manageable. (iv) Commodity coverage: should the PSE be computed only for major commodities, and for primary products as well as for processed products? This will largely depend on the feasibility of data collection. Health and Sanitary Regulations. Some proposals on the table contain elements which should find broad acceptance. To enhance transparency, the Cairns Group proposals detailed notification procedures and information requirements. Most proposals suggest some harmonization of regulation and standards. This may be difficult to achieve in light of the disparate health and plant protection regulations applied in many industrial countries. Special and Differential Treatment. As we saw, the group of developing country net importers of agricultural products has demanded the right to protect its underdeveloped agriculture. As long as this is limited to net importers, such right could probably be granted in analogy with Article XVIII(c) which allows infant industry protection for developing countries. It should be noted, however, that the group also demands continued access to cheap food and food aid, a demand not obviously in consonance with the request for the right to protect high cost domestic agriculture. - 30 - Export Subsidies and Harket Access. There is clearly room for agreeing on substantial reduction in export subsidies, and there can be not doubt that all parties consider this a major stake. This is, of course, the area where philosophies differ. The marginalists will consider export subsidies a legitimate means to dispose of temporary export production as long as it does not hide a structural surplus. The US and the Cairns Group will certainly argue for total elimination of export subsidies. It is difficult to see how the EC could move beyond the point at which it would jeopardize its CAP. Watching the difficulty its members have in containing the mushrooming expenses of the CAP (the recent Copenhagen Summit broke down over this question), and at the same time listening for the clarion cries for higher farm prices by the lobby and parts of the government in Germany, a country more generally known for its free-trade stance, I doubt that the EC could compromise on its CAP. But then the give and take in the negotiations will not be limited tc,gricultural trade. In fact, concessions will be exchanged across all sectors, and this is where pressures could be brought to bear also on farm policies. And perhaps at that time some countries will begin to realize that it does not make sense to support their farm sectors at all costs, if this will hurt their exports in other fields. Let us not give up hope. - 31 - Negotiating Plan for Agriculture Negotiating Obiective 'CONTRACTING PARTIES" agree that there is an urgent need to bring more discipline and predictability to world agricultural trade by correcting and preventing restrictions and distortions including those related to structural surpluses so as to reduce the uncertainty, imbalance and instability in world agricultural markets. Negotiations shall aim to achieve greater liberalization of trade in agriculture and bring all measures affecting import access and export competition under strengthened and more operationally effective GATT rules and discipline, taking into account the general principles governing the negotiations, by: (i) improving market access through, inter alia, the reduction of import barriers; (ii) improving the competitive environment by increasing discipline on the use of all direct and indirect subsidies and other measures affecting directly or indirectly agricultural trade, including the phased reduction of their negative effects and dealing with their causes; (iii) minimizing the adverse effects that sanitary and phytosanitary regulations and barriers can have on trade in agriculture, taking into account the relevant international agreements. In order to achieve the above objectives, the negotiating group having primary responsibility for all aspects of agriculture will use the Recommendations adopted by the CONTRACTING PARTIES at their Fortieth Session, which were developed.in accordance with the GATT 1982 Ministerial Programme, and take account of the approaches suggested in the work of the Committee on Trade in Agriculture without prejudice to other alternatives that might achieve the objectives of the negotiations. Principal stages of the negotiating process Initial Phase Identification of major problems and their causes, including all measures affecting directly or indirectly agricultural trade, taking into account inter alia work done by the CTA, and elaboration of an indicative list of issues considered relevant by participants to achieving the Negotiating Objective. The concurrent submission of supplementary information on measures and policies affecting trade in the AG/FOR-series, including full notification of all direct and indirect subsidies and other measures affecting directly or indirectly agricultural trade. - 32 - Consideration of basic principles to govern world trade in agriculture. Submission and initial examination of proposals by participants aimed at achieving the Negotiating Objective. Subsequent Negotiating Process Within this process, further examination as appropriate of proposals and initiation of negotiations. Negotiations with a view to reaching agreement on (a) comprehensive texts of strengthened and more operationally effective GATT rules and disciplines; (b) the nature and the content of specific multilateral commitments to be undertaken including, as appropriate, implementation programmes and transitional arrangements; (c) any other understandings which should also be deemed necessary for the fulfillment of the Negotiating Objective; and (d) exchange of concessions, as appropriate. - 33 - THE EC PERSPECTIVE ON AGRICULTURE IN THE URUGUAY ROUND Stefan Tangermann The agricultural negotiations of the Uruguay Round have gathered significant momentum. Not much more than twelve months after the opening of this new round of multilateral trade negotiations in Punta del Este, and only nine months after the negotiating plan has been agreed (on January 28, 1987), most of the main protagonists have tabled their proposals for negotiations on agriculture. Negotiators in Geneva and their colleagues in national capitals are busily doing their homework in terms of developing negotiating positions, assessing areas of agreement and disagreement with their negotiating partners, and analyzing the consequences of different options. Official and informal meetings inside and outside the GATT are used for testing the water, and in spite of the enormous complexity of the task there is already a relatively clear vision of how negotiations on agriculture could be approached, at least in a first attempt. Before getting too much used to what so far has turned out to be relatively fast progress in the agricultural negotiations in the Uruguay Round, we should call to mind that only around eighteen months ago there was not even agreement among the contracting parties on whether and how agriculture should be included in a new round of multilateral trade negotiations, and that this lack of agreement threatened to get into the way of a new GATT round altogether. Moreover, after more than three years of work in the GATT Committee on Trade in Agriculture (between early 1983 and mid-1986), it was hard to sense any convergence of views among major countries, and the outcome of the Committee's consideration of possible approaches to bringing agricultural trade under "more operationally effective GATT rules and disciplines' was essentially a shopping list of all conceivable different solutions. Compared with the situation around mid-1986, it appears that there is now much more common ground in the negotiating proposals of the main protagonists, and the fact that the possible use of Producer Subsidy Equivalents (PSEs) as a negotiating tool is envisaged in all the proposals is almost revolutionary against the background of the earlier inability to boil down the list of possible approaches. It is true that there are still major discrepancies between the views of the different parties involved. In particular, there are significant differences between the positions of the USA and the Cairns Group on the one hand and the EC on the other. but it appears to me that often too much stress is laid on these discrepancies. For a fruitful conduct of negotiations it is more productive to emphasize areas of agreement than to stare at disparities of views. In what follows I shall, therefore, first look at where the EC position appears to overlap with that of the other countries which have already tabled proposals for negotiations on agriculture, before I comment on some of the issues where the EC perspective appears to diverge. - 34 - One introductory comment is in place. For the time being, and possibly until the end of the Uruguay Round, it is difficult if not impossible to identify the EC perspective. There may be a position of the EC Commission (which will not be shared by everybody in the Commission), there may be a position of the Council of Ministers (which, though, certainly differs among e.g. the agricultural and the foreign affairs Council), and there are different positions in the different member countries. For the time being the disparities between these different positions have not yet become very visible, possibly because the Community is so much preoccupied with its internal agricultural policy problems that it has not yet found the time to engage in a serious debate about what is position on agriculture in the Uruguay Round should be. However, the difficulties which the member countries currently have in terms of agreeing on a plan for simultaneous reform of the Common Agricultural Policy (CAP) and the Community's financial system indicate the enormous extent to which views diverge among, say, the United Kingdom and Germany. These divergencies of views among member countries will one day necessarily spill over to the GATT negotiations. It appears that for the time being what is considered to be the "Community' position is essentially the position of the Commission, though the Commission has got agreement from the Council to table its proposal in Geneva. It is this proposal tabled in Geneva (October 26-27, 1987) on which I shall comment. Areas of Agreement between the EC and Other Countries The common ground between the EC and other countries, in particular the USA and the Cairns Group, covers three essential issues--the importance of agriculture in the Uruguay round negotiations, the need to bring agricultural support down, and the desirability of trying the PSE approach. The Community, like the other countries, is sufficiently unhappy with the current state of affairs in agricultural trade that it agrees that agriculture must be a central element in this round of trade talks. And it also appears that the EC is aware of the fact that a failure to make progress on agriculture would endanger the overall order for international trade. It is therefore in the Community's own interest to make sure that a possible success of the Uruguay Round is not jeopardized by a lack of agreement on agricultural issues. It is also clear to EC negotiators that the direction of change in agriculture must be a reduction of support for agriculture, an improvement in access to markets, and restrictions to export subsidization in agriculture. And there cannot be any doubt that the EC, too, must make a contribution to this end. In this sense there is not, in principle, a fundamental contradiction between the EC position and that of other countries. It would be unfair, and unproductive, to argue that the EC position is that the Common Agricultural Policy must be kept sacrosanct and that, therefore, there is not scope for serious negotiations on agriculture. The Commission is certainly serious when it speaks, in the EC proposal for the Uruguay Round, of 'a significant, concerted reduction is support." Again it is simply in the own interest of the Community to reduce the level of price support to EC farmers since the current policy is no longer sustainable in financial terms. It is true that some member - 35 - countries (in particular Germany) would like to avoid significant price cuts. However, the Commission is since long arguing for a reduction of price support in the EC, and it appears that a majority of member countries is now prepared to go along. For the Commission it would certainly be helpful to be embedded in an international agreement which would support its position vis-a-vis those member countries which still are against price cuts. Certainly the EC would strongly oppose any attempt at destroying or modifying significantly the mechanism of the CAP in terms of the type of policy measures used in its commodity market regimes. However, one should not confuse the mechanism with the way it is used. The Community's market regimes would have less disruptive effects on international agricultural trade if the level of price support granted to EC farmers were lower. Hence, if the EC maintains that it is not prepared to give up on the CAP as such, this should not be taken to indicate that the Community is not prepared to make a contribution to improving the situation in agricultural trade. Finally, there is a broad convergence of views between the EC and its negotiating partners on the usefulness of trying the PSE approach this time. Of course all sorts of disparities of views will crop up once the first practical negotiating sessions begin on how to integrate the PSE approach into the GATT framework. However, there is no reason to assume that the Community's willingness to give this approach a chance is not serious. After all there is a certain similarity between the PSE approach and the Community's montant de soutien proposal of the Kennedy Round. Hence the PSE approach certainly has its intellectual and political attractions for the EC. Even at the level of more detail the EC position on the PSE approach appears to be rather consistent with that of other countries. Like other countries, the EC also envisages changes to the PSE definition as used by OECD, in particular with regard to excluding direct income payments and similar measures. In this regard, and also in the sense that the EC would like to see PSEs adjusted for the effects of supply control policies, the Community proposal comes rather close to the Canadian proposal for a 'trade distortion equivalent. There is also a significant overlapping between the Cairns Group views on which types of subsidies should be exempted from the envisaged general prohibition of subsidies, and the EC position on which types of subsidies should be excluded from PSE measurement. Given the many different ways in which PSEs can be defined and used in trade negotiations (Tangermann, Josling, Pearson, 1987), the similarity between the EC view and other countries' views on these issues is remarkable. In summary there is much common ground between the EC and its negotiating partners with respect to the principles, the fundamental objectives and the basis approach for the agricultural negotiations of the Uruguay Round. Of course this may be less important than divergent views on concrete measures, practical matters and the speed and extent of policy adjustments. However, given the fact that the objectives for agriculture in the Uruguay Round are so much more demanding than in earlier GATT rounds and that the negotiating approach considered currently (the PSE approach) - 36 - is a significant departure from traditional procedures, agreement on such fundamental issues is not at all unimportant. There will be enough occasions during the actual negotiations when solutions are difficult to find. It should then be useful to remember that there is broad agreement on principles. Looking only for differences in the starting positions can destroy the necessary momentum for the more difficult times. Diverging EC Positions On the other hand there is no doubt that on a number of issues the EC position diverges significantly from that of other countries. In some cases the apparent divergence may be more of a tactical nature and should not be taken too seriously. In other cases there are, indeed, fundamental disparities of views which can potentially get in the way of fruitful negotiations. But there, too, it is worth considering whether the common interest in a successful round of negotiations is not strong enough to suggest that compromises can be found. Among the actual or potential areas of conflict, I shall deal with six major issues, leaving aside some other points of disagreement and less important matters of detail. Extent of Policy Reform. One of the most visible disparities of views between the EC and some other countries is the extent of policy reform envisaged in the respective proposals. The United States proposes 'a complete phaseout over 10 years of all agricultural subsidies which directly or indirectly affect trade;' the Cairns Group proposal speaks of 'full liberalization in, and elimination of existing exceptions for, agriculture;' and the Canadian proposal aims at 'the elimination of all subsidies which distort trade and of all access barriers, over a period to be negotiated.' Contrary to that the EC proposal only speaks of 'stronger rules and disciplines on market access and export competition,' of "the phased reduction of support which directly or indirectly affects trade in agricultural products,' and of 'a significant, concerted reduction in support.' Of course one could argue that this divergence between the proposals reflects fundamental differences of views, or an ideological gulf between the major protagonists. The United States and the Cairns Group countries appear to believe in free trade in agriculture, while the EC is not prepared to give up on government intervention. To some extent this may be true. However, a cool look at the facts suggests that in reality the disparity between perspectives must be less pronounced. After all, it is simply not the case that the EC is the only area in which agriculture is the subject, and to some extent also dependent, of government intervention. There are clearly differences in the extent to which governments support agriculture, as the OECD Ministerial Mandate study has clearly shown. But it would be wrong to construe such quantitative differences as insurmountable qualitative divergences. Moreover, in practical negotiations some sense of realism is necessary. Given all the experience with past attempts at improving the situation of agricultural trade this is more realistic than an effort to achieve a significant reduction in support for agriculture. - 37 - In the end these apparent disparities of starting positions for the negotiations may turn out to be essentially an issue of tactical nature. Instead of arguing for a complete phase-out of subsidies over a ten year period, the United States could equally well have argued for a cut by 50 percent. It may be that the US Administration felt that its bargaining position was better served with a more extreme proposal. It is difficult to imagine that the actual negotiations should break down only because the EC is not prepared to underwrite the aim of a complete trade liberalization in agriculture. The Canadian proposal is somewhat more flexible in this regard. After setting the goal of a (complete) elimination of subsidies, it then speaks of 'an initial phase of this process' which should aim at phasing in 'a major reduction in all trade-distorting subsidies and a major improvement in secure and predictable access.' It would appear that is a realistic starting point for fruitful negotiations. Short-Run versus Long-Run Solutions. A more important issue is the US-EC conflict over whether an immediate improvement of the situation on world markets should precede any attempt at finding a long-run solution to the problems of agricultural trade. The EC proposal stresses the need of agreeing, in a first stage, on 'emergency measures,, valid for a single marketing year but renewable, for improving the situation on world markets for cereals, sugar and dairy products. The US Administration appears to be strongly opposed to this notion, arguing that it reflects the old EC tendency towards market sharing and that this is completely contrary to US interests. This disparity of views is potentially dangerous since it could block the beginning of fruitful negotiations. However, there is, again, not much point in treating this issue as a matter of ideological discrepancies, rather than as a matter for pragmatic consideration. Much can be said for halting the current progressive degradation of the situation on world markets for agricultural products. It could improve the atmosphere in international trade, create the peace which is necessary for calm negotiations, and demonstrate the universal genuine willingness to cooperate. The argument should, therefore, not be over whether but over how one could improve the situation in the short-run, without jeopardizing progress towards long-run solutions. From such a more pragmatic point of view, there are at least three issues which would need to be considered, and on which the EC would have to make concrete proposals, if emergency measures were to contribute to a productive negotiation on longer-run solutions. First, the nature of emergency measures should not be such that it is inconsistent with the nature of the longer-run solutions envisaged. Market sharing, for example, would essentially contradict the PSE approach, while an agreement on maximum export subsidies or import levies (explicit or implicit through quantitative import restrictions) would not. Second, the formal link between emergency measures and the GATT process has to be considered. Should there be formal commitments to emergency measures in the GATT framework, or is it better to keep agreement on emergency measures outside the GATT? It would appear that much can be - 38 - said for negotiating emergency measures outside of, but simultaneously with, the GATT negotiations. This would at least reduce the danger that disputes over adherence to the agreement on emergency measures could block the GATT machinery. Third, there is the issue of how to make sure that successful emergency action does not reduce the momentum for aiming at longer-run improvements. After all, the universal dissatisfaction with current conditions in agricultural trade and the resulting domestic policy problems is the most important incentive for engaging in serious negotiations on more fundamental solutions. The answer to this question may be simultaneous negotiations on, and progress in, both emergency action and longer-run solutions. In this sense there may have to be agreement at least on the scope and nature of longer-run solutions before emergency action can be taken, while negotiations on the details of the longer-run solution may have to wait for, and could be supported by, successful implementation of emergency action. It is worth noting that there is a striking correspondence between the Cairns Group's preference for "early relief measures' and the EC interest in emergency action. To be sure, the type of action envisaged by the Cairns Group is different from that proposed by the EC. But the principle of early action is the same. Perhaps the Cairns Group can again play the useful role of a mediator. Implemented properly, and viewed from a favorable angle, an interim agreement on improvements in agricultural trade could even be interpreted as going a step in the direction of the 'early harvest' preferred by the United States. Both the EC and the Cairns Group proposals contain the notion of some cuts in support at an early stage, before the longer-run solution is embarked upon. It is somewhat difficult to see how such an action could fail, conceptually and practically, into line between emergency measures and reductions of PSEs in the longer-run sense. If the emergency action agreed is significant enough, and if progress is made towards reducing PSEs, there may not be a useful role for such a third type of agreement. However, the EC obviously has one other target in mind. It would like the other countries to make early policy adjustments similar to what the EC feels it has already achieved since 1984. I shall come back to this issue below in relation to the reference period for policy adjustments. There is one other hitch to the EC proposal for emergency action. One element the EC would like to see in a package of emergency measures for cereals is a limitation on EC imports of cereal substitutes. This aspect is best discussed in relation to the overall EC strategy towards reducing Idisharmonies.1 Reducing "Disharmonies". For a long time, the EC Commission and some member countries, in particular France, have aimed at 'completing the CAP" in the sense of closing the 'holes" for imports of cereal substitutes and oilseeds into the Community. The point is that because of earlier GATT bindings of zero or low tariffs for these commodities the EC now has rather unbalanced levels of protection between, on the one hand, cereal substitutes and oilseeds and, on the other hand, cereals, sugar, olive oil, - 39 - and livestock products. In the EC jargon this situation is sometimes referred to as a 'disharmony, in agricultural policy. This disharmony adds to EC surpluses of the highly protected commodities. So far the Community has found it impossible to close this 'hole, in the CAP, except in the case of manioc, where the EC has been successful in terms of persuading the main supplier, Thailand, into a self-restraint agreement. The view of the Commission now is that the Community should use the Uruguay Round for correcting this disharmony, preferably by negotiating the introduction or increase of tariffs on cereal substitutes and oilseeds in the EC.1 Given that manioc is already covered by a self-restraint agreement, the commodities primarily affected would be soybeans and corn gluten feed, both imported in large quantities from the United States. It is therefore no wonder that the US reaction to this part of the EC proposal is not exactly enthusiastic. In purely tactical terms one can doubt the wisdom of including, in the first round proposal of the EC, an element which is as hard to digest as this one. If the EC really hopes to make progress in the Uruguay Round negotiations, it might have been better to avoid shocking the negotiating partners right on the first occasion. An alternative tactic could have been to wait until some significant progress is made and then to suggest that, by the way, there is one more thing one would like to talk about ... In terms of substance it is difficult to given an unequivocal answer to the question whether an agreement along the EC lines would make sense. There is much to be said against increasing protection for cereal substitutes and oilseeds in the Community. The major drawback is that, once the "hole" in the CAP is closed and there is, consequently, less surplus pressure on other EC markets, the incentive to bring down price support for cereals, sugar, olive oil and livestock products in the Community is less strong. From the US perspective it would be difficult to give up on the original EC tariff bindings for the commodities concerned, which are still regarded by many as the most important agricultural concession ever negotiated in the GATT. On the positive side it is clear that, with a given level of protection for other agricultural products, the EC is better off, in both budget and overall welfare terms, with some import protection on the currently less protected commodities. In this sense there is an obvious case for second best policy. Benefits to the EC become even higher when the introduction or increase of tariffs for the currently less protected commodities is coupled with a reduction of EC protection for cereals, sugar, olive oil and livestock products, as suggested by the Commission. From the US point of view it would be wrong to look at a possible introduction of tariffs on EC imports of oilseeds and cereal substitutes in isolation. After all it is the overall package of negotiation results which determines the balance of benefits and costs. There must clearly be 1/ The EC proposal speaks, less explicitly, of "a readjustment of ... external protection," la reduction of ... distortions," and "an elimination of imbalances in internal production." - 40 - some combination of (a) cuts in EC support for cereals and livestock products and (b) increased EC protection for oilseeds and cereal substitutes which results in net benefits for the United States. It all depends on the extent of support cuts on the one hand and on the level of new tariffs on the other. In assessing the "costs" of new EC tariffs for the US one must not forget that the lower they are the more the EC brings down its protection for the "core" commodities under the CAP, simply because a reduction of EC protection for cereals and livestock products would tend to reduce the volume of EC imports of soybeans and the price EC feed compounders would offer for corn gluten feed. Looked at from a slightly different angle one can argue that the US should consider wselling' its GATT rights on soybeans and corn gluten feed as long as these rights still have a high value to the EC (Tutwiler and Rossmiller, 1987). Of course the US could also consider "selling' only its rights on cereal substitutes, while sticking to the zero tariff binding for EC soybean imports or even requesting a guaranteed minimum access for soybean exports to the Community. In addition to the purely quantitative assessment of costs and benefits for the United States, there are also qualitative changes of the CAP in which the US should have a major interest. One such change would be a binding of the maximum level of variable levies and export restitutions in the EC. Such a binding would fundamentally change the legal situation of EC agricultural trade measures in the GATT, since for the time being there is essentially no effective GATT discipline for these EC measures. In this regard it is extremely important to note that the EC proposal envisages 'GATT bindings ... of the maximum levels of support, protection and export compensation." If this were what the US could "sell" its rights for, it should be worth considering. One other aspect requires attention. It will be difficult enough for the EC Commission to convince the Council of Ministers of Agriculture that in the end the Community should accept a major reduction of agricultural support and possibly even a binding of support rates. There will have to be some 'sweets' in the package which the Commission brings home from Geneva. US acceptance of closing the "holes" in the CAP may be such a "sweet.' Reference Period for Policy Adjustments. Among the many issues which would have to be negotiated in relation to a PSE approach for agriculture in the GATT, there is the appropriate reference period for measuring starting values of PSEs. In its passage on the PSE approach, the EC proposal does not mention any particular reference period. However, in the earlier passage on short-term actions during a first stage,- the EC proposal refers to the "1985186 marketing year, which immediately preceded the commitment to hold multilateral trade negotiations." Moreover, from internal discussions in the EC one gets the impression that the EC would like to receive 'credits' for the adjustments it has made to the CAP since 1984. Since the other countries' proposals are not explicit on this issue, it is not clear whether this is a point of disagreement or not. However, it would be difficult to imagine that the EC would be able to convince other countries they should grant the EC credit for adjustments - 41 - which the EC has made prior to the Uruguay Round, on purely domestic grounds and outside any GATT agreement. One of the major adjustments the EC has made was the introduction, in 1984, of quotas on milk production and later reductions of these quotas. Of course the EC can argue that, though these policy changes were made out of domestic concerns, they have made a contribution to improving the situation international trade. Yet, to treat them as a contribution to the Uruguay Round negotiations would go a little too far. The only non-arbitrary reference period for assessing the starting point for commitments made in the Uruguay Round is the period immediately preceding the Punta del Este Declaration. Since it is technically impossible to measure PSEs, or any other indicator of the level of protection, on one specific day (e.g. September 20, 1986), the average of one year (calendar year 1986, or crop year 1985/86) will have to be used. However, policy adjustments made in 1985 or 1986 can hardly be considered a contribution to any Uruguay Round obligations. Processed Products. The EC proposal appears to be the only one which contains a specific reference to processed products. The relevant passage speaks of the need to apply more detailed GATT rules to "conditions for the application of subsidies, including those for agricultural products which are incorporated in processed products.' Given the EC system of export restitutions for processed products (which are derived from export restitutions for the raw agricultural products incorporated) and the experiences the EC has recently had in the pasta encounter with the United States, it is not surprising that the EC should aim at the development of GATT rules for export subsidies for processed products. This concern of the Community should be taken seriously by other countries. There is no economic reason why an industry which processes agricultural commodities should not be compensated for the effects of protection on the raw commodities, provided this compensation is adequately fixed and does not lead to effective protection of the processing activity. In practice, however, it is difficult to develop, at the international level, appropriate rules for monitoring and controlling policies of compensating the processing industries. Yet, compared with the overall difficulties of finding a solution to the problems of agricultural trade, this is a technical matter which should not create insurmountable difficulties. State Agencies. The EC proposal is also more explicit than other countries' proposals on the issue of state agencies and marketing boards. This issue is of particular importance in relation to some of the Cairns Group countries which channel part or all of their agricultural trade through such agencies. In view of the importance of state agencies and marketing boards in agricultural trade, it is highly important that any improved GATT rules and disciplines for agriculture apply fully to these agencies as well. Otherwise there would not be balance among different countries' obligations, since some countries rely more heavily on the operations of state agencies and marketing boards while other countries use different means to implement their agricultural policies. - 42 - It will therefore be necessary to consider carefully the way in which the activities of state agencies and similar institutions can be integrated in such improved rules. For example, the effects of the activities of state agencies would have to be fully included in the measurement of PSEs. Moreover, there needs to be more transparency with respect to the operations of state agencies. GATT Article XVII provides a useful starting point for such improvements. However, provisions should be elaborated which make sure that more effective use can be made of this Article. Conclusions The Community is not regarded by its trade partners as a serious proponent of agricultural trade liberalization. This is certainly true in the sense that the Community will not be prepared, in the Uruguay Round, to go nearly as far as to free trade in agriculture. Moreover, it is true that in some parts of the Community, strongly protectionist tendencies still prevail when it comes to agriculture. For example, Germany, which otherwise strongly advocates the market economy approach and a liberal trading regime, is strongly opposed to reducing agricultural support. In this situation it would be wrong to pretend that the Community will be an easy partner in the Uruguay Round negotiations on agriculture. However, it would be equally wrong to project the image of the Community's position on agriculture in earlier GATT rounds into the future. Things have changed significantly in the EC, and today's problems with the CAP are so large that adjustments have to be made, if only for domestic EC reasons. One of the major problems in this situation is to find agreement between EC member countries on how these changes should look. The Commission strongly advocates a more market-oriented approach, but some member countries are not prepared to go this road. In this situation it is important for the Community's negotiating partners to support those tendencies in the Community which point towards a reduction in agricultural protection and more liberal trade. In the practice of the GATT negotiations this means that there is good reason to take the Commission seriously when it offers to negotiate a phased reduction of agricultural support, and to search for solutions which would make it easier for the Commission to go back to Brussels and convince the Council that this is an acceptable package. To some extent this situation in the Community is similar to that in other countries where the government has to convince the parliament that the overall outcome of the negotiations is beneficial for the country. The particular situation in the Community, though, is now that the Commission may be prepared to go significantly further towards liberalization of agricultural trade than the 'average' of the member countries. Making things too difficult for the Commission negotiators in Geneva therefore does not necessarily help the overall process. As far as the EC proposal for the agricultural negotiations in the Uruguay Round negotiations is concerned, it can be interpreted in different ways, depending on how one reads it (or wants to read it). There are certain elements which are hard to digest for the Community's trade partners, above all the United States. This could lead one to argue that - 43 - the EC is still on its old track of wanting to preserve the CAP. However, it is worth reading the text of the EC proposal in a cool mood. In some important fundamental points there is not a gulf between the EC perspective and that of other countries. The EC is prepared to negotiate on a significant reduction of agricultural support, and it is willing to try the PSE approach. For a start, and considering past difficulties, this is certainly enough common ground to enter into promising negotiations. Some other elements in the EC proposal will create difficulties for other countries. The EC preference for emergency action in a first stage should be less of a problem than is sometimes argued, in particular since there is an obvious overlap with the Cairns Group proposal. The most difficult element in the Community proposal is probably the EC desire to secure acceptance of tariffs on imports of cereal substitutes and oilseeds into the Community, along with a reduction of support on cereals, sugar and livestock products. However, this issue, too, requires a cool calculation of benefits and costs by the Community's trade partners. There is no point in striving for a maximum and settling for nothing, when a limited improvement would have been possible. Experience with the Kennedy Round negotiations, where the Community's offers were turned down by the United States because they did not appear to go far enough, should have taught that lesson. It appears that there is a real chance that the Uruguay Round could make significantly more progress on agriculture than any of the earlier GATT rounds. References Tangermann, S., T.E. Josling and S.R. Pearson. 'Multilateral Negotiations on Farm Support Levels.' World Economy, Vol. 10 (1987), pp. 265-281. Tutwiler, M.A., and G.E. Rossmiller. "Negotiating Agriculture in the GATT: A Strategy for the United States.' Mimeo. Resources for the Future, Washington, D.C. 1987. - 45 _ DEVELOPING COUNTRY PERSPECTIVES ON THE MULTILATERAL TRADE NEGOTIATIONS Carlos Vidali I wish to thank you for your invitation to take part in this Agricultural Sector Symposium organized by the World Bank. This very important meeting provides a valuable opportunity to examine the implications for the developing countries--and particularly for Mexico--of the agricultural trade negotiations currently taking place in GATT, and especially the prospects that these offer for increasing exports from the developing countries, in an international environment characterized by profound changes. The world economy is becoming more and more complex, under the influence of new technologies that are increasingly interrelated with monetary and financial variables. This is imposing a new rationale on productive and trade activities, the impact of which is also being felt in agriculture. After World War II, the developed countries adopted agricultural policies aiming at self-sufficiency, supporting producers by providing subsidies, production incentives and technological and financial support for research and investment. The considerable development in the industrial countries' agro-livestock sectors counteracted the Malthusian expectations voiced in the 1970's by the Club of Rome causing agricultural surpluses to build up in those countries. The major challenge now is to distribute these surpluses more equitably, because we are simultaneously witnessing an increase in hunger in the developing world that reflects the inability of an increasingly monopolistic market to achieve the level of balance that would enable it to expand. The combination of scientific and technological progress in the developed countries, together with their ample financial capacity for providing subsidies, has enabled them practically to dominate agricultural markets, making them the scene of confrontations in which transnational corporations exert great influence as a result of both their control of technological resources and true genetic varieties, and their dominance over a substantial volume of agricultural trade. These problems are even more aggravated by the volatility of exchange rates (particularly for the dollar), the increasing speculation in agricultural goods resulting from their incorporation into financial markets, and the decline in demand for commodities resulting from the adoption of more efficient production processes and the constant development of substitutes. As a result, the developing countries have been virtually ousted from agricultural markets, because--having only their natural resources- -they are financially and technologically uncompetitive in this environment, which is also characterized by a high degree of protectionism. Thus, they have lost an important source of foreign exchange. Because of their high level of indebtedness and critical lack of resources for - 46 - financing development, they have undertaken a justified struggle to open the markets of the developed countries to their agricultural exports. GATT has become a battleground. The Geneva multilateral negotiations on agricultural products constitute one of the most important examples of this. The topic is so momentous and controversial, that it was as a direct result of the consensus between the adversaries on the need to strengthen the GATT Convention regarding agricultural trade that the current round of negotiations was launched. Negotiations and agreements on agricultural trade have acquired an importance that is unprecedented in the history of GATT. In the seven previous rounds, comparatively little attention was paid to agricultural trade, even though it already constituted about 10 percent of the value of world trade. Today, however, the decisions taken in the Uruguay Round could determine the immediate future of agricultural trade, and also what its main characteristics are to be in the 21st Century. Nevertheless, great efforts will be necessary to bring this to fruition. As you know, agricultural negotiations in the Uruguay round have been divided into two groups: tropical products and agricultural products. The former had been considered as providing an opportunity for discussing the interests of the developing countries, the developed countries having undertaken to grant special concessions facilitating the entry of such products into their markets. Recently, however, the developed countries have shown signs that they will demand reciprocity in the form of equivalent concessions for these or other products, asserting that, in many cases, they also are large producers and exporters of tropical products. The agricultural group is specially important because of the strategic nature of the products in question, from the standpoint of both food security and job creation, which affects a large part of the population in many countries, be they exporters or importers of such products. So far, the various views expressed within this group have been concerned with the problems faced by the large exporters, and the role of the importers--mostly developing countries--has been disregarded, even though they form a large majority of the contracting parties. The general view is that one of the major factors producing distortions in agricultural trade is the disequilibrium between supply and demand promoted by the subsidies paid to producers in the industrial countries, and the enormous scientific and technological progress that has served to increase their output. This had led to the series of recommendations and proposals presented by the exporters and international organizations, such as the World Bank. The former, wishing to sell their surpluses and reduce the cost of their agricultural support policies, call for the total liberalization of agricultural trade, for the withdrawal of governments - 47 - from these activities, and in some cases, for cuts in the production of supposedly 'surplus" crops. The international organizations, and especially the financial institutions, in line with the liberalization they have advocated as a condition for renegotiating the external debts of most developing countries, have become stalwart defenders of these proposals. Their main argument has been the need to revitalize agriculture, and thus use its great potential to Third World economies, in the expectation that free competition at the international level will produce efficiency. All this would require an overall package of macroeconomic measures designed to counteract the antiagricultural bias evident in these countries. It would be necessary to eliminate those sector policies that keep domestic agricultural prices lower than international, to abandon overvalued exchange rates, and to put an end to parastatal agricultural marketing 'monopolies.' The recommendations ignore the fact that the problems arising from agricultural surpluses in the large exporting countries and shortages of foreign exchange in developing countries--most of which are net importers of these products, cannot be solved through a free market, because the essential prerequisite for such a market, i.e. comparative advantage, does not exist. Mexico, like many other developing countries that import agricultural products, cannot accept proposals that advocate a reduction in output as a method of bringing supply and demand into balance. In my country, the liberalization of world agricultural trade is acknowledged to be an important precondition for the more efficient allocation of resources. As you know, Mexico does not subsidize the export of its agricultural products, and recently the process of replacing its permit system by a structure of tariffs has accelerated, so that now permits are required for fewer than 10 percent of goods. Mexico has, therefore, shown itself willing to proceed along the path toward liberalization, as proposed by the large exporters. Nevertheless, it insists that the difference cannot be disregarded between the developing countries, which largely depend on food imports, and those that have large exportable surpluses that would enable them to participate freely in world agricultural trade. Consequently, while we acknowledge that world trade must provide mutual advantages and increase benefits for all participants, we emphasize that this does not imply that the developing countries should make a contribution that is not commensurate with our special, financial and development needs, or with our strategic objective of achieving food security. The recommendations put forward by international organizations such as the World Bank to make agriculture the driving force behind development ask developed countries that are parties to the GATT Convention to grant special and more favorable treatment to the developing countries, as regards both their exports and the protection of their agricultural - 48 - sectors. This treatment must not be considered "exceptional,' but an integral part of multilateral trade negotiations. The developing countries' structural weaknesses as regards agricultural competition--resulting from low productivity, the use of labor-intensive methods, their underdeveloped technologies and underspecialized management--is impelling their governments to adopt policies for modernizing agriculture and increasing productivity. To these problems must be added the difficulties of planning agricultural output resulting from susceptibility to climatic variations, and even natural disasters. In short, negotiations in this group must take account of the differences in circumstances and conditions affecting production in each country and region, while respecting their sovereign right to adopt policies for increasing domestic food production and consumption to at least a minimum level of self-sufficiency, and for promoting rural development, including capital investment, research, education, market information, genetic improvements, and pest and disease control. Agreements in this area will have considerable repercussions on the economies of the developing countries. The deliberations of the negotiating group dealing with agricultural products are the object of great hopes and the desire to see solutions found to problems that have mounted up over the decades, have been mentioned in all international trade discussions, but have so far never been tackled directly by the two sides concerned. One of the purposes of the Uruguay Round is to change this situation, as was stated in the Punta del Este Ministerial Declaration. Liberalizing and expanding agricultural trade for the benefit of all countries, and particularly the less developed countries, is one of the basic objectives of the Round. In order to achieve this, the broad view will have to be adopted, so that all participants are included. In particular, however, the initial steps will have to be taken by those who have already achieved the goal of food security, and hope to obtain greater benefits through trading their surpluses on the international market. SESSION II: AGRICULTURAL DEVELOPMENT STRATEGIES POLICY REFORM AND NATURAL RESOURCE ISSUES - 51 - LENDING STRATEGIES FOR AGRICULTURAL DEVELOPMENT Moeen A. Qureshi Last month I circulated a statement I made to the Bank's Board of Directors on the emerging Operational Agenda for the Bank. This morning, I would like to fill in a part of that broad outline by focusing on some of the lending priorities in agriculture. It would be difficult to overstate the importance of agricultural development in today's economic environment. Agricultural development will continue to be the main vehicle for improving the lot of the world's poor, since most live in rural areas. The rural poor rely on agricultural production as their main source of income and employment. But agricultural development must aim at more than poverty alleviation and income distribu- tion. It is also the key sector for economic growth in most of the world's developing countries. The challenges facing agriculture in the developing world today are indeed formidable. Not only must agriculture serve as a source of income, food, employment and economic growth, it must also play a lead role in export expansion and efficient import substitution; earn foreign exchange for debt service, and serve as a source of revenue for countries with few fiscal options. To that growing agenda, we must add other pressing priorities such as the better integration of natural resources management concerns in agricultural development. Indeed, agriculture in most of our borrowing member countries is increasingly influenced by the overwhelming changes that are taking place in the international economic environment. We can no longer treat agriculture as an isolated sector within relatively closed country economies. You all know that the prospects for improvement in world markets for agricultural commodities are not favorable; you also know that this is largely the result of insufficient growth and inappropriate agricultural policies in developed countries. In a number of countries, agricultural prospects have been deeply affected by exchange rate instability. Finally, and this should come as no surprise to you, shifts in agricultural comparative advantage are increasingly likely in the years ahead. These pressures and challenges are not abstractions, but concrete issues in your operational work. They vary greatly from country to country and from region to region and do not lend themselves to instant solutions; however, we definitely need to take account of them in the design of our agricultural lending program. I believe that we can still make further progress in this direction. In that spirit, I would like to examine several key issues as they apply to the different country groupings that I highlighted in my recent Board statement. I am aware of the normative nature of this approach, but it should enable us to focus on the most critical points of our agenda. So, let us turn, first, to agricultural priorities in the heavily indebted middle-income countries. - 52 - Heavily Indebted Middle-Income Countries In the heavily indebted middle-income countries, our agricultural assistance must have as its main objective the restoration of economic growth and creditworthiness. For the short- to medium-term, this will mean a heavy concentration on quick-disbursing, policy-based adjustment lending, and complementary investment lending in the agricultural and other sectors, to achieve the needed supply response. In this-process, we will have to be sensitive to political realities, fully aware of the time needed for reform programs to be accepted and to take root, and conscious of the need to cushion the painful social effects of adjustment, especially on the poor. The Bank's present concentration on adjustment lending for these countries should be seen as a transitional phase, to be followed by increased emphasis on high quality investment lending to support the growth renewal process. But in the short run, there is no alternative: successful reforms and adjustment are essential for restoring the conditions for sustainable development in the highly indebted middle-income countries. While there can be no standard prescriptions, the parameters of a meaningful agricultural adjustment program are well known to all of you. The overriding objective of such programs is to improve the consistency of macro-economic and sectoral policies so as to maximize the contribution of agriculture to growth. Your work in support of efficient resource allocation and use through the streamlining of agricultural public investment programs and the gradual liberalization of agricultural and food pricing, marketing, and trade has already yielded important benefits in a number of countries. Public enterprise reform, including privatization, and increased financial discipline to reduce the fiscal drain of loss- making public enterprises are, along with realistic pricing of services provided by the public sector, continuing areas of emphasis in most .agricultural adjustment programs. We should continue, and, where possible step up our support for economic reforms designed to build a competitive and efficient private sector. We have done this by encouraging measures such as the removal of restrictions to market access, the reduction or elimination of quantitative restrictions to trade, the adoption of realistic exchange rates, and the establishment of adequate incentives for private investment. We will need to continue to concentrate on these reforms especially in countries where expansion of the public sector in agri-business activities has overstretched the government's managerial capacity, and where public monopolies have crowded out private undertakings. Our support for private entrepreneurship and risk-taking in the agricultural sector should also continue to be supported actively through agricultural credit projects. These projects, in addition to directing funds to the agricultural sector, will help expand the coverage of financial intermediaries so that they reach larger numbers of farmers including smallholders. Increasingly, such projects should be undertaken in the context of financial sector reforms designed to improve the allocative efficiency of financial intermediation. Liberalization of interest rates, reduction of credit rationing by government, strengthening - 53 - of credit institutions, and improvement of collection rates are objectives that deserve to figure prominently on your agenda. Now I know that some of you are concerned about perceived pressures to lend to these highly indebted middle-income countries at all costs. Let me speak to that concern directly. The World Bank will not push out money at the expense of quality. I have stated my position clearly to the Board: to the extent that borrowing country circumstances do not permit progress to be made in policy reform, the possibility of a major drop in total Bank lending cannot be ruled out. But I must also point out that our total lending has been stagnant for the last three or four years, and therefore declined in real terms. This is doubly true for agriculture, where the most recent lending proposals from the regions show a drop from 24 percent of total lending in FY85-87 to 22 percent in FY88-90. In order to serve as the premier development institution in the world, the Bank will have to step up its lending and coordinate the flow of resources from others as well, since the resource needs, particularly of the major debtors, are far in excess of what the Bank can be expected to deliver. Our challenge is to expand our agricultural lending and help mobilize these resources, but sacrificing quality would be more damaging than a shortfall in lending, and there can be no compromise on that. While the needs of highly indebted middle-income countries are enormous, our financial and staff resources are limited. We will therefore have to be selective in the programs which we are willing to support, giving priority to those countries where the commitment to adjustment is strongest. In these countries we have to stand ready to assist in a net transfer of resources in support of sound adjustment programs so that they can re-establish their creditworthiness. Other Middle-Income Countries For the other middle-income borrowers the challenge for agriculture lies mainly in diversification and downstream integration into agro-industrial and marketing activities. Within this group, the East and South-East Asian countries show a particularly great need for diversifica- tion and innovation as external conditions change and as patterns of agricultural comparative advantage shift. This need for diversification has intensified as a result of the long-term secular decline in agricultural commodity prices, and their extreme volatility in recent years. In this environment, we will need to rethink our strategies for agriculture and look for new approaches to maintain sectoral growth, particularly in large economies such as Indonesia. These countries cannot continue to rely to such a large extent on basic staples and traditional tree crops and still maintain adequate growth rates. More work is needed to assess the potential for shifts toward higher value products, for which there is growing demand. Strategies will have to be developed for research, marketing and infrastructure investment to improve responsiveness to rapidly changing marketing and technological conditions. Such transformations within the agricultural sector will undoubtedly give rise to substantial labor adjustment issues that we should also be prepared to tackle with the governments concerned. - 54 - In this context I want to re-emphasize some comments I made in November to the Agricultural Division Chiefs on the subject of repeater projects. I am concerned about a tendency toward 'supply-driven decisions on many such projects. The fact that they may have high economic rates of return is not a sufficient justification for Bank involvement. Repeater projects deserve our support if they are innovative and include qualitative improvements. We should stay away from them if we have nothing to contribute other than financing. This applies particularly to those projects where we support the same traditional export crops over and over again while making only limited technical, institutional or other contributions. Let me here also highlight the need for careful analysis and a differentiated approach in our support of agricultural projects designed to expand production of the so-called 'surplus' commodities facing inelastic demand in world markets. We know that many developing countries have a comparative advantage in the same crops. While I do not believe that blanket lending restrictions would be an appropriate way to deal with these commodities, our choice of projects should be more selective. More careful analysis of a country's potential for diversification and more weight to the effect of incremental commodity production on world prices, on export revenue and on incomes in other countries producing the same commodities, would be useful additions to our approach to this problem. This does not exhaust what can be said about this difficult issue, and, as most of you know, we are presently developing with the assistance of PPR more comprehensive and transparent criteria to guide our policies with respect to such projects. In the middle-income countries of Eastern Europe, agriculture, though declining in relative terms, will continue to have an important role to play in helping to achieve greater integration with the economies of Western Europe. We know that export marketing in the face of the EEC's common agricultural policy will be difficult. Our main challenge here is to help these countries increase the efficiency of their agricultural sectors, improve the quality standards of agro-industries, and develop more commercially oriented and effective trading regimes and marketing institutions. Only then will their producers be able to meet strong international competition. At the same time, we need to press for greater liberalization and efficiency in these countries' internal trading arrangements and in their channelling of agricultural inputs and credit to the most productive users. The other middle-income countries of the Middle East and North Africa face similar challenges. But due to escalating food deficits and heavy reliance on food subsidies in many of them, our assistance will have to focus even more on improved production technology, extension systems, and, above all, on re-establishing sound pricing, trade and marketing policies in the entire farm to market chain. Sub-Saharan African Countries I would like to turn now to a third group of countries -- the low- income group of Sub-Saharan Africa. Agriculture is the dominant sector - 55 - contributing in many countries more than 50 percent to GDP and in excess of 80 percent to exports, and it will continue to be the most important source of economic growth and income generation. It must also be the mainstay in the international effort to ensure food security for the continent by the year 2000. Our strategy in the agricultural sector should concentrate on removing the impediments in the policy environment to increased production of food and export crops, on improving the stability of annual food output, and, last but not least, on tackling the technological and institutional weaknesses that prevent the achievement of a significant supply response. As those of you who have been at the forefront of the agricultural development effort in Africa well know, achieving these goals will not be easy. We have learned that well-meaning but misguided government interventions in the areas of pricing, trade and marketing can stifle the production they had sought to support. More work is needed, however, to address questions of allocative priorities for public expenditures, taxation, and trade and exchange rate regimes. We will also have to assist in reducing the high protection frequently accorded to the import- substituting manufacturing sector which has tended to create a strong bias against agriculture. Within the sector, there is much scope for improving farming incentives. Increased incentives for agricultural producers will, however, need to be balanced by targeted food security programs for those consumers who are vulnerable to higher food prices. In our support for directly productive investments in agriculture, improved technology is clearly one of the key elements. Despite our longstanding involvement, there are still fundamental gaps in our knowledge of Africa's diverse ecology and agronomy which must be filled. Our inadequate knowledge of appropriate agricultural technologies for Africa highlights the need for increased attention to adaptive and applied research, a need which we, along with other donors, are now addressing through the Special Program for African Agricultural Research. The emphasis on research must be complemented by equally strong attention to extension services, and improvement in farm management systems. The greatest challenge there is to find ways to deliver efficiently and effectively the extension messages to smallholders, not only on production technology but also in social areas such as health and nutrition. The other key element will be the rehabilitation of deteriorating rural infrastructure, especially roads, storage facilities and irrigation systems; for the latter, I expect that the economic and institutional implications of the technical choices being made will be carefully evaluated. You will certainly agree with me that Africa can ill afford overly ambitious irrigation schemes of doubtful economic viability. Besides contributing to economic growth and food security, our work in agriculture will have to tackle the increasing degradation of the natural resource base in Africa. Large-scale soil erosion, dwindling forests and increasing desertification pose major challenges for our sector and project work. Our African borrowers must act -- with our help -- now to reverse a disastrous trend. The removal of plant cover, depletion of - 56 - soil nutrients, reduction of water retention in the soil, decreases in crop yields and reduced ability of land to support livestock, all feed on each other and are leading to ever-increasing human deprivation. We must be ready to help African Governments with advice and resources so that they can come to grips with this vicious circle. In particular, I would hope that the increase we have planned in forestry lending can materialize over the next few years. To meet the challenges of Sub-Saharan Africa we cannot rely on proven designs alone. We must also explore innovative approaches. In many cases, this may entail relatively small, low cost pilot schemes to be set up as a means to gain experience and test their replicability on a larger scale. Also, in designing agricultural projects, we will have to take fully into account the dominant role played by women in agricultural production and marketing in many rural societies. This is of particular significance in the formulation of extension, credit, and education projects where women must be provided better access. Other Low-Income Countries In the other low-income countries, the fourth group I will discuss today, agriculture has already made significant contributions to economic development, especially in India and China. But many challenges lie ahead. There is still considerable need for improving technology, and for strengthening management and institutional capabilities. There is also continued need for agricultural reforms especially with regard to prices, marketing mechanisms, land tenure, credit controls and the efficiency of public sector enterprises. Let me speak briefly about my recent trip to China. That country's most impressive accomplishment over the past decade has been the development of agriculture, with 8 percent average annual growth for the last ten years. China was able to achieve these gains by revolutionizing the incentive system. But after a decade of spectacular advances, China must find new ways of maintaining the momentum of growth in its agricultural output. The Chinese authorities are contemplating bold new steps to adapt their system of land occupancy and usage to the requirements of increased mechanization, to accelerate the process of rural industrialization, and to diversify out of basic staples and towards commodities with higher income elasticity of demand. The Bank can assist in this effort and I am encouraged that we are now discussing our first policy-based operation in China -- an agricultural sector adjustment loan to support the second phase of the reform program. This is likely to be a wide-ranging operation, addressing questions of land use and ownership, price liberalization, rural credit institutions and sectoral organization. To ensure the success of these bold reform measures, it will be important to anticipate the rapid changes that are taking place in the Chinese countryside, and to build flexibility into project design. We must also continue and expand our project lending program with emphasis on the application of new technology, for without new technology the prospects for further productivity gains are limited. - 57 - The most significant challenge for agriculture in the lower income countries outside Sub-Saharan Africa, however, lies in the sector's importance for poverty alleviation. About 500 million of the world's absolute poor live in rural areas in Asia, and agricultural and rural development will be crucial for improving their welfare. We will need to encourage investments which stimulate growth of agricultural production, increase productivity, and expand employment opportunities. Our lending will therefore require a substantial element of direct assistance to subsistence farmers, and to landless laborers through employment generation. It will also have to provide for the strengthening of agricultural support services. These efforts will need to be supplemented by investments in education and health in the rural areas to strengthen the human resource base for an expansion of agricultural production. In formulating our project assistance in agriculture and rural development, we must build on our experience and the lessons learned. 'While many of these lessons have already been incorporated in the design of investment projects in recent years, the recent OED study on rural development highlights that more needs to be done. In particular, we will have to be especially watchful with overly complex projects which have proven to be difficult to implement and sustain. Our lending strategy in these countries must also give due weight to rehabilitation, maintenance, and new construction of productive infrastructure such as rural roads and irrigation schemes. These improvements in infrastructure generate direct production benefits while at the same time improving farmers' access to modern agricultural inputs and technology, and increasing the marketability of agricultural output. There is abundant empirical evidence that infrastructure investments are an essential ingredient for successful agricultural development. But, in the recent past, governments have often tended to avoid new infrastructure investments and to neglect maintenance and rehabilitation of existing capacity. As a result, substantial efforts are needed to redress the situation, particularly in the area of water resource management. You know better than I that these problems require urgent attention. Conclusion Let me conclude now with these thoughts: First, the role of agriculture in World Bank lending needs to be expanded, first and foremost in qualitative terms, but in quantity as well. I have asked the Regional Vice Presidents to re-examine their plans to see how this objective could be achieved taking into account the specific contribution agriculture can make to our overall country assistance strategies. Second, the increasing diversity and complexity of our work in agriculture may well require the development of new lending approaches, such as 'hybrid' loans involving elements of both policy-based and investment operations, or pilot projects to pioneer new ideas. This may lead us to develop a more responsive and flexible approach to project documentation and processing. I would like to explore this further with you in the coming months. - 58 - Third, the new responsibilities and challenges facing the sector are no coincidence. Your skills, your past accomplishments, and the strategic position agriculture occupies in development are all powerful incentives for asking you to do more. Indeed, I recognize that pressures are upon you from both inside and outside the institution to pursue many objectives simultaneously: alleviate poverty, contribute to the restoration of macro-economic equilibria, and maintain resource transfers at adequate levels, to name just a few. Clearly, we need to establish priorities amongst our objectives and in our work programs. But there is no higher priority than to be responsive to our borrowers' needs. And we must do so in a flexible and innovative way, and, above all, we must maintain our standards of technical excellence and quality. I do not expect all of you to be "renaissance" men but I have every confidence in your ability to rise to the emerging challenges and achieve splendid results. -59- WORLD BANK EXTENSION: POLICY AND ISSUES John Hayward Development of Bank Extension Policy Despite the fact that the Bank has, since the mid 1960's, provided over US$1.8 billion to support agricultural extension in about 460 projects spanning 80 countries worldwide, it has no formal policy on extension. Many might argue that Training and Visit (T&V) extension is Bank policy and nothing further is required. Yet, according to a detailed review of extension projects carried out in 1987 by Michael Baxter and Roger Slade,1 only 30 percent of Bank-supported projects have explicitly incorporated either pure T&V or some modification of the system. Furthermore, although the proportion of projects involving T&V has increased somewhat in recent years, the number which employs some modification of the system as originally described has increased more so. All such modifications of the T&V design are intended to mold the system to fit local conditions; some are trivial yet some involve significant departures from the basic pattern. If there is one policy which the Bank has followed in supporting extension it is that there is no system blueprint which should be applied indiscriminately. And Danny Benor was the first to agree with me on that point. Nevertheless, the Bank is identified with T&V despite the fact that there is much confusion outside and indeed inside the Bank on just what constitutes T&V. This has led to misunderstanding, to severe criticism and to downright antagonism particularly where marginal details of the system have been employed in situations where they simply did not fit local circumstances. T&V is nothing more nor less than a management system which applies basic organizational principles to geographically scattered operations which are aimed at changing the behavior of many isolated individuals using poorly educated and often poorly motivated staff. Unfortunately, T&V has become identified with precise staffing patterns, fixed extension worker to farmer ratios, visits to contact farmers every 10 days, etc. But these are details which pertain to particular regions at particular times and in particular circumstances. They must not be mistaken for fundamentals of the management system. Let me here quote Danny Benor: "There can be no one system of extension suited to all farming communities. The variation in agro- ecological conditions, socio-economic environments and administrative structures is such that one system cannot be expected to suit all conditions. To be successful, the T&V system must be adapted to fit local conditions. However, the flexibility that enables successful adaptations to be made in the system does not allow for adaptation of its basic principles.12 1/ Report in preparation. 2/ Daniel Benor. "Training and Visit Extension: Back to Basics,' in Agricultural Extension Worldwide, by William Rivera and Susan Schram, Croom, Helm. London. 1987. - 60 - This statement could well form a cornerstone of the Bank's Extension Policy Paper which is now in its early stages of preparation. The vital question remains, however, as to what are those basic principles of extension which the Bank should incorporate into its policy, what characteristics should we insist on being at the heart of any Bank- supported extension system? And this is where there will be much debate. I would suggest, however, that the basic principles should include: * a professional service with full-time trained staff supported by resources required to perform their professional functions; * a single line where staff are technically and administratively responsible to one authority; * staff effort to be concentrated on extension activities with staff members performing clearly defined and monitorable tasks; * time-bound work and training programs including regular farm visit schedules; * field and farmer orientation, with special reference to meeting farmers on their own fields; * regular and continuous training at all levels to up-grade professional skills; and * a procedure for ensuring a two-way flow of information between research, extension and farmers. These seven points are the fundamental principles of the T&V system and I believe are fundamental to any effective management system. They are principles which would be at the core of Bank extension policy and we should get away from focusing on site-specific details. As the Bank moves from supporting extension projects to providing support for the extension sector at large we must be able to say what criteria are critical to effective extension. Some concern has been expressed that the production of an Extension Policy Paper will be a constraint on the design of extension systems. Quite the reverse. Bank policy should stress the basics but allow staff and particularly the borrowers themselves to determine the details. The policy should, however, set the bottom line for conditionality. Issues in Extension. As a first step towards developing the Policy Paper, the Agriculture and Rural Development Department recently interviewed thirty Bank staff members to determine their concerns over extension implementation. We found that concerns fell into six areas: * the identification, attitude and involvement of beneficiaries of extension; * the multiplicity of extension systems and extension organizations within the same area; - 61 - * the weakness of linkage mechanisms in the information system; * the roles and responsibilities of the public and private sectors in extension; * government commitment to extension and the impact of policy on extension operations; and * concerns related to the Bank and donor agencies. These issues are obviously interrelated, some closely, such as the lack of careful definition of farming problems and poor research extension linkages, a topic on which Claude Blanchi will speak, and some more distantly, such as government policy and the role of the private sector which Oliver Lafourcade will touch upon. In the brief time at my disposal I wish to focus on three issues: the first involving extension incentives; and the third relating to government commitment and the role of the Bank. Unifying Extension. Several Bank-supported extension projects have foundered on attempts to unify extension organizations--bringing parallel systems of agriculture, forestry, fisheries, livestock, irrigation, etc. under one extension administration. These attempts stem from the implicit assumption that the farmer should interact with a single counsellor or extension advisor who in turn has access to the full range of subject matter specialists each providing technical backstopping. Such advisory systems operate well in several advanced agricultural countries, particularly where both farmers and field level advisors are relatively sophisticated, technically astute and with sufficient confidence and mutual respect to intereact effectively, together and with technical staff. Unfortunately, the situation in many developing countries is far from this ideal. By force of circumstances most extension systems are delivery services and not advisory services. And just as delivery services, for mail, milk, power, etc. do not require a unified service, indeed mostly demand their own specialized service to operate effectively, so the misconception of the nature of extension and the limitations of personnel create a perceived need for similar division of labor in agricultural extension. A characteristic of delivery systems is that interaction with beneficiaries is minimal and feedback is to a large extent non-existent. Such a situation is clearly inappropriate for an advisory service. Yet, we are faced with relatively untrained extension staff and vast numbers of uneducated farmers which makes the transmission of simple messages through a delivery system appear more appropriate and is obviously more readily understood by project and government agencies. But this delivery system approach, which incidentally leads to the erroneous impression that extension is unnecessary if there is nothing to deliver, must be seen only as a stepping stone towards a true advisory service. Our projects must be designed to promote and not to block the development of an advisory service. Yet we must be realistic. I believe that extension services should be unified wherever possible but it is far more important to get existing services working according to the basic management principles - 62 - outlined above than to raise antagonism by demanding unification. Evidence from several countries shows that a dogged inisistence on unifying existing services cuts so drastically across turf lines and meets such strong resistance that it can be counter-productive. Agencies fight against unification by sniping at the extension system and eventually by opting out of the development process. We therefore lose the opportunity of guiding change. Extension Incentives. Here I am not going to dwell on the problems of adequate salaries, or indeed the lack of motivation brought about by inadequate housing and. poor mobility. We are all aware of those problems. What I wish to address is the lack of tangible incentives for any extension worker to improve agriculture. Government extension workers in developing countries almost invariably get the dirty end of the stick. They are criticized by farmers for not providing an efficient service, by research for not transferring messages, and by governments for being generally ineffective. Yet if they do succeed in stimulating improved production, in getting a new variety accepted, or in influencing the direction of research, what is in it for them? Perhaps pride and honor, but such feelings don't feed the family. If we are to develop professional extension services, and if we are to attract and retain the best extension staff, I believe we must devise and, for a time, fund, incentive schemes related to farm production. I am fully aware of the problems associated with measuring agricultural improvement, with apportioning rewards according to the contribution of research and extension, and of the opportunities for abuse such schemes imply. Nevertheless, we all accept that private sector operations work on the basis of performance-related bonus schemes and if we fail to recognize a similar need in government extension we condemn it to mediocrity. Government Commitment. Finally, I wish to touch on the critical issue of the lack of commitment to extension shown by many borrowing governments. This manifests itself in the well known vicious spiral of inadequate budgetary resources leading to ineffective performance, even greater disenchantment and further lack of commitment. In the hope of promoting heated discussion, I am going to question whether this is unreasonable behavior on the part of governments. Bank staff take for granted the fact that a good information system can bring about agricultural improvement. Many of us have had first hand experience of seeing good extension at work or we may have read evaluation reports such as those by Feder and Slade. But do we have the evidence to convince government officials that they are doing a grave disservice to their countries by not creating and supporting an efficient extension service? Evidence does exist in the literature, in some of our own projects and particularly in private sector business both within and outside the agricultural field. I feel there is an urgent need to bring this evidence together, not in an esoteric report, but in a format designed to convince government officials, who may have no feel for extension, of the strategic role which extension should play in long-term, sustainable rural development. In summary, I would like to restate the flexibility of the management system which has come to be known as T&V. If we focus on the - 63 - fundamentals and assist governments in designing their own extension systems around those fundamentals, then I feel we shall have a better chance of promoting cooperation rather than conflict. If our long-term goals are to create a unified agricultural advisory service we may have to work for a time with parallel extension services. We should look carefully at the possibilities of introducing performance-related incentive schemes for extension and we should arm ourselves with tools to convince governments of the value of extension. I hope that these thoughts will promote lively discussion, and I particularly look forward to close liaison over the production of the Policy Paper which I see as a joint venture of PPR, the Regions, other donors and, of course, our borrowers. - 65 - RESEARCH AND EXTENSION: LENDING STRATEGIES Olivier Lafourcade What more can be said about Extension and Research? In preparing for this session, I went back to some of the literature and looked at the proceedings of all the previous Agricultural Symposia. Matters discussed in the past have covered virtually every conceivable aspect related to the subject, with large emphasis on the lessons of experience. Perhaps one of the most interesting presentations was that made by Max Lowdermilk at the 1981 Symposium, which I invite you to read again, as it seems to me as relevant today as it was seven years ago. It provides a fairly extensive review of the problems and issues which need to be taken into account to ensure an effective development of extension services. Many of the observations made would apply equally to research. As expected, most problems relate to issues in one or more of the following areas: technical, structural/organizational, financial, political and human resources. As past experience has shown, in discussing policy and strategies for lending in extension and research, we tend to be sometimes excessive in our objectives and in our positions. We are often too ambitious, perfectionist, and somewhat dogmatic if not at times plainly arrogant. Experience, however, should teach us to be humble, flexible, innovative, and imaginative. In this discussion, instead of trying to address all possible policy and strategic issues related to lending for agricultural extension and research, I would rather focus on a selected number of observations which I feel are particularly pertinent for assisting our member countries. As should be obvious, these take the form of questions and suggestions rather than assertions and prescriptions. As has been touched upon by John Hayward, in dealing with the issue of eventual support to research and extension programs in a country, are we satisfied that there is the sufficient degree of political commitment to the development of efficient services to agriculture, especially extension and research--something which goes beyond lip service or neutral endorsement? Is this political commitment present at the local/regional level as well as the national level? When this political commitment is not there, what steps can we think of to foster it? Is it reasonable, as has been seen in many cases, in particular in Africa, to promote--not to say to force--the creation of bureaucratic, civil service systems in places where there is no commitment, political or otherwise, and where there are serious doubts as to the ability of governments to finance such systems from budgetary resources? One interesting observation here which comes from our experience in India is that relating to the role and the importance of the external environment to extension services. In a sense, extension in India may be suffering from its own success: the fact that it has been rather successful in many parts of the country has led to its being able to - 66 - attract good people and substantial financial resources. This has often created interdepartmental jealousies and resentment in some quarters, which have sometimes resulted in political undermining, or at the very least in the decrease in political support. In such a context, what steps can be taken to protect the achievements already made and to ensure the continuous development of the services? Another question which we may wish to ask ourselves with increased attention is that of the value of extension and research systems in places where there is virtually no sense of overall agricultural development strategy. Are we sufficiently satisfied that the establishment and operation of these systems are taking place in the context of a reasonably well defined and transparent policy framework? A related question is of course the extent to which government policies, development strategies and priorities reflect and reconcile legitimate concerns by farmers as expressed by producers and extension agents, with overall macroeconomic objectives as set by governments. Both with research and with extension, we are dealing primarily with human capital, starting with the farmers and including all levels of intellectual skills and preparedness in the extension and research institutional apparatus. Do we sufficiently consider the fundamental requirements for education at all these levels, first and foremost that of the farming population, both male and female. As is well recognized and as mentioned earlier by John Hayward, the problem of the nature and quality of the interface/relationship between the extension worker and the farmers is critical. Education and training of both sides are absolutely essential. As an illustration of some of the shortcomings in this area, in India, in its support to research, the Bank may have paid insufficient attention in the past to the intermediate level of agricultural college graduates, i.e. those likely to become subject matter specialists in the extension system, and the key link between extension and research as carried out by the agricultural universities. Any future intervention by the Bank in this area will need to pay greater attention to strengthening this level. When we assist governments in conceptualizing their approaches and designing their investment programs, are we considering enough of the various possible alternatives, or at the very least, possible complementary actions and strategies? In particular, are we paying sufficient attention to the potential involvement of the private sector, in research as well as in extension? Are we not running the risk of encouraging governments in the unnecessary creation of development or bureaucracies? In the case of some African countries, are we not just being unrealistic in our expectations that public services can be established to run reasonably efficiently in the short or medium term? Central to this issue is of course the problem of financing and sustainability of the services performed, which raises the question of cost recovery. In this respect, perhaps some lessons can be learned from the Brazilian experience. The creation of EMBRAPA for research and EMBRATER for extension as semi- autonomous government agencies seems to have allowed an interesting degree of flexibility. EMBRAPA for instance does have the ability to contract or subcontract out some of its research activities. - 67 - In many instances, we tend to forget, or ignore the existence of on-going research and extension activities carried out by the private companies and often neglect to look at the potential for their greater involvement. This may in large part be due to our somewhat excessive focus on public sector approaches to the development of agricultural services. In talking about financing and cost recovery, are we satisfied or convinced that there is no scope whatever for farmers paying directly for extension services? After all, we all know cases of small projects, usually managed by NGOs or private entities where this is taking place, not only for industrial crops, as is the case of cotton in Africa, but also for food crops. One could of course go on and on with questions of a similar nature. In most cases, answers to these questions will inevitably lead to the reply: It depends. And it is of course true, as indeed has been mentioned earlier by John Hayward and Claude Blanchi, that extension services and certainly research services need to be adapted to local circumstances. With this in mind that I would now like to offer a few thoughts on possible approaches to Bank strategies in lending for extension and research. First, the Bank could adopt an approach more clearly differentiated among various situations: * There are cases where there is already a reasonably high level of institutional development, with fairly substantial institutional and organizational infra- structure, e.g. India, Brazil, and Mexico. The case here is how to put flesh, or more flesh onto the bone; in other words how to put more and better substance to the system. In general, this will be more a matter of adiustina existing things. Typically, it will involve change in behavior. The general pattern is an existing underutilized and undermotivated, often underpaid cadre of civil servants who are already there. In this case, the issue becomes one of providing sustained incentives for the institutional apparatus to be innovative and dynamic. Financing may not be required for specific investments, but rather may take the form of broad sector support, attached to a set of specific institutional and policy adjustments. This is incidentally the case in a good part of India, to which I will return in a moment. * There are other cases where there is virtually no existing institutional infrastructure, for instance as in many countries in Africa. The challenge there is to create something where little or nothing existed before. It is the issue of garnering resources, financial and human, on an incremental basis in - 68 - contrast to the previous cases where incremental financing, while necessary, may be of a relatively smaller magnitude. In addition, in this case, there is still the need to create and maintain the indispensable dynamism and innovativeness in the systems that were mentioned in the previous cases. This is clearly more difficult. In general, lending strategies in this case will tend to focus on the creation of the institutional infrastructure, with physical assets (buildings, vehicles) and human resources. In sum, we must bear in mind that different situations call for different types of solutions. This in turn may require different types of lending instruments and practices. In all cases, and this is the second thought which I would like to offer, there is the need for the Bank to recognize that it should be ready to make longer term commitments to extension and research programs. As much as possible, 10 to 20 year horizons should be envisaged, even though it is of course necessary to limit the timing of specific financial packages. This, tranching may be a preferred approach. The Bank could explore what situations could justify what sort of new processing mechanism it could use to ensure successive financial packages over a long period. In other words, what criteria could be used to ensure renewal/continuation of financial flows? A concept which we are now exploring in Indian and which may have some attractiveness for other large countries with large regional administrative entities, is that of the line of credit for the sector, in this case extension, which states would be allowed to tap provided they meet a number of specific technical, institutional and financial criteria. We are here fully in line with John Hayward's recommendation that fundamental principles be differentiated from the detailed criteria. In our case, clearly the challenge is to establish specific criteria that are reasonable and adapted to circumstances in very different states in India, while respecting a set of fundamental principles. A third idea, which comes from observations made previously is that we should be more cautious about our tendency to look for the unique, ultimate, and exclusive answer. In extension as in research, I am convinced that there is much more ample scope for a combination of efforts from many different sources: government services, private companies, cooperatives, farmers associations, NGOs. Not only should we be more aware of what others are doing (including other donor agencies) but we should be more imaginative and aggressive in pursing complementarity and combination of efforts. From an operational standpoint, I guess that what all this spells out is the need for a greater focus and resources to be attached to the preparation of projects and operations in the area of extension and research strategies. The nature and quality of the farmer/extension agent interface is something that does not evolve overnight. In the final analysis, however, I suspect that the area which deserves our greatest attention in our support to the conceptualization and - 69 - implementation of extension and research programs is that of the education and training of all the agents involved in the system, starting of course in priority with the farmer. _ 71 - IRRIGATION: ISSUES. POLICIES AND LENDING STRATEGIES Harald D. Frederiksen Christopher Perry Shawki Barghouti The Bank's Eighth Agricultural Symposium theme, 'Trade, Aid and Policy Reform' is indeed broad, essentially touching all of agriculture. The interdependence of most activities in agriculture, obviously, complicates devising a balanced thrust in these three areas in a given country. Likewise, this limits the validity of dealing with even a few aspects of these matters in the narrower irrigation subsector. Nevertheless, while details vary among countries, certain common Irrigation issues and related policy and lending strategy questions of fundamental importance can be identified. A great number of issues, in fact, can be cited in irrigation. We will limit our examination to those grouped in three areas with suggestions for the associated policies and lending strategies. But first, let us briefly ask the basic question and then note the foremost problems confronting irrigation today. Role of Irrigation Do we need more irrigation? India is perhaps the most widely quoted success story in food self-sufficiency. The precarious nature of the balance between supply and population increase which has been achieved, however, is evident by this year's drought-created food crisis. And questions of nutrition and, indeed, adequacy of supply in years of normal rainfall remain. Yet, a balance of sorts has been achieved, but maintaining the balance means increasina supply, not stabilizing supply. While the example -- India -- is termed a success by some, many other countries, all of which would set self-sufficiency in basic foods as important national objectives, are still far short of self-sufficiency. This objective is not sensible for every country, but that is a separate issue. Dramatic world population increases continue. Moreover, the demand for agricultural production expands faster than population in many of the more populous countries. As incomes increase, the demand for food increases. As income rises above subsistence levels, higher quality foodgrains -- wheat and rice instead of sorghum and millets -- are preferred, while demand for vegetables and industrial crops such as cotton also increases. This shift in the composition of demand is, for many countries, a shift from unirrigated crops to irrigated crops. While demand is growing, supplies of production factors are often falling. Large areas of cultivated land are lost to urbanization each year. Water supplies are becoming a limiting factor in more areas, due to over-exploitation, competition with municipal and industrial (M&I) uses, and pollution of groundwater and rivers by M&I and agricultural effluent. - 72 - The required increase in irrigated production will of course depend heavily on what happens in improving production on existing irrigated areas and in the rainfed areas. Further improvement of existing irrigated production is complex and results have been slow in coming. The degree of success to date confirms the extensive effort yet to be expended. Recent developments in the rainfed production practices are encouraging and here, perhaps, a part of the long-sought increases in rainfed production will be facilitated by new and better moisture conservation methods. But we stress the "perhaps'. A rainfed production breakthrough has been awaited since the green revolution. And to serve the future agricultural demands, we require not only higher and more stable yields of existing rainfed varieties, but also new varieties of some 'preferred' crops which are currently only -- or primarily -- produced under irrigated conditions or in heavy rainfall regions. We also need time -- the "green revolution' took almost 40 years from early findings to widespread results. Problems in the Irrigation Sector Just because it needs to be done, it does not follow that we are doing it rightl In many countries, irrigation projects are typified by poor performance: cost overruns; time overruns; failure to meet production targets; poor distribution of water; waterlogging; salinity problems; and the disruption to the lives of those whose lands are submerged under reservoirs. These criticisms are too often accurate. Offsetting -- but not justifying -- these criticisms is, we believe, a serious under-accounting of the benefits. Declines in foodgrain prices represent very important income transfer from the wealthier seller of surplus production to the landless workers -- while not adversely impacting the subsistence farmer, who buys and sells little. The effect on the employment market often far exceeds our simple calculations of incremental income to labor. Irrigation provides stable year-round employment allowing more settled living conditions, and improved educational opportunities for otherwise migrant labor. But criticisms of what is achieved in relation to what could be achieved must be addressed. Water logging need not happen. Farmers should know and be assured of the level of service -- quantity, timing and reliability, which they will receive, through the agricultural season. Reservoirs should be operated consistently, and trade-offs between power and irrigation should not be an ongoing and indefinite battle between agencies of the same Government. There is no point in building canals for excess land areas that will never see water, except during heavy rain. And no works should be built if they will not be maintained. Allowing facilities to deteriorate forcing major rehabilitation in 10,20 or 30 years should not be tolerated - and failures in two years are inexcusable. The costs of poor facilities performance -- almost as a built-in 'self-distruct' feature of many projects -- is brought to the fore more forcefully today. The pervasive funding difficulties -- for the initial investments and for the ongoing operation and maintenance -- have now become critical. National treasuries are shrinking while even more essential public _ 73 - demands on funds are growing - obliterating the past budgets for irrigation. As was cited recently, Sub-Saharan roads require a $10 billion expenditure in five years just to prevent further deterioration and clear the backlog of maintenancell Issues to be Addressed If the above scenario of continuing long-term demand for irrigation development is accepted and the problems summarized are acknowledged, then a list of perhaps fifty issues could rather easily be drawn up. Rather than a list of issues, we would suggest three major objectives under which these issues can be organized. The first general objective would be increasing the cost effectiveness of investments: in part this is no different from seeking "better" designs, "higher' yields, or 'optimum' irrigation efficiencies. But the route to this objective would focus on the achievable, describing the means for achievement, and fully funding those means. We should recognize clearly that poor planning, programming and budgeting for implementation is a vicious circle. Ill-conceived projects assure wasted funds. Under-costing of projects and overambitious implementation targets delay all projects, as resources are spread too thinly, thus causing further under-budgeting due to inflation, and yet further delays. 'Truth in planning' can greatly improve investment efficiency. It may well be that the most efficient irrigation investment is a compact, heavily irrigated area with intensive cropping. Indeed, in the absence of traditions, laws, and political commitment to sharing a limited water resource, it may be that this is the onlv sensible pattern of development. If so, we should avoid financing under-utilized (sometimes non- utilized) fringe areas where no water reaches, and which are built only to generate theoretical economic benefits or the temporary political benefit of 'bringing irrigation". And what holds for planning is equally true in the flaws and ineptness demonstrated in design, construction, operation and maintenance. Institutional shortcomings, in every sense of the term, are by far the dominant cause of unacceptable performance. Though complex and politically sensitive, it must be resolved as no progress can be made in absence of comprehensive, sound, effective institutions. There is no substitute; this must be In place first. The second general objective we would define is to transfer major responsibilities for project. success to the customer. Specifically, project costs together with large components of operation and maintenance must be assigned to the beneficiaries. The only issues are the selection of practical measures to accomplish this. And the time is now. A rough count indicates that about 20 cost-recovery related studies are now under way in India. Each represents a failure to agree at appraisal and negotiations as to what should actually be done to secure reimbursement from the water users. Beneficiaries are described as poor; the benefits take time to develop; precedents may be set; and of course political pressures are 1/ Statement by Hr. Moeen Qureshi on December 8, 1987 at Executive Directors' meeting. - 74 - powerful. All are real, but the results of present inaction are twofold -- an ever-increasing burden now exceeding the nation's finances and the accelerating deterioration of even new projects due to inadequate maintenance. Too often government underfunding of O&M is excused by inadequate cost recovery. The current stand-off with the borrower is entirely unsatisfactory. Indeed we judge the studies not on content, but on timing (the Borrower shall, by December 31, 1989 ..... ) and progress is thus somewhere between negligible and non-existent. The incredible rate of deterioration is translating into rapidly expanding list of so called 'high-return investment opportunities in rehabilitation'. And the greatest disservice is to behave as though satisfactory progress in the area of cost recovery and O&M funding is being made. The third general objective we would define is to plan the irrigation investment program so as to ensure that the long-run pattern of demand is matched by the near-term development of irrigation facilities. Specifically, that all schemes - small, large, old and new - are properly included in the government's investment plan. (An inherent assumption here is that the irrigation component is defined within the government's total agricultural development plan.) Pursuing this aim, amid the conflicting demands of today's projects, today's benefits, and today's beneficiaries (not to mention today's politicians) is a difficult task, but one which is essential to avoiding major disruptions to food and non-food production when the present projects are completed. Policies Six basic policies are suggested to focus Bank activities in dealing with these issues. These must be stated separately but should be read as an inter-dependent group. First. Bank policy in most countries should be to view and treat irrigated agriculture more akin to other industries. It will have to be an efficient producer, not merely a source of employment. It must demonstrate that it can be a self-sustaining, minimal-subsidy activity. Public funds simply will not be available to underwrite schemes as in the past. And the water supply function must be treated as a utility -- staffed, operated and funded to provide an efficient, equitable, reliable service while maintaining the facilities in a condition that will assure its permanence. Second. Bank policy should be that the means to satisfy long-term food, industry and export demands should be identified in the course of establishing investment levels and the mix of projects. The debate of small vs. large, new vs. rehabilitation is not a rational basis for planning, scheduling and allotting funds for water resources development. The extent of resources already exploited and the characteristics of the remaining are key. If food demands in 20 to 30 years are to be met by irrigation and large projects are essential to meet that demand, then the 30 year gestation period, commonly found on large projects, dictates an immediate start. It should be recognized that, a great many of the existing large projects - even in developed countries, have taken 40 to 50 years to plan, design and construct (and finance) before full production is attained. - 75 - Third. Irrigation should be addressed not only in the context of agriculture - rainfed and irrigated - but more explicitly as but one of all the many demands on the nation's and region's land and water resources. And all aspects should be addressed: discharge of waste/return flows, instream quality standards, priorities of each use and project/user rights - not just the quantity of water. The single-purpose projects defined by single-purpose agencies addressed by single-purpose Bank units only assure inefficiencies and permanently foregone opportunities for the country. Bank policies must force governments and the Bank to remedy these long-outdated, detrimental institutions - both the organizational constraints and the narrowly focussed resource planning and management. Fourth. Present policies on cost-recovery and funding project operation and maintenance have not accomplished their objectives. The luxury of study and debate is unconscionably costly to all - particularly the borrower. And if the Bank is to live up to its reputation for sound technical/financial advice on consequential matters, then it must act. To facilitate this, it is suggested that cost recovery and project O&M should be unlinked and two Bank policies setforth. First the Bank should adopt a policy to demand without exception, full funding of O&M as necessary to provide equitable, reliable service and maintaining the level of maintenance to assure permanence of the facilities. This should be enforced on existing projects as a condition for any new loan. Sources of funds should be explicit and guaranteed, but should not become an issue for government to justify or create project underfunding. The Bank cost recovery policy should incorporate water charge principles reflecting the relative degree of service, reliability to various types of users - M&I and irrigation; the delivery of surpluses, particularly during early years of large projects, with the resultant increased benefits; and the fundamentals of utility funding - an availability charge, a use charge, pre-payment for emergency expenditures, and funding stability. Relating the charges to the services not only implies but warrants project specific charge rates - and cost recovery. Separately and publicly defining the O&M budget and the source of O&M funds seems the most likely way of forging the link which we have unsuccessfully sought as a package--of having O&M costs recovered through water charges. Fifth. If one examines most of the truly successful irrigation developments in the world, one almost always finds the harnessing of government with a strong, broadly-involved private sector in the areas of technology and equipment, as well as, farmer-groups as the owner/manager of the majority of distribution works. Nevertheless, minimal use is made of this potential in many borrower countries. Private sector involvement in irrigation development is frequently limited to farmer-built wells and construction of civil works. All other activities are the government's domain. The support industry--consultants, construction firms and equipment manufacturers/suppliers are frequently weak through government exclusion from effective participation. This is true even though substantial projects developed in earlier times in these same countries were planned and are managed and funded entirely by farmers. - 76 - To help remedy this situation, Bank policy should be to more directly secure government/private sector partnership. Establishment of water-user associations is being encouraged with positive results in some countries. But the examples of successful farmer involvement in significant O&M functions that show tangible reduction in government costs and visible O&M improvement should be the undisputed objective, not just to organize for minor tasks. Opening technical training components of projects to consultants and expanding their use, thus prolonging the contribution of retirees, among other benefits, would be productive steps. And the joint development of technical standards and criteria by government, consultants and manufacturers are fundamental to a dynamic irrigation industry. Sixth. Bank policy should elevate institutional assessment and requirements during project preparation and appraisal to the same level of detail and importance as the economic, financial and technical aspects. A vast majority of the problems and project shortcomings can be directly related to institutional deficiencies. It is not a lack of technology nor a lack of example successes that planners could follow - or we would not find many old projects outperforming the new in the very same country. Organizational structure, staffing and personnel policies, and rules, regulations and codes must be addressed. Typically we now ask for studies of these matters--some cited earlier--and implementation of wmeasures' after the project is underway or even complete. And, minor tinkering with institutions that were devised to meet the needs of the early decades of this century won't do it either. Lending Strateties Most projects in the irrigation sector are complex, comprising a variety of equally important, but greatly varied elements--from major dams to small outlet structures--and depending for success on the proper interaction of physical factors--plants, climate, and soils--and social, economic, institutional and political factors. In this context, finding strategies which are sufficiently comprehensive to capture enough defects, while remaining succinct enough to be understood and applied, is not easy. We propose four general strategies. In some countries the priorities may be different; in some countries these measures may already be in place; but in our experience the need for these is common. First, all institutional reforms and strengthening essential to project success should be in place before the need arises under the project. For example, the appropriate organizational restructuring of the implementing agency with clearly defined unit responsibilities and authority should be in force under the appropriate legal means before project agreements are signed. The full agency capacity (by recruitment or consultants) for planning, design, and construction supervision also should be on-board before project agreements are signed. O&M organization, procedures and funding should be firm and in existence a minimum of six months before start-up of the first facilities - or project funding should halt. Water rights, priorities among users, basic operating criteria among competing users must be clearly established as inherent in the project at the time of project signature. -77 - Second, in addition to requiring a full feasibility level project plan, and this is not always met, no project should be considered unless it is also formulated in accordance with and incorporated into a national resources development and management plan and with a detailed river basin plan. These plans would account for all current and potential water uses, and reflect all allocation and regulatory rules, thus immediately crossing boundaries between agriculture, industry, mining, power and urban sectors. Long-term resource planning would, for irrigation, be based on projections related to food, export and industrial crop demands within the agricultural planning. Thus, as mentioned above, small, long gestation, and rehabilitation projects would find their proper place in the investment program. The near-term government programming, budgeting and scheduling would by nature follow on a sound foundation. The best strategy will likely be to explicitly support these three levels of planning efforts and title them sector programs, if desired, under appropriately established permanent planning units with adequate funding. The resulting orderliness in irrigation investments will shortly offset any time delays while cost-effectiveness will be gained. The third major strategy thrust would be in the area of standards. Minimum standards for data collection, for planning, for design, for construction, for system operation, for system maintenance are rarely found, and more rarely enforced. This has several serious implications. For the project agency, it is wasteful and inefficient to design every minor structure from scratch. For contractors and construction staff, standardization leads to better quality work at lower prices. For the Bank, a clear definition of standards can greatly simplify the relationships with borrowers and the appraisal and supervision of projects. As long as standards remain ad hoc, negotiable, and usually ill-defined, far too much management time will be wasted on problems which become "policy, issues, but which should usually be simple 'accept or reject" decisions based on consistent, agreed criteria. A sub-set of the standards which should be defined for the sector is believed to be so important that it requires special attention: The interface between the 'supplier" of irrigation services -- usually the government -- and the users, is rarely defined in detail, while many of the problems in the sector relate directly to that interface -- poor cost recovery, damage to facilities and lack of maintenance by water users, poor distribution of water, unreliable supplies. The wide variety of arrangements (even within the same state) under which irrigation takes place testifies to the undefined nature of the state/farmer interface. What should be defined? First, the level of service to be provided should be specified. As suggested, irrigation is essentially a utility, like electricity or domestic water. In fact, the supplier operates within constraining parameters -- quantity of water available, maximum and minimum delivery capability -- and the service can be explicitly defined, including weather-related adjustments under fixed rules. Those systems where the rules are well defined facilitate management, because operators know what they are supposed to do, and do it repetitively, while farmers know what they are entitled to, and can plan accordingly. - 78 - The second area in the supplier/user interface where definitions are required relates to the need to transfer financial responsibilities for O&M to beneficiaries. Here, as a condition for executing the project, the role and responsibilities of the State and the farmers need clear definition: who must do what, who pays, and the penalties for failure to pay are prerequisites to involving farmers in project planning, operation and maintenance. Ensuring that major project components become the responsibility of the beneficiaries, rather than a burden on the State is essential to long-term success of any project. A fourth action, whether it can be classified as a strategy or not, is to strengthen the project/loan agreements to better assure the envisioned results. Though this is a subject in its own right, some steps can be noted as were implied in the discussions of policies. Project criteria, standards, CPM schedules, as well as the detailed project plan should become a part of the agreements--as is generally sought. But these should be more explicit and detailed in a manner to assure understanding by the executing borrower and Bank staff. Very importantly, conditions of earlier agreements--dam safety inspections, 0 & M funding, water charges and water allocation should be specifically cited for enforcement. Much of the inconsistency and omission that lowers project quality is caused by ignorance of those staff subsequently assigned to carry out the project. Coupled with this must be the prompt thorough enforcement of these agreement provisions. The proven support by the borrower's project staff and more efficient, effective Bank supervision will ease everyone's burden while better assuring the required project quality. A specific list of actions in this regard has been drafted for consideration in one country. Summsary In summary, the need for expanding irrigation remains. But several modifications to policies and associated strategies are believed essential to realize acceptable undertakings today. Those suggested reflect field results on Bank projects. And they address broader changes facing countries-- particularly today's financial and economic conditions. Severe, and in instances, disastrous results are believed imminent if strong actions are not effected now. A statement2 made by Vice President Moeen Qureshi to the Executive Directors bears directly on this discussion and the stances proposed. 'But let me emphasize, lest there be any wrong impression, that it is not lending volume objectives per se that we seek to achieve. It is not in our interests or those of our borrowers to compromise, even slightly, in the quality of our lending operations.' 2/ Statement by Mr. Moeen Qureshi on December 8, 1987 at Executive Directors' meeting. - 79 - PRICING AND TRADE: ISSUES, POLICIES AND LENDING STRATEGIES Robert Picciotto We have one hour to reason together about pricing and trade policies and their relevance to agriculture in developing countries. As we go about this, we must remember that these issues are as old as economics itself and there is an ample legacy of doctrines which we must contend with. The discredited physiocratic school according to which agriculture alone is productive still has its adherents. The pessimistic ghost of Malthus (diminishing returns, etc.) and of Ricardo (unearned rent) are also with us. The influence of Marx, while on the wane, also remains pervasive (at least in command economics). And, of course, Adam Smith's hypotheses about agriculture, trade and taxation are central to the debts which will animate our session this morning. Pricing and trade issues cannot be divorced from policies and programs impacting on rural investment and support services. These policies are reflected in the irrigation, research and extension methodologies which are being reviewed in parallel in the H Building. In guise of an introduction to our own session, let me speculate briefly on the conceptual links between what we are talking about here and what they are talking about in the H Building. The first linkage I wish to highlight relates to the ultimate aim of the Bank's agriculture development enterprise. What each and every one of you is striving for, as Bank professionals active in the agriculture sector, is the transformation of traditional agriculture into a cheap source of sustained economic growth. Specifically, the search for an appropriate marketing policy framework (the broad object of our session this morning) is a search for conditions which will make investment in physical capital (including irrigation) and in human capital (including research and extension) profitable to the economies and societies of our LDC clients. The acute scarcity of public investment resources in the current global economic environment only makes this search more urgent and relevant. The second set of linkages arises from the definition of agricultural modernization as the creation of a fruitful disequilibrium between current and future agriculture production functions through the widespread adoption of new farming production inputs and practices. From this perspective, allocative efficiency in agriculture is enhanced by judicious pricing and trade policies for outputs as well as for inputs. To the specific extent that knowledge and water can be viewed as production factors, the topics being discussed in the H Building sessions might be simply viewed as "special cases" of the general themes we will be discussing here. Conversely, the particular characteristics of these privileged inputs (the indivisibility of major irrigation investments, the importance of externalities in knowledge creation and dissemination, etc.) are such that it does make sense to analyze them separately. - 80 - The third consideration which unifies the three topics under discussion relates to the importance of functional specialization in the process of economic growth. The crucial importance of trade and prices in efficient land and water use is obvious. Less well know is the role of scale economies and specialization in the generation and dissemination of water, technical know-how and other production inputs. It is important to stress, in this context, that the relative indivisibility of supply systems for modern production inputs contrasts with their divisibility on the demand side: this is what makes efficient small-scale farming possible and this is why public or cooperative management of inputs is not necessarily inconsistent with a decentralized market-based approach to agriculture production policy.1 Which is not to say that it is easy to construct efficient, non-profit approaches to the production and delivery of research and irrigation water. Hence, the priority of Bank projects in these fields. We will be taking a regional cut at the pricing and trade issues in agriculture. Thierry Baudon will kick off with North Africa. Kevin Cleaver will carry the ball into Sub-Saharan Africa. David Greene will deal with some aspects of the Indian marketing policy scene. Finally, Odin Knudsen* will close the circle from the elevated perspective of PPR and Latin America. I expect the differences as well as the convergences in the stories they tell to be instructive. * Due to time constraints, Messrs. Baudon and Knudsen were unable to submit written papers. 1/ Adam Smith at the end of the Agriculture Systems Chapter of The Wealth of Nations states that "according to the system of natural liberty, the sovereign has only three duties to attend to, three duties of great importance indeed but plain and intelligible to common understanding: first, the duty of protecting the society from the violence and invasion of other societies; second, the duty of establishing an exact administration of justice and thirdly, the duty of erecting and maintaining certain public works and certain public institutions which can never be for the interest of an individual or a small number of individuals to erect and maintain though it may frequently do much more than repay it to a great society. - 81 - THE USE OF PRICE POLICY TO STIMULATE AGRICULTURAL GROWTH IN SUB-SAHARAN AFRICA Kevin M. Cleaver The general Bank position on agricultural price policy is briefly that poor agricultural price policy is the major cause in many Sub-Saharan countries for poor agricultural performance and that appropriate price policy involves a number of measures. These are: * raising agricultural prices to world levels and increasingly freeing prices from official control so that they respond to supply and demand on both world and domestic markets; * freeing exchange rates (or a managed float); * eliminating subsidies on farm inputs, credit, and foodstuff; * imposing economically neutral taxation on agriculture (general income taxes, value added taxes, land taxes are better than agricultural export duties); and * allowing free competition between private and public marketing and processing enterprises. Public marketing and processing enterprises are to be made more efficient, and divested if possible to the private sector. Freeing prices makes no sense if there are public monopolies responsible for agricultural marketing. Bank economic and sector reports generally predict significant agricultural supply response to the above policy changes. There is frequent reference to a large reservoir of repressed private initiative which will be released when prices and markets are liberalized. The purpose of this presentation is not to refute the standard Bank position summarized above. There is no doubt that if artificially low prices are imposed on farmers, their incentive to produce for the market is reduced. The question is a quantitative one: how responsive is farmers' investment and production to price signals. On the downside, when official prices are confiscatory and black markets actively suppressed by governments, commercial agriculture becomes unprofitable and therefore declines. There are gains to be had in this circumstance if producer prices are increased. Ghana, Nigeria, Guinea, Guinea Bissau, and Tanzania are good examples in which a change in price policy from one which was confiscatory in its application to farmers, to one which was more liberal, had positive impact on production. The question for debate is not the direction of price policy change needed (although there are technical questions open to debate), but the magnitude of the likely supply response - 82 - to price policy in the vast majority of African countries with poorly performing agricultural sectors, and the importance of other non-price constraints to agricultural development. Should price policy continue to be the centerpiece of agricultural policy reform in all SSA countries, or should it be the centerpiece only where it is very distorted (as it was for example in Ghana, Nigeria, Guinea, and Tanzania until recently)? This presentation will introduce a somewhat less enthusiastic perspective regarding the value of price policy reform in many countries of SSA. Specifically, it will be argued that: * Agricultural price policy in SSA has been less the culprit for poor agricultural performance than we have presumed. * The positive impact of our standard price policy reform on agriculture will in most of SSA be much less than we have projected due to other constraints to agricultural development. The private sector, while repressed, is not so responsive to market and price liberalization as we have presumed. * One standard agricultural price policy prescription is not appropriate to all situations even from a growth and efficiency perspective. * There are social costs to adjustments of price policy. These will require either some modification to our standard price policy package, or compensatory measures benefiting the poor, to be undertaken within structural adjustment programs. Agricultural Performance in Sub-Saharan Africa Agricultural growth in Sub-Saharan Africa during 1973 to 1974 was 7 percent a year in real terms, or about -1.9 percent per capita. Comparing 1974-76 with 1981/1983, the index of food production shows a decline from 100 to 94.1 This poor performance has led to a remarkable increase in food imports. Cereal imports by SSA have increased at 10.7 percent p.a. during 1973-84. Food imports have not been sufficient on aggregate to ensure an adequate diet to even the average African. The average daily caloric intake in SSA was 96 percent of requirements in the 1980s (2205 calories). This compares to an average caloric intake of 105 percent of needs in all of the world's low income countries. Not only is food production performing poorly, but exports have declined in both volume and value, in many cases drastically. Causes of the Problem In determining the role of price policy in the above performance, it is useful to first identify, from available literature, the entire spectrum of problems facing SSA agriculture. The problems are well known, with debate centering on the relative importance of the various factors. 1/ Data from Financing Adjustment with Growth in Sub-Saharan Africa. 1986-90, World Bank, Washington, D.C. April 1986. - 83 - There is an enormous variation in agricultural performance between African countries. A minority have performed well (Cote d'Ivoire, Rwanda, Kenya, Malawi, Botswana, Mauritius, Cameroon have performed consistently well). There is also variation in the causes of poor performance. Frequency of drought, war, difficult agricultural potential, and poor policy all play different roles in different countries. The first set of problems affecting agricultural performance and hunger are the cluster of often inappropriate agricultural price, tax, subsidy and exchange rate policies which are the focus of this paper. In Africa, these policies have generally served in the last 20 years to depress farmers' incomes and incentives to produce. This has discouraged agricultural production for the market, encouraged rural-urban migration, reducing investable resources remaining in agriculture, hence reducing agricultural investment. Recently there has been some improvement of these policies in some African countries, although the CFA franc zone improvements have been offset by an increasingly overvalued CFAF. Most African nations have emphasized government-led growth, creating parastatal enterprises to manage agricultural marketing, processing, and regional agricultural project schemes. These government enterprises tend to be inefficient and costly. They often require monopoly status to avoid competition with less costly private sector enterprises. The private sector has been actively surpressed in many African countries, eliminating a source of agricultural growth. Government agricultural expenditure programs often involve low allocations to agriculture, numerous white elephants, excessive government expenditure allocations to salaries, and little allocation to other operating costs. Governments often provide inadequate attention to agricultural research, extension, farm input supply, forestry, and animal health services. Donors have contributed to this situation by dividing SSA countries into a mosaic of expensive regional development projects. This has caused the fragmentation of agricultural services into isolated regional project services, which tend to disappear when donor financing disappears. Agricultural services (research, extension, forestry, credit) do not work in these conditions. The lack of adequate land tenure and land use policy has discouraged investment in agriculture. The absence of secure tenure by farmers in much of Africa has discouraged investment in the land and has not encouraged soil conservation measures. Lack of land titles makes eligibility for agricultural credit difficult. Women are often discriminated against in part because they have no security of tenure although independent women in many African countries constitute a large proportion of farmers. Africa's environment constrains agricultural potential in many countries. Rainfall occurs predominantly in erosive downpours. Stress on vegetation is greater than in temperate areas. The continent's soil resources are poor. According to an FAO study, only 19 percent of Africa's soils have no inherent fertility limitations, while 55 percent have severe or very severe constraints.2 Outside the humid zones, rainfall is highly 2/ FAO. Report on the A2ro-Ecological Zones Project. Rome. 1978. - 84 - variable from year to year (by 20-40 percent up or down from the mean each year). The risk of prolonged droughts is high. Two-thirds of Africa's land area faces high or very high risk of drought. The Sahel faces the additional problem of unusually wet or dry periods persisting for one or two decades. To add to these difficulties, the tsetse fly predominates over central Africa preventing widespread introduction of cattle in that vast area. Africa's farmers developed traditional agricultural methods well adapted to the above environmental constraints. The most important adaptation is the system of shifting cultivation. This involves one to three years of cultivation on a plot, followed by leaving the plot to revert to bush and forest. In the fallow period, organic matter is restored. Vegetative cover lifts nutrients from the lower soil, depositing them on the surface with leaf fall. Shifting cultivation depends for its stability on abundant land. As Africa's population has grown (now at 3.2 percent annually), land has become increasingly scarce. Fallow periods are gradually being reduced (in most of Kenya, Rwanda and Burundi for example they have stopped entirely in agricultural areas as new land is no longer available). In many areas, fallow periods are no longer sufficient to allow fertility grazing and fuelwood. In some countries, successful action has been taken to intensify agriculture (Kenya highlands, much of Zimbabwe, Nigeria's humid southeast). But in most of Africa, intensification and conservation have not occurred. Pressure on the land is resulting in declines in crop yields, overgrazing of fallow and farmland. Fuelwood needs are met by attacking the forests. Vegetative cover is weakening, erosion accelerates. The weakening agricultural performance in much of Africa cited above is in part the result of this situation. The above has been known for some time at the micro level. Recently, information has been patched together showing environmental damage for the continent as a whole. The picture which emerges is shocking. The first part of the problem is deforestation, related directly to the increase in population, and the consequent need to open up new farm land, and to find fuelwood. The FAO reports that Africa's 703 million hectares of undisturbed forests in 1980 were being cleared at the rate of 3.7 million hectares a year--or 0.6 percent a year. Local rates ranged from 0.2 percent for the Cameroon-Congolese forest up to 4 percent a year in West Africa. Deforestation outstripped the rate of new tree planting, which was only 126,000 hectares per year, by 29 to 1.3 At the same time, 55 million Africans faced acute scarcity of fuelwood.4 The second aspect of the problem is desertification. Desertification affects primarily Africa's drylands. An assessment for 1983 suggests that in these areas 80-90 percent of the rangelands, 80 percent of the rainfed croplands and 30 percent of the irrigated land may be affected at least moderately. Of the dryland population of 118.5 million, 92 million people lived in areas 3/ J.P. Lanly, 'Tropical Forest Resources', Forestry Paper #30. FAO. Rome. 1982. 4/ World Resources Institute, Energy. Washington, D.C. 1986. - 85 - affected by desertification, 52.5 million of them in severely affected areas.5 The third aspect of the problem is soil erosion. Soil erosion is widespread in all areas of Sub-Saharan Africa. It is perhaps most serious in Ethiopia, where top-soil losses of up to 296 metric tons per hectare have been reported on 16 percent slopes. In West Africa per hectare losses of 10-21 metric tons have been reported on slopes as gentle as 0.4-0.8 percent, and of 30-55 metric tons of 1-2 percent slopes.6 Wind erosion is significant in drier areas. Even more serious in the medium term is the gradual decline in fertility of all types of land. All contributed to the decline in agriculture reported above, and hence to increasing incidence of hunger and poverty. There are limits to the speed at which traditional farmers can introduce improved technology due to social and cultural barriers, level of knowledge and other factors. The most common technology used in African agriculture involves shifting cultivation. This is characterized by low input use, and is appropriate to low population density and abundant land input use. With rapid population growth, this technology is increasingly inappropriate, leading to low investment in the land, inadequate conservation efforts by farmers, and low output per unit area. The introduction of improved technology, appropriate to sedentary cultivation, must be accelerated. Finally, there is the problem of low world prices for many of the commodities exported as well as those produced as import substitutes in Africa. This situation is caused by a combination of more rapidly growing world supply than demand, industrial country subsidies for their own agricultural production, and fierce competition from new suppliers, especially in Asia. How Important is Price Policy in this Situation? Where official agricultural prices are severely depressed and are effective, commercial agriculture can become unprofitable. When this occurs, little investment can be expected in commercial agriculture. In such cases there seems little doubt that a change in the price policy regime is a necessary condition for agricultural growth, and indeed appears to have been important in improving agricultural performance of the four countries cited earlier which moved from this situation to a more liberal price regime (Nigeria, Tanzania, Ghana, and Guinea). Most of the economic literature on crop supply elasticities shows good response to changes in prices. High price elasticities are found particularly for commercial crops, irrigated crops, and where official marketing enterprises actually pay the official prices (if official marketing enterprises do not exist, official prices are less likely to be paid). The literature suggests, however, that there is a greater price impact on crop mix than on aggregate agricultural production. This results 5/ Jack Maobutal. 'A New Global Assessment of the Status and Trends of Desertification' in Environmental Conservation, Vol. 11, No. 1, 1984. 6/ Paul Harrison. Greening of Africa, Penguin Books, New York. 1987. - 86 - from the fact that as one crop price increases, farmers will tend to switch labor and land into that crop, and out of alternative crops. Where land, labor or some other essential factor are severely constrained, increases in prices of one or two crops will have no aggregate production impact, simply causing a switch of inputs and investments into the crop with the increased price. In Marion Bond's oft-quoted IMF article on agricultural price response in Africa, in only two of nine SSA sample countries was aggregate agricultural output significantly related to agricultural price levels (see Table 1). Ms. Bond found aggregate supply elasticities to be small, and in most cases insignificant. In my own study, using cross-country data for 31 African countries, I similarly found aggregate agricultural production response to variation in aggregate agricultural prices levels, but with a very low supply elasticities.7 Indeed, a careful look at the literature shows much of the single crop, single price elasticity estimates meaningless. These simple bivariate statistical estimates presume output is a function of numerous factors in addition to price. This mis-specification renders the resulting elasticity estimates (such as those given in Table 2) meaningless. In addition, single crop elasticities tell nothing about aggregate production impact of price policy changes. Recent literature, including Bond's article and an article by John Strauss, 'Marketed Surplus of Agricultural Households in Sierra Leone,' (American Journal of Agricultural Economics, 1984), using a different methodology, finds weak aggregate agricultural supply response to prices. Uma Lele's recent work in Malawi and my own in Kenya for the MADIA project found the same thing: low aggregate supply response to aggregate price changes. On the other hand, studies prepared for the Bank's 1987 WDR found considerable aggregate agricultural supply response to price policy, but the focus was outside Africa. Nevertheless, significantly distorted relative prices, which distort the agricultural output mix, cause "efficiency losses;' i.e., have a cost in terms of total value of agricultural production. There are several factors which tend to reduce the aggregate farmer response to changes in official prices in SSA: * Subsistence farming is important in SSA. Official prices are less important to farmers producing only for family consumption. * Additional input supply needed for production to respond to prices is often not available. For example production is often constrained by family labor. An increase in price makes expanded production more interesting to commercial farmers but with no unemployed labor, farmers can only respond slowly. Input availability, such as fertilizers, improved seeds, and equipment are commonly constrained. 7/ Kevin Cleaver. "The Impact of Price and Exchange Rate Policies on Agriculture in Sub-Saharan Africa,' World Bank Staff Working Paper, Number 728. Washington, D.C. 1985. Table 1: RIi r sion Results for Nine Sub-Saharan African Countries: mast c itv Co fficlents for Assrcate SUDDIV R sDons (1963-19811 Short-term Partial Price Adjustment Climat Intercept Elasticity Coefficient Trend Events Country bo b1 b2 b3 b4 D-W RS SEE Years Ghana 1.74 0.20 0.42 -0.01 2.11 0.824 0.Of 1963-81 (2.27) (3.18) (2.65) (1.70) Kenya 2.62 0.10 0.36 -0.003 0.04 2.24 0.676 0.02 1966-80 (2.93) (3.06) (1.91) (1.86) (2.61) Ivory Coast 4.08 0.13 -0.01 0.04 2.S6 0.838 0.03 1969-78 (5.42) (0.77) (1.43) (2.66) Liberia 3.97 0.10 0.08 -0.01 2.07 0.182 0.04 1966-80 (2.28) (0.88) (0.26) (1.48) Madagascar1 2.70 0.10 0.31 0.0001 0.07 1.95 0.774 0.02 1968-81 (2.91) (0.83) (1.48) (0.03) (4.27) Senegal2 3.68 0.17 0.0002 0.16 2.30 0.781 0.12 1970-79 (1.45) (0.36) (0.009) (3.83) Tanzania 4.68 0.03 -0.02 2.28 0.961 6.01 1972-81 (21.27) (0.69) (8.98) Uganda 3.08 0.05 0.30 -0.02 2.13 0.864 6.04 1988-78 (2.12) (0.54) (0.88) (1.97) Upper Volta 3.26 0.22 0.08 -0.01 1.83 0.470 0.047 1964-80 (1.89) (1.16) (0.32) (1.92) 1Corr.cted for first-order autocorrolation p=0.36 (1.68). 2Corrected for first-order sutocorrelation p=-0.72 (2.59). Numbers in parenthesis are T statistic. Source: Marion Bond "Agricultural Responses to prices in Sub-Saharan African countriesO, IMF Staff Papers, Vol. 30 (1983). - 88 - Table, 2: Elasticities of C.SuI ro Various Studies lsna the Ner'oeLrA i. Crop and Short-Run Long-Run Region Period Author (Year) Elasticity Elasticity COCOA wOh an 1947-84 B.hrman (1968) - 0.71* Chana(old areas) 1949-62 Bateman (1906) 0.39 0.77 Chana(med.areas) 1949-82 Bateman (1966) 0.42-0.51 1.28 Ohans(n*w areas) 1949-62 Bateman (1965) 0 61-0.87 1.06 Nigeris 1947-64 Behrman (1968) - 0.71* Nigeria 1947-64 Behrman (1988) 0-46* Ivory Coast 1947-64 Behrman (198S) n Cameroon 1947-64 Behrman (1968) 0.68* 2 81: COFFEE KRnya 1946-64 Maitha (1970) 0.64* 1.33* Kenya(eststes) 1946-64 Maitha (1970) 0.66* 1.38* Kenya(smal .holdrs)1946-64 Msitha (1970) 0.64* 1.48* Kenya 1946-64 Ford (1971) - 1.17* Kenya(estates) 1946-64 Ford (1971) _ 1.18. Kenya(saal.holdrs)1946-64 Ford (1971) - 1.665 Africa 1947-73 de Vries (1975) 0.12* 0.44* COTTON -mGijjFa2 1948-67 Oni (1969b) 0.23-0.38 0.28 Nigeria 196n-64 Dtejomaoh (1973) 0.67* 0.67* Sudan 1951-66 Medani (197') 0.39* o 6o Uganda 1922-38 Frederick (1969) 26 26* Uganda Buganda 1922-38 Frederick (1969) -O 73* 1-O 73 Uganda BuSanda2 1945-66 Alibaruho (1974) 0 :0 0.68 Uganda(E.region)21945-66 Alibaruho (1974) . 23 8 U Ugand*(W.regIon)21946-66 Alibaruho (1974) 0.26 0.62 Uganda(N.r*gIon)21945-66 Al7ibruho (1974) 0.02 o O' OROUNDNUTS NigTri* 1948-87 Olayide (1972) 0.24-0.79 0.24-0.79 PALM KERNELS NrIgeria 1949-64 Oni (1989a) 0.22-0.28 0.22-0.28 NIgerIa(Eastsrn) 1949-64 Oni (1969a) 0.28- .39 0.28-0.39 Nigsria 1960-64 Diejomaoh (1973) 0.22s 0.26* PALM OIL ffiONrMa 1960-64 Di;jomaoh (1973) 0.81* 0.81* Nigeria 1949-63 Helleiner (1966) 0.41* 0.41* Nig ria 1949-84 Oni (1969n) 0.29-0.36 0.29-0.36 Nigeria(Eastern) 1949-64 Oni (1969a) 0.41-0.70* 0.41-0.70* RUBBER -TiEis 1950-72 Ghoshal (1974) 0.14 0.22 Nigeria 1962-72 Olayemi401ayide(1976) 004 1.76* SISAL YTn;zania 1946-67 Cwyer (1971) o o8* 0.48*-0.76* TOBACCO Malawi 1926-60 Dean (1966) 0.48* 0.48* Nlgeria2 1946-64 Adesimi (1970) 0.60* 0.82* So rce: Sam as Table 1. YAsterisk Indicates that the estimate is significantly different from zero at the five percont level of significance. 2In these equations, acreage rather than quantity produced was used as the dependent price. - 89 - Official marketing agencies which pay the official price often market little of the product. Do we seriously believe that private traders pay much attention to official prices? Restrictive price policy is often ignored by everyone involved in the trade: from farmers to end-users. * Cross-border smuggling and parallel markets are common and are often tolerated by government. If official prices are low, many farmers and traders smuggle to neighboring countries where prices are higher. On parallel markets prices are relatively free. * Often official prices are floor prices. Prices can increase above the floor, rending the official price meaningless if it is artificially low. The conclusion is that prices are more important in Africa than is price policy. The two are often not the same because African governments have trouble making official prices stick and farmers have trouble converting better official prices into profits (for the reasons given above). African farmers will react to incentives like anyone else, if they have the means to react. It is the manipulation of incentives by governments and the ability of farmers to react, which is so much less effective in Africa than elsewhere. In this situation, the other constraints relating to the absence of agricultural services, the weakness of private institutions, the destruction of the environment in an already weak environmental situation, the lack of widely available and improved agricultural technology, the poor Government agricultural expenditure programs, inadequate land tenure systems, the crazy-quilt of donor intervention, wars, droughts, civil strife, and the absence of food security become the most critical constraints to increasing agricultural production in most SSA countries. The exceptions are as stated above where official prices become confiscatory and are made to stick. In addition to the weakness of agricultural price policy as an instrument to stimulate growth, there are other problems with its use. African reticence to liberalize price and marketing policy is partly founded on poor experience with a foreign dominated, socially unconscious private sector. It is politically unacceptable throughout Africa to hand-over the economy to foreigners who respond most quickly and enthusiastically to price and market liberalization. Investment by indigenous African private investors has been less enthusiastic than expected. In addition, it is often the poor who buy food who suffer from price policy reform. When beneficiaries of price policy reform are most visibly foreign private enterprise, and those hurt are the indigenous poor, the political constituency for this kind of reform evaporates. Finally, there are technical issues with the types of price policy reform often suggested by the World Bank, requiring careful adaptation for - 90 - the situation of each country. The use of world prices to establish official agricultural commodity prices in Africa has the following problems: * Which world price should be used (most commodities have many prices)? * Which cost should be deducted from border prices to get back to farmgate (marketing costs of parastatals are often very inflated leaving little to the farmers)? * World prices fluctuate greatly. Do we really want to kill an industry one year when prices are low, and induce it to expand the next year? Our long term projections are often wrong. Can we push for use of our projected prices as official prices in this situation? * Many world prices represent at least in part the result of distortions of industrial country agricultural prices, in turn caused by agricultural subsidies. Such subsidies are unlikely to last. Can we suggest to our clients that their prices be based on such world prices? An alternative to the use of world prices in establishing official domestic prices is freeing of agricultural prices. This, however, leads to difficulties due to the predominance of parastatal marketing enterprises which often form official monopolies or near monopolies. Free prices mean that these enterprises can pay farmers what they like which, given the frequent political pressure to increase salaries and other operating costs of the official marketing enterprise itself, can mean squeezing farmer prices. If such enterprises are not predominant, official prices are likely to be nearly irrelevant anyway (private traders tend to ignore such prices). This is a question of adaptation to particular country circumstances. If free competition can be successfully introduced, then this is not a problem; prices can be freed. But competition requires years to establish, and often is not apparent. There is also the foreign dominance problem. In many African countries, exchange rates are overvalued (especially the 14 countries in the CFA franc zone). Fixed producer prices in situation of grossly overvalued exchange rates are usually minimum support prices. Freeing such prices usually means their reduction, permitting the full tax of over-valuation to be imposed on producers of export crops or import substituting crops (unless for the latter there is an effective offsetting duty). Again this means carefully adapting the price recommendation to the country situation. Despite these technical problems, the freeing of prices, or at least the use of world prices as official prices is still preferable to administered prices based on past experience. What the above shows however, is that unless there are simultaneous measures to introduce broader competition, to encourage private investments, to get exchange rates right, the free market" prices (or uncontrolled price) may be worse than the administered price. - 91 - Conclusion To provide some answers to the original question: * Price policy is important for agriculture in SSA, but except for the extreme cases of official confiscation, is less important than elsewhere in the world, due to the overwhelming importance of other constraints to supply response. The Bank's price policy package is generally the right one. The liberalization of markets and prices is necessary because market determined prices are generally better for agriculture than are government determined prices. However, the response of the private indigenous sector to liberalization of price has been weak in many SSA countries. Official marketing enterprises are often important, and liberalizing prices when such enterprises are dominant may serve to hurt farmers. Since the introduction of greater competition, encouragement of the private sector, and improvements in exchange rate prices are necessary for price liberalization to actually lead to better prices, it is possible that appropriate exchange rate policy is of greatest importance. Once this is undertaken, improved competition and price liberalization may follow. * Other constraints to agricultural development are more important than price policy in most of SSA. Due to structural constraints, farmers will react more slowly on aggregate improvements of price policy. For these reasons, liberalization of price policy in many countries might occupy a less important place in adjustment programs. Removing the other constraints might occupy a more dominant position. These other actions include active measures to promote private sector investment in input supply, marketing and processing, as well as measures to introduce improved agricultural technology, deal with land tenure, environmental problems; and improve public investment programs. * We can expect a much more prolonged and slower agricultural development in SSa than projections based on inflated supply elasticities suggest. * We must look seriously at social costs and compensation for damage done by price policy reform if such reform is to be politically sustainable. This might include the incorporation of food security components to structural adjustment programs. Considerable more thinking and effort will have to be made in developing private African investors if 'liberalization' is to become politically sustainable. - 93 _ AGRICULTURAL PERFORMANCE AND POLICY IN INDIA: A BRIEF OVERVIEW AND SOME LESSONS David Greene It is with some trepidation that I venture to say anything about India's agricultural experience: first, because my experience with India is relatively short and I am essentially a macroeconomist, not a sector specialist; and second, India's agricultural performance has been the subject of considerable investigation and the object of some controversy, more inside India than outside. This may be because if you put three Indians together, you are bound to get four opinions and if they're economists, you'll probably get more. It may be a bit presumptuous of me to add my own views, but I will anyway. The word has gotten out that after decades during which Indian agricultural performance was often discussed in gloomy Malthusian terms, there has been a dramatic turmaround. In fact, India's agriculture stagnated during the colonial era. Between 1891 and 1947, foodgrain output increased by only 0.1 percent per annum while overall output grew at 0.4 percent. Even with population increases averaging only 0.7 percent per year, per capita food production was declining, and the food situation was becoming increasingly precarious. Nutrition levels deteriorated and the periodic droughts to which India is subject often resulted in widespread famine. In contrast, in the forty years since Independence, agricultural growth has averaged 2.6 percent per annum and foodgrain production has risen from about 50 to 150 million tons per year. Although the country is now experiencing a severe drought, there is no danger of famine as the country had accumulated a foodgrain reserve of 23+ million by December 1986. As a result of this performance, Indian agriculture is now viewed as a success and perhaps even a model to be emulated (see Table 1). Eyes are turning from Africa, where the agricultural situation continues to deteriorate, to India, to see what lessons India has to offer for the adjustment process there. Because the Indian situation is so complex, such a question cannot be answered meaningfully without some overview. So, at the risk of making this a ten minute version of everything you wanted to know about Indian agriculture but were afraid to ask, I will review some of the major factors that influenced agricultural policy, discuss some of the key elements of the policy framework, then discuss post-independence performance and finally, say a word or two about the challenges ahead and the lessons to be learmed. I have a suspicion that this will take more than the allotted ten minutes. India's post-independence agricultural policy was driven by the precarious food situation and by the desire to attain food self- sufficiently, not Just security. Imports were, and still are, considered a last resort and food aid not worth the political price. The self- sufficiency objective was also important in the case of industrial policy, where it took the form of heavy protection from imports and intense regulation, and led to development of a highly-protected, high-cost sector. - 94 - Table 1: India: Agricultural Performance Pre- and Post-Green Revolution (percent arovth rates) Area Yield Output All Crops Pre-Green Revolution 1.2 1.8 3.0 Post-Green Revolution 0.5 1.7 2.6 Food Grains Pre-Green Revolution 1.0 1.5 2.5 Post-Green Revolution 0.4 1.8 2.6 Note: Pre-Green Revolution 1950-51 to 1964-65. Post-Green Revolution 1964-65 to 1985-85. Source: V.M. Rao and R.S. Deshpande 'Agricultural Growth in India: A Review of Experiences and Prospects' in the The Development Process of the Indian Economy; P.R. Brahmanandad and V.R. Panchamukhi (eds.) Himalaya Publishing House. 1987. _ 95 - Equity has been the second major influence on policy. Because agricultural prices are a key element influencing real incomes and poverty levels, as well as efficiency, the Government has been cautious about the use of producer price incentives, preferring instead to subsidize both investment and inputs. This differs from industry, where as a general proposition, the higher cost and low quality of products, resulting from protection and limitations on domestic competition, are borne by consumers. Thus, the effects of protection of industry tend to be disguised (except in the obvious difficulty involved in exporting) while the subsidies to agriculture are more explicit in the budget and evident in the losses incurred by enterprises providing inputs and services to the sector. Finally, there was, and is, a strong predilection for government leadership and guidance of the process of development, which also cut across all sectors. Fortunately, however, in the case of agriculture, this did not lead to government ownership of productive capacity, as it did in industry, where the so-called 'commanding heights', basic and intermediate goods industries, are dominated by inefficient public enterprises. Nor did there develop the system of direct controls on production and investment decisions that has been applied to industry. Against this background, the key features of agricultural policy in India have been: Massive Investment in Irrigation Irrigation potential increased from under 23 million ha. in 1950/51 to about 68 million in 1984/85 or about 60 percent of total potential. This has been the key factor in the expansion of agricultural output. I might add that India, partly because of geography, has some of the lowest cost irrigation in the world. Large and medium works cost roughly $5000/ha. I seem to remember that the estimated cost of the Bura project in Kenya was about five times this. Investment in Agricultural Research and Extension By the early sixties when high-yielding semi-dwarf varieties of wheat or rice were being developed at CIMMYT and IRRI, the agricultural research establishment was in a position to select, cross and adapt useful varieties. The basic framework of an extension system already existed and was restructured to speed adoption of high yielding varieties (HYVs). Expansion of the Credit Network The institutional credit system has been restructured and expanded to ease the flow of low interest credit to cultivators and to refinance loans issued by banks for minor irrigation works and capital goods. Development and Strengthening of Public and Quasi-Public Institutions Cooperatives were transformed, through financial and administrative support, into instruments of government and special schemes, usually with an area or target group focus, and thus have been important vehicles to encourage production. - 96 - Subsidization of Prices of Key Inputs Fertilizers, seeds, electricity (for pumping) and water forirrigation have been heavily subsidizedl ; and Creation of a Stable Market Environment A balance between interests of producers and consumers has been maintained by supply management and price administration. Supply management has taken the form of occasional application of restrictions on movement of foodgrains, compulsory levies, export and import quotas, controls on stockholding and monopoly purchase provisions. Support prices are published for different crops and public agencies act as purchasers of last resort. In addition, the Government systematically announces procurement prices for commodities regularly purchased by public agencies. The most influential procurement prices are those paid for grains procured by the gigantic Food Corporation of India and marketed through roughly 340,000 Government ration shops. FCI now purchases about 20 million tons of grain annually and its procurement price is, de facto, a support price in the grain surplus areas where its procurement is concentrated. Most of these features of policy have taken on their present characteristics during the phase of Indian agricultural development now commonly referred to as the 'Green Revolution', which began with the introduction of high yielding varieties in the mid-1960's. The trend rate of growth of foodgrain production in India since Independence has been 2.6 percent. Although there was no significant change in the period after the Green Revolution, the structure of agriculture underwent an important transformation during this period (see Table 2). The area under irrigation increased from 22.6 million ha. in 1950-51 to over 60 million in 1984-85. HYVs, which were introduced in the mid-sixties, covered 15 million ha. (38 percent of irrigated area) by 1984-85. Fertilizer use, negligible at Independence, reached 2.2 million tons by 1970-71 and 8.4 million by 1984-85. This bio-technological 1/ The issue of financial cost of subsidies to agriculture is an important one but very difficult to sort out, partly because it is not clear in all case who benefits, and partly because of other measurement problems. Irrigation expenditure, for example, is almost pure subsidy since there is extremely little cost recovery. Water charges are negligible and/or not paid. Total budgetary irrigation expenditures were about 1.1 percent of GDP in 1985/86. Food subsidies, which amounted to 0.7 percent of GDP in that year, are probably benefitting consumers rather than producers. Fertilizer subsidies which were another 0.8 percent of GDP tend to subsidize fertilizer producers and/or the gas producer, rather than the farmer. The losses of electric boards, which our power colleagues attribute largely to low rates of agriculture, amount to 0.6 percent of GDP but there is a question of inefficiency in their operations. Finally, the credit subsidy is undoubtedly substantial. Agricultural interest rates range roughly between 5 and 12 percent while most other are in the 14 to 16 percent range, and recovery rates are low. However, I have not seen nor attempted an estimate of the cost. - 97 _ Table 2: Indicators of Technological Change in Indian Agriculture 1950-51 1984-85 Irrigation (million ha.) Major and Medium Potential 9.7 30.5 Utilization 9.7 25.3 Minor Potential 12.9 37.4 Utilization 12.9 35.1 Total Potential 22.6 67.9 Utilization 22.6 60.4 High-yielding Varieties (million ha. planted) 0 8.4 Fertilizer Use (million tons) 0.1 8.4 Pesticide Use (thousand tons) 2.4 50.0 Source: Rao and Desphande, op.cit. _ 98 - change enabled foodgrain production to stay on trend, even though gross cropped area had reached an effective plateau and production in dryland or rainfed areas trended slowly downward. In sum, the major difference was a shift in the source of growth from increases in area cultivated to increases in yields. Change was most rapid in rice and wheat production and they have accounted for roughly four-fifths of the increase in foodgrain production. Output of traditional coarse grains and pulses has stagnated. Thus, Indian agriculture's revival seems to be very closely related to irrigation development. Statistical analysis conducted by Seckler and Sampath in a report prepared for AID indicate that irrigation directly accounted for one-half to two-thirds of the increase in foodgrain production, even without taking into account its indirect effects of use of HYVs and fertilizer. Despite recent progress, sustaining the rate of agricultural growth will be a major challenge. At current rates of growth of population and expected income elasticity of demand, production will have to continue to grow at 2.6-2.7 percent per year to maintain food self-sufficiency. Foodgrain production will have to expand by another 80-85 million tons in the next 15 years. However, irrigation potential is being exhausted rapidly and irrigation costs in major and medium works are becoming increasingly expensive (rising by almost 70 percent in real terms between 1967-71 and 1982-86). Irrigation is now 60 percent of its potential , and at current rates of expansion, groundwater and surface resources could be fully developed by early in the twentyfirst century. India also faces the prospect of very substantial costs arising from poor construction and inadequate maintenance of many existing systems. The sources of agricultural growth will therefore have to shift, relying less on extension of irrigation and more on improving its efficiency. There is substantial scope for this: Rates of return on irrigation projects have been lower than expected because of excessive water use, cultivation of excessively water-intensive crops and excessive applications of fertilizer and poor operational and maintenance practices. Moreover, problems of salinity and waterlogging are already severe in some places and are increasing. To some extent, these are the results of inadequate management, but they do suggest that input and output pricing issues that will have to be given greater consideration. The days of brute force* programs focused almost exclusively on expanding areas irrigated are at an end. Second, increased attention has to be given to rainfed agriculture, where production increases have lagged badly, poverty concentrations are high and environmental deterioration is already a very serious problem. Techniques for soil and moisture conservation which can raise crop yields substantially as well as prevent further environmental deterioration already exist, but their dissemination and adoption may not be easy or rapid. As an aside, I've worked on many countries and I can't recall one where I haven't been told that yields could be doubled by adoption of existing best practice technology. Third, looking further ahead into the twentyfirst century, I believe unless there is a second green revolution for rainfed farming, it is unlikely that India can remain self-sufficient in foodgrains, unless population growth rates are reduced. - 99 - Finally, I would like to get back to what is supposed to be subject of this session, that is pricing, trade and adjustment issues. Let me start out by saying that despite the technical questions about the sustainability of growth of agriculture over the long term, despite the unevenness of past growth between regions and crops and the persistence of rural poverty and despite the high cost of financial subsidies to the sector, agriculture is not India's major adjustment problem, and in the constellation of of agricultural problems India faces, pricing is probably not the critical issue. While the agricultural sector receives large financial subsidies, it is probably not protected in the economic sense. Preliminary estimates of coefficients of nominal and effective protection and effective subsidy for wheat and rice indicate that they are all somewhat less than one2 . Moreover, pricing policy is generally satisfactory in the sense that it has provided a stable, predictable market environment to producers and reasonable' food security to consumers (albeit at high overhead cost). The crux of India's development dilemma is not that agriculture has performed badly, but that the rest of the economy has grown slowly. From Independence until in mid 1970's, overall GDP growth averaged only 3.5 percent annum. With the population growing at 2.2 percent pace, gains in per capita income were very modest, and opportunities for labor absorption outside agriculture were limited. As a result, the rural population has continued to grow, land holding size is shrinking and the landless laborer class is increasing. Poverty remains a persistent phenomenon. The major problem has been rather, the slow growth of industry, at about 5 percent per year. Thus, the key adjustment challenge India faces is moving away from the highly protective trade regime and dense set of domestic regulations that have stifled domestic and international competition and restricted industrial growth. While progress can be made in reducing or improving the effectiveness of the subsidization of the agricultural sector, improving management and refining investment criteria, strengthening institutional support, major changes in resource flows to agriculture can probably not be made in the absence of a structural adjustment that will improve the terms of trade for the sector. Even in this contacted, it will be difficult because subsidies are increasingly regarded as entitlements by the recipients. On a broader scale, India's problems of growth and poverty cannot be solved within the agricultural sector but will depend on a shift in its economic model toward one which is more open and competitive and that will engender more efficient resource allocation and use. 2/ Ashok, Gulhati. India: Effective Incentives for Agriculture. Consultants' Interim Report, June 1986. - 101 - SUSTAINABLE NATURAL RESOURCE MANAGEMENT IMPLICATIONS FOR WORLD BANK AGRICULTURE OPERATIONS John Spears The Bank's 1987 Agricultural Sector Symposium focused on sustainability aspects of agricultural development. In his key note presentation, Robert Repettol briefly summarized available information on the extent of degradation of developing country soil, water and biological resources as these impact on agricultural sustainability. The orders of magnitude of the extent of natural resource degradation as presented in this paper are sobering to say the least.2 Some 65 million hectares of once productive land in Africa have become 'desertified". An estimated 160 million hectares of upland watersheds have been seriously degraded. Sedimentation and flooding are affecting the lives of some 400 million people living downstream. An estimated one to one and a half million hectares of prime agricultural land become salinized each year. In India and Pakistan alone, some 20 million hectares are affected by water-logging, 40 percent of which is too saline for agriculture. Each year more than seven million hectares of tropical rainforest are cleared, leading to irreversible extinction of valuable plant and animal species. In Indonesia, some 16 million hectares of biologically diverse tropical rainforest have reverted to coarse grassland of little economic value. About 1 billion people in the developing countries are faced with increasing fuelwood scarcity as a result of over-cutting resources. Repetto's paper posed the question, 'What are the best ways for the World Bank to address these problems of resource deterioration and to promote sustainable agricultural development?" This paper sets out some preliminary responses to that question with special reference to their practical implications for Bank country lending operations. Strengthening of the Bank's Environmental Capability to Deal With Natural Resource Issues The Bank has recently taken some positive steps to strengthen the environmental content of its work, particularly as it relates to conservation of natural resources. Jerry Warford's Development Committee Paper 3 traces the linkages between economic growth and the environment and sets out an agenda for Bank action that would elevate concern about l/ Managing Natural Resources for Sustainability: Proceedings of the Seventh World Bank Agriculture Sector Symposium, World Bank, Washington, D.C. 1987. 2/ Set out in more detail in World Resources 1987, World Resources Institute, Washington, DC. 1987. 3/ Environment, Growth and Development, World Bank, Washington, D.C. 1987. - 102 - environmental matters to the highest levels of country planning and development. In keeping with the recommendations of that Development Committee paper, a major focus of the Bank's Environmental Department research and country operational support work is being directed towards several specific natural resource degradation issues, including for example: * Desertification * Salinity and environmental health aspects of irrigated lands * Protection of critical ecosystems with special reference to conservation of biological diversity * Deforestation * Rehabilitation of degraded watersheds * Scope for greater use of integrated pest management techniques. A working group has also been formed to examine the implications of global climatic change to Bank agriculture, energy and forestry policies. The Task Force work of the Environment Department on the above topics is a collaborative venture with the Regions, with outside scientific expertise and with NGO and environmental agencies. It will incorporate socio-economic, technical and policy research aimed at developing a better understanding of the underlying causes of natural resource degradation and of potential solutions. This is being linked to ongoing or planned Bank country operations which can provide a testing ground for research hypotheses and formulation of improved development strategies that could ensure sustainable natural resource management. Since this work is still in its early days, this paper is intended only to summarize some of the preliminary conclusions that are emerging from this Task Force work and to present some of the key issues on which it is planned to concentrate further research. The formulation of these work programs is still under review and it is hoped that this 1988 Agriculture Sector Symposium will contribute further ideas that could be taken into account as the work proceeds. Broadening the Focus of Bank Agricultural Investment A review of the Bank's lending performance through the past decade suggests that to some extent the objectives of past Bank agriculture lending have tended to bypass broader issues of natural resource degradation. In some situations Bank agricultural settlement, transportation, hydroelectric and mineral development lending has contributed to accelerated natural resource depletion, particularly of tropical rainforests. Thirdly, it has become increasingly apparent that an individual project-by-project approach to tackling issues of large-scale natural resource degradation has proven to be largely ineffective. The primary objectives of about 90 percent of Bank agriculture project lending in the period 1965-86 have been to increase food production and to enhance rural incomes (see Table 1). The main thrust of Bank agricultural support has been towards ensuring supplies of improved inputs - 103 - and credit, strengthening of agricultural extension and research and financing of irrigation, farm storage, infrastructure and rural feeder roads. Selection of project areas has been strongly influenced by the Bank's focus on poverty target groups. Much of our past agriculture investment has been directed towards areas of high rural population density or to locations that present an opportunity for expansion of the agriculture frontier. By contrast, the development strategies for ensuring sustainable land-use management are likely to require more complex project design. The choice of project area may in some situations need to be based more on consideration of the location of the degraded natural resources themselves such as soils, water, forest or other resources that are under pressure rather than on exclusive consideration of the location of poverty target groups.4 As a generalization, the steps needed to achieve sustainable natural resource management will require a blend of people-oriented investment, improved technology, economic and other policy reforms, Table 1: Bank Agriculture Lending 1965-1986 Number of Bank/IDA Subsector Projects Lending Percentage Agriculture Sector Loan 37 2,243 6 Agricultural Credit 88 5,817 15 Area Development* 249 7,842 20 Fishery 24 342 1 Irrigation and Drainage 219 11,381 30 Livestock 61 1,261 3 Agro-industry 53 2,505 7 Perennial Crops 75 2,441 6 Research and Extension 65 1,744 5 Forestry 55 1,237 3 Unidentified 1 30 neg. Other than above 16 1,690 4 Grand Total 943 38,538 100O * Predominantly integrated rural development projects with a strong emphasis on raising agricultural productivity and per capita income. Source: OED Report, World Bank Experience with Rural Development, 1965-1986. 4/ This is particularly relevant to the issue of upland water catchment area protection. Investment in upland soil conservation, deforestation and other works benefits downstream communities often located many miles away from the catchment area itself. - 104 - environmental legislation, institutional changes and intensified environmental research. Multi-faceted programs would be required to protect, for example, tropical rainforests (see Chart 1) or to ensure sustainable land-use management in upland watersheds (see Chart 2). To summarize, the practical implication is that a shift in the emphasis of Bank agricultural lending that would broaden our past food production/poverty alleviation objectives and simultaneously support strategies for broader land-use management will require a conscious decision by Bank management to ensure that land-use management considerations are taken into account at the earliest possible stage in country policy planning. It will require a greater input at the project identification/preparation stage of the necessary sociological, economic, ecological and technical expertise required to formulate sustainable land- use programs. It may require in some situations a greater focus in selection of project areas on the status of the natural resource base in addition to continued emphasis on location of poverty target groups. Intersectoral Linkaaes A particularly difficult issue is the question of achieving more effective integration of agriculture, forestry, energy, industry and other related sectoral interventions during both the planning and project implementation stage. Even within the Bank itself this is proving a difficult task. At the national level it can pose an even more formidable problem. Nevertheless, there are several examples of integrated land-use management projects already financed by the Bank that provide a pointer to the way ahead and which, in some situations, have clearly played a role in strengthening of the linkages between individual line agencies of government and also (but so far in regrettably few cases), between government and local NGO and grassroots communities. A good example is the India Himalaya Watershed project which incorporates a major institutional strengthening effort aimed at involving local panchyat communities in development and planning of project interventions in individual water catchments. Interministerial coordination is being encouraged by treating the whole watershed as a management unit. Initiatives being supported by government irrigation, agriculture, forestry and soil conservation agencies in an integrated program combine the objectives of increasing agricultural productivity and raising rural incomes with specific measures for improved soil conservation, fodder tree planting, reforestation of degraded slopes and reduction of sedimentation by gully plugging and other minor civil engineering works. Selection of Priority Areas for Bank Intervention Providing Bank support for more complex multisectoral approaches to land-use management will present both national governments and the Bank with a dilemma concerning the optimal allocation of scarce staff and financial resources. It will also require careful review of which of a range of possible economic incentives and policy reforms would be most critical for encouraging sustainable land-use. For example, the wide range - 105 - CHART 1: AN "AER&JD- -C[ " ACIION PEM ElR SAVIt T¶PICAL RAIREST 12) Structural adjustnent loans incorporating conditios that w.1l help to relieve pressure an rainforest 11lL (1 Population Reservation, legal planig/ protection & mlgration/ scientific inventory resettlemnt of rainforest larxs (10) (2) Inovative financing Preparation of aomtry comser- mechanisms. International vation strategies & support for legislation to discourage infrastructure & annagement of trade in wildlife products conservation areas nat'l parks (9) 3) Support for conservation Diversion of Bank investment awareness & education PIE D in transportation, hydro- programs with special RAINFSTS electric mmneral exploration referenoe to NCO involve- AREA, & agricultural settlement ment in policy dialogue away fran conservation areas (8 4) Support for developent Support for dev't of buffer zones of cxpensatory supplies around natural forest that will of fuelwod & industrial provide shifting alltivators with wood that will relieve an alternative to further forest pressure on naturnl forest encroachent investment in perennial tree crops (cocoa, (7) coffee, oilpalm, rubber, tea) Energy conservation (51 °Alternative fuels Support for intensive agroforestry TIpr--d d-arcoal, trials of alley-croppirg & other wod stoves, Idlkns ultiple cropping systems that *Better utilization offer prospect for sustainable of logging wastes farming ao acid forest soils (6) Fblicy reforms °Timber concession licenses 0TLaber taxation 'Lam taxes °Lan temure *Tree planting infctives "Logging contracts °Domestic processing °National acccunting CHART 2: ICIMOD WORKPLAN FRAMEWORK POLICIES AND PROGRAMMES FOR SUSTAINABLE DEVELOPMENT IN THE HINDU KUSH-HIMALAYA PROGRAMME I I PROGRAMME 11 MOIJNTAIN RESOURCE MANAGEMENT INTEGRATED MOUNTAIN DEVELOPMENT < I D PROGRAMME III 1( M1IIU MOUNTAIN DEVEL(rM L'T IW I A. I' INFOFIMATION HILL OFF-LAND MOUNTAIN SERVICES nI EI.', LONGER-TERM PERSPECTIVE WATERSHED FARMING EMPLOYMENT INFRASTRUCTURE MANAGEMENT < > DEVELOPMENT GENERATION DEVELOPMENT 1. Mountain 4. Watershed and 7. Diversification 10. R-ral-urbon linkages 13. Remote Ara Access: 16. Promotion of ICIMOD Senior Environmental Forest Management of Hill Farming In Marketing and technologies and international exchange Research Management: Ihe Programmes: economies: Processing of economics of of practical knowledge fellowships for 25-year framework comparative evaluation and integration farm produc Hill Transportation on mountain develop. Hindu Kush- of practical project in wider market ment and mountain Himalaya Region eupernence economies eco-system management DEVELOPMENT WITH CONSERVATION: 2. Mountain Agricutture 5. Organilsaton of 8. Himalayen Pasture 11. Small-scale 14. Risk Engineering 17. Organisatlon of Strategin: the Mountain Rural & Fodder Resarch Industrie Development in fragile mountain Mountain 25-Vear framework Development Proects: and Management with emphasis on environments: tcc-development ICIMOD matl with emphasis on technical and entrepreneurial control of erosion, Date ase reserch awards nQ, (ITT S i.T :v.,'I~~~~rT' community responsibility training landslides andprgam fo river sedimentation Hindu Kush- Himalaya Region 3. Monitoring and 6. Ecological Conervation 9. Integrated Rural 12. Mountain Recration 15. Environmental 18. Inventories of Mosntailn Evaluation Systems: in vulnerable mountain Energy Development end Touism: Impact Management. Development Projects for sustainable eco-systems in Mountain Districts assessment of consequences of and Research mountain development development progress engineering prnjects, mith built-in ecological and potential tourism or urbanism Iboth in area of conservation approved programme priOrities onlyf ORGANISATION 19. Onganlston for effective Mountain 20. Trining for integrated Mountain 21. Monitoring and Evaluation Development and Conservation: Development and Conservation of programme and project implementation AND tRAINING -role of government agencis assessment otnining ne ds to eachange field experience across I rJR role of local rural Institutions - preparation of practIcal national frontiers IMPLEMENTA OON - role of NGO's tmrining ataterials role of private enterprs organisation of traIning workshops INTERNATIONAL 22. Expent Cooprsaton 23. Exchange of Expeetse 24. Mobiisaton of intenationar Experdst TECHNICAL on longer-range thiough systematic for specific technical assistance needs COOPERATION resource management international study touts in Hindu Kush-Himalaya Region - 107 _ of interventions necessary to combat desertification as outlined in Chart 1, would in theory move the Bank towards supporting an extended agenda covering almost all aspects of rural and urban development. Given the complexity of this issue, where should the Bank be investing its main resources? Should we for example put the major thrust of our effort into securing participatory support of local people in improved management of the degraded, range land areas (as for example, is being encouraged in Burkina Faso and Lesotho). Alternatively should we increase Bank support for assisting spontaneous migration of people out of the arid Sahel/Sudanian zone (in which current human and livestock populations far exceed the carrying capacity of the land?) To conserve savannah woodland resources, how can the Bank help to ensure an effective balance between, on the one hand, energy conservation policies that would encourage a shift to alternative fuels versus, on the other hand, investment in forest management or tree planting to increase fuelwood supplies? What are the trade-offs between such options? What should be the appropriate mix of Bank investment and policy reform that would make the most useful contribution towards reducing pressure on over- grazed and over-populated marginal arid lands and ensuring sustainable land-use management? What about equity in these situations? Could a systems analysis approach help us better to quantify the trade-offs between such options? History suggests that in practice both national government and Bank planning of natural resource management programs has been largely an ad hoc process. For example, review of the project portfolio supported by various development agencies working through UNEP's DESCOM desertification program leads to the conclusion that historically too high a proportion of development community aid in the Sahel zone has been directed towards more obvious curative desertification control measures such as sand-dune stabilization and reforestation on the desert fringe, rather than preventive measures not necessarily in the most threatened areas. There are so far relatively few examples of situations where the Bank (or any other agency) has supported a comprehensive regional land use development program incorporating a wide enough range of activities and policy reforms to ensure that desertification is contained. The Burkina Faso, Mali, Chad, Lesotho, Sudan and Somalia projects under preparation are now moving in this direction, but making progress across the board on the full range of constraints is expected to be a slow process with many political and institutional setbacks. Similar arguments can be developed for the Bank's past approach to other issues of natural resource degradation such as deforestation and upland watershed management. With all these issues we need to broaden and deepen the Bank's understanding of the most effective approaches to sustainable resource management. Because of its multidisciplinary structure and country policy focus the Bank is well placed to play a more positive role in this area than we have done in the past. The Role of Economic Incentives A major hypothesis behind the Environmental Department's Task Force work on natural resources, is that economic incentives and - 108 - conservation education campaigns may be the most efficient ways of encouraging sound environmental management and ensuring the use of appropriate technologies. Environmental regulations (the alternative) such as restriction of public access to forest lands are immensely difficult to enforce. Perhaps the most obvious incentive example in relation to agricultural productivity is the evolution of permanent land rights and the incentive that this can provide to better land management. As land becomes scarce society must improve the efficiency of nutrient extraction, utilization and recycling by adapting fertility restoring technologies that will allow more continuous exploitation of land. Such technologies require investments of capital and effort and cultivators need an increased incentive to make those investments, particularly those of a longer-term nature. This incentive is strengthened when the right to cultivate a given tract of land and the ability to transfer it by will or sale are secured not only by social custom, but also by an effective state-enforced legal system. Similarly in relation to management of common property resources, the willingness of local communities to participate in management of these resources is likely to be enhanced where the ownership and custody of those resources is placed in the hands of local communities with clearly established and unequivocal ownership rather than with a centralized government agency. Illustrations of the above principles are well documented throughout the Bank's agricultural and forestry lending portfolio. Local community land ownership for example, is a theme of several of the West Africa livestock projects in pastoral areas, e.g., Senegal and Niger and they provide a good starting point for further Bank involvement. The Influence of Pricing and Taxation Policies Agricultural pricing policies and taxation rates can strongly influence cropping patterns and land use and presumably therefore land management. Taxation policies that exempt agriculture have been a major factor in fuelling accelerated deforestation in the Brazilian Amazon. They have encouraged large-scale speculation in forest land; its conversion to economically unsound cattle ranches which frequently after a few years are abandoned leaving behind a biologically depleted landscape and ecological wilderness. Through its country policy dialogue the Bank is well placed to assist governments in tackling essential tax reforms that can help foster more sustainable resource use. The influence of pricing policies on natural resource sustainability is less clear cut and I refer to this issue again, below. Choice of Crops and Farming Systems Some crops are less damaging to soils than basic food crops. Coffee, cocoa, rubber, bananas, tea, spices and so on grow on trees and bushes that provide continuous root structure and canopy cover. These crops are suitable for hilly terrain where they are often grown and they leave soil much less susceptible to erosion than do crops such as yams, maize, sorghum, millet and cassava (see Table 2). - 109 - Table 2: Rainfall Runoff Under Varying Land Uses Share of Annual Rainfall Vegetative Cover Running Off Percentage Forests 1 Perennial Tree Crops (tea, coffee) 2 Undisturbed pasture 8 Soybeans 20 Bare Soil 35 Source: East African Agriculture and Forestry Research Organization, 1961. Dick Grimshaw's work on Vetiver grass planting in India has clearly demonstrated the potential of that grass to contribute to low cost and effective soil conservation. Increased Bank support for stall feeding of animals in the uplands of Nepal is helping to reduce pressure on upland range and forest lands. Planting of fast growing fuelwood and industrial tree species in Kenya has provided an alternative source of wood supply and helped to take the pressure off the natural forests. Since most of the Bank agricultural staff participating in this Symposium are well aware of these more obvious technical solutions to soil, forest and water conservation, I do not intend to expand further on this topic. However, there is one particular aspect of farming system research that would appear to justify increased Bank support in the future and that is the need to improve our understanding of the potential of multiple agro-forestry farming systems to contribute to sustainable natural resource use (such as the well documented Nyabisindu project in Rwanda--see Figure 1). A recent World Resources Institute publication, 'Agroecology for Sustainable Development" sets out some thought provoking ideas on the future prospects for increased adoption of organic farming systems which are less dependent on fertilizer and chemical pesticides. Withholding Bank Investment from Proiects that Would Lead to Accelerated Natural Resource Repletion Many environmental critics of the Bank have alleged that Bank- financed agriculture and other lending operations have played a major role in contributing to natural resource degradation. Notwithstanding the fact that some of this criticism has been emotive and somewhat exaggerated, the fact remains that some Bank-financed projects have contributed both to environmental damage and to human hardship. Examples include the Brazil - 110 - Figure 1 Example of Model Farm in Nyabisindu, Rwanda. Small Forest I IO tolSMeters water retention by i chanrnels, stabilization with fodder grasws vw Field Crops: * mixed cropping 'S. < * controlled weed tolerance additional tiu.s * rotation with intensified in the fields seasonal fallow trees and bushes (Acacia, Albizzia) (Albizzia. Grevilleak Leucaena) divensUied large hedgf A. Side View. around the farm C<-5 B. Typical Horizontal Layout of Model Farm, t 1 Hectare Homeste,Sm ores garden -p- > q * C hCopffee a% a WA TM TAZNA*OAADTNA FGV XPOEEA:OAADTNA FGV X 150 50 E~~~~~~~~~~~~~~~~~~~~~~~ 0. ~ ~ ~~~~10 iwo 1975 1980 1970 1975 1980 TANZANi&~ O~ AD TIASCOFGVD(SEEA. TANA OAN TR S%OFGV X - 139 - compared to agricultural project lending of $187.0. Tanzania received no funding from the Bank for SALs or projects in the agricultural sector from 1982 to 1986, when a multisectoral rehabilitation loan was approved. Senegal received three structural adjustment loans totalling $209 million in that period whereas loans for the agricultural projects amounted to only $55.9 million. In Nigeria, non-project lending reached $452.0 million in 1987 and $1,239.5 million went to projects in the agricultural sector. The Donors' Record: Aid Flows and Policy Influence. This section summarizes trends in the scale and terms of the development financing provided by donors to the six MADIA recipient countries. Among the bilateral donors, Denmark and Sweden, whose aid is important in Tanzania and Kenya, had the highest percentage of TRN qualifying as ODA, followed by Germany and the U.S. (See Table 4 for ODA as a percentage of TRN flows from MADIA donors to MADIA recipients.) 18 Interestingly, France and the U.K. had the lowest percentages of TRN qualifying as ODA (ranging from 31 percent to 63 percent of TRN from France to all MADIA countries except Nigeria, and from 39 percent to 66 percent of U.K. TRN to the East African MADIA countries), and France's share of grants in total TRN to Senegal has been declining over time. Among the multilaterals, 74-100 percent of TRN from the EEC to MADIA countries (except Nigeria) qualified as ODA, while IDA flows to MADIA countries were 100 percent ODA. Nigeria received over 90 percent of its transfers from the Bank 19 on non-concessional terms, while the figure for Cameroon was about 50 percent; terms have hardened for both countries since their emergence as oil producers. Indeed, both Nigeria and Cameroon have pleaded for increased concessionality, especially in the case of investments with long gestation lags, e.g., agricultural research: as falling oil prices and devaluation (by 400 percent) have reduced Nigeria'sper capita GNP, its case for concessional assistance has become stronger. Colonial connections, commercial interests, and recipients' political and ideological attractiveness have produced major differences in the relative importance of individual donors in concessional flows. Not surprisingly, the U.K. (15 percent), U.S. (10 percent), Germany (10 percent), and the World Bank (9 percent) have been the major players in Kenya (see Figures 6a-6f). These donors have also been predominant in Malawi. In the case of Tanzania, Sweden (15 percent), the Netherlands, (9 percent), and Denmark (7 percent) have been attracted by its socialist ideology, (and the views of these donors -- who have been described as 18/ Danish TRN to Kenya and Tanzania was 99 percent and 97 percent ODA, and Swedish TRN to these countries was 94 percent and 96 percent ODA respectively. German TRN to the MADIA countries (with the exception of Nigeria) was 72-93 percent ODA, while the U.S. TRN to MADIA countries was 62-98 percent ODA. 19/ e.g., IBRD & IDA combined total. tobi. 4: OfficiaI D.,.Iop-nt Assist n.. (OA) A. P.r .t of Total R ..iit. Nat (TIR) Tr.n.. .d fro MADIA Donr to MADIA Coont,i.. (1970-1984 Totul. in Million. of 1983 U.S. DoIIaI) Ri3CPIENTS I OtNORS | CAMRION NIGERIA SENA1L KENYA N4LMI TANZiA N l I Tot ODA Tot t.°N Pct ODA Tot ODA Tot TRN P.t MA Tot OWA Tot TiN Pct WA Tot ODA Tot TRN Pct ODA Tot ODA Tot TliN Pt ODA Tot WDA Tot TRN Pet WDA ------ I-------- -----i -------- I-----I -1----- l---- -----I -----I ------- ------I ----I - If---- I-----I - l----- ---- I------- - ------ It ----- DAC CaNVRIES: l - Oon_rk l 22.5 41.8 84.0 7.8 250.2 3.1 30.6 32.0 95.8 205.0 207.5 98.8 6i.0 6i.1 90.8 433.3 448.1 9U.7 1 l - F ..n. c 908.4 2439a.6 7.2 20.8 2108.8 1.0 1159.9 1834.4 62.5 59.2 189.4 31.8 10.9 17.2 65.1 31.6 102.2 S0.9 l I - Qr_ony. F. R. 1 298.6 S33.7 88.7 188.0 2068.7 9.1 142.5 165.3 86.2 444.9 614.5 72.4 177.6 196.6 89.4 590.5 632.0 93.4 1 l - S..dm n 0.0 32.2 0.0 4.1 -13.0 -29.7 0.2 2.7 7.3 293.3 312.2 93.9 0.1 3.4 2.9 938.3 971.2 96.4 l - U.ited Kinedo. 48.4 169.5 30.4 192.4 3944.0 4.9 9.7 43.1 22.4 643.3 1846.3 39.1 424.5 647.3 65.6 361.7 606.0 59.5 1 - U.itd States 136.3 220.9 61.7 341.6 482.2 70.8 329.6 33S.0 98.1 429.5 454.8 94.4 80.8 83.7 90.5 382.0 393.S 97.1 1 ULTILATBAL: l l - E. E. C. 3 804.5 343.8 88.6 16.6 41.6 39.8 570.3 596.3 93.6 169.6 228.7 74.1 91.9 103.8 88.5 242.5 243.2 99.7 l - lw 20.6 300.1 6.9 0.0 1008.2 0.0 19.0 98.6 19.2 13.2 940.8 1.4 17.6 72.3 24.3 41.8 303.7 13.7 1 - IDA I 252.1 282.1 10C.0 34.8 34.6 100.0 230.6 2.2 103.8 369.0 389.0 102.0 327.9 327.9 100.0 563.2 563.2 100.0 1 GAND TOTAL I 2683.5 5125.5 52.4 1580.4 12794.6 12.4 3381.7 4598.0 73.5 4225.5 6852.9 61.7 1565.7 1968.4 80.6 6510.8 7477.5 84.4 1 So.urc.: OEM, C ooaphical Distrib.timn of Fin.nci. Fl. to D.o.Iping Cont,i... - 141 - Figures 6a - 6f: Top Six Donors of ODA (MADLA Countries) Kenya: ODA 1970-1984 Cameroon: ODA 1970-1984 Other 38.2% 15.5% Other 21.2% 33.9% France 103 Germany U.S.A. U.S.A. Canada I.B.R.D. 1. Sweden I.B.R.D. .E.C Net erlands Germany E.E.C. Malawi: ODA 1970-1984 Nigeria: ODA 1970-1984 Other 7 2 U,K, Other U.S.A. E.E.C. / 21.8 X I.B.R.D. Japan 8,9 2% U.K Canada 7a7 Canada 04 Ge 11.0% Germany U.N. Agencies Tanzania: ODA 1970-1984 Senegal: ODA 1970-1984 < Swe~~~~den Other 43.5% 14.8% Other 8.2% 34.3% France g 9.6X I.B.R.D. aCanada / \ <9 4Z GermanY I.B.R./\ \ / \9.1% 5 OPEC (MULTI 8.3% 6.8% 6.9% Netherlands +BI) Norway ark .A _ 142 - 'friendly donors' by Tanzania -- were on the whole slow to change on the need for adjustment.20 Their infrastructural support, together with the levels of framework aid by all donors, enabled Tanzania to postpone reform measures promoted by the IMP and the Bank until well into the 1980s. in contrast to these new donors, Tanzania's traditional donors (the U.K. and W. Germany, with both of whom it has had a long colonial connection), had actually terminated their aid in the 1970e, owing to foreign policy differences over Southern Africa. In West Africa, again reflecting colonial ties, France has been the primary donor in Senegal (34 percent) and Cameroon (34 percent), while the U.K. has been the leader in the more commercial (TRN) transfers in Nigeria (31 percent), followed by France (16 percent) and Germany (16 percent). Changes over time in individual donors' support for particular recipients both reflect and prompt changes in their relative influence, and especially in the impact of their policy advice. In Kenya, for example, the most striking changes are the declining role of the U.K. in percentage terms and the diversification in the countries offering assistance. On the other hand, many of Kenya's successes in smallholder agriculture (e.g., in tea, coffee, dairying, etc.) are explained by the inheritances of British institutions, policies, and manpower.21 By the same token, the depletion of cotton research capability in much of anglophone Africa reflects the U.K.'s withdrawal from the cotton industry well before indigenous capacity was established, together with a major change in the character of its technical assistance from a long-term supportive presence in the colonial period to much shorter-term and smaller-scale assistance in more recent years.22 Declining U.K. aid is also evident in Malawi, where the E.C. has emerged as a major donor (and where the World Bank's role has increased after a dip in flows during the mid-1970s). In Tanzania, Sweden contributed twice as much ODA as any other donor in the early 1970s (20 percent) but had little presence in agriculture. Its concentrated on social services and industry.23 (Indeed, the much greater share of donor resources going to industry and social services in Tanzania compared to other countries explains how Tanzania was able to maintain its pro- industrialization and equity-oriented policies as well as it did.) The importance of Tanzania's original top six donors has also declined, with the contributions of others rising from 32 percent to 48 percent for TRN, and from 30 percent to 46 percent for ODA. A larger number of donors now each contribute smaller amounts of assistance. Tanzania's so-called friendly donors have now begun to appreciate more fully the importance of the macroeconomic environment for development, and have supported the reform measures promoted by IMP and World Bank conditionality. 20/ See Ellen Hanak and Michael Loft, ' Danish Development Assistance to Tanzania and Kenya (1962-1985): Its Contribution to Agricultural Development," and Marian Radetzki, 'Swedish Aid to Kenya and Tanzania: Its Impact on Rural Development,' both in Aid to African Agriculture, ed. Uma Lele, forthcoming. 21/ See Howell, op.cit. 22/ Ibid. 23/ See Radetzki, op.cit. - 143 - In West Africa, France has sustained and (in Senegal) even increased its leading role (with 33 percent and 40 percent of total ODA and TRN respectively) in contrast to the U.K. in East Africa.24 At the same time, the EEC (which France joined in the early 1960s) has picked up more of the ODA share in Senegal (its share having risen from 10 percent to 24 percent of ODA). In the case of Cameroon, however, EEC flows have shrunk from 17 percent to 3 percent of TRN, and from 22 percent to 5 percent of ODA. In Nigeria, the World Bank has been an important contributor of capital, especially in agriculture once the U.S. departed in 1974 (after Nigeria joined OPEC). Nigeria's higher per capita income after the oil boom reduced its eligibility for concessional assistance. While France and Germany are emerging as sources of non-concessional flows to Nigeria, the Bank's role in the agricultural sector has remained strong. 25 The Bank's share in ODA flows to a country can be taken as an indicator of its influence in two quite opposite ways. We have already noted the implications of contributing large shares of total assistance, but in the specific case of the Bank, a relatively small share might mean lower direct financial influence but greater need for aid coordination-- and hence a different but potentially important opportunity for the Bank to influence policy. In the 1970s, much of the Bank's influence came from the authority of its country economic work and reports, from its role as the organizer of aid consortia and consultative groups, and coordinator of co-financing arrangements. As lending in support of policy reform increased (along with balance of payments support operations in which the Bank plays an important role), the Bank's influence on the size and form of total donor resources going to countries -- and on the associated policy reform packages -- has risen considerably.26 Over the 1970-84 period as a whole, however, the Bank has played a relatively minor role in the volume of direct financing channelled to the six MADIA countries. IDA accounted for a small 9.5 percent of the ODA received by Kenya and Cameroon during 1970-84, compared to 20.7 percent in Malawi but only 8.9 percent in Tanzania and 6.8 percent in Senegal.27 The share of total Bank, i.e. IDA and IBRD lending in TRN was 24/ Claude Freud, 'Policies of Rural Development in Senegal and Cameroon from Independence to Today," MADIA Paper (World Bank, Washington, DC, July 1987). 25/ We have shown elsewhere that nearly 40 percent of the contributions to Nigeria's Agricultural Development Projects (ADP) strategy has come from the World Bank. As the budget crunch increased, the Bank may have been influential in protecting expenditures on the smallholder sector relative to other expenditure cuts in, e.g., irrigation investment. See Lele, et. al., 'Nigeria's Economic Development.' 26/ See Radetzki, op.cit. 27/ See Maria Cancian, 'Aid Allocations to Cameroon, Kenya, Malawi, Nigeria, Senegal and Tanzania: A Review of the OECD Database,' MADIA Paper, (World Bank, Washington, DC., February 1986). - 144 - only 9 percent in Nigeria during 1970-84; in Eastern Africa, the shares were 19 percent in Kenya, 20 percent in Malawi, but only 12 percent in Tanzania. The Bank's influence in promoting important development ideas has been distinctly greater than that suggested by its ODA contributions, especially since the 1973 McNamara speech and the subsequent growth of the Bank's share in capital transfers to developing countries. Among the MADIA countries, this expanding influence emerged earlier in the anglophone countries, as the Bank moved into the vacuum left by the declining U.K. role. Bank influence on integrated agricultural development also increased in francophone MADIA countries, but it only became really substantial by the late 1970s and early 1980s, as the need for macroeconomic adjustment grew in these countries. Several factors help to explain this development. First, the Bank's breadth of experience and professionalism relative to that of bilateral and even other multilateral aid agencies is generally acknowledged, as is its international (and hence non-partisan) status. This has tended to give its presence and policy stance more weight. The personal commitment of Messrs. McNamara, Clausen and Conable on poverty and adjustment lending also played an important part. This is far from implying, however, that there have been no criticisms of the Bank: indeed it has attracted vociferous critics, e.g., for helping socialistic countries, encouraging public sector growth and promoting welfare states in the McNamara years, and for its excessive private sector orientation and movement away from its earlier poverty alleviation stance during the Clausen and Conable periods.28 It should also be remembered that support in the donor community for policy reform and adjustment lending has been variable. The U.S. has been the most overt and active supporter of adjustment assistance and of the use of conditionality. The U.K. and Germany have followed suit, although they have been less active in devising conditions for lending. Because of the need for burden sharing, France has had to go along with adjustment lending, although in several cases adjustment programs are dismantling the very institutions that France has established.29 Meanwhile, knowledgeable technocrats are concerned about how far new lending patterns take adequate account of the variety of technical, organizational, and other constraints on smallholder development, the successes and failures of past donor efforts to address these issues, the respective roles of adjustment and project lending, and the need for balance between assistance based on conditionality and policy reform on the one hand, and that which emphasizes long-term capacity-building to address the many complex development issues facing African agriculture, on the other. It is to these issues that we now turn. 28/ See Michael Lipton, 'Limits of Price Policy for Agriculture: Which Way for the World?" in Development Policy Review, London, 5 (1987): 197-215. 29/ See Freud, op.cit. _ 145 - Agricultural Performance in HADIA Countries This discussion of country performance needs to be viewed against the background of several major ongoing debates about the appropriate balance between (1) food and export crop production, (2) growth and equity objectives, and (3) price and nonprice factors in enhancing (and explaining) agricultural performance. We outline the issues in these debates and our own hypotheses below, before providing the relevant evidence from the MADIA study. Development debates and government and donor policies have tended to emphasize the conflict between food and export crop production, rather than promoting policies that support balanced development of the agricultural sector as a whole. This approach has resulted in swings in aid flows and activities supported by donors, with a major shift of focus from export crop expansion in the 1960s (reflecting the priorities of the colonial era) to support for foodcrop expansion in the mid-1970s, in response to the deteriorating food situation on world markets and in the African continent. This was followed by a new emphasis on the need for export orientation in the early 1980s, associated with the World Bank's report on Sub-Saharan Africa (the so-called Berg Report) and exemplified by the structural adjustment programs initiated in Africa and elsewhere. In the latest swing of the pendulum, this priority has been succeeded by a revival of concern about food security, as reflected in recent policy statements of major donors. 30 In later sections, we shall address this issue by contrasting the experience of Kenya, which has pursued an agriculturally-led development strategy, and has achieved growth in both food and export crop production, with the very different policy stances and performance records of several other countries in the MADIA sample, where unbalanced positions either favoring or discriminating against the export crop sector have had adverse consequences for both growth and equity objectives. Development economics literature in the 1970s tended to emphasize the extent of complementarity (rather than competition) between growth and equity objectives, without paying adequate regard to its key determinants in particular the profile of asset distribution in a given economy, and the substantial public sector planning and implementing capacity needed for the provision of public goods in support of smallholder production. These two factors critically determine the time horizon within which growth and equity objectives can be reconciled. We shall use evidence from Kenya, Tanzania and Halawi to illustrate the extent of the tradeoffs between growth and equity that have in fact occurred during the short and medium run under specific country conditions. The comparative experience of these countries also illustrates the complex interactions between initial conditions, resource endowments, external shocks and policy responses that 301 See the Annual Heeting Speech of Barber Conable, President of the World Bank, to the Board of Governors (World Bank, Washington, DC. September 1987), and the recent policy paper on food security, Poverty and HunRer. World Bank. Washington, D.C. 1986. - 146 - have determined short- and long-run growth and equity outcomes. The primacy given by donors to 'getting prices right" since the publication of the Berg Report on Sub-Saharan Africa has come under criticism from several analysts. 31 We shall use examples from the three West African MADIA countries to show that price incentives are a necessary but by no means a sufficient condition for broadly based and sustained agricultural growth. A variety of nonprice factors -- including the availability of effective agricultural research, extension, input supply and output marketing arrangements -- have played important roles in determining overall supply responses, as distinct from relative cropping shifts. We shall also demonstrate the part that country-specific political and other unquantifiable factors have played in providing nonprice preconditions of growth. The analysis will show how structural adjustment lending needs to be complemented by other forms of project and nonproject assistance, in order to reconcile the short-term nature of structural and sectoral adjustment programs and the time required to alleviate man of the nonprice constraints on growth. This is not to imply that Africa is not getting other forms of assistance. Rather that the glamour which is attached to the relatively short-term structural adjustment lending now needs to be attached to the broader and longer-term developmental concerns which received attention in the 1950's and 60's. The Roles of Resource-Poor and Resource-Rich Regions in Agricultural Development One of the development debates that has not yet occurred -- or rather, that has taken place mainly by default in the 1970s (as a result of the perceived failure of the trickledown following the green revolution in Asia) -- relates to the appropriateness of diverting scarce government and donor resources and policy attention to the alleviation of poverty and food security concerns in resource-poor regions -- as opposed to focusing on the development of other areas with better natural endowments or known technological potential. We shall use the contrasting approaches of Tanzania and Kenya to illustrate their different growth performance, and how -- despite Tanzania's worthy efforts to open up areas of high potential -- its policy of quick universal coverage of services to all rural areas made it financially impossible to maintain many of its worthwhile long-term developmental efforts in the productive and social sectors, despite substantial external assistance. We now summarize country performance growth and equity and food and export crop production. An Overview of Country Performance. The primary focus of our discussion is on the 1970 to 1985 period. 1970 was selected as the base as it was a relatively normal year in terms of climate and the institutional environment in most of our countries (with the exception of Nigeria where a civil war had recently ended), as well as in terms of the international market environment. The 1985 cutoff was selected for similar reasons. This period also permitted comprehensive coverage of production performance in all six countries. To understand developments in the 1970 to 1985 period, we examine 'initiall conditions prior to the 1970s (including those 31/ See Lipton, op.cit. - 147 - emanating from the colonial experience). Finally, the review covers production performance in the years of structural adjustment since the early 19809 to explore the extent to which policy reforms have addressed the crucial constraints on production identified in our long-term analysis. It needs to be stressed that data on export crop performance are far more reliable than on foodcrops, and for foodcrops, there are differences among MADIA countries in data consistency. Our judgments on country performance are not based on statistical measurements alone but also on other information such as the nature and extent of technical change, growth of input use, effectiveness of services, etc. Growth rates for major food and export crop production for the six countries are presented in Table 5. Kenya has been the best performer in the agricultural sector. Not only did its production of virtually all major export and food crops increase, but the share of small farmers in the production of all crops also increased substantially relative to that of large farms and estates. 32 Moreover, higher smallholder production did not come at the cost of the large farm/estate sector; rather, the former increased mainly through area expansion (with yield growth in maize and coffee only), while large farm/estate output expanded mainly through increases yield per hectare. Because small farm yields increased little, despite policies which favored intensification in the smallholder sector, yield differences (in the case of tea and coffee) between small farms and estates remained in the order in 100 percent (see below). In Malawi, estate production of major crops increased impressively, especially for tobacco (13 percent p.a.) and sugar (15 percent p.a.). Smallholder maize production stagnated, however, falling in per capita terms, but since output of all other smallholder crops fell to a greater extent (in per capita terms), the profile for all smallholder crops shows a net shift towards maize and away from export crops until about 1985. Smallholder productivity showed no increase, but estate sector tobacco yields increased considerably, with an average differential of four times relative yields in the smallholder sector (compared to Kenya's differential of two times). Malawi's much higher estate/smallholder land productivity differential reflects the fact that its development strategy strongly favored estate agriculture to take advantage of the export opportunities opened up in the mid-1970s.33 Productivity differences based 32/ See Lele and Meyers, "Agricultural Development and Foreign Assistance." 33/ It should be noted, however, that Kenya's gains in the smallholder sector were slow and steady, arising from growth in smallholder production over a long period beginning in the late 1950s and the early 1960s, whereas Malawi's estate-led export crop growth showed a rapid burst during the 1970s and peaked at the end of the 1970s and early 1980s (a point that we shall take up later when we discuss structural adjustment). Malawi's superior performance has tended to be attributed to favorable macroeconomic policies and outward orientation. This observation is only partially true as it applies to the estate sector. See Bela Balassa, 'Policy Responses to External Shocks in Sub-Saharan African Countries, 1973-76,0 World Bank Reprint Series No. 270 World Bank, Washington, DC. 1987. Table 5: Average Annual Percentage Oroth in Volue, 1970-1985 (Major Agricultural Eaporte, Estate and Seiholder Production, and Food Imports) 1Country ------ Major Agricultural Etports ------1 ----------------------------- Production --------------------------------- ------------- Food --------------11 ------------- Seatlholders ------------ ----------- Estate ----------- - Maiz ----- - Official - I Coff*e Toa Cttn Tbbco O'nut Hort. Coffe. Teo Tbbco Cttn C'nut Sugar Coffe Too Tbbco Cttn Sugar Prod. Purch. Sales Iaprte Fd Aid I lEset Africa Kenya 3.8% 7.51 12.71 6.01 13.51 4.91 16.91 1.01 5.51 3.99 2.41 9.21 6.41 43.1T1 Mea1ci 5.21 -12.51 11.71 -13.2% 3.01 1.1% -7.4% 12.91 14.7% 1.5% 19.11 23.71 3.11 26.611 Tanzania 0.6 1.91 -2.31 -4.71 2.31 13.71 -4.61 1.61 -4.11 1.01 -7.51 0.61 2.11 1.111 1.9 3.01 23.551 l~~~~~ ~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ICountry ------ Major Agricultural Ezports ------…1------------------ Production ----------------------- ----------------------- Food ------------------------- i1- Selholdere --I I- Esatest -I 1---- Ceneral ----- -------- Import -------- Coffee Coaco Cttn CGnut Rubber Pi. Oii Coffe Cocao Cttn Rubbr P1m Oil Cttn C'nut Cocso Rice Maize MI/Sgp Rice Wheat Sugar Can. Fd. Aidl iWst Africa I Cameroon 1.91 0.41 4.61 -5.91 6.61 1.01 2.01 6.31 2.7% 4.21 16.51 4.11 1.31 6.11 4.111 I Nigeria -6.11 -3.21 -4.91 10.51 6.11 0.21 46.71 15.2T 20.01 Senegal no -9.51 6. 61 -0. 41 1.21 5.61 0.21 7.3t 0.5%1 -64.6 Source: Compiled From MADIA Country Highlights. Note: Croeth rste. averaged for certain crops, e.g. burley and flue-cured tobecco. Crowth rat.s for Nigeria production are calculated using FAO date. - 149 - on farm size have profound implications in the short and the long run for foreign exchange earnings, government revenues and expenditures, output growth, land distribution, and for the robustness of the growth process generally.34 Kenya and Malawi are the only countries in the MADIA sample that expanded world market shares for major export crops; all others lost shares (see Table 5a). Both large and small farm export agriculture performed poorly in Tanzania (see Table 5). Coffee and tea exports stagnated, and exports of all other major crops declined. Within the smallholder sector, there was a major shift in agricultural production away from export to food crops until about 1986. Informal food markets were active in all three countries, but the government's share of purchases and sales of maize increased in Kenya and Malawi, whereas in Tanzania, informal (including parallel or black) markets had become more active by the end of the 1970s -- both internally and across national borders, mainly due to the flexibility maize offered in exchange for consumer goods which had become more scarce in Tanzania relative to Kenya or Malawi, due to a poor macroeconomic environment. Despite its lackluster performance in maize production, Malawi was a consistent net exporter of maize except in 1980-81 and 1986. In spite of increases in maize production, however, Kenya, Tanzania, and Malawi all increased food imports and food aid, Kenya being the most dependent of the three on these sources. Malawi's food exports may have been due to a lack of effective demand at home, owing to its skewed land (and consequent agricultural income) distribution. The growth in food imports in Kenya may reflect exactly the contrary -- a more dynamic internal demand for maize, stemming from more broadbased income growth. The growth of Tanzania's food imports and food aid receipts, in spite of its land abundance and high levels of financial assistance, emphasizes its poor policy environment. In West Africa, Cameroon's performance was the best of the three MADIA countries but was unimpressive relative to Kenya's and Malawi's. Among export crops, palm oil, cotton and robusta coffee expanded, while all others stagnated. Poor data make foodcrop performance harder to gauge, but rice production, for which relatively reliable statistics are available owing to its enclave status, increased sharply at 16 percent p.a. (although from a small base). Rootcrops, sorghum and millets, the prime food sources, kept pace with population growth. An important development in Cameroon has been the growth of maize production, and even though this comes from a small base, it shows much potential for growth as a food and feed crop in the long run. Cameroon was the least dependent on food imports of the three West African MADIA countries, with the exception of rice, imports of which 34/ See Uma Lele and Mohan Agarwal, 'Smallholder and Large-Scale Agriculture: Are There Tradeoffs in Growth and Equity?' MADIA Paper World Bank, Washington, DC, forthcoming. - 150 - Table 5a: Export Volumes, Shares, and Growth Rates of Major Crops Grown by MADIA Countries and their Major Competitors (1961-1986): Average Values for Indicated Periods. (volume in thousand metric tons) 1961-68 1971-78 1988-8S 1961-86 CROP VOLUME SHARE VOLUME SHARE VOLUME SHARE GROWTH RATE COCQfA BEN World 1,043.2 100.0 1,186.1 100.0% 1,319.6 100.0% 0.74X Ghana 417.0 40.0X 3868.8 31.0X 158.2 12.0X -4.05x Cot D'Ivolire 94.4 9.2X 149.8 12.6! 384.9 29.0! 6.44X Brazil 76.1 7.38 101.4 8.5x 144.1 11.0X 2.865% Ecuador 83.2 3.2X 42.9 3.6x 40.6 8.0o -1.73X Malaysia 0.3 0.0% 4.3 0.4! 68.8 6.2! 27.72X Cameroon 70.6 6.8s 81.9 6.9x 86.2 6.5s 0.659 Nigeria 187.3 18.0! 237.7 20.1% 143.2 11.1X -2.76% COFFEE World 2910.3 1OO.OX 8669.9 10O.OX 4220.6 1OO.OX 1.64! Brazil 1057.2 86.3X 1061.9 29.6! 1001.7 23.7X -1.39X Colombia 866.9 12.6X 896.4 11.2X 674.5 18.6! 2.62! Cote d'Ivoir. 180.6 5.6X 196.6 5.5X 218.3 6.1! 1.71X Angola 140.1 4.8! 192.4 5.4X 22.7 0.5! -8.39! Mixico 85.1 2.9x 111.5 3.1X 196.6 4.7X 3.71X Indonesla 64.6 2.2X 94.0 2.6! 273.7 6.5X 6.64X Cameroon 39.2 1.3X 70.6 2.0! 90.8 2.2! 3.49! Kenya 34.3 1.2! 65.0 1.8! 97.3 2.3! 6.03! Tanzania 26.9 0.9! 60.2 1.4! 49.8 1.2% 2.28! COTTlN World 3547.9 100.0! 4299.2 100.0! 4294.9 100.0! 0.82! USA 1103.8 30.1X 961.2 22.2! 1265.1 29.4! 1.20X Mexico 866.8 10.1! 182.9 4.38 85.7 2.0! -6.36x USSR 349.2 9.6! 642.4 14.9! 691.8 16.1! 3.655 Egypt 278.5 7.6! 304.4 7.1! 176.7 4.1! -3.31% Brazil 214.5 5.9x 264.6 6.2! 99.7 2.3% -10.76% Pakistan 121.6 8.3! 216.3 5.1! 203.6 4.7! 1.79x China NA NA 22.0 0.5! 203.3 4.7! 14.91X Nigeria 87.8 1.0X 10.7 0.3% NA NA -8.86% Tanzania 87.3 1.0X 60.0 1.4! 33.1 0.8! -1.75! GROUNDNUT World 1386.0 100.0! 917.4 100.0! 785.6 100.0% -2.95! Sudan 106.6 7.6! 120.9 13.2! 17.1 2.2X -8.6ox Niger 76.0 5.5X 76.3 8.4X NA NA -29.e6x S. Africa 65.8 4.8X 6a.8 6.2X 10.8 1.4! -4.96! Gamble 60.4 3.7! 34.0 3.7! 31.0 4.0X -2.38! USA 14.8 1.1X 1683.4 17.1% 266.8 33.9% 12.64! China 2.6 0.2! 32.1 3.6X 164.0 19.6! 13.60X Argentina NA NA 1.2 O.1X 93.4 11.9X 46.87% Cameroon 11.9 0.9% 9.4 1.0% 0.3 O.OX -20.62! Malawi 20.7 1.5X 30.8 8.4% 4.9 0.6% -4.78! Nigeria 664.7 40.0X 147.1 16.0% NA NA -33.26% Senegal 249.9 18.1x 17.2 1.9% 13.7 1.8! -19.64! - 151 - Table Sa 1961-68 1971-7i 199S8* S 1961-*6 CROP VOLUME SHARE VOLUME SHARE VOWilE SHARE GROWTH RATE WRWUNONUT CAKE World 1,426.6 102.6X 1,6830.6 100.0X 591.1 100.0X -4.07X India 615.2 48.8% 845.0 51.9X 248.1 4S.1X -4.07X Burma 152.3 11.0% 61.8 3.1X 4.2 0.7X -14.85X Argentina 127.8 9.2X 78.5 4.68 80.6 5.5% -S.SSX Brazil 101.5 7.4X 150.5 9.2X 28.9 S.4X -5.87X Gambia 2.9 0.2X 16.0 1.0% 13.6 2.6% 4.08% USA NA NA NA NA 16.5 3.1X 1.80X Malawi 1.0 0.1X 1.8 0.1X 1.5 o.ax 0.8SX Nigeria 84.0 6.1% 112.0 7.0% NA NA -2S.41X Senegal 168.8 11.9X 201.9 12.2% 116.1 18.2X -2.70X GOUNIT OIL World 354.9 100.0X 4U.2 100.0X 388.8 10D.OX 0.02X Argentina 56.2 16.2% 65.0 11.5X 85.6 9.8X 1.95X India 87.7 9.iX 0.1 O.OX NA NA -14.16X China 6.2 1.8X 19.8 4.2X 58.0 18.8X 6.44X Brazil 5.6 1.5X 59.8 18.1X 54.3 14.7% 6.19X Nigeria 60.1 16.9% 64.5 18.7% NA NA 14.76% Senegol 116.0 38.7X 126.4 26.2X 109.1 26.7% -2.24X PALM OIL World 601.7 100.0%O 1878.2 100.0% 4518.7 100.OX 10.73X Zaire 149.8 24.8X 87.0 6.65 8.9 0.2X -14.48X Indonesla 109.1 18.1% 286.0 17.1X 486.2 9.5X 6.64X Malaysia 106.4 17.7X 689.4 49.8X 8029.1 67.6x 17.36X Singapor- 82.5 5.4X 210.5 16.8X 685.8 14.9X 14.52X Cameroon 8.9 1.5X 8.4 O.8X 5.7 0.1X -0.29X Nigeria 188.5 22.9% 7.4 0.6%X NA NA -21.91X TEA World 611.4 100.0X 778.0 100.0X 1049.2 100.0X 2.46x India 218.6 84.9X 196.9 25.8X 216.1 20.6X 0.16% Sri Lanka 201.6 88.OX 208.2 26.1X 186.8 17.7X -0.47X China 80.2 5.OX 48.7 5.6%e 186.7 12.9X 7.26X Indonosla 29.6 4.9% 40.0 6.1% 81.6 7.7X 4.76x Kenya 16.2 2.6x 60.8 6.6x 111.9 10.7% 8.9ex Malawi 12.0 2.0X 20.4 2.6% 86.8 3.6X% .47X Tanzania 8.8 O.6% 9.0 1.2% 13.4 1.8x 6.73% TOBACCO World 879.0 100.0X 1161.6 100.0% 1375.0 100.0X 2.17X USA 228.1 25.4% 260.1 22.8X 247.1 18.OX 0.49X Zimbabwo 76.9 8.7X 60.0 5.1X 90.7 6.ex 2.21% Turkey 74.6 8.5X 105.8 9.1X 80.7 5.9X 0.78x Bulgaria 68.7 7.8X 64.4 5.6% 61.7 4.SX -0.S7X India 59.9 6.8% 72.7 6.2% 76.2 s.ex 1.99X Greece 68.4 6.6x 59.8 5.2X 84.8 6.1X 0.59X Brazil 45.0 5.1X 68.5 5.6% 187.6 18.6% 7.12X Italy 16.6 1.8% 22.8 1.9X 87.8 e.3x 12.83X Malawi 18.0 1.5X 27.5 2.4% 57.8 4.2% 6.88X Source: FAO trade tapes, from BESO. Note: In caoec where data for certain years were not available, interpolations basod on averagec ware made to allow calculation of growth rates. - 152 - increased rapidly with the rapid growth in internal demand from urbanization and income growth. In Nigeria, production of most export crops fell sharply; Nigeria not only lost its shares in world markets (see Table 5a), but became a major importer of crops such as edible oils and cotton. Production of other (nontraded) food and root crops probably kept pace with rural population growth, but not with the increased demand resulting from rapid urbanization and income growth. 35 As in Cameroon, the production of rice and maize appear to have done well. Nevertheless, there was accelerated demand for the traded food crops (rice and wheat), with increased imports of wheat, rice and maize until 1986, when a ban was imposed on food imports. Senegal's agriculture stagnated, though with substantial year-to- year fluctuations (see Table 5). Such production increases as occurred were due to area expansion. Technical change in the form of drought- resistant groundnut varieties arrested a production decline which would have occurred from increased frequency of droughts in the early 1970s. Senegal has had the lowest self-sufficiency ratio of the MADIA countries, with food imports accounting for nearly 35 percent of aggregate calorie availability (compared to 10 percent or less for the rest of the MADIA sample). Stagnant domestic production and expanding internal demand pushed up rice imports sharply until they peaked in 1984/85 at over 370,000 mtons. As in the other two West African MADIA countries, maize production did well in Senegal but also from a small base. Factors Explainint Performance We now turn to an assessment of agricultural performance in terms of three categories, described in the introduction, namely luck, macroeconomic policies and sectoral policies. For analytical purposes, each of the three explanatory categories is subdivided into a total of 23 variables as follows: 'luck' -- eight variables covering initial conditions at independence, and four variables related to subsequent political or economic (internal and external) shocks; macroeconomic policies/environment -- four variables covering implicit and/or explicit taxation and public expenditures; sectoral (mostly nonprice) policies/environment -- seven variables related to land, labor, credit, technological, and institutional factors needed to support agricultural growth. Table 6 presents the results. Each of the six countries is rated for each variable on the basis of a simple 0/1 rating, where 0 = unsatisfactory, and 1 - satisfactory. Our judgment is based not simply on how perfect the policies have been, but rather on the extent to which the countries have used the first quarter century effectively to lay a foundation for long-term growth relating to these various categories. In reality, of course, the story of initial conditions and subsequent policy responses is much more nuanced than the table suggests; a more fully articulated picture of the genesis and evolution of the relevant policies is provided in the sections that follow. 35/ Nigerian foodcrop production data are by far the most inconsistent among MADIA countries, and subjective judgment is needed to arrive at conclusions. ----- ---T-T-T--T----T-T-T-T--- iJ @10:o: 1 0a a a 3 ---- -- -- --- ----- -- -- - - - - - - - - -- - - - - - - - - - - 31 | tr --T-T-T--T---T-T----- 1 ' o 1 o _ o _ a a a a a~~ ~ a a a 3 i 3 a. i a a a a a- - -a-a a a 2 2 I a- - - - - - - -a- - - a C a - a 0 a - a o a ii' 3L}°3° aaaa30 -------------------- ---- ---T-T -------T -T---- I. 3,EAl 3°1 ° 313a3a3a a a- 0 001 a a a -- a a : - i j,a . j¢obog~ ~ a a a a-. a a__ _ _ __ _ _ __ 1 3 - l ff , i . ia a a---a-a°-Ta-T---T- °- -T C ' qi, ; i i aa i@a3 iC i a* a*Oae i S H iol 1011e.t } i 3 5 a_ ^ o ao o - at a._ a a a i~~~~~~~~~ ;;I __ _ _ _ _ _ _ _ _ _ * * a a a . 33i3- 3 3a aa 3 3oao - tXi5 aI : i. .k,;Q I 5 i * : '.a.a. -- ia . g @ 3 Sy. S1ia a a a a a ajE S3 |-. a3 . 3 - 154 - The "Luck' Factor Initial conditions reflecting 'luck, are divided into the quality and quantity of natural, human capital, and institutional resources at the time of independence. Following Balassa and others, external shocks are then decomposed into changes in overall international terms of trade, interest payments on foreign borrowings and changes in foreign demand for their overall exports, i.e., the extent to which shares were maintained in world markets. Finally, internal or external political strife that affected the countries' performance is also considered as well as the effect of domestic decisions on the current account. Initial Conditions at Independence. Tables 7, 8, and 9 show population, per capita income, arable land, social indicators and road densities in MADIA countries at independence and subsequently. In East Africa, per capita income was the highest and the general level of development was the greatest in Kenya, followed by Tanzania and Malawi. In West Africa, Senegal's per capita income was the highest, followed by Cameroon and Nigeria. Unlike East Africa, per capita income levels in West Africa do not necessarily represent the development of the countries' rural sectors as the more detailed discussion below of the land resources, social indicators, infrastructure, etc., will make clear. Even in East Africa, judgements on these matter need to be carefully balanced. Per capita land availability needs to be considered jointly with land quality as an indicator of a country's natural resource endowments. The population factor is something of a two-edged sword. On the one hand, high population densities make intensification of agricultural production possible by increasing the supply of labor and reducing wage rates. They therefore facilitate the production of export crops and the adoption of new foodcrop technologies, which tend to use large quantities of labor.36 In countries at relatively early stages of development, however, high and growing densities also increase land pressure which in turn leads to environmental degradation through reduced bush fallow and increased cropping intensity. The relative effects of autonomous increases in population densities and policies which counter their adverse effects on agricultural growth is still a largely unexplored issue. 37 Here we need only note that in terms of per capita arable land (see Table 7) Tanzania and Cameroon have been the two land-surplus countries (although they have pockets of land pressure). In terms of simple consideration of per capita arable land, Malawi, Nigeria, and Kenya have had the most land pressure at independence, in that order, followed by Senegal. Given Kenya's higher 36/ See E. Boserup, 'The Conditions of Agricultural Growth' Aldine Publishing Company, New York 1982. Also see Prabhu Pingali, Yves Bigot and Hans P. Binswanger, 'Agricultural Mechanisation and the Evolution of Farming Systems in Sub-Saharan Africa' The Johns Hopkins University Press for the World Bank, Baltimore, 1987). 37/ See Uma Lele, S. Stone, and Kundhavi Kadiresan, Population Pressure and Agricultural Intensification: Does the Boserup Hypothesis Hold?' MADIA Paper World Bank, Washington, DC, forthcoming. - 155 - population growth and lesser growth of urbanization than Nigeria's, however, actual pressure of population on the land has been clearly greater there. Malawi inherited the least favorable position of the three East African countries when consideration of per capita arable land is combined with land quality.38 Within the West African group, Senegal was clearly the worst off. 39 Cameroon and Nigeria enjoy a much greater range of production possibilities, because they not only include semi-arid lands in the north (similar to but better watered than Senegal's) but also the Sudano-Sahelian areas in the middle belt and humid southern rainforest zones. 40 Table 8 shows road densities in the MADIA countries at independence. Kenya, Nigeria, and to a lesser extent, Malawi were clearly 38/ The high degree of micro variability in soils and rainfall, however, makes a global evaluation difficult. Besides, little systematic analysis of soils, rainfall, and technological possibilities exist on a comparable basis, with the notable exception of a recent FAO study. See G. M. Higgins, et al. Potential Population Supporting Capacities in Developing Countries, FAO/IIASA Rome. 1983. Kenya has a greater range in the quality of (high and low potential) land (and rainfall levels and patterns) whereas a relatively greater proportion of the land in Tanzania and Malawi is of medium potential. Malawi only has a unimodal rainfall compared to the bimodal rainfall regimes in Kenya and Tanzania, a combination of land quality and rainfall regime means that production possibilities are more limited in Malawi than in Kenya and Tanzania. 39/ On Senegal's groundnut basin the inferior soil texture, lower rainfall levels and their greater overall variability have limited production possibilities of groundnut and sorghum/millets. 40/ It is hard to make comparisons in land quality between countries in East and West Africa. For example, whereas the FAO study shows greater carrying capacity in Nigeria than Kenya (defined by agroclimatic potential) what limited data on fertilizer responses exist for various ecological zones in Nigeria suggest much lower response coefficients there for maize, sorghum and millets than in areas of comparable rainfall in Kenya. At an aggregate level average maize yields are also lower in Nigeria than in Kenya, but this is because much of Kenya's maize production is in areas of relatively high potential not found in Nigeria. See Uma Lele and Robert Christiansen, 'Issues in Fertilizer Policy in Africa and Adjustment Lending Experience in MADIA Countries, 1970-87," MADIA Paper World Bank, Washington, DC, forthcoming. Some agronomic studies conclude as we do that on the whole the East African semi-arid tropical soils may be superior to those in West Africa. See Peter J. Matlon, *The West African Semi-arid Tropics,' in AcceleratinR Food Production in Sub-Saharan Africa, eds. John Mellor, Christopher Delgado and Malcolm Blackie The Johns Hopkins University Press, for IFPRI, Baltimore, 1987. - 156 - Table 7: Per Capita Arable Land, Present and Projected (In Hectares per Person) Country 1965 1985 2000 Total Rural Total Rural Total Population Population Population Population Population East Africa Kenya 1.34 0.86 0.73 0.60 0.42 Malawi 0.86 0.81 0.73 0.60 0.45 Tanzania 3.99 2.59 2.30 1.68 1.44 West Africa Cameroon 5.99 5.23 3.34 4.76 2.09 Nigeria 1.22 1.01 0.71 0.88 0.48 Senegal 2.67 2.38 1.62 1.80 1.04 SOURCE: Calculated from MinistrylGovernment data from respective countries. Notes: 1/ Arable Land: Estimates and methodologies vary; for Kenya, which conducted a detailed agro-climatic analysis in conjunction with the German Agency for Technical Cooperation (GTZ), the estimate is 26Z. Other countries, such as Cameroon and Nigeria, where extensive soil analysis is lacking, the estimates reach 75Z of total land area. 2/ Population: Figures projected from most recent census in country to year 1985 and 2000. Rural population calculated from government estimates ot urban population, and percent urbanized in year two thousand. For more information on data and methodology used see original tables (S. StonelMADIA). Table 8: Roads in MADIA Countrles at Independence and at Present ROADS IN MADIA COUNTRIES AT INDEPENDENCE Paved Gravel/ Total Population D-noity Total Arable Density to Density to (ki) Earth Roads Classified (sees) (r/person) Land (7) Lend Total Land Arable Land (9) ('811 sq-km) (8) (km/100 sq-k.) (km/2ll sq-km) Kenya (1) 2013 39984 41947 9464 4.6 589.26 20.0X 7.4 28.3 Malaiw (2) 481 9697 11128 3884 2.6 94.08 J7.0X 10.8 29.1 Tanzania (a) 1308 14292 15692 lS86 1.8 J86.04 60.0X 1.8 8.1 Cameroon (4) 1281 18122 14858 5882 2.7 469.44 76.0X 8.1 4.1 Nigeria (5) 11858 60818 71871 54278 1.8 916.77 75.O 7.9 18.6 Senegal (6) lOS8 0851 8599 8839 2.2 192.00 SJ.OX 4.4 8.4 ROADS IN MADIA COUNTRIES AT PRESENT Paved Gravel/ Total Population Density Total Arobl Density to Density to (kin) Earth Roads Clossiflld (,000) (n/person) Land (7) Land Total Land Arabl- Lend (9) (0006 sq-ki) (8) (km/10 eq-k.) (km/100 sq-k. Kenya (16) 7944 56648 64584 18791 3.4 569.2S 26.00 11.3 4J.6 Malawi (11) 2176 9253 11429 7044 1.6 94.08 87.ex 12.1 82.8 Tonsonia (12) 8194 78701 81896 21497 8.8 8806.4 56.OX 9.2 1O6. Cameroon (18) 2922 46599 49521 28665 4.7 469.44 75.61e 10. 14.1 Nigeria (14) 24900 88200 113100 98402 1.2 910.77 7S.8e 12.4 16.6 Senegal (15) 3O88 16280 18968 6OO8 2.8 192.00 6c.ex 7.8 18.7 (1) Date for 1965. International Road Federation, World Road Statistics, 1960/69 (2) Data for 1964. Inventory of Designated Roads in Malawi, 1984, Government Printing Office (3) Data for 1966. Some as (1). (4) Data for 1960. Cooperation Nord-Sud Ech-co et Succe-: Lea Cos dos Infrastructures de Transport au Cameroon Louis Mvele, Geneve, 1984. (5) Data for 1962. Fourth National Development Plan, Lagos, 1981. (6) Date for 1964. Appraisal of a Feeder Road Project, Senegal, World Bank, 1976. (7) FAD (8) Stone, Steve, Population Pressure and Agricultural Intensification, Forthcoming (9) Data from UN Social Indicators, BESD, for some yeor as road length statistic. (10) Dota for 1983. International Road Federation, World Rood Statistics, 1985. (11) Data for 1985. Inventory of Designated Roads in Malawi, 1985, Government Printing Office (12) Data for 1984. Some as (10). (18) Date for 1986. Information de Base our Io Roseau Routl-r Comerounals, Jullit, 1984. Min. of Equip., and Etude d'un Plan d'octions pour le Dovelopp-emnt dos Routes de Collectos, BCEOM, July 1987. (14) Data for 1988. National Transport Survey and Projections, Interim Report, Vol. I, 1988. (1S) Date for 1982. Same as (10). - 158 - better endowed with transportation networks than Tanzania, Cameroon, or Senegal. Kenya's superior development of internal transportation resulted from its having had the largest European settlement in Africa, and the related development of large-scale farming of coffee, tea, maize, dairying, etc. Kenya's transportation network also included a railway connecting the so-called "White Highlands, to the port of Mombassa. Nigeria's road and rail network supported a thriving smallholder export agriculture. While Nigeria ranks high in terms of kilometers of road per unit of area of arable land its per capita road mileage was similar to Malawi's. The latter's road and rail network -- while relatively favorable in terms of arable land, has not offset extremely high transportation costs that come with being landlocked. These costs have more than doubled since the closure of its traditional shipping outlets in Mozambique in the early 1980s. Senegal's density of roads and rail to arable land similarly looked especially favorable. The groundnut basin benefited from investment in an effective road and railway network made by French colonialists to facilitate the exchange of smallholder groundnut production and Indo-Chinese rice. 41 Cameroon and Tanzania had relatively little physical infrastructure, although they enjoyed good ports. Economic literature has documented that investment in human capital is critical for increasing agricultural productivity. The MADIA study did not undertake a detailed analysis of policies and investments in the social sectors (except to the extent that such investments were included in integrated rural development projects financed in the 1970s). Data on social indicators presented here need to be considered with caution (especially when cross-country comparisons are made as they are based mainly on secondary sources.) Nevertheless, what evidence exists suggests that Kenya had generally more favorable initial conditions in terms of life expectancy, infant mortality, population per physician and primary school enrollment (see Table 9). Consistent with its lowest per capita income in 1965, Malawi had the lowest life expectancy, the highest child mortality and the highest population per physician. Tanzania had poorer indicators than Kenya's in terms of its primary school enrollment percentage and access to safe water. It made major strides in the 1970s particularly in access to primary education and safewater, but also in child mortality and life expectancy, transportation, etc. However, excessive emphasis on the pursuit of equity in absence of growth-oriented policies made it difficult to sustain these gains. Nigeria's social indicators at independence in terms of life expectancy, child mortality, access to physicians, school enrollment and safe water were not particularly impressive relative to other MADIA countries but clearly improved after the oil boom. Being the center of the French West African colonial empire, Senegal had the highest level of secondary school attendees. Also (along with Malawi) Senegal had the highest proportion of population with access to safe water. Both Senegal and Malawi retained their leading positions in this respect, but Senegal's position worsened in GNP per capita and secondary school attendance by the end of the period. Malawi's social indicators remained the least favorable despite considerable strides over the base period. 41/ See Freud, op.cit. Table 9: Basic Social Indicators --------- East Africa ---------- ---------- West Atrica ------------- ITEM Yeor Kenya Malawi Tanzania Cameroon Nigeria Senegal Population 1968 9.6 8.9 11.7 6.1 2/ 4S.7 8.4 1985 20.4 7 22.2 10.2 09.7 6.6 Population growth Rate: 1965-7a 8X.8 2.eiX 8.2 2.4X 2.51 2.4X 1980-86 4.11 3.1X 8.51 3.8X 3.81 2.9X 08' P-r Capita: 1966 108 63 76 l68 49 241 1986 290 170 290 8/ 610 800g1/ 870 Lite Expectancy (in years): 1965 45 89 48 46 42 41 1965 64 45 52 56 s0 47 Intnnt Mortality Rate: 1965 112 199 la8 148 177 171 1986 91 16 110 89 109 187 Population per Physician: 1965 12,820 48,900 21,700 28,680 44,280 21,100 1981 10,140 65,000 19,810 18,990 12,000 14,200 Percent Enrollment In Primary School: 1965 64X 44X 32x 94X 82X 40X 1994 97X 62X 87X 107X 92X SSX Secondary School: 1965 4X 2X 2X 65 SX 71 1984 191 4X ax 28X 29X 18X Safe Water Access: 1973 16X 881 18X 2SX 5SX 871 (percent ot population) 1980 26X 41X 34X 58X sex 421 Source: World Development Report, 1986 - 1987. Social Indicators of Developmnt, 1986. Per Captis GNP for 1986 calculated trom INS Statistical Yearbook (1987). Notes: 'Safe Water Access' figure represents percentage of population served. Cam_roon 1980 figure calculated from 'Enquete Nat'l Sur la Nutrition," p. 183 for 1978. Nigeria calculated from 2nd Five Year Plan for 1978; and trom Lele, 8indlish et a1. for 1980. 1/ As a result of the recent devaluation, per capita CNP in Nigeria was approximately four times lower then amount shown above. 2/ tor 1968. - 160 - Subsequent External Shocks and Domestic Policy Developments. Developments in the external environment, such as terms of trade volatility,(in particular, oil price hikes), worldwide recessions, escalating interest rates on foreign debt, and exchange rate fluctuations have affected economic growth and financial stability of all MADIA countries. At the same time, countries' own policies, such as excessively expansionary fiscal measures, failure to adjust relative prices, restrictions on trade, etc., have been also affected growth and payments in these countries. In order to understand their magnitude and relative effects, we have evaluated of external shocks and domestic policy developments in HADIA countries between 1967 and 1984. Table 10 shows the results on the basis of a ranking assigned to each country with (1) meaning have suffered (benefited) the least (most) and (0) meaning have suffered (benefited) the most (the least).42 Comparing the six MADIA countries in terms of the total effect of external shocks as a percent of current GDP, the three West African countries benefited from shocks due to their mineral resources while their East African counterparts, which are dependent mainly on agricultural exports, suffered substantially from external shocks. 43 In terms of rank order, Nigeria and Cameroon benefited the most, with Senegal a distant third. In East Africa over the entire period, Kenya suffered the greatest loss from unfavorable shocks, followed by Tanzania and Malawi respectively. (The ranking between Malawi and Tanzania changes if the period since 1970 is considered.) Detailed analysis of the shocks shows that: (1) whereas the effect of favorable movements in oil's terms of trade dominated in Nigeria, in Cameroon, the effect of increased foreign demand was more dominant. Senegal, on the other hand, suffered a terms of trade loss primarily due to a trade imbalance between import and export volumes; a strong gain from increased foreign demand for rock phosphate, however, more than outweighed the negative terms of trade effect, leading to a minor positive net effect of external shocks; (2) the negative effects of shocks in Kenya, Tanzania, and Halawi are dominated by the unfavorable movements in their agricultural terms of trade, with Kenya suffering the greatest loss, followed by Tanzania and Malawi, respectively, (3) higher interest payments, associated with higher interest rates on foreign loans, had adverse effects on all MADIA countries except Tanzania. While the five countries increased the proportions of their debt owed to private sources and subject to fluctuating interest rates, Tanzania relied more on debt from public sources (concessional loans), and did not alter its debt profile significantly, even in the era of structural adjustment. Cameroon suffered the greatest loss, followed by Senegal, Malawi, Kenya and Nigeria. 42/ It should be noted that this section refers only to items that are in a broad sense formally measurable. It does not include natural or manmade disasters such as droughts or wars that have substantial but essentially unquantifiable 'shock' effects. 43/ See Yaw Ansu, op.cit." also see Seka, 'Macroeconomic Shocks., Table 10: External Shocks and Policies, 1967-1904 (percent of Current GDP) ---------- WEST ------------------ ------------------ EAST ---------- CAMEROON NIGERIA SENEGAL KENYA MALAWI TANZANIA Effect Rank Effect Rank Effect Rank Effect Rank Effect Rank Effect Rank 1. CUtRENT ACCOUNT VARIATIONS 1i -2.4 (2) -0.0 (1) -7.8 (5) -4.4 (8) -8.0 (a) -5.9 (4) 2. SHOOCS 11 5.6 (2) 9.0 (1) 0.2 (3) -4.6 (6) -1.0 (4) -1.5 (6) term of trade 1 0.1 (2) 6.6 (1) -1.a (a) -4.5 (6) -8.9 (4) -4.8 (5) foreign demand Jj 6.0 (1) 4.1 (2) 2.9 (5) 4.1 (2) 0.0 (4) 2.6 (6) interest rate on Debt II -0.6 (6) -0.2 (2) -0.4 (4) -0.J (3) -0.4 (4) 0.8 (1) net factor inc.loon k.inc. tl 0.0 (a) -1.7 (5) -1.1 (4) -1.9 (6) 0.2 (2) 0.5 (1) S. INTERNAL qJANTITY ADJUSTMENT II -8.5 (2) -1.7 (1) -12.9 (6) -8.8 (8) -6.8 (4) -8.6 (5) Exports Promotion I -0.0 (2) 5.4 (1) -1.9 (8) -1.9 (8) -2.3 (6) -6.9 (6) Income Growth Effect (-) II 1.8 (1) 2.1 (2) 18.8 (6) 8.7 (8) 8.8 (5) 7.7 (4) Import Compression (-) II 1.1 (1) 4.9 (6) -8.4 (8) -2.6 (4) -5.1 (2) -5.8 (1) Incroasd Borrowing II -0.6 (5) -0.2 (1) -0.9 (6) -0.6 (4) -1.2 (6) -0.7 (8) 4. OTHER li -4.0 (5) -7.4 (6) 4.9 (1) 4.6 (2) 0.8 (4) 8.9 (8) Yearly Fluctuation in Exports ll -8.6 (6) -6.1 (6) 1.8 (8) 8.1 1 1.5 (2) 0.5 (4) Yearly Fluctuation In Imports fl -0.0 (4) -0.1 (1) -0.1 (1) 0.4 (6) 0.1 (5) -0.1 (1) tranfetr paymnt II 0.1 (4) -0.8 (6) 2.4 (1) -0.1 (6) 0.8 (8) 1.6 (2) NET WFS II -0.6 (4) -2.0 (6) 1.1 (8) 1.6 (2) -0.9 (6) 1.7 (1) II 5. RESIDUAL || -0.6 (4) 0.8 (1) 0.0 (8) -0.6 (4) -1.1 (6) 0.8 (1) Memo It_s 6. Internal Quantity Adjustment excl. 11 The Effect of GDP Growth: Pure Policyll -1.7 (6) 0.4 (2) 0.4 (2) -0.1 (4) 1.5 (1) -0.9 (6) II 7. Imbalanced Tot Effect II -8.4 (8) -21.5 (6) -4.7 (6) -1.0 (1) -1.9 (2) -4.80 (4) Pure Tot Effoct ll 8.6 (3) 28.1 (1) 6.8 (2)- -6.6 (6) -2.0 (6) -0.5 (4) Notes: The rank in par order of poaltive to nogative . a For 1967-1973 1ntrest payment. are Included In net factor income from abroad. But for 1974-84 it has been possible to single out interest paymnt from it ee Imports enter the current account with a negative sign.Honce,whon summing the various factors to obtain their total Impact on the current account the sign of the imports ltm are reversed. Sourceo: IMF International Financial Ststistics,19S5 World banT-CEM (for soms of the 1984 data). EPD, for Not Factor Income from Abroad - 162 - Kenya, Nigeria, and Senegal, in that order, are net exporters of factor incomes, while Tanzania and Malawi are net importers. This positive effect of factor income in Tanzania and Malawi is due primarily to remittances by their natives working in the mines of South Africa. The net factor income effect is neutral in Cameroon. Effects of Domestic Policies on Current Account Variation. Item (3) in Table 10 presents effects of internal policies on export promotion as reflected in changes in world market shares, income growth effect, i.e., import income elasticity, import compression effects (i.e., induced by changes in aggregate demand) and increased borrowings. Item 6 presents the total of these various effects less income growth effect. Distinction between total and implicit income effects on imports is also an important one, given that by increasing imports, growth can be seen to have a "bad" effect on policy and on variations in the current account. Item 6 clearly shows policies to have played a positive (contracyclical) role in Malawi, as in Kenya. Tanzania lost the most-market shares followed by Malawi and Kenya. On the other hand, the growth effect on imports was most most important in Malawi. Import compression was also the greatest in Malawi. Tanzania's loss of market shares offset the positive effects of import compression. In West Africa the ranking is led by Nigeria and Senegal, followed by Cameroon. It is essential to understand the factors underlying this interpretation however. The ability to increase shares in world markets had to do with the fundamental importance of the commodities exported as well as policies directed toward them. The relatively better performance of Nigeria is explained by the substantial growth in export market shares in oil which more than offset negative effects of import expansion and other policies of traditional exports. The net policy effect (6) is primarily due to import expansion and increased borrowing in the context of change in the market shares of exports. Senegal's smaller role relative to the three East African countries is once again due to the role of phosphates. Only Nigeria increased its market share, followed by Cameroon (whose share stayed fairly constant). The remaining four lost market shares, the loss being the greatest in Tanzania, followed by Malawi, Kenya, and Senegal. Facing deteriorating export market shares, these countries were forced to contract imports in order to survive substantial external disequilibria. They therefore used import compression to ease their deteriorating current account, with the extent of compression being the greatest in Tanzania and Malawi, followed by Senegal and Kenya. Nigeria and Cameroon, on the other hand, were not constrained to compress imports. Indeed they (particularly Nigeria) increased their import shares along with their expansion of export market shares. The cost of interest payments owing to increases in the volume of debt was the greatest in Malawi, followed by Senegal, Kenya, Tanzania, Cameroon, and Nigeria. Others Factors. Shocks which cannot be accounted for as external or internal are classified under the heading 'other.' They comprise yearly - 163 - fluctuations in exports and imports, transfer payments, and nonfactor services (freights and insurances). Owing to the volatility of the oil market, Nigeria and Cameroon (see Table 6) have suffered the greatest export income loss. The agriculturally dominated countries on the other hand benefited from market fluctuations, with the greatest benefit accruing to Kenya, followed by Senegal, Malawi, and Tanzania. The cyclical effect of imports is generally very small. Transfer payments (grants) mainly benefited Senegal, Tanzania and Malawi, while Nigeria and Kenya were net losers. Cameroon recorded a very small beneficial effect. Tanzania and Kenya benefited substantially from nonfactor services, followed by Senegal. Nigeria appears to be the biggest loser in that respect, followed by Malawi and Cameroon. Other shocks that were not amenable to systematic measurement owing to their random nature but still considered important by policymakers should also be noted. For example, Kenya and Tanzania broke up the East African Community and closed their borders in 1977. Although informal trade in agricultural goods continued between the two countries, Tanzania's agricultural export trade (which had relied on sales through Kenyan-based traders and export markets) and agricultural research (which had relied heavily on the Community) suffered. Tanzania also paid a heavy price for its war with Uganda in 1979.44 While all countries suffered from droughts, in Senegal climate (along with poor trading arrangements for its major crop, groundnuts) had a more severe adverse influence on the outlook of policymakers. Malawi, meanwhile, suffered the most from adverse external political and logistical constraints. The closure of the ports in Mozambique not only increased transport costs, but increased insecurity of transport, and also the number of refugees, which by 1987 had amounted to well over 500,000 or close to 10 percent of its population. 45 Nigeria had by far the worst internal political difficulties. The civil war in the late 1960s was followed by six military coups, numerous changes of governments and divisions of states, all of which created an unpredictable political and administrative environment, leading to numerous new policy initiatives, with successive changes in the governments. 46 Macroeconomic and Sectoral Policy Responses Examining the nature and scale of initial resource endowments and subsequent exogenous events only tells us about the general availability of 44/ Some commentators consider a number of the items listed here to have been consequences of voluntary policy decisions, and thus not "shocks" in the strict sense. See Ansu, op.cit. 45/ See Uma Lele, "Structural Adjustment, Agricultural Development and the Poor: Lessons from Halawi, in World Development, forthcoming. 46/ See Lele et al. 'Nigeria's Economic Development.' - 164 - resources for development. We now turn to an analysis of the ways in which the six MADIA countries' policymakers and their donor supporters have managed those resources and events, and the returns they have earned over 1970-1984. Whatever one's judgments about the relative resource positions of the six MADIA countries at independence, it is clear that all six have been faced with absolute shortages of critical physical, institutional, and human capital assets, such that governments and donors need to deploy scarce resources optimally to obtain the best developmental returns. In reviewing the evidence on relative returns to resource use in agriculture vis-a-vis other sectors it is important to recognize that returns in agriculture are a function of output and input prices as well as the productivity of the resources deployed. Also, expectations about future world and domestic market prospects have been as important -- if not more so -- in determining the policies pursued than the actual subsequent course of developments in these markets. Whereas input and output prices (as determined by exchange rates, taxes and subsidies) have been the primary focus of economic analysis, the role of nonprice factors has attracted less analytical attention. In our view, an item in this latter category -- i.e., public (including donor) investments -- have formed a significant but usually overlooked part of the picture. These investments have in turn influenced the levels of taxes and subsidies on production and consumption that governments have tended to apply in subsequent periods, in order to maintain and implement activities initiated in the preceding periods. Similarly, by influencing the technological frontier, public expenditure has influenced the relative returns to factors of production. Finally, the actual allocation of land, labor and capital to activities in agriculture has also been determined by the ability of small farmers to mobilize and use resources efficiently -- and that has been affected by market as well as nonmarket forces. An important theme in the competition for public resources in our countries has been diversification of three kinds: (i) out of agriculture into industry and construction; (ii) within agriculture, especially in favor of import-substituting food crops; and (iii) by small producers into opportunities outside traditionally defined and often controlled economic activities. Overall Development Strategies and Diversification out of Agriculture Only Kenya and Malawi followed moderate diversification strategies and both performed better than the other four countries in terms of growth of agricultural exports. Table 11 shows changes in the shares of agriculture and other sectors in the GDP and trade for the MADIA countries since independence. Tanzania's primary policy response to export pessimism was an intense import substitution effort, implemented through a Basic Industrialization Strategy involving the establishment of heavy industry as well as development of the agroprocessing sector to increase domestic value-added in export - 165 - Table 11: Share of Agriculture in Exports, Employment and GDP in MADIA Countries -------AGRICULTURE AS A SHARE OF------ EXPORTS EMPLOYMENT GDP COUNTRY 1967-73 1985 1965 1985 1967-73 1985 East Africa Kenya 752 57Z 84Z 78Z 34Z 31Z Malawi 97Z 942 91Z 832 44Z 382 Tanzania 78Z 792 882 862 412 58Z West Africa Cameroon 812 652 86Z 70Z 31Z 212 Nigeria 38Z 42 67Z 682 41Z 362 Senegal 712 462 822 812 242 192 Note: For details on structural change over time, see various MADIA country papers. Source: World Development Report, 1987, World Bank Trade System (EPD), and P. Seka/MADIA Database. Shares represent latest available data. - 166 - agriculture. Both these strands of Tanzania's industrial policies were Rupported by donor assistance to a greater extent than in any other MADIA countries.4' Agriculture's share in GDP, employment and exports was smaller and urbanization was greater in West Africa than in East Africa, even in the early post-independence years. In Nigeria, as in Tanzania, further diversification out of the export crop sector involved a substantial expansion of the industrial and construction sectors. In Senegal, again like Tanzania, diversification included agroprocessing and the. development of the fertilizer and the fisheries sectors. Cameroon's industrialization efforts were more moderate than Nigeria's. It maintained the emphasis on its plantation agriculture later than most other countries, but nevertheless expanded investments in physical infrastructure and industry.48 Following a Kuznetsian pattern of growth, agriculture's share in GDP and exports should be expected to decline with overall development. This had happened in Kenya and Malawi by the end of the 1970s; in Tanzania, however, where industrialization had been given primary emphasis, agriculture's share in GDP and exports had paradoxically increased.49 Agriculture's share of GDP, employment and exports fell further in all three West African countries, with the sharpest decline in Nigeria; this reversed the positions of Cameroon and Nigeria at the end of the 1970s in terms of the importance of agriculture in GDP. Industry's share increased in all three West African countries; the increase was sharpest in Nigeria, reflecting the importance of the mining sector. As in Tanzania, however, Nigeria's manufacturing sector declined. Senegal, which started with a higher industrial share than either Nigeria or Cameroon, showed no gains in that sector's share, but public administration and defense increased their shares sharply (surpassing the share of infrastructure) and remained the highest in the three West African countries. Nigeria's economic structure showed a more unstable pattern than Cameroon's and Senegal's. The three West African countries' decline in agricultural employment was more rapid than in the East (reflecting the importance of their mining sectors), the wage rates of unskilled workers 47/ See Uma Lele, 'Tanzania: Phoenix or Icarus?' in World Economic Growth ed. Arnold Harberger. Institute of Contemporary Studies San Francisco, CA, and Paul Collier, 'Aid and Economic Performance in Tanzania" in Aid and Development: The Transition from Agriculture to Industrialization, and from Concessional to Commercial Capital Flows ed. Uma Lele and Ijaz Nabi World Bank, Washington D.C., forthcoming. 48/ See Lele, et al. "Nigeria's Economic Development," and Christine Jones, 'A Review of World Bank Agricultural Assistance to Six African Countries,' MADIA Paper World Bank, Washington, D.C. May 1985. 49/ See Ansu, op.cit. - 167 - were higher and increased more sharply in all three countries with industrialization, with the increase being the sharpest in Nigeria.50 Real wages did not increase commensurately as the inflation increased. The food component of the CPI grew more rapidly than the rest. Implicit and Explicit Taxation of Agriculture. Figure 7 shows the behavior of the trade-weighted exchange rates in the six countries, providing an indication of the extent of implicit taxation. Tanzania and Nigeria had the most acutely overvalued exchange rates, which led to substantial implicit taxation of export agriculture. In Tanzania's case, the coffee boom in the mid-1970s combined implicit taxation of this kind with considerable explicit taxation of the coffee sector -- the country's main export. In Nigeria, subsidies to export crop producers through producer prices in the 1970s did not inadequately compensate for exchange rate overvaluation.51 Kenya and Malawi adjusted their exchange rates regularly, and Cameroon and Senegal (both of which are members of the West African monetary union) also had a relatively moderate record on exchange rate policy. Tables 12a and 12b show the ratios of producer to international prices at nominal and trade-weighted exchange rates. While they do not reflect transportation costs, they do provide a general indication of the level of taxation of export crops and the means by which it was achieved. Only Kenya refrained from imposing any significant explicit taxes on its two important crops, coffee and tea, the prices of which were determined by the international market. Kenya also eschewed mobilizing resources through regressive taxation of the smallholder sector, offering the same price incentives to its smallholder tea and coffee producers as to estate producers (barring the slightly higher costs involved in the marketing of small farm production). Malawi's smallholders, who were only allowed to produce dark- fired, sun-cured and oriental tobacco (because growing of burley and flue cured tobacco was reserved for estates through a licensing policy) were expected to sell their crops to ADHARC, Malawi's agricultural marketing parastal, at officially fixed prices: Halawi's estates could sell their tobaccos at open auctions. Small farmers typically received only about a third of the price ADMARC obtained for their tobacco on the auction floor. Even taking into account ADMARC's higher marketing costs for smallholders compared to those incurred by estates, this differential involved taxation of small farmers at rates of well over 50 percent. In Senegal, as in Tanzania, expansion of the groundnut processing sector in the latter half of the 1970s resulted in higher margins going to the processing sector; this partly explains the lower producer share in the international price. Senegal's groundnut pricing problems were also compounded by the removal of the protection accorded by France since 1929. 50/ Nominal wage rate in agriculture in Nigeria's Kaduma State increased from N 1.75 in 1976 to N 7.0 in 1986. 51/ See Lele et al. "Nigeria's Economic Development." REAL EFFECTIVE EXCHANGE RATE INDEX (1972=100) 130- 120 m'1 110 100 90 80 70 80 50 40 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 198Z 1983 1984 1985 1986 CMR + KEN O MI a NGA x SEN V TZA Rates were calculated using current trade shares as weights. Using constant (1970-72 average) weights give similar results. SOURCE: MADIA database, calculated by P. Seka and P. Fishstein. - 169 - Tabl 12.: RATIOS OF PRODUCER PRICES TO INTERNATIONAL PRICES. 1970-198l Nosinal Euch.nge Rat". Y..a KENYA KMLAWI TANZANIA S&l holder --------- Seallholder Estate ------------ SmalIholdr ----------------- Coffee Tea Darb-Fir.d Burley Flu.-Cured Tobacco Cotton Coff.. 1970 0.91 0.60 0.22 0.43 0.57 0.43 0.72 1971 0.90 0.67 0.25 0.39 0.68 0.80 0.61 1972 0.98 0.63 0.23 0.40 0.63 0.46 0.57 0.57 1973 0.96 0.60 0.22 0.54 0.6 0.44 0.35 0.43 1974 0.97 0.55 0.23 0.62 0.84 0.42 0.32 0.43 1978 1.01 0.63 0.22 0.47 0.66 0.47 0.81 0.36 1978 0.88 0.57 0.21 0.48 0.70 0.40 0.41 0.30 1977 0.92 0.70 0.26 0.60 0.76 0.42 0.43 0.35 1973 0.94 O.6 0.26 0.50 0.74 0.47 O.SS 0.39 1979 0.98 0.66 0.24 0.45 0.68 0.37 0.81 0.29 1980 0.98 0.76 0.23 0.46 0.40 0.35 0.52 0.41 1981 0.84 0.62 0.19 0.73 0.56 0.33 0.81 0.53 1982 0.83 0.86 0.24 0.51 0.50 0.30 0.73 0.52 198 0.90 0.98 0.23 0.27 0.39 0.36 0.67 0.47 1984 0.80 0.68 0.25 0.30 0.36 0.27 0.65 0.47 1988 0.88 0.76 0.21 0.26 0.34 0.36 1.07 0.53 1988 0.79 0.69 0.22 0.43 0.45 0.32 1.11 0.33 Source So. Selao. Table 12.: RATIOS OF PRODUCER PRICES TO INrT3ATIoNAL PRICES, 1970-198 Reol Effective Echange Rates Year KENYA MALAWI TAIIMIA Sml IOholder --------- S…… l lholder Ett ------------ Sel Ihold…r ----------------- Coffee Tea Dark-Fired Burl.y Flu.-Cured Tobacco Cotton Coffee 1970 0.68 0.56 0.22 0.42 0.56 0.41 0.68 1971 0.68 0.66 0.24 0.39 0.66 0.49 0.39 1972 0.98 0.63 0.23 0.40 0.63 0.46 0.57 0.57 1973 1.02 0.64 0.24 0.59 0.95 0.45 0.35 0.44 1974 1.01 0.57 0.25 0.68 0.92 0.40 0.31 0.41 1975 1.02 0.64 0.25 0.52 0.73 0.41 0.43 0.32 1976 0.89 0.59 0.23 0.53 0.76 0.37 0.39 0.29 1977 0.94 0.71 0.30 0.70 0.98 0.40 0.43 0.33 1976 0.90 0.61 0.30 0.58 0.86 0.44 0.52 0.37 1979 0.92 0.65 0.29 0.53 0.77 0.37 0.51 0.29 1980 0.98 0.75 0.27 0.54 0.46 0.31 0.47 0.37 1981 0.86 0.64 0.21 0.81 0.62 0.23 0.42 0.36 1982 0.82 0.56 0.28 0.59 0.89 0.16 0.39 0.28 198 0.94 1.02 0.26 0.31 0.44 0.20 0.35 0.24 194 0.77 0.64 0.26 0.31 0.40 0.13 0.32 0.23 1985 0.87 0.74 0.22 0.27 0.36 0.15 0.46 0.23 1966 0.98 0.86 0.25 0.S0 0.52 0.23 0.88 0.26 Source: Codity Dat. from DI Coeaodity Statistics. World Prices are: Coffee OtAhr Mild Arabice;' Tea CAer.g* Auction (London);: Tobacco 'United St.ta. All Markets;. Cotton -Egypt (Liverpool). IFS for noanil achange rat.s. P. SekaelMADIA for real effective eachang. rat.s. (updated for 1964-f by P. Fiahst.in, 11 Dec 1967). Weight are current trade hara.. Producer Price. are fro- Kenya: M.J. Westlake. M.O.A. Hlisel: Christianean/Econosic Surveys Tanzania: Hanlon/ FA0/IUP Agr. Sector Miaaion, 1987 (Annese.). Note: Seed cotton producer price. convort.d to lint cotton equivalent using 342 conv-rsion rate. Oreen leaf producer prices convertad to ade t.o quivalent using 22m conv-rsion rate. - 170 - Tabl. 12b: RATIOS OF PRODUCER PRICES TO irERNATIONAL PRICES. 1970-1966 Nooinal Eachan.g Rates Y... CAMNEON ------------------------------------ NICERIA ------------ 5ENErAL -------------- Arabics Robuost Pal. Cround- Ceffo Coff.. Co e Cotton Cocoa Krnel nt. Cottrn 1970 0.55 0.49 0.45 0.50 0.61 0.51 0 27 0.16 1971 0.60 0.48 0.60 0.4 0.77 0.59 0.27 0.14 1972 0.62 0.50 0.56 0.45 0.64 0.60 0.36 0.16 1973 0.65 0.53 0.40 O.37 0.66 0.76 0.26 0.10 1974 0.54 0.43 0.32 0.37 0.67 0.81 0.17 0.09 1975 0.76 0.50 0.49 0.50 0.66 1.16 0.45 0.14 1976 0.41 0.29 0.31 0.40 0.51 1.04 0.41 0.10 1977 0.26 0.21 0.24 0.50 0.42 0.71 0.31 0.12 1976 0.44 0.36 0.34 O.SS 0.48 0.65 0.29 0.13 1979 0.43 0.40 0.41 0.57 0.61 0.60 0.33 0.14 1950 0.47 0.47 0.55 O.4 0.91 1.06 0.44 0.13 1981 0.48 0.54 O.SS 0.53 1.02 1.03 0.30 0.12 I192 0.44 0.43 0.58 0.59 1.11 1.29 0.56 0.13 1983 0.37 0.37 0.46 0.48 0.91 0.87 0.53 0.11 1984 0.30 0.32 0.39 0.55 0.82 1.00 0.46 0.10 1985 0.38 0.42 0.77 0.75 1.57 0.51 0.13 L9i8 1.25 1.61 0.27 Soorce: Sao B.lo.. Table 12b: RATIOS OF PRODUCER PRICES TO DINEFITI0NAL PRICES, 1970-1988 Real Effactiv* Eoohboos Rates Year CAMERON ------------------------------------ NICRIA ------------ SENECAL -------------- Arabics Robu-ta Pal. Cround- Colffs Coffee Cocoa Cotton Cocoa Kernel nuto Cotton 1970 O.S 0.49 0.46 0.51 0.65 0.54 0.27 0.16 1971 0.65 0.50 0.6S 0.45 0.77 0.59 0.27 0.14 1972 0.65 0.50 OS. 0.45 0.54 0.60 0.38 0.15 1973 0.63 O.S1 0.36 0.35 0.71 0.83 0.25 0.09 1974 0.52 0.41 0.30 0.35 0.68 0.52 0.16 0.08 1975 0.99 0.48 0.44 0.48 0.74 1.01 0.35 0.11 1976 0.37 0.27 0.26 0.36 0.37 0.74 0.35 0.09 1977 0.23 0.18 0.21 0.44 0.30 0.52 0.26 0.10 1978 0.38 0.33 0.29 0.46 0.33 0.45 0.27 0.12 1979 0.37 0.34 0.35 0.49 0.40 0.39 0.32 0.12 1980 0.41 0.40 0.47 0.47 0.56 0. S 0. 44 0.13 1981 0.45 0.50 0.51 0.49 0.57 0.58 0.32 0.13 19182 0.43 0.42 0.58 0.57 0.62 0.72 0.57 0.13 1983 0.3o 0.38 0.45 0.45 0.43 0.41 0.53 0.11 1954 0.28 0.29 0.3J 0.50 0.28 0.34 0.53 0.12 1985 0.36 0.39 0.72 0.29 0.60 0.53 0.14 1986 1.13 1.35 0.26 So-r..: Co_oodity Data froa IF Co.aodity Stati.ti.. and World Bank Cqo_odity and Pric. Tr.nd. (1956). dodld Pric-. are: Coffee *Othar Mild A-abi.. for Arabic. .ad Angolan (Aabri. 2AA)' for Rboota; Cocoa ICCO an.raas daily price (Na York and London); Cotton 'Eaypt (Li-arpool);' Palo Kernel 'Nigarian (Eoro.); -roand.ot. aNigerian (Lond-n).a IFS for no.iaal auchang. rat.a. P. Sa&/KADIA for ral affctina -chno t... (updated for 1984-88 by P. Fiabatoin 11 D.c 1987). WVight are currant trade ar-. Prod...I Pric. are fro. C. _roon: Mkhrj/IFDC, Oilan Diagnostic and World Bank (Miniatry of Agricoltara). Cagnov-C..ais and World Bank (SODEC0TON and Nini.try of Aricltora). Nigeria: MacDoqa1l/L*la.0yojid. Bu. and Bindliah (Niarin Co-odi ty/Markati no Board.). Senegal: Muh.,rjsa a -alon/Ja.,oh. Niniat.r. do D-nlopp--nt R.r-l. Direct -, St.tiatiqo. Note: Sd cottor producer prie.o conAorted to lint cotton aqoinalant using 345 con-arion rat. _ 171 - Under this arrangement, groundnut producer prices had been about 50 percent of the French import price (which itself was about 25 percent above the world price),52 Since the signing of the Yaounde convention in 1967, the international groundnut prices received by Senegal have declined, and the ratio of domestic to international prices has also fallen, never reaching the earlier 50 percent. Whereas EEC's STABEX assistance was intended to compensate this loss to the producers, it appears to have gone for the expansion of other sectors of the economy. This has meant thatgroundnut/millet price ratios, which had earlier favored groundnuts, now favored millets and remained close to 1. Groundnut prices also moved unfavorably vis-a-vis producer prices of rice. Import substitution of the latter became the primary focus of Senegal's food self-sufficiency strategy. Only Kenya had relative prices of coffee and tea vis-a-vis maize that assured favorable (albeit fluctuating) returns to land and labor use in the production of the two export crops.53 The higher returns to coffee and tea producers in Kenya also reflected the higher quality of Kenya's arabica coffee and smallholder tea. Thus, the actual international market prices Cameroon earned were only 65 percent of those earned by Kenya at the end of the 1970s. When Kenya's quality premia are placed against other countries' taxation of major export crops (e.g. coffee in Cameroon and Tanzania, tobacco in Malawi, cocoa in Cameroon and Nigeria, etc.) the Kenyan ratios of export crop prices to maize prices were better a fortiori, than the comparable ratios in other MADIA countries (see Tables 12a and 12b). Turning to trends in the producer price structure as a whole, all MADIA countries but Kenya (and Malawi, for estate-grown crops) had officially fixed prices for the export crops, and the structure of producer prices moved in favor of food crops. This was true regardless of whether food markets were controlled, as in East Africa, or free, as in West Africa, (with the exception of rice)54 -- despite the increase in food imports in several countries earlier noted. West African food crop prices tended to be substantially higher than those in East Africa and far above international levels. For example, the prices of maize were typically twice their East African levels (even when calculated at trade-weighted exchange rates). Relative prices thus help to explain production shifts from export to food crops in all MADIA countries with the exception of Kenya. 52/ See Freud, op.cit. 53/ While the maize producer price was fixed by the government and increased at about 1OZ annually in local currency terms to make up for the low maize prices in the early 1970s, it was subsequently adjusted so that it remained by and large in tune with international prices. 54/ Where rice prices were influenced by a combination of trade policy and internal price controls. - 172 - How unfavorable West African export prices have been compared to food crop prices in the East is evidenced by Kenya's coffee/maize producer price ratios. These were well over twice as high as Tanzania's (becoming even more favorable to Kenyan coffee since the late 1970s if higher informal maize prices in Tanzania are considered), but as much as four times as favorable compared to those in Cameroon. Similarly in Senegal, the maize/groundnut price ratio favored maize twice as strongly as it did in Malawi, again reflecting both lower groundnut prices and higher maize and millet prices in the latter. Correction of a combination of exchange rate and producer price distortions in Nigeria and Tanzania since the introduction of structural adjustment programs in the 1980s is shifting some resources from food to export crops, although growing internal food demand and high food prices moderate this shift (especially if flexibility in the disposal of foodcrops relative to export crops is considered). Nevertheless, if aggregate supply response is going to materialize from the agriculture sectors, there is a need for increasing agricultural productivity. Here nonprice factors are important. Before we turn to these factors, we briefly review public expenditure patterns. Public Expenditure Patterns. Information on overall expenditure patterns in MADIA countries varies. On the whole, among anglophone countries, Kenya and Malawi have better information than Nigeria and Tanzania, reflecting superior economic management. Systematic data on planned and actual expenditures in francophone countries have also tended to be weak. To the extent that data permitted, the results of our detailed analysis of public expenditure patterns are presented in various MADIA papers. 55 Kenya and Malawi had a better intersectoral balance of government expenditures (i.e., between agriculture, transportation etc., relative to other sectors) than Tanzania in the East, Cameroon had a better record than Nigeria and Senegal in the West. 56 A comparison of Tanzania's spending patterns at the beginning and the end of the 1970s and relative to Kenya and Malawi show a higher share of government expenditures to GDP at the end of the period, from a lower initial base, but a sharp decline in the expenditure shares of agriculture, the social sector, and infrastructure compared to the share of industry and defense. 57 Unlike Tanzania, Nigeria did not neglect agriculture in government expenditures. Its budgeted expenditures on agriculture in 1981-1985 were 63 times greater than the actual expenditures in 1962-19681 Caution needs to be exercised in viewing relative shares of agriculture vis-a-vis other sectors as an 55/ See Lele et. al. 'Nigeria's Economic Development," Lele and van de Walle, "Agricultural Development in Cameroon," and Lele, Jammeh, and Ranade, *Agricultural Development in Senegal: Domestic Policies and The World Bank Role." MADIA Paper (Washington D.C., World Bank, forthcoming). Also see Lele and Meyers, 'Agricultural Development and Foreign Assistance' and 'Growth and Structural Change.' 56/ See Lele and Meyers, 'Growth and Structural Change.' 57/ Ibid. - 173 - indication of commitment to agriculture without regard to expenditure quality. It has frequently been argued that Nigeria's agricultural share was still low in comparison to other sectors. However, even the level of expenditure that did occur could not be absorbed efficiently in Nigeria owing to a poor agricultural strategy which emphasized high-cost irrigation and faced substantial political, organizational, and technological difficulties.58 From this latter viewpoint, the three countries that we consider to have had superior intersectoral expenditure balances also operated superior expenditure programs in another sense, i.e., their spending was more predictable in overall level, in the balance between recurrent and capital expenditures, etc. Nevertheless, it must be emphasized that much remains to be desired in public expenditure quality in even the best performing countries, partly reflecting the lack of a well-conceived overall agricultural sector policy. Even well-intentioned donor expenditures did not have the results they expected.59 In Nigeria, where donors gave priority to smallholder agriculture, the government stressed irrigated agriculture and industry. In Malawi, donors supported smallholders, while the government favored the estate sector. Clearly, government and donor policy interactions on public expenditures as a whole, as well as at the sector level, are critical for understanding the precise nature and content of development policy. It is to this sector level analysis that we now turn.60 58/ See Lele et.al. , 'Nigeria's Economic Development.' 59/ Lele and Meyers, 'Agricultural Development and Foreign Assistance," and 'Growth and Structural Change." Also see Lele, 'The Role of Prince and Non-Price Factors in Explaining Sources of Growth in East African Agriculture: Some Lessons for Government and Donors," in World Bank Economic Review, forthcoming. 60/ For example, the MADIA country study on Kenya (see Lele and Meyers, 'Agricultural Development and Foreign Assistance') shows that Kenya's agricultural sector generally performed well in the 1970s, but that the World Bank's agricultural portfolio did poorly (see Lele and Meyers, Growth and Structural Change."), notably because its assistance went largely to projects for agricultural credit, sugar, development of semi-arid areas, etc., which had relatively low (or even negative) rates of return. In Tanzania virtually all MADIA donors' projects performed relatively poorly. Production did not match up to the agroprocessing capacity established, and overcommitment of government expenditures in the economy as a whole undermined the effectiveness of area projects. In Nigeria, however, the Bank played an important role in providing assistance that improved the quality of expenditures both between agriculture and the rest of the economy, and within agriculture (by focusing its resources on smallholder related agriculture). (See Lele, et.al., 'Nigeria's Economic Development.) _ 174 - Relative Roles of Price and Nonprice Factors. Based on the preceding discussion it would be tempting to conclude that the absence of price distortions in Kenya relative to other MADIA countries explains its better overall agricultural production performance. Certainly the shifts between food and export crop production in the MADIA countries can be explained by relative price incentives, as we pointed out earlier. However we now turn to the discussion of the relative roles of price and nonprice factors first by reviewing the importance of technological issues and then by considering the roles of price levels, stability, etc., especially relative to other factors. Table 13 shows the yield difference for major crops grown in MADIA countries. As can be seen from this Table, coffee, tea, and maize yields ere as much as two to four times as high in Kenya as in Cameroon, Tanzania or Malawi. This means that the relative advantage for coffee to maize production in Kenya was at least twice as great as the relative price differences reviewed earlier suggested (allowing of course for some increase in input use which enabled the achievement of these higher yields). The relatively easier access of Kenya's small farmers to research, extension, credit inputs and marketing, handling, processing and information compared to the access and quality of services available to their counterparts in Tanzania, Malawi or Cameroon is of special importance. This and other institutional factors can critically affect the willingness of producers to apply their labor in ways that enhance yields.61 Kenya's coffee and tea research is of high quality. So is Malawi's. Kenya's smallholder coffee cooperatives and the Kenya Tea Development Authority are recognized to be among the most effective smallholder institutions in the provision of services for export crops. Their clientele, includes an unusually high proportion of politically conscious and vigilant small farmers (reflecting the generally more grassroots development of Kenya's commercial and political institutions). 62 It is difficult to quantify the relative importance of these factors compared to price levels as determinants of the efficiency and profitability of particular crop growing activities, but there is no question of their positive impact. Cotton in Cameroon and cocoa in Nigeria show that price levels are not necessarily the most important determinants of crop expansion. On the contrary, technology and organization can counter adverse price effects. Cotton producer prices in Cameroon were substantially lower than in Kenya, 61/ The processing units for smallholder tea and coffee funded by the World Bank and CDC in Kenya also improved crop collection and greatly encouraged production of both these crops. 62/ Members of KTDA recently won a lawsuit against the Authority for having illegally retained funds from the proceeds of tea payments for construction of an office building in Nairobi. KTDA was obliged to pay back the sum with accumulated interest. ml 0 1- ob Go W V is C4f I -bo t IIlj ~ ~~ Ii ii i! II% e - uI NIl 0 1*0 8 t° 1 °t e 0 ii oo-j 0 0 000 0c 114 II .4 '0 0Is - - - - - - - - __ __ __ __ __I iI __ _ _ __ _ _ _ 04a 0Z, Ii II II@Ce j_ jX 001- S: N _04 1 CD I… tofD 1 00 . o o e 00e 0~~~~00 _~~~~~~~ IY~ .4__ .4 _ r_ V z _ _ _ O 00~ N~ 0N_ 414 .J 0 J U _ _ _ N ^ ^ ^ ^ o | " N N e t~~~g %;_ sO*eSon ti - - - - - 1 -01 PM' la 0C e1_ P~~- - I .I 00so 0a a U *o 0- !< 10 S.- et : z zN 10 4 3 ffi 25 - ;E 11 - 11 z Y < l ; lso > A zrR e N 4)~~~~~~~~~ t 4) - - w 0 a 000 - * 8 2 MA 04.0 C, 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 1*01* 1*010 1*01* 1*10 1** 1-00 1 1-10 NO Is0 Iii It Il I Il 00. 00 - 176 - Malawi or Nigeria throughout the 1970s, not simply in nominal terms but when considered in real effective exchange rates. 63 (see Figures 8a and 8b). Nevertheless cotton yields in Cameroon at the end of the 19709 were 4 to 8 times as high as in Kenya or Tanzania. As a result, returns to cotton production in Cameroon have been significantly higher than in the anglophone countries. This has greatly increased cotton production, at 8.3 percent p.a. (see Table 5). Interestingly, Cameroon's cotton success story seems to contain some of the same ingredients as that of smallholder tea and coffee in Kenya, raising important questions not simply about the price and nonprice factors but about the relative roles of the private and public sectors, and about the relative importance of financial, technological and managerial factors that have contributed to it. SODECOTON in Cameroon is a public sector-operated agency. In terms of management practices, it is a more paternalistic operation compared to the participatory KTDA and coffee cooperatives in Kenya. Comparison of the services available to the cotton sector in Cameroon and its Nigerian or Kenyan counterparts indicate that SODECOTON has access to an excellent network of research on cotton undertaken by CFDT in French West Africa, especially in contrast to anglophone Africa. Moreover, since the returns to CFDT (which has equity interests in SODECOTON) depend on the amount of cotton exported, it has considerable incentive to increase cotton production by improving services, whereas cotton cooperatives and parastatals in anglophone East Africa have not had such a stake. (We shall note later the way in which grassroots cooperatives were undermined in Tanzania as they threatened to become an alternative political power base and a source of political influence.) 64 In addition, Cameroon's cotton sector benefited from sound capitalization until 1986 when falling world market prices, overvaluation of the CFA franc and rising government demands that SODECOTON provide developmental services in the cotton areas combined with higher producer prices led to financial difficulties for SODECOTON. Until that point, stable access to capital had ensured that farmers actually received the official price at harvest time -- in contrast to the situation in anglophone Africa where the regular lateness or absence of payments (along with underweighing of the crop) have reduced the effective of prices that farmers have received. Finally, the political support of. the government of Cameroon for development in the country's northern and extreme northern regions has been crucial for SODECOTEN's success. 63/ This is despite the fact that the bulk of Cameroon's cotton gets classified as higher quality (strict middling 1' 1/16 to 1' 3/32 memphis) compared to Nigeria's strict low middling (medium staple) from 1' to 1' 1/32 texas. The difference in Memphis and Texas cotton was estimated to be some $125 dollars per ton of lint. Moreover the ginning outturn in Cameroon had reached 39.5Z in 1986 compared to an estimated 331 in Nigeria, leading to a difference of $250 per ton of lint. 64/ Tanzania's cooperative sector did, however, have an impressive record of cotton development in the 1960's. See Lele, The Design of Rural Development. - 177 - Fig. 8a NOMINAL COTTON PRODUCER PRICES 1970-1986 (US 3) 0.9 0.5- 0.7 X 0.6 / 0.5 0.4- 0.3- 0.2- 1970 1971 1972 1973 1974 1975 1976 1977 1975 1979 1950 1981 1982 1983 1984 19B5 1986 O CA4 + KEN O SEN A NIG Fig. 8b:REAL EFFECTIVE COTTON PRODUCER PRICES 1970-1956 0.5 - 0.45 0.4S 0.35- 0 0.3 0.25- 0.2- 0.15 1970 1972 1974 1976 1978 1980 1982 1984 1986 0 CAM + KEN O SEN A NIG - 178 - The private sector nature of cotton production in Nigeria does not appear to have ensured efficiency of the cotton sector. Whether privately, cooperatively or publicly operated, cotton sectors in anglophone Africa have suffered from inadequate capitalization, lack of credit and a poor record of payments for output, and in particular, a lack of accountability to producers. Two World Bank-funded cocoa projects in Nigeria offer another example in which nonprice factors explain both the success throughout the 1970s and the decline of smallholder cocoa project level development. The Bank-funded projects coincided with the oil boom when cocoa was relatively heavily taxed and when there was also a 300 percent increase in the nominal wage. Nevertheless, the two projects exceeded their cocoa planting targets -- a rare occurance in donor-funded agricultural projects in Africa -- primarily because the almost totally Nigerian-operated cocoa subsector was well-managed. A second contributory factor in this case was the fact that returns to planting of improved cocoa strains were fully competitive with labor use in the non-agricultural sector, leading participating farmers to conclude that benefits from cocoa would match those in other sectors of the economy once the oil ran out. Finally, tree plantings make land rights more secure than planting annual crops, or leaving it fallow. Also, increased land pressure in the cocoa belt meant investment in cocoa had a high return. The World Bank, however, decided not to finance the third cocoa project in the 1970's even after its internal processing had advanced. This was because the problems between the federal and state governments on the level of financing for cocoa investments could not be resolved. Neither was the extent of subsidy on interest rates in the credit component for cocoa resolved. It is interesting to note that the Bank's pessimistic outlook on financing of cocoa investments (as in tea and coffee in East Africa) also played a part. Finally, the Bank concluded (contrary to our assessment here) that the adverse macropolicy environment had undermined incentives to the cocoa sector to a point where financing of a third project was not worthwhile. These cases raise questions about the extent to which prices alone matter relative to numerous non-price factors. They also raise questions about the role stable vs. unstable prices play an increasing production, and whether there are differences in this regard between annual and tree crops. In the case of export crops, price stabilization has typically been associated with taxation of the export crop sector. We therefore consider the role of price stability together with that of taxation in the growth of export crop production. Coffee and tea in Kenya, cotton in Cameroon and cocoa in Nigeria show good performance of the export crop sectors both in circumstances of low and high taxation and stable and unstable prices. The argument which emphasizes the need to provide international (meaning unstable and high) prices to producers, frequently states that tree crop prices fluctuate less than annual crop prices, that upswings in tree plantings occur in periods of price booms and that countries that do not pass on international prices to producers lose out on the consequent supply response. By the same token, in periods of low prices producers tend not to uproot tree crops but simply to reduce variable expenditures -- unless of course the price declines are sustained through public policy as in Tanzania. Certainly - 179 - Kenya's experience supports all the above arguments. It also shows that considerable revenues can be generated even at low (but mildly progressive) rates of taxation by increasing production in response to high prices. Besides, the efficiency of private expenditures resulting from the increased household savings and investment that higher producer incomes permit are more efficient for growth because of the dynamism they create in the rest of the economy. Many reasons, however, are offered in support of price stabilization and export taxes. For example, relatively inelastic world demand for a given commodity under conditions of high producer responsiveness and high shares of individual countries in the world market could lead to excess supply and a fall in world prices. Indeed, as we have shown elsewhere,65 concern about this scenario led the World Bank to adopt a policy in 1972 of halting financing for further expansion of tea and coffee (except when countries had no production alternatives), and confining assistance for these crops to investments in improving productive efficiency, including the processing of output already on-stream. Paradoxically, Kenya's smallholder tea and coffee production rose in the 1970s, partly as a result of World Bank lending for processing; growth came mainly from area expansion rather than from increases in land productivity.66 With regard to export taxes, we have also pointed out elsewhere67 that a strong comparative advantage in the production of an export commodity may entail substantial producer rents, some of which could be taxed away without adverse effect on the return to resource use relative to the next best option. Further, taxation of the agricultural sector may be compensated for by government expenditures that directly or indirectly support agriculture -- for example, by expanding markets and raising productivity through better farmer access to technology, inputs, and information. Thus policies for taxation of the agricultural sector or producer price stabilization cannot be judged adequately without also taking into account public expenditures on agriculture that offset the revenue raised. Stabilization may be more appropriate for annual crops than tree crops. First, annual crops' prices and yields vary more than those of tree crops, thereby increasing farmers' risks and uncertainties. Second, most annual crops are of lower value than tree crops (at international prices), so that the return to factor use tends to be less attractive compared to competing foodcrops -- making switches from annual export crops to foodcrops more probable. 65/ See Lele and Meyers, "Agricultural Development and Foreign Assistance." 66/ Meanwhile, concern that falling tea prices would mainly benefit developed world consumers rather than developing country producers has been substantially offset by the fact that much of the growth in consumption has taken place in developing rather than developed countries. This may also turn out to apply in the future to coffee and cocoa as the demand for them grows in developing countries. 67/ See Uma Lele, 'Comparative Advantage and Structural Transformation: A Review of Africa's Economic Development Experience,' (paper presented Continued on next page - 180 - Finally, fluctuations in domestic production to which annual crops are more prone than tree crops may also adversely affect capacity utilization in downstream processing activities -- as in the case for groundnuts in Senegal and cotton in Kenya (where price stabilization may help stabilize supply by permitting increased use of purchased inputs). Per contra, rising capacity utilization of processing facilities may reduce processing margins and stimulate higher producer prices and production as Ranade and Jammeh have shown to be the case in Senegal. 68 Supply stabilization through domestic production stabilization may be also necessary as trade policy, which is supposed in theory to improve internal supply. This was some of the reasoning underlying British and French colonial decisions to support price stabilization for export crops. These various arguments, and the ability to find evidence from MADIA countries to support conflicting conclusions suggests that there is no unique solution to the pricing issue -- and that donors need to beware of over-enthusiastic application of generalized blueprints for reform, that gloss over the need for case-specific responses to individual crop production and country realities. Meanwhile, recipient governments also face domestic socio-economic and political dilemmas of their own with regard to this issue: in particular, a stabilization-plus-export-tax approach may appeal to them on the grounds that they are unwilling to incur the substantial regional income disparities and income instability that the application of international parity pricing would entail. Their ultimate decisions on this point may depend a great deal on the political history of their countries. In the MADIA sample, Kenya seems able to handle these sociopolitical problems but other MADIA countries seem less able to do so; however, recent evidence with policy reforms suggest that even this might change over time. Diversification Policies Within Foodcrop Agriculture69 The priority given in West Africa to rice production is explicable by government concern about food security for urban populations. Investment also increased in sugar in most MADIA countries. The rapidly growing urban demand for rice, wheat, and sugar contrasts with the rural pattern of diverse and region-specific dominance of traditional food crops (sorghum, millets, cassava, yams) in domestic production. The costs of domestic rice were subsidized through major investments in local production, consumer prices of food imports were kept low through overvaluation of the exchange rate (e.g., in Nigeria), and through trade and price policies (in Cameroon and Senegal). In East Africa, where maize dominates in production and consumption, there were less acute import substitution efforts for rice and other preferred crops. In view of the foreign exchange constraints faced by countries, it is instructive to note the heavy foreign exchange requirements of the 'new, Continued from previous page at the Symposium on 'Current State of Development Economics: Progress and Perspective' at Yale University, April 11-13, 1986) forthcoming. 68/ See Sidi Jammeh and Chandra Ranade, 'Agricultural Pricing and Marketing in Senegal,' MADIA Paper (Washington, D.C., World Bank, January 1986). 69/ Small producers have pursued increased production of horticultural crops for domestic urban markets and exports. Sugar irrigated or mechanized rice played an important role particularly in West Africa. - 181 - crops in relation to the needs of the traditional crops -- for example, the requirements of Tanzania's sugar industry in the early 1980s alone were estimated to be 40 percent of the total requirements of the agricultural sector.70 Employment content of the 'new' crops is also worth considering. Only Kenya pursued an active smallholder sugar production strategy; all the other MADIA countries treated it as a quasi-enclave industry. Only Malawi's sugar production was an almost completely labor- intensive estate crop.71 Nigeria pursued by far the most active expansion of large-scale irrigation for rice production, when considered as a share of total investments, although the other five countries also operated irrigation schemes costing between $10,000 and $25,000 per hectare. The role of price expectations is important to note as well. Many of the investments, including those financed by donors, were undertaken in the mid-1970s when world prices were projected to reach well over $500/ton by 1990 (compared to the current projected 1990 prices of $240/ton). Although these schemes attracted substantial amounts of donor funding, little systematic information on their actual production costs exists, however, and few studies have been undertaken of factors influencing internal demand for rice (especially of the factors determining the income and price elasticities of demand) and, therefore, the likely effects of alternative production, consumption and import policies on employment, income distribution, foreign exchange earnings and savings, government budget, etc. Nevertheless such data as the MADIA study has been able to draw on suggest that the unit production costs of rice have been high in MADIA countries compared to those in Asia. Inter alia, this reflects high costs of capital works, high operating costs of the schemes, low utilization of irrigation works and high labor costs. 72 In addition, high internal transport costs of shipping rice to the urban centers in the port cities of the south compared to the current costs of rice imports have resulted in a continuing need for subsidies in Cameroon, Senegal and Nigeria, as high as 100 percent at current international rice prices. At the same time, while individual countries subsidized domestic rice production (in order to make it competitive with imports in distant port cities), the appropriate markets happened to be across national borders. This raises important issues about international and regional trade policy. For example, the 70/ See Tanzania Agriculture Sector Report World Bank, Washington D.C., August 1983. 71/ See Lele and Meyers, 'Growth and Structural Change." 72/ The Nigerian Agricultural Development Projects (ADPs) funded by the World Bank provide an important positive example of a significant effort to introduce low cost to well and surface irrigation which have the potential to transform agricultural prospects in that country. Even in these projects, however, emphasis on improving indigenous capacity for policy planning, implementation, management and operations of irrigation development, including, in particular, implications for long term soil and resource management have been few. See Lele, et. al., "Nigeria's Economic Development.' - 182 - market for rice produced in northern Cameroon is logically located in nearby Nigeria rather than in southern Cameroon. However, Nigerian bans on rice imports in 1986 have resulted in substantial losses in rice production in Cameroon. This does not mean however that parallel markets across national boundaries do not exist, only that the costs of marketing are higher than they need be, the risks and uncertainties greater, and the difficulties in planning production policy harder to overcome. Given the growing urban demand for rice, the income effect of rising rice prices and the investments that have already been made in domestic production, restraining (if not reducing) the future production costs of such investments is of considerable policy importance. In practice, however, governments and donors have tended to overlook the gross inadequacy of domestic capacity in Africa to operate and maintain these investments. This has resulted in a recurring need for rehabilitation, involving continued technical assistance and imported equipment. For instance, 30 percent of the investment costs of rehabilitation of rice schemes in the Fleuve region of Senegal has been spent on technical assistance for management. Finally, past high world market price projections have exacerbated subsidies, resources for which could have gone for traditional food and export crops, in turn, allowing for more efficient growth in the short- and the medium-run until true comparative advantage could be developed. Thus in Senegal in a normal year, for instance, income from groundnuts production is 7 times that of rice. Contrary to much of the donor analysis, results of the MADIA study conclude that Senegal has a distinct comparative advantage in groundnut production in Casamance under improved technology. Improvement in groundnut production there has, however, received relative little attention compared to the policy priority given to the promotion of irrigated rice in the Fleuve. Donors' Foodcrop Diversification Investments. A consistent and long-term financing policy towards diversification would seem clearly to be necessary both within each donor agency and in the donor community as a whole, based on a probabilistic (rather than deterministic) analysis of world market prospects, country-specific and regional considerations, etc. The outcomes of investments in diversification in Africa have depended more on the radically different price expectations over time as well as on the ebb and flow of country-specific dialogue and the roles and views of individual donor and African government officials, rather than on a well- conceived overall strategy. Thus while the World Bank provided financing for irrigated rice production in northern Cameroon during the early and mid-1970s, it withdrew support in the late 1970s as rice prices declined and production costs exceeded expectations. The EEC and France, however, continued their support. In Senegal, on the other hand, at around the same time, the Bank did not participate in the investment in irrigation works in the Fleuve (for which several other donors provided support), but then undertook to finance field investments for the production of rice in the large and small perimeters in the 1980s on grounds of sunk costs (once the investment in the barrage had been financed). More recently, donors have begun to coordinate their policies towards rice investment in West Africa, but it is too early to notice the results. - 183 - Similarly, while several donors (including the World Bank) invested in Bura irrigation in Kenya in the mid-1970s (which later turned out to have had a negative rate of return), at around the same time, the Bank steadfastly -- and wisely in our view -- insisted on the pursuit of a rainfed strategy in Nigeria and followed it up later with assistance for the development of low-cost irrigation, with an important positive effect on Nigeria's own smallholder development strategy. Diversification into Horticultural Crops. Horticultural crops have tended by and large not to be controlled by governments. They tend to be high-value crops, with substantial scope for income and employment generation among small farmers. The growth of many such crops offers several impressive examples of "uncontrolled' diversification in, e.g., northern Nigeria, the northern and southern highlands of Tanzania and the highlands of Cameroon -- and of course including the growth of Kenya's horticultural exports at nearly 12 percent a year (albeit from a small base). This substantial diversification to meet growing urban and export demand has occurred in response to investments in physical infrastructure, particularly roads. Such diversification typically gets overlooked in an evaluation of price policy, especially the impact on welfare gains as the mainly partial analysis of efficiency and welfare losses focuses on traditional food and export crops. Unfortunately, despite the importance of developments of this kind for income and employment generation, their implications for public policy (in terms of the need for supportive transportation, information and financial market networks for private trade) have yet to receive attention by governments and donors on the necessary scale. Subsidies Resources taken out of agriculture through implicit or explicit taxation may also be returned to the sector, through general subsidies on interest rates, or through specific subsidies on inputs, or both. We discuss input subsidies which have been justified on grounds of encouraging learning-by-doing by reducing the farmers' risks of adopting new technology and correcting for other (e.g., output--mainly export-- price) distortions. Of the six MADIA countries, Kenya has been the least reliant on explicit subsidies on fertilizers (removed in 1977), Nigeria and Tanzania, the most. Recall that the latter two also subsidized fertilizers and other inputs implicitly through overvaluation of the exchange rate, whereas Kenya did not. The rate of explicit fertilizer subsidy in Nigeria and Tanzania was similar (75 percent in the 1970s in Tanzania and 85 percent throughout in Nigeria). Explicit fertilizer subsidies in other countries have been relatively more moderate -- e.g., Senegal 55 percent, Cameroon 54 percent, and Malawi 23 percent. Fertilizer use has been directed towards particular crops through specific development programs in specific regions. Use at the farm level has been influenced by incentives as producers perceive them, and consequently a great deal of fertilizer, including that directed at export crops has gone to food crop production, e.g., away from coffee to maize in the Western highlands.73 Growing food insecurity as reflected in price 73/ Rate of subsidies represent means: For Senegal, mean for 1970-82; for Cameroon, mean for 1977-82; for Malawi, mean for 1983-87. From Lele and Christiansen, 'Fertilizer Policy in Africa,' Table 6. - 184 - shifts has also led some governments. e.g. Nigeria and Malawi, to explicitly promote fertilizer use on food crops. Kenya has had the most diversified direction and use of fertilizers in food and export crops. Given levels of output prices, and taking into account the extent of implicit and explicit fertilizer subsidies, Nigeria has had the most favorable food output/input rice ratios. Reflecting its high transport costs and slightly undervalued exchange rate, Malawi has had the least favorable output/fertilizer prices. Profitability of fertilizer use has also been determined by the output-input coefficients. Our survey of fertilizer responsiveness at the farm level stresses how little attention has been devoted to developing consistent and reliable information on this important issue. Existing evidence suggests that fertilizer use is by and large profitable on maize (and especially hybrid maize) at undistorted prices in Malawi, Kenya, Tanzania and large parts of Cameroon. The least is known about output- input coefficients in Nigeria and Senegal. Profitability on other crops depends greatly on assumptions regarding technological coefficients. The growth of nutrient availability in the countries has been influenced by price as well as nonprice factors, in particular foreign exchange availability and promotion of fertilizer use through extension efforts. Because of liberal foreign exchange availability Nigeria has had the highest rate of growth of nutrient availability, followed by Cameroon, Malawi, Kenya (see Figures 9a and 9b). Senegal and Tanzania have had no growth in fertilizer use. The budgetary implications of fertilizer subsidies have been the most important concern in their abolition, in addition to the misuse and wastage of fertilizers resulting from distorted prices. Nigeria's budgetary costs have been the greatest. Thus implications of fertilizer use or misuse for retention of soil fertility under conditions of rapidly growing population pressure, and declining soil fertility have received relatively little attention in initial structural adjustment dialogues and in the pressure applied to countries by donors for policy reform, although this is changing. Removal of fertilizer subsidies and its likely effects on fertilizer consumption raise complex questions about the relationships of factor productivity to food crop prices (given that close to 80 percent of the value-added in food crops under traditional technology comes from labor), and of food crop prices to wage costs in the economy, given that food constitutes a major share of the cost of labor. These relationships have major efficiency as well as welfare implications. Increased cost of food under conditions of little or no technical change (as prevails in most of West Africa) leads to increased costs of labor with adverse effects on export and import substitution competitiveness. In Malawi and Kenya, on the other hand, the lack of productivity growth in circumstances of immense land pressure is also leading to increased market dependence for food even by rural producers. Up to 50 percent of the food consumed in the Eastern and Central provinces of Kenya by rural households is bought in the market. The shares are even higher in Malawi's Southern and Central regions. Higher food prices therefore have significant adverse welfare implications, - 185 - Fig. 9a: TRENDS IN FERTILIZER CONSUMPTION NUTRENTS IN TONS: 1974-1985 300 - 250 (Growth Rate) 260 240 220 200 o 180 ISO 140 - 120 100 ( 6.4%) 80 60 40 ((7.8%) 20 1974 1975 1976 1977 197B 1979 1980 1981 1982 1983 1954 1985 0 MALAWI + KENYA O TANZAN/i Fig. 9b: TRENDS IN FERTILIZER CONSUMPTION NUTRENTS IN TONS: 1974-1985 300 -- - (20.6%) 280 -i 260- 240 - 220- 200 - I B0 - Y IS 140- 120- 40 20 1 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 A SEN EGAL X CAMEROON v NIGERIA - 186 - especially for low-income rural households, if they are not offset by increased food imports or food subsidies. Fertilizer subsidies also need to be considered in this broader context of effects on labor efficiency and labor welfare under conditions of growing land pressure and declining soil fertility on the one hand, and increased food imports and budgetary expenditures on food subsidies on the other. All six MADIA countries have subsidized agricultural interest rates, but Kenya's and Malawi's have been lower than Tanzania's, Nigeria's or Senegal's. The effective level of interest rate subsidy has depended on the amount of seasonal and medium-term credit -- largest in Kenya, followed by Malawi, Senegal and Tanzania. In Cameroon, credit is tied to the promotion of specific export crops, such as coffee and cotton. It benefits a smaller number of farmers than in Kenya or Malawi. Whereas much of the subsidized credit has gone to the relatively larger farmers in all countries, Kenya's small farmers have tended to benefit the most in relative terms from institutional credit followed by Malawi's. 74 The indiscriminate growth of inadequately supervised credit has resulted in low repayment rates and consequent erosion of the financial capital of credit institutions in Kenya, Tanzania and Senegal (although erosion of the financial capital of individual institutions in Kenya has nonetheless coexisted with the relatively high saving and investment rates of rural households). Malawi and Cameroon, on the other hand, have had an excellent record on repayments -- group credit in Malawi and supervised credit for cotton in Cameroon. Group pressure to repay credit in Malawi, however, discouraged its expansion to those low-income small producers who most need credit but cannot bear the risk.75 Inequitable access to subsidized institutional credit and erosion of financial capital due to nonrepayment elicited the view in the 1970s that institutional credit is unnecessary for agricultural development. 76 There has also been a view that the supply of informal credit in rural areas tends to be larger than is generally acknowledged. The extent of free-standing credit projects or credit components in agricultural projects has differed among countries. While Kenya has had the highest number of donor-funded credit projects followed by Tanzania, Malawi and Senegal, Nigeria has had no credit components in donor funded- projects. In recent years, however, donors have suggested that the supply of institutional credit should not be expanded until there has been an 74/ In Nigeria, credit was formerly available to cocoa and palm oil producers (through World Bank-funded projects). But these groups' access to credit may well have fallen owing to the decline of the export crop sector, whereas that of the larger more mechanized farmers involved in maize and poultry production appears to have increased -- nearly 96 percent of the credit provided by Nigerian commercial banks to agriculture in 1983 went for poultry production. 75/ See Uma Lele 'Structural Adjustment, Agricultural Development and the Poor: Lessons from Malawi", in World Development, forthcoming. 76/ Dale Adams, Douglas H. Graham and J.D. Von Pischke, Undermining Rural Development with Cheap Credit, Westview Press, Boulder, CO. 1984. _ 187 - adequate effort first to mobilize rural savings. MADIA research, in common with other studies of rural households, indicates that easy access to cash -- e.g., through remittances -- has facilitated the adoption of new technologies,7 while cash shortages have been a major constraint to the adoption of new technologies among small farmers.78 Studies have repeatedly pointed to the need for increasing the supply of institutional credit, especially where increasing the use of hired labor and modern inputs is critical for raising productivity. So even though institutional mobilization of rural savings is essential, abolition or undermining of rural credit until rural savings are mobilized may be counterproductive. This is especially the case as costs of purchased inputs increase due to abolition of subsidies, devaluations and increased internal transport costs. The MADIA study clearly shows the likely adverse effect on input use, especially among low-income producers as cash purchases are being promoted at the same time that input prices are increasing (e.g., as in Senegal and Malawi). Both Kenya and Nigeria operate subsidy schemes on tractor services for land preparation. The Nigerian program is the more substantial of the two and has been a major bone of contention between the World Bank and the Government of Nigeria. Tractor hire services were subsidized by state governments to the extent of 50 - 75 percent of cost; tractors were sold at 50 - 75 percent of their cost prices. Maize price stabilization operations have been another potential source of food subsidies in Kenya, Tanzania, and Malawi. The overdrafts of the parastatals on the maize account have frequently been large in macro- 77/ William L. Collier, Agricultural Technology and Institutional Change in Java, Agricultural Development Council, New York. 1975. 78/ In Kenya, for instance, the practice of plucking two buds and a leaf by small farmers - which ensures its high quality premia in the world market - is said to reduce the quantity of tea plucked per hectare. Our own field investigations (supported by a recent survey of small tea farmers) indicate, however, that shortage of cash for hiring additional labor is a far greater constraint on increasing smallholder yields in Kenya than other factors, e.g. inadequate fertilizer supply or extension (see Stanly Mwangy Karuga, 'An Evaluation of Tea Productivity on Smallholders in Kenya, 'unpublished M.A. thesis, University of Glasgow). And yet credit policies in Kenya have discriminated against small farmers, because many have argued that credit is unimportant for small farmers. Further even if credit is provided, it is offered in kind (fertilizers and pesticides) rather than cash (for hiring labor) on the grounds that input use will be more easily monitored. It is only in the cocoa project in Nigeria that early Bank projects recognized the need for cash to intensify labor use. See Uma Lele, "Structural Adjustment,' in World Development , forthcoming. Also see Lele and Meyers, 'Agricultural Development and Foreign Assistance." - 188 - economic terms and in relation to the size of the recurrent budgets of the agriculture ministries. 79 It is hard to determine whether consumers or the producers have been the primary beneficiaries of the maize price subsidies, as the relationship between open market prices and official producer (and consumer) prices have been inversely related to the size of the crops -- and varied greatly year by year, owing to substantial production instability. Some analysts have argued that consumers have not benefited -- because of the poor availability of food supplies at official prices in periods of scarcity, nor have producers, because of the marketing boards' inability to purchase all the maize supplied in years of surpluses owing to inadequate working capital. Consumers and producers, especially in remote areas where private trade tends not to operate, and where producer and consumer prices tend to fluctuate more in the absence of stabilization, have gained on balance from the relative price stability that marketing boards have provided. Costs of the marketing boards' operations could certainly be reduced by increasing managerial efficiency, allowing greater interseasonal and spatial price variability, and making them buyers and sellers of last resort. However, it is clear that governments have attached greater importance to price stability on grounds of political stability, consumer welfare (especially of the lowest income groups) and maintenance of real urban wages than have donors. This is already an important issue in countries with high land pressure such as Kenya and Malawi, where the proportion of food purchased even by rural households has reached 50 percent or more. If intensification of land use with increased use of fertilizer does not proceed then the problem will be further exacerbated. Increased urbanization is also increasing the proportion of population dependent on the market, but it is the rural poor which are the most vulnerable to price fluctuations. An equally neglected issue is the importance of capitalization of public sector grain marketing institutions, especially if they become the buyers and sellers of last resort and do not have the profits to offset against the inevitable losses in interyear price stabilization, under conditions of substantial year-to-year fluctuations in both supply and demand. Overall, Kenya's pricing and subsidy policies seem to have been the least distortionary. While distortionary policies extracted resources out of agriculture in Nigeria, more resources have been returned to small farmers producing food crops in the form of government expenditures and subsidies than is generally recognized. On the whole, however, there has been a redistribution of income from export to foodcrop producers since agricultural taxes have been levied on export crops, (with the exception of Kenya) and production and input (including subsidy) programs have focused mainly on foodcrops. 79/ Kenya's and Tanzania's marketing parastatals accumulated losses, for instance, have been estimated to be of the order of $300 million and $200 million, in 1987 for Kenya and in 1983 for Tanzania respectively, compared to the annual budgets of the ministries of agriculture of between $100-200 million at official exchange rates. - 189 - Land Policy It is important to bear in mind that most of the increase in agricultural production in MADIA countries over the past two decades has come from increases in the area under cultivation, and that the composition of output has been determined mainly by the shifts in relative prices of crops. Pricing variables have determined the value-added by labor use, the most critical single factor determining output, although the ability of producers to mobilize additional land (and labor) -- along with such little capital as is used in production in the form of implements, animal traction or fertilizers -- has also been important. In Cameroon and Nigeria, access to tractors has helped to determine the ability of rural households to clear land, and subsidies on tractor operations, together with the social and political factors that influence individuals' access to tractor power, have made a difference to the mobilization of land. On the other hand, the institutional/judicial aspect of land policy -- such as legally specified rights to the use and the ownership of land or rights to grow crops has not been an important factor in West Africa compared to the three East African countries. Indeed, despite the growing land pressure in at least two of the three West African countries, land has been a surprisingly unimportant issue in public discussion and policy formulation. This does not mean, of course, that land access has been equal. The land issue in East Africa has received more public attention and consisted of three factors: ease of access to land, the right to cultivate and to own land, and rights to grow crops and to hire labor. In our view, these factors have fundamentally determined agricultural production performance in the 1970s. In Kenya, land policy mainly involved settlement of Africans on land formerly owned and operated by European settlers in the Rift Valley and the 'White Highlands, along with substantial increases in land titling in areas of high potential where tree crops such as tea and coffee, together with dairying have been promoted. Kenya's data for overall land distribution are limited, especially for the large farm sector. The piecemeal evidence that is available suggests that there has been a broadening of the distribution of land, with the proportion of total land under the control of smaller rural households rising over time, and with a substantial increase in the land market. Nevertheless, given growing land pressure and differential access to institutional credit, land access will continue to be a central policy issue determining growth and equity outcomes in Kenya. In Halawi, on the other hand, the increased alienation of land for estates, leading to increased land pressure in smallholder areas than simple statistics on arable land/person ratio suggest, combined with restrictions on small farmers' rights to grow certain crops is the single most important factor explaining the lack of growth of smallholder production (along with the more conventional discriminatory producer pricing policies discussed earlier). Land registration has not progressed far in Malawi, and much of smallholder cultivation is undertaken on customary land. But the alienation of land for tobacco, sugar and tea - 190 - estates, as well as increases in the amount of public land, has shrunk the share of customary land under small farmer control over time. 80 The subsistence needs of a growing population under conditions of land pressure, combined with the government's policy of using a licensing system to restrict the rights to grow high value export crops (flue cured and burley tobacco, tea and coffee) has meant an increase in the skewedness of land distribution between the estate and smallholder sectors. Within the estate sector, although farm size has declined over time, 81 there is still much underutilization of land -- as much as 75 percent of estate land is estimated to be underutilized. Especially as producer price distortions between the estate and the smallholder sector are being corrected, land policy is one of the most important factors determining Malawi's future growth in productivity in smallholder agriculture. Without its resolution, a three tier land ownership of estate owners, smallholders and marginal (or near landless) is beginning to emerge. In Tanzania, government policy towards land both discouraged land titling a la Kenya or the use of customary land rights a la Malawi. Traditional land rights were instead transferred to the public sector, with individuals being given rights to the use of land. The ideology of the ruling party, and growing political mobilization at the grassroots level in support of that ideology in the 1970s, discouraged "capitalist' farming by either large or small farmers. By far the most important land policy decision in Tanzania was to move farming households into 'Ujamma villages' -- frequently against the wishes of rural households in circumstances where poor land quality required dispersed rather than concentrated populations. Villagization increased walking distances to the farm, while at the same time increasing land degradation, both because of the increased cropping intensity that land pressure encouraged, and because of the reduction in the tree cover as farmers made use of public land for firewood -- while resisting replanting trees under the arrangement of village wood lots that the government attempted to promote. On a more positive note, Tanzania opened up high potential areas in the southern highlands by investment in the Tanzam road and the railways. Western donors had declined to finance the latter, leading Tanzania to obtain funding from the People's Republic of China. Tanzania's southern highlands now constitute an important source of agricultural production (including coffee, tea, maize, tobacco, etc.) Nevertheless, the growth that resulted from opening up these areas of high potential was offset by the government's discriminatory pricing and investment policies 80/ For instance, between 1966 and 1985 land available for cultivation decreased by one half-million hectares, or 26 period, while area under tobacco estates has grown by 400,000 hectares in the period 1977 to 1983 alone. 81/ For example, while in 1976 the total number of tobacco estates in Malawi was only 710, by 1985 that number had grown by 21 percent p.a. to reach 3,972. The average size meanwhile decreased from 34 ha. to only 11 ha. - 191 - (which mostly hurt the traditionally established production areas in the north and the west) and its active support of low-income and resource-poor regions. Labor Policy An important and related issue affecting factor mobilization in East Africa is that of labor policy. Labor legislation, use of minimum wage laws and unionism were all the most active in Tanzania. These factors, together with the political campaign to discourage the use of hired labor, all help to explain the decline of smallholder and large-scale agriculture alike in Tanzania, given the labor-intensive nature of export crop production. The Malawian government's virtual neglect of unionization of labor and wages, on the other hand, explains Malawi's growth rate of wage employment of nearly 10 percent annually in estate production in the 1970s, in circumstances of a declining real wage created by an elastic supply of labor due to the land policy. Kenya, on the other hand, created a wide range of employment opportunities in the agricultural sector (i.e. in both large-scale and smallholder farming). While it provided minimum wage guidelines which were generally observed in agricultural employment, it nevertheless followed a more middle-of-the-road course towards labor than either Tanzania or Malawi. As a result, employment has grown rapidly in agriculture and the nonfarm sector alike, while real wages in the rural sector, despite rapid population growth have fallen less in Kenya compared to their levels in the early 1970s and relative to in Malawi and Tanzania where they have declined by nearly half.82 Technology Policy The fundamental importance of increased factor productivity in agriculture has been stressed in a variety of different contexts in MADIA countries. Increased foodcrop productivity is important not simply for improvement of human welfare, because small producers give first priority to achieving food security through the use of their own resources. This releases land and labor for diversification into other higher-value activities for domestic consumption or the market. Growth of maize production in a wider range of ecological conditions in MADIA countries is therefore of interest as a case of technical change in the foodcrop sector. Not only do traditional varieties of maize yield higher than the sorghum, millets, and rootcrops they replace, but more fertilizer-responsive varieties of maize have been available. In the case of improved maize technology once again Kenya had made the greatest strides. Up to 60 percent of Kenya's smallholder maize acreage is under improved (hybrid or composite varieties) compared to less than 10 percent in all other MADIA countries. This in part is because the better watered high- and medium- potential areas of Kenya have shown greater fertilizer responsiveness than elsewhere in Africa. Moreover, Kenya has had an active seed production program and an effective extension system. Research now indicates that the willingness of Kenya's relatively better-endowed small farmers to undertake 82/ See Uma Lele and Manmohan Agarwal, op.cit. - 192 - risks have also played a part in greater adoption in Kenya than in Malawi, where even after 20 years of generally effective agriculture development programs less than 6 percent of the the small farmers use improved maize varieties.83 However, the greater progress of Kenya also reflects a longer history of effort for developing agricultural technology suited to the particular requirements of small farmers. This was not a priority for governments and donors in the 1970s when extension programs received priority over research. It is only in the 1980s that donor financing to establish national agricultural research capacity has been provided in Africa. Our analysis of the experience in building indigenous research capacity indicates that, in contrast to Asia earlier, there is still relatively little political commitment to science and technology for the development of smallholder agriculture. In externally assisted programs, the substance of research (as it relates either to factor endowments or agricultural policy), has received relatively little attention compared to the provision of physical capital and external technical assistance. This is because there is not yet adequate agreement among the donors and governments on the substance of research. Only the U.S. has played an effective role in building African scientific manpower, albeit primarily in foodcrops research. Meanwhile, ineffective foodcrop research systems and the diversion of resources from those systems into the staffing of rural development projects and elsewhere have been major problems in all MADIA countries. Commodity research for export crops has historically been of high quality but deteriorated in most MADIA countries, e.g., in Tanzania and Nigeria. In the latter, a once impressive Nigerian scientific community remains unsupported and unproductive (despite substantial increases in expenditures on research during the oil boom), mainly because of unstable funding and lack of political support for research. 4 In Tanzania, the breakup of the East African Community and subsequent primacy of ideological over technocratic considerations in the formulation and implementations of agricultural policy has undermined research. More generally, the rapid indigenization of research staffing has been a problem in most MADIA countries, along with poor research management and leadership. In the francophone countries, commodity research carried out by the French has continued to be strong, but little training of nationals has taken place relative to that which was formerly provided by the British in anglophone Africa for export crops (and more recently by the US in foodcrops). Moreover, although commodity research has yielded major innovations (such as drought-resistant varieties of groundnut, promotion of sole cropping, and increased use of animal traction in Senegal), it has not addressed the serious problems of soil degradation, especially the integration of cropping, livestock and tree farming by smallholders that is urgently needed to protect the environment from rapid population growth. 83/ Strong preference of traditional maize varieties is often offered as an explanation for the low adoption of hybrid maize in Malawi. 84/ See Lele et al. 'Nigeria's Economic Development." - 193 - MADIA analysis of technological capacity stresses that long-term political commitments of governments at the highest level will be essential for establishing sound research policy and its implementation. This will have to involve far better utilization of trained African manpower on a stable basis, as well as far greater investment in indigenous human capital and in the organizational and management capacity for research. Finally, the MADIA study emphasizes the neglect since the early 1970s of export crop research (in contrast to the colonial era) by governments and donors alike (partly reflecting the combination of competing commercial interests. In the U.S., for example, humanitarian concern about food security, and the related public relations importance of food security issues among constituents of foreign aid in the Western community, as well as the concerns about environmental effects of export crops prevailed. It is striking to note, for example, that the Consultative Group on International Agricultural Research (CGIAR) provides relatively little support for export crop research, and despite the emphasis placed on export-led growth in policy reform in Africa, there has been little discussion of export crop research and support from the international community, except through individual bilateral efforts. Even the latter are atrophying with passage of time. Thus we do not yet see solutions to promote agriculturally-led export growth in Africa. The emphasis has continued to be on a relatively short horizon, mainly in the context of policy-based lending -- approaches that have important merits in the right context, but that lack the specifically targeted and catalytic approach to building a larger balance of capital that we consider essential.85 Infrastructure Rural feeder roads have a key role to play in the growth of smallholder production.86 In Senegal and Malawi, however, a relatively good feeder road network has not stimulated agricultural growth; in Senegal due to poor natural resources, and in Malawi due to poverty aggravated by effects of land and price policies which keep internal effective demand low. Kenya and Malawi have continued to have a good general record on feeder road development and maintenance. Nigeria and Tanzania have had a rather poor record, especially of maintenance of newly constructed and existing feeder roads. Cameroon's feeder road network has been the worst. Contrary to general belief, our observations -- albeit based on field visits and fragmentary data -- suggest that markets for foodcrops are not well-integrated in Africa and government control -- which is important in East Africa -- is not the only constraint to market integration. Unavailability of information, lack of standardization of weights and 85/ See Uma Lele and Arthur Goldsmith, 'The Development of National Agricultural Research Capacity: India's Experience with the Rockefeller Foundation and its Significance for Africa," in Economic Development and Cultural Change, forthcoming. 86/ See Uma Lele, 'Agriculture and Infrastructure," paper presented for a Symposium on Transportation and Structural Adjustment, organized by the Transportation Department, The World Bank in Baltimore, MD, May 6-8, 1987. - 194 - measures, shortages of credit to private traders, and inadequacy of private transport and storage have inhibited the development of local marketing infrastructure in all MADIA countries. Kenya and Nigeria, however, already show a distinct edge in the role that markets and the private sector play, a role in part augmented by high population densities and greater effective internal demand. Institutional Development The MADIA study addresses several dimensions of institutional development that together critically determine the formulation and implementation of a cohesive agricultural policy. The first issue concerns the relative roles of technocracies vis-a-vis political factors in the formulation and implementation of policy. Kenya and Malawi have placed more emphasis on the role of technocrats than Nigeria, Tanzania or Senegal. Ministries of agriculture have had clearer roles in policy planning and implementation in the former than in the other MADIA countries, where the ministries have been very weak. Fragmentation of responsibility for policy planning is a major problem. In Tanzania the party (CCM) and the Prime Minister's office have had far greater policy influence in agriculture than the ministry of agriculture since the decentralization of the government in the 1970s. In the francophone countries and in Nigeria, planning and implementation of agricultural development is mainly undertaken by large numbers of parastatal agencies and autonomous project units rather than by government departments or ministries of agriculture. As to the formulation of agricultural policy, other ministries -- commerce, industry, planning, science and technology -- play important roles with little coordination and no clear center for decision-making. Because of the strategic importance of agriculture, in particular the food security issue, the role of the Presidency in agricultural policy has been strong in all countries. In some cases (Malawi), the President has retained the agricultural portfolio; in others, the president's office increasingly 'second guesses, the ministry of agriculture. In Nigeria such centralization has allowed donors to deal with a single center of power vested in the federal government. However, the weak capacity of the state departments of agriculture, as well as of local governments and cooperatives has been a particularly serious problem in ensuring responsiveness of smallholder development programs to the diverse needs and potentials in a large country and especially to ensure their sustainability. As with so many other developmental variables reviewed in the MADIA study, in Kenya there has been greater responsiveness of agricultural policy to grassroots interests through the establishment of routine mechanisms which articulate these interests. This reflects Kenya's political struggle for independence, which was based on the Africans' assertion of their rights to land and to grow export crops, rights which were denied to them during the colonial era. Kenya's policy, therefore, represents agricultural interests to a greater extent than other MADIA countries. - 195 - Elsewhere governments have tended to show little enthusiasm for grassroots institutional development, because they have perceived it as leading to alternative centers of political power. Emergence of such alternative centers of power explains the lack of stability of institutions even in circumstances where political stability has existed. Halawi, Kenya and Cameroon have enjoyed more stable institutions, although even in these countries institutional instability is increasing. Institutional instability has been a major problem in Tanzania, Senegal and, of course, in Nigeria.87 Encouragement of privatization, of course, is another critical form of economic decentralization. Whereas Nigeria and Kenya have shown a greater proclivity in this direction--in the case of Nigeria even to the abolition of marketing boards in 1986--the examples of cocoa, coffee, cotton, tea and maize cited in this paper provide support to our argument that that the private sector is invariably more efficient than the public sector in marketing, agroprocessing or exports. Meanwhile the public sector has an irreducible regulatory function involving the establishment and enforcement of weights, measures, standards, quality and payment procedures (as in export crops marketing), together with investment/implementation responsibilities for the provision of public goods through the development of transportation and communications, and the dissemination of information; even agroprocessing may best be undertaken by the public sector in instances where the potential availability of scale economies means that time is needed to develop production and to put these institutions on an economically viable basis in the private sector. Substantial weaknesses in MADIA countries' formal institutional structures, as well as broad organizational shortcomings and poor demarcation of responsibilities between different levels of government (and among different units of management at the same levels) are the norm as are similar weaknesses in the allocation of developmental roles between government, commercial organizations and participatory institutions. In our view, the institutional issue is an important constraint on development that has received far too little attention in analysis of agricultural development in Africa in relation to the weight given to macro and sector policy reform, even when allowance is made for the promotion of privatization and strengthening of the planning capacities of ministries under recent structural adjustment loans. Indeed, given the underlying sociopolitical factors which have affected institutional choices, it is not clear to us that adjustment programs have adequately reflected their implications either for the content or the speed of institutional reforms. 87/ In Tanzania, Malawi, Cameroon and Senegal, the role of private trade in agriculture was actively discouraged in the late 1960s. In Senegal and Tanzania, this was followed by the encouragement of the cooperative movements, in the early 1970s, then by its replacement with parastatal credit, marketing and processing since the mid 1970s, followed by abolition of parastatals in the late 1970s and early 80s and their replacement again by cooperatives and the private sector. - 196 - Concluding Assessment This paper has demonstrated the complexity of agricultural development in Africa, the number of variables that impinge on the outcomes and in particular the extent of variability in the endowments of the countries as well as in the policy responses and outcomes. In terms of initial conditions Kenya and Nigeria were the most well off, followed by Cameroon and Tanzania. Senegal and Malawi inherited by far the least favorable initial conditions. Nigeria and Cameroon had favorable external shocks due primarily to the dominance of oil. In Senegal, while the changes in external terms of trade were favorable due primarily to the role of phosphates, other external shocks relating to agriculture turned out to be unfavorable both as regards terms of trade changes for groundnuts and the climate. Fortunes of the more agriculturally based economies in the East were less favorable than in the West. Terms of trade losses were the greatest for Kenya, although both-Malawi and Tanzania also suffered from major losses. Only Kenya among the MADIA countries made the most of its initial conditions and pursued a combination of macroeconomic and sectoral policies that achieved rapid agricultural growth while also achieving equity. While Malawi's growth record was good in the 1970s due primarily to its good macroeconomic policies, the land and price policies swamped the effects of other favorable policies in smallholder agriculture. Nigeria's adverse policies and "luck' in terms of internal shocks to the system meant that it did not make good use of the resources at its disposal to lay the foundation for long-term growth, although much physical infrastructure got developed and social indicators improved. Political problems have been enormous in Nigeria, indeed the nature of policy responses were in many ways symptomatic of those political and institutional problems. Cameroon followed more moderate policies than Nigeria, albeit with highly variable performance between cotton and other subsectors of the agricultural economy. Tanzania and Senegal were the least well performing countries. Whereas adverse policies played a part in both countries, Tanzania's more favorable resource endowments relative to Senegal's dominate the role of policies in explaining performance. In Tanzania's case, genuine strides were made on the equity front but could not be sustained due to inadequate attention to agriculturally-led growth. While favorable price incentives through conducive macroeconomic and sectoral policies played a key role in explaining performance, the fundamental importance of the quality of natural resources, technological, institutional, political and human and physical investments played a major role in the ability of small farmers to mobilize land and labor, the two most important factors explaining growth. There was relatively little technical change in the agricultural sectors of MADIA countries. - 197 - An important foundation of physical and human capital was laid in all countries, but successes and failures in MADIA countries show the amount of time involved in learning-by-doing, and therefore how important it is to exploit initial conditions as well as how difficult it is to create a new niche through diversification. Ironically, the countries that attempted to diversify their economies the least rapidly did well. Given the growing population pressure on limited land resources in Kenya, Malawi, and Senegal, they face the most difficult problems. Now that Kenya has developed a sound foundation of smallholder agriculture, productivity increases will be crucial for growth. In Malawi and Senegal, smallholder agriculture faces far more complex problems in part due to the policies pursued in the 1970s. Tanzania and Cameroon, and to a lesser extent Nigeria, have better prospects, if only because of favorable resource endowments. We have noted the relatively small role that donor assistance has played in the growth that has occurred in MADIA countries -- large amounts of donor assistance have been allocated with the best of intentions but to types of activities that have had little effect on growth. Nonetheless, there are some outstanding examples of the catalytic role that well- conceived donor assistance can play. They include smallholder tea and coffee development in Kenya, cotton in Cameroon, and maize and small-scale irrigation in northern Nigeria and elsewhere. The success with which donors have contributed to the growth process seems fundamentally to depend on the extent to which they understand the myriad microlevel constraints on growth prospects in individual projects and subsectors. Not surprisingly, therefore, those donors with prior colonial connection with Africa have had a relatively greater share of the successes achieved than others. The importance of the "colonial" donors has been declining in Africa, however, and their ability to create sustainable indigenous systems has been limited. This decline in external expertise and knowledge about Africa is especially worrying in relation to the amount of external financial resources being devoted to alleviating the continent's crises. Equally worrying is the fact that with the major exception of the U.S. record (in Asia as well as in Africa), 'new' donors have tended to underemphasize the importance of human and institutional capacity, while overestimating the utility of aid in the form of physical plant and expatriate technical assistance. It is important to stress that our findings reflect the donor studies carried out for the wider MADIA program. The official studies contributed by donors themselves emphasize the extent to which the effectiveness of external assistance has been undermined by the donors' limited ability to tailor their assistance to important aspects of the local conditions under which their programs operate, and to take adequate account of the impact of microlevel constraints. Donors also note the tendency to respond to such problems by falling back on technological and organizational solutions arising from their own particular backgrounds and expectations, which may have relatively little connection in practice with recipients" needs or organizational and manpower capabilities. Time and again, studies by MADIA's collaborating donors stress the problems associated with lack of country-specific knowledge, including historical and situation-specific constraints: they also emphasize the pressing need for a greater institutional memory in the donor community and a better - 198 - understanding of the sociopolitical and technological factors operating in recipient countries, if the current focus of reform programs on the removal of price distortions is to be appropriately complemented by the institutional and other nonprice changes needed to give the pricing reforms a chance to work. There also needs to be greater emphasis on the longer- term "superstructural constraints' that persist even while SAL-type programs are being completed, constraints that only Africans themselves can remove with increased political will and improved human and institutional capital. The MADIA study also stresses the imperfect understanding of the real sources and causes of growth and the means to promote them -- donors and governments do not always agree on means or even on specific ends. An objective diagnosis of a particular development problem (or definition of a particular policy goal) can only be built up through data-based analysis, in which donors and recipients need to share. This should enable donors and recipients to reach a consensus about the steps needed to solve the problem or achieve the goal. A second broad consensus then needs to be built within the recipient country (based on the involvement of individual recipient country policymakers in the previous two stages), so that there is a sustained indigenous commitment to the reform process. Finally, if the MADIA study has one observation to offer in addition to that of the need for greater depth in framing and implementing agricultural development strategies, it is the extent to which the swinging pendulum of donor concerns -- from a preoccupation with equity in the 1970s to emphasis on efficiency in the 1980s -- has tended to divert attention from more basic, long-run problems. The emphasis on "quick" poverty alleviation during the 1970s gave priority to helping low-income regions and populations, and to raising foodcrop production. The present tendency to emphasize equally 'quick' solutions based on correction of price incentives and markets, can lead to inadequate attention to an appropriate balance between food and export crop development, between growth and equity objectives (regionally and nationally), between short-term macropolicy adjustments and long-term capacity building, and between physical and human capital development. The problems associated with framing and maintaining agricultural development strategies based on specificity and balance are very real. If such strategies are to become successfully institutionalized, fundamental changes in approach will be needed. This entails a new focus on the part of donors and recipients alike -- a more comprehensive, data-based. systematic and comparative understanding of specific development issues and constraints on a continuous basis, perhaps using much broader-based programs of analysis of the kind attempted in this study. As a part of the aid coordination process, donors need to specialize and concentrate their resources on their respective comparative advantages. The process of knowledge acquisition and utilization by African governments themselves needs to be supported, so as to improve their ability to address their own development needs successfully. This process should include establishing and fostering centers of excellence on African issues, in both African and donor countries. - 199 - COMMODITY AID FOR AGRICULTURAL DEVELOPMENT1 Robert Chase The generic topic I have been asked to address is that of the role of in-kind commodity aid in promoting agricultural development. As a practical matter, however, food aid is the sole form of such assistance which has managed to demonstrate its viability on any significant scale, and I therefore propose to explore with you that mode of assistance, its form and uses, and its untapped potential as a development resource. There are many misconceptions about food aid, its scope, the flexibility of its use, and--above all--its potential utility in furthering economic development. In my comments this morning I hope to address a few of these issues. In general, I will be talking about all food aid from all donors and not limit myself to the modalities of the World Food Programme. For the most part I will be talking principally about the contribution of food aid to agricultural development in the somewhat traditional sense in which the latter term is being used at this conference; that is to say without specific attention to the nutritional, income transfer, and general humanitarian purposes which tend to be inherent in the provision of food aid and which form the basis for its role in a larger *food security' dimension such as we and the Bank's Africa Bureau are now seeking to develop. As a starting point it is important to note that we are talking about a substantial international resource transfer. With a value of more than $3 billion a year, food aid constitutes something like 10 percent of all Official Development Assistance from DAC countries. The aggregate value of food aid has compounded since its origins in the early fifties, and notwithstanding an overall downward swing in the price of major commodities in recent years (and thus of the imputed value of food aid) it is one form of development assistance that continues to demonstrate a capacity for growth. Given the scale of this effort (and in some countries of course the proportion of food aid is predominant) it is therefore surprising, and disappointing, that so relatively little attention is paid to the development promise inherent in this resource. In the following commentary I propose briefly to explore a few of the reasons why this neglect may have occurred, and then to describe the various types of aid that are in common use and the contribution they are capable of making to economic and, more specifically, to agricultural development. An original impetus to the provision of food aid, and still a significant underlying factor, is that in a number of countries around the world cereal grains and other food commodities have been in surplus to both domestic needs and commercial export possibilities. Due largely to domestic production support policies, some governments find themselves sitting on extensive stocks which they find expensive to purchase, store, and manage. In the light of the pervasiveness of world hunger these 1/ The views expressed herein are strictly those of Mr. Chase and do not necessarily reflect those of the World Food Programme. - 200 - idle riches are often felt to be an embarrassment as well. Except for irregularities in world supply and demand which tend to periodically, and for short periods, generate excess supplies of certain commodities needed by developing countries, this continuing phenomenon of surplus food tends to be unique among needed commodities. It is this fact about food aid which may also give rise to the notion that food aid is inconstant, strictly a function of "dumping', and somehow unworthy of consideration by development professionals. In fact, however, experience has demonstrated that there is no necessary contradiction between the desire of surplus countries to find uses for their products and the capacity of donors and recipients to make those uses fit for development purposes. Moreover, an increasing amount of food aid is provided in the form of cash. Another reason which underlies the neglect of food aid as a development resource may be the dynamics and politics of its institutional growth. A complex set of institutions--delivery agents, laws, budgets- -have grown up around the provision of food aid. They have often been staffed by people with less regard for, or understanding of, its development potential than by the desire to simply move the commodities off their shore of origin. This institutional separateness has often frustrated the efforts of development specialists to factor the resources into their programming processes. This tradition too has changed radically, however; new laws and institutional mechanisms within donors have increasingly emphasized the developmental purposes of food aid and facilitated the integration of the aid with developmental concerns. To an increasing extent, as well, the agencies charged with the management of the food commodities are themselves development professionals who are seeking to reach out to make appropriate linkages and ensure that food aid is used together with other resources in ways that maximize its potential for longer-term development benefits. Ironically, the tradition of institutional separateness may have generated unintended benefits as well. Many donor countries still treat food aid as an addition to, not just a component of, their budgets for economic assistance. This dimension of additionality gives a special poignancy to the desirability of maximizing its development use. Critics of food aid often argue that it is inferior to cash as an instrument of development, but basically that is beside the point. In fact, in certain cases it serves as a substitute for cash, or is monetized to make cash available. But in any event, does anyone seriously believe that donor budgets for development aid would be expanded by the value of food aid if the latter were to be abandoned tomorrow? Wouldn't it be more sensible to devote ourselves to capitalizing upon the 'bird in the hand"? It must be acknowledged, however, that a further reason for this indifference to the productive use of food aid is its own track-record. It is true that in the past too many food aid programmes have operated without significant reference to their developmental impact vis-a-vis more traditional "development resources". In the worst cases, they have not been closely coordinated with other donor inputs, their provision has not been preceded by the same rigor of analysis, and there has not been the same concern to maximize their possible positive effects. As I have suggested, however, this is not nearly as true as it was 10, much less, 20 years ago. A great deal has been learned in this period including that the - 201 - disincentive and dependency effects of such aid are not inherent in the form, and conditions have been identified and ways have been devised to avoid such problems. Moreover, practices among donors vary enormously. To an increasing extent there are "success stories", at both the project and national level, and the development literature is slowly but surely--and belatedly--reflecting this fact. Yet the bottom line remains that food aid, from a developmental and humanitarian vantage point, is still both an overlooked and an underutilized resource. I expect that it is for this reason that President Conable has recently expressed to my Executive Director the Bank's interest in developing a common strategy of how food aid might be used more effectively in Africa. To begin to grapple with the development possibilities, it is necessary to understand that there are three basic types of food aid which are provided by the global community. The first is emergency food aid which constitutes approximately 45 percent; and the third is project food aid, which constitutes the remaining 25 percent. Let us deal with them separately. Of the three types of food aid, emergency aid is clearly the headline grabber--and properly so; in Ethiopia, in Mozambique and elsewhere, it literally saves lives. From the vantage point of its contribution to economic, much less agricultural development, however, because it tends to be of limited duration and to be provided without the same deliberation as other forms of aid, it has less interesting possibilities than the other two types of food assistance. At the same time it should be noted, however, that there is a new and growing dimension of emergency food aid which has gone largely unnoticed: aid to refugees, which now comprises over 70 percent of WFP's emergency resources. With well over 10 million refugees now in the world, it is difficult to consider economic and social development issues in many countries without due attention to the special problems created by the presence of these unfortunate people. The three million Afghan refugees in Pakistan, for example, comprise a population larger than many countries. Refugees invariably create a burden on the budget of the host governments and they often engender social friction. As producers of agricultural products, refugees are essentially inconsequential. Because they are often powerless, and are seen by host countries as temporary residents, they are often allocated the poorest land, have little resources, and are provided little or no incentive to create an agricultural infrastructure. They can, however, have an important effect on local markets for agricultural produce: occasionally, they may sell food aid, but more often because they serve as purchasers from local markets where they drive up the price of local foodstuffs. They also can have an impact on local labor markets and can create downward pressures on effective wage rates and contribute to local unemployment. Little attention, unfortunately, is usually paid to ameliorating these issues, and less yet to the positive development contributions of which refugees are capable. There are exceptions, of course. The UN High Commissioner for Refugees has devoted special attention to this issue, often in conjunction with WFP, and I am delighted to say that the World Bank is one of the few other institutions in the donor community that has paid any attention to the possibilities Co mobilizing and enhancing these human resources. Much more attention needs to be paid to this issue, however. - 202 - The second type of food aid, programme or non-project food aid, is a category of assistance similar in key respects to the similarly named modality of general financial assistance: that is, hard currency assistance to buy imports, in this case food, usually cereals, and more often than not, tied to the donor economy. This aid is relatively easy to provide, it forges potential longer-term marketing links and because it is provided in large, visible increments, it tends to have high foreign policy overtones. But it also has significant developmental potential. It is fast disbursing and helps to save foreign exchange. Moreover, when the food is sold on the market as it usually is, it generates counterpart funds which can be used to support national budget expenditure for (hopefully) useful development purposes. Some donors actively participate in the programming of such counterpart and most often attention for these purposes is devoted to the agricultural sector. The counterpart that is generated can be attributed in the budget to additional investments in the agricultural sector, including to meet local costs of donor project activities. Given the scale of the individual programme agreements and the fact that the Ministries of Planning and Finance as well as agriculture are often involved in the negotiations of the agreement, donors have also found the negotiation of these agreements provide an opportunity to undertake policy dialogue about various sectoral constraints which inhibit agricultural production. They have used this dialogue to reach new understandings--often supported with the local currency proceeds from food sales--on such important issues as agricultural prices, mechanization policies, land use, marketing channels, and fundamental institutional changes. Yet while the potential is there, experience suggests that the actual track-record in making positive developmental impacts leaves much to be desired. Some donors still make little effort to capitalize upon developmental opportunities and even make little effort to avoid the risks of dependency and disincentive effects that are always especially prevalent when providing such aid. Other donors may be interested in principle in harnessing the developmental potential of programme but find themselves constrained by the fact that their assistance in any given circumstance is intended primarily to serve political or commercial objectives, the felt urgency of which leaves little scope for potentially complementary developmental impacts. And lastly, there are circumstances in which donors would like to make greater use of programme food aid for developmental purposes but find it difficult to do so because they do not have the manpower or detailed knowledge to engage in the extensive analysis and/or negotiations that are often necessary to ensure the relevance and utility of the input. Even this brief overview of programme food aid begins to suggest ways in which the World Bank might exercise a constructive influence in a more systematic way. Where food aid is a significant factor in balance of payments and budget support, the need for such support should be carefully deliberated in fora such as consultative groups where the Bank is helpful in seeking to mobilize donor resources. Moreover, at such fora, or in more informal meietings, the Bank can be helpful in not only sharing with food donors their knowledge and understanding of the agricultural sector but providing suggestions about how such food aid might be used to greater - 203 - positive effect. In fact, there may be a useful role to be played by the World Bank in the coordination of the allocation, type, amount, timing and above all the use of programme food aid counterpart, especially where there are multiple donors who may sometimes be working at cross purposes. The possible uses of such aid in reinforcing the momentum of changes in structural and sectoral adjustment programmes, or in ameliorating their impacts on the affected poor, are particularly promising. Finally, let me turn to project food aid, which as I indicated, in any given year, constitutes approximately 30 percent of global food aid. Project aid is designed to meet discrete and specific developmental objectives; projects tend to be multiyear in nature and the food is specifically targeted to vulnerable individuals or households. Donor and recipient institutions agree on who those beneficiaries will be, on the precise nature and level of the ration, and on a specific delivery system, normally outside the general market distribution system. For donors, the identification, design, implementation, and monitoring of such activities tends to be highly labor-intensive, and thus relatively few donors provide such aid. The United States Government and the World Food Programme are the two largest providers, although the EC, Canada and some donors provide aid of this nature on smaller scale. Voluntary agencies and NGOs are particularly involved in these project activities either with food aid provided by bilateral governments or that purchased directly from their own resources. The distribution of WFP's food aid is probably rather typical in the sense that in any given year somewhere between 50 and 70 percent of all of our development projects (and we have about 250 in our portfolio at any time) impact upon the agricultural and rural sectors. These projects are characterized by extraordinary flexibility and variety. Food aid to such projects can vary in scale from several hundred thousand dollars for relatively short duration to multiyear commitments with a food aid value of $100 million or more and be national in scope. Project food aid can be used to support a variety of different activities in the agricultural sector. Just illustratively, our own portfolio includes projects in forestry development, soil conservation and watershed management, fishing, dairy and livestock development, in agricultural settlement and resettlement projects, training, in the development of irrigation works, the construction and maintenance of rural roads, cereal market restructuring and price stabilization. In all these activities, the food input is but one component of a larger and more complex development activity. Moreover, within the projects, the food itself can be used in a variety of different ways. It can be used to pay partially or in full for wages and is thus useful in creating employment opportunities; it can be used as an incentive for training, attending school or health clinics, or undertaking community development activitiest and it can be used as a means of support to institutional budgets. In addition, most food aid project donors permit some degree of monetization of food aid with the proceeds being used, as a minimum, to meet the needs of the project itself. In undertaking project aid, WFP and other project food aid donors increasingly have concerned themselves with issues regarding the technical - 204 - and economic feasibility of the projects they undertake. We occupy ourselves with such issues as cost-effectiveness, sustainability of these investments after their conclusion, cost recovery, and--perhaps more seriously than other donors--the distribution of benefits. But the investment-level quality of these activities should be, and can be, further enhanced. One of the most compelling facts we have learned about project food aid is that it contributes to long-lasting, sustained growth only when it is accompanied by inputs over which the food donor institution often has little direct control or influence. One such constraint is the absence of the physical and social infrastructure to actually ensure the safe, efficient, and economical movement, storage and handling of food. This is often--especially in Africa--a function not just of inadequate capital facilities, but the absence of trained manpower, or sometimes of the budgetary support to pay salaries or travel costs. Clearly, in this area, the World Bank could be helpful, particularly in providing heightened attention to the relevant capital needs sector of these countries. A second major constraint is the absence of technical support within host governments to maintain the quality of the broader project activities which project food aid supports. Reforestation projects do not meet targets due to the absence of critical technical decisions during implementation; irrigation activities suffer in similar fashion. WFP and other food aid donors seek to associate UN and bilateral experts with their projects, but these arrangements tend to be ad hoc. Such problems are not unique to food aid, of course, but their prevalence underlines the need for more systematic arrangements. A further way to provide an even greater measure of assurance of the developmental soundness of such activities is to associate food aid with broader activities in which other funding agencies are a principal donor. In fact, however, only a small percentage of all of the World Food Programme's project activities are 'co-financed' with other development institutions and the same situation pertains for other food aid donors. One of the principal means by which the Bank can facilitate the positive use of food aid is by designing project activities which from their very inception build in the provision of food aid. In the case of Africa, the current intention is for WFP and Bank staff to sit down together and jointly review their prospective portfolios for selected African countries to explore the possibilities for collaboration on specific projects and/or by devising separate activities that are mutually reinforcing. We have high hopes for this endeavor and look forward to expanding the relationship. - 205 - FOOD SECURITY AND STRUCTURAL ADJUSTMENT Per Pinstrup-Andersen Food insecurity as defined by lack of access to enough food for an active and healthy life (World Bank, 1986a) is a serious problem among a large number of low-income households in the third world. Although the statistical base is weak, it appears that recent economic recessions and attempts to deal with them through stabilization and adjustment programs have caused further deterioration in the food security of large segments of the poor in many developing countries. The consequences of such deteriorations among people who are already close to the subsistence minimum are severe including increased malnutrition, reduced labor productivity, higher morbidity, low birth weight, and death of the most vulnerable family members. While there may be a considerable time lag between adverse economic policies and the above consequences, evidence of increasing malnutrition and mortality among small children is now beginning to emerge in countries most severely affected by the economic crisis and where little attention was paid to the potential effects of adjustment programs on the poor (Cornia, Jolly, and Stewart 1987 and 1988, Pinstrup-Andersen 1987; 1988) Up until recently, most stabilization and adjustment programs have been designed without serious attempts to protect the poor from deteriorations in food security, health, and nutrition except when deemed necessary to maintain political stability. During the last year or two, an increasing awareness of the potentially severe effects on the poor of stabilization and adjustment and the opportunities for avoiding such effects through alternative adjustment programs or compensatory measures has prompted several international agencies including the World Bank to attempt to identify and include components into structural adjustment programs that will at least partially protect the poor from the most severe deteriorations in their welfare. The purpose of this paper is to contribute to these attempts by discussing and proposing how structural adjustment may be pursued in such a way as to improve rather than reduce food security for the poor. The design of structural adjustment programs must take into account the political, economic, and social environments within which they are to operate. Therefore, each program must be tailored to the particular country and time period for which it is meant. While it may be tempting to design a 'general recipe' for countries in need of structural adjustment with improved food security, this would clearly be just as useless as designing a general recipe for structural adjustment without food security considerations. All that can be done at the general level is to present various options which may be considered for a particular program. In order to set the stage for the discussion of such options, the most important factors and relationships that determine the impact of stabilization and adjustment on food security are briefly presented. Then follows a summary of existing evidence of the impact of past stabilization - 206 - and adjustment programs on food security. The section on options for simultaneously pursuing structural adjustment and food security follows next and the paper ends with a set of concluding remarks. Links Between Food Security and Structural Adiustment It may be useful at the outset to define the terms 'food security" and 'structural adjustment' as used in this paper since a number of definitions have been used in the past. The World Bank definition of the term "food security' as presented in World Bank (1986a), i.e. "access by all people at all times to enough food for an active and healthy life" is adopted in this paper. Thus, the level of food insecurity in a society or a population group is measured by the proportion of the people who do not have such access and the magnitude of the deficiency. Various proxies such as household or individual energy consumption relative to requirements or nutritional status of individuals may be used to measure the degree of food security. As further elaborated by the World Bank (1986a), food insecurity may be chronic or transitory, the latter referring to seasonal, year-to- year, or irregular fluctuations in food security. The term "structural adjustment" is defined as government action aimed at adjustments in the economy to reduce or eliminate current account deficits caused by unsustainable imbalances between aggregate supply and demand. Structural adjustment is usually aimed at the expansion of aggregate supplies while stabilization emphasizes reductions in aggregate demand. Stabilization is often seen as a way of getting quick adjustments in the demand-supply imbalance while structural adjustment is seen as more of a long-term measure aimed at structural changes that will not only contribute to the solution of the acute crisis but also assist in maintaining sound balances in the future. However, in practice there is a great deal of overlap between the two types of programs and the distinction referred to above is not operationally useful. For the purpose of this paper it is more important to distinguish between demand contracting and supply expanding programs and among specific policies irrespective of whether they are part of a stabilization or a structural adjustment program. A schematic overview of the principal relationship between human nutrition and variables influenced by economic crises and structural adjustment policies is discussed elsewhere (Pinstrup-Andersen 1987a). The key factors linking structural adjustment to food security are: * the level and fluctuations of the income of households that either suffer from or are at risk of becoming food insecure, and * the level and fluctuations of the prices of goods and services that occupy large budget shares among such households. If, instead of food security, the nutritional status is considered the target indicator of welfare effects, a third factor--the supply of primary health care services--becomes important, (Figure 1). - 207 - Since all food insecure households do not: 1) derive their incomes from the same sources, 2) face the same relative prices, 3) have the same consumption patterns, and 4) do not have the same basic needs, it is important that they be classified into functional groups for purposes of understanding how they are affected by structural adjustment, predicting how they may be affected, and determining what can be done to avoid undesirable effects. Merely lumping the poor or food insecure into one group will not provide operationally useful guidelines for future policies and programs. Effective classification of the poor should attempt to identify and group households expected to be affected similarly by a given adjustment policy or program. The key factors to be used for such classification include: income level and source, relative prices paid, consumption patterns, basic needs, asset ownership, employment status, and geographical location. A number of other indicators are suggested by Rogers (1988). An example of a recent study where functional classification was used is given by Garcia and Pinstrup-Andersen (1987). Figure 1: Structural Adjustment Prtces Inco mes C Primary health care, sanitary conditions Food Security Infectious diseases Nutritional status Summary of Empirical Evidence Insufficient data and time lags do not permit a systematic assessment of the effects of specific adjustment policies on food security. However, evidence of increasing rates of mortality and malnutrition among preschoolers, reduced food consumption among low-income households, and severe decreases in real incomes of the poor is mounting in many countries where stabilization and adjustment have been undertaken in response to - 208 - foreign exchange crises. It is not always clear whether these deteriorations are lagged results of economic crises that led to adjustment or to the adjustments themselves. However, since these countries undertook major adjustments prior to or during the period for which data were available, it may be concluded that adjustment policies either had negative effects on the poor or were unable to counter negative effects caused by other factors. The empirical evidence is presented elsewhere (Cornia, Jolly, and Stewart 1987 and 1988 and Pinstrup-Andersen 1987a, 1987b, 1988) and only a brief summary is provided here. As mentioned above, incomes and prices are the key factors determining the effects of stabilization and adjustment on food security. As further elaborated elsewhere (Pinstrup-Andersen 1985), the poor spend a large share of their total income on food and both income and price elasticities of demand for food are large. Therefore, changes in incomes provide strong indications of changes in food security. Traditional stabilization programs generally result in decreasing real wages, at least in the short run. Real wages fell in Sri Lanka during the period 1979-84 after adjustments were initiated in 1977-78 (Sahn, 1986; UNICEF, Colombo, 1985). American countries studied by the Inter-American Development Bank (Inter-American Development Bank, 1985). The real wage decreases were not offset by increasing employment. On the contrary, unemployment increased in most of these countries. Real wages in Mexico declined by 28 percent from 1981 to 83 with another drop in 1984 (World Bank, 1986b). In Brazil, average real wages decreased by 32 percent during the period 1981-83. The decrease was accompanied by "increasing unemployment, underemployment, and poverty' (Cortazar, 1986, p.3) Drastic decreases in the real minimum wage rate in a number of countries indicate that the poor are seriously affected. Thus, the purchasing power of the minimum wage in Zaire in 1982 was only about three percent of what it was in 1970 (Ntalaja, 1986). Furthermore, the Inter-American Development Bank concludes that there is evidence that a disproportionate part of losses in real incomes 'have been concentrated in the lower income strata." The Bank furiher suggests that 'to the extent that real wage containment remains a necessary element of the adjustment process, mechanisms will have to be found to shift some of the burden to the higher income groups in the interest of social justice and domestic peace", (Inter-American Development Bank, 1985, pp. 12-13). In Mexico, real minimum wages decreased and the percent of workers earning one minimum wage or less tripled from 13 percent to 38 percent during the period 1982-1985 (Lustig 11986). Similar developments occurred in Brazil and Chile during 1981-83 (Cortazar). In Brazil, per capita GDP fell by 14 percent but real incomes of the poor fell by 20-30 percent during 1981-83 (Cortazar). During the same period the proportion of households below the poverty line increased from 40 to 60 percent. In Costa Rica, real wages declined by 40 percent and the proportion of households below the poverty line increased from 17 to 29 percent during - 209 - the economic crisis 1979-82. However, primarily due to a successful adjustment program initiated in 1982, real wages were back to precrisis levels by 1985 (World Bank, 1986b). Thus, developments in Costa Rica illustrate a case where macroeconomic adjustment clearly had a positive effect on real wages. CASAR estimates that 150 million people were below the poverty line in Latin America in 1986, up by 20 million since 1981. The contribution made by macroeconomic adjustments to this increase is not clear. Stabilization has generally increased inflation, (primarily due to devaluations), increased unemployment and reduced real wages due to the strong emphasis on demand contraction. It also appears that food prices increased more that non-food prices during the period of adjustment in many Latin American countries (CASAR). Increasing food prices together with falling real incomes are likely to be harmful for poor consumers as illustrated by developments in Peru where it is estimated that 70 percent of the population has insufficient income to cover a minimum food basket in 1984, up from 51 percent in 1972 (CASAR). Similarly, in Mexico the cost of a basic diet for one person increased from 8.5 percent of a minimum wage in 1982 to 13 percent of a minimum wage in 1986 (Lustig, 1986). In Chile, both relative income distribution and absolute poverty deteriorated between 1969 and 1978, a period of serious economic crisis and severe macroeconomic adjustments. Thus, the real value of total expenditures of the poorest quintile of the population dropped by 30 percent while it increased by 16 percent for the richest quintile (Raczynski, 1985). Similar developments occurred in the Philippines (UNICEF, Manila, 1988) and Sri Lanka (UNICEF, Colombo 1985). Up to this point the discussion has focused on the poor and food insecure without distinguishing among the various functional groups. For the purpose of exploring how the various groups have been affected it may be useful to make some rough classification of the food insecure. A more effective functional classification can be done only on a country- by-country basis. In such a rough classification it may be useful to distinguish among the following groups: 1) Semi-Subsistence farmers. 2) Small market-oriented farmers. 3) Landless agricultural workers. 4) Rural landless non-agricultural workers and self-employed. 5) Urban workers in sectors producing goods that are or could be exported or imported or inputs for such goods ("tradeables'). 6) Urban workers and self-employed in sectors producing goods that are generally not exported or imported ('non-tradeables'). 7) Public sector workers. Available evidence suggests that the first two groups have been able to maintain their food security more successfully than any other group. Semi-subsistence farmers were at least partially protected from the erosion of real incomes from lower wages and higher prices because they - 210 - produced their own food. The importance of this is illustrated in Uganda where, in spite of very severe economic deteriorations, the nutritional situation did not deteriorate significantly (Jamel 1985). Small market-oriented farmers have gained from certain policies such as notable agricultural price increases, which frequently are parts of structural adjustment. However, they have lost from increases in the prices of other goods and services and the net effect is likely to have been positive in some cases and negative in others, depending on the nature of the relative price changes and the proportions of total incomes that comes from off-farm sources. Although very little empirical evidence is available, agricultural workers would be expected to gain from higher agricultural prices through increased labor demand and lose from higher prices of the goods and services they purchase. In view of the generally low elasticity of labor demand with respect to output prices it is likely that losses have exceeded gains in most cases. The rural landless workers and self-employed who derive their incomes from producing goods and services traded locally will gain because farmers will spend some of the additional income on such goods and services and lose because of higher prices of what they purchase. As in the case of agricultural labor and small farmers, the net effect is not obvious. Thus, in cases where structural adjustment has resulted in higher output price levels to farmers without large contractions in the demand for agricultural output and without large increases in input prices, the overall effect on the food security of the rural poor may -- but need not -- have been positive. The picture is even less clear in cases where large relative price changes have occurred among agricultural commodities or where input prices have increased significantly. In attempts to expand the production of agricultural commodities that could be exported or used for import substitution in order to improve the balance of payment, some countries have focused agricultural price increases on commodities and regions where quick responses were expected. Food insecure farmers frequently are found in regions with poor infrastructure and where the supply response is slower and they may have been bypassed by adjustment-related output prices policies. Increasing input prices caused by devaluations, trade liberalization, and removal of subsidies are commonly part of adjustment programs and the net gains to the agricultural sector from the total program are usually considerably less than indicated by output price changes. Finally, regarding the rural poor and food insecure, it should be mentioned that the large share of their incomes usually comes from outside agriculture and many if not most, are net buyers of food. Thus, in conclusion, incomes of rural poor may have increased either directly through higher prices for the marketed surplus, or indirectly through increased labor demand and expanded demand for locally produced non-agricultural goods and services, negative effects have been encountered through lower real wages outside agriculture and higher prices of agricultural inputs and consumption goods. The net effect on food security is likely to have been positive in some cases and negative in others. - 211 - As mentioned earlier, traditional stabilization programs usually result in reduced real wages. Due to changes in the relative prices between tradeables and non-tradeables, it is expected that employment in the tradeables or formal sector would increase. However, it appears that urban formal sector employment has either decreased or increased less than the growth in the labor forces. In many of the Latin American countries during the first half of the 1980's macroeconomic adjustments were unable to counter unemployment caused by the crises. In some cases, demand contractions caused by stabilization programs have in fact further reduced formal sector employment. Open urban unemployment rates in Latin America increased from about 7 percent in 1980 in 10.4 percent in 1984 (ILO, 1987). The result has been rapid increases in employment in the informal sector at low rates of renumeration, widespread underemployment and reduced food security. Thus, as shown in Table 1 informal sector employment in Latin America increased much faster than employment in the formal sector. Table 1: Selected Latin American Countries: Annual chanRes in Total Formal and Informal Urban Employment, 1980-85 (in percent) Urban Formal Urban Informal Total Sector Sector Country Employment Employment Employment Argentina 0.8 -0.2 3.2 Brazil 4.0 2.6 9.3 Columbia 2.5 2.3 5.4 Chile (1) 1.2 -1.6 1.2 Mexico (1) 3.0 1.9 8.4 Peru (1) 1.8 -1.3 6.5 Venezuela - 2.1 1.5 2.2 (1) 1981-85 Source: ILO/PREALC: Creation of Productive Employment: A Task that Cannot be Postponed (Santiago, 1986). Thus, based on available empirical evidence, it may be concluded that the rapid deteriorations have occurred in real incomes of low-income urban wage earners and self-employed, both in the formal and the informal sector. In some countries, particularly African ones, urban to rural migration has occurred to cope with this situation and urban to rural remittances have undoubtedly been reduced and possibly reversed in some cases. Reductions in public sector employment in response to the need to reduce deficit spending have contributed to the hardships experienced by the urban poor. As mentioned above, reduction in real incomes among the poor are expected to result in lower food consumption. Such reductions in food consumption by the poor during periods of adjustment are now documented for - 212 - a few countries. Furthermore as illustrated by data from Chile (Raczynski 1985) and Sri Lanka (Sahn 1986), it appears that such reductions are inversely correlated with income level and that the highest income groups have suffered little or no reductions. Thus, both the absolute level of food consumption by the poor and the relative distribution among the income strata have deteriorated. In view of the very low levels of energy and nutrient intakes by the poor prior to the periods of adjustment, the observed reductions are almost certain to have had negative food security and nutrition effects although households will attempt to counter the effects of adversity in the variety of ways. One such coping mechanism is substitution among foods in the diet towards cheaper calories as illustrated by data for urban households in Costa Rica. The effects of decreasing purchasing power on the ability to meet energy requirements were countered by shifting to foods providing cheaper energy i.e. carbohydrates. Thus, the consumption of carbohydrates was maintained unchanged between 1978 and 1982, a period of severe economic hardship, while protein and fat consumption was reduced by 8 and 6 percent, respectively. These reductions refer to the average urban consumption. Much larger reductions were undoubtedly found among the poor. As shown in figure 1, food insecurity results in deteriorations in the nutritional status and mortality rates. In many countries infant mortality rates (IMR) continued a long-term trend of improvement during the early 1980's although at a slower pace. A considerable time lag is expected between macroeconomic policy changes and changes in infant mortality rates because households will attempt to cope by exhausting available assets and entitlements and substitutions in diets and expenditure patterns. Therefore, a slower rate of reduction in IMR may be an indication of future increases unless something is done. Such increases have already been detected in some countries, e.g. Brazil, Ghana, and Uruguay (Cornia, Jolly and Stewart 1987). A long-term trend of falling child mortality rates in Brazil was reversed in 1982 (Becker and Lechtig 1986). The increase since 1982 is more pronounced in the poorer states. The reversal was accompanied by a significant increase in the prevalence of low birth weight, an indication of deteriorations in maternal nutrition. Although the causes of the increase in child mortality rates and deteriorations in maternal (and probably preschooler) nutritional status are not identified, it appears that large falls in real incomes of the poor may be at least partially responsible. Evidence from several other countries where the economic recession has required severe adjustments support the notion of deteriorations in malnutrition and infant and child mortality rates during recent years. In Mexico, energy consumption among the poor fell by 13 percent between 1982 and 1984, the infant mortality rate increased from 5 to 5.5 from 1981-82 to 1983 and the proportion of infant deaths due to malnutrition increased (Lustig, 1986). In Uruguay, the infant mortality rate increased from 28.6 to 31.8 between 1983 and 1985 and long-term declines in IMR in Costa Rica were replaced by a constant IMR during the early 1980's (Cornia, 1987). In Bolivia, one-third of all deaths among infants were nutrition-related in 1972, increasing to two-thirds in 1982 (Musgrove, 1987). Small but - 213 - significant increases in malnutrition occurred in both urban and rural areas of Jamaica during 1978-85 (Boyd 1988) and nutritional wasting (percent of preschoolers with weight-for-height less than 80 percent of standard) in Sri Lanka almost double between 1975/76 and 1980/82 (Sahn, 1986). While IMR continued to decrease in the Philippines, a significant deterioration in the nutritional status of preschoolers appears to have taken place since 1982. Whether this will result in increases in IMR in the years to come depends largely on whether anything is done to avoid it. Pursuing Structural Adiustment vith Improved Food Security In principle, governments can do one or both of two things in order to incorporate food security considerations into the design of structural adjustment programs: they can design new or modify existing adjustment programs to better take into account food security effects, or they can introduce separate policies and programs to compensate the poor for any adverse effects caused by the adjustment program. The choice of compensatory measures over modifications in the adjustment programs is appropriate if the program is expected to contribute to improvements in food security in the long run, e.g., through higher incomes of the poor, while short-run negative effects are expected to be transitory. Although the record is mixed, this is an argument frequently made in support of traditional adjustment programs. If, on the other hand, it is unlikely that the long-run food security effects of the adjustment programs will be positive and of a sufficiently large magnitude, compensatory measures should be accompanied by changes in the adjustment programs in order to deal with both short and long-term requirements. Modifying Adjustment Programs. Conflicts between achieving the main goal of structural adjustment, i.e. alleviating current foreign exchange problems and strengthening the ability to avoid or effectively deal with such problems in the future, and food security goals are likely to be relatively less severe or absent: * if stabilization and adjustment are sought over a longer rather than a shorter period of time. Solutions to very severe foreign exchange problems have frequently been attempted over an unrealistically short period of time using policy measures that have had excessively severe hardships on the poor. Spreading the required adjustment over a longer period of time, making available the necessary financial support over such a longer period of time, and initiating corrective measures at a much earlier point in time rather than postponing adjustment until it is inevitable, would be likely to be less harmful to food security, ceteris paribus. * if more emphasis is placed on supply expansions and growth in both tradeables and nontradeables than on demand contraction. Orthodox stabilization and adjustment tend to emphasize demand contraction in part because it is likely to respond faster than supply expansion and therefore be more effective - 214 - to close an acute supply-demand gap in short period of time. However, as illustrated in the section on empirical evidence, drastic cuts in domestic absorption can result in very severe hardships for the poor. The way to avoid it is to begin corrective measures before the crisis is acute, to stretch adjustment over a longer period of time, and to focus on supply expansion rather that demand contraction. * if adjustment programs are focused on selective removal of market and institutional distortions in the economy rather than a single-minded pressure for market liberalization. While institutional rents may be reduced, the latter frequently result in rapid accumulations of wealth among a small number of people because of imperfections in markets and institutions that cannot be removed in the short term. Removal of certain distortions in input and output markets, asset ownership including land, and a series of other institutional and market distortions that are adverse to the poor would allow for a much broader participation in the benefits and would provide opportunities for simultaneously achieving growth and food security goals. Structural adjustments, if properly designed, may be very favorable for the poor. Many of the existing distortions in developing country economies are favorable to those in power and adverse to the poor. In order to partially compensate politically vocal groups of low-income people for such adverse effects, other distortions have been put in place. For example, consumer food price subsidies in many countries may be viewed as a partial compensation for negative equity effects of distortions in capital and product markets and institutions which result in low wages, unemployment, and high production costs of food. Unfortunately, poorly designed structural adjustment may further enhance the discrimination against the poor by removing the compensatory distortions while leaving or even strengthening the more basic distortions which prohibit full access by the poor to productive resources and markets. * if emphasis is placed on strengthening the capacity of the poor to generate income. This implies a focus on policies and programs which will result in increased employment, higher labor productivity and higher real wages among the poor. While full wage indexation for all is likely to contribute to the economic crisis, opportunities for wage indexation for the poorest wage earners using price indices most relevant for their expenditure patterns should be explored. This would include but not necessarily be limited to full indexation of institutional minimum wages. * if special attention is paid to measures which will enhance the productivity of the self-employed in the informal sector, many of whom are food insecure. Credit programs, technical assistance, market development, training and skill development are some of the possible measures to be considered. - 215 - With respect to the agricultural sector, a number of issues should be considered. First, while an important part of structural adjustment, the importance of price policy has been grossly exaggerated as a tool to achieve rapid increases in total agricultural output and food security in many developing countries. Poor rural infrastructure, lack of appropriate production technology and modern inputs, seasonal labor bottlenecks, and land and marketing constraints result in low supply response in total output. On the other hand, changes in relative prices, a common feature of adjustment programs, have been very successful in changing the output mix when these relative price changes have in fact reached the farmers. This has resulted in surpluses for some commodities, countries, and time periods and deficits for others. The contribution of such relative price changes to the achievement of adjustment and food security goals varies among countries and time periods and no consistent picture has emerged. What is clear, however, is that higher food prices result in reduced food security for those poor who do not derive their incomes from food production, i.e. the urban and many of the rural poor. If, as mentioned above, total output responds only very little to price increases above a certain minimum level necessary to induce production within the constraints facing the farmer, further price increases will transfer incomes from consumers to producers in proportion to the amounts purchased and sold. In the case of a large number of low-income consumers and concentration of the marketed surplus on a small number of large farmers -- a rather common scenario -- such transfer will result in lower food security for the poor. Unit cost-saving measures such as enhanced access by farmers to appropriate technology and modern input and increased marketing efficiency for inputs and output are much more appropriate to achieve the combined goals of stabilization and food security. One of the key modifications needed in structural adjustment programs from the point of view of food security is a change from the maximization of agricultural supply expansions to the maximization of real incomes of the poor (both rural and urban) as a goal. The former leads to policies and programs which are likely to benefit larger, better-off farmers who control better production environments while food insecure farmers may be ignored because the short-run potential for expanding the marketed surplus is lower. Food insecure consumers will gain from such policies and programs only if prices are permitted to fall. However, the opposite usually occurs because higher prices are used to bring forth the additional supplies. When such policies are taken to the extreme as in some African countries during the last 5-6 years, surplus stocks of commodities for which prices were increased are accumulated at prices that exceed export parity prices and consumer purchasing power. Parallel with the stock build-up, food insecurity and malnutrition among urban and many rural people increase due to the price increases. In cases where total output responds little to price increases, the surplus stock of one commodity is accompanied by reduction in the production of other commodities. The price of these commodities is therefore likely to increase adding to the negative effects on the food security of the poor consumers and non-producers. The net impact on food security of this scenario which -- although a bit extreme -- has occurred in several African - 216 - countries and is not an unlikely outcome in the future if current approaches to structural adjustment are continued, is clearly negative. If, instead of attempting to maximize market supplies, the goal is to maximize incomes of the poor, the design of structural adjustment as well as the impact on food security would be different. In such a scenario, emphasis would be on enhanced access by low-income farmers to land, cost-saving technology, technical assistance, fertilizers, credit, irrigation and other inputs where appropriate, and output markets as well as reduction in marketing costs and improvements in infrastructure in areas where such farmers reside. This would result in higher real incomes for rural as well as urban poor and appears to be a much more appropriate strategy than blanket price increases. Since a large portion of the rural poor in many countries are not likely to gain access to land, the above should be accompanied by various policies and programs to facilitate self- sustained income generation in rural areas including labor intensive rural infrastructure. Examples of programs in this area are mentioned later. Due to lack of success in many integrated rural development programs of the past, there is currently a strong tendency not to enter into such programs. Rather than shying away from intergrated rural development as a concept, it is now time to regroup and search for innovative ways of facilitating rural development without repeating past mistakes. Attempts to improve food security in rural areas where a large share of the poor is either landless or have access to only a very small amount of land cannot be successful if based solely on a goal of maximizing agricultural output. While drawing lessons from past successes and failures, ways must be found to develop rural areas so as to benefit the rural poor within and outside agriculture. Compensatory Measures. When adjustment programs are expected to have negative effects on certain food insecure population groups and modifications to avoid such effects are not appropriate either because the negative effects are expected to be transitory or because the necessary modifications would be unacceptable from the point of view of adjustment, compensatory measures targeted on these groups are needed. There are essentially three ways in which compensatory measures to avoid negative effects on food security among the poor may work. First, expected real income losses of food insecure households may be offset by equal size income transfers or income generation. Second, programs and policies may be introduced to maintain household food consumption constant during a period of decreasing real incomes by increasing the income share spent on food or by substituting towards a lower-cost diet. Reduced food prices, both absolutely and relative to non-food prices, and changing relative prices among food commodities may contribute to achieving these aims. Improved nutrition information, changes in budget control among household members, and increased availability of food from own production may also be effective. Third, efforts may be made to reallocate food within the household towards the potentially food deficit members. Nutrition information and education as well as food supplementation schemes effectively targeted to those individuals are the most common measures to reach this goal. - 217 _ Many types of compensatory programs are available for the policy- maker who wishes to avoid or compensate for negative effects on food security of adjustment programs including the following: Income-generating programs * Public works, including food-for-work. * Employment generation with or without subsidies. * Informal sector support. * Programs to expand subsistence food production, including home gardens. * Programs to increase agricultural production and incomes on small farms. Income transfer programs * Food stamp programs. * Social programs, poverty relief. * Unemployment compensation. Food price subsidies and Food supplementation schemes * On-site feeding schemes. * Take-home schemes. * Nutrition rehabilitation center. Nutrition education programs Each of these are further discussed elsewhere (Pinstrup-Andersen 1987c). The most appropriate choice of compensatory measures for a particular situation depends on the nature of the existing and expected food security problem, household food acquisition and allocation behavior, and the capacity of the government to implement various types of programs. In order to design and implement the most appropriate compensatory programs, the following six-step approach is suggestedl : 1. Identification of the functional groups of households that are or are at risk of becoming food insecure and have been or are expected to be adversely affected by adjustment programs. 2. Assessment of food acquisition and allocation behavior of these household groups. 3. Assessment of household resource availability and constraints. 4. Assessment of institutional and administrative capabilities for program implementation. 1/ A more detailed discussion of these six steps in provided in Pinstrup-Andersen (1987c). - 218 - 5. Identification of sources of financing including opportunities for the use of external food aid. 6. Choice of the most appropriate compensatory measures. Need for Information. The design of adjustment programs and compensatory programs and policies must take into account the social, economic, and political environments of the country for which the programs and policies are intended. Therefore, in order to facilitate explicit consideration of the expected food security effects at the time of designing adjustment programs, it is essential that national decision- makers have access to the relevant information, particularly information about expected impact of various adjustment and compensation options on specific food insecure household groups. The generation of such information should be pursued in two ways: * Analysis to improve current understanding of how specific policies frequently found in adjustment programs and combinations of such policies affect incomes, prices, food consumption, and nutritional status of specific functional groups. * Continuous monitoring and surveillance of changes in the food security of these groups during periods of adjustment using indicators such as nutritional status, mortality, household food sufficiency, incomes, and prices. The former is most appropriately undertaken as a set of ex-post studies in selected countries where macroeconomic adjustment programs have been enforced for a period of at least two years. Such studies are currently being planned by several institutions including the World Bank and Cornell University. The latter, i.e., monitoring and surveillance, should be integrated with the research mentioned above. The overall purpose would be to provide timely information about current or expected changes in food security brought about by elements of on-going economic recession or macroeconomic adjustment. In order to assure that the information is timely for the decision-maker and has strong predictive power, it is important to monitor variables for which changes are likely to cause subsequent changes in food security. A more detailed discussion of the design and content of effective monitoring and surveillance programs in this area is provided by Stewart (1987). In cases of severe crises, the question usually is not whether adjustments should be made but how they are made. Therefore, research, monitoring and surveillance should not address the question of whether macroeconomic adjustment is needed, but rather how the poor are or will be affected in the short term by various specific adjustment policies and how short-term effects not desired by governments may be avoided by policy modifications or additional policy measures and programs specifically aimed at alleviating these effects through compensation for expected losses or insufficient gains. - 219 - Adjustment policies that hurt the poor in the short run cannot be justified merely on the grounds that lack of adjustment would hurt even more. The challenge is to design the adjustment policies in such a way as to achieve the desired mix of short-and long-term equity and efficiency goals, including the protection of the poor from serious deteriorations in their food security in the short run. It is toward this challenge that the proposed research, monitoring and surveillance should be aimed. Since the poor are not a homogeneous group, the analyses must be based on a disaggregation of the poor into a number of functional groups as discussed earlier. Concluding Remarks The following key findings and issues emerge from this paper: * Severe deteriorations in real incomes, food security and nutritional status among the poor have occurred in several countries during periods of stabilization and adjustment. It appears that these deteriorations are particularly severe among the urban poor. Some rural poor are likely to have lost while others have gained. * Currently available empirical evidence is grossly insufficient to effectively guide the design of future structural adjustment programs which will avoid severe hardships on the poor. This has now been recognized and research is being planned to remedy the situation. * In addition to such research, there is an urgent need to develop and institutionalize monitoring and surveillance systems that will provide timely information to decision- makers in national governments and international institutions about the actual or expected effects of ongoing or planned adjustment programs on real incomes, food security, and nutritional status of the poor. It is recommended that such systems be promoted and financed either separately or as part of future structural adjustment loans. * Attempts to pursue structural adjustment and food security goals simultaneously may be based on either the design of adjustment programs which will achieve both goals or a combination of more traditional adjustment programs and compensation to those food insecure groups expected to lose. * Instead of what appears to have been rather general recipes used across countries for stabilization purposes, structural adjustment programs should be tailored to the particular country, time period and economic problems for which they are intended. In order to accommodate food security goals, such programs should: - focus on supply expansion rather that demand contraction, - 220 - - extend the desired adjustment over a longer period of time than previously attempted, - be more selective in the removal of market and institutional distortions, focusing on removing certain distortions in input and output markets, asset ownership, and a series of other distortions adverse to the poor, instead of blanket market liberalizations, and - strengthen the capacity of the poor including the self- employed in the informal sector to generate incomes. For the agricultural sector, the role of price polic5 should be deemphasized and unit-cost saving programs and policies as well as access by the poor to productive resources should be emphasized. The goal of maximizing agricultural supply should be replaced by the goal of maximizing real incomes to the poor -- rural and urban. A fresh look should be taken at past successes and failures in rural development in an attempt to develop successful future projects and policies in that area. Compensatory measures should be considered in cases where negative food security effects of structural adjustment are expected to be transitory. The measures should be targeted to the groups most in need. Since stabilization and adjustment may have very powerful effects on future economic development and are likely to be needed for a long time to come they should be closely integrated with overall development strategies. Ignoring the effects of structural adjustment on the poor while pretending to pursue a development strategy of growth with equity is not only inconsistent but likely to assure that the goals of the development strategy will not be achieved. 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Monitoring and Statistics of Adjustment with a Human Face. In: Cornia, Jolly, and Stewart (1987). UNICEF, Colombo (1985). The Social Impact of Economic Policies During the Last Decade. A Special Study. Colombo. UNICEF, Manila (1988). Redirecting Adjustment Programmes Towards Growth and the Protection of the Poor: The Philippine Case. In Cornia, Jolly, and Stewart (1988). World Bank (1986a). Poverty and Hunger. Washington, D.C. World Bank (1986b). Poverty in Latin America, the Impact of Depression. Washington, D.C. World Bank. DISTRIBUTORS OF WORLD BANK PUBLICATIONS ARGENTIA GERMANY. FEDERAL REPUBLIC OF KOREA. REFUUC OF SPAtN Curios Hairch. SRL UNO-Vecrala Pan Komva Book CoipotAtion Mundi-Prensa ibeos. S.A. Gainis Guenics Po~jl"sdkifer Alice 55 P. 0. box 101. Kwangwhamtun Candle 37 Flonda 165. 4th Floor-Ofc. 4533465 D-5300 Bonn I Seoul 28001 Madrid 1333 Surtion Aire GREECE KUWAIT SRI LANKA AND THE MALDIVES AUSTRALIA. PAPUA NEW GUINEA. FIUI. 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