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Central American University - UCA  
  Number 191 | Junio 1997



Is a Pro-Agriculture Policy Possible?

There will be no economic recovery nor any reduction of the poverty of the majority if Nicaragua does not overcome the anti-agrarian policies of recent years. Resolving to do so is to undertake a path full of challenges and dilemmas. Will the Alemán government make the commitment?

Oscar Neira

On april 3, the liberal government presented a set of measures for the 1997-98 agricultural cycle that sought to lay the foundation for making agricultural activity the centerpiece of the national economy's reactivation and growth. It was the government's first concrete official position on its economic policy. Even though it explicitly referred to the tasks to be accomplished in the 1997 agricultural cycle, the program aspires to establish a strategic orientation that will give a pro-agricultural spin to the entire economic policy.

To understand the logic of the government proposal, the political and economic dilemmas that such a shift implies must first be identified and evaluated, and the viability of the departure point for achieving it must be clarified. The reason for this is that, while the proposal itself is feasible, such a change could generate strong resistance, which would make not only the shift much harder, but also call into question the viability of the economic policy as a whole.

A strategy of gradual change, which attacks the key problems one by one while simultaneously encouraging a participatory process that makes consensus around the solutions possible, could be more prudent than a shock strategy that simultaneously opens various fronts in which resistance to the change is expressed. Nicaragua's future stabilization should rely mainly on governmental policies and actions that are steeped in realism and open to political validation.

A Knot of Political Contradictions

The strategic dilemma for Nicaragua's development is to work through the knot of political contradictions that is paralyzing and squandering the economy's potential, keeping it in an unstable balance between low inflation and insufficient economic growth.

To be successful, the country's recovery task requires a major dose of national unity and lasting peace. This doesn't imply eliminating the conflicts, but successfully channeling them through the existing institutions under democratic conditions and within a framework of universally accepted rules. Democratic systems live in conflict and differences, but the intensity of the contradictions is modulated by institutions, which must be strong enough for everyone to accept them and expeditiously honor their dispositions.

To achieve lasting development in Nicaragua, the acute problems of poverty and unemployment must be attacked, since otherwise no increase in the population's consumption per capita can be achieved. The failure to incorporate this dimension into the development process undermines the basis of a democratic society, in which equity and the existence of supportive public institutions are key to the system's political stability.

"Revolutionary" Change in Agriculture

Since sources of growth are limited in Nicaragua's case, maximum use must be made of those available. First it must be taken into account that, although idle capacity exists in the agricultural sector and in natural resources, this capacity is quickly exhausted in an accelerated growth process. The basic challenge to resolving the crisis at its root is to increase the economy's productive capacity, obtaining a greater yield from all the production factors in the medium run.

Investment levels of 20-30% of the gross domestic product (GDP) cannot be sustained fundamentally on public investment. Although this should be maintained to facilitate the credibility of the structural reforms already initiated, private savings should be substantially recovered and should finance the bulk of real fixed investment.

But even if this happens, state intervention must be firm enough to be able to regulate the orientation of private investment either toward the direct production of investment goods or the production of export goods so as to permit the acquisition of investment goods. The role of public investment is also key when it is applied to expanding the supply of public goods that improve general well-being and allow private investment to become profitable. Nonetheless, even if a good investment level is achieved, with strong participation by the private sector and a pro-export orientation or one of developing investment goods, it is still impossible to guarantee sustained expansion of productive capacity. As Kalecki indicated, "In general, the basic prerequisite for the rapid industrialization of an underdeveloped country, and particularly for solving the problem of unemployment and underemployment, is a revolutionary change in agricultural production."

How Can It Be Achieved?

Expanding productive capacity in a full-employment policy implies that there will immediately be increased demand for goods of primary need, or salary goods, precisely because people who manage to find work will have more income. But with a basically rigid supply of goods of primary need, this increased demand tends to drive their prices up, generating inflationary pressure. Resolving the demand through more imports implies shifting resources from investment to consumption, which would slow down the growth rate and widen the trade gap in an unsustainable manner. A rise in prices also risks unleashing an inflationary spiral, and with that a strong distributive conflict that would create disorder in economic growth. Financing the investment process through forced savings, at the expense of workers' real salaries, would turn the less well-heeled into the source of investment financing. On top of being an unjust way to finance investment, this method would seriously affect the credibility of the reforms and could undermine democratic stability.

All the above problems result from trying to get around the problem of a rigid supply of goods of primary need. The better answer is to expand the supply of such basic goods, which involves making the agricultural sector profitable and helping it make the technological leap that allows it to increase the food supply. For countries such as Nicaragua, which have a strong peasant presence in the rural sector, this means strengthening and supporting the production and sales systems of peasant family units. On this basis, the increase in per capita GDP-and with that, per capita consumption-would be sustained by increasing the production of goods of primary need, hence avoiding inflationary pressure.

On the other hand, increasing investment levels is obtained by tax penalties on idle property and financial resources, as well as by an increase in the tax base, eliminating exemptions and subsidies for the wealthy. Public investment can be expanded in a sustained fashion with lower tax rates but a sufficiently expanded tax base.

From Anti-Agriculture To Pro-Agriculture

All these prescriptions make sense in general. But implementing them requires breaking through the resistance of the two small but powerful interest groups that defend the current system of privileges. These two major interest groups-Nicaragua's traditional commercial and financial oligarchy and the new group of politician-entrepreneurs created with the privatization process of the 1990s-have highly oligopolist market structures, keep domestic prices higher than international ones and enjoy a series of state exemptions and subsidies that allow them excessive earnings.

A persistent anti-agricultural policy has been maintained in Nicaragua in defense of these interests. The transfer of resources from Nicaraguan agriculture to the rest of the economy has been copious, to the point of seriously slowing down agriculture's potential and making its activity largely unprofitable. Going from an anti-agricultural policy to a pro-agricultural one, regulating private investment to skew it toward productive exporters and getting the wealthy sectors to make a greater tax contribution thus implies locking horns with the oligarchy and the nouveau riche. In short, it implies economic and institutional modernization.

In a democracy these necessary structural changes can only occur little by little, and in a sequence. Even this requires a political force that can amass enough social consensus. Rebuilding the country implies a state with a hierarchy of objectives and the capacity to create acceptance of them. And such acceptance cannot be achieved without the political support of broad organized sectors of the population.

1994: Growth Begins

After its long economic slide downward between 1984 and 1989, Nicaragua succeeded in stabilizing its economy at the beginning of the 1990s, lowering the inflation rate to 3.7%. It set off down the path of economic growth in 1994, in an environment of economic adjustment and partial structural reform. That year, production showed a positive growth of 3.3%. That was followed by 4.5% in 1995 and 5.5% in 1996, thanks to the recovery of agricultural activity. The 1996 increase is the greatest in 17 years.

Maintaining price and exchange rate stability promoted this positive behavior of the activities that were making a comeback: agriculture, fishing, some manufacturing, construction and mining. There has been a similarity in the past three years between the annual inflation rate, around 12%, and the slippage of the exchange rate established in January 1993.

The relative reactivation of production has mainly been in exports, with notable growth in the weight of nontraditional products. The volume of goods exported grew an average 10.1% annually in 1990-96, while import volume grew 7.2% in the same years largely because of the reactivation itself. This meant that the trade deficit stopped growing, and instead hovered around an average 35% of the GDP. By 1996 the trade deficit before donations was 34%, slightly higher than it had been in 1990. That year 44% of the trade deficit balance of payments was financed with foreign donations.

Nonetheless, since production only grew at about the same rate as the population between 1994 and 1996, no palpable change could be observed in the living standards of most Nicaraguans. Even with price stability, the economic reforms were too partial and too insufficient to sustain the required growth levels. In particular, the production conversion process that would have improved the country's international competitiveness did not go far enough.

Various indicators demonstrate that the current growth has not been congruent with the expectations of national well-being. At the end of 1996, 71% of all Nicaraguans were living in conditions of poverty, the infant mortality rate was 50 per 1,000 live births, 26% of the population under 5 years of age was suffering from malnutrition, food consumption in energy terms was 37% lower than is recommended, and 25% of the population was illiterate.

The first effect of the partial economic adjustment was expressed in the expansion of the open unemployment rate, which rose to 21.8%. In 1996 it dropped to 16% due to the reactivation of production, while the underemployment rate for that year was 35%.

The Hour of the Agricultural Sector

The 1997 agricultural cycle is thus getting underway in a setting of low inflation and reactivation of agricultural production that began in the 1993-94 cycle. It falls to the Alemán administration to firm up the basis of the reactivation that the Nicaraguan economy experienced between 1994 and 1996. In Nicaragua, as in any agricultural country with a prolonged period of economic decline, sustained development can only be obtained by reactivating, restructuring and strengthening the productive activity of the agricultural sector.

The strategies of the country up to now have overprotected the urban segment of the population and subsidized sectors of the economy that consume serious amounts of hard currency, relegating the agricultural sector to the back burner even though it generates 25% of the GDP, 65% of exports and over 40% of employment.

The most important problem for the sustained development of Nicaragua's agricultural sector is the profitability of the production units. Two factors have a determinant influence on this: the effects of an economic policy that does not benefit agriculture enough and the generally low productivity of the different goods produced in the sector.

Nonetheless, the agricultural sector as a whole has improved its dynamism since 1992 despite the anti-agricultural skew of the policies. The relative stability of the pacification process initiated at the beginning of the 1990s, the existence of idle land capacity, the opening of the frontiers and improved international prices have contributed to this improvement.

The sectoral reactivation has been sustained more by expanding the areas under cultivation than by productivity increases. Since available land for agricultural use is reaching its limit, the major task for the future will be to improve the policies and design programs that increase agricultural productivity. In the 1996 agricultural cycle, however, the priority objective should be to improve its profitability.

The Starting Point: Data on Agro

In the first years of the 1990s, the dynamism in agriculture was found in production for domestic consumption, while in the next couple of years, those of greater reactivation, it was found in the agroexport categories. Between 1990 and 1994 agroexports grew an average of just under 1% per year, while they grew 12% annually between 1994 and 1996. The largest increase was in traditional export crops, mainly coffee and cane sugar, with average annual increases of 18% and 16%, respectively, in that latter period.

Coffee received incentives through the coffee renovation program. Sugar was favored by high protection levels, which led to an increase in the area planted and thus in yields in the last three agricultural cycles. The financing sources for both crops were diversified beyond the state banking system. The sources for others, such as cotton, were reduced, as were the possibilities of investing in technological improvements.

The crops for domestic consumption rose by an annual average of almost 8% between 1990 and 1994. The rice crop was expanded at the beginning of that period, while corn only began expanding after 1992. Between 1994 and 1996 the cultivation of basic grains moved at a rhythm of almost 3%. The increase in corn and beans (6% annual average in 1995-96) was largely based on reactivating planting areas that had been abandoned during the war and on the push given by a greater supply of direct credit through rural programs outside of the financial system (7% of the total credit to the agricultural sector in 1995 and 10% in 1996). Credit restrictions in irrigated rice and industrial sorghum, where capitalist producers operate, had an influence on the under-2% annual rhythm shown in the total production evolution of these two crops.

The extensive development of basic grain production by peasants is reaching its limits. Without changes in agricultural policy, fundamentally with respect to technology and pricing, development can only be sustained by expanding the agricultural frontier, with the consequent destruction of forest resources.

The livestock sector increased at an overall rate of almost 2% between 1990 and 1996, although with a 4% growth in 1990-1994 and a 2% contraction in 1994-96. The sector's aggregate activity level was sustained by the rise in milk and poultry production. In the first half of the 1990s poultry registered a notable recovery in the production of both meat and eggs, managing in the last years to cover the demand for domestic consumption.

Between 1990 and 1996, particularly after 1994, the levels of fresh milk storage improved notably. In 1996, supply grew 8% over 1990 and 2% over 1993. On average, the pasteurizing plants have pulled in 15% of the fresh milk, permitting a return to powdered milk exports in the 1990s and the initiation of cheese exports to Central American countries.

Livestock activities did not reach greater growth levels due to the reduction of cattle slaughter and exports, in turn due to the drop in international beef prices and to technological backwardness. The low profitability of the activity has resulted in less investment, thus aggravating the arrears problems in the portfolio of cattle rancher credits. The credits issued in 1996 were 36% lower than in 1995 and 98% lower than in 1990.

Will It Be Possible To Surmount All of This?

In order for the resources available to the agricultural sector to contribute to the economy's overall development in 1997, a series of limitations that add to and interact with the overall restrictions must be overcome. Among those affecting the 1997 agricultural cycle are:
The still unresolved property problem prevents greater dynamism in the land market, access to financial resources and the reestablishment of adequate confidence levels.

Technological backwardness, which turns into low productivity and profitability for the sector and contributes to keeping the rural population in poverty. Even when timely and sometimes successful technological development efforts were implemented in the past, technical indicators for the majority of the agricultural categories exhibit significant backwardness, not only in relation to industrialized countries but also to those of the region.

The low levels of vertical integration. With little industrial processing of raw agricultural products, for example, it is impossible to add value to production.

The precarious levels of horizontal integration, which provoke greater risks in productive activity. Again to give an example from agriculture, the strong dependence on imported inputs such as fertilizer and pesticides due to their limited production in the country creates price differentials between domestic and foreign currency that are hard to compensate for.

The extensive model of agricultural development, with cropping practices that ravage the environment and natural resources, increasingly shrinking the biological potential of the sector's soils and water resources. The deforestation has mainly occurred though the clearing of lands for cattle and subsistence agriculture in areas that are basically apt for forestry. To this are added the settlements, the destruction of forests and the use of wood for fuel. Wood currently represents the main energy source for the country. Nearly a million and a half tons of firewood are burned as fuel annually, which is equal to more than 12 times the energy consumption for industry.

The lack of environmental protection and consequent ravaging of the country's national resource base, which conditions everything else. Despite advances in environmental legislation and institutional development, the legal procedures and framework for environmental protection are incipient and still lack the instruments and capacity to apply them in order to achieve tangible results.

The lack of an appropriate infrastructure and obsolescence and bad condition of the existing infrastructure for producing, storing and commercializing agricultural goods and services, which affects the costs of the harvest and of transacting agricultural business and influences the significant post-- harvest losses of the farmers.

The anti-agricultural bias of the economic policy, which contributes to high operating costs and reduced agricultural profitability. The tax burden for agriculture is considerable. In addition, restrictions on the export of agricultural products and the handling of food imports and donations contribute to keeping prices low and thus affect the sector's profitability.

The existence of heterogeneous, distorted and not very developed markets, combined with a rudimentary and inefficient set of institutions to deal with land, technology, inputs, information and financial services, which cause errors in the price-setting mechanisms and increase post-harvest losses. This further reduces income to producers and rechannels a large part of their surplus toward tertiary activities.

The limited access to short- and long-term credit for the sector, due to the existence of a structure that doesn't create incentives plus the low profitability of agriculture. In addition, long-term credit lines depend on foreign resources, which makes the sustainability of agricultural growth vulnerable.

The scant savings capacity of agricultural businesses and units and the precarious financial resource flow toward agricultural activity, which affect investment volume, the capitalization rate and even, in vicious circle fashion, the very flow of resources toward the sector.

The producers' low organizational level and lack of the kind of managerial capacity required to move into domestic and foreign markets with advantages, which adds to their lack of competitiveness.

The lack of a strategic vision and coordination among the public agricultural sector institutions, which contributes to a waste of the scarce resources and impedes the development of a modern agricultural economy.

Attacking, modifying and eventually overcoming these restrictions will take longer than the government's term in office, and there is no question that the 1997 agricultural cycle will be plagued by all of them. Dealing with the agricultural sector's structural bottlenecks is also a task that exceeds the specific attributes of the Ministry of Agriculture and Livestock (MAG). It is among the activities that correspond to the public sector in general, in coordination with the private sector and with foreign cooperation. Will the new government make a serious dent in these challenges and dilemmas?

The Tax Law Is Pro-Agriculture

The agricultural policy measures laid out by the government, which seek to again make Nicaragua the granary of Central America, are based on the positive behavior of agriculture in the past three cycles and on the existence of stable prices. But that isn't enough. This policy faces serious problems.

The first of them is that, beyond its rationality and justice, the policy is surrounded by a bitter political conflict that grows out of the property rights problem. Given the all or nothing attitude of the parties to the conflict, the economic policy could be sabotaged by the tug of war to gain quotas of power or to maintain the privileges of the economic groups favored by prevailing anti-agricultural policy.

Even if this bottom-line political problem is resolved through civilized and democratic channels, the agricultural policy proposal crucially depends on what happens with both the credit policy and the tax reform. Creating a pro-agricultural framework depends on assuring that economic policy as a whole is geared in that direction. The financing situation for this year's agricultural cycle is critical.

The decapitalization suffered in these last years by the National Development Bank (BANADES) has left the state development banking system unable to provide credits to agricultural producers. For its part, the private banking system has no intention of taking risks with any policy of loans to agriculture. The suspended collection of overdue debts due to the supposed death of the "Cobra" * and plans to restructure the debts instead should resolve the threat to the patrimony of the debtors. It will not, however, resolve their inability to get new financing for this year's cycle.
Because of all this, the government's effort is geared to trying to maintain last year's real financing levels for this year, thus palliating the problem of working capital for the producers.

With respect to the tax reform, its implementation directly attacks the privileges of the oligarchy's agroindustrial and industrial oligopolies. This generated a ferocious resistance to the reform from large oligarchic capital. Pressure is intensifying since this reform has been postponed since 1994 and is a prerequisite for both the signing of the new Enhanced Structural Adjustment Facility (ESAF) with the International Monetary Fund and the continued reduction of the country's foreign debt. A good part of the incentives to agriculture are linked to approval and implementation of the tax reform. Achieving consensus around this bill as soon as possible-saving its essential aspect, which is the pro-agriculture reorientation of the economic policy-is vital to stimulate the agricultural cycle, which is already getting underway.

• A plan to liquidate BANADES' huge portfolio of overdue agricultural debts in arrears by either wringing payment out of the debtors or embargoing their property, harvests or cattle. The name Cobra has a double meaning, since it refers to both the snake and the verb cobrar, to collect. Strong lobbying by the more powerful debtors succeeded in getting the Cobra stopped in February by decree, but there are reports from the field that it has not been stopped in practice.

By economist Oscar Neira, adviser to the Ministry of Agriculture and Livestock (MAG).

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