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The development of the agricultural sector is a cornerstone of any strategy aimed at mitigating poverty in El Salvador, and in the majority of nations. The rural sector harbors a greater percentage of poor than the urban sector, and these are basically involved in the production of staple grains [rice, corn, beans] and in the seasonal labor market associated with traditional export crops [coffee, cotton, sugar].
The gradual tariff reductions proposed for the next several years could have harmful effects on the internal supply of basic foodstuffs and on the living conditions of the rural population. This is probably why the director of trade policy, Eduardo Ayala Grimaldi, has announced that the government is studying ways to award special treatment to "sensitive" agricultural products.
Deregulating foreign trade will probably lead to a substitution of national supply -which have "inefficient" prices compared to international goods- with foreign products which can offer cheaper domestic prices. The rural sector will be one of those most harmed by this substitution, and this will also compromise the generation of jobs and incomes in the area of producing staple grains. According to research conducted by the U.S. Agency for International Development (AID), around 75% of staple grain production occurs in plots under 8.6 acres, which means that this activity is dominated by low-income producers with small plots. Most of these producers consume their own product; however, this same population group, and other poor sectors, also display high levels of nutritional deficiency.
Given how doubtful is the outlook of increased rural employment in activities other than picking traditional export crops, we can certainly expect increased poverty in the countryside. There has not been much diversification in the agricultural sector, while industry has yet to confront the urgent need to reconvert its installations and production methods in order to increase its share of the export market.
On top of these consequences for rural employment and income, we will probably see a reduction in the national production of foodstuffs, making the nation more dependent on food imports and donations. Over the past several decades, El Salvador has either imported or received donations of a large part of the food its people eat, because there is insufficient domestic capacity to meet demand.
The proposal to open up foreign trade, together with inadequate economic policies for the agricultural sector, threaten to compromise the incomes of staple grain producers. The agricultural sectors of developed nations such as the United States, Japan and the European Union enjoy great protection, incentives and higher levels of technology.
In this context, we must review government policies toward grain producers, as well as the possible implications of tariff reductions on the campesino sector. As we will show, efforts to address this sector are closely tied to strategies to develop the agricultural sector and address poverty.
Since the early 1950's, the government has had the policy of intervening in the staple grain market with two main objectives. First, the policy sought to ensure a minimum price to producers in order to guarantee them a profit margin; in the second place, the government sought to avoid speculation in consumer prices for basic goods, in order to guarantee medium-term stability. The institution in charge of the necessary transactions was the Food Regulatory Institute (IRA), which was unfortunately incapable of carrying out its mandate fully, because market prices could never equal the guarantee prices for both producers and consumers.
This policy continued until 1989, when the first ARENA government began to deregulate the economy. As part of this process, the government began liquidating the institutional structure and assets of the IRA, adopting a policy of price ranges in order to set the prices of staple grains.
The mechanism of price ranges [bandas de precios] is used to adapt the tariffs applied to basic grains to international price fluctuations, so that domestic prices will not vary outside a set range. A system was devised which sets a ceiling and floor for international prices, on the basis of which tariff levels are set. If the international price is higher than the ceiling, the tariffs are reduced so that domestic prices do not go out of control; if the international price falls below the floor level, tariffs are increased so that domestic prices do not drop too low. Thus, international price fluctuations are mitigated, guaranteeing domestic prices which are acceptable to both consumers and producers.
In both mechanisms, the underlying principle is State intervention in the marketplace. The need to protect consumers' and producers' interests was behind both the IRA and the price range system. However, so far neither of the two systems appears to offer an appropriate alternative to address the problem of satisfying the people's food needs while stimulating domestic production of staple grains. The system of price ranges for staple grains is under consultation among the economic ministers of the Central American countries. In El Salvador, price ranges were discontinued last September because, according to the director of trade policy, the system was open to far too many errors of interpretation in its implementation.
One of the greatest problems facing staple grain producers is their relative technological backwardness and ensuing competitive disadvantage with grain producers in more developed countries. The latter enjoy enormous competitive advantages which allow them to offer their crops at lower prices, making local production extremely inefficient by comparison. In this context, tariffs play a decisive role in keeping international prices from falling below the cost of production, since that would imply economic bankruptcy.
Before reducing tariffs on imported staple grains, and on agricultural products in general, El Salvador ought to study the policies implemented in countries like the United States. Some of the measures taken include mechanisms to protect the incomes of producers, to improve their technological development, provide credit and agricultural insurance, technical assistance packages, trade protection policies to make production profitable even in the context of import substitutions (these policies include tariff and non-tariff barriers), programs to develop infrastructure which supports production, financed by progressive taxes (including heavy property taxes), etc.
One could say, therefore, that international prices cannot be the correct signal to send to staple grain producers, unless they too are awarded special government treatment to offset the privileges awarded their counterparts who offer lower prices and greater quantities. As things currently stand, low prices to domestic grain producers combined with subsidies in developed countries could mean that domestic production of staple grains may be substituted by imports. Thus, the proposal to drop tariffs would imply a national reduction in staple grain production and a decline in the standard of living of the rural population.
The government must intervene in the production of staple grains, otherwise it runs the risk of jeopardizing national food security and seeing poverty levels increase even further. The fundamental problem which must be resolved continues to be how to set an appropriate price for both producers and consumers, which does not appear too feasible under the proposed strategy.
However, simultaneous with tariff policies, it is also important to take measures aimed at increasing technological levels of food-growing methods and improving the public infrastructure necessary to develop that sector. Dropping tariffs could make the price of staple grain imports fall below domestic levels; however, that could be offset by reduced production costs based on more efficient production methods, along with State subsidies.
There are at least three aspects which could be addressed with regard to this sector. First, there is a need for credit assistance, because staple grain producers have traditionally received only a very small share of the total credit awarded by the financial system. This might mean a loan guarantee fund and specific credit programs.
In the second place, there must be a broader agricultural extension program than what has been undertaken to date by the Ministry of Agriculture. Some aspects of this program must include improving productivity through the introduction of appropriate technologies.
Finally, the State must adopt a sectorial policy to transfer part of the profits of higher-income sectors to campesino sectors. This could be done by subsidizing the prices paid to producers using increased direct taxes, for example the property tax.
The State must find ways to finance programs to assist the agricultural sector, because the free play of market forces will only worsen living conditions for the rural population, and is therefore no positive development alternative.
Proceso is published weekly in Spanish by the Center for Information, Documentation and Research Support (CIDAI) of the Central American University (UCA) of El Salvador. Portions are sent in English to the *reg.elsalvador* conference of PeaceNet in the USA and may be forwarded or copied to other networks and electronic mailing lists. Please make sure to mention Proceso when quoting from this publication.
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