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WDR/Latin America and the Caribbean: Developed Country Subsidies, an Obstacle for Agricultural Development

Agribusiness and Biofuels are transforming the sector
Available in: Español
Series #:2008/080/DEC

Contacts: 
In Washington: Sergio Jellinek (202) 458-2841
sjellinek@worldbank.org
Merrell Tuck (202)473-9516
Mobile: (202) 415-1775
mtuckprimdahl@worldbank.org
Stevan Jackson (202) 458-5054
Sjackson@worldbank.org

WASHINGTON, DC, October 19, 2007 – In spite of the fact that subsidies from countries of the Organization for Economic Cooperation and Development (OECD) represent an obstacle for Latin American agricultural exports, the sector has shown a remarkable success in agribusiness development and biofuels according to “Agriculture for Development “ the World Development Report (WDR) 2008, launched today. Furthermore, agriculture for development in the region the last decade has had little impact on poverty reduction.

While agriculture accounts for a small share of economic growth in Latin America and the Caribbean countries — 7 percent from 1993 to 2005 —, several agricultural sub-sectors with strong comparative advantage have sustained spectacular growth — for example, soybeans in the Southern Cone countries, biofuels in Brazil, fruits and salmon in Chile, vegetables in Guatemala and Peru, cut flowers in Colombia, and Ecuador, and bananas in Ecuador— and the agribusiness and flood services sectors are large in national GDP.

Traditional exports remain relevant accounting for 80 percent of the region’s agricultural exports, offering new markets as they become increasingly “decommodified” to adjust to differentiated consumer tastes, for instance organic coffee and Fair Trade. High-value exports have been expanding rapidly, with smallholders moving into niche markets, such as specialized vegetable production and organics in Central America.

Agriculture in Latin America and the Caribbean employs 30 percent of the labor force and generates 7 percent of GDP growth.

Leveling the playing field
“Significant gains can be made from agricultural trade reforms,” said Pamela Cox World Bank Vice President for Latin America and the Caribbean. “Gains will, however, be unevenly distributed among commodities, and within countries.  It is urgent that the Doha Development Round of trade negotiations leads to the removal of the almost distorting policies that hurt poor countries.” Leveling the playing field in international agricultural trade in Latin America and the Caribbean, Cox, says, is critical because protection and subsidies remain high in developed countries.

Relatively little progress has been made in reforming agricultural policies of developed countries. Protection and subsidy support to producers in OECD countries declined from 37 percent of the gross value of farm receipts in 1986 to 1988 to 30 percent in 2003 to 2005. Although this decline of 7 percentage points is progress, the amount of support increased over the same period from US$242 billion a year to US$273 billion.

Latin America countries, such as Brazil, would share the largest gains in estimated agricultural output growth, of a potential agricultural trade liberalization.

Research and Development (R&D) bring returns on investment
Returns on investment on research and development in agriculture are high in Latin America and the Caribbean. The high payoffs relative to the cost of capital also indicate that agricultural science is grossly under funded, according to the new report.  In Latin America and the Caribbean countries invested more in agricultural research and development than all regions except Asia and (OECD) countries.  Brazil has rapidly increased spending on research and development over the past two decades and has developed cutting edge knowledge in the sector.

Biofuels: Promise and risks for Latin America and the Caribbean
With oil prices near an all-time high and with few alternative fuels for transport, Brazil, Peru and other countries in the region, are actively supporting the production of liquid biofuels from agriculture—usually maize or sugercane for ethanol, and various oil crops for biodiesel.  Possible environmental and social benefits, including mitigation of climate change, and contribution to energy security are cited as the main reasons for public sector support of the rapidly growing biofuel industries. 

As the economic, environmental, and social effects of biofuels are widely debated, they need to be carefully assessed, —according to the report—before extending public support to large-scale biofuel programs. National biofuel strategies need to be based on a thorough assessment of those opportunities and costs. 

A Latin American Agenda 
“There are three key areas where Latin America could get additional benefits in agriculture and rural development,” said Laura Tuck, World Bank Sector Director for Sustainable Development.  “First, growth in agricultural production could be more inclusive of small-holders.  Second, the sector could become more environmentally friendly. Deforestation is closely linked to agriculture in the region and we are seeing significant impact on the climate from large-scale land conversion in the region.  Finally, the efficiency of expenditures in the sector could become much more efficient,” Tuck concluded.

The report notes, an average of 54 percent of subsidies go to the private sector; therefore a shift to public investment in agriculture, or a balanced approach, in Latin America and the Caribbean countries, is needed.  Furthermore, Latin America and Caribbean countries less than 2 percent of GDP where Asian countries like China and India spend approximately 4 to 6 percent of GDP, suggesting the region should and can use resources for agriculture better.

Domestic consumption is the main source of demand for agriculture, absorbing three-quarters of output, with 60 percent of domestic retail sales channeled through supermarket chains. A transformation of traditional, low-productivity agriculture into modern, commercial agriculture is needed, to create both growth and jobs. Increasing the competitiveness of smallholder farmers in dynamic domestic food markets requires paying special attention to deep-rooted inequalities in access to assets, public services, and support institutions.

According to the report, most of Latin America and Caribbean countries are considered urbanized, however Central America and Paraguay have the character of agriculture-based countries.  Mexico has states with agriculture-based features.  And Brazil has the unique feature of states that are both urbanized and highly dependent on agriculture for growth. 

In urbanized regions, agriculture contributes just 5 percent of GDP growth on average. However, rural areas are still home to 45 percent of the poor, and agribusiness and food services account for as much as one third of GDP. The broad goal is to link smallholders to modern food markets and provide remunerative jobs in rural areas. 

“Rapidly transforming economies must move from the green revolution to focus on new high-value agriculture—with fast-growing urban incomes and demand for high-value products in cities becoming the drivers of  agricultural growth and poverty reduction,” said Alain de Janvry, Co-Team Leader on the report. 

Climate Change & Agriculture
Climate change will have far-reaching consequences for agriculture that will disproportionately affect the poor, the report notes.  Greater numbers of crop failures and livestock deaths are already imposing economic losses and undermining food security.  The cost of modifying irrigation schemes, especially those that depending on glacial melt in the Andes, could run into millions or even billions of dollars.
 
The World Bank support for agriculture and rural development in Latin America and the Caribbean in FY07 was $1.8 billion, with a total of 42 projects region-wide.




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