US - Andean Free Trade Agreement: A Strategy for the Development of the Peruvian Rural Sector

Peru and two Andean partners - Colombia and Ecuador, are engaged on trade negotiations with United States with the goal of reaching a Free Trade Agreement by the second quarter of 2005. The Andean-US FTA entails a complete elimination of tariffs in 10-15 years, regulations on non-tariff barriers, services, rules on intellectual property and investment.

With the FTA the rural economy of Peru faces great opportunities but also challenges. One answer to the challenges arising from trade liberalization and a more open economy is increase sectoral competitiveness. It is thought that the increase in competitiveness and the resultant economic growth are necessary but not sufficient condition for poverty reduction. Without specific interventions that will allow the rural population access to efficient and transparent markets- factors and goods, any real gain will fall short of a permanent solution.

The questions that the paper analyzes are: Are there structural problems in the rural sector that impede an adjustment to the market conditions derived from trade liberalization? Will the market reallocate efficiently resources in the economy to reap benefits from the FTA?

The purpose of the paper is to provide recommendations for the design and implementation of a strategy for the development of the Peruvian rural economy to obtain the most out of the FTA. The task is to analyze the limitations in the rural sector that prevent efficient reallocation of resources and provide recommendations to eliminate obstacles that affect Peruvian competitiveness.

The motivation for the paper is that for political, economic and social reasons the Government of Peru requires a strategy that could facilitate the implementation of the US-Andean FTA in the rural sector. On the political side, there is social unrest (strikes, protests), farmers are demanding concrete actions and the Congress will not approve the FTA without a strategy for rural development. On the economic and social side, the rural economy represents one third of the total workforce and 78 percent of the rural are poor. Besides, the dual character of the agriculture- agribusiness and small farmers could require different governmental actions to be able to compete (or even survive) in the new market conditions.

The paper examines the Peruvian rural sector and its structural failures to identify the binding constraint(s) for the reallocation of resources to the new market conditions. I complemented this analysis examining two experiences of agricultural products from which I derived crucial lessons for the recommendations of the elements of a strategy for rural development.

Our findings suggest that there are structural failures in the rural sector that could prevent an adjustment of farmers and that could hinder the opportunities of gaining benefits from the Andean–US Free Trade Agreement. As a response, the Ministry of Agriculture is obliged to implement a strategy that includes the following elements: improve access to the land; improve management of technology and biotechnology; change private sector’s culture and promote a self-reliant entrepreneurship that could replace rent-seeking attitudes. I also present two principles that the address should be based on: first, that the solution to address small farmers’ problems is outside, with the medium-large farmers; second, that external markets are not an option but a must. We also propose a public-private partnership that could design strategic interventions with a problem-solving approach and a demand-driven focus. The goal is to tackle bottlenecks that impede the full engagement of small farmers into the market and make small production feasible. I finally present some recommendations on the implementation of the strategy addressing the legal framework, the financial feasibility and the political and bureaucratic consensus that needs to be built to get it approved.