Peru - Agricultural sector survey (Vol. 1 of 2) : General report

Report No. 549a-PE Agricultural Sector Survey FILE COPY Peru (In Two Volumes) Volume 1: General Report March 14, 1975 Latin America and Caribbean Regional Office Not for Public Use Document of the International Bank for Reconstruction and Development International Developrment Association This report was prepared for official use only by the Bank Group. It may not bf published, quoted or cited without Bank Group authorization. The Bank Group does not arcept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENT* Current Unit : Sol (SI.) US$1 = S/.38.70 Soles 1 = US$0.026 Soles 1 million - US$25?840 US$1 million = S/.38.70 million * Above rate applies to some 85% of total foreign exchange transactions (largely trade) and is used normally for conversion in this report. There is also a draft market rate of US$1-S/.43.38 which covers some 15% of foreign exchange transactions.  AGRICULTURAL SECTOR SURVEY PERU TABLE OF CONTENTS Volume I GENERAL REPORT Para No. GLOSSARY PREFACE . ..................................................... i - vii SU 4mY ......................................................i - x GENERAL REPORT ............................................... 1 118 A. Background .1 - 9 Supply/Demand Situation and Trade .................. 2 - 4 Employment and Resource Base ....................... 5 - 7 The 1968 Revolution ................................ 8 - 9 B. Objectives .............................................. 10 - 16 C. Recommendations ......................................... 17 - 113 Resource Development ............................... 18 - 60 General ....................................... 18- 21 The Sierra .................................... 22- 32 The Selva ..................................... 33 - 49 The Coast ..................................... 50 - 60 Public Administration .............................. 61 - 68 Land Reform ....... ............ ..................... 69- 81 Marketing and Price Policies ....................... 82 - 92 Agro-industry ...................................... 93 - 100 Credit ............................................. 101 - 113 D. Projects Identified by the Mission ...................... 114 - 118 Maps: IBRD - 10841 IBRD - 10838 IBRD - 1u840 IBRD - 10837  TABLE OF CONTENTS (Continued) Volume II Annex 1 - Agriculture in the Economy Annex 2 - Natural Resources and Farming Systems Annex 3 - Organization and Administration of the Public Sector Annex 4 - Agricultural Education and Research Annex 5 - Agrarian Reform Annex 6 - Agricultural Marketing Annex 7 - Agro-industry Annex 8 - Agricultural Credit Annex 9 - Forestry Statistical Annex Mission Contacts  GLOSSARY OF ABBREVIATIONS BCR - Banco Central de Reserva - Central Reserve Bank BFA - Banco de Fomento Agropecuaric - Agricultural Development Bank CECOAAP - Central de Cooperativas Azucareras delPera - Central of Agricultural Sugar Production Cooperatives CENCIRA - Centro de Capacitacion e Investigacion para la Reforma Agraria - National Training and Research Center for Agrarian Reform CIDA - Comite Interamericano de Desarrollo Agricola - Interamerican Committee for Agricultural Development COFIDE - Corporacion Financiera de Desarollo - Development Finance Corporation MRLAJAR - Direccion General de Reforma Agraria y Asentamiento Fairal - Directorate General for Agrarian Reform and Ruiral Settlement DGPA - Direccion General de Produccion Agraria - General Directorate for Agricultural Production DGC - Direccion General de Conmercializacion - Directorate General for Marketing DGA - Direccion General de Aguas - Directorate General for Wate- Resources DFC - Direccion General Forestal y Caza - Directorate General for Forestry and Wildlife DGIA - Direccion General de Investigacion Agraria - Directorate General for Agricultural Research EMDEPALMA - Empresa para el Desarrollo y Explotacion de la Palma Aceitera, S.A. - Oil Palm Enterprise ENCA - Encuesta Nacional de Consumo de Alimentos - National Survey of Food Consuiription EPSA - Empresa Publica de Servicios Agropecuarios - Public Enterprise for Agricultural Services IIA - Instituto de Investigaciones Agro-Industriales - Institute for Agro-industrial Investigations INP - Instituto Nacional de Planificacion - National Planning Institute  - i~i - JURPAL - Junta Reguladora de Precios de Productos Agricolas Alimenticios de Lima Metropolitana - Control Board of Food Prices for Lima OGIP - Oficina General de Ingenieria y Proyectos - General Office of Engineering and Projects ONEC - Oficina Nacional de Estadisticas y Censos National Office of Statistics and Census ONERN - Oficina Nacional de la Evaluacion de Recursos Naturales National Office of Evaluation of Natural Resources ORDEZA - Organizacion de Desarollo de las Zonas Afectadas - Regional Agency for Development of the Earthouake Zone OSPA - Oficina Sectorial de Planificacion Agraria - Agricultural Sector Planning Office PIAR - Proyecto Integrado de Asentamiento Rural Integrated Rural Settlement Project PID - Proyecto Integrado de Desarrollo - Integrated Regional Development Project SAF-CAP - Sistema de Asesoria y Fiscalizacioqn para las Cooperativas de ProducciAn - Advisory Services for Sugar Cooperatives SAIS - Sociedad Agr{cola de Interes Social - Agricultural Society Interest SENAFER - Servicio Nacional de Fertilizantes - National Fertilizer Service SIMAP - Servicio de Informacion de Mercadeo Agropecuario - Agricultural Marketing Information SINAMDS - Sistema Nacional de Apoyo a la Mobilizacion Social - National System of Support for Social Mobilization UNA - Universidad Nacional Agraria - National Agriculture University ZA - Zona Agraria - Agrarian Zone  PREFACE i. This report presents the findings of a mission which visited Peru in the fall of 1973. 1/ It is intended to provide a basis for discussions be- tween the Government, the members of the Consultative Group for Peru, the Inter-American Development Bank, and the World Bank concerning foreign assistance for the agricultural sector of the Peruvian economy. ii. The report is presented in two volumes. The first presents the General Report, 2/ which outlines the central observations leading to policy recommendations and project proposals. Much of the descriptive and analy- tical background for the General Report will be found in a number of self- contained annexes (Volume two) on such topics as the role of agriculture in the economy, the sector's resource base, government institutions, agrarian reform, marketing, agro-industries, forestry, and credit. Volume two also contains the basic agricultural statistics, and a list of the contacts the mission had while in Peru. A greater than usual effort has been put into the statistical annex, 3/ inasmuch as comments on discrepancies and the strength of the data have been incorporated. iii. The mission took place in the context of a recently enacted policy of collaboration between IDB and IBRD in the field of agricultural sector studies. IDB officials took part in the mission's briefings and in discussing the draft report; the IDB marketing specialist participated in the mission. iv. A first draft of the report was informally discussed in July 1974 and a revised version was submitted in October 1974 for official comments. Written comments were received and discussed in February 1975. In most cases, differences in view could be narrowed down and resolved by changes in the text. In a number of cases, it was agreed that it would be preferable to include an explicit statement on the Government's position. 1/ The mission members were - E.P. Riezebos, Chief of Mission, IBRD - P. Bargholtz, Deputy Chief and General Economics, IBRD - Mrs. M. Sanchez-Gavito, Logistical Support, IBRD - J. Andreu, Agricultural Economics, IBRD - M. N. Alexander, Marketing, IDB - J. Allchin, Agro-Industries, Consultant - J. Beausoleil, Agricultural Credit, Consultant - M. Bueno-Gomez, Agrarian Reform, Consultant - K. Goossens, Irrigation, Consultant - H. Gregersen, Forestry, Consultant - F. Johnson, Crops and Livestock, Consultant - P. Malone, Government Institutions, Consultant Miss J. Dino made all arrangements before and after the mission, including typing of the report. Miss B. Griesel was the editor. 2/ Prepared by E.P. Riezebos. 3/ Prepared by P. Bargholtz.  - ii - v. During the discussions, the authorities of the Ministry of Agri- culture emphasized that the final text does not necessarily reflect its position on all points. They believed that the image the report gives of the prospects of the sector is more pessimistic than warranted and does not sufficiently reflect the socio-political principles and objectives of the Government. vi. The report intends to reflect the mission's perception of the sector as of the end of 1973. In some instances updating was possible. Of the significant developments that have occurred since the mission took place, mention should be made of the creation, in early 1975, of two separate ministries dealing with the agricultural sector, one called Ministry of Food (responsible for all aspects of food production, marketing and processing), and the other, Ministry of Agriculture (responsible for Agrarian Reform and development of agricultural resources). It should also be noted that, since the time of the mission, preparation has considerably progressed on such projects as the first drainage project, a project for rural development and reforestation in Cajamarca, the Huallaga Central Settlement project, the Alexander von Humboldt Forestry Complex. vii. The mission is grateful for the considerable support and hospitality it received from all parts and all levels of the Peruvian administration and farming community, as well as from representatives and field staff of the multilateral and bilateral aid agencies. Particular mention should be made of Ing. Luis Paz Silva and his staff of the Oficina Sectorial de Planificacion Agraria in the Ministry of Agriculture. The information and documentation so generously provided by all contacts was invaluable in draft- ing the report. Of course, the mission accepts the responsibility for the contents of the report.  SUMMARY i. Agrarian reform in Peru, possibly the most ambitious effort of its type ever undertaken in Latin America, has dominated the agricultural scene since the present Government acceded to power in October 1968. Since that date, the previous modest process of expropriating some large holdings for allocation to individual smallholders has been replaced by a massive program of transferring much broader categories of holdings in the Coast and Sierra (but not the Selva) into worker-owned production cooperatives and other associative units. The initial target was that by end 1975, expropriation (but not adjudication) of 13 million ha (i.e., about two-thirds of total agri- cultural land) would be completed, benefitting about 0.35 million families (out of a total of over one million rural families). Because of delays in the early years the program is behind schedule, but in the last few years the au- thorities have accelerated the pace. By mid-1974, expectations were to complete expropriation and adjudication of 10 million ha by end 1976. Even this some- what lower target and the expected delay represent a considerable achievement. The program had involved by mid-1974, nearly 5 million ha and 0.2 million families. It is still too early to make a definite judgment about the program's impact on output, but so far, it certainly has not had the strong negative short-term effects that have been observed elsewhere. There are two areas of concern: uncertainty among small and medium sized farms,which has slowed down their production effort, and current managerial inadequacies in the newly created production cooperatives, which are likely to be reflected in future performance. There are strong attempts to counter both problems -- a rapid issuance of exemption certificates (35,000 by mid-1974, versus less than 1,000 a year earlier), and a training program for managers of production cooperatives. ii. The current program, 1/ together with reforms in other sectors, has already succeeded in achieving its prime objective -- to remove the obstacles to economic development that resulted from the power of the previous economic oligarchy. At the same time, it helped to reduce the inequities in land owner- shiip. Although those who benefitted most from the transfer of assets (the workers on the coastal sugar estates) were already in a relatively favorable position, later beneficiaries belong to less (but in many cases not the least) privileged categories of the rural population. iii. Miuch effort is going into the current land reform program, and the expediency of its implementation is remarkable. It should be noted that it is helping to lay the groundwork for what should, in the mission's opinion, be considered the two major objectives for the agricultural sector in the years ahead: (a) to provide employment and raise incomes for the growing masses of rural people that now find a marginal existence in the Sierra; 1/ A second phase is to address itself to the minifundia problem.  - ii - (b) to meet growing domestic demand 1/ for agricultural products without undue pressure on the trade balance, that is, without resorting to massive imports or jeopardizing current exports. The Government underwrites these objectives, which it wants to achieve with full economic and political participation of the rural masses. There is only limited overlap between these two objectives. Consequently, given the existing financial and administrative capacity, there are distinct trade-offs. Although the mission views the "output" objective with considerably more optimism than the Sierra "unemployment" objective, it would like to endorse the Government's intention to put greater emphasis on the latter. iv. In the past, only lip service has been paid to the Sierra. Most of Peru's rural population subsists there, in some regions under most precarious conditions. During the last two decades, an increasing number has spilled over to the slum areas around the coastal towns. The basic problem is that the resource base is too small for the present population. The mining and service sector employ a small part of the labor force, and the remainder has to live off the land. Climatic and soil conditions are such that only part of the land is suitable for extensive grazing and the small pockets marginally suitable for crop production are so crowded that per capita production is insufficient by any standards. Yet, there are indications that a concentrated effort in reforestation, pasture improvement, fertilizer use, and small irriga- tion schemes can improve production. If population were to remain constant, this would mean improved per capita incomes. Unfortunately, it must be expect- ed that much of any increase in output will be absorbed by growing numbers. v. The Government is making efforts to mobilize the social and political awareness of the rural population. Concrete programs to raise productivity of land and labor are in the early stages of design and have not yet received the fullest support in all Government circles. Admittedly, such programs require substantial administrative and financial resources and are likely to yield smaller economic returns than in some possible alternative uses. To promote expediency in implementation as well as access to large numbers of the target population, projects designed for the Sierra should be institutionally simple, rely on local participation and cost hundreds rather than thousands of dollars per family. vi. Possibilities to solve the Sierra problem by relocating substantial numbers of serranos in the sparsely populated Selva have proven to be largely illusory. First, ecological differences render adaptation problematic, and, second, whatever areas are suitable and still available for agriculture (and there are some in the high Selva) are likely to be developed by local mini- fundistas. Similarly, any employment generated by further expansion in cul- tivable areas in the Coast is likely to be absorbed by those already on the spot. 1/ Demand being defined as effective demand at present relative prices, and not as a function of nutritional requirements.  - iii - vii. Much more promising are the prospects of meeting the expected rise in domestic demand for agricultural products. Of the measures proposed by the mission, some involve considerable capital outlays and lend themselves to external financing: (a) Bringing back into full production of the 150,000 ha of coastal irrigable land affected by salinity. This can make a rapid, sub- stantial and economically attractive contribution to supply, and so would groundwater development in the Southern Coast. (b) Developing the areas with identified potential for crop and live- stock production in the high Selva. This would also prove a worthwhile venture, at least if public investment per family is kept down to acceptable proportions. (c) Exploiting the forest potential and developing non-forest activities in the low Selva, such as cassava production and processing, exploi- tation of the aguaje (wild palm) reserves, and water buffalo devel- opment. The recent boom in oil explorations has increased the strategic importance of the Selva, and the ongoing improvements in transport infrastructure are also conducive to the region's devel- opment. viii. In addition to public investment programs, a number of policy measures would also help to promote production. Removal of uncertainties surrounding the land reform program could restore output performance on small and medium-sized holdings in the Coast. Efforts to correct managerial and technical standards in the newly created worker-owned production cooperatives are already being undertaken. A rapid and definite winding up of the expro- priation/adjudication phase of the land reform program would have the further advantage of freeing Government staff for other pressing tasks. ix. The decentralization of the Ministry of Agriculture decided in November 1972 shows encouraging results that could be enhanced by staff incentives for field posts. The mission also believes that Government interference in the marketing process - which was meant to be transitory anyway - can now be advantageously reduced without risking recurrence of past abuses. Ideas for agro-industrial development have been proposed by COFIDE (Peru's DFC), the well-equipped agro-industrial institute, IIA, and others. Finance is available (including substantial amounts of land reform bonds), but for some time there was a reluctance on the part of the private sector; it seems, though, that during 1974 investments in several types of industry picked up again. x. Two sets of policies will have a critical effect on agricultural performance. First, there is no doubt that agricultural production responds to financial incentives. The Government has recognized this, as evidenced by its decision to allow substantial increases in farm prices during the last 12 to 18 months. These measures have already had a favorable effect on pro- duction. Secondly, however, price policy affects only one of the facets of  - iv - the farmers' economic and social environment. Indeed, market prices for agricultural products are largely irrelevant to the many subsistence farmers of the Sierra. What matters most for these low-income farmers, and what is also of critical importance in shaping the production plans of commercial farmers is the array of non-price measures discussed above. Unless this global perspective is maintained, price increases may adversely affect the incomes of poorer consumers of foodstuffs without leading to the desired increase in production.  GENERAL REPORT A. Background 1. The objectives for development of the agricultural sector in the years ahead and the way in which they can best be accomplished depend on a series of factors, some of which are given, while others reflect the Govern- emnt's political outlook. Briefly the principal ones are: (a) the trend in the domestic supply/demand situation for agricultural products; (b) the ability to cover food deficits through imports; (c) the role agriculture can be expected to play in providing gainful employment to a growing rural population, particularly in the Sierra; (d) the resource base for agriculture and the extent to which the existing potential is unused; and (e) the basic principles of the 1968 revolution as they affect agriculture. Supply/Demand Situation and Trade 2. Domestic demand for foodstuffs will grow at least as fast as population, currently rising at a rate of about 3% p.a.; mortality is likely to fall as health services are further improved, and, unless there is a drastic drop in fertility, population growth will accelerate in the decades ahead to, say, 3.3 to 3.5% p.a. How growth in national income will further affect food demand depends on the size of this increase and its distribution over the various population groups -- large segments of the population in the Sierra and also in the urban slums suffer from undernourishment and protein deficiency, and any rise in their income is likely to lead to at least a proportional increase in their caloric intake, combined with an improvement in their diet. Just to maintain nutritional standards would require a growth in food supply of 3.3 to 3.5%, while a modest improvement would call for a growth of 4.0 to 4.5% p.a. 3. Available data and other indications show that domestic supply has in the past decades fallen short of this growth rate, leading to rising food imports and declining availability of cotton for export. Although Peru expects to increase its mineral exports from the Sierra, and oil exploration in the Selva has lately yielded promising results, it is unlikely, even under reasonably optimistic assumptions about the price and volume of the mineral exports and development of the oil resources, that the future balance of payments situation will allow more than a modest proportion of food require- ments to be imported on a sustained basis. By the same token, the country  - 2 - cannot easily forego the foreign exchange from its agricultural exports (sugar, coffee, and cotton). The temporary disappearance since 1972 of the anchoveta from the Peruvian coast has further aggravated the trade balance situation. But even if the future foreign exchange position would allow sustained massive food imports, such an eventuality would not per se help to solve the nutritional and employment problem of the rural poor. To go even further, to the extent that such a situation would reduce the pressure to raise domestic food production, it might well have adverse effects for large segments of the population, unless a conscious effort be made to counter these effects. 4. Several factors have been cited as causes for the unsatisfactory output performance -- declining relative farm prices during the 1960s, a number of years with unfavorable weather conditions, and the like. There are indications that stagnation must currently be seen largely as a by- product, probably an inevitable by-product, of the drastic and in many ways exemplary land reform program that has been going on since 1968. It should be stressed, though, that, so far, the impact on output performance has not been as great as could be feared - few countries have carried out a reform program of similar proportions, and in the ones that have, the short term effects on output was much more serious (Chile, Tunisia, Mexico, and Eastern Europe). Drops in output have reportedly occurred on the medium-sized farms in parts of the Coast, not, or not yet, subject to transfer of ownership. The obvious reason is uncertainty about the future; another is that, in order to speed up the process, Government efforts in the sector had to be concentrated on land reform. Output on the holdings that have already been subject to land reform has reportedly remained stable, while output of the sugar estates exceeded one million tons in 1974, thereby surpassing the 1966 record. Employment and Resource Base 5. About half of the population makes a living or at least subsists in the farm sector (Annex 1). It is estimated that the total labor force will continue to grow by at least 3% p.a., and the agricultural labor force by about half that rate. This means that, each year, some 30,000 new people will be looking to the farm sector for their source of income. Without over- estimating the capacity of coastal agriculture to absorb its "own" people, the problem concerns principally the Sierra population. In the Altiplano, where the resource base is particularly small the situation has been serious for a long time and has now assumed dramatic proportions, with high infant mortality and low life expectancy. The situation in other parts of the Sierra (Cajamarca, the Central Sierra and the Cuzco region) is less desperate, but still considerably worse than in the Coast or in the agricultural areas of the Selva. Today's Sierra population is about 6 million (somewhat less than half the country's total population), about one million of which are in the Altiplano, one million in Cajamarca, and one million in the Cuzco area (see Map IBRD 10841). About a quarter depend on mining and services and the remainder on the land.  - 3 - 6. Just how scarce the agricultural resources are and how low the average farm income is as compared with that of the farm population else- where in the country can only be approximated. One indication is the ratio between rural population and cultivated land. 1/ In the major Sierra depart- ments (Puno, Cuzco, and Cajamarca), the figure is as high as 400 to 500 per- sons per km2 (0.2 ha per person). In comparison, most coastal areas have a ratio of between 100 and 200 persons per km2 (0.5 to 1.0 ha per person). In addition, water availability, climate and soil conditions permit cultivated land in the Coast to produce at least twice as much as such land in the Sierra. Another indication is average gross value of farm output per rural person. 2/ In the Coast, this is in the order of SI. 15,000 (US$400), but in the Sierra, it is not more than a quarter of that amount. Data on income distribution within each area are not available 3/ but the impression is that poverty is rather evenly spread in the Sierra, with below-average levels in the Altiplano and parts of the Cuzco area and somewhat better incomes in the Central Sierra. The spread in coastal farm incomes-is larger, with those of small individual holdings in the South possibly half those of the worker-owned production cooperatives in the North. 7. The scope for non-farm employment in the Sierra appears so far quite limited 4/ so that the prospects for income improvement depend largely on the resource base for agriculture, especially in the Sierra itself, but, in theory, elsewhere in the country as well. From the discussion in Annex 2, it will be clear that the mission does not share the optimism of some observers who have discerned a large untapped potential of idle land. Admittedly, with only 2% of the country's territory used for crop production, and an additional 12% for extensive pastures, most of the land is unused. Unfortunately, it is also mostly unusable. In addition, surface communications between and within the three regions are constrained by topographic and seismic conditions (Map IBRD 10838). There are, however, some possibilities of expanding the agricultural frontier, along the Coast (particularly rehabilitation of 150,000 to 200,000 ha of irrigable land, and possibly some expansion of irrigation areas beyond those now under construction) and in the Selva; there 1/ Cultivated land is a more relevant yardstick than total farmland, which includes fallow land and large areas of marginal grazing areas. 2/ Data on the more relevant concept of net output per agricultural person are not available. 3/ Efforts to estimate income distribution on the basis of farm size distri- bution are particularly meaningless in the case of Peru, even within ecological zones, because many farm units support more than one family, sometimes as many as several hundred. Also, many of the small coastal farmers derive a substantial part of their income from off-farm activities. 4/ The Government is presently making efforts to find alternative sources of employment. Although the mission agrees that these efforts should be pursued, it is still too early to assess the quantitative impact these measures may have.  - 4 - is also considerable scope for increasing output through more intensive use of existing cropland in the Coast and some in both crop 1/ and grazing land in the Sierra. Although this offers some chance for improvement, it is not likely that the country's unused agricultural potential can reduce Sierra underemployment and poverty to acceptable levels even if the population growth rate remains at past levels (since 1940 only 1.1% p.a. 2/). This rate, in- cidentally, has been low because of high mortality and massive migration to the coastal towns. The 1968 Revolution 8. Creating the "new Peruvian" and promoting a society that is neither capitalist nor communist were among the aims of the 1968 revolution that brought the present Government to power. 3/ In matters of agricultural policy, this was reflected in a series of measures to remedy what were then perceived to be the major problems of the rural sector -- inequitable distribution of land ownership; economic and political isolation of the rural masses; and unsatisfactory marketing arrangements leading to rising food prices, but stag- nating farm incomes. (a) Comprehensive agrarian reform legislation was drawn up (i) to break the power of the large and middle-size landowners (national and foreign alike) by converting the properties into cooperative-owned and operated holdings, and (ii) to improve the situation of the minifundistas. So far, implementation has dealt principally with the first of these aims. The target for end 1975 ,is 12,000 farms totaling 10 million ha to be allocated to 350,000 families. 4/ Between mid-1969 and mid-1974, 6,000 farms, amounting to a total of 5.8 million ha, were expropriated (i.e., seven times as much land as was taken over during the preceding five years under previous legislation), 4.6 million ha of which were allocated to 190,000 families. 5/ 1/ It should be noted, however, that part of the cropland in the Sierra is of such a marginal quality that it is classified in soil capability studies as suitable only for grazing. 2/ The national annual growth rate over that period was 2.2% (currently about 3%); that of the non-Sierra part of the country, 3.2%; and that of the Lima area, nearly 5%. 3/ The complete definition of the ideological base of the Peruvian Revolution was published in all newspapers on February 26, 1975. 4/ The total number of farm families in the country can be estimated at about one million. 5/ In official accounts of the number of beneficiaries, the authorities include a further 50,000 farmers who have received exemption certificates.  - 5 - (b) The political base of the country has traditionally been concentrated in the coastal cities, and, to some extent, in the workers in the large plantations. Down on the scale remained the 6 million Indians of the Sierra. Although the present regime has also to reckon mainly with the coastal popula- tion (including the workers of former estates that have now been transformed into worker-owned production cooperatives), a considerable effort is being made, particularly through the National System of Support for Social Mobilization (SINAMOS), to mobilize the Indian masses into greater aspirations as to their political and economic status. (c) The desire to assure a regular and cheap supply of food for the urban consumer led to placing strict price regulations on half a dozen basic commo- dities, fixing of trade margins, Government agencies entering distribution (and, lately, production and processing) activities, and imposing several measures regulating the movement of produce. At the same time, recent legislation affecting the industrial sector aims at a gradual transfer of industry owner- shlip to the workers. 9. Although the Government has on several occasions shown a considerable degree of pragmatism, most of the measures taken are quite basic to its eco- nomic and social philosophy. It must therefore be expected that the program of property transfer will continue until at least the end of 1975, the announced target for completion of this phase; that there will be a continued preference for associative rather than individual ownership; that the concern with the underprivileged categories of the rural population will be expressed in concrete steps to improve their welfare; and that there will continue to be a considerable degree of Government intervention in the marketing process. B. Objectives 10. It is against the above-sketched background that the basic objectives for the agricultural sector must be seen: (a) provide a regular and relatively cheap supply of agricultural commodities, without massive recourse to imports; and (b) raise the living standards of the most underprivileged of the rural population. What remains open for discussion is the emphasis each of these objectives should receive and the most appropriate ways to pursue them (Section C). The first point is particularly relevant because of possible trade-off effects between interests of producers and consumers, or between the Sierra and Coastal populations. Within a given availability of administrative and financial re- sources, it would be reasonable to assume that development activities (e.g., input supply, pasture improvement) in favor of the people of the depressed areas of the Sierra would not yield the same returns in terms of output growth  -6- as would the same effort in some other parts of the sector (e.g., rehabilita- tion of saline irrigable land in the Coast). W4hile an all-out administrative and financial effort only on the Sierra could effectively alleviate hardship among the most underprivileged of the rural population and reduce the income gap between them and other categories of farms, it could lead to deficiencies in domestic food supply, from which the rapidly growing class of urban poor would suffer the most. 11. While it can thus be argued that, in general, increased emphasis on one objective would be at the expense of the other, it should also be recog- nized that there are balancing effects -- the investment needs in the Coast arise to some extent because little has been done so far in the Sierra. A case in point is the construction of new high cOst irrigation infrastructure, e.g., near Arequipa, which is mainly justified by its promoters as a contri- bution to alleviate the minifundia.problem around that city, but which, in turn, has been aggravated by migration from the Altiplano. A similar case con- cerns the effort in public housing in the coastal cities. Thus, the argument is that the pressure for public investments on the Coast could be reduced by doing more in the Sierra. 12. Price policies might give rise to trade-offs between the interests of consumers and producers. It should be pointed out, however, that half of all consumers are also producers, most of them subsistence producers in the Sierra. Price policy would therefore mainly affect the urban population and commercial producers. 1/ Many of the former are poor and rely heavily on a cheap supply of basic foodstuffs. On the other hand, although the terms of trade for commercial farmers have deteriorated until recently, factors such as security of tenure (in the Coast) and availability of inputs (in the Sierra) would be equally powerful or more effective production incentives than prices. Obviously, subsistence farmers, whose nutritional standards are among the lowest on the scale, would not be served at all by generally higher farm prices; on the contrary, until they reach the commercial stage, they would benefit from other measures to raise the productivity of their land. 13. In view of the above considerations, the desirability of slowing down migration to the coastal towns, and the fact that the living standard in most of the Sierra is so much below that of the Coast and even Selva, there is a case for giving equal attention to the two objectives, rather than continue to put almost exclusive emphasis on the first. Furthermore, adequate growth in domestic food supply, at least in the Coast, can, to a large extent, be accomplished by measures other than public investment (such as security of 1/ The bulk of marketed foodstuffs is produced in the Coast and some in the Selva. The Sierra accounts, however, for most of potato, wheat, and lamb production. Of these three, only potatoes are a staple food for the urban poor, while wheat and lamb are mainly consumed by the urban middle class.  tenure, availability of credit and inputs, improved marketing arrangements), while measures to alleviate the Sierra problems depend heavily on a capital inflow into the region. 1/ 14. There remains then the question of whether the Sierra can absorb a major administrative and financial effort. In other words, is there really a lot one can do to promote a sustained and substantial rise in living stan- dards in the Sierra? A frequently encountered opinion has been that any effort is wasted because of the magnitude of the problem, the extremely harsh natural conditions, and the apathy of the population. The obvious rejoinder is that one does not know if one does not try. Also, there do exist indications that the land can produce (para 23) more and that the people have shown interest in improving their lot, as witnessed by the numerous demands for Government assistance in small irrigation works. 15. On the basis of available technology, a concentrated effort in the Sierra can increase agricultural productivity and hence living standards. But, unless technological breakthroughs are made and put to use, there is no agricultural solution that would bring, on a sustained basis, the average living standards in the Sierra up to an acceptable level (say, the level now reached by the beneficiaries of the land reform in the Coast); further, there do not seem to be sufficient obvious non-agricultural employment opportunities in the Sierra, with the exception of road construction and minor expansion in mining (cf footnote of para 7). Consequently, there is great risk that any gain will last only until population growth catches up on it. The mission would therefore like to make a plea for a rapid and massive program of infor- mation about birth control to accompany any other efforts to improve living standards, lest the latter have only a temporary effect. It is recognized, however, that the Government rejects any type of demographic control, because it considers underdevelopment not the result of rapid population growth, but of inadequate social, political and economic structures. 16. In addition to the two objectives mentioned above, there appears to be one that will directly affect agricultural development in one of the three regions. Integrating the Selva with the rest of the country is a major objec- tive, as it was under the previous Government. The current boom in oil ex- plorations, the sudden urgency of developing the oil resources and the fact that Brazil has now completed the Transamazonian highway all the way up to the Peruvian border has turned the Selva into a politically strategic region. This change is likely to be accompanied by better communications with the rest of the country and thus improve the prospects for developing the agri- cultural possibilities that hitherto were constrained by the isolation of the region. 1/ The fact that the mission assigns priority to investment in irrigation rehabilitation in the Coast seems to contradict this statement. However, the economics of this activity appear to be so attractive that it is, in the mission's opinion, clearly justified, despite the fact that the direct beneficiaries do not belong to the lowest income category of the rural population.  -8- C. Recommendations 17. In the following parts of this chapter, a number of policy sugges- tions and proposals for pre-investment work and projects have been formulated that would help to attain the goals outlined above. It is in the very nature of recommendations to imply criticism. However, it should be stressed that the mission, in making its suggestions, has very much kept in mind -- and the reader is invited to do likewise -- the important strides forward in the last few years in various fields of public policy, including the increasingly prominent place development of the rural sector occupies in the actions of the Government. Resource Development 18. General. Studies of natural resources (land, water, and climate) that are important for agriculture have so far mainly been concentrated on the Coast. The National Office of Evaluation of Natural Resources (ONERN) has completed an inventory of coastal soils and surface water, although a number of regional studies have also been made for other areas. The same applies to the Directorate General of Water Resources, who has only recently started to have a limited interest in water availability and exploitation in the Sierra. Other institutions who are involved in determining what the country's resources are have also tended to concentrate in the Coast. Foreign assistance efforts have been less unbalanced, regionally speaking. It is suggested that future work programs be brought in line with the major objectives for the rural sec- tor; specifically, that more emphasis be given to the study of the resource base of the Sierra and the Selva and ways to develop it. 19. Despite attempts to avoid overlap and duplication in determining the country's agricultural potentials, present coordination leaves much to be desired, and there are many instances where one institution embarks on acti- vities that fall under the responsibilities of another. Examples are ONERN's activities in project preparation, which in the case of agriculture should fall within the General Office of Engineering and Projects (OGIP), 1/ or re- search activity by the D.G. of Agricultural Production, undertaken because of impatience with the D.G. of Research. It is suggested that ONERN, which is officially responsible for studies of all natural resources and is the insti- tution best equipped to carry them out, should be solely in charge of basic resource studies. Its work program should be established by The National Planning Institute (INP) on the basis of requests by the various ministries that have a stake in ONERN's work. Each ministry should list its requests in order of declining priority; in the case of the Ministry of Agriculture, the Agricultural Sector Planning Office (OSPA) should centralize the requests from the various parts of the Ministry and decide on priorities. On the basis of ONERN's work, more detailed studies could then be undertaken, as the case and the necessity may be, by the D.G. of Research or D.G. of Water Re- sources. 1/ In some instances, ONERN engages in project preparation because there is as yet no organization set up to prepare multi-sectoral projects.  - 9 - 20. OGIP should concentrate on the project preparation aspects of the follow-up, and pay close attention to economic matters as well as to engineer- ing. It should become the sole institution in charge of preparation of agri- cultural projects, not necessarily with its own permanent staff, but by super- vising work contracted out to private engineering firms. Its work program should correspond with the priorities set by OSPA. 21. Once it has become clearer what the agricultural resource base looks like, research has an obviously crucial role to play in developing its use. Again, the accent has been mainly the Coast, so far. Also, the effort has been small and scattered over several institutions. And, most importantly, research activities concern virtually only purely technical aspects and neglect agro-economic considerations. In other words, efforts are concentrated on maximizing the yield of a given crop, but not on maximizing the returns from the scarcest factor, a hectare of land, or a cubic meter of water. This is a common situation, in developing and developed countries alike, and individual farmers normally decide for themselves, by trial and error, how to optimize their returns, taking into account such things as market prices, risks, and labor availability. In the present situation in Peru, however, many prices and decisions on land use are not determined by market forces, but by the Government. This makes proper agro-economic research all the more essential. Systematic agro-economic research, if accompanied by measures for effective implementation of its results, could have a significant impact on output and farm incomes. It is also recommmended that the research effort be expanded and concentrated in one institution, the D.G. of Research, and that more attention be given to problems typical of the Sierra. Considering the inadequacy of the present situation and the potential gains, an agricultural research project that would include these features is proposed for external finance, 22. The Sierra. Although only limited information exists on the possi- bilities of developing production in the Sierra, there is a strong impression that there are no large tracts of idle land that can be brought into production, and there is not much chance of converting 'Land now under extensive grazing into crop land. However, the magnitude of the problems facing the Sierra population makes it imperative that use be made of whatever possibilities exist, even if such use will only partially and temporarily solve the problem at hand and be costly compared to development of possibilities in other regions. 23. While awaiting studies that may produce major breakthroughs on how to overcome the natural constraints of Sierra agriculture, the obvious route would be to take some specific steps to intensify production. Rather than approaching the problem with a comprehensive, but necessarily thinly spread, prograrn that would introduce improved seeds and breeds and improved cultiva- tion practices and make attempts to raise the fertility of all soils, it would seem preferable to concentrate on programs in two or three regions (Altiplano, Cajamarca, and Cuzco). Such programs should consist of only a few activities in which there is already some promising experience available, such as (a) use of fertilizer and improved seed in potato production, (b) introduction of a system of pasture management in the higher elevations, (c) construction of  - 10 - small irrigation works, and (d) marketing arrangements. In the case of the Altiplano, one could also consider expanding the cultivation of rape seed, provided the ongoing experiments prove this to be a viable cash crop, and improving both the production and marketing of guinua, a protein-rich native cereal crop. 24. It is suggested that a start be made to design a project for one or two well-defined parts of the Altiplano that would consist of only the above- mentioned directly productive components, be designed and implemented with active participation of the beneficiaries, and be carried out at a cost per family that permits the project to reach tens of thousands rather than hundreds of families. 1/ Other features that the project should include are as follows: (a) Central production units of the Agricultural Societies of Social Interest (SAIS) should be used as a channel for the supply of fertilizer and related credit to its member communities and as a collection center for mar- ketable surpluses of potatoes. They should also organize the necessary ex- tension work (assisted by the ongoing FAO fertilizer demonstration program). (b) Plans for improved pasture management should be commissioned to the regional research center in Puno, in consultation with the beneficiaries (central production units of the SAISes, and member communities); the execu- tion of necessary investments (fencing, water points) should be entrusted to the beneficiaries or local contractors. (c) In much the same way, the Directorate General of Water Resources should help in determining where irrigation works would be useful, draw up the plans, and supervise the execution. For this purpose, it should detach some technicians to the relevant "Oficina Agraria." (d) The entire program should be under the responsibility of the Agrarian Zone of Puno, possibly a specially created unit therein. 25. In order to keep problems of execution and coordination to a mini- mum, it is suggested that institutions not, or not directly, responsible to the Ministry of Agriculture (like Banco de Fomento Agropecuario, SINAMOS, other ministries) be involved only in an advisory capacity. And also, acti- vities that are not directly productive (social infrastructure), desirable as they may be, should be excluded from a first project. On the other hand, it is not suggested that a special project authority would be set up, as this 1/ The approach proposed here would be quite unlike that of the 1970 FAO/ IDB proposal for four small "Integrated Regional Development Projects" (Proyectos Integrados de Desarrollo (PID), a notion introduced in the agrarian reform legislation), two of which would be in the Sierra. The mission's objections to that proposal are that: it involves numerous as- pects, agricultural and non-agricultural. This "integrated" approach would not only complicate implementation but would also render local participation problematic. Secondly, the envisaged cost per family (US$2,000 per family) precludes'the possibility of reaching a sizeable portion of the target population.  - 11 - would run counter to the desirability to strengthen the new regional structure of the Ministry of Agriculture. As soon as sufficient experience is gained, projects can be designed that include other activities and institutions and reach people outside the SAIS framework. 26. The projects as envisaged by the mission would show similarities with a recent IBRD project in Ethiopia, the "Minimum Package Project" insofar as it concentrates on a few activities and aims at numerous beneficiaries. A project of this type in Peru would have advantages over the Ethiopian one in that there is no problem with land tenure security, a vehicle (the SAISes) already exists to help in carrying out the project, and the beneficiaries are already grouped in well-established communities. It is suggested that the experience gained in the Ethiopian project be used in preparing the first project of this type in Peru. Also, inform.ation should be drawn from the project recently prepared by the FAO/IBRD Cooperative Program for the Bolivian Altiplano because the technical aspects of that project are obviously quite relevant for the Peruvian Altiplano. Once a first project is underway, steps should be taken to prepare follow-up projects of the same type for the Altiplano. 27. For Cajamarca, the emphasis would be on afforestation, in combination with improved livestock and crop production. It mid-1974, project preparation was about to start and could have advanced quickly thanks to the experience gained by the Belgian and British technical assistance teams there and a pre- feasibility study prepared by UNA la Molina and the D.G. of Forestry. 28. In the Cuzco area, a first project should preferably include the Production Cooperative "Anta," which is the largest in the area and consists oF a Lumnber of for-mer liv-estock haciendas in the Anta valley and a dozen or '30 comunlidades on the surrounding slones. Recently, the CAP "Anta" has been plagued by a number of internal conflicts, probably because too many coimunities were '-gratted' on too small a production unit (the furmer haciendas in the va-113,