Peru - Agricultural policies for economic efficiency

M' ILRJF I (-'Ht- C(PY fRorP-u? r t '1e .: :I;5 I F- T v r1)u % C Report No. 10605-PE 1 It I e: (.tkI1-t I. 1(R-'I PICI RN I C I [ I 1 'LINt Aut hcr- 11 HtHN I, M Peru FE t .: 'uk 22 Io; T1u): ' l PPe t .: t. Agricultural Policies for Economic Efficiency September 11, 1992 Environment and Agriculture Division Country Department I Latin America and the Caribbean Region FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit prior to 1985 Sol (S/.) 1985-1990 Inti (1/.) = S/1,000 1991-present New Sol (S/.)=I/1,000,000 Fiscal Year January 1 to December 31 Exchange Rates US$1.00 equivalent (period average) Ofricial Parallel Market 1986 1/13.9 I/17.8 1987 1/16.8 1/40.2 1988 1/128.8 I/314.8 1989 1/2,666.2 1/4,394.9 1990 1/187,885.6 1/206,441.1 1991* Jan-Dec. S/0.76 October S/0.92 November S/1.02 December S/1.00 1992 January S/0.99 February S/0.97 March S/0.96 April S/1.01 May S/1.12 June S/1.17 * From August 1990, the exchange rate was unified.  FOR OMCFFCA USE ONLY GLOSSARY OF ACRONYM AACH Autoridad Aut6noma de la Cuenca Hidrogrifica Autonomous Hydrographical Basin Author!ty ATr Agricultural Technology Transformation Project BAP Banco Agrario del Pead Agrarian Bank of Peru BFN Banco de Fomento Nacional Bank for National Development BN Banco de la Nacidon National Bank BNF Banco Nadonal de Fomento Natdonal Bank for Development CAPs Cooperativas Agrarias de Produccion Agriculw'ral Production Cooperaives CCA Comisidn Consuidva Agraria Consultative Agricultural Board CIAT Centro Internadonal de Agricultura Tropical International Center for Tropical Agriculture CID Centro Internacional de Investigacldn y International Development Research Center Desarrollo CIP Centro Internmaional de la Papa International Potato Center COCOA Comite pars la Coordinacidn de la Agricultura Agricultural Coordination Committee COFIDE Corporacfon Nacional de Desarrollo National Development Corporation CORAH Proyecto de Reduccidn y Control de Ia Coca en Project for the Reduction and Control of Coca in el Alto Huallaga the Upper Huallaga CNC Consejo Nacional de Concuerdos Agrtcolas National Council for Agricultural Agreements DL Decreto Legisladvo Legislative Decree DS Decreto Supremo Supreme Decree ECASA Empresa Comercializadora de Alimentos Food Marketing Enterprise Socdedad Anonima ENCI Empress Nacdonal de ComerclaHizacidn de Inputs Marketing Enterprise Insumos EPSA Empresa Pdbilca de Servidos Agropecuarios Public Enterprise for Agricultural Services FAO/CP Food and Agriculture Organization/Cooperadve Program FONCODES Fondo Nacional de Compensaci6n y Desarroflo National Soclal Compensation and Development Fund FONDEAGRO Fondo pars el Desarrollo del Agro Agricultural Development Fund FRASA Fondo de Reactivadcn Agraria y de Seguridad Fund for the Reactivation of Agriculture and Food Alimentaria Security FUNDEAGRO Fundacion para el DesarroUo dei Agro Foundation for Agricultural Development GAPA Grupo de AnaUlsis de Politica Agraria Agricultural Policy Analysis Group GDP Gross Domestic Product 1DB Inter-American Development Bank IDEA Instituto de Desarrollo Alternstivo Alternative Development Institute MF International Monetary Fund INADE Instituto Nacdonal de Desarrollo National Institute for Development INEI Instituto Nacional de Estadfstica e Informitica National Institute of Statistics and Inormation INIA Instituto Nacdonal de Investigadcn Agraria National Institute of Agricultural Research INIAA Instituto Nadonal de Investlgacl6n Agrfcols y National Institute of Agricultural and Agroindustrial Agroindustrial Research INIPA Instltuto Nacdonal de Investigaddn y Promodin National Institute of Agricultural Research and Agraria Promotion INP Instituto Naonal de Planficacl6n National Planning Institute MRTA Movinmento Revolucdonarlo Tupac Amaru Tupac Amaru Revolutionary Movement NGOs Non-Government Organizations ONA Organizacin Nadional Agraria National Aguisn Organization ONAA Oticdna Nadonal de Apoyo Alimentario National Office for Food Assistance OPA Oficina de Planificadon Agraria Agricultural Planning Office I BC Pasta B$ica de Cocatna Basic Cocaine Paste PBL Pasta Basica Lavada Washed Basic Paste PEAH Proyecto Especial Alto Hlualiags Upper Huallaga Special Project PRONADRET Programs Nasional de Drenaje y Tierras National Program for Drainage and Soils QR Quantitative Restriction SAIS Sociedades Agrfcolas de Interds SocialAgricultural Societies of Social Interest SCIPA Servicio Cooperativo Interamericano de Interamerican Cooperative Service for the Produccitn de Aiimentos Production of Food UMOPAR Unidad Movii de Patrulliae Rural Mobile Unit for Rural Patrolling USAID United States Agency for International Development This document has a restricted distribution and may be used by recipients only in the performance of their omcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  ABSTRACT When President Alberto Fujimori was elected in July 1990, Peru was ia the throes of hyperinflation and depression, with terrorism and illegal coca productior- rife. Per capita incomes had fallen by 25 percent since 1987 and poverty was widespread. Recognizing that macroeconomic stability was a prerequisite for stimulating growth, the Government implemented a strong stabilization program and a structural reform program aimed at controlling inflation and imnproving economic efficiency. The stabilization program succeeded in eliminating hyperinflation and far-reaching reforms in trade, privatization, agriculture, the financial sector, and labor markets have improved economic efficiency and prospects for economic growth. This report's analytic description of agriculturel policies since 1969 suggests that the Fujimori Government's growth-oriented strategy focusing on stabilization and structural reform is generally well- conceived. These reforms now need to be complemented by targeted poverty alleviation programs. In addition, further reforms are needed in some key areas. This report's main objective is to support the Government's adjustment efforts uy recommending additional agricultural policies to improve economic efficiency. These recommendations, which are summarized below, are expected to result in broad-based income and employment growth, which is the key to sustainable poverty alleviation. In agricultural pricing and trade, the analysis suggests that while variable import surcharges are an improvement over price supports, the current system needs to be replaced with a more effective scheme that is better tailored to the Government's objectives. In marketing, the priorities are improving the road network and privatizing ENCI. The significant reforms in the land market need to be extended to traditional communities and restrictions on minimum land holdings eliminated. The new property register merits support and should be extended to allow registry of goods and equipment. In rural finance, although the public Agrarian Bank (BAP) was needed to be shut down, this action has left many rural inhabitants unable to make deposits or obtain loans from the formal sector. Instead of creating another first- tier public institution, private institutions should be encouraged to meet rural banking needs by (a) selling or leasing them branches of BAP, and (b) providing them with temporary trensactions cost subsidies as well as technical assistance and training. At the same time, the supervision and zegulation of rural financial institutions should be improved and COFIDE and BFN should be merged into a sLngle institution limited to second-tier lending. Marginal farmers should be given assistance through targeted poverty alleviation programs rather than through credit. In Irrigation, the Government should agree to finance the rehabilitation, complLwion or construction of only those projects where beneficiaries demonstrate willingness and ability to repay incremental costs of the project in addition to all 0 & M costs. It should also assist water user groups to plan and evaluate projects and consider mechanisms to transfer ownership of irrigation infrastructure to them. Efforts should also be initiated to establish a market for water rights and privatize the large irrigation schemes. To cope with the deteriorated research and extension system, INIAA's staff and research facilities should be transferred to private foundations and to an autonomous agency, which would receive budgetary funds to carry out activities that are socially, but not privately profitable. An agricultural research council should be established within the Government to decide which activities to fund and to participate in the boards of directors of private foundations. To control coca production, which is found to have high economic costs, international interdiction efforts should be enhanced and complemented by measures to increase the profitability of alternate crops. In the medium term, this should be done by international assistance to rehabilitate or construct roads, to implement a land tidtling program, and to promote institutional development; in the short term, transportation or credit subsidies may need to be provided. Finally, a program to control domesdc drug consumption is needed. * , , , , 1 | t I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~II  PERU AGRIC'LTURAL POLICIES FOR ECONOMIC EFFICIENCY TABLE OF CONTENTS Page EXECUTIE SUMMARY ...................................... i SUMMARY OF AGRICULTURAL REFORMS ......... .............. xiii INTRODUCTION ........................................... 1 I STRUCTURE AND CONSTRAINTS ......... ...................... 3 A. Agricultural Resource Base .................................... 3 B. Land Use and Distribution .................................... 5 C. Constraints on Agricultural Development ........... ................ 7 Rural Violence ..................................... 7 Coca production ..................................... 8 D. Production Structure and Trends . ............................... 10 E. Public Agricultural Institutions . ............................... 12 H ECONOMIC POLICIES AND AGRICULTURAL PERFORMANCE (1968-1990) .................................. 13 A. Redistribution and State Control (1968-1978) ......... .............. 13 B. Market Liberalization Efforts (1978-1985) .......... ............... 16 C. State Control and Subsidies (1985-1990) . .......................... 19 in POLICY REFORMS OF THE FUJIMORI GOVERNMENT . . 24 A. Introduction .24 B. Macroeconomic and Trade Policies .24 C. Pricing and Marketing Policies .26 Price Policy: Sobretasas .27 Marketing Reforms .30 D. Land Tenure Policies ............................. ........ 31 The Situation Inherited .31 Recent Reforms .32 This -raprt was wiuen by Matcon Thobaxu (Saeior EBonomiat) bsed on t