Argentina : country case study of agricultural prices and subsidies

Argentina: Country Case Study of Agricultural Prices and Subsidies SWP386 World Bank Staff Working Paper No. 386 April 1980 Prepared by: Lucio G. Reca (Consultant) Agriculture and Rural Development Department Copyright X 1980 The World Bank 1818 H Street, N.W. Washington, D.C 20433, U.S.A. The views and interpretations in this document are those of the authors and should not be attributed to the World Bank, to its BI>r " rg5 affiliated organizations, or to any individual acting in their behalf.  I  The views and interpretations in this document are those of the authors and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting on their behalf. WORLD BANK Staff Working Paper No. 386 April 1980 ARGENTINA: COUNTRY CASE STUDY OF AGRICULTURAL PRICES, TAXES AND SUBSIDIES This study examines pricing policy in Argentina from 1950-1975 for seven major agricultural products. Based on estimates of coefficients of nominal and effective protection, price and tax discrimination against producers appears to have declined between the 1950's and the 1960's. This was probably a contributing factor to the improved growth perforcmance of Argentine agrL- culture in the 1960's, as compared with the previous decade. Estimates of domestic resource costs for grains suggest that, while Argentina has a comparative advantage in grain production, this advantage deteriorated for wheat in 1960-74, but improved in the cases of corn and grain sorghum as a result of recent productivity gains for these two crops. The high taxation to which the grains were subjected during these years implied a massive redistribution of incomes from producers largely to consumers and the Govermnent, with consumers collecting about half of the income transfer and Government one-third. Argentina's comparative advantage as defined by various estimates of domestic resource costs appears clear-cut in the case of wool but less certain for cattle and cotton. Prepared by: Lucio G. Reca (Consultant) Agriculture and Rural Development Department Copyright Cc 1980 The World Bank 1818 H Street, N.W. Washington, D. C. 20433 U.S.A. 4,oS sip ,IVS+x .;,>p(2O eSC-   ARGENTINA: COUNTRY CASE STUDY OF AGRICULTURAL PRICES, TAXES AND SUBSIDIES TABLE OF CONTENTS Page No. PREFACE I. INTRODUCTION .................................................... I II. THE AGRICULTURAL SECTOR . .......................... . 2 A. The Performance of Agriculture (1950-1975) ..... 2 B. Regional Differences ...... ......... ............. 5 C. Factor Shares in Argentine Agriculture ......... 6 D. Land Tenure ................... . ...... .......... 7 III. PRICE AND TAX POLICY ..................... . . 10 A. Producer and Consumer Price Control ............ 10 B. Customs Duties and Quotas .................... . 11 C. Differential Exchange Rates .................... 11 D. Credit Rationing and Interest Rates ............ 12 E. Wages and Wage Control ........................ 12 F. Rent Control ................................................... 13 G. Agricultural Taxation ..................... ..... 14 IV. MEASUREMENT OF INCENTIVE AND RESOURCE COST COEFFICIENTS ................ . .. .. ........ . 16 A. Definition of Terms .......................... . 16 B. Coverage of Seven Major Commodities ............. 19 C The Effective Subsidy Coefficient ............... 37 V. SOCIOECONOMIC IMPLICATIONS ......... . ................. 41 A. Welfare Changes Associated with Grain Policy .... 41 B. Social Costs of F ertilizerPolicy ............... 44 C. Income Distribution Effects ..................... 45 VI. SU-uMMARY ............................................... 48 ANNEX I: Accounting Prices ..... ......................... 52 ANNEX II: Methodology ..... 56 ANNEX III: Prices and Output Response in Argentine Agriculture, 1950-1974 ....................... . 63   PREFACE This paper is one of a number of companion papers (see below), which report on the results of a research project -- Country Case Studies of Administered Agricultural Prices, Taxes and Subsidies, RPO 671-';2 -- which commenced in the second half of 1976. The research, which included some desk studies besides the eight country case studies (Argentina, Egypt, Kenya, Mexico, Pakistan, Portugal, Thailand and Yugoslavia), was oriented towards eventually providing operational guidelines for country economic, agricultural sector and project planning work. Two of the country case studies involved the use of formal agricultural sector models (Mexico and Portugal), while the other six involved the use of a number of informal methodologies. An overview and integrated summary of the results of the six country case studies and the complementary desk studies given in: "Agricultural Prices, Taxes and Subsidies: a Review of Experience", a Staff Working Paper (forthcoming), prepared by Gilbert Brown and Graham Donaldson. The informal methodologies are described, reviewed and evaluated in: "Methodologies for Measuring Agricultural Price Intervention Effects", a Staff Working Paper (forthcoming), prepared by Pasquale Scandizzo and Colin Bruce. These other country case studies, in addition to the present one, are considered of significant individual merit and have also been published. These are: "Thailand - Case Study of Agricultural Input and Output Pricing", Staff Working Paper No. 385, prepared by Trent Bertrand (Consultant). "Prices, Taxes and Subsidies in Pakistan Agriculture, 1960-1976", Staff Working Paper No. 387, prepared by Gilbert Brown and Carl Gotsch (Consultant). "Agricultural Price Management in Egypt", Staff Working Paper No. 388, prepared by William Cuddihy.   I. INTRODUCTION 1.01 Argentine agriculture is usually regarded as formed by two different components: the "Pampas" - where the main comparative advantage seems to lie - and the "rest of the country", an aggregate of areas highly specialized in producing one particular commodity (cotton, sugarcane, grapes, wool, etc.). This study deals in depth with seven major commodities - wheat, corn, grain sorghum, beef cattle, cotton, wool and rice - all of which have been chosen for their national or regional importance. It attempts to explore the comparative advantage of these seven commodities in various ecological areas of the country as well as the price-related incentives (disincentives) granted for their production through time. 1.02 The analysis goes back to either 1950 or 1960, according to the information available for grains, beef cattle and wool. For rice and cotton shorter series have been constructed. Given the frequent changes in policies directly affecting agriculture (e.g., wheat prices) or indirectly (e.g., a devaluation), it was considered desirable to work with historical series going back as far as possible. This perspective clearly shows that from 1950-1975 there were two distinct subperiods from the point of view of performance in agriculture. Up to about 1963/64, gains in productivity and increases in output were meager. However, after 1964 the picture became slightly more favorable. It seems appropriate then to compare policies with performance in the two subperiods. 1.03 In all cases calculations have been based on averages. This applies to yields as well as to the different inputs considered in each production process. The information is by no means homogeneous or equally abundant for the different activities covered in this study. The grain sector, in this respect, is in better shape than the critical beef production sector. 1.04 The estimation of nominal and effective protection coefficients and of domestic resource costs for the seven major commodities, presented in Section IV, constitutes the core of this study. But it would be very difficult to make any evaluation without an overall framework. Consequently, a general view of the agricultural sector in Argentina is presented in Section I and a summary of price and tax policy in Section II. Certain socioeconomic impli- cations of price intervention are discussed in Section V. 1.05 The derivation of accounting prices is discussed in Annex I, while Annex II supplements the methodological explanations provided in the main text. An effort is made in Annex III to determine the extent to which economic incentives influence the level of production in Argentina. The fact that producer prices are found to have a definite influence on production decisions adds to the significance of this study.  -2- II. THE AGRICULTURAL SECTOR A. The Performance of Agriculture (1950-1975) 2.01 As in most countries, the relative importance of agriculture in Argentina has been declining. In 1950/54, Argentine agriculture generated 18.7% of GNP (at factor cost) and employed 20% of the labor force. It contributed 92% of total exports in 1961/65. By 1970/71, these percentages had declined to 12.4% for GNP, 16% for employment and 85% for exports. 2.02 Between 1950 and 1975, agricultural production in Argentina grew at the annual rate of 2.3% (Table 1). The annual rate of growth of 2.9% in the 1950's is somewhat deceptive owing to an abnormally low starting base caused by severe crop failures in 1950 and 1952, which drove production down 15% from the already low values prevailing at that time. Real progress in agriculture began in the 1960s, with overall growth rates on the order of 2.4% Table 1 ARGENTINA: ANNUAL RATES OF GROWTH IN THE AGRICULTURAL SECTOR (selected periods, 3 year averages) 1973/75 1973/75 1966/68 1956/58 1950/52 1966/68 1956/58 1950/52 All Agriculture All country 2.3 2.4 1.9 2.9 Pampas 2.2 1.8 1.8 3.5 Non Pampas 2.4 3.8 2.2 1.2 Crops All country 3.3 3.4 2.5 4.4 Pampas 3.6 3.0 2.4 6.4 Non Pampas 2.9 4.0 2.6 2.2 Livestock All country 1.6 1.5 1.4 1.8 Pampas 1.6 1.1 1.4 2.3 Non Pampas 1.5 3.6 1.4 1.1 2.03 In the period covered here, the share of crops in total agricultural production grew at the expense of livestock. While crops accounted for only two-fifths of total agricultural production in the early 1950's, they represented one-half of this total by the early 1970's (Table 2). The increased share of crop was due to a number of factors, which included the introduction of improved  -3- Table 2 RELATIVE COMPOSITION OF AGRICULTURAL PRODUCTION Period 1950-59 1955-59 1960-64 1965-69 1970-74 All agriculture Crops 40.1 42.4 43.7 45.1 47.2 Livestock 59.9 57.6 56.3 54.9 52.8 Pampas Crops 30.2 32.4 33.8 35.3 37.6 Livestock 69.8 67.6 66.2 67.4 62.4 Non-Pampas Crops 65X2 69.4 69.6 71.9 71.3 Livestock 34.8 30.6 30.4 28.1 28.7 crop varieties and technologies, which increased the relative profitability of crops, and the considerable cyclical fluctuations in beef prices which discouraged development in this sector. Within crops, grains and oilseeds increased their proportion of production in the period under consideration at the expense of industrial crops (cotton, sugarcane, tobacco, wine grapes, etc.) The share of fruits and vegetables remained constant. The composition of livestock production showed some changes, but not enough to alter substantially the picture prevailing at the beginning of the 1950s. The share of beef production increased slightly, but remained close to two-thirds of all livestock production. Poultry production, which was almost negligible in the early 1950s, represented 4.5% of total livestock production by the early 1970s. On the other hand the relative importance of both milk and wool declined, with the share of wool decreasing from 9% to 6.5% of total output. 2.04 The area planted to crops grew at an average rate of 1.1% per year from 1950 to 1975. The expansion was stronger after the early 1960s, equalling approximately 1.4% per year and reflecting the modest but steady agricultural upswing that began in the early 1960s. 2.05 Agricultural productivity increased between 1950/54 and 1970/74. Average productivity coefficients in Argentine agriculture (Table 3) show the following relationships: (a) labor productivity increased more in the first decade under analysis than in the second; (b) land productivity increased at a substantially higher rate in the second decade than in the 1950s. Two-thirds of increases in production per unit of land in all the period took place in  -4- the period 1960/64 to 1970/74, mainly as a consequence of increases in grain yields; (c) the ratio between output and stock of tractors decreased at a substantially higher rate in the first decade as compared to the second; (d) the ratio between production and the stock of beef cattle grew steadily during the period analyzed; and (e) productivity relative to the stocks of buildings grew until the mid-1960s and, then declined. Table 3 INDICES OF INPUTS AND PARTIAL PRODUCTIVITY RATIOS IN ARGENTINE AGRICULTURE (1960-100) INPUTS Period Labor Land Tractors Cattle Numbers Constructions 1950-54 107.4 95.9 20.3 94.8 88.2 1955-59 107.1 99.8 63.2 102.9 96.2 1960-64 97.9 101.0 122.9 104.5 102.9 1965-69 102.1 104.9 166.4 114.7 106.9 1970-73 113.6 105.8 289.4 119.3 110.8 PRODUCTIVITY RATIOS Indices of Volume of All Agricultural Output Relative to Period Labor Land Tractors Cattle Numbers Buildings 1950-54 80.8 90.5 450.1 91.6 80.6 1955-59 90.4 97.8 173.9 95.2 90.4 1960-64 105.9 102.7 85.7 99.4 105.0 1965-69 114.5 111.2 70.5 102.3 114.5 1970-74 110.9 122.0 68.4 108.1 109.6 Sources and Notes: Labor input is total man days per year, source Banco Central de la Republica Argentina (BCRA). Land is measured by an index of productive services obtained adding up land indifferent uses (cattle breeding, fattening, grain crops and crops in non-Pampean areas) weighed by a measure of rent to each use. Tractors are measured in horse power and cattle in animal units at the beginning of the year. Stocks of buildings and constructions are estimated from series on annual investment (BCRA).  -5- 2.06 The substantial increases in labor productivity observed in the 1950s stemmed primarily from the substitution of capital (tractors especially) for labor accompanied by migration from rural to urban centers. The rate of growth of land productivity accelerated after 1960 due primarily to the introduction of better crop varieties in the case of certain crops and better pasture management and particularly the substitution of improved for natural pastures in the case of beef cattle. B. Regional Differences 2.07 Agricultural production in Argentina comes from several natural regions that differ in ecological characteristics, size and importance. The Pampas, which is the most productive agricultural region in the country, covers some 45 million hectares 'in the East-Central part of the country. Output from the Pampas has accounted for between two-thirds and three-fourths of total agricultural output from 1950 to 1974. This area receives sufficient rainfall to grow ce~reals, oil bearing crops and pastures. Rainf.al decreases from East to West, and the Western boundary of the Pampas is found at the rainfall line of 500 milimeters approximately. In general tbexre -is a remarkable degree of substitutability in production in the Pampas, so that producers can decide to grow one of several crops or use the land for pasture under different schemes. The degree of substitutability is not uniform throughout the region, however, as one would expect in such a large area. 2.08 The other agricultural regions of Argentina are: (a) the Northeast, specialized in cotton, citrus, rice, tobacco, tea and livestock; it produces between 7% and 9% of total agricultural production; (b) the Northwest, where sugarcane is the most important commodity, also produces tobacco, citrus and vegetables. It supplies 8%-9% of total production; (c) Cuyo, in the Central Western part of the country, is heavily specialized in grapes and fruit production, supplying 6% to 7% of total output; and finally, (d) the Patagonia, in the Southern half of the country where sheep raising is the dominant activity, contributes about 4% to 5% to total output. 2.09 Almost 90% of the total area planted to crops in 1950/54 and close to 86% of the total in 1970/74 was in the Pampas (Table 4). The rate of growth of crop production has traditionally been higher in the Pampas than elsewhere; however, beginning in the 1960s crop production started to grow at a higher rate outside the Pampas (Table 1). While the percentage of crop land in grains remained constant at about 88% between 1950 and 1974 in the Pampas, it grew from around 25% in 1950/54 to almost 50% in 1970/74 outside the Pampas (Table 4). Nonetheless, crop production from the Pampas supplies most of domestic consumption and all of the export market. 2.10 Beef production is more important in the Pampas than in the rest of the country (70% and 55% of total livestock production, respectively), but while the share of beef production has remained constant in the Pampas, in the rest of the country it has grown substantially. Milk production is far more important in the Pampas, while wool is more important outside the Pampas where it accounts for 20% to 25% of total livestock production.  -6- Table 4 AREA PLANTED TO CROPS IN ARGENTINA (five year averages, figures in million ha) Period 1950-54 1955/59 1960/64 1965/69 1970/74 All Crops Pampas 13.4 14.1 14.2 16.0 16.0 Non Pampas 1.5 1.8 2.1 2.3 2.6 Total 14.9 15.9 16.3 18.2 18.7 Grains and Linseed Pampas 11.7 12.4 12.6 14.2 14.0 Non Pampas .4 .5 .7 1.0 1.2 Total 12.1 12.9 13.3 15.2 15.2 Industrial Crops Pampas 1.4 1.5 1.4 1.5 1.8 Non Pampas 1.1 1.2 1.2 1.2 1.4 Total 2.5 2.7 2.6 2.7 3.2 Truck Crops Pampas .2 .2 .2 .2 .2 Non Pampas .1 .1 .1 .1 .1 Total .3 .3 .3 .3 .3 Sources: Secretary of Agriculture and Bolsa de Cereales. Note: Grains include wheat, corn, grain sorghum, barley, millet, rice, bird- seed, oats and linseed. Industrial crops include sunflower, sugarcane, grapes, cotton, peanuts, tobacco, tung, tea, yucca, olives and soybeans. Truck crops include potatoes, tomatoes, onions, sweet potatoes, green peas, garlic and peppers. C. Factor Shares in Argentine Agriculture 2.11 Estimates from an aggregate production function for the agricultural sector of Argentina (1950-74) 1/ yield, under the usual assumptions, the following contributions of inputs to total output: labor .24, land .38, buildings .07, livestock .12, machinery .06 and intermediate inputs .12. Constant returns to scale seem to prevail, while technical change has taken place at an approximate rate of 1% per year between 1960 and 1974. 1/ Reca L. and Verstraeten J. "La Formacion del Producto Agropecuario Argentino", Desarrollo Economico, Vol. 17 niumero 67, Buenos Aires, 1977.  -7- 2.12 It is of some interest to compare these results, derived from a Cobb-Douglas production function with those obtained by M. Ballesteros in his study of Argentine agriculture (1908-54) 1/ where he utilized a different procedure to derive factor shares. In the Ballesteros study the labor and land coefficients are .46 and .36 respectively. Results for the most recent period confirm the tremendous importance of land as a contributor to production in Argentine agriculture. Few land substitutes have been developed (or are currently used). The labor input in the Ballesteros study is higher than the one found for 1950-75, possibly because he did not allow for intermediate inputs and also because substitution of machinery for labor took place to a considerable extent only in the recent past. Machinery and buildings contributed to .08 of total output in 1908-54, while in 1954-74 their share was almost twice that figure (.13). The general trend in factor substitution and agri- cultural development provides a reasonable explanation for this change. The livestock coefficients in both periods are about the same. 2.13 The figures previously discussed provide the following characteriza- tion of Argentine agriculture: 62% of total output from 1950-1974 is accounted for by two of the primary factors of production (land and labor) and if it is assumed that approximately one half of construction and machinery is value added, then almost 70% of the value of output consists of retuees to the direct factors of production. It then becomes evident how much Argentina's agricultural production relies on these primary factors. The figures analyzed also suggest that this characteristic of Argentine agriculture has not changed significantly through time, in spite of the significant changes observed in agriculture in other countries. D. Land Tenure 2.14 About three-fourths of the land in Argentina is owner-operated (Table 5). Although the area operated by tenants is only about 10% countrywide, it includes almost 20% of the land in the Pampas.2/ Share cropping arrangents are infrequent in Argentina and other contractual arrangements are important only in the north. 2.15 The most detailed analysis of land tenure in Argentina was carried out by CIDA/CFI/CONADE 3/ on the basis of the 1960 census (Table 6). The criterion followed in that study was to group land holdings according to their possibilities of creating employment. Four categories were considered: 1/ Ballesteros, Marto, "Argentine Agriculture 1908-54: A Study in Growth and Decline" unpubliTh0-1 P', i) 3 ssertation, U. of Chicago, 1958. 2/ Based on the 1969 Agricultural Census. 3/ CIDA/CFI/CONADE, Tenencia de la Tierra  -8- Table 5 LAND TENURE PATTERNS IN ARGENTINA (1969) (regional distribution, percentages) Share Other Total Area Owners Tenants Croppers Forms Difference Area