Uruguay - Agricultural Sector Project

Document of The World Bank FOR OFFICIAL USE O.NLY Repwt N.. P-3866-UR REPORT AND RECObNENDATION OF THE PRESIDENT OF THE INTERNATIONALB RANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$60.0 MILLION TO TUE REPUBLICA ORIENTAL DEL URUGUAY FOR AN AGRICULTURAL SECTOR PROJECT August 1, 1984 This docuent bs a restrided didnrbton *nd my be used by rec*ents only ithe performance of their 5cl duti. Ift conteot may na oterwibe be discdod witout Wodd Bank anthcioat.  CURRENCY EQUIVALENTS (June 27, 1984) Currency Unit = New Peso (N$) US$1 = N$ 52.4 Ll$1 = US$0.02 GOVERNMENT OF URUGUAY FISCAL YEAR January 1 - December 31 WEIGfTS AND MEASURES Metric System GLOSSARY OF ABBREVIATIONS BROU Banco de la Republica Oriental del Uruguay (Bank of the Republic of Uruguay) CADA Comision Administrativa de Abastecimiento (Commission of Supply Administration) CONEAT Commission for Land Agro-Economic Studies DINACOSE Direccion Nacional de Control de Semovientes (National Cattle Control Directorate) DPS Development Policy Statement IMAGRO Impuesto Agropecuario (Agricultural Land Tax) INAC Intituto Nacional de Carnes (National Meat Institute) MAP Ministerio de Agricultura y Pesca (Ministry of Agriculture and Fisheries) PLAN Comision Honoraria del Plan Agropecuario (Commission of the Agricultural Plan)  FOR OMCIAL USE ONLY URUGUAY AGRICULTURAL SECTOR LOAN Loan and Project Summary Borrower: Republica Oriental del Uruguay Beneficiaries: The Central bank of Uruguay; Uruguayan livestock and crop producers; Uruguayan meat exporters. Asount: US$60.0 million equivalent including capitalized front-end fee of about US$150 thousand. Terms: Repayable over 15 years on a fixed amortization schedule, including 3 years of grace, at the bank standard variable interest rate. Project Description: The proposed loan supports a Government program to strengthen policies in the agriculture/ livestock sector, with particular attention to eliminating price distortions and increasing export incentives. Under the policy package supported by the loan, the Government would take additional steps to eliminate trade restrictions, to improve institutional support systems and rationalize regulatory procedures. Risks: There are two main risks associated with the project: (a) A deterioration in international cattle prices would mitigate the impact of the incentives of the policy package for higher levels of investment, productivity and exports. This risk, however, is considered small given the current stage in the domestic beef cycle and the positive outlook for the international demand for beef products. (b) The new Government, scheduled to take office in Uruguay in March 1985, may not continue the process of economic liberalization. Initial contacts with the two major parties indicate that a major change in course is not likely. Furthermore, the proposed policy package provides a balance between actions required immediately and those likely to be discussed Tig dowa"at hu a rsticWdistribubotk mar YbUW tw r_ ens only in the _r n *Of theklilduties lb tentsmayunothotheris b dosdwithut WorldBnk authontzadw  - ii - with, and implemented by, the new Government. The second tranche would be released only if the new government demonstrates its willingness to continue with the reform program. Estimated Costs: n.a. US$ million by Bank FY Estimated Disbursements: Year Annual Cumulative 1985 30.0 30.0 1986 30.0 60.0 Rate of Return: u.a. Staff Appraisal Report: No staff appraisal report has been prepared for this project.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN OF [SS60 MILLION TO THE REPrJBLICA ORIENTAL DEL URUtAY FOR AN AGRICULTURAL SECTOR LOAN 1. *I submit the following report and recommendations on a proposed loan to the Republica Oriental Del Uruguay for the equivalent of USS60 million, including the capitalized front-end fee of US$149,626 to strengthen the Government export promotion policies in the agricultural/livestock sector, to reduce price and non-price distortions, and to sustain the level of economic activity by easing the current pressing import constraint. PART I - THE ECONOMY 2. An Economic Memorandum (No. 3652-UR) was distributed to the Executive Directors in March 1982. A new memorandum will be prepared following the visit of a staff mission in August-September 1984. rhe following paragraphs provide a summary of recent developments. A summary of the Country Basic Data is attached as Annex I. Recent Economic Performance 3. After having become one of the most prosperous countries in Latin America in the first half of the twentieth century, Uruguay's economy deteriorated steadily in the 1950s, 1960s, and early 1970s. Political and social unrest, followed by the oil crisis in 1973, culminated in a generalized economic crisis, which forced the country into a fundamental reappraisal of its basic economic strategy. 4. The inward-looking policies of the preceding half century, and the loss of fiscal and monetary discipline, were seen by the country's new economic leadership as major contributing factors to the country's prolonged stagnation and periodic balance-of-payments crises. DuLing the 1974-78 period, efforts were made to reverse the historic import- substitution bias of macro-economic policy in favor of greater integration with world markets. Export growth accelerated under the impetus of new incentives, including export subsidies, state-supported credits, frequent devaluations, liberalized drawback facilities, and a streamlining of administrative processes. Investment was stimulated by phased reductions in price controls, expanded fiscal incentives, liberalization of the foreign investment regime, and decontrol of financial and foreign exchange markets. Between 1974 and 1980, real investment and exports grew by 14% and 20% a year, respectively. Overall output increased by nearly 5% annually, the highest average rate in a quarter of a century. Unemployment fell from over 12% in the mid-1970s to under 6% in the first half of 1981. International reserves rose to the equivalent of over one year's imports,  and the debt service ratio declined from 46% of exports of goods and non-factor services in the early 1970s to 11% in 1980. 5. However, only limited progress was made in reducing inflation and raising the technical and managerial efficiency of domestic industry. In the late 1970s, policymakers gave added emphasis to finding solutions for these problems. In 1978, the maxidmm global import tariff was lowered from 3002 to 150%, and it was announced that the maximum level would be reduced, in annual stages, to 35% by January 1, 1985. To curb inflationary expectations, the US dollar/peso exchange rate, officially-mandated salary increases, and increases in public utility tariffs were announced several months in advance at rates well below the prevailing rate of inflation. The advance announcement of salary and utility rate tariff increases was discontinued in 1979, but was maintained for the exchange rate until November 1982. The Central Bank also withdrew from active management of the domestic money supply during this period. Open market operations were halted, banking reserve requirements eliminated, and interest rate ceilings abolished. In the absence of controls on capital movements, the Government expected that domestic interest rates would converge quickly with foreign rates adjusted for depreciation of the peso, assuring a continuous source of credit on reasonable terms. 6. However, the initial impact of the anti-inflationary strategy was contrary to expectations. The rate of consumer price inflation nearly doubled between 1978 and 1979, rising from 46% to 83%, as large amounts of foreign capital, attracted by high peso interest yields and the comparatively low rate of devaluation, flowed into the economy. Inflation was also fueled by other factors, including the one-time liquidity effect of removing all bank reserve requirements; a surge of tourist and real estate investment demand from neighboring Argentina; a sharp increase in international beef prices, removal of longstanding domestic livestock and beef price controls; shortfalls in domestic crop production; and unused margins of tariff protection insulating some domestic producers from import competition. 7. Although subsequently inflation fell rapidly (to 43% in 1980, 29% in 1981, and 11% on an annual basis during the first 11 months of 1982), it remained substantially above the monthly rate of devaluation until late 1981, generating a severe cost-price squeeze that eroded both the international competitiveness of domestic production and public confidence in the peso. The boped-for convergence of external and internal interest rates was achieved only briefly before speculation and financial hedging once again opened a wide gap between foreign and domestic rates. In addition, exogenous factors, such as the world recessiort and the appreciation of the U.S. dollar vis-a-vis the currencies of 'uruguay's other major trading partclers, exacerbated the adjustment difficulties of domestic producers struggling to compete with imports. 8. As a result, Uruguay entered into a serious recession. GDP growth declined steadily from 6.0% in 1980 to -0.1% in 1981 and -8.7% in 1982. Unemployment rose from 5.7% of the active labor force in the first half of 1981 to nearly 14% in the latter half of 1982. Nominal merchandise  - 3 - export growth in U.S. dollars slowed from 34% in 1980 to 15% in 1981, an-d then fell by 16Z in 1982. Real peso interest rates rose from -1Z in 1979 to 25% in 1980 and 35% during the 12 months ending in November 1982. The non-financial public sector fiscal balance shifted from a surplus of 0.5Z of GDP in 1980 to a deficit of 2.2% in 1981 and 9.4Z in 1982. The Central Bank also incurred major -quasi-fiscal' losses associated with a variety of subsidized credit operations, equivalent in 1982 to about 9Z of GDP. Following surpluses of US$181 million in 1980 and USS12 million in 1981, the overall balance of Uruguay's external accounts registered a deficit of USS800 million during 1982, reflecting large-scale capital flight from the private sector (US$936 million) and a sharp deterioration in the services accounts, mainly due to higher interest payments on external debt and a substantial deterioration in net tourism earnings. Current Stabilization Program and Near-Term Economic Prospects 9. In late November 1982, the Government abandoned its exchange rate commitments and price containment strategy, announcing that it would no longer observe the previously fixed schedule of devaluations, and that the exchange rate would be freely determined by market forces. While the daily rate fluctuated widely, the average rate of around UR$34/US$1 during 1983 implied a nominal peso depreciation on the order of 60% relative to the US dollar parity quoted just prior to the float. In succeeding weeks, the Government introduced sweeping changes in salary, fiscal, monetary, trade and external debt management policies designed to reduce rapidly the size of the public sector deficit, correct distortions in relative prices which had damaged the competitive position of industries linked to world markets, and halt the dangerously high losses of foreign exchange. 10. The IMF supported the Government's stabilization program with a stand-by agreement. The agreement, effective April 22, 1983, provided additional resources in the amount of SDR 378 million (roughly USs400 million) over a two-year period. The associated program called for a sharp reduction in the borrowing requirements of the non-financial public sector, a scaling down of official external borrowing, a deceleration of central bank credit growth, and a renewed effort to improve resource allocation by freeing the exchange rate, continued liberalization of the trade system, and realistic pricing of public sector goods and services. Shortly after approval of the stand-by, Uruguay's external payment difficulties were further eased by agreements with foreign commercial banks and other external creditors to reschedule US$639 million in public short- and medium-term debt falling due in 1983 and 1984, and to provide fresh financing of US$230 million. 11. During 1983, significant progress was achieved in reducing the deficit of the non-financial public sector (from 9.4Z of GDP in 1982 to 4.02 in 1983), improving resource allocation via a roughly 40% real depreciation of the average trade-weighted exchange rate, and slowing the loss of foreign reserves (from US$585 million to USS34 million). Economic activity, after declining by more than 8% during the first half of 1983, experienced a mild recovery in the second half, expanding at about a 2% annual rate on a seasonally-adjusted basis. A 12% decline in real public  - 4 - and private sector wages may explain the substantial increase in the labor force participation rate observed during 1983 (from 542 to nearly 59% of the economically-active population). Rence, even though the unemployment rate rose from 13% of the economically-active population in 1982 to 15% in 1983, total employment actually increased slightly over the course of 1983. The quarterly rate of unemployment, which peaked at 16% during the second quarter of the year, had declined to just over 14! by the last quarter. 12. Despite these considerable efforts, the stabilization program did not achieve all its major aims. Belays in implementing the stand-by program, weaknesses in fiscal/financial policy management, uncertainties related to the political transition, the lower-than-anticipated levels of economic activity and imports (real declines of 4.8% and 17.0%, respectively) and the low level of confidence stemming from difficult conditions in the region as a whole were among the principal factors which slowed the rate of adjustment. Inflation greatly exceeded the level projected in the program (562 rather than the projected 392) - thereby inflating all fiscal variables - and there was a significant shortfall in general government revenues (20.2% of GDP rather than the projected 23.4%), stemming from the unexpectedly sharp decline in imports and the associated tariff revenues, the impact of inflation on lagging tax collections, and an increase in tax evasion. These developments led to a public sector deficit which exceeded the end-1983 program limits by about 25%, and substantial private capital flight which exacerbated the shortage of financial liquidity. 13. By the latter part of 1983, it was clear that large imbalances in the accounts of the non-financial public sector and the Central Bank persisted. Difficulties in the latter institution were related to several policy decisions: (i) high levels of Central Banl assistance to the National Housing Bank, which was unable either to meet its external payment obligations or to finance its rapidly-expanding housing program; (ii) purchases in 1982 of low-quality commercial loan assets on which virtually no debt service was collected in 1983; (iii) an export prefinancing scheme which provided credit on subsidized terms; and (iv) the costs to the Central Bank of assuming the debt service on external loans contracted by the non-financial public sector, while lending to the Government virtually interest-free. Globally, the combined deficit of the Central Bank and the non-financial public sector (13% of GDP in 1983 compared with 18% in 1982) remained incompatible with a sustainable program aimed at reducing inflation, decreasing reliance on external savings, and promoting economic recovery. Uruguay's inability to comply with the stand-by program's fiscal targets led to an interruption of drawings (currently totalling SDR 151 million) at the end of 1983. Discussions with the IMF on a revised standby are expected to lead to the announcement of a new agreement in the near future. 14. The authorities have stressed their continued commitment to the restoration of external and internal equilibrium, along with a recovery of output, before completing the transfer of power to an elected government (expected in March 1985). In the non-financial public sector, public enterprise tariffs were raised by nearly 30% in January 1984, and the Government has indicated that future adjustments would be sufficient to cover not only increases in enterprise costs, but also to raise the level of self-financing of new investment. Public sector wages and social  - 5 - security benefits, which together account for 70% of general government expenditures, are expected to fall further in real terms in 1984. The authorities have also indicated that they will raise social security taxes, if necessary, to avoid placing an undue strain on the finances of the central administration. While these measures would substantially reduce the non-financial public sector deficit relative to the level of the latter half of 1983, the deficit for the year as a whole is still expected to rise slightly to around 5% of GOP. The principal factor impeding decisive improvement in the non-financial public sector accounts is the continuing decline in the tax burden, which, at 19% of GDP, is now low by historical Uruguayan stand-rds. Therefore, a tax package with a potential 12-month yield of 2% of GDP was adopted in June 1984. 15. With respect to monetary/credit policies of the Central Bank, the authorities are acting in four main areas. First, the Central bank has stopped remunerating legal reserve deposits. Secondly, assistance to the National Housing Bank has been reduced substantially and is now controlled in the Treasury budget rather than by the Central Bank. The Housing Bank is also expected to begin liquidating its interest arrears on past credit obtained from the Central Bank and to agree to a schedule for the repayment of principal. Thirdly, agreement appears to be near on a plan to recover part of the portfolio of private assets purchased by the Central Bank from commercial banks. Finally, the export pre-financing scheme was terminated in late 1982 and, will occasion no further losses in 1984, since all outstanding credits have now been repaid. 16. On the basis of these measures, the deficit of the public sector (in-luding the Central bank) could be reduced over the twelve-month period ending in June 1985 to around 6Z of GDP, compared to 13% in 1983. This would appear to be compatible with a program calling for continued mild economic recovery (3-4% real growth), similar gains in overall employment, a modest reduction in inflation (45-50% compared with last year's 562), a trade surplus of around USS300 million (5.0-5.5Z of projected GDP), a current account deficit of around USS80 milYion (1.4% of projected GDP), and approximate balance on the capital account. The debt service ratio (including interest and amortization of short term debt) would be slightly over 30% of goods and non-factor service exports. Medium-Term Prospects 17. The domestic policy requirements for sustained growth beyond i984 are, in broad terms, the same as those indicated for the short-term. Uruguay is likely to bear a heavy debt burden for at least the remainder of this decade, the service of which will require sustained export growth and continued access to international financial markets. Rescheduling of approximately US$1.4 billion of principal payments falling due in the 1985-87 period will be necessary because of the bunching of maturities resulting from the refinancing agreements concluded in 1983. N2vertheless, public sector requirements for net additional financing could be limited to USS100 million annually, i.e., a nominal increase in the debt of about 4% annually. Assuming a moderate sustained recovery in the developed countries, no major increases in real international interest rate levels,  - 6 - and continued Uruguayan progress toward improved demand management policies, there are good prospects for obtaining the required amounts of financing without endangering the country's creditworthiness. The proposed sector loan, in addition to supporting Government efforts toward further agricultural liberalization and renewed export growth, would play a constructive role in easing Uruguay's external borrowing constraint. 18. It is notable that, notwithstanding increases in restrictive practices within and beyond the region and a very difficult short-term situation, Uruguay has maintained freedom of exchange transactions on both current and capital accounts and continued its program of general import tariff reductions. The authorities have indicated their intention to maintain open economic policies and continue to reduce effective protection. These commitments should serve Uruguay well. Given Uruguay's demonstrated readiness to adopt the domestic policy measures needed to raise its debt servicing capacity, and the prospect of early approval of a new agreement with the IMF, Uruguay is creditworthy for the amounts of external financing projected above. PART II - BANK OPERATIONS IN URUGUAY 19. As of March 31, 1984, the Bank had made 21 loans to Uruguay, amounting to US$441.9 million, of which 8 are not yet fully disbursed. The undisbursed amount as of March 31, 1984 was US$200.0 million. Annex II contains a summary statement of Bank loans. At the end of 1983, the Bank held 2.8% of Uruguay's external public and private debt outstanding; its share of the service on this debt in 1983 was 2.6%. 20. As of March 31, 1984, IFC had committed in Uruguay a total of US$21.3 million for four projects, of which US$18.5 was in loans and US$2.8 million in equity. The total undisbursed portion (all under the loan category) was US$2.0 million. 21. Bank disbursements in Uruguay are generally satisfactory for repeater projects, such as in the highway sector. Despite delays, it is expected that the Second Highway Project will be fully disbursed within six years compared to the Bank LAC average of seven years. However, operations in new sectors have experienced initial delays, mostly because it took the government longer than expected to comply with institutional covenants and because the executing agencies needed more time than anticipated to become familiar with Bank procedures. These factors have adversely affected the execution of operations in the education, ports, and telecommunications sector. By and large, these problems have been solved with increased supervision, and disbursements should proceed satisfactorily. Disbursements of the agricultural and the industrial credit operations have been affected negatively because of the economic recession in Uruguay. However, in the absence of alternative lines of medium and long term credit, there has been considerable recent improvement in committment levels under the industrial credit.  -7- 22. First among Uruguay's major long-term development priorities is Improvement in the efficiency of resource allocation. Progress in this area will require maintaining the momentum of the tariff liberalization process, followed by reduction of non-tariff barriers, and speeding up the restructuring and modernization of production facilities. The Bank's lending program, through its two industrial credit operations, has provided critical support to the Government's program to lower import barriers and reduce price controls. In the current difficult economic situation, Bank lending will be structured so as to encourage the Government to press forward with the tariff reforms, to eliminate distortions In relative prices and output, provide adequate incentives for exports, and resist strong domestic pressures to reverse the process of opening up the economy. This will be the objective of the proposed agricultural sector loan and additional industrial and agricultural credit operations. 23. Second, Uruguay's human resource base, though well developed in terms of literacy levels, needs to be further adapted to the needs of an open economy. Upper and middle managers, in both the public and private sectors, generally have a background of broad academic training which is not always well-suited to the pragmatic, problem-solving needs of a modern society. An on-going Bank supported vocational training and technological development project is addressing one aspect of this problem. Future Bank involvement in the process of human resource development would be provided through technical assistance for projects in individual sectors and, possibly, through a project focused on management training. 24. Third, Uruguay has not yet achieved the degree of institutional development required to assure self-sustaining growth. Some significant progress has been made, however, with the help of the Bank. Power, telecommunications, and ports projects supported by Bank loans are gradually improving operations of three of Uruguay's oldest and most poorly managed agencies into modern institutions. Longstanding assistance to the livestock sector has given birth to a high-quality extension service. Two recent industrial credit projects have led to the establishment of an independent appraisal unit that is rapidly improving public sector project evaluation and technical assistance to industry. Bank lending for highways has promoted the development of a previously nonexistent transport planning capability. Nevertheless, institutional capacity needs further strengthening. Future operations In the energy, water supply, and, possibly, railways would enphasize strengthening of management capabilities, planning processes and operating costs reductions. 25. Finally, agriculture is and will continue to be the mainstay of the Uruguayan economy. The contribution of this sector to GDP and employment is relatively modest, but it is of crucial importance as a foreign exchange earner and a supplier of raw materials to domestic industry. The Bank hitherto has concentrated on the livestock sector, particularly on strengthening producer incentives and ranch management. It has been instrumental in setting up a solid extension/appraisal institution and, more recently, in supporting Government efforts to formulate a series of reforms. The proposed loan continues the efforts made to improve  policies in this sector. In the future, Bank involvement in agriculture will shift towards the crop subsector with particular attention to intensified livestock/crop rotation techniques, more effective export promotion mechanisms, improved crop-oriented research services and a more comprehensive crop extension network. Projects under consideration would be geared to help stabilize producer incomes, enhance productivity, and reduce soil erosion. Experience derived from an on-going agricultural development loan, including a pilot lending program and a study, should further clarify the prospects for intensifying small farmer production. PART III - THE AGRICULTURAL SECTOR 26. Agriculture plays a central role in Uruguay's economy. The importance of agriculture in Uruguay's external trade reflects such basic characteristics of the country as its relatively abundant supply of land suitable for agriculture and grazing, its small population, and its lack of known mineral resources. Although the sector accounts for only about 15% of GDP, agricultural products in various stages of processing represent nearly 90% of total merchandise exports. Livestock-based products - chiefly meat, hides, wool and woolen textiles, shoes, and other leather produicts -- account for roughly two-thirds of agriculturally-based exports. Although crop exports (chiefly broad grain cereals) have increased in importance over the past 15 years, rising to around 15% of total exports in the early 1980s, the livestock sector and its related industries will likely continue to be the mainstay of Uruguay's export expansion efforts throughout the 1980s. Since the proposed loan has as its central objective increasing Uruguay's medium-term export potential, much of the succeeding discussion will focus on the livestock and related sectors of the economy. Sector Composition and Production Trends 27. Uruguay's agricultural sector consists of two well-defined and geographically separate subsectors: livestock and crops. Livestock production accounts for 602 to 70% of agricultural output and consists primarily of cattle and sheep raising and dairy production. Swine and poultry farming are still relatively minor enterprises. The crop subsector is dominated by cereals, -ainly wheat and barley. In recent years, however, the dynamism of the subsector has been provided by two new types of activities: rice growing in the central-eastern and northwestern regions, and fruit, mainly citrus and grapes, in the central-western area. 28. Physical, climatic, economic and social factors have combined to give Uruguay a strong comparative advantage in livestock production. The country's agricultural areas are characterized by shallow or very shallow soils that are best suited for pastures and prairie-type vegetation. The relatively homogenous and temperate climate facilitates legume development and favors the introduction of most of the recognized livestock breeds for production of beef, milk, and wool. The comparative advantage of livestock over crop farming is accentuated by Uruguay's irregular rainfall, which varies widely around the yearly avtrage of 1,000 mm and poses a more  serious risk to crop development than to livestock (although this risk can be reduced by a system of livestock-crop rotation)_ 29. Livestock production in Uruguay has fluctuated considerably during the past 15 years. During the latter half of the 1960s, significant growth took place, averaging over 6% an:ually. However, since 1970, the trend Line of livestock production has remained almost flat, partly as a result of cyclical changes in international prices, bat mainly because of unfavorable pricefcost relationships resulting from inappropriate policies. 30. Beef is the principal livestock product. Annual production ranges from 350,000 to 400,000 tons, of which roughly half is exported. Wool production is about 60,000 tons per year, of which 90Z is exported. About 100,000 tons of mutton are produced annually, mostly for local consumption. Milk production averages about 700,000 tons annually; exports of dairy products such as cheese and powdered llk have been increasing recently, but still represent dnly about 4% of total milk production. Productivity 31. Uruguayan agriculture is predominantly extensive, with yields that are substantially below those obtained in countries with similar endowments of natural resources. The adoption of relatively intensive production techniques based on pasture improvement has been limited by unfavorable cost/benefit relationships. Improved pastures, introduced in the early 1960s, reached a peak level of 12% of total grazing land in 1973, but the sharp deterioration in cattle prices in subsequent years, together with the continuing high cost of inputs, reduced this proportion to 8.5Z in 1977. After rising slightly in 1979-80 following the liberalization of agricultural policies in 1978 and an upswing in world meat prices, the share of improved pastures decllned once again to only 5% of total grazing land in 1982, reflecting not only a downturn in world prices, but also the price-cost and credit distortions associated with the macro-economic policies then in effect (see Part I). Previously improved pastures were overgrazed in an attempt by producers to wait out a recovery of prices; meanwhile, little refertilization was practiced because of high costs relative to expected returns. The consequent limited carrying capacity of unimproved land in the livestock sector (less than one ani=al unit per ha) is reflected in the low current level of beef production per hectare. At 45 kg/ha, this ratio is equivalent to only 56X of the average level reached in Argentina, and or-ly 32% of that reached in New Zealand. The cattle slaughter/stock ratio provides further evidence of the low productivity of beef production in Uruguay. In 1981, this indicator averaged 17% in Uruguay, compared to 28Z in Argentina (table 1). 32. Because of Uruguay's ample land resources and small rural population, farms are relatively large by international standards, although they generate comparatively low average incomes per hectare. Furthermore, land distribution and agricultural production closely follow local soil conditions, which vary widely in their productivity and suitability for agriculture. In general, farm size is inverselv related to soil  - 10 - productivity. (For this reason, actual farm sizes are usually adjusted by an official productivity index for purposes of taxation and the administration of credit programs.) Beef and sheep are raised principally in the interior of the country on medium- or large-sized farms (500 ha or above) where conditions for crop raising are typically unfavorable. 33. Overall, the distribution of income is more even than the distribution of land, because smaller holdings can be more intensively cultivated. Small, intensive dairy i!arms, for example, produce considerably higher per hectare incomes than large extensive beef ranches. Farms of less than 500 ha - the rough dividing line in Uruguay between smaller and larger holdings - make up about 89% of the total number of farms in the country, and account for about 27% of the total agricultural area (mostly around Montevideo and in the Littoral region). These percentages are somewhat misleading, however, since they include a number of small holdings which have either mixed rural/urban characteristice or are being used as part- or full-time homes by people employed in towns. Institutional Framework Regulatory Agencies 34. The production, pricing, domestic marketing, and export of agricultural products have traditionally been regarded as key national policy issues in Uruguay, because of their implications for domestic income distribution, self-sufficiency in basic food supplies, and foreign exchange availabilities. Moreover, the agricultural sector, in Uruguay as elsewhere, has looked to the state Lo provide vital support services. Thus, from the late 1920s onward, there developed a comprehensive set of public institutions designed to assure governmental influence, if not direct control, over all key aspects of agricultural production, with particular euphasis on the livestock and meatpacking sectors. 35. This process reached its culminating point in the mid-1970s. In this period, the Government controlled virtually all facets of meat production, pricing, and marketing via four semi-autonomous regulatory agencies, three of which were under the nominal control of the Minister of Agriculture: (a) The National Cattle Control Directorate (DINACOSE) was responsible for monitoring herd developments and controlling cattle marketing to assure the collection of reliable statistics, the correct payment of rural taxes, the observance of official price and marketing regulations, and the prevention of cattle smuggling; (b) The National Meat Institute (INAC) was responsible for fixing the purchase prices of live cattle, the licensing and inspection of slaughter facilities, the administration of  - 11 - five state-owned meatpackers, the enforcemaent of export quality control and sanitary requirements, tbe supervision of contract negotiations, and the approval of industry investment pl ans; (c) The Commission on Supply Administration (CADA) was charged with the licensing and inspection of butcher shops, control over retail meat prices, and the management of intervention stocks of frozen beef for local marketing during periods of rising meat prices; and (d) The state-owned commercial bank, Banco de la Republica Oriental del Uruguay (BROU), controlled the finances of the meatpackers, was the nearly-exclusive source of credit for ranching and export operations, and enforced the foreign exchange, licensing, and tariff regulations governing external trade in agricultural inputs and commodities. 36. By the late 1970s, there was growing official awareness that the agricultural sector was one of a number of key sectors where state interventionism had become asphyxiating and counter-productive. Over the previous half century, controls had reduced the supply and profitability of agricultural exports, increased the uncertainty of domest1c food supplies, and greatly diminished agriculture's traditional role as the generator of resources for domestic industrialization. To ease these regulatory bottlenecks, the Government announced a series of major agricultural reforms in August 1978, which included the elimination of agricultural price and geographic marketing controls, the removal of controls on the slaughter of liveetock by age or type, the conversion of the land tax from a potential gross to a potential net income base, the privatization of the state-owned meatpackers, an end to BROU's control of the finances of the meatpacking industry, the elimination of prior deposits and surcharges on imports of agricultural inputs, and the reduction of the maximum tariff on such imports to 10%. In effect, without abolishing any of the regulatory agencies, these reforms reduced their powers considerably. 37. Coinciding with an upswing in international prices then underway, the reforms produced substantial increases in agricultural investment and growth during 1979-80, but these gains were not lasting. While inconsistencies in macro-economic policies and unfavorable developments in export markets were major explanatory factors, so was the incomplete character of the reforms themselves. For example, nothing was done to lift the half-century old prohibition against exports of live cattle. Bence, Uruguayan ranchers, forced to sell their cattle to the domestic meatpacking industry, continued to receive prices substantially below those prevailing in neighboring countries. Secondly, although tariffs on imported agricultural inputs were lowered to insignificant levels, relative prices of imported inputs in many cases (notably machinery spares and agro-chemicals) did not decline proportionately; nor was the quality of domestic similars always satisfactory. High input prices reflected not only the high cost of operating in a small market, but also the costs and complexity of import prucedures which represented substantial non-tariff  - 12 - barriers, particularly for small-to-medium-sized operators. Thirdly, while there was an abundance of short-term, unsupervised production credit available to farmers after the reforms (so much so that it helped stimulate the overborroving and excessive indebtedness which are now slowing the recovery of the farm sector), the flow of medium-term, supervised credit was hampered by the lack of clearly defined policies on developmental credit within BROU, difficulties in harmonizing the credit and promotiona