Bolivia - Pricing and investment policies in agriculture

Geport No. 5198-BO Pricing and Investment Policies in Bolivian Agriculture July 2,1984 Latin America and the Caribbean Regional Office 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 offiicial duties. Its contents may not otherwise be disclosed without World Bdnk authorization.  CURRENCY EQUIVALENTS Currency Unit Bolivian Peso (Sb) Exchange Bate Effective November, 1982 USS1.00 - Sb 200.00 Sb 1,000 USS5.00 Effective November 1983 US$ 1.00 = Sb 500 Sb 1,000 = US$ 2.00 Effective April 1984 1155 1.00 - $b 2,000 Sb 10,000 USS 5.00  FOR OMCIAL USE ONLY FOREWORD This report is based on the findings of a joint WB/FAO-CP economic mission, which visited Bolivia in February/March 1983. The missicn consisted of Roberto Zagha (Economist, World Bank), Jorge Schuster (Agricultural Economist, FAO-CP) and Michael Framageot (Consultant, FAO-CP). Since the mission took place, the Bolivian economic situation has continued to deteriorate. GDP, after declining 9% in 1982, declined by a further 8% in 1983. The inflation rate (annual average) increased from 120% in 1982 to 280% in 1983. The official exchange rate was devalued twice: from $b200/USS to $b500/US$ in November 1983 and then to Sb2,OO0/USS in April 1984. The parallel market has operated at rates which have varied bet-ween 100% and 600% above the official rate. These developments do not alter the thrust of the report and its recommendation to increase the access of the agricultural sector to foreign markets and to operate on more market-oriented rules. If anything, recent developments made the need to tap the potential of the Bqlivian agricultural sector more urgent. With the exception of the elimination of the 8% tax on agricultural exports in April 1984, there have been no substantial changes in agricultural policies and the conclusions and recommendations of the report remain valid. This document has a resicted distribution and may be used by recipients only in the peormanceof their officia duties. Its contents may not otherwise be disclosed without World Bank authonzatioL  ABBREVIATIONS ADEPA - Asociacion de Productores de Algodon (Cotton Producers Association) ADELPE - Asociacion de Productores de Leche (Milk Producers Association) ADIM - Asociac-ion de Industrias Molineras (Millers Association) ALBAPOR - Fabrica de Alimentos Balanceados de Portachuelo (Animal Feed Products Factory of Portachuelo) ANAPO - Asociacion de Productos de Oleaginosas (Soybean Producers Association) ANPROCA - Asociacion Nacional de Productores de Cafe (National Association of Coffee Producers) APL - Asociacion de Productores de Leche (Milk Producers Association) BAB - Banco Agricola de Bolivia (Agricultural Bank of Bolivia) CAO - Camara Ag-opecuaria del Oriente (Eastern Agricultu-al Chamber) CBF - Corpor-acion Boliviana de Fomento (Bolivian Development Corporation) CDP - Cent_o de Desarrollo Forestal (Center for Fo-estry Development) CIA! - Centro de Investigaciones de Agricultura Tropical (Center for Tropical Agricultural Research) CNECA - Comision Nacional de Estudios de la Cana y del Azucar (National Commission for the Study of Sugar Cane and Sugar) CNDE - Centro Jacional del Desarrollo de la Comui-dad (National Center for Community Development) COBOLCA - Comite Boliviano del Cafe (Bolivian Coffee Committee) CONAR - Comision Nacional del Arroz (National Rice Committee) COBDEBENI - Corporacion de Desarrollo del Beni (Beni Development Co rporation) CORDECH - Corporacion de Desarrollo de Chuquisaca (Chuquisaca Development Corporation) .1/  CORDECO - Corporacion de Desarrollo de Cochabamba (Cochabamba Development Corporation) CORDECRUZ - Corporacion Regional de Desarrollo de Santa Cruz (Santa Cruz Regional Development Corporation) CORDEOR _ Corporacion de Desarrollo de Oruro (Oruro Development Corporation) CORGEPAI - Corporacion Gestora del Projecto Abapo Izozog (Abapo Izozog Project Corporation) COEDEPANDO - Corporacion de Desarrollo del Pando (Pando Development Corporation) CORDEPA2 - Corporacion de Desarrollo de la Paz (La Paz Development Corporation) CORDEPO - Corporacion de Desarrollo de Potosi (Potosi Development - Corporation) CORDETAR - Corporacion de Desarrollo de Jarija (Jarija Development Corporation) ENA - Empresa Nacional de Arroz (National Rice Corporation) FAO/WFF - Food and Agriculture Organization/World Food Programs FECA - Federacion de Caneros (Sugarcane Producers Federation) FEQABENI - Federacion de Ganaderos Del Beni (Cattle Raisers Federation of Beni) FEGASACRUZ - Federac5on de Ganaderos de Santa Craz (Cattle Raisers Federation of Santa Cruz) FENCA - Federacion Nacional de Cooperativas Arroceras (Rice Producers Association) GOB - Government of Bolivia IBTA - Instituto Boliviano de Teenologia Agricola (Bolivian Institute of Agricultural Technology) IDRA - Institato para el Desarrollo Rural del Altiplano (Institute of Rural Development of the Altiplano) IPC - International Finance Corporation INBOLCA - Instituto Boliviano del Cafe (Bolivian Institute of Coffee) ./J/  lIE - Instituto Nacioxal de Estadistica (Nacional Statistical Institute) INFOL - Instituto Nacional de Fomento Lanero (National Institute for Wool Development) mACA - Ministerio de Asuntos Campesinos y Agropecuarios (Ministry of Agriculture) MICT - Ministerio de Industria, Comercio y Turismo (Ministry of Industry and Commerce) PAM - Productos Alimenticios de Maize (Maize Feed Products) PERTT - Programa Ejecutivo para la Rehabilitacion de Tierras en Tarija (Executive Program for Land Rehabilitation Tarija) PIL - Plantas Industriales de Leche (Milk Industry Plants) PL480 - Public Law 480 PRONASOR - Productores de Maize y Sorgo (Maize and Sorghum Producers Association) SENARB - Serwicio Nacional para el Control de la Aftosa, Rabia y Brucelosis (National Service for Control of Hoof and Xouth Disease, Rabies and Brucelosis) USAID - United States Agency for International Development  TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ... .............................. i - lINTRODUCTION ................................... 1 I. CONSTRAINTS FACING THE BOLIVIAN FARMER AND EVOLUTION OF THE AGRICULTURE SECTOR ....... 2 Ao The Altiplano Farmero....o.................... ........ .. 4 B. The Farmer of the Valleys....... ... ..... .... 9 C. The Farmer of the Lowlands............................... 11 D. Evolution of the Agricultural Sector.................... 13 E. The Role of Government Policies.oo..o.o.oo.............. 14 II. PRICING OF AGRO-BASED COMMODITIES ............. ............. 17 A. Institutional Agents and Their Role...o................. 18 B. The Fixing of Producer Prices: Production and Marketing Features Relevant to their Determination in Ten Selected Cases ................................. ............ 25 C. Subsidies ............................. 54 D. External Trade .......................................... 60 E. The Impact of the Pricing System ........................ 64 F. Recommendations ........ -.-................... 70 III. INVESTMENT POLICY .................. ........................ 72 A. The Design of the Public Investment Program and Public Agencies Concerned ..... . 72 B. The 1982-1984 Investment Program ........................ 78 C. Regional Distribution of the 1982-1984 Public Investment Program o.e..eeeo.o.o.*............................. .eo ..........So.. 94 D. Recommendations ......................................... 94 ANNEX I. The 1982-1984 Public Investment Program ................. 98 STATISTICAL ANNEX .......................... ...................... 108 MAP  TEXT TABLES Tabie 1.1 Language Distribution by Sex and Areas 1.2 Average Farm Size in the Altiplano and Valleys, and Average Cultivated Area Per Family 1.3 Selected Data on Farm Income, Altiplano and Valleys 1.4 Farm Size Distribution in the Altiplano, Valleys and Lowlands, 1979 1.5 Income Distribution in the Rural Sector, 1977 1.6 Average Growth Rate of GDP and Agricultural Product, 1950-80 1.7 Land Use, 1980 2.1 Institutional Agents' Role in Price Fixing of Agro-Based Commodities 2.2 Selected Goods and Commodities with Prices Fixed by MICT at the Wholesale and Consumer Level 2.3 Forms of Intervention and Enforcement, Selected Cases 2.4 Main Market Features, Selected Cases 2.5 CBF - Agroindustrial Activity 2.6 Malt Supply and Consumption 2.7 Composition of La Paz Beef Prices (1980-82) 2.8 Beef Producer Prices (1970-82) 2.9 Selected Data on Cotton, Area Planted, Production, Yields and Exports (1971-80) 2.10 Sales of Domestic Cotton in 1981 2.11 Coffee Production, Domestic Consumption and Exports 1976-82 2.12 Maize Prices at the Producer Level 2.13 Data on Milk Plants 2.14 Milk Producer Prices 2.15 Number of Dairy Farmers Cooperating with CBF since 1975 2.16 Milk Consumption and Suppy, 1972-78 2.17 Capacity Utilization in ENA Silo and ENA Market Intervention, 1975-82 2.18 Producer Prices for Unhulled Rice 2.19 Miller Selling Price 2.20 Selected Data on Rice 2.21 Supply of Edible Oil (1,000 liters), 1970-80 2.22 Soybean Producer Price 2.23 Selected Data on Wheat 2.24 Wheat Imports (1978-82) 2.25 Milk Subsidy 2.26 Export and Domestic Sugar Prices 2.27 Imports of Principal Food Products - 1973-1981 2.28 Agricultural Based Products Subject to Prior Licensing to Export 2.29 Export Procedures: The Example of Coffee 2.30 Producer Prices as Share of Border Prices at the Official Exchange Rate 2.31 Domestic and International Prices Coefficient of Variation for the Period 1970-82 2.32 Producer Prices in 1970 $b Index, 1970-82 2.33 Tax/Subsidy Scheme for Bolivian Agricultural Exports  TEXT TABLES (cont.) Table 3.1 Public Sector Current Expenditures and Investment for Agriculture by Economic Category, 1976-1982 3.2 Public Sector Current Expenditures and Investment In Agriculture, Agroindustry and Marketing by Institution, 1976-1982 3.3 Agricultural Investment Program, 1982-84 - Agencies Involved with the Investment Program 3.4 The Main Agencies Responsible for the 1982-1984 Public Investment in Agriculture 3.5 Agricultural Investment Program, 1982-84 - Investment by Agency and Average Size per Project 3.6 The 1982-1984 Investment Program - Size of Projects 3.7 Agricultural Investment Program, 1982-1984 - Functional Classification 3.8 Population Estimates 1980 3.9 Agricultural Investment Program, 1982-84 - Geographical Location of Projects - ---- 3.10 Agricultural Investment Program, 1982-84 - Investment Per - - Capita by Department  SUMMARY AND CONCLUSIONS i. It is difficult to be a farmer in Bolivia. More than in other South American countries, Bolivia has inadequate institutions on which cultivators can rely for technical advice. Credit is hard to get. Shipping goods to market is a cumbersome and time consuming process. In areas where land is cheap, agricultural households live in nearly total isolation. As a result, over two-thirds of Bolivia's farmers live and work in a subsistence economy with limited v!arket participation. Being at the border line of survival, even minor fluctuations in their incomes can cause serious hardship. ii. There are some 700,000 farmers in Bolivia. In total, the agricultural sector accounts for about 3 million out of the country's 5.7 million population. They live in three agricultural regions-the Altiplano (602), the Valleys (20%) and the Lowlands (20X). Each of these regions has its own special problems. On the Altiplano, farmers face difficult ecological conditions, which allow for only one crop a year; they operate on low productivity minifundia whose soils have been exhausted by several centuries of intensive use, with inadequate soil management techniques, and weakened seeds. Farming is geared towards subsistance. Staples and vegetables dominate and there are few links to markets; an Altiplano farmer sells less than 30% of his output. The scope for improvement appears to be considerable, however, if appropriate technologies are generated and diffused. iii. Farmers from the Valleys operate under better climatic and soil conditions. Farms are generally around 5 ha. in size and rainfall is well distributed over the year. They are relatively willing to engage in market transactions, and cash crops (coffee, coca, cocoa and fruit) form an important source of incomes; dairy farming is also an important traditional activity in the area around Cochabamba. Despite low productivity levels, relatively favorable ecological conditions make it possible to harvest two crops a year. The main obstacle to raising agricultural output in the Valleys is the lack of access to markets. Apart from areas close to the main highland cities - La Paz, Cochabamba, Sucre, Oruro - the Valleys have few all weather roads and are generally inaccessible. It is often impossible to transport goods from farms to points where they can be shipped to markets, and farmers from the Valleys are consequently discouraged from expanding production to potentially attainable levels. iv. Climate and ecology in the Lowlands range from humid tropical Amazonian conditions to the semi-arid but high quality soils of the Chaco. The area around Santa Cruz has seen some development during the last 30 years, following the construction of a rail link to Sao Paulo and a highway to Cochabamba (which already had road and rail connections with La Paz). The linkage of Santa Cruz to product markets encouraged domestic com-ercial agriculture to substitute for agricultural imports (such as sugar, rice, cotton, and oilseeds) in the urban markets of the highlands. The development of these crops was also favored by the 1952 Agrarian Reform,  - ii - which made it possible for farmers from the highlands to obtain seasonal work in commercial ag=iculture. Similarly, the establishment of an aviation link to the northern lowlands encouraged the development of cattle in the area. Cheap surplus World War II airplanes were used to transport beef to consumer areas; by the mid 1960s, Bolivian beef had completely replaced imports. V. The most dynamic farmers in Bolivia are those of the Santa Cruz region. They are well organized in powerful producers' associations, which negotiate prices with Government and/o= agroindustries, fund research projects that complement the work of Government-financed research stations, provide technical advice to their members, and (in some cases) participate in marketing. vi. The potential scope for expanding lowlands ag=iculture is vast. Import substitution will soon be complete, however, and the subsequent further expansion of agricultural production will depend on successful penetration of foreign markets. This will in turn require a lessening of government foreign trade restrictions, new investment in storage, transport infrastructure, and mn research to bring domestic product quality up to - international standards, and the development of marketing networks able to handle agriculture exports and to service foreign markets. vii. Most government intervention in agriculture has been haphazard, and has taken place since the 1950s--usually in response to recommendations by fore;gn aid agencies, to pressures from specific producer groups, to the demand3 of politically imoortant constituencies, to technocratiz interests created wi;thn the growing state aDparatus, and sometimes in order to relieve farmers' poverty and to increase their productivity. Not surpr:s3ngly, what has emerged has been a poorly defined pricing and investment pol;&cy, which has not been properly articulated in any official or unofficial document or working paper. Decrees, laws, and regulations have been promulgated on an ad hoc basis over the years. Vlil. Pricing Polic:es. Government involvement in the pricing of agricultural goods varies from product to product, and policy instruments have been defined according to the specifics of each individual case. Basically, trade in agricultural commodities is restricted, in the sense that no commodity can be exported from Bolivia without the authorization of the Ministry of Industry and Commerce (MICT); additionally the Government has a monopoly in exports of some commodities such as rice. Imports of agricultural commodities are similarly restricted through licensing and quota agreemenzs between ziie importer and RICT. Wheat imports, unich account for the bulk of domestic consumption, are a Government monopoly. Having isolated the domestic from the international market, the Government attempts to influence prices through devices such as fixing producers' prices, intervening in the marketing and processing of agricultural commodities, and selective fixing of agro industrial import and export quotas. Some representatije cases analyzed in this report illustrate how Government intervention has developed over time.  - iii - ix. In the case of beef, once domestic production became the main supplfer of Bolivian consumption, the Gove-rnment intervened to stabilize the domestic price through occasional bans on exports, export quotas, and price fixing in producer and consumer markets. In the case of coffee, market conditions are such that producer prices level cannot be enforced; the Government has therefore limited itself to cont_olling consumer prices and regulating exports. X. For products used as inputs by State agroindustries (mainly milk and sugar cane), pricing policies have been designed to maximize the plant utilization. This objective has led to a variety of different price .egulations and policies, and mixed results. For example, milk pricing policy has aimed at increasing raw material supplies to raise the currently low utilization levels of processing plants. But the utilization levels continue to be low. In the case of sugar cane, however, officially set prices have stimulated supplies of raw materials well above the processing capacity of sugar refineries: so as to avoid excess supply, a complex set of regulations prevents the free entry of farmers into sugar cane production and even prevents technological changes designed to raise productivity. xi. Both rice and wheat receive special (and different) treatment. Both products are mainly produced by small farmers, and are laiportant food items for the urban population. The Government zonsequently intervenes extensively in the pricing of these two commodities, attempting both to increase domestic production and to maintain 3table pr:ces for urban co-3UMe=s. Iz has zreated a rice marketing enterprise, chazged with enforcemenz of offlcially set prices; this enterprise has a monopoly in marketing domestic output and in fureign trade. The results have been disappointing. Frequent shortages of funds have made the agency irrelevant in rice marketing, with producer prices bearing no relation to officially announced levels. The main result has been to isolate domestic markets from fo_eign ones. In the case of -wheat, the Government has similarly been unable to enforce official producer prices, mainly because the availability of nighly subsidi:ed imports has discouraged private millers from buying domestic output. xii. For goods in the private agroindustr.ial sector (mainly oilseeds and cotton), the Government has concentrated on managing the price negotiations between producers and private industry, and on allocating import and export quotas in response to changing circumstances. Xiil. Despite its extensive involvement, the Government has surprisingly little discretionary power in its producer price policy. Although it regularly fixes producer prices for six of the ten commodities analyzed in this report, it is able to enforce the prices of only three of them. Producer prices are based on international price levels in only two cases--soyabeans and cotton. For other commodities, such as rice, wheat and maize, market forces have often fixed prices below those officially set, which in tur-n bear no relation to international levels.  - iv - xsV. The way in which the Government fixes prices has many deficiencies. First, data on production costs are unreliable. The Government does not est-mate production costs; instead, it relies on information supplied by producers. Second, prcAucer prices are seldom A-n-nounced at the appropriate point in the agricultural cycle (i.e., at planting time). Rather, they tend to be announced sit harvest time, which means that farmers cannot take prices into account wiien determining their cropping patterns. Third, prices can sometimes remain fixed for several year-s, despite high levels of domestic in flation. Finally, official prices tend to remain fixed throughout a crop year, regardless of the season and without allowance for spoilage o- storage costs, or for the higher production costs of off season supplies. As a result, there is little incentive for private investment in storage and marketing infrastructure. xT. Government pricing policies have had a number of negative consequences. (i) They have distorted agricultural prices, so that they a=e out of line with international prices, and have consequently fostered inefficient production patterns. Land and other resources allocated to -*different crops do not yield optimum returns. In sugar cane production, for example, it is estimated that Bolivia's output could-be produced-on-- half the land currently used, if the complex regulations preventing increases in productivity were lifted. This would -release some 30,000 ha. of high quai-.Ity land in the Santa Cruz region which could be allocated to the production of other commodities. On the other hand, for other crops, offc-ial prices in recent years have f-equently been below international prices. (ii) Pricing policies have produced confusing price signals which make t-rasa`tions and the gathering of inforinazion on prices unnrecessarily difficult. Both predictability and transparency of prices are reduced. Available data suggest that the most extreme price fluctuations, both ove- time and at any given point of time, occur for commodities where the Government announces suppo-t prices which are not enforced--wheat, maize and rice. This suggests that Government intervention disturbs the market by creating unfulfilled expectations, and increasing the risk associated with projecting future prices. (ili) Finally, Government pricing policies have led to implicit or expl1cit income t=ansfers bet-ween different social groups; these snifts have been inconsistent with efficiency and equity considerations. xvi. The impact of fixing consumer prices for agricultural commoditie3 is not investigated in detail in this report. Both KICT and Muncipalities fix and control consumer prices. The list of commodities -with prices fixed by :ICT _s fairly -well defined; pr._e lists are -egularly publ3shed and well publicized. The role of iunicipalities is less clear. Each munici- pality in Bolivia is empowered by the Constitution to fix consumer prices of goods sold within its boundaries. Ia the case of commodities with prices fixed by MICT, market transactions have generally taken place at MICT prices. For commodities with prices not set by MICT, the situation is highly confusing, with each town following its own course. Huncipalities do not publish regular price lists; when lists are published, they are not  -appropriately distributed. Moreover, since the commodities whose prices - are fixed by Municialities--tubers, fruits and vegetables--are grown and marketed in high]v competitive conditions, market prices often diverge from official ones. Recommendations on Pricing Policy xvii. The report recognizes that an adequate pricing policy cannot alone promote the development of Bolivian agriculture, but it concludes that the policies pursued hitherto have unnecessarily hindered progress. The report makes a number of recommendations for change; in particular, it suggests that the Government: (a) create a unit that -ould (i) design pricing policies for items whose prices the Government still intends to control, and (ii) publish producer prices for these items in a timely and integrated fashion; - - : - (b). abandon attempts to set producer prices for commodities--notably - - maize, rice and wheat-whose official producereprices have proved - - - not to be enforceable in practice; (c) use border prices as a reference point for fixing domestic producer prices of commodities whose prices the Government still intends to control. In cases where international prices fluctuate widely--sugar, for example--it is reasonable for the Government to try to dampen the effects of international price volatility on the domestic economy. Nevertheless, domestic production levels cannot Fe allowed to remnin totally nnaffected by international prices. Domestic prices could be based on, say, a thr-ee year moving average of international prices or be fixed at the border price + %;- Cd) dissolve the bodies responsible for purchasing cereals at official producer prices, National Rice Enterprise (EIA) and the Depar=tento de Come=cialization de Trigo. Both agencies have accumulated sizeable storage facilities which have been used very inefficiently. In both cases, prLvate investors are actively involved in the marketing and processing of these products and coul' take over the Government's role. Given the size of the main ENA silo, there may be some difficulties in finding private funds la=ge enough to buy it. The nossibility should be carefully explored, however; (e) gradually phase oirt the subsidy on wheat. The present report is less concerned with the fiscal consequences of the wheat subsidy than with its impact on wheat production and income distribution. Wheat, and other staples are produced by small farmers, whose incomes are adversely affected by competition from subsidized imports. The Government could phase out the subsidy over a period of, say, three years. If this were done, private  -vi- - mllers would have an 3ncentive to buy domestic -heat. Further, they might be induced to participate in technical assistance programs and to make long term supply contracts with farmers (as has occurred in the case of barley).. The report does not recommend to subsidize the output (flour) instead of the input, as a way of having both imported and domestic wheat priced on the same basis for it requires Government control systeiLs not available in Bolivia yet; (f) gradually lift all the regulations that prevent free entry and increases in productivity of the sugar cane producing sector; (g) gradually remove all export regulations. The Government is understandably anxious to ensure that adequate food supplies are available in domestic markets, but existing trade restrictions have had the undesirable effect of impeding the growth of foreign markets for Bolivian agricultural goods. Removal of these constraints is an essential prerequisite for the rapid expansion of Bolivian commercial agriculture. The Government might, -for 7. - - - example, steadily increase the quotas for the country's-most -- important exportable goods over a period of four years, and design a simple administrative system to allocate quotas to exporte-s on a first-come-first serred basis. At the end of the four year period, all restrictions would be removed. The 8% tax on agricultural exports could be removed 3mmediately. There is no economic rationale for taxing an activity that is still in its =nfancy (espec:ally s:n_e zhe yLeld fron this tax i s an unimportant fraction of overall Government revenues); (h) investigate the possibility of transferring some of the main CBP agroindustries, notably the milk and sugar processing plants, to the private sector. Although CBF has played an important role in promoting agricultural development, especially in the expansion of sugar cane plantations and milk production, private investment could now substitute for CEF in these a-tivities. Such a move would be particularly appropriate in the case of CB? s sugar refineries in Santa Cruz and its milk p-ocessing plants in Cochabamba. CBF resources -ould then become available for other important development projects; (i) abolish price regulations for agro-based commodities that are produced under competitive conaitions (c=acken, eggs, coffee). The Government should only intervene in other commodity markets if it is equipped to do so--i.e. through a new unit that is capable of computing accurate production costs, see item (a) above, provided they are linked to border prices, as mentioned in (d).  - vji - xviii. - The report does not recommend any specific action on the consumer prices that are fixed by M(unicipalities. While the lifting of this control is desirable from an efficiency poi.nt of view, the problems associated with enacting a Constitutional amendment (and reducing the local authority of the States in the process) are disproportionate to any potential gains--which would mainly consist of a reduction of the variations iu prices found in different retail markets but would not affect the average - price level. Exchange Rate Policy xix. The exchange rate certainly has a decisive impact on agricultural prices. But the foreign exchange policy on agriculture is not examined in this report. Further study is needed to assess the domestic resource cost for different agricultural commodities, their competitiveness in foreign markets, and how they are affected by the Bolivian foreign exchange policy. Investment Policy -x=. Bolivia's agricultural investment policy lacks a clear --- :- rationale. Moreover, it fails to address such critical constraints on the sector as the lack of research appropriate to farmer's needs; the lack of adequate seed varieties; the urgent need to improve soil management and conservation practices, and to reduce the pace of deforestation; the lack of feeder roads; and the need to reduce population pressures in the highlands. There are no official documents indicating which constraints on agricultural development are meant to be -emoved by current policies, what role individual investment projects are intended to play in this effort, or the associated borro-wing and budgetary implications. Finally, analysis of the 160-project investment program for 1982-1984 and the investment policy implicit in it, shows that the fundamental constraints facing Bolivian agriculture are not addressed at all, or are only addressed through a poorly conceived and expensive strategy. This state of affairs is not unique to the 1982-1984 investment programs, it is representative of the way in which the Government has historically approached agricultural development constraints. xxi. The 1982-1984 investment program amounts to about 10% of Government capital expenditure, which is in line with the trend over the last decade. The program' 8 composition and goals stem from a number of uncoordinated initiatives taken by several institutions--foreign aid agencies (O&ich act according to thei- ow-a perception of Bolivian development needs); Government agencies (which make proposals on an ad hoc basis); and, particularly in the case of the Regional Development Corporations, local farming interests. xxii. The program is paternalistic in its approach. It gives low priority to activities that generate positive externalities (i.e., projects for feeder roads, for research, or for developing packages appropriate to farmers' needs), counting on farmers' initiative to take economic decisions adapted to the new env-rorment (as occurred in the case of 'spontaneous  - viii- migration" movements). It does, however, include a large nuuber of rural development projects, designed to raise the productivity and incomes of selected and limited groups of farmers. The packages of benefits presented to farmers in these programs vary widely. They may include a large number of components; integrated rural development projects, for example, may provide funds fo= research, health, education, modern inputs, irrigation, construction works, etc. Alternatively, they may be limited to only a few of these components, or even to just one of them. The 1982-1984 program consists mainly of integrated rural development projects, which include all of the components above; projects limited to providing inputs for the production of a specific commodity to a well-defined group of farmers; and projects whose scope falls somewhere between these two extremes. The inducements most frequently used to persuade farmers to adopt the packages are extension services, demonstration farms, and credit. In some cases, credit may be made available at negative real interest rates, or inputs may be provided at no cost to recipients. xxiii. This approach has several drawbacks. First, insufficient recognition is given to informal sources of credit and extension - serv Ices* In the few cases where technologies adapted to farmers'-needs have been generated and their profitability demonstrated, informal-rural credit - markets have provided the resources required for their adoption, and the informal diffusion of kno-wledge had led to their widespread use. Secondly, the patchwork approach implicit in the 1982-1984 investment program leads to duplication of effort and failure to realize potential economies of scale. For example, there is no mechanism for transmitting the results of the research car- ed out in one integ=ated rural development project zo other centers of research. There are also cases of t-o different institutions developing research on the same commodity, -without sharing their results. Thirdly, strategy emphasizing the rural development approach is too expensive to be used to increase Bolivian agricultural productivity at large. Even the cheapest and best designed rural development projects have a cost per farmer of USS1,500-3,000. Assuming that these projects include components that satisfy all agricultural investment requuiements, they would absorb funds equivalent to 30 to 60 years' -orth of cu,_ent levels of public investment in agriculturre. Fourthly, rural development projects tend to serve the needs of a specific group of farmers, and to exclude those outside the project area-from their benefits; they have consequently created rivalr.es and exacerbated political tensions. Of course, the benefits of any project are restricted in some degree; the problem is especially acute, hovever, in rural development projects Ahere farme-s a-e exaluded from benefits on the basis of artificial boundaries. Fifthly, by their very nature, rural development projects put only a limited emphasis on infrastructure and research, which are important bottlenecks in Bolivian agriculture. Finally, these projects are complex, and managing them recuires a relatively intensive use of Bolivia's scarce managerial resources. -  -ix- xxiv.- Most rural development projects on the Altiplano have been financed by foreign aid agencies. Whxle there are certainly cases where such projects have been warranted, Bolivia's experience with them has been disappointing. Fo-eign aid agencies have now generally agreed that these projects have by and large failed to substantially raise living standards among the farmers involved. Further research is needed to assess the validity and the basis on which this consensus has formed, to assess the scope for improving the living standards of the Altiplano population, and to define an investment strategy better suited to the Altiplano's investment needs. xxv. Returns on public capital expenditures could be increased if the public investment program i-n agriculture was restructured by (a) reducing the number and scale of projects adopting the rural development approach and (b) increasing the resources allocated to adaptive -esearch--which should emphasize applied farm systems research and soils management practices--feeder roads, production of improved seeds, soils conservation, and reforestation. In the case of colonization projects, this approach would-imply moving away from state oriented efforts'and encouraging - spontaneous colonization in selected areas of the lowlands. The full - potential of this enormous region (some 80 million ha.) is not known, - however, and -the Government has not yet defined a st-ategy to promote its development -while preserving its ecological equilibrium. xxvir. The restructuring of agricultural investment needs to be accompanied by a carefully designed strategy towards agriculture. The report thezefore recommends -hat 'ne Governmenc develop a medium term strategy for the sector that would specify (i) the role of domestic executing agencies and of foreign aid agencies in agricultural development; (ii) the coordinating mechanisms between Central Government agencies and Development Corporations; (iii) the fiscal and external resources needed; and (iv) the contribution of each individual project to the overall strategy. xxvii. It will take time to translate this ne-x approach into action; meanwhile, however, foreign aid agencies can play an important role in speeding the process up and increasing its effectiveness. It is now clear that the Bolivian Government cannot finance activities that require intensive use of technical expertise, or ones in which it is important to retain a staff that collects institutional knowledge and experience over time. This constraint is pa-t,cularly impo=tant in the fields of research and planniag--areas in which foreign aid agencies could usefully finance programs whose staff would be sheltered from Bolivian political and financial cycles. This approach was successfully used in the 1950s and 1960s. xxviii. The remort has not recommended increasing expenditures on extension services but changing the type of extension the current funds are financing. Experience in Bolivia has shown two things. First, the main impediment to the adoption of more productive technologies is either that they are not available or, if they a-e available, that they are not adapted  to farmers' needs. In the past, when suitably adapted technologies have been generated, they have been diffused without needing support from a conventional extension service. The speed of this diffusion could be accelerated through low cost extension services. Secondly, given the large number of small farmers in Bol3via, a conventional system of training and regular visits would cost too much. The report therefore suggests that efforts concentrate on low cost extension services, i.e. promotional systems, courses involving exhibitions, radio programs, demonstration farms, and working with leaders of farming communities. xxJ-. Similarly, the report does not conclude that credit is a major bottleneck in the successful adoption of new technologies and agricultural development at large. While fo=mal credit services can be very useful in promoting technical innovation, new technologies have been adopted in Bolivia vithout its support, and informal rural credit markets appear to have played an active role in this as well as in supplying regular credit needs. This does not imply that BAB should not be restructured in order to increase its operational efficiency and finance medium and long-term investments, but rather that the widespread use of credit components in rural development projects ought to be reviewed. -- - --= --- - - -  INTRODUCTION 1. The developmental problems of Bolivian agriculture have been unnecesarily compounded by Government policies which: (i) tend to underprice foreign exchange; (ii) set prices of agricultural commodities with a view to redistributing income rather than promoting efficiency and growth; (iii) restrict trade in agricultural commodities; and (iv) finance a public investment program that does not address the fundamental bottlenecks in the agricultural sector--the lack of adequate seed varieties, the lack of feeder roads, poor research and extension services, the urgent need to improve soils management and conservation practices, to reduce population pressures in the highlands, and to reduce the pace of deforestation. 2. The purpose of this report is to examine the nat-ure and effects of Bolivia's pricing and investment policies. Chapter I gives an overall picture of the Bolivian farmer and highlights how pricing and investment policies can affect his economic activities. It also reviews the past -performance of the agricultural sector. 3. Chapter II describes the objectives of current pricing policy and the institutional setting within which it operates. The literature on the subject is sparsel/ and much of this Chapter focuses on identifying the price fixing process and its institutional framework. Because of the heavy costs and marginal gains involved, no attempt is made here to estimate statistically the effects of Government peicing policy on production and f-rther, firm data on production costs are not available in Bolivia. Finally, case studies of ten commodities are used to show how prices are set, how they are enforced, and how domestic prices compare with international ones. Restrictions on trade in agricultural commodities and the Government's subsidy policy are deemed to be elements of pricing policy for the purposes of this report, and are consequently also reviewed in this Chapter. 4. Chapter III examines Government expenditures on agriculture and analyzes the features and objectives of the projects included in the 1982-84 Public Investment Program. The projects' objectives are then compared to the findings of previous Bank sector work on the main structural bottlenecks in Bolivian agriculture. 5. A detailed description of the agricultural sector--its patterns of' producticn, resoures, ecol og- 'Da IharO-terS. !t-Lc, in-st*5ittions, and technologies employed--is not undertaken here, since the subject has been dealt with elsewhere.2/ The foreign exchange policy and its inadequacy for agriculture is briefly examined in Annex I. 1/ The only study on the subject is Gardner, B.D., Agricultural Price Policy in Bolivia, La Paz, 1974, University of Utah. Series 8/75. This paper, however, is extremely limited in its scope. 2/ See Bolivia, Agricultural Sector Survey, World Bank Report No. 3029-BO, 1980 and Agricultural Develomment in Bolivia: A Sector Assessment, USAID, La Paz, August 1974.  CHAPTER I CONSTRAINTS FACING THE BOLIVIAN FARMER AND EVOLUTION OF THE AGRICULTURAL SECTOR 6. There are roughly 700,000 farmers in Bolivia. Some 80% of them live on the Altiplano and in the valleys, and the remainder live in the lowlands. About 55% of Bolivia's 5.7 million population are involved in agriculture. Because of their Indian origin, most farmers are bilingual and speak Spaaish and Aymara, or Spanish and Quetchua. A small proportion are trilingual. It is common to find non-Spanish speaking Indians among those born before the 1952 revolution, when the numbers enrolled in the school system were much smaller than they are today. 7. Most Bolivian farmers live in a subsistence economy. Their main objective is to reach a level of production that assures survival while - _i-niz-idzing risks. The farmer's economic activities are-organized to this end, and are the outcome of behavior patterns, production techniques,-and social conventions that have been tested and adjusted over centuries. From the farmer's point of view, s-witching his overriding objective from that of merely surviving to that of thriving--increasing his income through capital accumalation, adoption of modern production techniques, and greater reliance on the market--is an extremely difficult decision to take. Any capital investment capable of having a meaningful impact on his oatput -would require resources beyond U.is reach. To adopt modern techniques would expose him to an unacceptable level of risk, especJally during the transition period when the new technology is adjusted to the ecological conditions within which he operates. Finally, to produce for the market would raise the number of stochastic var