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thesis entitled

A Methodological Approach for Assessing the Impacts
of Macropolicies on Rural Households in Ecuador

presented by

Monica Acosta

has been accepted towards fulfillment
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M.S. degree in Agricultural Economics

     

 

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A METHODOLOGICAL APPROACH FOR ASSESSING THE IMPACTS
OF MACROPOLICIES ON RURAL HOUSEHOLDS IN ECUADOR

BY

Monica Acosta

A THESIS

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

MASTER OF SCIENCE

Department of Agricultural Economics

l 995

ABSTRACT

A METHODOLOGICAL APPROACH FOR ASSESSING THE IMPACTS
OF MACROPOLICIES ON RURAL HOUSEHOLDS IN ECUADOR

By

Monica Acosta

Stabilization and structural adjustment policy research in developing countries has focused
mainly on the effects of market distortions removal on aggregated sectors of the economy,
including agriculture. One of the criticisms of this research is that it has not addressed the
differentiated impacts of economic distortions on rural households and across subsectors within
agriculture due in part to the lack of data and an appropriate methodology.

This thesis describes the pre-crisis economic conditions in Ecuador and the process of
stabilization and structural adjustment during the period 1980-1994. The conceptual framework
and methodologies previously used to assess the effects of policy reforms in selected countries
were reviewed and subsequently adapted for an empirical assessment of selected policy changes
on a sample of households in Salcedo, a rural community in the mountain region of Ecuador.

This study demonstrates the usefulness of a methodology which links macro, meso and
micro relationships in assessing differential household and sub-sector impacts following major
macro-policy changes and adjustment of selected market distortions. The main conclusion is that
the partial effects of the changes in macro policy and market distortions on rural households
depends upon the enterprise structure of production, the level of tradeability among inputs and

outputs and the relative importance of off-farm income sources.

DEDICATION

I dedicate this work to the memory of my grandmother,
Luzmila, the woman I have admired the most.
I hope God shows me the way to be as wise as she was.

iii

ACKNOWLEDGMENTS

First, I would like to thank the Department of Agricultural Economics of Michigan State
University for having given me great solidarity and help as a foreign student and for the valuable
knowledge I achieved throughout the master program.

I would like to especially thank, Dr. Harold Riley, my major professor and Dr. David
Tschirley, my thesis adviser. Dr. Riley has provided constant guidance since I met him in
Ecuador in 1991, when he trusted my strong willingness to learn more about agricultural
economics and gave me the information and help to come to Michigan State and later he advised
me in the best way to complete the program successfully. He and Dr. Tschirley have given
permanent moral support as well, something I needed many times during my graduate program.

In addition, Dr. David Tschirley has provided a valuable academic support since we
started to discuss about the topic of my thesis. I went through a lot of obstacles during the data
management and he, with his extraordinary practical academic knowledge and professional
perseverance, encouraged and guided me throughout the data analysis and writing processes.

I have also received a lot of help from Dr. Harold Riley, member of my guidance
committee. He, with his unique experience in policy analysis of developing countries, guided the
preparation, organization and writing of many drafts of the thesis.

I would like to thank a number of persons from Ecuador including Engineer Neptali
Bonifaz, Director of the Institute of Agricultural Strategies; Dr. David Flood and Engineer
Ramon Del Salto, Economic Advisor and Director of the Project of Reorientation of the
Agricultural Sector; my good friends, who allowed me to get important data in carrying out the
research; and Mrs. Catalina Leon, member of the USAID-Ecuador Training Program, who gave

me professional support and her unconditional friendship whenever needed.

I am especially thankful to my parents, Raul and Carmen Acosta and my son, Robertito,
because they inspired me to achieve this goal. To my husband and friend, Brian J . Paterson, who
made this experience enjoyable with his constant love, care, patience and honesty.

Finally, I thank God for giving me the strength and faith to overcome the many problems

I faced for being in a different culture and the opportunity to enjoy wonderful times, as well.

TABLE OF CONTENTS

ABSTRACT .................................................
DEDICATION ..............................................
ACKNOWLEDGMENTS ........................................
LIST OF TABLES ............................................

LIST OF FIGURES ..........................................

CHAPTER 1. INTRODUCTION ...................................

Introduction and problem statement
Purposes and objectives

Scope and methods

Organization of the study

CHAPTER 2. STABILIZATION AND STRUCTURAL ADJUSTMENT IN
ECUADOR 1980-1994 ................................

Economic policy and the performance of agriculture prior to 1980
Crisis and adjustment from 1981 to 1987

Adjustment from 1988 to 1994

Performance of agricultural sector (1975-1994)

Welfare and socioeconomic results

- Employment

- Income and wage

Summary

CHAPTER 3. CONCEPTUAL APPROACHES AND METHODS FOR
ANALYZING THE EFFECTS OF POLICY REFORM
ON THE RURAL SECTOR ............................

Introduction

Conceptual approaches

- Stabilization and structural adjustment
- Levels of analysis

Methods and analysis

- Macro-mesa analysis

- Meso-micro analysis

vi

iv

ix

CHAPTER 4. FINDINGS FROM EMPIRICAL STUDIES .................. 63

Experiences of developing countries other than Ecuador

- General overview

- Stabilization measures and economic growth

- Employment and income during adjustment

The experience of Ecuador

- General overview

- Experiments and results of adjustment measures
on economic growth and political feasibility

- Policy mix when public and private investment
productivities differ

Effects of structural adjustment on poverty

Summary

CHAPTER 5. EFFECTS OF POLICY AND MARKET
DISTORTIONS ON NET HOUSEHOLD
INCOME - METHODS OF ANALYSIS .................... 87

The Data set

Analytical methods

- Processing and management of data
- Methods of analysis

CHAPTER 6. RESULTS OF THE SALCEDO RESEARCH ................. 111

Income and land use patterns

- Household income level

- Household income shares

- Return over variable costs

- Reporting different types of income

- Adding gross livestock sales

- Average size of farms and land use

Tradable and non tradable components in the

cost and output structure of farm production

- Cost structure

- Agricultural output

Partial and combined effects of policies on net

agricultural income

- Partial effects of policy and market
distortions on variable cost

- Combined effects of policy and market
distortions on agricultural variable cost

- Combined effects of policy and market
distortions on value of agricultural output

- Combined effects of policy and market
distortions on net agricultural income

vii

Combined effects of policy and market distortions
on off-farm income

Combined effects of policy and market distortions
on net household income

CHAPTER 7. CONCLUSIONS ................................... 143

Stabilization and structural adjustment policies
in developing countries including Ecuador
Notion of tradeability

Conclusions about a disaggregated methodological
approach

Conclusions about the results of the Salcedo
research

Limitations and weaknesses in the analysis of
the research

Methodological conclusions
Recommendations

APPENDIX A. NOTATION FOR ASSESSING IMPACTS ................ 153
APPENDIX B. BASIC INFORMATION FOR ASSESSING SOCIAL PRICES . . . . 163
APPENDIX C. EFFECTS OF IMPORT QUOTAS ...................... 171

BIBLIOGRAPHY ............................................. 173

viii

Table

10.

11.

12.

13.

14.

15.

LIST OF TABLES

Page
Summary of macroeconomic and agricultural behavior of
the economy of Ecuador, 1975-1994 ....................... 11
Macroeconomic and agricultural behavior of the economy
of Ecuador, 1975-1980 ............................... 12
Macroeconomic and agricultural behavior of the economy
of Ecuador, 1981-1987 ............................... 17
Macroeconomic and agricultural behavior of the economy
of Ecuador, 1988-1994 ............................... 23
Protection rates in Ecuador, 1980-1983 and 1984-1987 ........... 26
Share of economically active population by sectors,
Ecuador 1950-1994 .................................. 30
Rates of total un-employment, open un-employment
and under-employment, Ecuador 1980-1994 .................. 31
Share of economically active population (EAP) by sectors,
Ecuador 1950-1980 .................................. 32
Rates of growth in real income per capita by sectors,
Ecuador (1975-1994) ................................. 33
Information system for the social dimensions of adjustment ......... 43
Classification of cost components for imported inputs and
outputs by tradable and non tradable components ............... 93
A conceptual framework for partial assessment of the impacts
of selected policy interventions and market distortions ............ 95
Private and social exchange rate, 1990-1994 .................. 98
Distortion of tariffs, fees, duties and transport cost of
imported inputs and outputs to warehouse as percentage of
C&F, 1990-1994 ................................... 100

Private interest rate versus social interest rate
(WEIGHTED AVERAGE DEMAND AND SUPPLY SIDES) ....... 102

Table

16.

17.

18.

19.
20.
21.
22.
23.
24.
25.
26.
27.

28.

29.
30.
31.

32.

33.

34.

35.

Social return and social interest rate .......................

Private component of rural transport as a percentage of
total transport service fee ..............................

Private and social value components of transport
vehicle parts ......................................

Private and social value of diesel fuel ......................
Social component of rural transport ........................
Opportunity cost for farm labor ..........................
Opportunity cost for off-farm family labor ...................
Distribution of farm sizes, Salcedo Ecuador (1991) ..............
Average net household income in US dollars ..................
Income shares by source and farm size category ................
Cropping cash sales and own consumption shares ...............
Nominal private return over variable costs ...................

Proportion of households reporting different types of
income, by farm size - Percent of total cases ..................

Gross farm income shares ..............................
Land use by farm size ................................
Land use by farm size and crop group category ................

Share of tradable and non tradable components for
agricultural input and output, average 1990-1994 ...............

Share of tradable and non tradable components in input
cost by crop group category ............................

Partial effects of policy and market distortions on
farm input cost ....................................

Net combined effects of policy and market distortions
at the agricultural input level ............................

X

104

105

107
109
110
112
113
115
116

117

118
120
121
121

124

130

Table

37.

38.

39.

A.1

A.2

A.3

A.4

A.5

A.6

A.7

A.8

A.9

A. 10

Combined effects of policy and market distortions at
agricultural output level ...............................

Combined effects of policy and market distortions on
net agricultural income ...............................

Combined effects of policy and market distortions on
off-farm income level ................................

Combined effects of policy and market distortions on
household net income ................................

Notation for calculation of private and social values
of tradable and non tradable components of agricultural
variable costs .....................................

Notation for calculation of private and social values
of tradable and non tradable components of agricultural
output ..........................................

Notation for calculation of private and social values
of tradable and non tradable components of net
agricultural income ..................................

Notation for calculation of private value and social
values of agricultural output, agricultural variable
cost and off-farm income ..............................

Notation for calculation of private and social values of
off-farm income ....................................

Notation for calculation of private value and social
values of net household income ..........................

Notation for calculation of partial effects of policy
and market distortions on agricultural variable costs .............

Notation for calculation of combined effects of policy
and market distortions on agricultural variable costs .............

Notation for calculation of combined effects of policy
and market distortions on agricultural output ..................

Notation for calculation of combined effects of policy
and market distortions on net agricultural income ...............

xi

Page

133

155

156

158

159

159

160

161

Table

A.”

A.12

B.1

B2

8.3

B.4

B.5

B.6

B.7

Notation for calculation of effects of policy and market

distortions on off-farm income ......................

Notation for calculation of combined effects of policy

and market distortions on net household income ...........

Private - current tariffs for tradable inputs and

tradable outputs, percentage over C&F, 1990-1994 .........

Private - current import duties, other taxes and
transport to import warehouses for tradable inputs and

tradable outputs Percentage over C&F, 1990-1994 .........

Private - current tariffs, imports fees, other taxes
and transport cost to import warehouses as a percentage

of C&F 1990-1994 .............................

Social - ”competitive" custom and port expenses and
transport to import warehouses for tradable inputs and

tradable outputs Percentage over C&F, 1990—1994 ........

Social cost to bring imports to domestic market of

Ecuador as a percentage of C&F 1990-1994 .............

Private interest rate versus social interest rate

(FROM THE DEMAND SIDE) .....................

Private interest rate versus social interest rate

(FROM THE SUPPLY SIDE) ......................

xii

Page

162

162

164

165

166

167

168

169

I70

LIST OF FIGURES

Figure Page
1. Real devaluation and factor returns with tradable

inputs . . . .. ...................................... 51

Cl Effects of import quotas ............................... 172

xiii

Since the late 1970’s and early 1980’s, stabilization and structural adjustment policy
research in Ecuador has focused mainly on the effects of market distortions removal on
aggregated sectors of the economy, including agriculture. Although, these studies gave substantial
benefit for policy formulation at a macro level, no assessment of differential effects on
participants was carried out due to lack of detailed household data and a methodological approach
for analysis.

From the early 1970’s to the early 1980’s, the objective of Ecuador’s economic
development policy was translated into a mixture of goals including, a) taxation of agriculture and
use of petroleum export earnings for import substitution industrialization, b) food self-sufficiency,
b) more equitable income distribution through accessibility of food to all population groups, and
c) control of inflation and stability of domestic prices (De Janvry, 1992).

The Ecuadorian strategy of economic development introduced large distortions in
agricultural and non-agricultural markets through relatively strong state interventions such as high
public current and capital expenditure, control of macroeconomic variables and the creation of
a large bureaucracy. Domestic prices were isolated from the transmission of international prices
(variation of international prices leads to corresponding variation in domestic prices) through
protectionism toward import substitution and taxation of agricultural exportables (Whitaker,

1990).

2

By the early 1980’s, export earnings decreased, international debt payments were delayed,
public deficits and inflation rates increased and the overall growth rate decreased sharply. Along
with these facts, the level of intervention reached a point of high complexity. The goals were
confused and the crisis arrived (Fargeix, 1990).

Stabilization and adjustment policies were influenced both by international funding
organizations and political decision makers because past policies revealed un-sustainability. The
new set of policies aimed to (Bourguignon, 1992 and Krueger, 1993):

a) open domestic markets, so prices without distortions would be the opportunity

cost of non tradable inputs and outputs,

b) open international trade, so transmission of international prices would be the

opportunity cost of tradable inputs and outputs and,

c) apply institutional and legal reforms which would lower transactional costs and

improve competitiveness in markets.

In practice, stabilization programs in Ecuador after 1981 were partially successful in
reducing the public deficit, the current account balance deficit and in combating the acceleration
of inflation. Some legal reforms were enacted to give more flexibility to international trade and
the financial system, so more open markets were encouraged. However, from 1981 to 1994 many
developing country governments faced serious external shocks (fall of international prices of
export products and natural disasters) and opposition of political groups which forced them to
either delay or slow down the intensity of stabilization packages (De Janvry, 1992).

Past analysis of policy effects on the agricultural sector of Ecuador were based
on the following assumptions:

a) the agricultural sector is fully tradable and,

b) the variance of crop-mix, input-mix use and rate of substitution among factors

3

of production across farms sizes, types of producers and regions are non
significant. Therefore, aggregated means of income and cost were used to assess
the effects of policies on the whole agricultural sector.

Disaggregated studies of policy effects taking into consideration different levels of
tradeability among agricultural commodities and inputs were not done due to the lack of detailed
and updated household data. Also, the main purpose of those studies at that time was to show the
significant response of the agricultural sector as a whole to a revised set of incentives. Therefore,
assessing macro-level impacts of policies was enough to influence governments and political
interest groups to take decisions on a more rapid removal of distortions in domestic agricultural
markets, financial and international trade policies.

However, during the last three years, the policy formulation agenda has been moving
towards a more disaggregated analyses to assess:

a) the effects of policy and market distortions at the rural household level and,

b) the effects of policy changes and improvements in market performance on private

incentives and the welfare of the rural/urban poor.

For better policy formulation, it is necessary to pay more attention first, to the notion and
range of tradeability among agricultural commodities in Ecuador and, second to the

disaggregation across different kinds of rural households, farm sizes and regions.

3- W

The main purpose of the present research was to identify and further develop analytical
methods for assessing the effects of different policies that impact rural households because macro

approaches do not assess the variation of effects among households based on size, farm

characteristics and crop combinations.

a)

b)

d)

The specific objectives of the study were as follows:

To review theoretical concepts and empirical studies of the effects of stabilization and
structural adjustment policies on both overall economic performance and the welfare of

poor groups in developing countries including Ecuador.

To demonstrate how to combine rural household data with macro and meso economic
variables to quantify policy distortions and to give a more careful treatment to the notion

of tradeability across the crops produced in the area selected for detailed analysis.

To calculate relative changes in macro and meso economic variables in both current and
social values and to estimate the total and partial effects of policy and market distortions
on net household income in the area of Salcedo, Ecuador during 1990-1994 by farm size

and crop group categories.

To give methodological recommendations to improve data collection systems and
institutional inter-relationships and arrangements between data collection and policy

analysis agencies for better policy formulation at a disaggregated level.

C. W

A literature review was done to have a general framework about the historical experiences
and the usessment of impacts of structural adjustment policies in the agricultural sector of
developing countries including Ecuador. The macro-meso-micro approach and the theory of social
values were subsequently adopted as a methodological framework for the empirical research of
the thesis.

A household survey done by the Institute of Agricultural Strategies (IAS/USAID) in the
northern part of the Sierra of Ecuador (1991) was used as a data base to assess the impacts of
selected policy and market distortions on rural household incomes. The sample size was 592. A
representative sample was taken for farms with less than 50 hectares and a census was taken for
farms over 50 hectares. The sample was designed using the records of NIRT (National Institution
for Rural Land Titles) for this area through a sophisticated method of photographic area and

topographic measures for all farms.

The analytical procedures for the empirical research were the following:

a) Use of farm household data to break households into farm size categories and to
characterize each category by: i) income sources (off-farm income activities; and
cropping and own consumption farm income by crop group category) and, ii)

structure of variable input cost.

b) Use of macro and meso economic variables obtained outside the survey to

quantify policy and market failure distortion coefficients based on a comparison

6

between actual value (private) and an assessment of opportunity cost (social) for

each case of distortion.

c) Apply these distortions coefficients on tradable and non tradable components of
tradable and non tradable inputs and outputs of household farm income and on
agricultural wage off-farm income to calculate the effects on net household

income by farm size category.

The main limitations of the household data used can be summarized as follows:

a) Since the rural household survey available for the study was designed for a small
area in the northern mountain region of Ecuador, an assessment of micro-level
impacts of policy changes and structural adjustment measures over the entire

nation was not possible.

b) Lack of production costs of livestock to assess net livestock income. There was

only available data for livestock sales.

c) Lack of secondary data to estimate social values for some off-farm income

SOUTCCS .

In spite of these limitations, the linkage approach used between macro, meso and
household data, the notion of tradeability and therefore the level of disaggregation in the analysis

Of the results represents the main contribution of the present research.

D. Wham

The remainder of this study is organized as follows: Chapter 11 describes the pre-crisis
conditions of Ecuador’s economy and the process of stabilization and structural adjustment during
the period 1980-1994. Chapter 111 describes the conceptual approaches and theoretical framework
for assessing the effects of policy reforms on the rural sector of developing countries. Chapter
IV discusses empirical studies of structural adjustment effects (at a macro-aggregated level) on
economic and social performance in developing countries, including the case of Ecuador. Chapter
V describes: a) the methodology to assess social values of the variables involved in the analysis,
b) the methodology to assess total overall effects and contribution of partial effects of policy and
market distortions on net household income. Chapter VI presents the results of research: a) land
use and income patterns of households, b) the effects of tradeability and non tradeability on
agricultural input and output value and c) the combined effects of policy and market distortions
on net household income. Chapter VII summarizes the main conclusions of the empirical

research, the methodological conclusions and recommendations for further research.

CHAEIELZ

TI AND R ALAD E

INE R180-1 4

 

During the 1960’s, Ecuador was essentially an agricultural country. The main export
crops (banana, cocoa, coffee and sugar) were mostly produced by a few large farmers. The
import-competing crops and basic food products were produced by a large number of small
farmers in the mountain region (the Sierra) and medium and small farmers on the Coast. In the
Sierra, though, some food products such as milk and livestock were produced by ”hacienda”
owners under extensive systems of cultivation (Whitaker, 1990).

The economy changed sharply with the discovery of oil at the end of the 1960’s.
Production and exporting of oil started on a massive scale in 1972. With high petroleum prices
in international markets (four times prices during the preceding decade), Ecuador started its
modern economic development under the model of "import-substitution" that prevailed throughout
Latin America during this time. The real gross domestic product grew by 15 percent annually
between 1970-1974 (Fargeix, 1990).

Oil revenues generated a large balance of payments surplus, which gave the country
access to low interest rate loans in a time of excess liquidity in the international market. The
foreign debt of US$330 million in 1974 grew to US$26 billion by the end of the decade and

petroleum exports’ averaged 54 percent of total exports between 1975 and 1980 (Table 1).

9
The main policies and reforms implemented during 1975-1980 (Tables 1 and 2) were:

a) Increased public capital and current expenditures, the creation of a number of
public enterprises and a rapid expansion of the bureaucracy. During 1975-1980, government
budget deficit as a percentage of GDP averaged -2.5 percent and if public enterprises were added
it was -3.5 percent. Public investment as percentage of GDP was 6.1 percent but private
investment was still much larger (17.7 percent). The public deficit was financed mainly by
external sources (53.7 percent on the average). The contribution of oil revenues to the
government budget (measured as percentage of GDP) increased from 3.9 percent in 1973 to 7.5
percent in 1980. The growth in public expenditures benefited non-tradables like services
and construction. The services sector grew on average 7.7 percent annually between 1965-1980
(Table 1).

b) Creation of a whole structure of subsidies toward the industrial sector through an
overvalued exchange rate, protective tariffs and quotas on competitive imports, subsidies for
machinery and other inputs, preferential interest rates and tax exemptions. These subsidies
supported the creation of a capital-intensive industrial sector concentrated in the two largest cities:
Quito and Guayaquil (De Janvry, 1992). GDP grew on average 8.2 percent annually during this
period and the rate of growth for industry and petroleum were 9.3 and 6.1 percent, respectively
(Table 1).

c) In general, the agricultural sector was discriminated through taxes on export
crops, controls on producer and consumer prices, overvaluation of the exchange rate and direct
subsidies for wheat and barley imports. Agriculture growth slowed to 3.4 percent annually
between 1965-1980. However, there were some direct compensating policies like preferential
interest rates for agricultural short term loans, subsidies and low tariffs for imports of machinery,

agro-chemicals and fertilizers and subsidies in the use of water through the building of irrigation

10

systems and protection from imports of some food crops (corn, rice, soybeans, oil beans,
sorghum and sugar). Nevertheless, these sectoral policies did not offset the discrimination of the
overvaluation of the exchange rate (Whitaker, 1990).

The degrees of discrimination differed among sub-sectors and crops within agriculture.
Export crops grew by only 1.2 per cent during 1965-1981 while other crops grew at 2 percent.
In contrast, forestry, and fishing grew at relative rapid rates of 9.6 per cent and 11.7 percent,
respectively, while livestock grew at 4.6 percent (Whitaker, 1990).

Rapid growth in fishing is partially explained by growth in demand for shrimp and fish
in the international markets. The high rates of growth in livestock production, forestry, and some
import-substituting crops (hard corn, soybeans, sorghum and oilseeds) are explained by the
backward linkages from protected domestic industries to these sectors which produced raw
materials for expanding internal markets for milk, furniture, dairy products, processed meat,
vegetable oils, soaps and poultry (Acosta, 1990).

d) The economic boom and significant structural and social changes ended by the
early 1980’s. Oil production and exports fell by 5 percent in 1980. Both the current account of
the balance of payments and the public sector budget experienced substantial deficits in 1981 of -
7.1 percent and -4.8 percent of GDP, respectively. Economic growth slowed to 3.9 percent and
foreign lenders cut all new loans in August 1982 when adjustment became necessary (Fargeix,

Andre, 1990).

11

   

 

Title 1. M of .croecorw-ic and agricultu-al behavior of the acorn-y of Ecudor,
1965-1994
Concept/Item 65-80 75-80 81-87 -91 2-94
WEI-(T)
GDP growth 8 2% n/a 2.3% 2.7% 3.0%
GDP growth agriculture 3 4% n/a 6.2% 4.9% 0.0%
GDP growth petroletn 6.1% n/a 2.1% -1.0% 9.2%
GDP growth industry 9 3% n/a 0.2% -0.4% 3.3%
GDP growth services 7 7% n/a 0.9% 4.8% 1.4%
Share GDP by sectors f%)
Agriculture 20.1% n/a 15.3% 17.3% 17.3%
Petroleum 4.6% n/a 12.4% 12.5% 13.3%
Industry 17.1% n/a 18.1% 15.8% 15.2%
Services 26.6% n/a 26.9% 26.4% 26.3%
m HILIC DEFICIT I mus
Government budget (%IGDP) n/a -2.5% -1.4% -1.8% -3.6%
Government budget + public n/a -3.5% -2.1% nVa n/a
enterprises
%financed internal n/a 46.3% 80.7% 1.5% 8.8%
%financed external n/a 53.7% 19.3% 98.5% 91.2%
ravesmar as W
Public investment n/a 6.1% 5.7% 3.2% 2.5%
Private investment n/a 17.7% 13.5% 10.8% 11.9%
IALAMCE or PAYMEMTS (millions of SOS)
Current account balance n/a (423) (606) (489) (556)
Trade balance n/a 77 586 732 588
Balance services (interest debt) n/a n/a n/a (1,324) (1,274)
Direct investment n/a n/a n/a 150 469
Exteer debt received n/a n/a n/a 194 300
International Monetary Reserve n/a n/a n/a 228 472
SIIRE OF WIS IV SECIWS (%)
Agriculture n/a 43.9% 48.6% 52.2% 58.8%
Petroleum n/a 53.7% 49.9% 46.4% 40.0%
Others n/a 2.4% 1.5% 1.4% 1.2%
SMARE Of IMPORTS IV SECTORS (%)
For agriculture n/a 17.5% 18.4% 8.8% 16.9%
For industry, transp., n/a 82.5% 81.6% 91.2% 83.1%
construction
SRARE OF IMPORTS IV SECTORS
AID PRODUCTS (%)
Imorte for agriculture
Durable n/a n/a n/a 3.5% 12.2%
Raw tutorials n/a n/a n/a 4.4% 3.9%
Machinery nJa n/a n/a 0.9% 0.7%
Imports for other sectors
Mon Durable, transport and fuel n/a n/a n/a 10.1% 12.3%
Raw materials n/a n/a n/a 45.9% 33.7%
Machinery, construction n/a n/a n/a 35.2% 37.2%
AGRICULTURAL TRADE IALAMCE
Trade balance (millions of SOS) n/a 425 678 1,169 1,465
Agricultural trade balance n/a 70.7% 74.0% 74.3% 74.4%
as % of other sectors'imports
ROMETARY POLICY
Iotal domestic credit (%/GDP) n/a 22.1% 26.1% 14.3% 11.2%
Credit to private sector (%IGDP) n/a 19.0% 20.6% 7.5% 5.5%
Credit to public sector (%IGDP) n/a 3.1% 5.5% 6.8% 5.7%
Money supply M1
XIGDP n/a 15.4% 13.3% 9.3% 8.8%
Money growth n/a 23.9% 25.8% 47.6% 42.6%
MACROECOMOMIC VARIABLES
Inflation rate n/a 12.2% 27.2% 57.8% 42.3%
Mominal interest rate n/a 10.5% 17.3% 45.1% 51.4%
Real Interest rate n/a -1.7% -9.9% -12.7% 9.1%
Exchange rate (official) I n/a 25 75 662 1,828
Exchange rate (free market) b n/a 25 79 731 1,901
Ratio 8 b - a n/a -0.7% -2.6% 16.0% 3.8%

 

Source: Central Bank - Ecuador, “Boletin Anuario" various issues; Uhitaker, 1987

De Janvry A., 1991.

12

 

 

Tue 2. Macroeoorw-ic md agricultural behavior of the econ-y of Ecmdor, 19754”)
— =—
Concept 1975 1976 1977 1978 1979 1980

GOP AIALTSIS
GDP growth 5.6% 9.2% 6.5% 6.6% 5.3% 4.9%
GDP at factor costs

Agriculture 91.2 93.8 96.0 92.3 95.0 100.0
Manufacturing 64.2 72.7 81.3 88.0 96.5 100.0
Services 69.4 75.6 82.5 88.2 92.9 100.0
GLOBAL PUILIC DEFICIT
I SURPLUS
as percentage of GDP

Government budget -0.9% -2.6% -4.5% -3.0% -0.1% -3.7%
Government budget + -2.2% -3.3% -5.5% -0.5% -0.5% -4.5%
public enterprises

%financed internal 66.7% 87.5% 50.0% 0.0% 100.0% 66.7%
%financed external 33.3% 12.5% 50.0% 100.0% 0.0% 33.3%
IMVESTMEIT
as percentage of GDP

Public investment 5.9% 6.6% 5.9% 6.2% 5.3% 6.4%
Private investment 17.3% 15.6% 17.7% 20.0% 18.4% 17.2%

IRLRICE OF PINIEITS
(Idllionl of SUS)

Current account balance (220) (7) (342) (701) (625) (642)
Trade balance 7 259 40 (175) 54 278
Balance of services n/a n/a n/a n/a n/a n/a

(interest debt)
MOIETART POLICT

Total domestic credit (%IGDP) 20.6% 21.8% 21.9% 22.8% 22.9% 22.7%
Credit to private sector 18.8% 20.2% 18.9% 19.4% 18.4% 18.5%
Credit to public sector 1.8% 1.6% 3.0% 3.4% 4.5% 4.2%

Money supply M1
%IGDP 14.4% 16.1% 15.8% 15.6% 15.0% 15.3%
Money growth n/a 38.1% 22.9% 13.5% 17.0% 28.0%

MACROECOROMIC VARIABLES

Inflation rate 14.3% 10.2% 12.9% 13.1% 10.1% 12.8%

Mominal interest rate 12.3% 8.7% 11.2% 11.1% 8.6% 11.3%

Reel Interest rate -2.0% -1.5% -1.7% -2.0% -1.5% -1.5%

Exchange rate 25 25 25 25 25 25

(official) a

Exchange rate n/a 24 25 25 25 25

(free market) b

Ratio (b/a)-1 n/a -2.2% 0.9% -0.6% -1.4% 0.0%

 

Source: Central Bank - Ecuador, “Boletin Anuario" various issues; Hhitaker, 1987; De Janvry A., 1991
Elaboration: Author

13
B. cm): and ndigstmmt from 1981 to 1987

The crisis had its origin in the financial problems with the foreign debt and a 15 percent
decline in petroleum prices. The amount of total new foreign debt was reduced from US$1,218
million in 1981 to an average of US$354 million between 1982-1984 (Fargeix, 1990).

Loss of export earnings occurred from falling oil export prices from US$35 a barrel in
1980-81 to US$27 in 1983-84. The crisis was intensified by the floods of the winter of 1982-
1983, which destroyed a large part of agricultural production (it was estimated that the floods
were responsible for a 30 percent decline in agricultural production) (De Janvry, 1992).

Three periods of stabilization-structural programs can be identified after the crisis in 1981
based on the intensity of macroeconomic adjustment and institutional reforms.

The periods for the analysis were the following: 1. 1981-1987 (two government regimes),
2.1988-1991 (one government regime) and 3. 1992-1994 (one government regime).

The main policies and reforms during the government regimes (Tables 1 and 3) were:

a) Devaluation was used as a main policy of adjustment with restriction on imports
through quotas and tariffs and the elimination of export taxes. The exchange rate went from 25
sucres per dollar in 1981 to 63 sucres per dollar in 1984 in the controlled market compared with
61 s/US in the free market. There was an increase in the level of protection from 25 percent over
the 1970’s to 52 percent in 1982-1984 (Table 3).

b) Current expenditures in the fiscal budget were reduced from 9.9 to 8.3 percent
of GDP in 1983 and capital expenditures from 2.7 to 2.4. The government deficit was reduced
from 5.7 percent of GDP in 1981 to —0.9 percent in 1983 and turned into a surplus of 1.2 percent

in 1984 (Table 3).

ll.

14

c) Nevertheless, money growth (M1)' went from 11.7 percent in 1981 to 42.2
percent in 1984 and inflation accelerated from 14.7 percent in 1981 to 30.4 percent in 1984. This
sharp increase in the inflation rate can be partially explained by the winter floods in 1983
(Fargeix, Andre, 1990).

d) Favorable international prices for export commodities and the depreciation in the
exchange rate brought out a surplus in the balance of trade. It went from US$ 174 millions in
1981 to $US 1,055 millions in 1984. The current account deficit dropped from $US 993 millions
in 1981 to $US 263 millions in 1984 (Table 3).

With the election of President Febres Cordero in August 1984, there was an important
deepening in stabilization policies. The political power of this government coalition represented
the coastal agro-exporters and banking interests in contrast with the previous political power of
the bureaucracy and urban interests under the Dutch disease and discrimination against
agriculture.

The main policies and reforms during this government regime (1984 and 1987) (Tables
1 and 3) were:

a) Unification of exchange rate markets. In 1985, the official exchange rate was used
for petroleum exports and international debt and the rest of the international transactions passed
from the official exchange rate to a more "devaluated" intervention rate.

b) A series of measures were implemented to liberalize international market
transactions such as reduction of import tariffs and the elimination of import prohibitions and
quantitative restrictions. The trade system was further liberalized in January 1986 with a revision

in the entire tariff system under the Import Tariff Law.

 

Money growth M1 = growth referred to domestic monetary currency in circulation + domestic
monetary deposits in Central Bank.

15

c) Domestic prices of fuel and electricity were increased to cut down the subsidies
that prevailed since the oil discovery.

d) Nominal interest rates were increased from 17 percent in 1984 to 21% in 1986
which implied an increase in real interest rates from -l3.4 percent in 1984 to -2 percent in 1986.
By the end of 1984, financial liberalization started with some interest rates for specific savings
instruments, which were set up by the banks themselves and not subject to Central Bank
intervention (World Bank, 1993).

All of these brought some positive economic results: recuperation of economic growth
(GDP grew by 4.2 percent in 1984 and 4.3 percent in 1985); a public sector budget surplus (4.2
percent of GDP in 1985); a current account deficit turned into a surplus of $US 114 millions in
1985; and reduction of the inflation rate from 48.1 percent in 1983 to 30.4 percent in 1984 and
28 percent in 1985 (Table 3).

The large devaluations, the removal of price controls, unemployment in non-competitive
industries, decline in government subsidies and welfare benefits implied an increase in inflation
and a fall in the real wage bill. The only short-term gainers were the economic elites supporting
the regime - coastal agro-exporters and financial interests. Some politically powerful groups such
as organized labor, industrialists producing for the domestic market and importers which had
gained under the appreciated real exchange rates, lost during this period. Therefore the political
cost and instability was high due also to the lack of targeted compensatory measures for poor
groups (who lost in the process, too) (De Janvry, 1992).

In 1986 the fall of petroleum prices from $U825 to $U812 per barrel shocked the
economy deeply. The losses in export revenues were equal to 8 percent of GDP. This new
international shock forced the government to carry out additional measures. The programs of

liberalization of trade, financial markets and agricultural prices were intensified.

16

The nominal devaluation averaged 50 percent during 1986, when the inflation rate was
23 percent. By August 1986, the exchange rate was fully liberalized to a free market. The
elimination of agricultural subsidies and elimination of maximum prices for many consumer
goods was part of the agricultural structural adjustment program negotiated with the World Bank
(Fargeix, Andre, 1990).

The economic stabilization measures tended to offset the external shocks, but the program
was not politically sustainable. The government began to institute a program based on "populism
or regionalism” supported by a coalition between economic elites and lower class urban groups.
This meant that the government had to abandon austerity in favor of a program of public work
expenditures which contributed to inflation pressures again (De Janvry, 1992). The government
and public enterprises surplus of 4.6 percent in 1985 turned into a deficit of -3 percent in 1987
financed 30 percent by internal sources. Money growth Ml rose from 23.6 percent in 1985 to
32.3 percent in 1987 (Table 3).

At the end of 1987, an earthquake destroyed part of the only pipeline transporting crude
petroleum from the Amazon region to the coast. Exports were stopped for several months and
fell by 35 percent overall in 1987. The public budget deficit soared to 13 percent of GDP, given
the high proportion of petroleum revenues financing the budget. GDP fell by 5.2 percent in 1987
and the rate of inflation went to 30 percent. The situation was worsening by the falling of
petroleum prices again in 1988 and the transition to a new democratic regime with excessive

fiscal expenditure expectations (Whitaker, 1990).

17

 

 

Tile 3. Mic lei agricultta'el behavior of the scout] of Ecuador, 1%1-1m7
_

Concept 1981 1982 1983 1984 1985 1986 1987
GDP analysis

GDP growth 3.9% 1.2% -2.8% 4.2% 4.3% 3.2% -5.2%
GDP at factor costs

Agriculture 106.8 109.0 93.8 103.8 114.1 125.6 134.9
Manufacturing 108.8 110.4 108.9 106.8 107.1 105.3 105.5
Services 103.2 105.4 101.0 104.3 107.2 109.7 112.4

GLOBAL PUILIC DEFI-
CIT or SURPLUS as %.of

GOP

Government -5.7% -5.5% -0.9% 1.2% 4.2% -1.0% -1.9%
budget

Govern.budget -5.8% -7.5% -2.2% 1.4% 4.6% -2.4% -3.0%
+ public enterprises

%financed 42.3% 53.3% -16.0% -62.5% 15.8% 72.1% 30.4%
internal

IIVESTMEIT as %of GDP

Public 7.3% 6.5% 4.8% 4.4% 4.9% 5.8% 6.1%
investment

Private 14.9% 16.1% 11.8% 11.0% 11.2% 12.6% 17.0%
investment

IALRICE G PATENTS

Current (993) (1,201) (134) (263) 114 (548) (1,175)
account

balance

Trade 174 140 927 1,055 1,294 555 (33)
balance
MOIETARY POLICY

Total domestic credit 24.5% 25.9% 30.6% 28.2% 25.9% 24.2% 23.3%
(%IGDP)

Credit to 18.7% 19.8% 26.4% 23.7% 17.3% 18.4% 19.8%
private

sector

Credit to 5.8% 6.1% 4.2% 4.5% 8.6% 5.8% 3.5%
public

sector
Money supply M1

%IGDP 14.4% 14.5% 14.0% 13.7% 12.4% 12.0% 12.1%
Money growth 11.7% 20.2% 30.4% 42.2% 23.6% 20.4% 32.3%
MACROECOMOMIC
VARIABLES

Inflation rate 14.7% 16.4% 48.1% 30.4% 28.0% 23.0% 29.5%
Mominal interest rate 13.0% 13.0% 15.0% 17.0% 19.0% 21.0% 23.0%
Real Interest rate -1.7% -3.4% -33.1% -13.4% -9.0% -2.0% -6.5%
Exchange rate 25 30 44 63 70 123 170
(official) a
Exchange rate (free 21 27 40 61 60 148 194
market) b
Ratio (b/a)-1 -15.5% -11.5% -10.3% -1.9% -13.1% 20.8% 13.5%

 

Source: Central Bank - Ecuador, "Boletin Anuario" various issues; Uhitaker, 1987; De Janvry A.,
1991

   

 

18
C- W

During the 1988-1991 presidential term, some stabilization and adjustment took place,
but at the same time there were additional policies and measures which aimed to strengthen the
government intervention and the participation of the public sector. This political attitude was
justified by the political ideology of a need for a deeper intervention because of the perceived
structural failures in the economy related with the existence of oligopoly power in certain sectors.
At the same time, the new government coalition was based on bureaucratic and financial interests,
mainly related with urban interests.

The main policies and reforms implemented during 1988 to 1991 (Tables 1 and 4) were:

a) A return to differential exchange rates: The regime introduced an intervention
exchange rate for all, debt-service and imports of products named as ”basic" like food
commodities, medicines and agricultural and industrial inputs; a free exchange rate for all other
transactions in the economy (accounted for only 10 percent of the total international trade); and,
an official exchange rate for accounting purposes of the Central Bank. Average sucre
overvaluation was 24 percent during 1988-1991. By August 1992, international reserves were
almost depleted. From $US 400 million in 1990, it dropped to $US 22 million in 1991 (Central
Bank, 1993).

b) Renegotiation of external debt was not successful. External debt received went
from $US 159 million in 1988 to -$US 123 million in 1992. The payment of a total of US$2,000
million of debt service was delayed during 1988-1991 (Table 4).

c) Even though overvaluation of foreign exchange rate occurred, there were some
efforts to stimulate agricultural exports. A law which aimed to facilitate exports was issued in

May 1992. This law eliminated legal and paper requirements to export, customs procedures, port

19

fees and reduction of transportation restrictions. A one-step window for many imports and exports
was set-up at the Central Bank. Nevertheless, there were still some quotas, licenses, taxes and
even prohibitions to some commodities like rice, wheat and soybeans tort, for example (IDB,
1993). d) There was a system of controlled interest rates based on setting ceilings
for financial spread and preferential interest rates for agricultural commodities and export crops.
The exporters could receive sucres in advance from their exports as a kind of short-term loan
with lower interest rates than the average in the market. Because of this implicit subsidy given
by the Central Bank, there were big financial operating losses, which induced money creation and
inflation pressures (IDB, 1993).

The real interest rate went from -31.2 percent in 1988 to positive real interest rates of
4.5 and 7.7 percent in 1991 and 1992, respectively (Table 4). The preferential real interest rates
for the agricultural sector went from -37 percent in 1988-1989 to 1 and 3 percent in 1991-1992.
The difference between the general interest rate and preferential rates decreased from 14 points
in 1988 to 7 points in 1992 (ASRP/MAG, 1993).

e) Fiscal policy increased current expenditure more than capital investment. Public
employment was double the preceding period (1984-1987) and the number of public enterprises
went from 116 to 163. The global public surplus of 0.1 percent of GDP in 1988 turned out into
a deficit of -2.1 and -4.7 percent of GDP in 1987 and 1988, respectively (Table 4).

1) Monetary policy was more expansionary than during the preceding period (1981-
1987). The rate of money growth M1 rose from 25.8 percent to 47.6 percent between the two
periods, nevertheless the money supply as a percentage of GDP went from 13.3 to 9.3 percent.
The average inflation rate during 1981-1987 was 27.2 percent and it continued rising to average
57.8 percent during 1988-1991 (Table l).

g) The reactivation of the Andean Free Trade Agreement (Andean Pact) in the

20

northern countries of South America put some pressure on the government to begin a process of
liberalization of trade and simplification of the tariff and custom system. Under the Common
Andean Tariff, import tariff ceilings were reduced drastically from 290 percent to 40 percent and
the spread in tariffs between raw materials and processed goods dropped, meaning a more equal
treatment between the agricultural and industrial sectors (ARSP/MAG, 1993).

The last Tariff Reform in May 1992 has the following levels of tariffs (%/C&F): a) raw
materials, vehicles and inputs not produced in the country (0%-5%), b) inputs and other semi-
processed products (1096-1596) and final goods (20%).

The election of a new president in August 1992 was based on a political coalition between
the most market liberalized agro-exporters and financial interests. Therefore, it was expected to
turn the mild liberalization and stabilization program of the past regime into a most radical one.

The main policies and reforms implemented during 1992 to 1994 (Tables 1 and 4) were:

a) Monetary and public sector deficit: The stabilization package aimed basically to
reduce inflation which averaged the highest level during 1988-1991 (57.8 percent). Money growth
averaged 42.6 percent between 1992-1994 compared with 47.6 percent in preceding period. The
inflation rate went from 54.6 percent in 1992 to 45 percent in 1993 and 27.3 percent in 1994.
The overall public sector deficit was reduced from -4.7 percent of GDP in 1992 to -2.5 percent
of GDP in 1994 (Tables 1 and 4).

b) Exchange rate: The exchange rate was left to float within a band but the rates of
the devaluation rate in 1993 and 1994 (19 and 13 percent, respectively) were lower than inflation
(45 and 27 percent, respectively) (Table 4). This means that had been some overvaluation of
around 11 percent during this period (according to estimations of Central Bank of Ecuador).

c) International reserves: There was an important increase of international reserves

from US$200 million in August 1992 to US$800 million by the end of 1992, US$1,356 million

21
by December 1993 and $USl,522 million by the end 1994. International reserves exceeded the

monetary base by around 60 percent during these years (Central Bank Statistics, 1994).

(1) Interest rate: The interest rate was fully liberalized. The reform of the financial
system aimed to remove control of interest rates, preferential interest rates, ceilings on the
financial spread and lower the deposits the financial system is required to maintain in the Central
Bank. However, the interest rates for savings (average 35 percent during 1992-1994) have been
much lower than for loans (between 46 and 55 percent during the same period), suggesting the
possibility of a structural problem in the financial market of Ecuador (Central Bank Statistics,
1994).

The Central Bank is continuing to give liquidity to the banks through lines of credit at
preferential rates because of the lack of success in capturing savings from the public. Among the
monetary authorities of Ecuador, there are questions related with inefficiency and concentration
in the financial system, which have to be addressed as part of further adjustment and stabilization
in this matter.

e) International trade: Ecuador’s trade-openness ratio (exports + imports divided
by GDP) calculated by the Central Bank in 1993 was relatively high (50 percent). Many
quantitative restrictions have been removed; tariffs have been reduced from a range of 28%-290%
in 1990 to 0%-20% in 1994 (with the exception of automobiles, at 40%); tariff classifications
have declined from 21 to 10 with over 90% of total imports at four tariff rates (5%, 10%, 15%
and 20%) (Tariff Reform Book, 1990-1994).

0 Public services tariffs and subsidies: Prices of electricity, other tariffs and
domestic oil products have risen substantially to the point that the price of diesel and fuel, for
example was 26 percent higher than the international price by November 1993. There is an

implicit tax for combustible consumers of this magnitude and the revenues are part of the oil

22

stabilization fund, which has as one of its purposes the payment of service on the foreign debt
(Petra-Ecuador, 1994).

Nevertheless, there are direct subsidies to public transportation (used primarily by the
poor) and poor users of electricity in the rural sector. There are in effect target food and
medicine programs for the poor. The total cost of these social measures has been estimated at

about 0.4 percent of GDP (Ministry of Finance, Department of National Budget, 1994).

23

 

 

Tfile 4. Mecroecorwnic ltd agricultural behavior of the economy of Ecmdor, 1m-1994
—
Concept 1988 1989 1990 1991 1992 1993 1994
GDP analysis
GDP growth 10.5% 0.3% 3.0% 5.0% 3.6% 2.0% 3.9%
GDP growth agriculture 7.7% 2.8% 6.1% 5.9% 3.4% -1.7% 1.8%
GDP growth petroletm 115.8% -9.7% -0.9% 8.4% 5.8% 11.0% 7.4%
GDP growth industry 2.0% -5.0% 0.7% 3.2% 3.6% .S% 4.1%
GDP growth services 1.7% 3.1% 6.2% 5.1% 2.7% 0.1% 2.6%
GLOBAL PUBLIC DEFICIT
I SURPLUS as‘% of GDP
Government budget 0.1% -2.6% -2.6% -2.1% -4.7% -3.7% -2.5%
%financed external 100.0% 94.1% 100.0% 100.0% 84.4% 89.2% 100.0%
IIVESTMEMT as % of GDP
Public investment 3.8% 3.3% 2.9% 2.6% 2.7% 2.4% 2.4%
Private investment 10.7% 11.0% 10.3% 11.3% 11.7% 11.9% 12.1%
BALAMCE OF PAYMEMTS
Current account balance (611) (594) (210) (542) (73) (556) n/a
Trade balance 619 661 1,003 644 925 588 n/a
Balance of services (1,327) (1,352) (1,320) (1,296) (1,118) (1,274) n/a
Direct investment 155 160 126 160 178 469 n/a
External debt received 129 509 66 72 (123) 300 n/a
Inter.Monet.Reserv. (25) 379 400 157 22 472 n/a
SIARE WTS BY SECTGS
Agriculture 54.2% 49.8% 46.6% 58.4% 54.2% 57.8% 64.3%
Petroleum 44.5% 48.7% 51.9% 40.4% 44.4% 40.9% 34.6%
Others 1.3% 1.5% 1.6% 1.2% 1.3% 1.2% 1.0%
SMARE IMPORTS BY SECTORS
IMPORTS AGRICULTURE 7.9% 8.0% 10.0% 9.3% 15.6% 17.1% 17.9%
Durable 3.7% 2.5% 4.2% 3.5% 9.7% 13.1% 13.8%
Raw materials 3.5% 4.8% 4.4% 4.8% 5.0% 3.3% 3.5%
Machinery 0.7% 0.7% 1.4% 1.0% 0.9% 0.7% 0.6%
IMPORTS OTHER SECTORS 92.1% 92.0% 90.0% 90.7% 84.4% 82.9% 82.1%
Mon Durable, transport, fuel 9.1% 11.1% 9.9% 10.4% 11.0% 12.3% 13.6%
Raw materials 43.9% 48.0% 48.0% 43.6% 36.1% 33.5% 31.4%
Machinery, construction 39.1% 32.8% 32.2% 36.7% 37.3% 37.1% 37.2%
AGRICULTURAL TRADE BALAMCE
Trade balance (mil.US) 1,067 1,041 1,099 1,469 1,322 1,391 1,683
Trade balance as % of 76.6% 69.6% 74.4% 76.6% 79.4% 75.6% 68.4%
other sectors imports
MOMETARY POLICY
Total domestic credit (%IGDP) 17.8% 14.0% 14.2% 11.1% 10.0% 9.9% 13.8%
Credit to private sector 10.8% 7.8% 6.4% 5.1% 4.9% 4.6% 7.0%
Credit to public sector 7.0% 6.2% 7.8% 6.0% 5.1% 5.3% 6.8%
Money supply
%IGDP MI 11.2% 9.0% 8.7% 8.5% 7.7% 8.2% 10.5%
Money growth 53.8% 38.1% 52.2% 46.5% 44.5% 49.4% 34.0%
Other quasi money
%IGDP quasi money 8.7% 7.8% 8.8% 9.9% 10.4% 11.6% 19.0%
quasi money growth 39.1% 52.0% 80.5% 69.0% 64.9% 57.5% 70.9%
saucy/quasi money growth 47.0% 44.2% 65.3% 57.9% 55.5% 54.0% 55.6%
MACROECOMOMIC VARIABLES
Inflation rate 58.2% 75.6% 48.5% 48.7% 54.6% 45.0% 27.3%
Mominal interest rate 27.0% 48.4% 51.8% 53.2% 62.3% 47.8% 44.0%
Real Interest rate -31.2% -27.2% 3.3% 4.5% 7.7% 2.8% 16.7%
Exchange rate (intervention mkt) a 302 527 768 1,050 1,553 1,848 2,084
Exchange rate (free market) b 436 568 822 1,100 1,587 1,918 2,197
Ratio (b/a)-1 44.4% 7.8% 7.0% 4.8% 2.2% 3.8% 5.4%

 

Source: Central Bank - Ecuador, ”Boletin Anuario" various issues; Uhitaker, 87; De Janvry A., 91
—

24

D. Performance of agricultural sector (1975-1994)

Despite the discrimination experienced by agriculture and especially export crops during
the 1970’s and the 1980’s through an overvalued exchange rate and export taxes, agricultural
exports exceeded agricultural imports by big margins.

The share of agricultural exports in total exports went from 43.9 percent during 1975-
1980 to 52.2 and 58.8 percent during 1988-1991 and 1992-1994, respectively. Agricultural trade
surplus as a percentage of other sectors’ imports (durable, non-durable goods for industry, fuel
and raw materials and machinery for industry, construction and transport) was around 72 percent
during the last three decades, indicating the ability of agriculture to generate surplus export
earnings (Table 1).

Since adjustment began in 1981, the performance of the sector had been characterized by
a strong growth in traditional and non-traditional exports (shrimp, fruits and flowers). The
importable crops did receive more or less the same treatment as in the 1970’s, relatively high
tariffs with a system of import controls through import permits and financial deposits in the
Central Bank. The objective of ”self-sufficiency” and domestic protection for import substitutes
in agriculture guided the policy during the last three decades.

Most of the food crops produced in the mountain region can be qualified as non-tradable
because of bulkiness and perishability. These products were subjected to price controls between
1975 and 1988, but these had little effect because the budget for police control was insufficient
and inefficient. Therefore, a free market for these commodities prevailed and there was an active
trade with the frontier countries (Colombia and Peru) that provided market opportunities for both
producers and informal traders (IAS, 1991).

Publications of nominal and effective protection rates (Acosta, 1991 and ASRP, 1993)

25

helped to analyze the degree of protection or negative protection some agricultural commodities
experienced between 1980-1992.

The nominal protection rate is the difference between the domestic price (the effective
price the producer received) and the border price (which is the international price adjusted to an
equilibrium exchange rate without over or under valuation + custom expenses + transport to
farm). The border price is the opportunity cost of the farmer, the price he/she would have

received in the absence of distortions (exchange rate and trade regime) (Monke, 1989).

NPR = (Pd-Pb)/Pb (2.1)

where:
Pd = domestic price.

Pb = border price.

Effective protection rates adds the effect of indirect policy effect on the product and direct
compensating effect of tradable input polices (subsidies in import of machinery, fertilizer, agro-
chemicals in the form of preferential exchange rates or exemptions in payment of tariffs, duties

and other custom expenses) (Monke, 1989).

EPR = [(Pd*u-Td*q.)/<Pb*q.-Tb*q..,1-1 (2.2)

where:

Pd = domestic price.

q; = quantity produced of product.

Td = domestic tradable input price.

26

q”. = quantity of tradable input j on product i.

Pb = border price.

Tb = border tradable input price.

Rice, wheat, barley, banana, coffee and cocoa during 1980-1983 were discriminated
against according to nominal protection analysis. Producers of these products received less than
they would had distortions related to exchange rates, tariffs and other duties been removed. For
importables, the nominal protection rate was positive during 1984-1987 except for wheat,
meaning that exchange rate and trade policies protected these commodities. For banana, coffee
and cocoa, the nominal protection rate was negative from 1980-1987 except for cocoa during

1984-1987, meaning that exchange rate policy and taxes on exports highly discriminated against

exporting cr0ps (Table 5).

 

 

 

 

 

Table 5. Protection rates in Ecuador, 1980-1983 and 1984-1987
—

Years / Rice Hard Soy- Wheat Barley Banana Coffee Cocoa
Concept Corn beans

Nominal

protection

1980-83 -11% 37% 7% -32% -37% -81% -86% -15%
1984-87 40% 52% 23% -28% 1% -75% -74% 12%
Effective

protection

1980-83 -9% 52% 68% -35% -38% -84% -95% -22%
1984-87 46% 64% 60% -35% 5% -78% -88% 20%
1988-1992 Rice Hard Sorghum Soy— Wheat Sugar Milk

(NPR and corn beans

EPR)

Nominal -17% -4% -24% -11% 28% -45% -10%
protection

rate

Effective -2% 14% -13% 7% 47% -45% 5%
protection

rate

Source: Acosta, 1991; ARSP, 1993

 

27

Effective and nominal protection patterns were very similar during these two periods,
indicating that direct and indirect policies largely cancelled each other. Each measure shows a
strong shift in policy during 1984-1987. Nominal and effective protection for rice, hard corn,
soybeans, barley and cocoa increased substantially. Soybeans and hard corn used relatively more
tradable inputs than other commodities, for that reason it received higher effective protection
rates. Banana and coffee still experienced high levels of discrimination if exchange rate
overvaluation and other explicit export taxes with compensating input subsidies are taken into
account (Table 5).

For the period 1988-1992, the farm producers of sugar, sorghum, rice, soybeans, milk
and hard corn received less (in the order mentioned) than they would have received if free trade
and competition with international markets would have occurred. Only wheat had a positive
nominal protection rate of 27.3 percent. Since 1988 it was a trend of reducing the level of
nominal protection for products denominated ”basic food". There was a general perception in the
government that keeping these prices depressed would be an efficient way to control inflation
(Table 5).

Effective protection rates turned out positive for hard corn, soybeans and milk, less
negative for rice, sorghum and sugar and slightly more positive for wheat, meaning that subsidies
in tradable inputs cancelled discrimination against the output. All the commodities used more than
40 percent of tradable inputs, therefore compensating policies on inputs had a significant effect
on the effective protection rates of these commodities (Acosta, 1991 and ASRP, 1993).

The trade reform between 1990 and 1994 did not reach the agricultural sector to the same
extent. Some exports like rice, hard corn, soybean meal, african palm and cotton are still subject
to quotas, restrictions, licenses, taxes and controls.

There has been no reform of the "Agricultural Development Law" since 1975 when it

28

was created. This law set low tariffs for imports of agricultural inputs, but legalized a margin up
to 30 percent of profit and 30 percent of administrative and sales margins for importers. During
1992-1994, the law had still some restrictions on input imports in relation with qualification of
importers, brand registers and other additional requirements.

The ”Law for the Defense of Consumer Prices" was issued in June 1990 setting minimum
prices for producers and maximum prices for consumers. Producer support prices for cotton,
sugar cane, milk, rice, barley, hard corn, wheat and soybean and consumer ceiling prices for
sugar, pasteurized milk, wheat flour, processed rice, pharmaceutical products and vegetables and
meat.

The Agricultural Marketing Board (AMB) was in charge of controlling producer prices
by purchases at harvest time. However its role was relatively marginal between 1980-1992 and
focused only on rice and eventually hard corn. The average market share of the Marketing Board
on rice was 17 percent between 1988-1992 compared with 12 percent between 1980-1987 and
during the last three years, its market share was reduced to less than 7 percent (Statistics Ministry
of Agriculture and Agricultural Marketing Board, 1994).

Neither minimum producer nor maximum consumer prices had any effect on the market
because the lack of institutional ability to put the law in practice.

By 1993, the Law for the Defense of Consumer Prices was partially abolished as a
condition to implement the band prices policy which is part of the negotiations within the Andean
Trade Agreement. The band price policy consists in setting a domestic price for import substitutes
based on international price plus an andean common tariff and other custom expenses under
which no imports can enter the market. Rice, hard corn, soybeans, wheat, barley, flour, palm
oil, sugar, milk and their sub-products are included in this mechanism (Manual of Band Prices,

Project of Reorientation of Agricultural Sector, 1994).

29

Some technical reports of the Project of Reorientation of Agricultural Sector within the
Ministry said that overall, the price band has compensated the overvaluation of exchange rate

during the last two years which had made agricultural imports cheap.

E. flglfare and sgg’mnomic results

13.]. 12mm

Between 1950-1980, the economically active population grew at an average rate of 3.1
percent. The very high concentration of land and the persistence of rural poverty induced high
rates of rural-urban migration. Between 1974 and 1982, urban population grew at an average
annual rate of 4.5 percent while the rural population growth rate was 0.9 percent. The migration
pattern was accelerated because of the stagnation of agriculture during the 1970’s and part of the
1980’s and the concentration of public investment and service sector employment in the urban
sector (Fargeix, 1990).

Share of economically active population EAP2 in modern agriculture and modern urban
sector remained almost constant between 1950 and 1980. Therefore, informal activities had to
absorb the surplus supply of labor, growing at an average annual rate of 7 percent during 1954
and 1980 and took a quarter of economically active population in 1980. Share of EAP of informal

sector almost doubled for the period analyzed (Table 6).

 

2

EAP = economically active population = population who actively is looking for a job.

30

Table 6. Share of economically active population by sectors,
Bonsdor 1950-1994

 

Years Agricultural Formal Informal sector
sector sector
1950 66.3% 21.9% 11.7%
1960 62.2% 19.4% 18.4%
1970 58.8% 17.5% 23.7%
1980 51.6% 23.0% 25.4%
1991 38.0% 29.9% 26.7%
1992 37.3% 30.0% 27.1%
1993 37.9% 30.3% 26.5%
1994 37.8% 31.2% 25.7%

 

Source: 1950-1980: De Janvry, 1991; 1991-1994 Estimates
National Institute of Census (NISC), 1994

Small farmers in agriculture was another refuge of urban unemployed. By 1980, despite
the stagnation of employment in the modern subsector, agriculture still employed 52 percent of
EAP (De Janvry, 1992).

Rural informal activities are more important than urban informal activities according to
Labastida and Vos who calculated a 5.5 percent of under-employment3 in agriculture by 1982,
4 percent in non-agriculture and 3 percent for the whole economy.

The employment situation worsened during the period of crisis and adjustment. Open
unemployment increased from 5.7 percent in 1980 to 12 percent in 1986. Total industrial

employment fell at a rate of 1.7 percent between 1982 and 1986 (Table 7).

 

3 Under-employment = population employed in non formal activities.

31

Table 7. Rates of total unemployment, open unemployment
and under employment, Ecuador 1980-1994

 

 

 

Years Total Open Under
unemployment unemployment unemployment
1980 5.7% n/a n/a
1981 6.0% n/a n/a
1982 6.3% n/a n/a
1983 6.7% n/a n/a
1984 10.5% n/a n/a
1985 10.4% n/a n/a
1986 12.0% n/a n/a
1991 12.0% n/a n/a
1992 11.2% 8.9% 2.4%
1993 10.7% 8.3% 2.4%
1994 10.0% 7.6% 2.4%
Notes:

1/ Under unemployment is considered when economically
active population are looking for a full time job but are
working either a part time job paid the average wage
according to their skills or a full time job paid less
than the average wage according to their skills.

Source: 1980-1986: De Janvry, 1991; 1991-1994 Estimates
National Institute of Census (NISC), 1994

 

The labor market remained complex and inefficient between 1987-1994. Until now, there
is a wide array of bonuses, compensation payments (for cost of living, vacations, holidays,
overtime and sixteen additional salaries). All of these extra payments increases the basic wages
by 70 percent or more (Central Bank Statistics, 1993).

This situation has been a structural distortion in the labor market, creating strong
rigidities which have prevented a labor reallocation. Likely, the marginal productivity of labor
is less than its wage in the formal sector, meaning that the demand for labor is lower than the
supply. It suggests that excess supply has been sheltered in the informal sector. There was an

increased share of economically active population in informal sector from around 20 percent

32
between 1950-1980 to around 45 percent between 1991-1994 (including domestic services). Share

of economically active population in urban modern sector decreased between the same periods

from around 22 percent to 18 percent (Table 8).

Table 8. Share of economically active population (BAP) by sectors,
Ecuador 1950-1980

 

 

 

_

Years Agricultural Modern Informal Domestic
activities sector 1/ sector 2/ services
sector

1991 6.6% 47.6% 40.5% 5.5%

1992 5.6% 47.8% 41.1% 5.6%

1993 6.3% 48.2% 40.3% 5.3%

1994 6.1% 49.7% 39.0% 5.3%

Notes:

1/ Modern sector includes modern agriculture EAP in around 30 per-
cent

2/ Includes rural and urban EAP in informal sector

 

Source: Estimates National Institute of Census (NISC), 1994
—

Fiscal austerity during stabilization and adjustment after 1981 reduced employment
opportunities for skilled labor by cutting current expenditure and unskilled labor by cutting
investment expenditure. Since investment expenditure fell more rapidly than current expenditure
during adjustment, open unemployment hit the unskilled labor the most. Some of this unskilled
labor was rural because small farmers (peasants) who had less than 5 hectares usually
complemented their income by either public / private formal or informal activities (Fargeix,

Andre, 1990).

33
EJ- W

By 1988, the real minimum wage‘ had decreased 45 percent relative to 1980 (using the
consumer index price) and 65 percent (using the food index price). However, real remuneration
fell by only half the minimum wage, indicating that legal minimum wage was overstated and not
effectively paid.

The overall wage bill fell, but in agriculture it fell more rapidly than in industry after
1981. The rate of growth of real income per capita in agriculture decreased by 11 percent
annually between 1980—1982 compared with -2 percent in non-agriculture. During 1982-1987,
the rate of growth of per capita income decreased by 7 percent in both sectors (Table 9).

Estimations of the National Institute of Census of 1994 revealed that between 1990 and
1993, the agriculture income per capita for some crops in the coast increased more rapidly than
the average agriculture income per capita in the sierra. Between 1993 and 1994, the situation
reversed but by a lower margin. Growth of income per capita in the informal sector of the sierra
and coast had almost the same trend during 1990-1992 and bigger differences between 1992-
1994. This analysis suggests that there were differences in income variations as stabilization went

forward (T able 9).

 

4

Minimum wage: legal minimum wage established to be paid in industry and public sector.

34

table 9. Rates of growth in real income per capita by sectors,
Ecuador (1975-1994)

 

 

 

 

 

Years Agricul- Non agri- Agriculture Informal sector
ture culture

Sierra Coast 1/ Sierra Coast
75-80 5% 9% n/a n/a n/a n/a
80-82 -11% -2% n/a n/a n/a n/a
82—87 -7% -7% n/a n/a n/a n/a
87-90 9% n/a n/a n/a n/a n/a
90-91 9% n/a 9% 15% 20% 20%
91-92 18% n/a 18% 39% 34% 35%
92-93 -13% n/a -13% 9% -l6% -1%
93-94 15% n/a 3% 1% 1% -10%
87-94 7% 8% n/a n/a n/a n/a

Notes:

1/ Average wage in banana, palm oil, sugar, hard corn, rice,
soybeans and tropical fruits

Source: 1975-1987: De Janvry, 1991; 1991-1994 Estimates National
Institute of Census (NISC), 1994
m

i m

F. Summer!

a) Between 1965 and 1994, the economy of Ecuador relied heavily on two main
sectors petroleum and agriculture. Between 1965 and 1980, GDP growth was 8.2 percent, driven
mainly by the petroleum and industry growth because oil exporting revenues were used to
subsidize the development of the industrial sector.

b) In general, agriculture was highly discriminated between 1965 and 1980 and less
discriminated during adjustment (1981-1994). The discrimination reached agricultural sub-sectors
in different degrees. Agricultural exports were hit the most through an overvalued exchange rate
and export taxes. Agricultural import substitutes were protected against international imports
through high rates of tariffs and direct subsidies of tradable inputs and preferential credit.
Nevertheless, sectoral policies did not offset the negative effects of the overvalued exchange rate.

Agricultural import substitutes and agricultural non-tradables were subject to domestic

price controls during the last three decades under the ideology of self-sufficiency. Since 1984,

35

when inflation accelerated (especially the food consumer price index), the governments treated
some of these agricultural commodities as targets to control inflation. Nevertheless, the lack of
institutional ability made price control ineffective and the incentives or dis-incentives came
basically through macroeconomic policy. Overvalued exchange rates made domestic production
compete with cheap formal and informal imports. High interest rates (between 1984-1994)
discouraged new investments in agriculture.

c) Stabilization programs after 1981 were partially adequate in reducing the public
deficit, current account balance deficit and controlling the acceleration of inflation. Some legal
reforms were put into practice to give more flexibility to the international trade and financial
system. However, most developing country governments including Ecuador faced serious external
shocks (fall of international prices of export products and natural disasters) and opposition of
political groups which force them to either delay or slow down intensity of stabilization packages.

The main political groups who constantly opposed such programs were the bureaucracy
(which grew dramatically during the oil boom), a non-competitive industrial sector (which became
large in the economy of Ecuador during industrial development period), urban middle class (who
bore part of the adjustment cost through less employment opportunities by cutting current and
capital public expenditures) and urban poor (who did not receive any effective target
compensation programs during adjustment).

Rural rich and poor were hit less hard by the stabilization and structural adjustment
programs than were industrialists and urban poor, especially when devaluations became an
important instrument to reduce current account balance and made agricultural export commodities
relatively more profitable than before 1981. The acceleration of real interest rates between 1991
and 1994 made investments and operating financial costs higher than in the preceding periods.

Therefore, there was a partial shift from capital intensive practices in seeding, insecticide-

36

herbicide application, harvest and collection toward greater use of labor, especially among

medium and small farmers.

AP A AND D R AN LYZIN

1111B Efiififfljlfi QF EQLIQY REFQRM QN THE RURAL SEQLOR

During the period 1960-1985, the main objective of economic policy in developing
countries was to achieve rapid economic growth through industrialization and import-substitution,
taking as example the case of Japan, USSR. and other developed countries, which had
successfully grown through taxation of agriculture.

For policy formulation, this objective was translated into certain goals like: a) self-
sufficiency, b) income distribution through accessibility of food to all groups of the population,
c) stability of domestic prices, holding back the influence of international markets, and d)
extraction of resources from agriculture to finance fiscal budgets of state enterprises.

The policy instruments used to achieve those goals dealt with various aspects at the same
time: economic growth, efficiency, income-distribution, price stability and political coalition
issues.

Johnson stated the following:

One of the most discouraging lessons... is that failure of a policy measure is
almost never followed by the abandonment of that measure. Instead an effort is
made to fix the measure, often in a way that exacerbates its already bad record,

or a new measure is introduced designed to offset some of the worst effects of
the first measure....(l987, p.360).

In fact, in all the countries the degree of intervention reached a point of high complexity

37

38
by the beginning of the 1980’s, the goals were confused, the crisis arrived by a lack of growth,

export earnings and high levels of foreign debt and the political
coalitions and urban-rural interests changed.

The causes of the crisis at the beginning of the 1980’s in most developing countries were
related to budget deficits and current account deficits. In most of the countries the problem started
with the payment of interest on the foreign debt accumulated in the 1970’s, which had financed
a large proportion of the public investment in that period. Nevertheless, in some cases (Ghana,
Zambia, Argentina, Colombia, Egypt, Philippines) a tight trade regime (control of imports
through quotas, prohibitions and high import duties) was applied in an attempt to reduce the
international trade imbalance. In other cases, devaluation was used instead, combined with a more
mild control of imports (Korea after 1970, Malaysia, Chile and Portugal).

High inflation rates in some countries (Brazil, Argentina, Thailand, Sri Lanka, Turkey),
made many governments abandon totally or partially the policy of low producer/consumer
agricultural prices applied before the crisis started and use a tight monetary policy and
devaluation (Krueger, Anne, 1991).

In combination with the stabilization programs, there was a need over the 1980’s to
implement structural adjustment programs. These more extensive measures were taken, not only
to stabilize in the medium and long run the imbalances of the economy, but they were a condition

to receive loans from the IDF and IBRD for longer investment projects.

39

11.1. i n nd ru r Iad'ustment

The levels of stabilization and structural adjustment a country requires depends on the
degree of disequilibria in the economy. The first term has the analogy of ”curing the illness” and
the second term of ”preventing the illness". It is important to make this distinction in order to
determine: a) the time frame of policy implementation, b) the level of autonomy a government
can have in the process, and c) the intensity and level of macroeconomic alignments.

51311111231100 mainly concerns measures which affect the demand side of the economy to
decrease the external deficit. Such programs generally involves similar measures across countries
devaluation, reduction or stabilization of current expenditure and public investment and
contraction of the money supply. The attempt to reduce the demand to the level of supply in the
short term shows, that along with the external shocks some parts of the crisis originated from
insufficient domestic supply with respect to demand. Once equilibrium has been reestablished
by the measures mentioned above, these programs foresee avoiding new imbalances and ensuring
sustainable economic growth. For that reason a complementary set of medium and long term
measures have to be designed (if countries want to grow after stabilization). The IMF and World
Bank work together to persuade governments that stabilization measures should be accompanied
by structural reforms (Bourguignon, 1992; Alain de Janvry, 1991).

Structural adjustment prggrams consist of an in-depth reform of the economy to change
the public and private legal and operating framework in which enterprises function. Structural
adjustment measures are based mainly on the idea of increasing the economy’s efficiency in the

long term through the liberalization of markets (financial, goods, services and trade) and

4o

flexibility of resource movement across activities.

The areas involved in structural adjustment reform are:

3) Domestic marketing policy reform
b) Ownership and management of public enterprises
c) Trade regime reform

(1) Financial sector reform

Domestic marketing policy reform typically deals with liberalization of price controls and
abolishment or size reduction (targeting) of government marketing boards. The reform can
include projects for enhancing private investment in post-harvest, storage and marketing of
agricultural commodities if there is a lack of sufficient private facilities.

Privatization or management reform would look for less intervention of the state in
controlling prices at different levels and more efficient intervention of the state. The government
agencies subject to this reform are generally those which: i) trade agricultural goods to support
prices, ii) deliver subsidized credits to certain sectors or subsectors of the economy, iii) deliver
special services to the community such as electricity, water, irrigation or transport.

Trade regime reform would include lowering of customs tariffs, reduction of the spread
between the bottom and ceiling custom tariff, elimination of import quotas and other non-tariff
barriers, clarification of sanitary, standards and norms, and reduction of explicit export subsidies
or taxes.

Financial sector reform including clear rules to function efficiently, is an important
component of a structural reform. For example, the ability to mobilize domestic savings in
response to rising interest rates (in a competitive framework among financial institutions) helps
to offset the negative effect of reduction investment in the short term, when contraction of the

money supply is implemented and interest rates start to go up (Bourguignon, 1992; Fargeix,

41

1990). Generally, stabilization programs were a condition to receive loans from the IMF,
especially when adjustment came after the crisis and when the country’s financial position did not
allow borrowing from commercial banks.

Similarly, the structural adjustment programs were needed to receive funds from other
international funding organizations like the IDB or the IBRD. The conditional ity attached to these
loans generally allowed the country somewhat more ”autonomy” in the sense that they took into
account factors like: a) a longer term to prevent recurrent imbalances; b) some political and social
dimensions specific to each country’s history and current situation; and c) other factors related
to the world’s economy such as the instability of international prices (especially agricultural
commodities) which can make complete liberalization to world markets risky for the domestic
tradable sectors.

Analyzing the history of adjustment after crisis in developing countries, there was
typically a mixed implementation of both stabilization and structural adjustment programs. Even
though, the importance of making a conceptual distinction between these two terms, the following
sections will take one or the other to refer for stabilization itself or structural adjustment if a

combination of both issues are included.

3.2. n l i

The social effects of macroeconomic stabilization and structural adjustment depend in part
on the level of the expansionary and recessionary forces which are involved in those programs.
These forces are partially determined by private reactions to changes in incentives, which in turn
are conditioned by cultural norms in the country, by the credibility of the economic reform

package, and by the ability of the infrastructure and institutions to facilitate resource movement

42

among sectors and activities. Also a difference in productivity between public and private sector
is important to determine the social effects of the stabilization package (Fargeix, 1990).

Changes in different aspects of welfare (consumption, basic needs and leisure) are
experienced by households and individuals through the process of stabilization and structural
adjustment. The analysis of the social cost of adjustment requires a microeconomic and household
level orientation. The step from micro analysis to household level has not been done widely
because there is a lack of integration between micro and macro theory. (Bourguignon, 1992).

Responding to this weakness, mesa-economic analysis is a new notion of analysis which
basically combines both frameworks. The first level of analysis tries to isolate the effects of
macro policy structural adjustment changes on relevant markets and infrastructure. The second
level analyzes how household income-earning activities, consumption behavior and satisfaction
of basic needs respond to these meso—economic changes. The most important elements on relevant
markets and infrastructure affecting households are labor markets, credit and product markets,
health and education services and the state of economic infrastructure such as transportation,
electricity, water and irrigation.

Table 10 summarizes the information system required to analyze the socio - economic
dimensions of adjustment going from the macro level through the micro and household level
(Demery, I993).

The analysis needs to identify periods of distabilization and adjustment. During
distabilization, major macro imbalances creates the need for adjustment. During adjustment, one
could expect reduction of these imbalances. For example, during distabilization, inflation rates,
external deficits and government budget deficits are likely to increase. Also there are other signals
of distabilization such as imposition of import restrictions because of scarcity of foreign

exchange, appreciation of the real exchange rate and resource transfers into the non-tradable sector.

43

The analysis also requires a search for the causes of the imbalances during a chosen
period of distabilization and divide them between internal and external shocks (qualitative
analysis) along with an analysis of policy instruments used to achieve stabilization and an

assessment of changes in relative prices between tradable and non-tradable goods (Bourguignon,

1992; Fargeix, 1990 and Demery, 1993).

 

 

Table 10. Information system for the social dimensions of adjustment
—
Level Focus Analysis Constructs Data
Nacro Policy: Macro economic ‘- National - Economic
models accounts trade and
- devaluation - Social financial
- monetary account statistics
contraction matrix
- fiscal - Consumer
deficit price index
reduction - Balance of
payments
- Other macro
indicators
Neso Effects: Sectoral and - Social - Community
institutional account survey
- markets studies matrix - Price
- economic and - Food balance statistics
social infra- sheets - Production
structure - Sectoral statistics
quantity and
price index
Micro Impact: Household - Poverty Household
models profiles surveys:
-Individua1 analysis - Social - economic
household welfare indicators - social
- anthr0po-

Source: World Bank 1991 b, Table 6.1.
—

metric and
- demogra-

phic

measures

Another issue that must to be taken into account in the analysis is the existence of

informal markets in agricultural products, credit, foreign exchange, and even labor. The informal
sector has been a significant proportion of the economy of developing countries and has behaved

as an option to access markets (credit and exchange rate, for example) or has been a shelter for

44

rural and urban un-employees (who started to increase during adjustment) (Bourguignon, 1992
and Krueger, 1992)

W is the study of achievements at an aggregated level of economic and
social sectors during the period of adjustment. It tries to evaluate the effects of policy changes
on markets and infrastructure, but it is difficult to predict accurately such effects for the following
reasons (Bourguignon, 1992):

- First, some policy instruments have opposite effects and it is difficult to assess which
dominates. For example, a devaluation produces a mix of income and substitution effects and the
relative importance of those effects will determine the net outcome. Income effect means more
national currency for a foreign currency (exportables are motivated); substitution effect implies
a change in consumption away from importables and toward domestic substitutes. If import-
substitutes are competitive enough, domestic production of exportables and importables are
encouraged, if not only exportables benefit from devaluation.

- Second, a stabilization/adjustment program is a combination of many measures, and it
is difficult to isolate the net effect of only one and determine the weighted effect of each measure.
For example, a devaluation with trade liberalization could carry a substitution away from
importables if the devaluation dominates the liberalization effect, or could increase imports if the
liberalization effect dominates.

- Third, sometimes stabilization and adjustment occur simultaneously with external shocks,
and it is difficult to isolate the net effects of each.

- Fourth, comparing the effects of any structural adjustment package versus another
arrangement of policies such as no adjustment, gives important insights to assess the trade-offs
of the current adjustment policies (which could be the most politically feasible; for example) (De

Janvry, 1991). In other words, besides comparing conditions before and after the reform, it

45

would be necessary to examine the hypothetical question “what would have happened under an
alternative set of policies”.

Mmmigmnflysjs is the study of income sources, expenditure decisions, and basic
needs coverage as a function of prices, household characteristics, head-family wage, total family
income and relevant infrastructure available to the household. Household surveys constitute the
basic data for this type of analysis, complemented by sectoral surveys on prices and infrastructure
characteristics. However, it is difficult and costly to do household surveys, especially at a
national level; so the analysis could be partially done for specific regions of a country (where
household data is more available) (Bourguignon, 1992).

Analysis at me macro level consists of trade policy indicators which include: exchange
rates, rural-urban terms of trade (tradable versus non-tradable prices), structure of protection by
sectors and the external terms of trade. Generally this analysis involves a set of indicators which
can tell how the exchange rate policy, custom tariffs on tradable goods, and price policy can
affect the incentives in the industrial and agricultural sector, for example. Indicators of this style
include the nominal protection rate, the effective protection rate, the coefficient of comparative
advantage and the coefficient of producer subsidy (Scandizzo, 1989).

At this level, it is important to define and understand the notion of exportables,
importables and non tradables, in order to isolate the effects of stabilization and adjustment on
different kind of products depending on their degree of tradeability, see Scandizzo, 1989. Some
households earn their income from the activity of tradables (importables or exportables); others
depend on the activities of non-tradables; and others can derive their income from a mixture of
these activities (Bourguignon, 1992).

W, there are three main prices involved: wage rates, price of food and

fuel, and for farmers, agricultural output prices.

46

In addition to this meso analysis, it is often necessary to consider institutional
characteristics of the markets in which the poor operate such as: i) institutional arrangements
concerned with minimum wages and other social benefits of urban and rural workers and, ii)
institutional arrangements in rural credit markets (subsidies on interest rates or constrained access
to credit by smallholders as a way of rationing cheap credit).

minimum, economic, social, demographic and anthropometric characteristics of
the household’s members are the base to analyze changes in individual and household income and
welfare resulting from a change in policies. There are two different kind of surveys that can be
used for this purpose: the "Light Priority Survey" and the ”Multi-topic Household Survey”.

The Light Priority Survey (PS) involves data collection on a limited number of topics
over large samples aimed at target groups, establishing key indicators of welfare and basic needs
characteristics. The advantage of this kind of survey is that it allows fast tabulation, and gives
a quick view and initial data base for targeting essential and short-term interventions as part of
compensation under stabilization programs (around 2-4 years). It is recommended to do this
survey on a repeated basis to keep track of the evolution of target group characteristics during
long term structural adjusunent periods.

The Multi-topic Integrated Survey (IS) collects information over restricted samples, which
includes data on income and expenditures, assets, socio-economic characteristics and welfare
indicators of households and their members. The main goal is to analyze in-depth household
responses to changes in their living and working environment (Demery, 1993).

IS surveys take time to be analyzed (data collection usually requires a full year). They
are considered as long-term planning tools in an attempt to offset the negative effects of structural
adjustment measures on the more affected set of households. After this general evaluation through

IS surveys or other alternative methods, the PS surveys can be designed more efficiently on a

47

targeted and short-term basis.
Because the IS surveys require time in being analyzed, sometimes the PS surveys could
be implemented under more general analysis and criteria about which target groups should be

protected during the stabilization period (Demery, 1993).

C.l. I si

There are two approaches that can be used in the macro-meso analysis: a) analysis of time
series of variables to assess economic and social trends and construction of cross-sectional and
time series tables, and b) development of econometric models.

The first technique deals with analysis of historical records. In this approach, it is
important to identify periods of distabilization and adjustment to explain how adjustment has
affected markets and infrastructure over time. However, this analysis has certain drawbacks:

i) historical records do not imply causation because what happens over time is
influenced by a wide range of factors and not only by macroeconomic policies. Movements in
relative prices might reflect changes in the supply curve due to technological progress or the
adverse effect of a drought, for example. This problem can be addressed to some extent dividing
the historical series in sub-periods,

ii) this approach does not distinguish between first-order and higher-order effects.
A policy that raises the market price of a good will cause some households to reduce demand and
hence reduction in price (depending on the demand elasticity of the good). So, the initial increase

in prices, affecting household income is moderated by ex-post demand and supply responses.

48

iii) the approach does not account for the interactions between infrastructure and
markets. A rise in the price of food will stimulate an increase in the production of food which
will increase the demand for labor and raise of the rural wage (depending on the level of
unemployment in the rural sector).

The second technique can be complementary to the first in order to test if the indicators
deviate significantly from their historical trend during a period of structural adjusunent
(Bourguignon, 1992). The use of this tool requires a good understanding of the country to handle
the model’s predictions in a realistic manner. One advantage of this approach is that when theory
is ambiguous in the direction of a change (two opposite effects involved), models can simulate
them and reveal which is stronger.

The main weakness of macro-meso modeling is that it does not allow disaggregation,
which limits the design of actions by policy makers to aim at certain problems carried out in the
adjusMent process such as economic efficiency or social distributional costs among groups. (De
Janvry, 1991).

In either of the two techniques, the analysis of macroeconomic policy changes must be
divided into three sections:

i) the effects of adjustment in relative product prices,

ii) some assessment of the real-wage effects of policy interventions, and

iii) changes in the credit market.

C.l.l. l v non tradabl

In economies where agriculture is the most important sector, the response of agricultural

production to reforms in macroeconomic policies is a major determinant of the success of the

49

adjustment package program. Removal of policy distortions can lead to improvements in resource
allocation, agricultural investment and economic growth.

However, because agriculture in developing countries is heterogeneous in terms of
structure of production and response to policy reforms, there is a need to go beyond the
macroeconomic policy reform. In this context, sectoral policies, investment and programs to
alleviate poverty in the rural sector must be complementary to macroeconomic policies to ensure
a sustainable response of agriculture to changes in incentives. For this reason, it is necessary to
clarify the notion of tradeability and its influence in agriculture performance once structural
adjustment is implemented.

W are goods which face physical impediments to trade at any conceivable
price. The most common causes are transport and distribution costs. Dornbusch (1980) defines
the non-tradables as goods where transportation costs are too high in comparison to the price
differential between world and domestic production. In agriculture, there is a wide range of goods
that can be classified as non-tradable because of their intrinsic characteristics such as:
perishability, high fixed costs related to marketing and distribution and low value/bulk ratios.

However, there could be policy factors such as high tariffs, import or export prohibitions,
subsidies and non-tariff barriers that can make some goods non tradable for long periods of time.
The most important question is whether a good is in fact tradable or would become tradable as
a result of a policy change. However, when analyzing the effects of macro-policies such as
exchange rates on production, it is not correct to treat a crop as tradable if the marketing system
and other policies prevent transmission of border prices.

Non-tradable inputs are the land, capital and labor assuming absence of mobility outside
the national boundaries. If there is some kind of mobility for capital and labor, for example, the

opportunity cost of these factors would be the international price in their respective relevant

50

market. Relevant market is defined as the market where the good is traded in greater proportions
that in other equivalent markets.

mm are goods that effectively or potentially can be traded internationally, where
the transport costs are lower than the difference between the international and domestic price. As
discussed above, there could be some changes in economic policies (price, trade and exchange
rate policies) that can give some goods more flexibility to be traded. Also, longer term changes
in infrastructure and institutional efficiency can make some agricultural goods tradables,
depending on the degree of perishability, value/bulk ratio and fixed costs for distribution and
marketing.

The notion of tradeability within agriculture has to be analyzed carefully when assessing
effects of macro policy changes in agriculture because those effects can vary widely among
subsectors, regions or crops, especially in the short and medium terms depending on:

i) how tradable is the subsector or crop in a certain period of time chosen for the
analysis because, during that frame of time a significant proportion of agricultural production
might still not be completely tradable due to lack of marketing and institutional infrastructure;
for example. These restrictions usually takes longer time to be solved than other trade regime
obstacles which make goods non tradable,

ii) proportion of tradable inputs in the total costs of tradable output and,

ii) flexibility of input substitution (biological technology or mobility of factors among
sectors). Given both conditions, a producer can either stick with his original input mix or change
it for a lower cost input mix and this will result in different absolute effects of the exchange rate
policy.

Only when deviations from the average are small and consequently there is homogeneity

in the structure of costs among crops or groups of producers or regions, can the sectoral averages

51

of tradable inputs be used in the assessment of macro policies effects in short or longer terms.

Figure 1 shows the effects of a real exchange rate depreciation.

 

 

 

     

 

 

 

 

 

 

 

 

 

 

 

100
901 T-T'-T“ = iso-prics oi variable sector
NT = iso-pics of non-tradable sector
80‘ \ E0 = initial equilibrium point
w E' E' :- shiflochardoitradabiem
70- E " = shift back toward origin again
w 604
a
9 50 w" E” '
a \ ' 4 T'
40‘ \ i
r I
a : T”
t 30‘ wo E0 3
. \!\
20+ __-_.,,,
__________________ To
1 0‘ ‘ NT
r' r” ro
° 1' ' a a é ' 7‘ a
r = pics of capital
Figure 1 Real devaluation and factor returns with tradable inputs (Source:

Taken from Kyle, 1992)

The increase in output price due to depreciation will shift the iso-price curve of the traded
sector outward (lower r and higher w), but because the exchange rate depreciation has an effect
in imported inputs, the curve shifts back toward the origin. Depending on the structure of the
imported input cost and the degree of substitutability between factorJ, this shift could offset

partially or totally the initial impact on r and w.

 

5 High substitution values in a more pronounced curvature while complementary relationships result

in relatively flat curves.

52

Substitution effects between factors can modify the output effect of price changes. The
effect of input price changes can be cancelled or reinforced, if the imported input is a good or
poor substitute for the factor in which the tradable sector is not intensive. The larger the effects,
the greater the participation of imported inputs in the structure of costs. Consequently, there is
a situation where it is inappropriate to treat existing technical coefficients as fixed to predict the
response of capital and labor allocations from policy changes.

The presence of these substitution effects indicate that it is not possible to predict
accurately the effects of a removal of overvaluation of exchange rate policy or subsidies on
agriculture incentives; for example, without taking into account the conditions of production and
their differences among commodities, groups of producers and regions. However, at a first level
of analysis, one can point out the set of conditions that could prevent a strong output effect in
agriculture coming from the elimination of policy distortions such as overvaluation of the
exchange rate, subsidies, taxes, high import tariffs and quantitative restrictions for trade.

The set of conditions can be the following:

i) A significant portion of non-tradable agricultural output coming either from
physical characteristics of the goods or from infrastructure and institutional impediments for
trade,

ii) Removal of large subsidies on tradable inputs which may represent a large
fraction of short-run variable costs and,

iii) Low substitutability between imported inputs and non-tradable inputs (Kyle,

Steven, 1992)

53
C.l.2. Mmgrmmt 9! market intervention gffects

It is important to try to calculate the terms of trade between agricultural and non-
agricultural products. The income terms of trade is the ratio of the index of the value of

agricultural output (sales) to the index of non-agricultural prices.

lt= (P.*Q.)/P.. (3-1)

where:
It = income terms of trade.
P, = index of agricultural prices.
Q. = agricultural output.

P. = index of non-agricultural prices.

The household terms of trade describe the ratio of a weighted index of all prices
associated with household income (farm and wage) and a weighted index of the prices of all
expenditures. Therefore, the household terms of trade gives a complete idea about the net impact

of price changes on household net income.

k k
Ht= E(Pfi*Wfi+PM*W,,i2)/E(P,,*er+PW*W,,,,) (3.2)
i=1 i=1

where:

Ht = household terms of trade.

54

j,k = number of households.

P“ 8 index of farm output prices.

W“ = share of farm income in total household income.

P“- = index of wages.

W“ = share of wages in total household income.

P,, = index of farm input prices.

W“ = share of farm input expenditure in total household expenditure.
P... = index of out-farm household expenditures.

W“ = share of out-farm expenditure in total household expenditure.

Producer prices would include agricultural exportables, tradable food and non-tradable
agricultural products; consumer prices would include tradable food, non-tradable food products
and non-agricultural products. Estimates of real-income change are obtained by combining
changes in relative producer and consumer prices with income and expenditure shares,
respectively. The different producer and consumer prices can be a weighted average of the main
products representing the pattern of the target groups selected. The analysis gives only the first
order effects of relative—price changes on smallholders as producers and consumers (Sahn and
Sarris, 1991).

The use of a consumer price index (CPI), for example will not reflect the expenditure
pattern behavior of the group. The use of CPI can overstate real income losses from producer
price decreases and consumer price increases because it does not allow production and
consumption responses to relative price-changes.

The inclusion of international price changes in household income could be included using

nominal and effective rates of protection for specific crops.

55

Nominal protection rate is the ratio of domestic prices to border prices minus one (2.1).
The NPR can be calculated using official exchange and equilibrium exchange rates to include the
level of implicit taxation resulting from exchange rate distortions. NPR>0 means that domestic
production is encouraged through specific policies (exchange rate policy and international trade
policy), if NPR<0 the opposite is true (Scandizzo, 1989).

The effective protection rate takes into account the value added of commodity output. It
is the difference between the value added measured in domestic prices and in border prices minus
one (2.2). EPR>0 means that valued added of domestic production is encouraged through
specific policies which affect the output and tradable inputs (exchange rate policy and

international trade policy), if EPR < 0 the opposite is true (Scandizzo, 1989).

C2. Mariam

C.2.1. ° n mi lassifi tion E n r rou i r r

W

The Priority Analysis (PA) is one method that can be used for the analysis of social
effects of structural adjustment at the meso-micro level. The basic idea of PA is to identify socio-
economic groups (SEG). This classification is specific for each country and therefore must reflect
specific socio-economic attributes of the groups and conditions of policy changes during
adjustment. From this classification, it is easier to narrow down target groups and establish key
indicators through which the impact of adjustment on these selected groups can be monitored
(Demery, 1993). PA relies primarily on tabular presentation but it can include multiple variable

regression analysis.

56

The indicators for PA can be proxy variables because direct welfare measures are difficult
to get in the sense that they require a large data base of total household expenditures, income and
assets. The selection of proxies must be in such a way that they can reflect in the short term,
undesirable effects from adjustment. The indicators must be sensible enough to change when
households have to make decisions, facing constraints of income and employment. For example,
literacy is an important indicator that is associated with personal welfare, but it will not change
much in the short term. Instead, student dropout rates and mis-match between age and grade
attended, will quickly respond to changes in the opportunity cost of schooling that occurs during
adjustment.

The following SEG classification in developing countries can be taken as an illustration:
- Rural-export-oriented farmers (medium and large holdings)
- Rural-export-oriented smallholders
- Rural-food/subsistence farmers
- Rural-pastoralist
- Rural-landless agricultural workers
- Rural-non agricultural workers
- Urban-skilled public sector employees
- Urban-unskilled public sector employees
- Urban-formal private sector workers
- Urban-informal private sector workers
- Urban-inactive or unemployed

Target groups must be homogeneous internally with respect to major economic
parameters. They are defined using economic and non-economic criteria, and can overlap so that
one individual of a household can belong to several target groups. For example, the poor, female—
headed households, malnourished children, smallholders, coffee farmers, and so on can be target
groups.

In this sense, three relations between target groups and socioeconomic groups are

possible:

- A target group equals a SEG (farm-subsistence holders)

57

- A target group is part of a SEG (laid-off unskilled public employees)
- A target group overlaps various SEGs (female-headed households).

A construction of distribution of households across SEGs will help to indicate the extent
to which the target group is concentrated across SEGs. Therefore, interventions needed to be
targeted will focus on those SEGs with high participation of that specific target group, in order

to minimize the leakages to people outside the target group (Demery, 1993).

C.2.2. V In ment and we es durin .tru tural ad'ustmen

Structural adjustment affects households directly through employment opportunities being
cut, so especially poor households may have to reallocate their time to different types of
employment and different sectors of the economy. There are differences in the way households
diversify their sources of income, depending on the endowments (physical or human capital) they
have, to respond to a new incentive structure derived from structural adjustment. Households that
have diversified their income beyond agriculture would have more adaptation to past shocks
(Bourguignon, 1992).

There are arguments that structural adjustment affects men and women differently and
depending on the region, activity and SEG, these differences could be more pronounced.
Structural adjustment affects employment in general, but there could be differences in the
unemployment rate by age, sex, level of education, region, activity, SEG and labor mobility.

There is a discussion also that structural adjustment not only increases job mobility, but
induces pe0p|e to hold more secondary jobs. An analysis in which SEG or secondary activity jobs
occurred more often would help to understand better the diversification of income sources during

structural adjustment (Demery, 1993).

58

Structural adjustment affects employment and earnings through product markets, labor

markets and capital markets, as well (Demery, 1993).

BMW affect employment and wages through:

- Restrictionary fiscal and monetary policies: These policies reduce aggregate demand.
Prices of non-tradables fall relative to prices of tradables, so this will increase production of
tradables and reduce production of non-tradables. The speed and extent of these changes will
depend on supply responsiveness.

- Devaluation and import liberalization: Devaluation increases prices of tradables relative
to non-tradables. Agricultural export prices increase more than production in the short term,
because of the relative low elasticity of supply of agricultural exports. Not all tradables expand,
because cuts in tariffs and quotas reduce the prices of importables relative to exportables. Sectors
producing importables contract relative to exportables (Fargeix, 1990).

- Sectoral price adjustments: The elimination of price controls and the reform of marketing
institutions alter the structure of prices.

- Changes in the provision and rehabilitation of infrastructure: Reduction in public
investment affects the profitability of the private sector in general, but if the reduction of public
investment is concentrated in certain sectors, it will affect the profitability differently (De Janvry,
1991).

These product market adjustments change the demand for labor. If a sector is labor
intensive, then employment and earnings in the long term will increase (under the supposition that
no labor market rigidities exist). The short term outcome will depend on the mobility of labor.
The changes in demand for labor will affect the stability of jobs in the short term, as well. Also,

price increases may raise labor participation of members of households (children and women, for

59

example), and induce multiple job holdings (Demery, 1993).

W affect labor markets through:
- Change in private wage determination: Government minimum wages induce a dual
structure in employment, in the sense that wages cannot adjust downward (because of the
minimum wage) and the unemployment shelter in the informal sector. Minimum wages could be
more flexible during the adjustment process to let the wages go down in response to contraction
in demand, so this may have implications in the wage determination of formal and informal
sectors (Bourguignon, 1992).
- Change in public wage determination: In some countries, during structural adjustment,
public sector wages are still above market levels, but in others, wages for skilled public
employees fall below those in the private sector (Fargeix, 1990).
- Retrenchment in public sector employment: In most countries, public employment is
overextended before adjustment, so retrenchments of public labor (specially unskilled labor used
in public investment as in the case of Ecuador) release resources to pay more to scarce
professionals. Public employment is more often concentrated in urban areas, so during adjustment
one may expect large changes in local labor markets (Fargeix, 1990; Alain de Janvry, 1991).
- There could be some causes for segmentation in labor markets such as unionization and
monopsony, barriers to mobility, discrimination and distortions in capital markets. In this context,
segmentation influences output fluctuations on employment and earnings. For example, if there
is a fall in demand of non-tradables with inflexible formal sector wages, formal labor markets in
the non-tradables bear the employment contraction, since they can not maintain employment by
taking lower wages. Informal sector demand of labor decreases as a result of general aggregate
demand contraction. This informal sector shelters more newly unemployed coming from the

formal non-tradable sector and informal sector’s wages fall more than they otherwise would

(Bourguignon, 1992; De Janvry, 1991).
Web; affect labor markets through:

- Change in the price of capital to producers: Devaluation and import liberalization change
the price of machinery and equipment. The net change will depend on which of those effects
dominates the other. The devaluation makes the importables more expensive, but the trade
liberalization could offset this effect through reduction of tariffs, elimination of quotas and hence
more competition among importers.

- Reduction or elimination of financial repression: Structural adjustment usually tries to
eliminate general subsidies in markets, especially those related with capital markets. This changes
the relative factor-price ratios households and enterprises face inducing them to changes in the
factor combination used (Demery, 1993). In some countries, the price of capital may rise relative
to labor, favoring employment and wage growth. But, this will depend on the flexibility of
substitution between labor and capital in the different activities. In general, agricultural export

activities can substitute capital for labor more easily than industrial sectors, for example

(Bourguignon, 1992).

C.2.3. 111mm and assets

Income is another variable directly affected by policy changes. It is known to be a
difficult variable to obtain from household surveys in the sense that respondents under-report their
income for fear of taxation or they may not estimate accurately the income for a referred period.
Also, income is determined by seasonality, so in one-visit surveys, it is difficult to obtain
seasonal variations of income.

The analysis should start with sources of income: wage income of head and spouse,

61

revenue from agricultural enterprises and revenue from non-agricultural enterprises. Asset
holdings analysis could be complementary.

W Tables that summarize the sources of income by SEG and family member
of household can be constructed for the analysis of wage—earnings. This analysis helps to:

i) determine to what extent the head’s income is determinant for household income

ii) determine which SEGs have been more affected by adjustment policies; and

iii) which households have been losing or gaining or offsetting the negative impacts

by combining sources of income among the members of the household.

Also a table on wage earnings can give some insights about the wage differentials
between public and private sector. In the very short-term, one expects a rise in the wage of
tradable-oriented activities relative to non-tradable activities and the public sector.

Wage differences by SEG can be explained by changes in the structure of incentives from
structural adjustment, but also they can be explained by level of education. The estimation of a
simple wage-earnings model (based on human capital theory) will help to analyze the changes of
returns to education and work experience during the adjustment period. The regression will help
to test the presence of segmentation, in the sense that in developing countries workers may not
be able to move easily among different sections of the market (informal and formal sectors, or
urban and rural, or male and female workers) (Demery, 1993).

AW Some crops are favored by structural adjustment through the
mechanism of prices and other crops experience declines in prices. The change in prices will
affect the area planted and therefore the production. Also the availability of agricultural inputs
as labor, capital, fertilizer and seeds can change due to adjustment policies.

W Market opportunities for tradables are supposed to increase and

decrease for non-tradables. Infrastructure and institutional changes may improve access to

62

product, factor and credit markets and have a direct impact in the profitability of non-farm
activities.
The first step is to classify non-farm activities as
exportables, importables and non-tradables, then identify which groups have business in each of
the sectors and finally determine which activities are increasing and which are declining.
Assets; Asset is an important indicator of household’s welfare. When households loss
assets means that they have to sell assets to meet consumption needs, which will erode future

earning abilities.

H ER4

NDIN FR M EMPI AL I

This chapter is organized in two parts. The first part describes the findings of empirical
studies about the effects of stabilization and structural adjustment policies in the economy and
agricultural sector of developing countries. It is based on three country comparative studies:
Krueger (1991); Krueger, Schiff and Valdez (1991) and Bourguignon and Morrison (1992).

The second part describes the social impact of stabilization policies in Ecuador between
1980 and 1987 with the inclusion of a political feasibility analysis to carry out stabilization. It is
based on two studies, one by De Janvry and Fargeix (1991) and the other by De Janvry and

Graham, 1994).

A. V! in unri thrhn or

A1. W

During the period 1960-1985, the main objective of economic policy in developing
countries was to achieve rapid economic growth through industrialization and import-substitution,
taking as examples the cases of Japan, the U.S.S.R. and other deveIOped countries, which had
successfully grown through taxation of agriculture.

For policy formulation, this objective was translated into certain goals like: a) self-
sufficiency, b) income distribution through accessibility of food to all groups of the population,

c) stability of domestic prices, including insulation from the influence of international markets,

63

\((.fl\](fl\a

64

and d) extraction of resources from agriculture to finance fiscal budgets of state enterprises.

The policy instruments used to achieve those goals dealt with various aspects at the same
time: economic growth, efficiency, income-distribution, price stability and political coalition
issues. The causes of the crisis at the beginning of the 1980’s in most of these countries were
related to budget deficits and current account deficits. The problem started with the payment of
interest on the foreign debt accumulated in the 1970’s, which had financed a large proportion of
the public investment in that period. Nevertheless, in some cases (Ghana, Zambia, Argentina,
Colombia, Egypt, Philippines) a tight trade regime (control of imports through quotas,
prohibitions and high import duties) was applied in an attempt to reduce the international trade
imbalance. In other cases, devaluation was used instead, combined with a more mild control of
imports (Korea after 1970, Malaysia, Chile and Portugal).

High inflation rates in some countries (Brazil, Argentina, Thailand, Sri Lanka, Turkey),
made many governments abandon totally or partially the policy of low producer/consumer
agricultural prices applied before the crisis started and use a tight monetary policy and
devaluation (Krueger, Anne, 1991).

The study by Krueger, Schiff and Valdez (1991) which analyzes agricultural pricing
policies in four groups of countries‘, concludes that the greatest discrimination against agriculture
was associated with slower overall economic growth, because of the high participation of

agricultural GDP in overall GDP. The combination of low international prices and overvaluation

 

Countries grouped by their degree of intervention.

Group 1: Cote d’Ivoire, Ghana, Zambia) - extreme discriminators against agriculture (1960-1984,
-52% of direct and indirect discrimination)

Group 2: Argentina, Colombia, Dominican Republic, Egypt, Morocco, Pakistan, Philippines,
Thailand, Turkey) - big discriminators against agriculture (1960-1986, ~36%)

Group 3: Brazil, Chile, Malaysia - mild discriminators against agriculture (1960-1983, -l6%)
Group 4: Korea, Portugal - mild discrimination in favor of agriculture (1960-1984, 10%) (Schiff
and Valdez).

65

of the exchange rate under the prevalence of the ideology of import substitution caused export
earnings to fall, especially agricultural export earnings.

This study describes two types of policies affecting agriculture:

a) Direct discrimination policies: These are sectoral distortions in the trade and
payments regime, such as exports and imports taxes and subsidies, quotas and direct interventions
that affect individual agricultural outputs and inputs through credit and level of public investment
in agriculture.

b) Indirect discrimination policies: These are macroeconomic distortions, which the
author calculated as a weighted average of the overvaluation of the exchange rate and the tax due
to industrial protection (change of agricultural prices versus non-agricultural prices due to
removal of industrial trade policy interventions).

In Argentina, it was estimated that the direct discrimination against agriculture caused a
loss of export earnings of 40% during the period of 1960-1985. In Ghana, where indirect
discrimination was relatively high and there was a mild indirect protection, it is estimated that
the losses in export earnings were around 80% of actual exports over the period 1963-1985. The
average losses for all groups were calculated at 30 percent.

For the second group of countries, the direct transfers out of agriculture were 8 percent
of agricultural GNP over the period 1960-1983, but total transfers were 36 percent of GNP,
meaning that the main distortion against agriculture came from macroeconomic policy.

As a result, the total impact of interventions on relative prices was in some countries very
large. In Ghana, even before 1976, farmers received only 40 percent of what they would have
received under free trade. In Argentina, Cote d’Ivoire, Dominican Republic, Egypt, Pakistan,
Sri Lanka, Thailand and Zambia, farm incomes in real terms could have been increased by more

than 50 percent removing indirect and especially direct discrimination.

66

In relation to the impact of pricing policies on overall food consumption levels, there was
a big variation among countries. Brazil, Ghana, Korea, Portugal and Turkey, where food
production was protected through import prohibitions but taxed through low producer and
consumer prices, total food consumption fell as a result of a insufficient domestic agricultural
supply. Another problem was that discrimination against agricultural commodities most affected
the rural poor, since they were the main producers of these commodities (Brazil, Egypt, Ghana,
Thailand and Turkey).

In Egypt, Philippines, Sri Lanka, Thailand and Zambia, there was a net subsidy to food
consumption through the existence of marketing boards, which bore the financial costs of the
subsidy (relatively high producer prices and low consumer prices). In these cases, total
consumption was higher than otherwise, but this was achieved at substantial cost:

a) discouragement of private investment in storage facilities;

b) unequal income distribution (the subsidies in most cases went to high and medium
income groups; for example it was estimated that upper income groups in Thailand gained more
than 10 percent in income because of direct and total agricultural pricing policies);

0) corruption within government intervention enterprises accompanied by un-
sustainable expenditures that lead the re—organization and in some cases elimination of these
enterprises.

In addition in all the cases, there was a shift of resources from highly productive
exportables (which experienced both direct and indirect discrimination) to less productive
exportables and import-competing commodities. The latter often received less direct
discrimination and in some cases mild direct protection that offset much of the indirect

macroeconomic discrimination.

67
A.2. ’ ’ u nd n mi r h

The effects of stabilization on economic growth can not be predicted a priori. To address
this question empirically, Bourguignon and Morrison (1992) conducted a study covering 7
countries: Chile, Cote d’Ivoire, Ecuador, Ghana, Indonesia, Malaysia and Morocco. Their
findings include the following:

a) There was success in cutting the current account deficit comparing the two years
before and the two years after a stabilization program. In Ecuador and Malaysia the deficit went
from 10% of GDP to equilibrium during this period.

b) Four out of the seven countries showed that the rate of GDP growth was higher
in the years following the stabilization than the preceding ones. Per capita GDP declined in only
two of the seven countries (Cote d’Ivoire and Indonesia).

However, the study points out the need to qualify the assessment incorporating unusual
circumstances of some countries prior to stabilization, which could overestimate the low economic
growth before stabilization (case of Chile with economic policy errors and unfavorable exogenous
shocks, the crisis in Ghana between 1971-1974 and 1982 was characterized by insufficient supply
and not, as in the other cases, by excess demand).

c) In countries facing a large budget deficit, the stabilization program reduced it,
but it was less evident than the reduction of the external deficit and in some countries like
Morocco there was still a significant budget deficit after two years of stabilization.

d) The rate of inflation fell, except in Chile and Ecuador, where the growth of the
money supply was not controlled. In Ecuador, inflation went from 16 percent in 1982-1983 to
42 percent in 1984.

e) Service international debt / exports ratio increased much less than international

68

debt I GDP ratio, or even decreased, as a result of stabilization programs and re-scheduling of
foreign debt under agreement with the International Monetary Fund (IMF).

During the period of discrimination against agriculture, the studies stated that this was
accompanied by a slow rate of growth of agricultural GDP and overall GDP because net transfers
from agriculture to other sectors implied low rates of investment in agriculture. Adjustment in
some countries clearly showed a recuperation of GDP growth and in other countries there were
other exogenous factors such as low world prices and natural disasters which slowed GDP
growth. Increases in the flow of foreign loans and export earnings were a pattern across most

countries when stabilization was instituted.

A.3. Empmymmt and incgme during adjustment

The negative impact of adjustment on employment can be hidden through the expansion
of the informal sector and migration. The term unemployment in developed countries is linked
in part to a system of unemployment benefits, which do not exist in most developing countries.

Bourguignon and Morrison (1991) stated that in a very poor country most economically
active people work in the agricultural sector more or less depending on the season, and when
labor demand is low, labor mobilization toward informal activities in the rural or urban sector
offsets the effect of not working "full-time" in one specific job. In towns and cities more pe0ple
are active in informal activities (which are often not-full time) than in the formal sector. In fact,
when there are workers losing jobs in the formal sector, unemployment does not increase as in
the developed countries, where there is a system of compensation.

A decline in wages has to be understood in an overall context too. In a poor country

people employed in the formal sector could be in the top four income deciles, while people in

69

the rural sector are usually in the lowest four. If an adjustment program causes a decline in wages
but increases export prices of agricultural commodities, then the effect in the rural sector would
be an increase in agricultural incomes and reduction in income inequality and rural poverty.

Despite these conceptual approximations, it is difficult to explain changes easily because
the impact of an adjustment program is combined with other effects such as long—term
demographic trends, migratory flows and the financial crisis preceding the adjustment. Therefore,
in order to isolate the impact of adjustment on employment and wages, it would be necessary to
use a model.

Nevertheless, there is a phenomena which has occurred in developing countries. Informal
activities increase because of the excess labor supply (which grows rapidly in cities, 5 to 6
percent a year) and stagnant or decreasing labor demand in the formal sector. The impact of
adjustment on employment is not expressed in terms of increased unemployment but rather in a
consistent growth of informal employment, which absorbs the surplus of labor from formal
activities (public and private). Adjustment typically made prices and incomes fall in the informal
sector, but at least this sector has served as a refuge of people who, otherwise, would be
unemployed. In Cote d’lvoire, there was a 7.7 percent annual growth in labor supply from 1980-
1985 and a 20 percent fall in labor demand by the modern sector (public and private). If not for
informal activities, the number of unemployed would have tripled and the unemployment rate
would have been 42 percent rather than 29 percent (Bourguignon, 1992). The same pattern
happened in other countries. In Ecuador industrial employment grew at a 1.7 percent annual rate
during 1981-1986 compared with 9.1 percent between 1975 and 1980. A 1987 survey in Quito,
the capital city, and two other cities reported that the number of underemployed in the informal
sector was greater than the number of unemployed in Quito and twice the number of unemployed

in the other cities (De Janvry, 1992).

70

There is a difference between the trend of real wages in the formal public and private
sectors. In general, the stabilization measures target the reduction of recruitment and payrolls in
the public sector and the government can influence the trend in the private sector by setting
minimum wages. In Ecuador, the legal real minimum wage fell by 15 percent between 1982 and
1985, so the real wage bill in the formal sector would have had to decline at least in the same
proportion.

The experience of other countries in this respect is opposite that in the Latin American
cases. The private sector’s real wage decreased less and in some cases increased or remained
stable in Morocco, Malaysia and Cote d ’Ivoire.

The impact of unemployment in the rural sector coming from stabilization is not the same
as in the urban sector for two main reasons: a) the impact of adjustment on agriculture is
favorable, in general, or at least neutral, so it does not reduce this sector’s demand for labor; and
b) labor supply grows more slowly in rural areas than in cities and the conditions of employment
are different.

The impacts of adjustment on agricultural sector incomes are less negative than in other
sectors for several reasons. First, wage reductions in the public sector to control budget deficits
do not affect agriculture. Second, devaluation has the most positive impact in terms of increasing
the relative prices of tradable versus non-tradable goods and agriculture frequently has a large
proportion of tradable goods. Finally, in some cases, there is a liberalization of price controls for
other commodities, which have made them adjust upwards given the negative protection these
commodities faced before adjustment.

Surveys from 1979-1985 in Cote d’Ivoire show that farmer incomes did not decrease
during adjustment. In Morocco, small farmers’ income in cereals and legumes increased by an

average of 40 percent between 1984-1985, without any fall in real prices of these products. In

71

Indonesia, the slow increase in rice output in 1984-1985 was followed by a rapid increase in other
commodities’ output (Bourguignon, 1992).

The only case where this trend did not occur was in Ecuador, mainly because of the
problem that many farmers’ holdings are so small (especially in the mountain region - Sierra) that
they have to complement their agricultural income with informal activities or public sector
employment in great proportions. Thus, they suffered directly from the fall in formal wages and
urban informal income activities. There was a 46 percent fall in the construction sector’s wage
during 1982-1985 and a 20 percent fall between 1982-1987 in small farmers’ total farm and non
farm income.

In the coastal region of Ecuador, the effect was different. Small farmers participate in
significant proportions in export crops (banana, coffee, cocoa) and agricultural wages for some
commodities (oilseeds, shrimp, fruits) have been higher than in the mountain region’s rural sector

(especially after adjustment and during seasonal peaks).

3.1. v vi

The study of structural adjustment effects on the economy and on the income of social
groups in Ecuador is based on a macroeconomic model with a high level of aggregation.
Therefore, there is no linkage framework between macro, micro and household level in assessing
impacts. Nevertheless, the macro - aggregated effects in this study gave important insights and
patterns for the general framework involved in the particular analysis of the thesis.

Using a general equilibrium model, De J anvry and Fargeix (1991) assessed the economic

72

and social effects of four stabilization instruments in Ecuador during 1980-1987: devaluation,

cutting of current and capital public expenditures, cutting the rate of growth of the money supply

and wage repression.

a) Exchange rate adjustment was the main instrument used in the short-term
adjustments.

b) Monetary policy was the main instrument to control inflation by reduction of

money supply relative to GDP.

c) In fiscal policy, both current and capital expenditures were reduced, but in the
short term, capital investment expenditures were cut more. While exchange rate and monetary
policy have had a certain degree of acceptance by political groups and the broader population,
fiscal austerity did not enjoy such acceptance.

(1) Wage repression on unskilled labor was accomplished by drastic reductions in
minimum wage rates.

The authors used a dynamic model for the Ecuadorian economy to examine each policy.
The endogenous variables for 1980 (the year for which the model was built) were not the current
variables, but smoothed historical trends during the decade before 1980. Policy experiments were
made in deviation from this base run. Parameters for the real side of the model were incorporated
with a high level of aggregation.

The high level of aggregation implies less dispersion in parameters. Parameters for the
financial side of the model were not estimated due to lack of time series available on household
holdings of financial assets disaggregated by households groups, so elasticity parameters were
taken as constant across households and across firms using econometric estimates and information
from other sources. The model was calibrated to reproduce a state economy with no foreign

sector shocks, with trends as close as possible to the historical trends in the precrisis period.

73

3.2. ’ n l fa ' stm n mensur n onomi h n ' '

The authors analyzed the following alternatives using sensitivity analysis in the general
equilibrium model:

a) the impact of exchange rate, fiscal and monetary adjustment approach when the
relative productivities of private and public investment differ,

b) the role of alternative fiscal instruments - budget cuts concentrated on current
expenditures or equal across capital and current expenditures,

c) the effects of delaying implementation of fiscal adjustment, or monetary
adjustment or both as Opposed to exchange rate adjustment or immediate implementation of fiscal
and monetary policies,

(1) the possibilities of compensation through income transfers to ensure political
feasibility and neutrality of poverty,

1) differential effects of alternative policies on rural and urban poverty and the type
of political coalitions most effective to endorse interests of either urban or rural poor.

Because the authors gave a series of scenarios to analyze the impact of adjustment policies

and their relative importance in the past and future trends, the cases and events closer to the

reality of the Ecuadorian economy during 1980-1987 will be highlighted here.

 

The model distinguished between public and private investment with respect to demand

composition, import content and intensity of labor use. Also, each sector was assumed to have

74

a different total factor productivity (important in the long run growth). Protecting one type of
investment or another under different stabilization policies would have affected differently
economic growth, political feasibility and welfare.

a) Productivities of public and private investment were represented by elasticities
of total factor productivity growth with respect to investment, when these were set at medium
values (chosen by the authors in 0.01 according to historical trend). The mass of private
investment is four times larger than that of public investment.

For a high discount rate (short-term preference), fiscal policy is preferred by monetary
policy after the initial preference for exchange rate adjustment in year 2. For medium and low
discount rates (medium and long-term preferences), fiscal adjustment is the best alternative for
economic growth. The reduced pressure of government loans in the financial market lowers
interest rates and stimulates private investment, which in turn has a greater absolute productivity
effect with better economic growth than public investment. The higher GDP in the long-term
catches up with that achieved with monetary adjustment three years after the shock.

In year 2, before the crisis has induced a full recession, the exchange rate adjustment is
bater in terms of economic, political feasibility and welfare criteria. At medium and high
discount rates, monetary policy is better for political feasibility and overall welfare index. This
is because the future gains of economic growth from fiscal austerity are discounted too much by
politicians. The politicians prefer monetary instruments because are less harmful in cutting
employment of the politically supportive skilled workers in public sector.

b) When private productivity is lower than public productivity, in countries with a
small entrepreneur investment and poor market institutions, monetary instruments might be the
best option to achieve stabilization and economic growth.

c) When public investment is more inefficient, restrictive fiscal policy remains costly

75

in the short run for political economic feasibility and welfare. Such fiscal policy, though, is
highly preferred even when evaluated at high discount rates. Since economic growth is the best
option to alleviate poverty, the fiscal adjustment approach is the best instrument to do it.
Nevertheless, political feasibility, even in the case of low productivity of public investment,
makes it difficult to use fiscal austerity measures.

In conclusion, there is a strong political preference to use monetary and exchange rate
instruments over fiscal adjustment at all levels of productivity of investment and different discount
rates, despite the superiority of fiscal policy instruments for economic growth. That has been the

case of Ecuador during 1980-1987.

3.2.2. Altmntivg fisgal instruments

If more austere fiscal policies are necessary to protect private investment and future
economic growth, the reduction of public expenditures should concentrate on current
expenditures. The study describes two alternatives: a) proportional cuts in both expenditures, and
b) all cuts done on current expenditure.

There is little difference between the two options in terms of economic efficiency in the
short-term. In the medium and long-run, protecting government investment results in greater
efficiency. At all discount rates, cutting current expenditure is economically superior. In a
political sense, the situation changes. Capital expenditures have given jobs mainly to unskilled
urban and rural labor and current expenditures have been targeted to skilled medium and high
income urban groups, who have had political and bureaucratic power to support coalitions and
influence the stability of governments.

Since stabilization was the only option, politicians preferred to cut proportionally capital

76

and current expenditure rather than cutting current expenditures only. The exchange rate

adjustments still dominated politically.

13.2-3- W

Both fiscal and monetary policy adjustments make economic growth stronger in the long-
run than exchange rate adjustment. The former act on different distortions and in opposite
directions on interest rates, an important indicator of investment and growth. They also both have
short-term recessionary and political costs. The question is if fiscal and monetary policies applied
together in the short term would add up to a stronger recession than applying one after the other,
and what would be the cost in long-run economic growth of delaying one or the other or both.

Implementing both policies simultaneously does lead to a deeper recession, therefore a
joint application would entail higher political and welfare cost in the short-term, but greater future
recovery of the economy.

If both adjustments are delayed, GDP decreases at a rapid pace before the economy starts
to recover. This alternative is not better under economic, political or poverty alleviation criteria.
If only one is delayed, total GDP never falls as low as in the case of a simultaneous delay of both
of them. However, because the recession occurs two years later in the simulation, with population
growing, per capita GDP falls to a lower level. Poverty reaches a higher level than with an
immediate implementation of both policies. The role of population growth is important to
determine the costs of delaying fiscal or monetary policies.

The ordinal ranking of policies shows that delaying the implementation of monetary
policies is never superior to their immediate implementation. In reference to fiscal policies, there

is a trade-off involved. For growth, immediate implementation is better than delay. For political

77

feasibility and short-run welfare, delay is better than shock.

Ecuadorian governments used persistently exchange rate adjustments during 1980-1992
without any significant delay. Monetary policies were used more consistently and with more
intensity than fiscal policies, but were still not sufficient (at least until 1992), as indicated by the
persistence of high levels of inflation (around 45%). Nevertheless in the last two years the
inflation rate dropped drastically to levels of 20%, suggesting that monetary adjustment was
intensified.

Fiscal austerity was delayed with mild periodic applications throughout 1980-1994. One
signal that this adjustment has not been intensified is the persistent high real interest rates for
loans since 1991 and specially since 1993 and 1994, when it has reached the highest levels since
the 1980’s.

The scenario analyzed closer to reality suggests that during 1980-1987, the short-term
costs of the type of adjustment actually pursued in Ecuador were less than in a case of
simultaneous implementation of monetary and fiscal policies, but that recovery of economic
growth and alleviation of poverty might not have reached the optimum levels according to the

structural adjustment benefits for the long-run.

3.2.4. Cgmmnsation mgsures

In order to design compensation programs to alleviate poverty and achieve political
feasibility in the case of immediate, persistent and simultaneous fiscal and monetary adjustment,
the gainers would have to be taxed to transfer income to the losers. The only obvious gainers in
the case of Ecuador from 1980-1987 were the large agro-export farmers, but their income gains

were too small to compensate the losers. Therefore, compensation schemes in a crisis period must

78

rely on transfers from the rest of the world. The question would be to what population groups
would income transfers be justified and what is the minimum cost of this program?.

The results of the model with respect to this issue are the following:

a) To achieve political feasibility, the urban medium and high income groups would
need to receive direct transfers equal to 1.8 and 1.2 percent of their pre-crisis income levels,
respectively in order to maintain their income levels un-changed after fiscal and monetary policy
adjustment. All other groups would receive some benefits from these transfers, but absolute
poverty would not decline. The cost of the compensation program to ensure political feasibility
(alter a campaign of persuasion to the public which points out the importance of a whole package
of adjustment relative to exchange rate adjustment only) was equal to 9 per cent of the pre-crisis
foreign capital flow.

b) Maintaining a poverty index equal to the post-crisis but pre-adjustment level - in
the case of cutting current expenditures and wage repression-, would require a direct transfer of
1.8 percent of their precrisis income levels for small farmers, 0.2 percent for the medium
farmers and 1 percent for the urban poor. The resource transfer would have a small multiplier
effect and income gains, mainly toward the large farmers. This would help to increase political
feasibility slightly (compared to implementation of fiscal policy without compensation) because
of the small income gains captured by the large farmers and by the urban medium and upper
income groups. Political feasibility ratio is still negative, though, so additional transfers would
be needed to buy political support from the urban medium and upper income groups in the short-
run.

The cost of both compensation programs (political feasibility - 9 percent and alleviation
of poverty - 8.3 percent of the precrisis foreign borrowing) were almost the same.

In Ecuador, compensation programs were neglected during adjustment. "Ex-post

79

accommodation costs” occurred for opposite political groups which meant reversal of certain
adjustment policies instead of creating short-term compensation programs with a commitment of
political support for further stabilization. Efficient targeted compensation mechanisms for the poor
never existed. Both types of compensation figures are important to ensure sustainable political
feasibility and reduction of social costs from structural adjustment (De Janvry and Graham,

1994).

3.3. rl 'stmnon vr

The poor in Ecuador are very heterogeneous. The largest number of poor are small
farmers and landless followed by low education urban groups and in lower proportion medium
size farmers. The composition of income sources varies widely across the different groups.
According to the study of De Janvry and Fargeix (1991), structural adjustment affected shares
of wages and profits in different ways across groups. The author gave an important general
insight about the evolution over time of rural and urban poverty.

Before the crisis, poverty was still largely rural, not only in individual income classes but
in participation of the rural population in total poverty. Under the scenario of ”no-shock”, a
continuation of migration out of rural areas would have continued during 1980-1987. Rural
poverty would have fallen dramatically and urban poverty would have increased its participation
in aggregate poverty.

A full exchange rate adjustment scenario (with no overvaluation) favors the tradable
sectors over the non-tradable and since agriculture is mainly tradable, the rural poor would have
been benefited relative to the urban poor. However, the rural poor in the coast could have gained

more relative to the rural poor in the mountain region, because of greater tradeability of crops

80

on the coast.

Since monetary policies control capital out-flight and the foreign deficit, implying a
reduction in the need for exchange rate adjustment, these policies would affect negatively more
the rural poor relative to the urban poor. By contrast, a fiscal adjustment scenario which cuts
proportionally current and capital expenditures would have a very direct effect on the urban
population (high salary civil servants and low income workers) and additional losses from public
goods benefits. The rural poor would be affected only in a marginal way, through the reduction
of construction investment, in the sense that this sector represents some proportion of their
income sources. Reduction in health and educational public services would not affect the rural
poor as the urban poor, since the rural poor benefited from public goods in a marginal way
(primary and some secondary roads in the rural sector, some electricity and water services and
no social or family benefits) (De Janvry and Fargeix, 1992).

Monetary and fiscal policies implemented simultaneously (which was not the case in
Ecuador) are just sufficient to stabilize rural poverty in the last year of the general equilibrium
model (1987). It is only with the cut of current expenditures (in the sensitivity analysis) that
growth is sufficient to reduce rural poverty.

The real scenario in Ecuador during 1980-1987 suggests that the rural poor benefited
from persistent exchange rate devaluation, but this positive effect could have been offset by the
delay of fiscal adjustment in current expenditures and the reduction of capital expenditures.

The conclusion of this study, though, is that rural poverty alleviation is related with an
aggregate recovery pattern (likely because of the more diversified structure of income in rural
areas), therefore fiscal policies always fit better for them.

The interests of the urban poor are related with the upper income urban groups in the

sense that both suffer from fiscal austerity, and they support a monetary adjustment over

81

exchange rate adjustment, along with a delay in fiscal policy adjustment.

Poverty alleviation in Ecuador does depend on the rate of discount chosen by political
coalitions under the condition of a need to intensify structural adjustment for economic growth
in future years. There is clearly a distinction in poverty treatment between rural and urban poor
and opposite interests are involved. The rural poor are benefited more by the promotion of
economic growth in a small public sector and the urban poor are allied with politically dominant
coalitions who prefer delay of fiscal policy adjustment.

Targeting for political feasibility and poverty alleviation are not the same thing. Targeting
for political feasibility is not explicit, so it could be done indirectly by targeting for poverty.
Therefore, this overall alleviation of poverty would spill over to the politically relevant poor
groups supporting political leaders in the government. There are different ways to do so, either
finding resources abroad or re—targeting existing subsidies - food in particular, or a combination
of the two.

The authors list some approaches for poverty alleviation such as direct investment in the
poor. It would work if it is consistent with the nature of adjustment policies. For example,
investments that would help the poor to shift to the production of tradables (exportables and
importables) or maintain their market share of tradables if they are already involved in their
production.

In this case, it would be necessary to enhance the productivity of the poor and to take into
account the elasticity of demand for what they produce. The sectors with the greatest share in
total income are agricultural exports (47.3 per cent), trade (45.6 per cent), services (43.9 per
cent) and food agriculture (43.3 per cent). Since export agriculture is the most tradable, it
suggests that the efforts of targeting for poverty alleviation should go there. In addition, the trade-

offs between tradeability and labor intensity in the design of compensation programs must be

82

analyzed carefully.
C. Summer!

The following studies about experiences of structural adjustment in developing countries
other than Ecuador were reviewed:

1.- The political economy of agricultural pricing policy: A synthesis of the political
economy in developing countries (Krueger, 1991); The political economy of agricultural pricing
policy: A synthesis of the economics in developing countries (Krueger, Schiff and Valdez, 1991);
and Political economy of policy reform in developing countries (Krueger, 1993).

The studies consisted of a comparative analysis of eighteen developing countries gathered
in 4 groups by their degree of discrimination against agriculture. The main purpose was to
estimate the degree of price discrimination against agriculture and explain how it changed over
time under structural adjustment policies. The analysis focused on the main variables affected by
such programs like foreign exchange earnings, agricultural output and income distribution. The
authors also considered political factors and how they affected the motivations of policy makers
to determine agricultural intervention and success or failure of reforms.

The main conclusions can be summarized as follows:

a) Direct and indirect policy discrimination occurred in all countries and
macroeconomic policies had the largest effect, especially toward exportables. Direct or sectoral
policies added to the negative effect on exportables, but in the case of agricultural importables,
direct policies tried to offset the discrimination of macroeconomic policies through high tariffs,
quantitative restrictions, cheap credit and cheap access to inputs. However, in most of the

countries the effect of those policies was smaller than the macro effect.

83

b) High taxation of agriculture was associated with low growth in agriculture and
the broader economy. The net transfers from agriculture to other sectors from direct and indirect
policies were large in all the countries, leading to depression in agricultural investment and
growth, losses in income by rural actors and regressive income distribution. "Cheap food
policies” benefited mainly urban households, employees in the government and the formal sector
at the expense of the rural sector. The cost was bigger for the rural poor as well as for the urban
poor in the informal sector. For the urban poor, the loss resulting from the negative impact on
growth was higher than the static gains from price intervention. For the rural poor, both negative
impacts added up over time.

c) Through the process of crisis and adjustment, a complex arrangement of political
actors appeared and influenced outcomes either in carrying out adjustment successfully or in
reversing periods of policy reforms. In general, the main opponents of reducing discrimination
against agriculture were urban industrial businessmen, bureaucrats and urban workers, while
those in favor were exporters and to some extent the rural poor.

(1) Along with these political factors, the economic crisis under large public and
current account deficits and conditions of foreign lenders pushed the initiation of reforms in all
the countries. Nevertheless, the delays in further liberalization and removal of distortions were
influenced by the complexity of political coalitions of interest groups, mistakes of technocrats (as
in the case of Brazil, Chile, Mexico, Taiwan) and unpredicted natural disasters or depressed
prices for developing countries’ exports.

2.- Adjustment and equity in developing countries (Bourguignon and Morrison,
1992). The sample consisted of seven countries. Some carried out adjustment measures in
cooperation with IMF (Chile, Cote d’lvoire, Ecuador and Morocco) and Indonesia and Malaysia

adjusted before the crisis without having to go to the IMF. Ghana rejected adjustment and

34

remained in crisis for ten years and had to reduce its imports to the level of its exports since it
did not use foreign loans. The main purpose of the study was to reveal the advantages of an early
adjustment, to state the importance of political factors in the process of removing distortions and
to describe the particular conditions of unemployment, incomes, government transfers and
poverty during the adjustment period.

The main conclusions were the following:

a) Adjustment in external and public deficits had different social and political costs
in all countries, therefore it is not possible not to have losers in the process. Increased poverty
occurred among certain groups and compensatory measures were urgent either to alleviate poverty
or to reach political agreement to continue reforms.

b) The only way to avoid the costs of adjustment is to adjust before a crisis because
a smaller reduction in demand is necessary and the country can avoid overshooting of
unemployment, swelling of the informal sector and large budget cuts. Also, this approach has the
advantage of a permanent flow of foreign capital before and during the adjustment that helped
to implement compensatory programs for the losers, leading to less opposition to further
adjustment.

c) Through the simulations used in the study, the authors state that devaluation is,
in general, a more efficient short term measure than cutting public expenditure or money supply.
A devaluation slows economic activity less, it is more advantageous for the rural sector and it
has better distribution effects. However, for further stabilization and growth, it is necessary to
carry out other adjustment measures. Political constraints were important in all the countries,
therefore a package has to be politically and economically feasible at any time of the process.

d) Liberalization of foreign trade lowers prices of manufactured goods relative to

agricultural prices, so it benefits small farmers and decreases poverty when this predominates in

85

rural areas. Removal of distortions gives the right signals in the markets and a mobilization of
resources occurs toward exportables (if factors are not rigid). Thus, income gains appeared for
small and medium farmers and in the non-agricultural sectors and labor-intensive industries were
favored, potentially reducing unemployment and underemployment. Cutting public expenditure
and reorganizing public enterprises has had the largest social cost though a number of lay-offs
that can be larger than the creation of new employment opportunities around exportables. In the
short and medium terms, compensation packages are necessary to ensure political and social
stability and therefore further stabilization and growth.

3.- Adjustment and equity in Ecuador (De Janvry and Fargeix, I991)

The purpose of the study was to determine the social impact of stabilization policies in
Ecuador between 1980-1987. The authors constructed a dynamic computable general equilibrium
model. Using that model, they compared the economic and social effects of four stabilization
instruments: devaluation, cutting of current and capital public expenditures, cutting the rate of
growth of the money supply and wage repression. The simulations show that the choice of a
stabilization technique affects social groups differently. A devaluation benefits farmers in the
short term, but affects urban upper and medium income classes by reducing real wages. A cut
in current expenditures reduces employment of skilled public employees. A cut in public capital
expenditures reduces employment of un-skilled public employees (composed of urban poor and
the rural poor who complement their rural income by working in public construction). A cut in
public social expenditures affects the urban poor more than the rural poor since the first have
benefited more from health and education services.

Using these results, the authors made simulations of the political feasibility of alternative
stabilization packages based on the interests of socio-economic groups and their influence in

policy makers’ decisions. Therefore, they stated that structural adjustment packages have four

86

dimensions: effectiveness in terms of political feasibility, least costly social terms, short term
economic stability and long term economic growth. The combination of all these elements would
help to conciliate stabilization with economic growth, reduction of poverty and democratic
political stability.

4.- The political feasibility of adjustment in Ecuador and Venezuela (De Janvry and
Graham, 1994). The study explains why delays in stabilization measures and reversals have
occurred in Ecuador since 1980. The strong opposition of the wide variety of industrial
organizations and organized labor as opposed to coastal agro-exporters have determined the weak
political support for stabilization in Ecuador.

Also imperfect and private information has been the cause of failures in economic
packages because the parties in coalitions never knew the whole set of policy options and the
expected responses of other players. In consequence ex-ante policy dialogue has occurred without
consensus and commitment and based mainly on a seeking of ”ex post policy accommodation”
that has determined later reversions of policies.

The empirical studies analyzed in this chapter have a common characteristic which is the
high level of aggregation used to assess impacts of structural adjustment policies in the
agricultural and non agricultural sectors. The analysis of the interaction of effects of macro and
micro changes on household income sources and households’ decisions on expenditure patterns
was not done. This might be due to a lack of methodological approach that can link macro, micro

and household dimensions and a lack of available household survey data.

HA R

EEEEQIE QF POLICY AND MARKET DIST 0RTION§
QE NE]: flQUSEI-IQLD INQQME - METHQDS QF ANALYSIS

This chapter describes the data set, the processing and the management of data from the
survey done in the area of Salcedo-Ecuador; the concept and methodology of social prices of all
the variables involved in the determination of household income; and the methods of analysis to

assess the impact of selected policy and market distortions on net household income.

In Ecuador, there are no complete records of data on land tenure that can define current
ownership of agricultural units. The last census was made in 1974.

The area of Salcedo was selected for the present research. It is located in the northern
part of the Sierra, mountain region of Ecuador. Salcedo is known as one of the communities
where land has gone through an intense process of sub-division, through the Agrarian Reform
and through informal and formal market activity. Small and medium farms have produced crops
for domestic consumption and for a small scale trade with the frontier of Colombia. It has been
assumed that this regional trade has motivated farming activities among small and medium
farmers. A significant proportion of these farms have no property rights, therefore the risk of
investing in agriculture is relatively high. Most of the largest farms are owned by communities
and because the law does not allow community land to be sold, there is either an active

underground rent land market or a large percentage of the land is not used for agricultural

87

88
purposes (Camacho, 1992).

In this area a survey was done in 1991 by the Institute of Agropecuarian Strategies (IAS),
National Institute of Statistics and Census (NISC) and Project of Titles and Rural Adjudication
of Land (PTRAL).

The sample size was 592. A representative sample was taken among properties of less
than 50 hectares and a census was made of properties of more than 50 hectares. The sample was
designed using the records of PTRAL in 1990. The Institute used a sophisticated method of

photographic area and topographic measures of all farms (Camacho, 1992).

3. Illmh

3.1. firming and management of data

The block of data was processed with the computer software SPSS/PC + . There were four
files for the block of data:

a) Socio-economic indicators about off-farm income per member of the household.

b) Use of land by type of property and by quality of land.

c) Cash production costs and cash and non-cash income per crop. The data in the
survey was disaggregated by 25 crops, which were combined into 10 crop groups. One group had
internationally tradable outputs, two groups had regionally tradable outputs and the rest of the

groups had non-tradable outputs’.

 

7 Internationally tradable outputs are defined as products which can be traded overseas, the ones

in the present research are import substitutes commodities. Regionally tradable outputs are defined as
products which have been historically traded with the frontier countries and not overseas because of
bulkiness and perishability. Non-tradable outputs are defined as products which can be traded only in the
domestic market because of high ratios of bulkiness and perishability in relation to value.

89

d) Livestock inventories and livestock sales. Because the survey data did not include
livestock production costs, the net farm income was calculated without taking into account
livestock sales in order to avoid an over-weight of this item into estimating total household
income. Nevertheless, gross farm income was calculated to estimate the relative proportion of
livestock in gross household income.

The household data were aggregated by five farm size categories and ten crop categories.
The farm size categories were divided based on a low variance of farm sizes and homogeneity
of cropping patterns.

The crop group categories were based on homogeneity of product characteristics:

1 = for animal consumption like hay, alfalfa and straw
2 = soft corn

3 = beans and lentils

4 = oats

5 = potatoes

6 = indigenous roots and grains

7 = non citrus fruits

8 = onions

9 = others

10= wheat, barley and hard corn

The data were combined in each case to produce the following summary files containing
average data on the following variables:

a) household net income by farm size crop group categories,

b) land use and quality of land by farm size,

c) gross livestock income by farm size,
d) tradable and non-tradable components in production costs by farm size and crop,
e) partial and combined effects of policy and market distortions on tradable and

non-tradable agricultural inputs and outputs, off-farm income and net household
income by farm size and crop group categories and,

1) private and social return over variable costs by farm size and crop group

categories.

3.2- was:

3.2.1. Writs

The methodology of the Policy Analysis Matrix (Monke and Pearson, 1989) was used to
calculated social prices. Comparison between social and domestic prices was done to estimate
partial and combined effects of policy and market distortions on agricultural output and variable
cost, off-farm income and net household income.

Agricultural variable costs were classified as: a) fertilizers, b) agro-chemicals, c)
machinery, d) labor and e) seed. Fertilizers, agro-chemicals, machinery and in some cases seed
from tradable outputs were considered tradable inputs, while labor was considered non-tradable.

W are those which have their opportunity cost in the international market.
Therefore, the social prices of these inputs were calculated making a matrix of social import costs
without distortions. The main distortions identified between 1990 and 1994 were: a) overvaluation
of exchange rate; b) import tariffs and duties and import taxes paid currently by importers; c)
non-competitive marketing and profit margins taken by importers. The Law for Agricultural
Development valid between 1990-1992, guaranteed marketing margins for sales and
administration up to 30 percent over Cost and Freight (C&F) for each import and a profit margin
of an additional 30 percent.

Wm are those whose prices are determined domestically. The opportunity
cost would be the next best alternative available without distortions. The main distortion identified

in the rural labor market of the Sierra (mountain region) was the lack of free mobility of labor

91

among areas and sectors (Coast, Sierra and Rural Informal Sector)“. This distortion has driven
differences in rural wages among sectors, crops and regions.

WM: From the crops of the research, barley, wheat and hard
corn were considered tradable internationally. The opportunity cost of these crops was their
border price (international prices adjusted by exchange rate, no tariffs or duties and transport to
farms in the Sierra).

Potatoes and soft corn were considered regionally tradable. The opportunity cost of these
crops was their border price in Colombia adjusted for exchange rate and transport costs. Data on
differences in prices between Ecuador and Colombia for potatoes and soft corn were taken from
annual publications of the National Association of Potatoes and Soft Corn growers in Colombia.

All other crops were considered non-tradable for being excessively perishable and bulky.

3.2.2. I in h 11' 1’ lie and marke istortion n ri lur l vari

mtg, ' l ral incom off-farm income nd ne househ Id incom

Summary 1: Steps of calculation

m: Divide each tradable input into proportions of tradable and non tradable
components. For tradable inputs, available records of imports in the Ministry of Agriculture
(1990-1994) were taken to determine share of tradable and non tradable components.

The Ministry of Agriculture in Ecuador has had the legal right to ask importers detailed

information about C&F, tariffs l fees / duties paid in customs, administrative / sales and profit

 

Information taken from: NISC publication of Employment and Wages (Formal and Informal
Sector), 1991-1994 and the survey done by the Agricultural Sector Reorientation Project
ASRP/USAID in 1993 in some selected areas in the Coast.

92

margins for every item before granting an import permit. When importers bring merchandise to
the country, they have the duty to give the Ministry of Agriculture another sheet with data
adjusted to real import values (generally C&F price and administrative/sales and profit margins).

“Effective” sheets of records of imports were used in the present research and the most
common items imported in each case during 1990-1994 were urea (representing around 80
percent of total fertilizer imports); Monitor 600 EC (around 35% of total insecticides imports);
Paraquat 24 EC (around 30% of total herbicides imports); Cuprosan 311 SD (around 45% of total
fungicides imports); tractors 110 HP as a record model for machinery (Statistics of Ministry of
Agriculture, 1994).

The reported prices from these records were compared with actual market prices from
the Price Information System available in the Ministry of Agriculture. Variations were not large
(between 3%-10%), therefore the source of data to calculate shares of tradables and non tradables
components was likely reliable (Table 11).

53991519123 Make a matrix of input cost and output income by tradable and non tradable
component for each crop, multiplying the respective shares by the actual values reported in the
survey.

Mm: Calculate distortion coefficients for each level of the matrix. Secondary data
(macroeconomic and microeconomic variables) were used.

mm: Make a matrix of social values multiplying the elements of the matrix in
private values by the respective distortion coefficients.

m: Calculate the partial and combined effects of policy and market distortions on:
a) agricultural variable cost, b) agricultural output, c) return on variable cost, (I) off-farm income
and e) net household income. A distortion rate was calculated for each policy and market
distortion, which is the ratio between social and private values. Tables A.1 - A. 12 in appendix
A summarize the methodology used.

It

93

 

 

 

cost of importer's capital)
Taken 70% 1/

table 11. Tradeability classification of cost
components for imported inputs and outputs a/
_
COMPONENTS
Item Tradable Non-
s trada-
bles
l. C&F X
2. Tariffs, duties, fees and x
taxes
3. Transport from port to
importer warehouse
a. Diesel x
b. Vehicle X X
c. Parts x X
d. Labor (driver) X
e. Return of owner of X
vehicle
4. Administrative/sales margins X
of importer
5. Financial costs of importer
a. Interest rate to open x
credit card in foreign
bank to carry out import
b. Domestic interest rate to X
hold inventory
(opportunity cost of
capital) Taken 30% 1/
6. Profit margin (opportunity X

 

Notes:

a/ Tradable inputs: fertilizer, herbicides, insecticides,
fungicides and machinery; tradable outputs: wheat,

hard corn and barley

1/ It was assumed that 30 percent of inventory was
financed by loans and the rest by own capital

Source: Records of imports, Ministry of Agriculture,
1990-1994

94

Summary 2 - Matrix of policies, variables and distortions

Table 12 summarizes the policies and variables involved in estimating private and social
values of tradable and non tradable inputs and outputs and the distortions identified in each

market.

3.2.3. li n m rk is ori

Exchange rate policy

Since the exchange rate affects the social prices of all tradables, it is important that
exchange rate distortions be properly identified and corrected for purposes of the present analysis.
Estimating an accurate real equilibrium exchange rate can present major problems. If no reliable
estimates of the real equilibrium exchange rate are available from secondary sources, a formal
method can be used. The purchasing power parity (PPP) method is the simplest. The version used
in this analysis involves selecting a base year, or preferably, a base month, in which the exchange
rate in the domestic market is judged to have been valued at its equilibrium rate in relation with
the currency from the dominant trading partner (often the US dollar) and deflating the exchange

rate in subsequent years (or months) by the difference in domestic inflation rates (I‘ able l3).

95

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98

table 13. Private and social exchange rate, 1990-1994

 

 

 

-

Year PRIVATE Price Price Price Real Soc. Over-
Exchan- Index of Index of index exch. exch. val.
ge rate Ecuador USA ratio rate rate rate
name) RER . sea

(1) (d/a)

a b c c/b a*(c/b) d) -1

1990 822 56.9 95.0 1.67 1,372 773 -5.8$
1991 1,101 84.6 98.8 1.17 1,287 1,107 0.3%
1992 1,594 130.8 101.8 0.78 1,241 1,661 4.2%
1993 1,919 189.6 104.8 0.55 1,061 2,340 21.7%
1994 2,198 241.4 107.5 0.45 979 2,902 32.0%
Notes:

(1) Social exchange rate calculated by PF? method Base year I
December 1991. Exchange rate was valued as its true equilibrium rate
in relation to the currency used by the dominant trading partner (USA
I 688 of Ecuador's trade). Reforms in cutting trade barriers and
tariff protection started 1991.

SER I social exchange rate I [NER(e)/RER] * NER(c) I d

RER I real exchange rate I [a * (c/b)]

NER(e) I nominal exchange rate in base year - dec 91/ I 1,293 s/US
NER(c) I current nominal exchange rate I a

 

Source : PPP methodology, CIMMYT economics paper, Determining
comparative advantage through DRC Analysis, 1990

Trade policy

Through the 1980’s, Ecuador’s tariffs for tradable agricultural inputs and outputs (import
substitutes such as wheat and barley) were relatively low in comparison with other South
American economies. Tariffs for tradable outputs which competed with domestic production such
as hard com, soybeans and rice were, on the contrary, relatively high.

Since 1992, when the Andean Trade Treaty started to be reinforced, the agreement for
an ”andean common tariff” pushed tariffs for inputs and import substitute outputs higher and
tariffs for competitive imports lower than the past decade.

Besides tariffs during 1990-1994, there were other import restrictions such as special fees,

duties and taxes to be paid to the Customs Institution, Police, Central Bank, Ministry of Finance

99
and Ministry of Social Welfare. The C&F value plus all of these expenses equal the import cost

at the importer warehouse.

In the case of tradable inputs, the estimation of private import cost described in table 12
is close to the observed domestic market prices because suppliers of inputs are only importers.
In the case of importable outputs, the estimation of private import cost described in table 22
differs from the prevailed domestic market price because suppliers of importable outputs are
domestic producers and importers.

By definition, the social value of tariffs, fees and duties are zero and only those custom
and port expenses considered "legitimate" in the sense that they would be paid anyhow in a free
trade situation, are left as social value. The social value of transport as a percentage of C&F is
included here for purposes of data management but is described in detail in next section.

Distortion coefficients as ratios between social values and private values were calculated
for tradable inputs and outputs. The coefficient is a measure that explains the extent to which
social value differs from private value (Table 14).

During 1990 and 1994, the social value of tariffs, fees, duties, port expenses and
transport cost to importer warehouses was between 29 percent and 64 percent of private value
for tradable inputs and between 26 percent and 38 percent for tradable outputs. The reason for
these low ratios is the prevalence of protectionism for importables through trade policy during

this period in the economy of Ecuador.

100

Table 14. Distortion of tariffs, fees, duties and transport
cost of imported inputs and outputs to warehouse as
percentage of car, 1990-1994 1/

 

 

.-
Concept 1990 1991 1992 1993 1994
l. Tradable input

1.1. Fertilizer 0.50 0.34 0.53 0.64 0.64
1.2. Agrochemicals 0.29 0.29 0.37 0.46 0.51
1.3. Tradable seed 0.32 0.31 0.40 0.46 0.48
1.4. Machinery 0.34 0.33 0.43 0.48 0.51
2. Tradable output
2.1. Hard corn 0.33 0.31 0.26 0.28 0.27
2.2. Wheat 0.32 0.31 0.33 0.38 0.26
2.3. Barley 0.32 0.31 0.34 0.38 0.27
3. Parts for vehicles 0.16 0.15 0.19 0.28 0.30

for rural transport

Notes:

1/ Distortion coefficient I social value / private value

Source: Import records, Ministry of Agriculture 1990-1994; Trade
Policy of Ecuador 1990-1994, Ministry of Finance
Table derived from tables 8.1 - 8.5 in appendix 8

Monetary policy

Calculation of a social interest rate

Through the 19703, part of the 19803 (1980-1986) and part of the 19905 (1988-1992),
either the interest rate or the "financial spread"9 were fixed with the purpose of controlling
inflation. Money growth was greater than the interest rate. The consequence was a permanent
high inflation rate that became difficult to control (high expectations of inflation rate spread

through the economy during the 19803 and 1990s). Informal loan markets were part of the

 

Financial spread = (interest rate for loans - interest rate for savings).

101

economy and were characterized by higher interest rates than in the formal financial system
during 1984-1991 (IDEA, 1992).

With the new government starting in 1992, interest rates were not controlled anymore,
the legal deposit of banks in the Central Bank was lowered to half and the legal barriers to entry
in the Financial System were removed (World Bank, 1993). The Reform aimed to give more

flexibility to domestic banks in order to:

a) slow down the increase in the financial spread (interest rate for loans - interest rate for
savings),
b) decrease the participation of the Central Bank in the loanable funds of the financial

system; and,

c) reduce the differential between inflation and interest rate and therefore the real return of
financial system to give incentive for investment in the whole economy.

Inflation slowed from 50 percent in 1992 to 27 percent in 1994, but interest rates and the
financial spread were still very high; the financial spread increased from 12.9 percent in 1992
to 17.1 and 44.5 percent in 1993 and 1994, respectively. Monetary authorities of the country
realized that the domestic capital market faced both macroeconomic distortions and market
failures during this period. Once macroeconomic distortions and legal barriers were partially
removed, interest rates did not go down.

The social interest rate was calculated following Lee and Flood (I994). The method
started by calculating a "social interest rate for loans” assuming demanders have free access to
international financial markets, which had lower interest rates than domestic markets. A "social
return for the financial system” was calculated, assuming domestic suppliers of loans lower the
financial spread and profit margins to levels of foreign banks in the USA (50% higher than USA

taking into account smaller economies of scale in domestic banks).

102

Finally a weighted "social interest rate" was calculated giving a weight of 60% to the
social interest rate from the demand side and 40% to the social interest rate from the supply side,
assuming supply distortions are more inflexible than mobility of demanders in the international
capital markets.

Table 15 shows the distortion coefficient on the interest rate. During 1990-1994 with the
exception of 1993, the social interest rate was between 75 and 83 percent of the private interest

rate due to the distortions previously analyzed.

 

 

 

Table 15. Private interest rate versus social interest rate
(WEIGETED AVERAGE DEMAND AND SUPPLY SIDES)
—

Year nominal nominal adjusted. weighted private Distorti
social social nominal social interest on
interes return social interest rate
t rate in return rate

Ecuador in USA
1/ 2/ 3/ 4/ S/ 4/5

1990 27.8% 57.5% 53.1% 39.2% 52.4% 0.75

1991 31.7% 57.7% 52.1% 41.5% 53.1% 0.78

1992 45.2% 63.6% 57.7% 52.0% 62.5% 0.83

1993 47.1% 54.0% 48.3% 49.3% 47.0% 1.05

1994 44.9% 37.5% 32.7% 41.4% 53.3% 0.78

Notes:

1/ Nominal social interest rate where domestic demanders for loans can

access international loan market

2/ Nominal social return domestic market where domestic suppliers of
loans (financial system) have on average (90-94) 58.6% lower margin

than international suppliers of loans
social return international market
4/ Weighted social interest rate with the following weights:

3/ Estimated nominal

For 1/ 60%
For 2/ 30%
For 3/ 10% - assuming domestic financial market face some sort of
competition with international financial markets
51 Current private interest rate

Source: Monthly statistical information of Central Bank of Ecuador

Table derived from tables 8.6 - 8.7 in appendix 8
—

103

Monetary policy

Calculation of average social rate of return

The adjustment for rate of return of importers and transporters was done adding a risk
premium of 10% to the social interest rate and comparing it with the estimation of Pearson and
Monke of real social rate of return for low income economies (T ables 12 and 16). The private
rate of return of importers of tradable inputs and outputs was taken from the records of imports
(Ministry of Agriculture, 1990-1994). The private return of transporters was estimated by adding

a 15 percent risk premium to the inflation rate.

Table 16. Social return and social interest rate

 

 

Item 1990 1991 1992 1993 1994
private return 63.5% 63.7% 69.6% 61.4% 42.5%
inflation + 15% risk free

social interest rate 39.2% 41.5% 52.0% 49.3% 41.4%
a

social return 49.2% 51.5% 62.0% 59.3% 51.4%

b I a + 10% risk free

 

Source: Monthly statistical information of Central Bank of Ecuador,
table 15

Market distortions: transport

Transport represents between 10 and 12 percent of total cost of tradable inputs and
outputs, therefore it was decided to correct distortions in its components. Transport cost was
divided into five components, and the contribution of each to the cost of total transport service
fee was calculated using approximations from the National Association of Transporters, Quito-

Ecuador, 1994 (Table 17).

104

Table 17. Private coeponent of rural transport as a percentage
of total transport service fee

 
 

 
 

 
 

 
          

 

Item 2 year 1990 1991 1992 1993 1994
old

vehicle
a. vehicle 20 9 7 8 9 10
b. parts 5 16 18 17 16 15
c. labor 5 5 5 5 5 5
d. diesel 8 8 8 8 8 8
e. return 62 62 62 62 62 62
TOTAL 100 100 100 100 100 100
annually 5.5 6.0 5.0 5.5 4.0
average age of
vehicles

 

Source: National Transport Association of Ecuador (Quito-Ecuador);
Degartment of Police - licenses and plates (1990-1994)

The assessment of social value for each component was done in the following way:

mick: Because the age of vehicles for merchandise transportation was close to 6 years
old between 1990-1994, the units were almost fully depreciated. For that reason, the proportion
of the vehicle component in total transport service cost was relatively low. The social value or
opportunity cost would be the replacement cost of purchasing new vehicles adjusted for the
exchange rate, tariffs and other distortions in the market for imported vehicles. It was decided
not to do this adjustment because of insufficient data.

Ram: Social value was calculated following the same procedure as the other tradable
inputs (Table 18).

um: The labor in transportation have been the best paid in non-skilled labor markets,
therefore the social value = private value. Considering lower international mobility of labor
(even among neighbor countries), their opportunity cost would be the same as for their current
occupation.

Liesejz The social value of diesel would be the international price of diesel (taking USA

as reference) adjusted by exchange rate and transportation - border price (Table 19). From the

105

Table 18. Private and social value components of transport
vehicle parts

 

=
1990 1991 1992 1993 1994

 

 

Item Descrip
tion

PRIVATE VALUE

a. C&F baseI100 100.00 100.00 100.00 100.00 100.00

b. Tariff, %/C&F 28.60 31.69 25.01 17.74 19.64
duties and fees

c. Marketing %/C&F 10.00 10.00 10.00 10.00 10.00
margin

d. Profit of %/C&F 24.40 30.20 21.17 21.23 23.20
importer l/

e. Total private a+b+c+d, 163.00 171.89 156.17 148.97 152.84
component

SOCIAL VALUE

a. C&F 2/ 94.60 100.30 104.20 121.81 132.01

b. Tariff, %/C&F 4.94 5.28 5.50 6.84 8.72
duties and fees

c. Marketing %/C&F 4.73 5.01 5.21 6.09 6.60
margin 2/

d. Profit of %/C&F 15.51 17.22 21.53 24.08 22.62
importer 3/

e. Total social a+b+c+d 119.79 127.81 136.44 158.82 169.95
component

DISTORTION S/ 0.73 0.74 0.87 1.07 1.11

COEFFICIENT

Notes:

1/ Profit of importer I average private profit of economy

2/ social C&F I private C&F * overvaluation rate

3/ Social market margin 2 15% annual / 3 frequencies imports per

4/
5/

year

Social profit importer

imports per year

Distortion coefficient

avg social profit / 3 frequencies

social value - private value

Source: Records of transport vehicle parts, Ministry of Finance,
1990-1994 and table 16.
-

106

Table 19. Private and social value of diesel fuel

 

 

_ m
Concept 1990 1991 1992 1993 1994
Market exchange rate 821 1,099 1,586 1,917 2,198
Overvaluation rate -5.4% 0.3% 4.2% 21.8% 32.0%
Social exchange rate 1/ 777 1,103 1,653 2,335 2,901
Quito wholesale price of 286 386 798 1314 1576
diesel (s/gal)
Quito wholesale pricetof 0.37 0.35 0.48 0.56 0.54
diesel (US/gal) 2/
International FOB price 0.66 0.58 0.55 0.50 0.46
of diesel Gulf of Mexico
(US/gal)

Freight (0.6%/F08)
Insurance (0.4%/FOB)
Other costs (10%/F08)

 

Border price diesel Gulf 0.59 0.52 0.49 0.45 0.41
of Ecuador (US/gal) 3/

Distortion coefficient 4/ 1J59 1.48 1.02 0.79 0.76
Notes:

1/ Social exchange rate I market exchange rate * (1+ overvaluation
rate)

2/ Price in dollars using social exchange rate

3/ P08 price Gulf of Mexico adjusted by freight, insurance and other
costs

4/ Distortion coefficient I social value / private value

Source: Monthly statistics of Petro-Ecuador (1990-1994); table 13.
—7

1970’s to 1992, the domestic price of petroleum sub-products was below the international price
as a result of subsidies. During the last 2 years, however, domestic prices have exceeded
international prices and have included a tax. This tax has been for a National Reserve Fund
whose purpose has been helping to pay the international debt (Petro-Ecuador, 1994).

Won vehicle owner: The social value of return to transporters was
calculated in the same way as for importers, adding a risk premium of 10% to the social interest
rate (See section on monetary policy - calculation of average social rate of return).

The total transport distortion coefficient may now be calculated as the sum of private

107

values of its components multiply by the distortion coefficients in each case (Table 20).

Table 20. Social component of rural transport a/

 

 

 

—

Concept 1990 1991 1992 1993 1994
a. vehicle 9 7 8 9 10
b. parts 12 13 15 17 17
c. labor 5 S 5 5 5
d. diesel 13 12 8 6 6
e. return 42 35 61 58 46
TOTAL 80 73 96 95 84
distortion 0.80 0.72 0.97 0.95 0.84
coefficient 1/

Notes:

1/ Distortion coefficient I social value / private value

Source: a/ Derived from tables 17-19
_

Market distortion

Calculation of social rural wage

The social value or opportunity cost of labor is the best alternative in a specific labor
market. There were wage differences between the Sierra and Coast and among the rural informal
and formal sectors for the same rural un-skilled labor during 1990-1994 (Tables 21 and 22).
These differences evidence the existence of rigidities in labor mobility across sectors and regions.
In general, in the Sierra and specifically in the area selected for the survey, the agricultural rural
wage was low relative to the coast (Ministry of Agriculture, 1990-1994). Rural informal sector
wages in the Coast and Sierra were higher than rural agriculture wages in the same regions
(National Institute of Statistics and Census, 1994).

Therefore, for the present research, there are three relevant labor markets for determining

the opportunity cost of paid rural labor in farm variable costs. These are: a) the rural informal

108

labor market of the Sierra, b) the rural informal labor market in the Coast and c) agricultural
rural

wages for selected crops of the Coast in a region closer to the area of the survey. These crops
were export crops and other more profitable crops than in the Sierra. The specific region of the
Coast (outside the primary banana area) was chosen for the analysis because rural labor of the
Sierra have more likely access to labor market due to geographical closeness and less cultural
differences than other regions in the coast (Table 21).

In the survey, off-farm income was composed of four income sources: a) non-agricultural
informal, b) non-agricultural formal, c) agricultural wage and (1) others. For the first one, the
relevant markets to determine the opportunity cost were the urban informal market in the Sierra
and the respective market in the Coast. For the second and the last one, it was assumed that the
social value equals the private value because of insufficient data. For the third one, the relevant
markets chosen were the agricultural labor markets in four crops of the coast: banana, palm oil,
sugar, and other crops such as rice, hard corn, soybeans and tropical fruits (Table 22).

There are two ways to determine the social value or opportunity cost of paid labor wage
in variable cost and off-farm wage: a) take the highest net wage (gross wage — mobilization cost)
in the respective relevant markets and, b) take a weighted wage taking into account risk and
probabilities of finding a job in the relevant markets, compare it with actual wage in each case

and choose the highest. For the present research, the first approach was used.

109

 

Table 21. Opportunity cost for far. labor
m 1==3
Item 1990 1991 1992 1993 1994

 

Dollarsgper day
A. Cross sage per day in relevant
sarket

A.1. SIERRA SELECTED AREA

a. Agricultural 3.57 3.86 4.40 4.12 3.72
b. Rural informal sector 3.96 4.75 6.40 5.37 4.92
A.2. COAST
a. Banana 4.63 5.45 6.36 6.10 5.64
b. Sugar/Palm oil 3.70 4.47 5.54 5.92 4.52
c. Other crops 1/ 2.96 3.58 4.76 5.80 4.06
d. Rural informal sector 3.53 4.23 5.70 5.65 4.61
Mobilization cost per person per day 0.67 0.73 0.76 0.93 1.19
from the Sierra to informal sector in
the Coast 2/
Mobilization cost per person per day 0.64 0.70 0.72 0.89 1.14
from sierra to banana farms in
OUTSIDE BANANA AREAS (closer to the
Sierra) 2/
I. let sage per day in relevant sar-
ket discounting anbilization cost
8.1. SIERRA SELECTED AREA
a. Agriculture 3.57 3.86 4 40 4.12 3.72
b. lnformal 3.96 4.75 6.40 5.37 4.92
8.2. COAST
a. Banana 3.99 4.75 5.64 5.21 4.50
b. Sugar/Palm oil 3.06 3.77 4.82 5.04 3.38
c. Other crops 1/ 2.32 2.88 4.04 4.92 2.92
d. informal sector 2.86 3.50 4.94 4.72 3.42
C. Opportunity cost of labor 3.99 4.75 6.40 5.37 4.92
agriculture in the Sierra 3/
D. Distortion coefficient 4] 1.12 1.23 1.45 1.30 1.32

 

Notes:

1/ Other crops I (rice, hard corn, soybeans and tropical fruits)

2/ includes room, food and transport

3/ Opportunity cost of labor I highest net wage in relevant market

4/ Distortion coefficient I Opportunity cost in relevant market / private wage in the Sierra

Source: Records of production cost by areas (1990-1994), Ministry of Agriculture, National Institute
of Statistics and Census (1991-1994); mobilization costs: estimates for food, room and transport for
1994 and adjusted 1990-1993 by inflation rates of food and beverages, housing and miscellaneous.

110

Tfile 22. (pportmity cost for off-farm faily labor

Item 1990 1991 1995 1633 1537

Dollars per day
A. Mal-AGRICULTURAL

lMFORMAL
A.1. Gross wage per day in relevant
market
a. Urban informal in the Sierra 3.88 4.64 6.24 5.24 4.80
b. Urban informal in the Coast 3.44 4.12 5.56 5.52 4.28
c. Mobilization cost from the 0.68 0.74 0.78 0.95 1.21
Sierra to the Coast
A.2. Met wage per day in relevant
market discounting mobilization
cost
a. Urban informal in the Sierra 3.88 4.64 6.24 5.24 4.80
b. Urban informal in the Coast 2.76 3.38 4.78 4.57 3.07
A.3. Opportunity cost of labor 1/ 3.88 4.64 6.24 5.24 4.80
A.4. Distortion coefficient 2/ 1.00 1.00 1.00 1.00 1.00
I. AGRICULTURAL “AGE - FORMAL
8.1. Gross wage per day in rele-
vant market
a. Agricultural wage in the Sierra 3.57 3.86 4.40 4.12 3.72
b. Agricultural wage banana 4.63 5.45 6.36 6.10 5.64
c. Agricultural wage sugar/palm oil 3.70 4.47 5.54 5.92 4.52
d. Agricultural wage other crops (Coast) 2.96 3.58 4.76 5.80 4.06
e. Mobilization cost from the Sierra to 0.64 0.70 0.72 0.89 1.14
the Coast
8.2. Met wage per day in relevant
market discounting mobilization
cost
a. Agricultural wage in the Sierra 3.57 3.86 4.40 4.12 3.72
b. Agricultural wage banana 3.99 4.75 5.64 5.21 4.50
c. Agricultural wage sugar/palm oil 3.06 3.77 4.82 5.04 3.38
d. Agricultural wage other crops (Coast) 2.32 2.88 4.04 4.92 2.92
8.3. Opportunity cost of labor 1/ 3.99 4.75 5.64 5.21 4.50
8.4. Distortion coefficient 2/ 1.12 1.23 1.28 1.27 1.21

 

Mates:

1/ Opportunity cost I highest net wage in relevant market
2/ Distortion coefficient I opportunity cost relevant market / private wage

Source: National Institute of Statistics and Census (1991-1994); mobilization costs: estimates for
food, room and transport for 1994 and adjusted 1990-1993 by inflation rates of food and beverages,
housing and miscellaneous; table 21.

FEA REA.

This chapter presents the results of the Salcedo research about the following issues: a)
land use and income patterns of households, b) tradeability and non tradeability of agricultural
input and output value, b) total and partial impacts of selected policy and market distortions on

agricultural output and variable costs, off-farm income and net household income.

A. W

For analysis purposes, farm households in the area of Salcedo were divided into five farm
size categories. The farm size categories were divided based on a low variance of farm sizes and
homogeneity of cropping patterns. Eighty six percent of the cases in the survey reported farm
sizes between 0 and S hectares and 14 percent of the cases reported farm sizes more than 5
hectares, therefore the distribution of the data was heavily skewed towards the smallest farm
sizes.

Because the purpose of the present research was to analyze differential effects of policy
and market distortions among the smallest sized properties, this group was divided in two
categories: 0-1 and 1-5 hectares. Even though only 14 percent of the cases reporter larger farm
sizes, this group was divided in three group categories due to wide differences in farm sizes

within this 14 percent (T able 23).

111

112

Table 23. Distribution of farm sizes, Salcedo Ecuador

 

(1991)
IIII==EIIl=EflIflIII====flE=====================================
Farm size category Number of cases % households in
(has) sample of 592

cases
0-1 has 302 51%
1-5 has 207 35%
5-20 has 53 9%
20-50 has 12 2%
> 50 has 18 3%
Total 592 100%

 

Source: Survey, IDEA/Ecuador, 1991

A.1. flgusflolg ingomg levgl

The level of household income varied directly with farm size rising from an average of
US$571 per year for farms of 0-1 hectares to US$12,084 per year for farms of more than 50
hectares. Net cr0pping income per hectare showed no systematic relationship to farm size because
of different cropping combinations as well as different profit rates among crops. The lowest
average net cropping income per hectare belonged to farms of 5-20 and > 50 hectares while the

highest average net cropping income per hectare corresponded to farms of 20-50 (Table 24).

113

Table 24. Average net household income in US dollars

 

 

—

Farm size category 0-1 1-5 5-20 20-50 >50
(has)

Household income 571 897 1,535 5,471 12,084
1. Off-farm income 424 354 542 927 1,211
2. Cropping income 148 544 993 4,544 10,873

a. Own consumption 23 36 60 125 312
b. Cash sales 125 507 933 4,420 10,561

Average cropping size 0.17 0.74 2.31 2.56 16.98
(has)

Average cropping income 870 735 430 1,775 640

per ha

 

Source: Survey, IDEA/Ecuador, 1991
-

A.2. flgfiggld inggmg shares

The off-farm income share in net household income showed a share negative relationship
to farm size, ranging from 74 percent in farms of 0-1 hectares to 10 percent in farms of more
than 50 hectares (Table 25). For the first three farm size categories, the highest share in off—farm
income corresponded to formal non-agricultural and agricultural wage. The importance of
agricultural wages in off-farm income could be related with the relative mobility of labor within
the rural sector, coming from small farms toward larger farms, especially in peak agricultural
seasons that occur with seed planting and harvest. In all cases, cash cropping sales are significant
and relatively higher than own-consumption income (Table 26).

In cropping income, potatoes were one of the main crops for all groups of farms, ranging
from 34 percent of cropping income in farms of 20-50 hectares to 79 percent on farms of 5-20
hectares. Wheat, hard corn and barley were relatively an important component of cropping

income for all farm size categories, ranging from 12 percent on farms of 20-50 hectares to 20

114

percent in farms of 1-5 hectares. Non-citrus fruits were relatively more important for farms of
20-50 hectares and more than 50 hectares than for the rest of farm size categories. Onions were
produced only on farms of 0-1 hectares (7.3 percent of cropping income) and in farms of 20-50
hectares (32 percent of cropping income). Crops for animal consumption (hay, alfalfa and straw),
soft corn, beans and lentils, oat and indigenous roots and grains had a very insignificant share

in cropping income for all farm categories (Table 25).

115

Table 25.

m
Farm size categories (has)

Income shares by source and farm size category

 

Item 0-1 1-5 5-20 20-50 >50
Percentage

A. Off-farm 74% 39% 35% 17% 10%
income (% total
household income

Sources: (% of total off-

farm income)

1. Non-agricultural 4% 2% 0% 0% 8%
informal

2. Non-agricultural 73% 81% 54% 31% 0%
formal

3. Agricultural 22% 14% 41% 10% 1%
wage formal

4. Other off-farm 1% 3% 5% 59% 92%
income

8. Cropping income (% of 26% 61% 65% 83% 90%
total household income)

Sources: (% of total

cropping income)

1. For animal consumption 1.8% 1.5% 0.7% 0.0% 0.0%

2. Soft corn 0.0% 0.0% 0.1% 0.0% 0.0%

3. Beans/lentils 0.7% 1.6% 2.0% 1.0% 3.2%

4. Oats 0.2% 0.0% 0.0% 0.0% 0.0%

5. Potatoes 74.3% 74.3% 78.6% 33.9% 38.6%

6. Indig.roots and grains 1/ 0.0% 0.1% 0.1% 0.0% 0.1%

7. Non citrus fruits 2.1% 2.5% 0.0% 21.3% 40.5%

8. Onions 7.3% 0.0% 0.0% 32.0% 0.0%

9. Others 0.0% 0.0% 0.0% 0.0% 0.0%

10.Wheat, Barley, Hard corn 13.6% 20.0% 18.5% 11.8% 17.6%

 

Notes:

1/ Indigenous roots and grains

Source: Survey, IDEA/Ecuador, 1991

116

Table 26. Cropping cash sales and own consumption shares

 

 

 

 

Parm size categories 0-1 1-5 5-20 20—50 >50
(has)

Cash / own 511 co sa co sa co sa 1/ co sa co
consumption shares 1/ 2/ 1/ 2/ 1/ 2/ 2/ l/ 2/
1. Animal consump. a/ 70% 30% 54% 46% 3% 97% 0% 0% 0% 0%
2. Soft corn 0% 0% 0% 0% 97% 3% 0% 0% 0% 0%
3. Beans, lentils 64% 36% 79% 21% 92% 8% 100% 0% 98% 2%
4. Oat 100% 0% 0% 0% 0% 0% 0% 0% 0% 0%
5. Potatoes 88% 12% 93% 7% 97% 3% 99% 1% 96% 4%
6. Roots and grains 0% 0% 92% 8% 95% 5% 0% 0% 100% 0%
7. Non citrus fruits 0% 100% 100% 0% 0% 0% 100% 0% 100% 0%
8. Onion 100% 0% 0% 0% 0% 0% 100% 0% 0% 0%
9. Others 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
10.Wheat/Barl . [8. corn 63% 37% 79% 21% 90% 10% 99% 1% 97% 3%
AVERAGE 77% 23% 86% 14% 95% 5% 98% 2% 97% 3%
Notes:

a/ Crops for animal consumption includes hay, alfalfa and straw
1/ SA I Cropping cash sales
2/ CO I Cropping own consumption

Source: Survey, IDEA/Ecuador, 1991

A.3. Bfigm mg vgrighlg gusts

The nominal return over variable costs is a ratio between net income and variable costs
(Gittinger, 1972). The meaning of this ratio can be expressed as the percent an entrepreneur has
left after paying all variable costs.

The return over variable costs was the highest for onions and non-citrus fruits with an
average of 35.4 and 25.5 percent, respectively. Potatoes, beans and lentils and animal
consumption had average returns ranging between 6.8 and 5.7 percent. The lowest return ranged
from 1.9 percent to -2.2 percent and corresponded to oats, indigenous roots and grains and the
group of tradables (wheat, barley, hard corn and soft corn) (Table 27).

The larger the farm size the larger the return on variable costs going from 6 percent on

average for farms of 0-1 hectares to 23 and 13 percent on average for farms of 20—50 and more

117

than 50 hectares, respectively. The highest returns for these farm sizes were due to cropping of

non—citrus fruits and onions (Table 27).

Table 27. Nominal private return over variable costs a/

 

“
Farm size categories (has)

0-1 1-5 5-20 20-50 >50 Ave

 

 

rage
Crop group category
1. Animal consumption 55% 53% 61% n/a n/a 55%
2. Soft corn n/a n/a 47% n/a n/a 47%
3. Beans/lentils 58% 54% 57% 55% 55% 55%
4. Oat 51% n/a n/a n/a n/a 51%
5. Potatoes 55% 55% 59% 63% 54% 56%
6. Indig.roots and grains n/a 49% 55% n/a 61% 51%
7. Non citrus fruits 70% 76% n/a 85% 72% 75%
8. Onions 83% n/a n/a 87% n/a 84%
9. Others n/a n/a n/a n/a n/a n/a
lO.Wheat/Barley/Hard corn 46% 45% 52% 54% 65% 48%
AVERAGE 55% 53% 57% 72% 62% -
Notes:

a/ Nominal return on variable costs I (((Gross income / variable
costs))-1)

Source: Survey, IDEA/Ecuador, 1991

A.4. Bemfling different typg of income

Table 28 shows that the proportion of households reporting some off-farm income
decreases with larger farm sizes, while the proportion reporting some cropping income is high
and relatively constant across farm sizes. The role of own consumption falls with larger farm
sizes, while cash sales show the opposite trend.

Potatoes, wheat, barley and hard corn were the four most important crops for all farm
size categories with more than 50 percent of the cases reporting the cropping of these products.

Cropping of beans and lentils were reported in all farm groups going from 5 percent of the cases

118

for farms of 0-1 hectares to 31 percent of the cases for farms of more than 50 hectares (Table
38). Production of soft corn was reported only in farms of 5-20 hectares (34 percent of the
cases). Oats were reported only in farms of 0-1 hectares with 16 percent of the cases. Indigenous
roots and grains were reported in all farm groups except farms of 0-1 hectares and 20-50
hectares. Non citrus fruits were relatively more important for farms of 20-50 and more than 50
hectares than in the rest of farm sizes. Onions were relatively more important for farms of 20-50

hectares than the rest groups (Table 28).

1/

Not

1/

Sou

Table 28.

119

income, by farm size - Percent of total cases

Proportion of households reporting different types of

 

 

Farm size categories (has) 0-1 1-5 5-20 20-50 >50
A. Off-farm income 95% 75% 60% 77% 46%
A.1. Non-agric. informal 2% 2% 0% 0% 17%
A.2. Non-agric. formal 55% 52% 33% 30% 0%
A.3. Agric.wage formal 26% 27% 37% 20% 17%
A.4. Other 18% 19% 30% 50% 67%
S. Cropping income 92% 98% 96% 89% 100%
8.1. Animal consumption 8% 5% 7% 0% 0%
8.2. Soft corn 0% 0% 34% 0% 0%
8.3. Beans/lentils 5% 17% 25% 25% 31%
B.4. Oat 16% 0% 0% 0% 0%
8.5. Potatoes 49% 54% 73% 63% 69%
8.6. Indig.roots/grains 0% 5% 23% 0% 8%
1/
8.7. Non citrus fruits 2% 1% 0% 12% 38%
8.8. Onion 1% 0% 0% 12% 0%
8.9. Others 1% 0% 0% 0% 0%
8.10.Wheat/8arl./M. corn 50% 49% 48% 49% 62%
8.a. Own consumption 96% 98% 98% 56% 54%
8.b. Cash sales 73% 87% 96% 100% 100%
Notes:

1/ Indigenous roots and grains

Source: Survey, IDEA/Ecuador, 1991

120
11.5. MW

Gross livestock sales were added to gross household income to analyze the relative
importance of livestock in gross household income. The participation of livestock sales averaged
7 percent in farms of 0-1, 1-5 and >50 hectares. In farms of 5-20 and 20-50 hectares, the
participation of gross livestock sales was relatively higher (12 and 11 percent, respectively)

(Table 29).

Table 29. Gross farm income shares

 

 

Farm size Total Total Gross
categories farm off- live-
(has) income farm stock
income sales
0-1 18% 75% 7%
1-5 55% 41% 5%
5-20 73% 15% 12%
20-50 64% 26% 11%
> 50 89% 4% 7%

 

Source: Survey, IDEA/Ecuador, 1991

A.6. Aymgg size 91' farms and land use

The larger the farm size the lower the percentage of cultivated land. It dropped from 21
percent in farms of 0-1 hectares to 5 and 1 percent in farms of 20-50 and > 50 hectares, respecti-
vely. In all farm size categories, more than 75% of total area was cultivated for wheat, barley,
hard corn, beans, lentils and potatoes. In farms of 0-1 , 1-5 and 20-50 hectares, the share of these
crops in cultivated area was more than 90% and the rest 10% was cultivated by animal feeding
crops in the first two lower farm size categories and non citrus fruits and onions in farms of 20-
50 hectares. In farms of 5-20 and more than 50 hectares, the share of indigenous roots and grains

in cultivated area was 13.8 and 23.5%, respectively (Tables 30 and 31).

121

Table 30. Land use by farm size

 

 

 

- a
Farm size categories (has)

0-1 1-5 5-20 20-50 >50
Cultivated land 0.2 0.7 2.3 2.6 17.0
(has)
% of total area 21% 16% 13% 5% 1%
Non cultivated land 0.7 3.9 15.8 45.2 1244.9
(has)
% of total area 89% 84% 87% 95% 99%
Average farm size 0.8 4.6 18.1 47.7 1261.8
(has)

 

Source: Survey, IDEA/Ecuador, 1991
_

 

 

 

Table 31. Land use by farm size and crop group category
I =
Farm size categories (has)

0-1 1-5 5-20 20-50 >50
Crop group category
1. Animal consumption 6.97% 2.89% 2.54% 0.00% 0.00%
2. Soft corn 0.00% 0.00% 4.25% 0.00% 0.00%
3. Beans/lentils 5.48% 12.44% 20.52% 11.11% 19.66%
4. Oat 0.08% 0.00% 0.00% 0.00% 0.00%
5. Potatoes 18.41% 18.24% 29.07% 18.83% 8.86%
6. Indig.roots and grains 0.01% 2.76% 13.76% 0.00% 23.49%
7. Non citrus fruits 0.05% 0.10% 0.00% 5.35% 0.56%
8. Onion 0.55% 0.00% 0.00% 4.17% 0.00%
9. Others 0.00% 0.00% 0.00% 0.00% 0.00%
10.Wheat/8arley/Hard corn 68.46% 63.57% 29.86% 60.54% 47.44%

 

Source: Survey, IDEA/Ecuador, 1991

122

B. rm ‘ :1. v 1121' .orlllltlm'_- in h as. 111 ~ 1 . '1 1w

3.1. Moisture

There was a slight difference among farm sizes in the proportion of tradable and non-
tradable components in the cost structure of the crops produced. The tradable component of
imported inputs was defined as the C&F value of fertilizer, agrochemicals and machinery. The
non-tradable components of imported inputs corresponded to tariffs, duties, fees, port and custom
expenses, marketing and profit margin of importers. Transport was defined as a combination of
tradable and non tradable components of cost. The non tradable inputs in cost structure were
basically the labor and non tradable seed.

The tradable component between 1990-1994 was between 51 and 57 percent of total
variable cost. The highest proportion corresponded to farms of 0-1 and 5-20 hectares, followed
by farms of 1—5 and >50 hectares. The lowest share of tradable component was 51 percent for
farms of 20-50 hectares. These differences were mainly due to cropping patterns where some
crops have more tradable inputs in their cost structure than others (Fable 32).

Another 13 percent on average accounted by non-tradable component of input imports
(tariffs, duties and other fees and marketing and profit margins of input importers). Seven percent
of total cost on average corresponded to transport costs (Table 32).

Non tradable components such as labor and non tradable seed shared total cost between
22 percent for farms of 0-1 hectares to 30 percent for farms of 20-50 hectares. The relatively
high pr0portion of non tradable inputs in the larger farm sizes was due to relatively lower levels

of use of tradable inputs such as fertilizers, agrochemicals and machinery than the other farm size

1 23
categories (Table 32).

The proportion of the tradable component in the cost structure varied greatly across
crops. Those which have more tradable components between 1990-1994 were in descending
order: potatoes, indigenous roots and grains, onions, fruits and non-citrus, soft corn, oat, cereals
(wheat, barley and hard corn), forage crops (straw, hay and pasture) and beans and lentils. The
range of share of the tradable component in total cost was from 17 to 64 percent of total cost.
The crops with less tradable inputs were crops for animal consumption and beans and lentils. The

crops with the highest tradable inputs were potatoes and indigenous roots and grains (Table 33).

B.2. l I bl 2

Agricultural output was classified into three categories: a) internationally tradable output,
b) regionally tradable output and c) non tradable output.

The share of the first category in total agricultural output value went from around 14
percent for farms of 0-1 and 20-50 hectares to 22 percent for farms of 1-5 hectares. The share
of regional tradable output was significantly higher for the farms of 0-1, 1-5 and 5-20 hectares
(more than 70 percent). For the last two farm size categories, the respective percentage was
between 37 and 42 percent.

The share of non tradable output was significantly lower for the first three small farm size
categories than for the larger farms, where the average share was 49 and 41 percent, respectively.
This was due to the relatively high importance of non tradable crops such as onions and non-

citrus fruits in the larger farms.

124

Table 32. Share of tradable and non tradable components

for agricultural input and output, average

 

 

 

1990-1994
I,
Farm size category (has) 0-1 1-5 5-20 20-50 >50
1. moms Issues 1/
(% of total input cost)
1.1. Tradable component
a. CE? 57% 54% 57% 51% 55%
1.2. Non tradable component
a. Tariffs, duties and 5% 5% 5% 5% 5%
fees
b. Financial cost 2% 2% 2% 2% 2%
c. Marketing and profit 6% 6% 6% 6% 7%
margins
2. TRADASLE / NON TRADABLE
INPUT (% total input cost)
2.1. Transport 2/ 7% 7% 7% 7% 6%
3. NON TRADABLE INPUT
(% of total input cost)
3.1. Labor 22% 25% 22% 29% 23%
3.2. Seed 1% 1% 1% 1% 1%
0. INTERNATIONALLY TRADABLE 15% 22% 20% 14% 17%
OUTPUT (% total output)
5. REGIONALLY TRADABLE 74% 73% 77% 37% 42%
OUTPUT (% total output)
6. NON TRADABLE OUTPUT 10% 5% 3% 49% 41%
(t total output)
Notes:

1/ Tradable input I fertilizer, herbicides, insecticides,

fungicides, machinery, tradable seed and machinery

2/ Transport cost I transport of tradable inputs to
importer warehouses + transport of output to wholesale

market

Source: Survey, IDEA/Ecuador, 1991

—_

125

Table 33. Share of tradable and non tradable components in input
cost by crop group category

 

Crop group category 1/
1 2 3 4 5 6 7 8 10

1 . moans
INPUTS 2/

1.1. Tradable

component
a. C&F 20% 43% 17% 38% 64% 50% 42% 46% 30%
1.2. Non tradable
component
a. Tariffs, 2% 4% 2% 4% 6% 5% 4% 5% 3%
duties and fees
b. Financial cost 1% 2% 1% 1% 2% 2% 2% 2% 1%
c. Marketing and 4% 5% 2% 5% 8% 7% 5% 7% 4%

profit margins

2. TRADABLB I NON
TRADABLN INPUT

2.1. Transport 7% 6% 6% 6% 7% 6% 6% 6% 6%

3. NON TRADABLB INPUT

 

3.1. Labor 43% 35% 66% 40% 12% 28% 39% 33% 56%
3.2. Seed 23% 5% 6% 6% 1% 2% 2% 3% 0%
Notes:

1/ Crop group categories: 1 I for animal consumption, 2 I soft
corn, 3 I beans and lentils, 4 I oats, 5 I potatoes, 6 I
indigenous roots and grains, 7 I non citrus fruits, 8 I onions
and 10 I wheat, barley and hard corn

2/ tradable inputs I fertilizer, herbicides, insecticides,
fungicides and machinery

Source: Survey IDEA/Ecuador, 1991

L

126

C. b' 11' of li ins n ne ricultur lin om

C.l. Ii n market distortions on total v riahl ost

This section uses distortion rates which were defined as the ratio between social and
private value minus 1. The distortion rates took into account separated values of policy and
market distortions. The results can be summarized as follows (Table 34):

a) Exghgngg rate: The separated effect of the exchange rate indicates there was
undervaluation during 1990 and an increasing overvaluation of the exchange rate from 1991 to
1994. The social exchange rate was 5.4 percent lower than the private exchange rate in 1990 and
32 percent higher than the respective private value in 1994.

This overvaluation implies that the tradable input cost was cheaper than what it would
have been if there were no distortions in the exchange rate market. On the other hand, if the
output is tradable, the overvaluation effect is the opposite and in general more than offsets the
protective effect from the input side, especially if the share of tradable inputs in total cost is
relatively low.

In the data set, only wheat, barley, hard corn, potatoes and soft corn are considered
tradable. The first three were internationally tradable and the last two were regionally tradable.
The rest of the crops were non-tradables because either they are bulky or perishable products.
Therefore, one expects an overall protective effect of overvaluation if non-tradable outputs
represent a large proportion of total output and if the share of tradable inputs is relatively higher
than non tradable inputs within the cost structure of these crops.

On the other hand, overvaluation might reduce net agricultural income if tradable outputs

are more important than non tradable and if there was a low share of tradable inputs in total cost.

127

b) mi Other duties and import fees had a negative impact in making private prices
of imported inputs higher than they would have been if free trade had existed. The effect of this
component decreased from 1990-1991. Social value of tariffs, duties and fees was 56.7 percent
lower than the current value in 1990 and 39.3 percent lower in 1994. The social value or
reference point represents a situation of free trade.

c) 1019105142319! The interest rate is part of the non-tradable component of imported
inputs, since importers charged financial cost to their inventory. In 1990, the social value was
25 percent lower than the actual cost paid by importers and 13 percent lower in 1994. The social
value represents a more free domestic and international capital movement in the market.

d) M: The social value of transport cost represents a situation of no distortions
of exchange rate, tariffs, duties, fees, marketing and profit margins that affects transport
components exist. In 1990, the respective social value was 20 percent lower than the private value
and went to 13 percent lower in 1994.

e) Mgkgtipg marging and profit of input importerg: The social value or scenario of
comparison represents a situation of more competitiveness in the distribution of imported inputs.
The distortion coefficient can be positive when enough competitiveness exists in the market or
negative when there is some market power in the domestic distribution of tradable inputs. The
social value was 29.1 percent lower than the private or current value in 1990 and 13.1 percent
higher in 1994. The elimination of legal barriers to imported agricultural inputs in 1993
encouraged new entrance to the market.

1) Lam: The labor distortions in the market of the rural sector in Ecuador during 1990
and 1994 were related to a lack of mobility of the labor force between the mountain region (the
Sierra) and the Coast due to cultural, social and geographic differences and lack of information
of agricultural job opportunities. The discrepancy increased sharply so that by 1994, the

opportunity cost or social value of labor was 32 percent higher than its private cost.

Table 34.

on farm

128

Partial effects of policy and market distortions
input cost a/

 

 

Farm size category 1990 1991 1992 1993 1994

(has)

EPPECT 8!:

1. Exchange rate -5.4% 0.3% 4.2% 21.8% 32.0%

2. Tariffs, duties -56.7% -56.6% -56.5% -44.4% -39.3%
and fees

3. Interest rate -25.0% -22.0% -16.8% 4.0% -13.0%

4. Transport -20.0% -28.0% -3.0% -5.0% -16.0%
profit margins

6. Labor market 12.0% 23.0% 45.0% 30.0% 32.0%

 

a/ Distortion rate I (social value / private value)-1;
derived following methodology of table A.6 in appendix A

Source: Survey IDEA/Ecuador, 1991
m

C.2. bin ff 1' Ii and market istor ion on a ri ultur lv ria l st

The total effect was defined as the ratio between social and private value minus one and
was divided into the partial contribution of six policy and market distortions: exchange rate, trade
and interest rate policy, transport, marketing and importer profit margins and labor market
distortions.

A negative rate means that farmers were not protected by current distortions affecting
variable cost since they paid a private value higher than what they would have paid without
distortions. A positive means the opposite. Differences across farm size categories were small but
substantial across years (Table 35). In 1990, all policy and market distortions had a negative

impact in total effect of variable cost but labor. In 1991, only exchange rate and labor had a

positive effect but they were more than offset by the rest of partial effects. From 1992 to 1994,

129

the positive partial effects of exchange rate and labor on variable costs were stronger and
continuously increasing, and either were added or offset by the relatively small effects of trade

and interest rate policy and marketing and profit margin distortions of input importers.

 

The total effect was defined as the ratio between social and private output values minus
one. The total effect was divided into the partial contribution of six policy and market distortions:
exchange rate, trade and interest rate policy, transport and marketing and importer profit margins
and the "residual effects" in domestic output market prices.

A negative distortion rate means that the farmers were protected by current distortions
affecting agricultural output since they received for their output a higher private value than what
they would have received without distortions. A positive distortion rate means the opposite.

The "residual effects" are the ones which make the border price or opportunity cost of
tradable output different from its current private value, but which are not accounted for by
adjustment of the five distortions described in table 36.

A large part of these ”residual effects" came from incomplete transmission of
international price changes to domestic prices. This incomplete transmission could be due to a
combination of two factors: a) existence of some quantitative trade restrictions during the period
of analysis and b) market rigidities and imperfections so that domestic markets were unable to
fully adjust to external price changes.

During 1990-1994, explicit quantitative trade restrictions were removed, but there were
other implicit trade restrictions such as the import permissions regime that remained in place

and gave the government the power to control imports through a system of distributing

130

Tdsle 35. Met Mined effects of policy and -rket distortions at the agricultural
imut level a/

Farm size categories (has)

   

 

 

 

 

 

 

0.1 1-5 5-20 20-50 >50
1. Total effect - 1990 -7.4% -6.5% -7.2% -5.9% -7.4%
a. Exchange rate -3.1% -2.9% -3.0% -2.7% -2.9%
b. Tariffs, cuties and fees -3.2% -3.1% -3.2% -2.8% -3.0%
c. Interest rate -0.4% -0.4% -0.4% -0.4% -0.4%
d. Transport -1.3% -1.3% -1.3% -1.3% -1.3%
a. Marketing and profit margins -2.0% -1.8% -2.0% -2.1% -2.5%
f. Labor market 2.6% 3.0% 2.7% 3.5% 2.8%
2. Total effect - 1991 -2.1% -1.0% -1.8% -0.1% -2.0%
a. Exchange rate 0.2% 0.2% 0.2% 0.2% 0.2%
b. Tariffs, duties ~3.2% -3.1% -3.2% -2.8% -3.1%
and fees
c. Interest rate -0.4% -0.3% -0.4% -0.3% -0.4%
d. Transport -1.8% -1.8% -1.8% -1.8% -1.8%
e. Marketing and profit margins -1.8% -1.7% -1.7% -1.9% -2.2%
f. Labor market 4.9% 5.8% 5.1% 6.6% 5.4%
3. Total effect - 1992 8.3% 10.0% 8.8% 11.4% 8.7%
a. Exchange rate 2.4% 2.3% 2.4% 2.2% 2.3%
b. Tariffs, duties and fees -3.1% -3.0% '3.1% -2.7% -2.9%
c. Interest rate -0.3% -0.3% -0.3% -0.3% -0.3%
:1. Transport -0.2% -0.2% -0.2% -0.2% -0.2%
a. Marketing and profit margins -0.1% -0.1% -0.1% -0.5% -0.7%
f. Labor market 9.6% 11.3% 10.1% 13.0% 10.5%
4. Total effect - 1993 16.3% 17.0% 16.6% 17.2% 16.2%
a. Exchange rate 12.5% 11.9% 12.4% 11.1% 12.0%
b. Tariffs, duties and fees -2.2% -2.1% -2.1% -1.9% -2.1%
c. Interest rate 0.1% 0.1% 0.1% 0.1% 0.1%
d. Transport -0.3% -0.3% -0.3% -0.3% -0.3%
a. Marketing and profit amrgins -0.1% -0.1% -0.1% -0.3% -0.5%
f. Labor market 6.4% 7.5% 6.7% 8.7% 7.0%
5. Total effect - 1994 22.9% 23.3% 23.1% 23.3% 22.7%
a. Exchange rate 18.9% 17.9% 18.7% 16.8% 18.2%
b. Tariffs, titties and fees -2.2% -2.1% -2.2% -2.0% -2.1%
c. Interest rate -0.2% -0.2% -0.2% -0.2% -0.2%
d. Transport -1.1% -1.1% -1.1% -1.0% -1.1%
a. Marketing and profit margins 0.7% 0.7% 0.7% 0.5% 0.5%
f. Labor market 6.8% 8.0% 7.2% 9.2% 7.5%
Motes:

a] Distortion rate I (social value / private value)-1,- derived from table A.7 in

appendix A
Source: Survey IDEA/Ecuador, 1991
m

131

permissions to importers based on an arbitrary assessment of domestic demand and supply. The
effects of this trade regime are similar to those under an import quota system (See figure C.1 in
appendix C). Structural rigidities of agricultural markets are not easily or immediately influenced
by removal of either explicit or implicit policy distortions. Therefore, a more careful analysis of
this incomplete of transmission of international prices into domestic markets is needed.

There were slight differences in combined effects across farm size categories. The total
effects were slightly lower for the larger farms given the relatively higher participation of non
tradable output (onion and non-citrus fruits) as compared to the smaller farm sizes (Table 36).

The total effect was negative in 1990, turning slightly positive in 1991 and moving up
steadily through 1994. This implies that agricultural output in this farm household sample
received negative protection during most of the period of analysis. Although the total effect went
up every year, there were differences in the trend of the partial effects. The total effect for all
farm sizes was mainly driven by the strong negative protection effects of the exchange rate
distortion for all years.

The partial effect of international trade policy distortions (tariffs, duties and fees) stayed
roughly stable between protection ratios of 0.9 and 2 percent. Interest rate and transport
component distortions had a minimum protection effect on gross agricultural output value for all
years and farm sizes. It went from 0.1 to 0.6 percent for interest rate and from 0.1 to 0.2 percent
for transport cost. The effect of distortions of marketing and profit margins of importers had the
same trend and direction as total effect and exchange rate although its impact was minimal (Table
36).

The "residual effects" related with the varying transmission of international prices and
the market distortions for domestic output exhibit considerable fluctuations across years.

In 1991, 1992 and 1994 the weighted variation of international and regional output prices

132

was increasingly positive going from 12.45 to 53.20 percent. Therefore, one could expect a
higher social value or opportunity cost of tradable output, and if there was complete transmission
of international prices, a higher domestic value.

During 1991 and 1992, social agricultural output value would have been higher than
private value if the distortion due to incomplete transmission of international prices were
removed. Also, it is probable that the slow transmission of international prices to domestic
markets along with the effect of "other inefficiencies" in domestic distribution made current
agricultural output lower than it would have been otherwise (I‘ able 36).

In 1994, social agricultural output value would have been lower than private value if the
distortion due to variation of international prices were removed. It is also likely that the strong
effect from the transmission of international prices to the domestic markets and the effect of
”other inefficiencies” in domestic distribution made current agricultural output higher than it
would have been otherwise. The effect of ”other inefficiencies" was opposite from the effects
observed in 1991 and 1992 (Table 36).

In 1990 and 1993 the weighted variation of international and regional output prices was
negative (-5 .9 and ~22.4 percent, respectively). Therefore, one could expect a lower social value
or opportunity cost of tradable output, and if total transmission of international prices, a lower
domestic value.

During 1990 and 1993, social agricultural output would have been lower than private
value taking out the distortion due to variation of international prices. It means that both, a likely
mild transmission of international prices to the domestic market and the effect of ”other
inefficiencies“ in domestic distribution, made current agricultural output higher than it would have

been otherwise (Table 36).

133

 

 

 

 

 

 

 

 

 

 

 

 

 

Title 36. Mined effects of policy mid .rket distortion at agricultu-al outpsn level al
—
Farm size (has) 0-1 1-5 5-20 20-50 >50
1. Total effect - 1990 -16.2% -15.8% ~17.3% -8.9% -10.7%
a. Exchange rate -4.2% -4.6% -4.6% -2.4% -2.8%
b. Tariffs, dUties and fees -1.0% -1.6% -1.3% -0.9% -1.1%
c. Interest rate -0.4% -0.6% -0.4% -0.3% -0.3%
d. Transport -0.1% -0.1% -0.1% -0.1% -0.1%
e. Marketing and profit margins -0.3% -0.5% -0.4% -0.3% -0.4%
f. Residual effects 1/ -10.2% -8.3% -10.4% -4.9% -6.1%
1.1. Total effect intern.trad.output -8.7% -5.6% -9.4% -11.2% -13.4%
1.2. Total effect region.trad.output -20.0% -20.0% -20.0% -20.0% -20.0%
1.3. Total effect non trad.output 0.0% 0.0% 0.0% 0.0% 0.0%
2. Total effect - 1991 2.1% 1.9% 2.5% 1.0% 1.0%
a. Exchange rate 0.3% 0.3% 0.3% 0.1% 0.2%
b. Tariffs, duties and fees -1.2% -1.8% -1.6% -1.1% -1.3%
c. Interest rate -0.4% -0.6% -0.5% -0.3% -0.4%
d. Transport -0.1% -0.2% -0.2% -0.1% -0.2%
e. Marketing and profit margins o0.3% ~0.5% -0.4% -0.3% -0.3%
f. Residual effects 1/ ........ 3.9% 4.7% 4.9% 2.7% 3.0%
2.1. Total effect intern.trad.output 3.9% 2.0% 4.7% 2.0% 1.0%
2.2. Total effect region.trad.output 2.0% 2.0% 2.0% 2.0% 2.0%
2.3. Total effect non trad.output 0.0% 0.0% 0.0% 0.0% 0.0%
3. Total effect - 1992 3.1% 2.0% 3.2% 1.4% 1.8%
a. Exchange rate 3.7% 3.9% 4.0% 2.1% 2.4%
b. Tariffs, duties and fees -1.1% -1.5% -1.4% -1.0% -1.2%
c. Interest rate -0.3% -0.4% -0.3% -0.2% -0.3%
d. Transport 0.0% -0.1% -0.1% 0.0% 0.0%
e. Marketing and profit margins -0.2% -0.2% -0.2% -0.1% -0.2%
f. Residual effects 1/ 0.9% 0.4% 1.2% 0.7% 1.0%
3.1. Total effect intern.trad.output -4.2% -7.4% -3.2% -3.2% -2.0%
3.2. Total effect region.trad.output 5.0% 5.0% 5.0% 5.0% 5.0%
3.3. Total effect non trad.output 0.0% 0.0% 0.0% 0.0% 0.0%
4. Total effect - 1993 2.9% 3.3% 3.2% 1.8% 2.2%
a. Exchange rate 16.6% 17.5% 17.9% 9.4% 11.0%
b. Tariffs, duties and fees ~0.9% -1.5% -1.2% -0.9% -1.0%
c. Interest rate -0.2% -0.3% -0.2% -0.2% -0.2%
d. Transport -0.1% -0.1% -0.1% 0.0% 0.0%
a. Marketing and profit margins 0.1% 0.1% 0.1% 0.0% 0.0%
f. Residual effects 1/ -12.5% -12.4% -13.3% -6.5% -7.6%
4.1. Total effect intern.trad.output 4.5% 5.2% 4.3% 5.1% 5.4%
4.2. Total effect region.trad.output 3.0% 3.0% 3.0% 3.0% 3.0%
4.3. Total effect non trad.output 0.0% 0.0% 0.0% 0.0% 0.0%
5. Total effect - 1994 12.2% 13.3% 14.1% 8.1% 9.8%
a. Exchange rate 24.7% 26.2% 27.0% 14.2% 16.7%
b. Tariffs, duties and fees -1.4% -2.0% -1.8% -1.2% -1.5%
c. Interest rate -0.1% -0.1% ~0.1% -0.1% -0.1%
d. Transport -0.1% -0.2% -0.2% -0.1% -0.1%
e. Marketing and profit margins 0.5% 0.8% 0.6% 0.4% 0.5%
f. Residual effects 1/ -11;4% -11.2% -11.3% -5.1% -5.7%
5.1. Total effect intern.trad.output 31.2% 27.3% 32.4% 31.5% 32.4%
5.2. Total effect region.trad.output 10.0% 10.0% 10.0% 10.0% 10.0%
5.3. Total effect non trad.output 0.0% 0.0% 0.0% 0.0% 0.0%

 

Motes:

a/ Distortion rate I (social value / private value )-1; derived from table A.8 in

appendix A

1/ Residual effects that make border price of tradable output being different from

domestic price

Source: Survey IDEA/Ecuador, 1991
—

134
C.4. Summarim efljegts in ngt ggrigultural ingome

The total effect was defined in the same way as in the analysis of agricultural variable
cost and agricultural output. It was divided into the partial contributions of seven policy and
market distortions: exchange rate, trade and interest rate policy, transport, marketing and
importer profit margins, labor distortions and the ”residual effects" in domestic output and input
markets. A negative distortion rate means that the farmers were protected by current
distortions affecting net agricultural income since they received for their net output a higher
private value than what they would have received without distortions. A positive distortion rate
means the opposite.

The ”residual effects" are the ones which make the border price or opportunity cost of
tradable output and input different from its current private value, but which are not fully
accounted for by the six distortions as shown in table 37.

A large part of these ”residual effects” came from an incomplete transmission of
international price changes for outputs and inputs to domestic prices. This incomplete
transmission could be due to the same factors as explained in section C.3. but applied to
agricultural tradable outputs as well as agricultural tradable inputs.

There were slight differences in the combined effects across farm size categories. The
structure of costs did not show great differences across farm size categories mainly because in
this area, there has been a considerable strong smuggling of chemicals and fertilizers coming
from Colombia which allowed the small as well as the large farmers easy accessibility to these
inputs. In fact, some studies of the International Potatoes Center and the National Institute of
Agricultural Research of Ecuador (1992) showed that in some communities in the northern part

of Ecuador, there was over-use of chemicals and fertilizers by the small and medium farmers.

135

In other parts of the country, there is evidence of differences in the use of variable tradable inputs
across farm sizes (Ministry of Agriculture, 1994).

As seen in section C.2 and C.3., there were more differences in the output crop
combination across farm sizes than in the structure of variable costs (Table 36). Large farms had
a relatively higher participation of non tradable output (onion and non-citrus fruits) as compared
to the smaller farm sizes (Table 36).

The total net effect in agricultural income was steadily negative between 1990 and 1994
with the exception of 1991. This implies that the combination of effects of agricultural input and
output in this sample received a positive protection during most of the period of analysis. The
current value of the exchange rate meant a negative protection to net agricultural income. The
level of overvaluation through most of the years analyzed affected tradable outputs more than
importable inputs. However, this partial effect was more than offset by the combination of the
partial effects of labor and the "residual distortions" (Table 37).

Agricultural labor was paid lower than its social value through all the period of analysis
and given its significant share in total variable cost for all farm sizes, the effect of the labor
distortions in net farm income implied current net cost-savings. The partial distortion rate was
between -4.7 and -17.7 percent (Table 37).

The existence of ”residual distortions" in the domestic markets for outputs and inputs
(incomplete transmission of international prices and market rigidities in domestic distribution)
protected the net farm income for all farms sizes in three of the five years of the analysis but the
contrary was observed in two of the five years. The "residual distortions” in the domestic output
markets were added to the ”residual distortions" in the domestic input markets (T able 37).

The partial effect of international trade policy distortions (tariffs, duties and fees),

transport and marketing and profit margins of importers stayed roughly stable between a negative

136

protection ratios of 0.1 and 2.9 percent. Interest rate distortions had a minimum protection effect
on net farm income for all years and farm sizes. The partial distortion rate went from -0.3 to -0.7

percent (Table 37).

 

The total effect of distortions on off-farm income was defined in the same way as for
agricultural output and variable cost. A negative ratio means that farmers were protected by
current distortions affecting the labor market since they were paid for off-farm labor a private
value higher than the social value. If the ratio is positive it means the opposite.

The only adjustment was done for off-farm agricultural wage income. Therefore the total
effect of off-farm income sources was lower than the observed effect on agricultural wage. The
differences of effects across farm sizes are due to the different levels in the agricultural wage
share in total off-farm income. The farms of 5-20 hectares had the highest effect due to higher
agricultural wage as an off-farm income source than the rest of farm sizes. Farms of more than
50 hectares had the lowest effect. From 1990 to 1994, there was an increasing negative protection
effect on off-farm income sources across regions and sectors due to lack of labor mobility (I‘ able

38).

Tfle 37.

Cdined effects of policy mud market distortions on net agricultural incne

 

 

 

 

 

 

 

al

Farm size category (has) 04 1-5 5-20 20-50 >50
1. Total effect - 1990 -32.3% -33.2% ~35.1% 43.2% 46.1%
a. Exchange rate -6.4% -7.7% -7.3% -2.0% -2.6%
b. Tariffs, duties and fees 2.9% 1.2% 1.9% 1.8% 2.1%
c. Interest rate -0.3% 4.0% -0.5% -0.2% -0.2%
d. Transport 2.2% 2.1% 2.0% 1.6% 1.9%
e. Marketing and profit margins 2.6% 1.9% 2.2% 2.2% 3.1%
f. Labor market -4.7% -S.7% -4.7% -4.9% -4.5%
g. Residral effects 1/ -28.7% -24.0% -28.7% 41.7% 45.8%
2. Total effect - 1991 9.7% 7.3% 10.1% 2.5% 5.8%
a. Exchange rate 0.4% 0.5% 0.5% 0.1% 0.2%
b. Tariffs, duties and fees 2.4% 0.7% 1.3% 1.3% 1.5%
c. Interest rate -0.4% 4.1% ~0.7% -0.3% -0.4%
d. Transport 2.9% 2.8% 2.7% 2.2% 2.5%
e. Marketing and profit margins 2.3% 1.7% 1.9% 2.0% 2.7%
f. Labor market -9.0% 40.9% -9.0% -9.3% -8.6%
L Residual effects 1/ 11.0% 13.6% 13.4% 6.5% 7.9%
3. Total effect - 1992 ~6.5% 43.2% -6.5% 42.7% -9.4%
a. Exchange rate 6.0% 6.7% 6.8% 2.0% 2.6%
b. Tariffs, duties and fees 2.7% 1.1% 1.7% 1.5% 1.7%
c. Interest rate -0.3% -0.8% -0.5% -0.2% -0.2%
d. Transport 0.2% 0.1% 0.2% 0.2% 0.2%
e. Marketing and profit margins -0.2% -0.4% -0.3% 0.4% 0.7%
f. Labor market 47.5% -21.3% 47.7% 48.2% 46.9%
g. Resimal effects 1/ 2.6% 1.3% 3.3% 1.7% 2.6%
4. Total effect - 1993 -21.5% -22.4% -20.3% 49.8% -20.4%
a. Exchange rate 24.0% 28.2% 27.7% 7.0% 9.3%
b. Tariffs, cuties and fees 1.3% -0.3% 0.5% 0.7% 0.7%
c. Interest rate -0.7% 4.1% -0.8% -0.5% -0.6%
d. Transport 0.4% 0.3% 0.4% 0.3% 0.4%
e. Marketing and profit margins 0.4% 0.5% 0.4% 0.6% 0.9%
f. Labor market 41.7% 44.2% 41.8% 42.1% 41.3%
LResidual effects 1/ -35.3% -35.8% -36.7% 45.7% 49.8%
5. Total effect - 1994 ~7.3% -5.4% 4.5% 43.2% 41.0%
a. Exchange rate 35.3% 41.7% 41.5% 10.7% 14.4%
b. Tariffs, titties and fees 0.1% 4.8% 4.1% -0.2% -0.5%
c. Interest rate 0.2% 0.0% 0.1% 0.1% 0.2%
d. Transport 1.6% 1.4% 1.4% 1.2% 1.3%
e. Marketing and profit margins 0.0% 0.9% 0.3% 0.3% 0.4%
f. Labor market 42.5% 45.1% 42.6% 42.9% 42.0%
1. Residual effects 1/ -32.1% -32.4% -31.2% 42.3% 44.9%
Motes:

a/ Distortion rate I (social value / private value)-1; derived from table A.10 in appendix A

1/ Resithal effects that make border price of tradable output being different from domestic

Source: Survey IDEA/Ecuador, 1991

price

I38

 

 

 

 

 

 

 

a/ Distortion rate I (social value / private valueI-l; derived from table A.9 in

appendix A
lSource: Survey IDEA/Ecuador, 1991

Title 38. Cdnined effects of policy and nrket distortion on off-farm incne
level a]

—
Farm size categories (has) 04 1-5 5-20 20-50 >50
1990
Effect non-agric.informal 0.0% 0.0% n/a n/a 0.0%
Effect non-agric.formal 0.0% 0.0% 0.0% 0.0% Na
Effect agricultural wage 0.0% 0.0% 0.0% 0.0% 0.0%
Effect other sources of income 12.0% 12.0% 12.0% 12.0% 12.0%
Total effect off-farm inc. 2.6% 1.6% 4.9% 1.2% 0.1%
1991
Effect non-agric.informal 0.0% 0.0% n/a n/a 0.0%
Effect non-agric.formal 0.0% 0.0% 0.0% 0.0% Na
Effect agricultural wage 0.0% 0.0% 0.0% 0.0% 0.0%
Effect other sources of income 23.0% 23.0% 23.0% 23.0% 23.0%
Total effect off-farm inc. 5.0% 3.2% 9.4% 2.3% 0.2%
1992
Effect non-agric.informal 0.0% 0.0% n/a n/a 0.0%
Effect non-agric.formal 0.0% 0.0% 0.0% 0.0% Na
Effect agricultural wage 0.0% 0.0% 0.0% 0.0% 0.0%
Effect other sources of income 28.0% 28.0% 28.0% 28.0% 28.0%
Total effect off-farm inc. 6.1% 3.8% 11.5% 2.8% 0.3%
1993
Effect non-agric.informal 0.0% 0.0% n/a n/a 0.0%
Effect non-agric.formal 0.0% 0.0% 0.0% 0.0% Na
Effect agricultural wage 0.0% 0.0% 0.0% 0.0% 0.0%
Effect other sources of income 27.0% 27.0% 27.0% 27.0% 27.0%
Total effect off-farm inc. 5.8% 3.7% 11.1% 2.7% 0.3%
1994
Effect non-agric.informal 0.0% 0.0% n/a n/a 0.0%
Effect non-agric.formal 0.0% 0.0% 0.0% 0.0% n/a
Effect agricultural wage 0.0% 0.0% 0.0% 0.0% 0.0%
Effect other sources of income 21.0% 21.0% 21.0% 21.0% 21.0%
Total effect off-farm inc. 4.5% 2.9% 8.6% 2.1% 0.2%
Motes:

139

E. i ff f I n mrk istrtion nn h shol in m

A negative ratio means that farmers were protected by current distortions affecting all net
income sources since they actually received a net household income higher than the value they
would have received measured on social terms (without distortions). A positive ratio means the
opposite (Table 39). The total effect of all distortions on net household income fluctuated across
years and farm sizes. These fluctuations were mainly driven by exchange rate, “residual effects”
and labor distortions.

The effect of distortion of the exchange rate on net household income under strong
overvaluation (1993-1994) was generally offset by the "residual effects" and labor distortions.
The effect of ”residual distortions” on net household income is explained the same way as in the
case of agricultural output but including the instability of transmission of international input prices
mainly due to market rigidities and inefficiencies in input domestic markets.

The effect of these other residual distortions in agricultural input and output markets was
stronger than the labor effect. Exchange rate distortion penalized private net household income
while both distortions, labor and ”residual” made current private value higher that its social value
and offset the former impact in 1993 for all farm sizes and in 1994 for all but 0-1 and 5-20
hectares. These farm sizes revealed the highest proportion of tradable output than the rest (Table
39).

In 1994, international and regional output prices increased on average 53.2 percent and
international input prices increased on average 21 percent. Removal of this effect would have
made net farm income lower than it really was (respective distortion rate < 0). Therefore, a
likely stronger transmission of international output prices than international input prices into

domestic market was added to ”other inefficiencies" in domestic distribution, making current net

140

farm income higher than its opportunity cost or social value (Table 39).

In 1993, international and regional output prices decreased on average 22.4 percent and
international input prices increased slightly in 0.75 percent. Removal of this distortion would have
made net farm income lower than it really was compared with 1994. Therefore, a likely mild
transmission of international prices was added to ”other inefficiencies" in domestic distribution,
making current net farm income higher than its opportunity cost (Table 39).

Lack of mobility of labor made private labor input cost lower than otherwise, and this
saving cost was higher than labor wage losses from off-farm income when compared with a
situation of more labor mobility for all farm sizes. This relationship becomes stronger the larger
the ratio between share of labor paid in total cost and share of labor wage in total off-farm
income (1-5, 20-50 and > 50 hectares).

The effect of mild overvaluation of the exchange rate on net household income during
1992 was reinforced by the effect of "residual distortions" but largely offset by the effect of labor
distortions for all farm sizes but 04 and 5-20 hectares, showing that for these farm sizes, lack
of labor mobility implied larger losses from labor wage off-farm income than labor-paid savings
cost compared with the rest of farms.

In 1992, international and regional output prices increased on average 26.4 percent while
international input prices increased only 0.95 percent. Removal of this effect would have made
net farm income slightly higher than it really was. Therefore, a likely slow transmission of
international prices was added to ”other inefficiencies" in domestic distribution, making current
net farm income lower than its opportunity cost. These inefficiencies in domestic distribution,
contrary as in 1993 and 1994, likely pushed a more rapid decrease in domestic output prices due
to seasonal variation of prices or bad weather/climate conditions, for example.

The effect of a minimum overvaluation of the exchange rate on net household income

141

during 1991 was reinforced by the effect of ”residual distortions" and more than offset the effect
of labor distortions for all farm sizes. Lack of labor mobility implied in this year smaller net
labor-paid savings than in 1992, 1993 and 1994 relative to a situation of more labor mobility
(Table 38).

In 1991, international and regional output prices increased on average 12.45 percent while
international input prices increased in 2.13 percent. Removal of this effect would have made net
farm income largely higher than it really was compared with 1992. Therefore, a likely slow
transmission of international prices was added to ”other inefficiencies" in domestic distribution,
making current net farm income lower than its opportunity cost compared with 1992. Therefore
”other inefficiencies" likely pushed domestic output market prices to decrease more rapidly than
in 1992.

The effect of a mild undervaluation of the exchange rate on net household income during
1990 was reinforced by all the rest of the policy and market distortions and mainly by the effect
of ”residual distortions". In 1990, international and regional output prices decreased on average
5.9 percent while international input prices increased on average 21 percent. Removal of this
effect would have made net farm income lower than it really was. Therefore, a likely slow
transmission of international prices (specially international input prices) was added to ”other
inefficiencies” in domestic distribution, making current net farm income lower than its
opportunity cost. ”Other inefficiencies" pushed domestic output market prices to increase more
rapidly than otherwise as in 1993 and 1994 (Table 39).

The effect of the distortions of the rest of policies on net household income was relatively
insignificant for all years and farm sizes. Effects of removing distortions in trade policy, interest
rates, transport cost, marketing and profit margins of importers were opposite for inputs and
outputs almost on the same level; therefore, the total effect of these policies on net farm income

was minimal.

Title 39.

142

Wind effects of policy mid nrket distortion on net honelwld income a]

 

 

 

 

 

 

 

Farm size category (has) 04 1-5 5-20 20-50 >50
1. Total effect - 1990 40.0% 47.3% 49.8% -5.7% -9.8%
a. Exchange rate -2.3% -4.2% -4.5% 4.0% 4.6%
b. Tariffs, cuties and fees 1.1% 0.7% 1.2% 0.8% 1.3%
c. Interest rate -0.1% -0.5% -0.3% -0.1% -0.1%
d. Transport 0.8% 1.1% 1.2% 0.8% 1.1%
a. Marketing and profit margins 0.9% 1.0% 1.4% 1.1% 1.9%
f. Labor market 0.0% -2.3% 4.0% 4.7% -2.7%
1. Residual effects 1/ 40.3% 43.1% 47.7% -5.6% -9.6%
2. Total effect - 1991 6.7% 5.4% 9.8% 2.4% 3.6%
a. Exchange rate 0.2% 0.3% 0.3% 0.1% 0.1%
b. Tariffs, drties and fees 0.9% 0.4% 0.8% 0.6% 0.9%
c. Interest rate -0.2% -0.6% -0.4% -0.2% -0.2%
d. Transport 1.1% 1.5% 1.7% 1.1% 1.5%
e. Marketing and profit margins 0.8% 0.9% 1.2% 1.0% 1.7%
f. Labor market 0.0% -4.5% 4.9% -3.3% -5.2%
g. Resimal effects 1/ 3.9% 7.4% 8.3% 3.1% 4.8%
3. Total effect - 1992 1.5% -5.4% 0.4% -4.7% -5.6%
a. Exchange rate 2.2% 3.7% 4.2% 0.9% 1.6%
b. Tariffs, cuties and fees 1.0% 0.6% 1.0% 0.7% 1.0%
c. Interest rate -0.1% -0.4% -0.3% -0.1% -0.1%
d. Transport 0.1% 0.1% 0.1% 0.1% 0.1%
e. Marketing and profit margins ~0.1% -0.2% -0.2% 0.2% 0.4%
f. Labor market -2.4% -9.8% -6.5% -7.3% 40.2%
g. Resichal effects 1/ 0.9% 0.7% 2.0% 0.8% 1.6%
4. Total effect - 1993 -4.0% 40.5% -8.3% -8.1% 42.3%
a. Exchange rate 8.6% 15.3% 17.1% 3.4% 5.7%
b. Tariffs, cuties and fees 0.5% -0.2% 0.3% 0.3% 0.4%
c. Interest rate -0.2% -0.6% -0.5% -0.2% -0.4%
d. Transport 0.2% 0.2% 0.2% 0.2% 0.2%
e. Marketing and profit margins 0.1% 0.3% 0.2% 0.3% 0.5%
f. Labor market -0.5% -6.0% ~3.0% -4.4% -6.8%
g. Resichal effects 1/ 42.7% 49.5% -22.6% -7.6% 42.1%
5. Total effect - 1994 0.3% 4.6% 2.4% -5.3% -6.6%
a. Exchange rate 12.7% 22.7% 25.6% 5.2% 8.8%
b. Tariffs, cuties and fees 0.1% 4.0% ~0.6% -0.1% -0.3%
c. Interest rate 0.1% 0.0% 0.1% 0.1% 0.1%
d. Transport 0.6% 0.7% 0.9% 0.6% 0.8%
e. Marketing and profit margins 0.0% 0.5% 0.2% 0.1% 0.2%
f. Labor market 4.6% -6.9% -4.4% -5.1% -7.2%
3. Residual effects 1/ 41.5% 47.6% 49.3% -5.9% -9.1%
Motes:

a/ Distortion rate I (social value I private value)-1; derived from table A.10 in

appendix A

1/ Residlal effects that make border price of tradable output being different from

.gwrce: Survey IDEA/Ecuador, 1991

doaestic price

HAPTER 7

CONQLUSIONS

A. .an it? in. 21' 1 rl H mn ml°°es in Q'V‘lll ' up ° 1 .'

Current economic theory assumes that stabilization and structural adjustment policies in
developing countries are urgent to encourage the overall economy to stabilize first and second to
give the different sectors undistorted signals for sustainable growth. Two kinds of distortions can
be distinguished, one related with policy intervention and another related with structural
inefficiencies of markets. Stabilization packages are supposed to remove policy distortion
interventions while structural adjustment programs are supposed to correct market failures over
time.

In general, the empirical evidence indicates that removal of policy distortions in
developing countries helps to reduce the public deficit, to control inflation, to increase export
earnings of tradeable sectors and thereby to attain higher economic growth rates. Nevertheless,
these achievements can differ among countries depending on various factors including variations
in international prices, the level of market failures and government intervention and the political
feasibility to carry out policy changes and legal reforms.

In Ecuador the influence of political groups forced the governments to either delay or
reduce the intensity of stabilization packages. The main political groups who constantly opposed
such programs were the public sector bureaucracy (which grew dramatically during the oil

boom), a non-competitive industrial sector (which became large in the economy of Ecuador

143

144

during the industrial development period), the urban middle class (which bore part of the
adjustment cost through fewer employment opportunities as a result of cuts in current and capital
public expenditures) and the urban poor (who did not receive any effective targeted compensation
programs during adjustment; De Janvry, I992).

The only interest groups favoring stabilization programs were the high income rural
enterprises and the rural poor. This support was based on the income gains that devaluations
brought to agricultural export crops and the relatively high prices of capital in agriculture, which
pushed a substitution effect toward labor in certain agricultural activities. However, there were
regional disparities because the Coast has specialized in export commodities while the Sierra has

produced mainly domestic consumption crops.

B. W

The main conclusion arrived at from aggregated studies of policy effects in developing
countries has been that the effect of changing exchange rate policy dominates the impacts from
changing simultaneously other policies and market structures, especially for tradeable sectors like
agriculture and for the short term.

In macro-meso level studies, it has been generally assumed that the agricultural sector is
fully tradeable. This assumption can be inaccurate for a substantial percentage of agricultural
production mainly because of the following conditions:

a) Non-existence of physical and other institutional infrastructure or high fixed costs
related with marketing and distribution can make agricultural production non-tradable for long
periods of time. Some products are naturally non-tradable due to low value/bulk ratios or high

perishability.

145

b) Stabilization and structural adjustment policy changes that are not applied
simultaneously and during the same time frame. Prioritation of policy changes occurs based on
the arrangement of political and economical forces within specific countries and the level of
influence from international funding organisms. Therefore, depending on the specific case,
sometimes it is more realistic to assess how a policy change will affect incentives under the
assumption of a systematic decreasing of other interventions, instead of assuming a removal of
the whole set of distortions. In this line of thinking, it is sometimes mistaken to treat a product
or group of products as non-tradeable if sectoral policy interventions or institutional inefficiencies
that preclude transmission of border prices are not a priority in the policy agenda.

c) The structure of input use and proportion of tradeable versus non-tradeable inputs
in total variable cost make effects of policy distortions or policy changes different across
products, farmers and regions. Also, the proportion of fixed cost versus variable cost in total cost
and level of tradeability of fixed costs have to be taken into account to assess overall effects of
changes.

(I) When changes in relative prices of inputs affect input mix use and the extent to
which inputs with higher relative prices after a policy change can be substituted will depend on
the production function of each particular product. The probability of substitution among inputs
due to price changes of inputs and outputs might mitigate or reinforce the "normal" effect of
incentives under a scenario of fixed coefficients of factor substitution. This fact deals with the

flexibility a producer could have to vary input mix after a change in input prices.

 

It is not possible even in theory to predict accurately the effects of removing policy and
market distortions on aggregated agricultural sector without going to a more disaggregated level
and to analyze the implications of it.

Also, if the purpose is to assess the impact of structural adjustment changes on target
groups of society such as rural poor, for example, the need for disaggregation is even more
evident. At this level, it is important to use a methodology which can connect macro policy
changes with specific relevant markets (micro analysis) with combined effects of both macro and
micro analyses on household net income.

The results of the present research contrast with more aggregated studies of
macroeconomic effects on agricultural activity because those studies analyzed mainly the tradable
proportion of agricultural production. In Ecuador, there is a significant proportion of non tradable
agricultural production located in the Sierra (mountain region). In this sense, the analysis of the
thesis deals with data collected in a selected area of the Sierra. Even though the results can not
fully support broad based policy implications, the methodology can be helpful in re-thinking

future household data collection systems and methods of analysis.

D. ' rulfhl r rh

The results of the Salcedo research can be summarized as follows:

a) Crop combinations across farm sizes did not differ greatly. All farm sizes

produced potatoes, wheat, barley and hard corn (regionally and internationally tradable outputs).

147

The share of cropping income from these products was more than 85 percent for the smallest
farm sizes but for the largest farms, the respective share was almost 50 percent. The rest of
cropping income for farms of 20-50 and more than 50 hectares was provided by non-citrus fruits
and onions, considered as non-tradable and which had the highest private real return on variable
costs.

b) Tradable inputs accounted for between 51 and 57 percent of total variable costs
for all farm sizes and the share of labor in non-tradable input costs was relatively larger than the
rest of non-tradable input components (between 22 and 29 percent of total variable cost).

c) The total effect of removing policy distortions and market failures on net
household income was disaggregated into seven partial effects: i) exchange rate, ii) tariffs, fees
and duties, iii) interest rate, iv) transport cost, v) marketing and profit margins of importers, vi)
labor and vii) ”residual effects”. The ”residual effects” are the ones which make the border price
or opportunity cost of tradable output different from its current private value, but which are not
accounted for by adjustment of the six distortions.

A large part of these ”residual effects" may have come from incomplete transmission of
international price changes to domestic markets. A more careful analysis of this issue is needed
for future research where the interaction of policy instruments, institutional dimensions and
structural rigidities of domestic markets could likely be one of the main issues to be discussed.

d) The total effect of all distortions on net household income fluctuated across years
and farm sizes. These fluctuations were mainly driven by exchange rate, "residual effects” and
labor distortions.

e) For all farm sizes and all years, lack of mobility of labor made savings in labor
paid higher than losses in off-farm income when compared with a situation of more labor

mobility. This statement is stronger the larger the ratio between share of labor paid in total cost

148

and share of labor wage in total off-farm income (1-5, 20-50 and > 50 hectares). The protection
effect of labor was continuously increasing annually.

f) The effect of distortion of exchange rate on net household income under a strong
overvaluation (1993-1994) was generally offset by the effect of ”residual" and labor distortions.
The effect of "residual distortions” in domestic input and output markets was stronger than labor
effect, though. Exchange rate distortion penalized private net household income while both
distortions, labor and ”others” protected it and offset the former impact in 1993 for all farm sizes
and in 1994 for all but 0-1 and 5-20 hectares. These farm sizes revealed the highest proportion
of tradable output than the rest.

g) With undervaluation, negative protection of the exchange rate distortion coming
from the variable cost side offset somewhat the protection effect from the output side. The higher
the overvaluation the stronger the protection effect from variable cost offset the negative
protection effect from output side.

h) From the analysis of the "residual effects ", one can assume that, in general, there
was a slow transmission of international output and input price changes into the domestic market.
Variation of domestic market prices was higher than variation of international prices, presumably
due to ”other inefficiencies" in domestic distribution.

i) The effect of the distortions of the rest of policies on net household income was
non significant for all years and farm sizes. Effects of distortions on trade policy, interest rate,
transport cost, marketing and profit margins of importers for inputs and outputs almost cancel
each other for all years and farm sizes. Therefore, the total effect of these policies on net farm
income was minimal.

j) The distortions of tariffs, duties and fees of tradable inputs brought up relatively

stronger effects than distortions of international trade policy of international tradable outputs for

149

all years and farm sizes but 1994 when the opposite occurred. Therefore, net effect would have
made net farm income higher than it really was with the exception of 1994.

k) The effect of distortions of transport affecting input (negative protection effect)
was stronger than protection effect from output side for all years and farm sizes. Therefore, net
effect would have made net farm income higher than it really was.

I) The effect of distortions of interest rate affecting financial cost of importable
output (protection) was stronger than the negative protection effect from tradable input for all
years and farm sizes but 1994. Therefore, net effect would have made net farm income lower
than it really was.

m) The effect of distortions of marketing and profit margins of input importers
(negative protection) was stronger than protection effect from importers of output side, for all
years and farm sizes but 1994. Therefore, net effect would have made net farm income higher

than it really was.

E. limitations and wgkngsss in the analysis

The main limitations of the data used were:

a) The household survey was done for a small area, so a broad base of policy implications
was not possible.

b) Lack of data on costs for livestock and household expenditures did not allow more
accurate assessment of effects.

c) Lack of secondary data to estimate social prices for some off-farm income sources did

not allow more accurate assessment of effects.

a)

b)

d)

150

The main weaknesses of the assumptions used were:

No substitution effects between labor-capital was considered from policy changes,
therefore technical input coefficients were assumed to be constant over the period of
analysis.

No variation of crop combination from policy changes was considered, so household
decisions on crop-mix were assumed to be constant over the period of analysis.
Because of non-availability of social indicators, effects of policy changes on education,
health, accessibility to basic services and labor participation of household members was
not estimated.

Because there were slightly differences in combined effects of policy and market
distortions on net farm income across farm size categories, a general conclusion about
the relevant importance of disaggregation in this specific sample can not be stated.

However, some studies of the International Potatoes Center and the National Institute for

Agriculture Research show that in the northern part of the country, where the sample was taken,

there has been low differentiation in the use of chemicals and fertilizers per hectare across farm

sizes. In other parts of the country, there is evidence of large variations in the use of variable

tradable inputs as well as in the output crop combination across farm sizes (Ministry of

Agriculture, 1994). Therefore, the need of a disaggregated methodological approach to assess

policy and market effects on rural households at a national or regional level is justified.

In spite of these limitations, the linkage approach used, the notion of tradeability and the

level of disaggregation achieved represent the main methodological contribution of the present

research.

151
E. WW

The approach used in the present research offers improvements in policy analysis and
strategy formulation for a more accurate assessment of policy changes on specific rural
households, agricultural crops, farmers and regions. A more disaggregated analysis, like that
presented here, is needed to link macro, meso and micro changes with differential household
impact variations.

The main conclusion using this approach was that partial effects played different roles on
net household effect depending on the farm structure of production, the level of tradeability
among inputs and outputs and the relative importance of off-farm income sources.

With the model developed in Chapter V, it is possible to have a more complete matrix
of elements that explains the interactions among policy and market distortions under different
conditions of output crop-mix, input-mix use and rates of substitution among factors of
production.

The model allows to do sensitivity analysis on different scenarios of policy arrangements

and household data components in order to give more dynamics to the analysis.

1". Recommendations

As seen in this research, there is a lack of adequate household survey data in Ecuador
to allow disaggregated analysis of policy impacts. Therefore, some recommendations can be
pointed out to improve the design of household surveys (national or regional) as follows:

a) Incorporate a careful treatment of tradeability on net farm income: output and

variable costs.

152

b) Incorporate a present value model for net livestock income due to nature of this
business (stock of animals of different ages and mix of variable and fixed costs).

c) Clarify classification of off-farm income sources

d) Incorporate social attributes for households: number of members contributing to
total household income (family labor and wage earnings); accessibility to basic

services (water, electricity and transport), education and health per member of

household.
e) Incorporate household expenditures
f) Design a proper and timely schedule of household visits to update data and

capture variation of income and expenditure household decisions from policy
changes

However, until more complete future household data is available, the use of sensitivity
analysis in the methodological approach used in this thesis could improve accuracy and dynamics
to the results.

There is a need for better coordination between data collection and policy analysis units,
so that data collection responds in a timely manner to policy analysis demands in order to achieve
a more practical analytical routine in policy formulation.

In addition, it would be interesting to research the interactions between policy instrument
changes, institutional dimensions from these changes and the role of market rigidities in order
to analyze more carefully the dynamics of stabilization and structural policy changes in
agricultural markets. Subsector studies of key commodity groups would be helpful in identifying
means to remedy structural inefficiencies in domestic markets that continue to be isolated from
regional and international markets. It is evident that changes in policy formulation are not enough

to overcome structural distortions.

153

APPENDIX A
NOTATION FOR ASSESSING IMPACTS

154

Table 1.1 notation for calculation of private and social values of
tradable and non tradable components of agricultural

variable costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item Private 1/ Social 2/
Tradable Non Tradable Non
tradable tradable
l. Tradable inputs
Total import cost A B A' 8'
a. C&F a1 a1'
b. Tariffs, duties and bl bl'
fees
c. Transport to importer a2 b2 a2' b2'
warehouses
d. Importer financial cost b3 b3'
e. Importer mkt./profit b4 b4'
margin
2. Tradable/non tradable input
a. Transport of output to C D C' D'
wholesale market
3. Total transport 3/ E F E' F'
4. Non tradable input
a. Labor G G'
4. Total variable cost H I H' I'
J=H+I J’=I-I’+I'

 

 

 

 

Notes:

1/ Private import cost of tradable input = domestic market price of
tradable input; Suppliers of tradable input s importers
= border price of tradable

2/ Social import cost of tradable input

input

3/ Total transport - transport of tradable input to importer
warehouses + transport of output to wholesale market

 

 

155

Table 1.2 Notation for calculation of private and social values
of tradable and non tradable components of agricultural
output

 

Private Social
1/ 2/

 

Item Do- Tra Non Tra Non
mes da tra da tra
tic ble da ble da

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

pri ble ble
ce
1. International tradable output
(importables)
A. Domestic price of national K
production
3. Import cost - L M L' I II'
- Y=L+M Y'=L'+M'
b.1. C&F 11 11'
b.2. Tariffs, duties and fees ml ml'
b.3. Transp.to importer warehouse 12 nm 12' m2'
b.4. Importer financial cost m3 m3'
b.5. Importer mkt./profit margin m4 m4'
2. Regional tradable output N 0 0'
(importable or exportable?) 3/ 4/
3. Non tradable output P
Non importable or exportable
4. Total agricultural output Q R 5 IR' 8'
Z=Q+R+S Z'=Q+R’+
SI

 

 

Notes:

1/ Private import cost of tradable output is not equal to domestic
market price of output
Private import cost of tradable output = opportunity cost (with
distortions) for domestic production
Suppliers of tradable output = domestic producers + importers

2/ Social import cost of tradable output = border price of
tradable output
Social import cost of tradable output = opportunity cost
(without distortions) for domestic production

3/ Border price of regional tradable output with exchange rate
distortion
Price in Colombia = opportunity cost for domestic production
(with exchange rate distortion)

4/ Border price of regional tradable output without exchange rate
distortion
Price in Colombia - opportunity cost for domestic production
(without exchange rate distortion)

 

 

156

Table A.3 Notation for calculation of private value and social values of
net agricultural income

 

 

 

 

Concept SOCIAL VALUE' Item SOCIAL PRIVATE

1/ VALUE VALUE
SVa PVa

NET AGRICULTURAL INCOME [Y'+O'Q] [Y+O+Q]
-J' -J

 

 

 

Net agricultural income
without distortions but:

 

 

 

 

 

 

 

 

 

 

 

 

a. Exchange rate (ERo+ERol+Q)- s ERa
(ERi)

b. Tariffs, duties and (TAo+O'+Q)- = TAa
fees (TAi)

c. Transport market (TRo+O'+Q)- = TRa
(TRi)

d. Interest rate (INo+O'+Q)- = INa
(INi)

e. Marketing/profit (MGo+O'+Q)- = MGa
margins (MGi)

f. Labor (Y'+O'+Q)- = MGa
(LAi)

Notes:

1/ Social value taking out some distortions

 

 

Table A.4

and off-farm income

157

Notation for calculation of private value and social
values of agricultural output, agricultural variable cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Concept SOCIAL VALUE' Item so PRI-
1/ CIAL vars
va- va-
LUE LUE
noxxcunrusnn ourpur *
1. International tradable Y’ K
agricultural output
International tradable output
without all distortions but:
a. Exchange rate (Y'-ll'+ll) a ERo
b. Tariffs, duties and fees (Y'—m1'+m1) = TAo
c. Transport market (Y'-12'-m2') = TRo
+(12+m2)
d. Interest rate (Y'-m3'+m3) = INo
e. Marketing/profit margins (Y'—m4'+m4) = M60
2. Regional tradable O' N
agricultural output
Regional tradable
i agricultural output without
all distortions but:
I a. Exchange rate IO [8 ERol O' N
I3. Non tradable agricultural Q Q
output
AGRICULTURAL VARIABLE COST
Total variable cost [J' [J
[Variable cost without
all distortions but:
I a. Exchange rate (J'-a1'+a1)fi . sat
b. Tariffs, duties and fees (J'-b1'+b1) = TAi
c. Transport market (J'-E1'-F') = TRi
+(3+1?)
I d. Interest rate (J'-b3'+b3) = INi
l e. Marketing/profit margins (J'-b4'+b4) = MGi
| f. Labor (J'-G'+G) = LAi
[arr—rank INCOME
[ Off-farm income [X' [X
Off-farm income without all
distortions but:
Labor market (X'-T'-U' = LAo

_VI_WI )4,
(T+U+V+W)

 

 

 

 

 

Notes:
ligSocial value taking out some distortions

 

158

Table 1.5 Notation for calculation of private and social
values of off-farm income

 

 

 

 

 

 

I Item Private Social
'1. Non agricultural informal T T'
I2. Non agricultural formal U U'
3. Agricultural wage V V'
[4. Others W W'
'5. Total off-farm income X X'

 

 

 

 

Table 1.6 Notation for calculation of private value

not household income

and social values of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1/ Social value taking out some distortions

Concept SOCIAL VALUE ' Item SOCIAL PRIVATE
l/ VALUE VALUE
SVh PVh
use sousssono INCOME [Y'+O'Q] [Y+O+Q-J+
-J'+X'] x1
Net household income
without distortions but:
a. Exchange rate (ERo+ERol+Q)- = ERh
(ERi)+(X(L
b. Tariffs, duties and (TAo+O'+Q)- = TAh
fees (TAi)+(X')
c. Transport market (TRo+O'+Q)- = TRh
(TRi)+(X')
d. Interest rate (INo+O'+Q)- = INh
(INi)+(X')
e. Marketing/profit (MGo+O'+Q)- = MGh
margins (MGi)+(X')
f. Labor (Y'+O'+Q)- = MGh
(LAi)+(LAo)
Notes:

 

 

162

Table 1.11 Notation for calculation of effects of policy
and market distortions on off-farm income

 

 

 

 

 

 

 

 

 

 

 

Concept Distortion rate 1/
EFFECTS ON:
1. Non agricultural informal (T'/T)-1
2. Non agricultural formal (U'/U)-1
3. Agricultural wage (V'jV)-1
4. Others (W'/W)-1
roman srrscr ox err-sans Incoxs (X'[X)-l
Notes:
1/ Distortion rates (social value / private value)

 

Table 1.12 Notation for calculation of combined effects of policy and
market distortions on net household income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Concept Distortion rate Item Combined
1/ effect
EFFECTS BY:
1. Exchange rate (ERh/PVh)-1 = 1 (nhe-l)
2. Tariffs, duties and fees (TAh/PVh)-l = 2 (nhe-2)
3. Transport market (TRh/PVh)-1 = 3 (nhe-3)
4. Interest rate (INh/PVh)-1 = 4 (nhe-4)
5. Marketing/profit margins (MGh/PVh)-1 = 5 (nhe—S)
6. Labor (LAh/PVh)-1 = 6 (nhe-6)
7. Other effects 2/ (nhe)-
(1+2+3+4+S+6)
rowan ssrscr on new (SVh/PVh)-l =
HOUSEHOLD INCOME nhe

 

 

 

Notes:

1/ Distortion rates (social value / private value)

2/ Other effects that make border price different from domestic price
They could be distortions related with distortions in domestic
market of output

 

 

163

APPENDIX 3
BASIC INFORMATION FOR ASSESSING SOCIAL PRICES

Table 3.1 Private - current tariffs for tradable inputs and
tradable outputs, percentage over C&P, 1990-1994

164

 

 

Concept 1990 1991 1992 1993 1994
l. Tradable input
1.1. Fertilizer 0% 5% 0% 0% 0%
1.2. Agrochemicals 1/ 5% 5% 2% 2% 2%
1.3. Tradable seed 5% 5% 2% 2% 2%
1.4. Machinery 5% 5% 2% 2% 2%
2. Tradable output
2.1. Hard corn 5% 5% 12% 12% 15%
2.2. Wheat 5% 5% 5% 5% 15%
2.3. Barley 5% 5% 5% 5% 15%
3. Parts for vehicles 19% 22% 16% 9% 10%

for rural
transportation

 

Notes:

1/ Agrochemicals - insecticides, herbicides, fungicides

 

Source: Manual of import tariffs (1990-1994), Ministry of Finance

of Ecuador

165

 

 

Tdile 8.2 Private - eta-mt inort daties, other taxes and transport to iqort smrehotmes
for tradable inputs and tradable outputs Percentage over C&F, 1990-1994
Concept 1990 1991 1992 1993 1994
1. Import duties in %/C&F for
tradable inputs and outputs
1.1. FOMIM 2.00% 2.00% 2.00% 2.00% 2.00%
1.2. IMFA 1.00% 1.00% 1.00% 1.00% 1.00%
1.3. Service fee Central Bank 1.00% 1.00% 1.00% 0.00% 0.00%
1.4. Foreign Bank commisions 1/ 2.00% 2.00% 2.00% 2.00% 2.00%
1.5. Customs expenses 2.00% 2.10% 2.10% 2.20% 2.20%
1.6. Municipal/police taxes 0.03% 0.03% 0.03% 0.03% 0.03%
1.7. Verification fee at port 2/ 0.00% 0.00% 0.00% 0.00% 1.00%
2. Transport from port to import
warehouse in US/TM but translate
to %ICEF for:
2.1. Tradable input
a. Fertilizer 2.83% 2.56% 2.43% 2.57% 3.08%
b. Agrochemicals 0.09% 0.08% 0.06% 0.09% 0.10%
c. Tradable seed 2.95% 2.85% 2.52% 2.73% 2.94%
d. Machinery 1.89% 1.77% 1.48% 1.56% 1.58%
2.2. Tradable output
a. Hard corn 3.64% 3.44% 3.29% 3.42% 3.55%
b. Hheat 3.04% 3.03% 2.39% 2.62% 2.91%
c. Barley 3.15% 3.03% 2.72% 3.05% 3.33%
2.3. Parts for vehicles for rural 1.00% 1.00% 0.80% 0.90% 0.90%
transportation
3. Port fees Paid in US/TM but
translate to %ICEF for:
3.1. Tradable input
a. Fertilizer 1.44% 1.31% 1.44% 0.40% 0.59%
b. Agrochemicals 1.08% 0.99% 1.11% 0.08% 0.07%
c. Tradable seed 3.44% 3.48% 3.42% 2.59% 2.41%
d. Machinery 1.08% 1.00% 0.99% 0.91% 0.89%
3.2. Tradable output
a. hard corn 4.13% 4.13% 4.28% 3.25% 2.92%
b. Uheat 3.63% 3.74% 3.38% 2.45% 2.36%
c. Barley 3.72% 3.74% 3.75% 2.92% 2.74%
3.3. Parts for vehicles for rural 0.57% 0.56% 0.54% 0.53% 0.51%
transportation

 

Motes:

1/ Foreign bank commisions to open credit card as a requirement to make an import

2/ Verification of merchandise at port

Source: Manual of fees, duties and other import taxes (1990-1994), Ministry of Finance and
Central Bank of Ecggdor; import records (1990-1994), Ministry of Agriculture of Ecuador

Table 3.3

166

Private - current tariffs, imports fees, other taxes and

transport cost to import warehouses as a percentage of

C&F 1990-1994

 

Concept 1990 1991 1992 1993 1994
1. Tradable input
1.1. Fertilizer 12.3% 17.0% 12.0% 10.2% 11.9%
1.2. Agrochemicals 14.2% 14.2% 11.3% 9.4% 10.4%
1.3. Tradable seed 19.4% 19.5% 16.1% 14.5% 15.6%
1.4. Machinery 16.0% 15.9% 12.6% 11.7% 12.7%
2. Tradable output
2.1. Hard corn 20.8% 20.7% 27.7% 25.9% 29.7%
2.2. Wheat 19.7% 19.9% 18.9% 17.3% 28.5%
2.3. Barley 19.9% 19.9% 19.6% 18.2% 29.3%
3. Parts for 21.6% 31.7% 25.0% 17.7% 19.6%

vehicles for ru-
ral transportation

 

Source: Tables 8.1 and 8.2
=

167

 

 

 

Table B.4 Social - “competitive" custom and port expenses and
transport to import warehouses for tradable inputs
and tradable outputs Percentage over C&F, 1990-1994
Concept 1990 1991 1992 1993 1994
1. Import duties in
%/C&F for tradable
inputs and outputs
0.00% 0.00% 0.00% 0.00% 0.00%
1.1. FONIM
1.2. INFA 0.00% 0.00% 0.00% 0.00% 0.00%
1.3. Service fee 0.00% 0.00% 0.00% 0.00% 0.00%
Central Bank
1.4. Foreign Bank 2.00% 2.00% 2.00% 2.00% 2.00%
commisions
1.5. Customs 2.00% 2.10% 2.10% 2.20% 2.20%
expenses
1.6. Municipal 0.00% 0.00% 0.00% 0.00% 0.00%
taxes
1.7. Verification 0.00% 0.00% 0.00% 0.00% 1.00%
fee at port
2. Transport from port
to import warehouse
in US/TM but
translate to %/C&F1/
2.1. Tradable input
a. Fertilizer 2.15% 1.71% 2.23% 2.29% 2.38%
b. Agrochemic. 0.07% 0.05% 0.05% 0.08% 0.08%
c. Trad.seed 2.24% 1.90% 2.31% 2.43% 2.27%
d. Machinery 1.43% .1.18% 1.36% 1.39% 1.22%
2.2. Tradable output
a. Hard corn 2.76% 2.30% 3.01% 3.05% 2.74%
b. Wheat 2.31% 2.03% 2.18% 2.34% 2.24%
c. Barley 2.39% 2.02% 2.49% 2.72% 2.57%
2.3. Parts for 0.68% 0.60% 0.62% 0.77% 0.73%
vehicles for
rural transport
Notes:

1/ Social value of transport

Source: Table 8.2 and table 20 for transport cost

168

Table 8.5 Social cost to bring imports to domestic market
of Ecuador as a percentage of C8! 1990-1994

 

 

u-I-II
Concept 1990 1991 1992 1993 1994
1. Tradable input

1.1. Fertilizer' 6.1% 5.8% 6.3% 6.5% 7.6%
1.2. Agrochem. 4.1% 4.2% 4.2% 4.3% 5.3%
1.3. Trad.seed 6.2% 6.0% 6.4% 6.6% 7.5%
1.4. Machinery 5.4% 5.3% 5.5% 5.6% 6.4%
2. Tradable output
2.1. Hard corn 6.8% 6.4% 7.1% 7.2% 7.9%
2.2. Wheat 6.3% 6.1% 6.3% 6.5% 7.4%
2.3. Barley 6.4% 6.1% 6.6% 6.9% 7.8%
3. Parts for 4.7% 4.7% 4.7% 5.0% 5.9%

vehicles for
rural transport

 

Source: Table 8.4

169

 

 

 

1/ Social interest rate a concept taken from Study of ”Matrix of

Table 8.6 Private interest rate vs social interest rate 1/ (FROM
m om SIDE)
r

Year prime overvaluat devalua nominal nominal
interest ion rate tion rate social private
rate 2/ interest interest

c rate 3/ rate 4/

a b d e

1990 10.0% -5.4% 43.2% 27.8% 52.4%

1991 6.5% 0.3% 37.9% 31.7% 53.1%

1992 6.0% 4.2% 47.0% 45.2% 62.5%

1993 6.0% 21.8% 31.3% 47.1% 47.0%

1994 6.9% 32.0% 19.8% 44.9% 53.3%

Notes:

2/

3/
4/

Policy Analysis" in the Project of Reorientation of Agricultural
Sector (PRSA/USAID) (Lee and Flood).

Social interest rate 8 rate it would be in an environment of
free movement of capital (domestic and international). Demanders
of loans have the possibility to access to international market.

prime interest rate = opportunity cost of domestic loan
demanders

a + d = b + c d = (b+c)-a

nominal private interest rate = current interest rate in
domestic market

Source: Monthly statistical information of Central Bank and table

13

170

Table B.7 Private interest rate vs social interest rate 1/ (FROM

THE SUPPLY SIDE)
w

 

Financial system in Ecuador 2/

 

 

Year real financ 1a 1 real inf lat ion nominal real
return to operating return of rate social social
attract expenses financial Ecuador return return
savings activity domestic 4/

capital
3 b c d a+b+c+d

1990 2.0% 3.0% 4.0% 48.5% 57.5% 9.0%

1991 2.0% 3.0% 4.0% 48.7% 57.7% 9.0%

1992 2.0% 3.0% 4.0% 54.6% 63.6% 9.0%

1993 2.0% 3.0% 4.0% 45.0% 54.0% 9.0%

1994 2.0% 3.0% 4.0% 28.5% 37.5% 9.0%

 

1/ Social return domestic capital = concept taken from Study of
”Matrix of Policy Analysis" in the Project of Reorientation of
Agricultural Sector (PRSA/USAID), (lee and Flood).

Interest rate a rate it would be in an environment of free movement
of capital (domestic and international).

2/ Hypothetical situation where financial system in Ecuador would be
more efficient, but still not the same efficiency as "international
USA system”. Therefore percentages of expenses and return are 50%
more than the average in USA.

3/ real social return domestic capital - nominal - inflation rate.

 

Source: Monthly statistical information, Central Bank of Ecuador

171

APPENDIX C
EFFECTS OF IMPORT QUOTAS

172

 

 

so.
I stic domestic

80" demand SUM)!

 

---------------------------—---- —--q---------

 

03

O
to

01

 

 

 

11111111.:11:T '

 

she

‘1
N
“-1

.1

ad

3025'. 6

 

 

 

Figure C.1 Effects of import quotas

Definition of terms:

P1 = price with no international trade

P2 = price with import quotas and international trade

P3 = price without import quotas and international trade

Q1 = domestic supply with international trade and no import
quotas

Q2 = domestic supply with international trade and import
quotas

Q3 = domestic supply and demand with no international trade

Q4 = domestic demand with international trade and import
quotas

Q5 = domestic demand with international trade and no import
quotas

QLQS = import level with international trade and no import quotas

Q2-Q4 = import quota

Analysis:

If import quota is imposed then the following effects occur:

a) Transfer of consumer surplus to producer surplus from area P2-P3-d-f to area P2-P3-a-b
b) Transfer of consumer surplus to importer rents from area P2-P3-d-f to area a-c~d-e

c) Net weigth losses equal to areas a-b-c and d-e-f

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