Highlights and Policy Recommendations
Chile has made important progress in raising incomes and reducing poverty, and more recently in narrowing income inequality too. The key to this strong economic performance has been sound macroeconomic management, institutional and structural reforms, trade openness, and the prudent management of mineral resources (principally copper).
The agricultural sector, in conjunction with related downstream activities, has played a key role in Chile’s economic success. Yet while the incomes of agricultural households have increased, smallscale farmers have seen little change in their farm incomes, with most of the gains coming from improved off-farm opportunities.
Agriculture as a whole has benefited from an open trading environment, characterised by a uniform MFN tariff of 6%, and an average effective tariff of about 2% resulting from a wide network of preferential trade agreements. Agriculture has received no more protection than other sectors, with the exception of commodities covered by the country’s price band system (wheat, wheat flour and sugar). In recent years, protection has been low for these products too, as a result of high world prices and (ongoing) policy reforms.
Support provided to producers is low compared with other OECD countries, with an average %PSE (producer support as a share of gross farm receipts) of 5% in 2004-06 – a similar figure to the estimates for Australia and Brazil. Budgetary payments have dominated producer support in recent years, with relatively little use of market price support. Total support to the agricultural sector also imposes a milder burden on the economy than in most OECD countries, accounting for 0.4% of GDP between 2003 and 2005, compared with an OECD average of 1.2%.
Government expenditures on agriculture have nevertheless more than trebled in real terms over the past ten years. About half of that spending is on public goods, while the other half consists of measures which aim to make Chile’s poorer farmers commercially competitive.
The spending on public goods includes essential investments that help raise agricultural competitiveness and protect the country’s environment and natural resource base. But the fact that money is spent on public goods does not itself guarantee that policies are effective, and there is a need for a more systematic evaluation of policy performance.
Payments to improve small-scale farmers’ commercial viability need to be based on a realistic assessment of who is potentially competitive within the sector, and to target that constituency. For future generations, that group is likely to be a minority of smallholders. For the majority, the main requirements are for non-agricultural policies that help them diversify their incomes and find better paid jobs outside the sector. In most cases the ultimate aim should be to transform the poorer family farm into a structure in which the farm operation may be retained, but family members (especially sons and daughters) develop the opportunities to obtain higher paid skilled employment. Recently introduced smallholder credit policies that focus on correcting underlying market failures represent a more productive use of resources than traditional credit subsidies.
Two-thirds of agriculture-dependent households are headed by salaried farm workers, and these households have similar incomes to the poorest farm households. While salaried farm workers may benefit from the increased employment opportunities offered by agricultural growth, the long-term priority is similarly to help them get better paid (skilled) work, within the agribusiness sector or elsewhere.
Agricultural policies therefore need to be framed within an economy-wide context, and consistent with other policies, such as regional initiatives and social safety nets. As agricultural spending by the Ministry of Agriculture is increasingly complemented by the outlays of other ministries and agencies, the need for close co-operation across branches of government becomes ever more essential.