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OECD Review of Agricultural Policies: Chile 2008

image of OECD Review of Agricultural Policies: Chile 2008

This Review measures the level and composition of support provided to Chilean agriculture, and evaluates the effectiveness of current measures in attaining their objectives. The study finds that Chile provides much lower support and protection to its agricultural sector than most OECD countries, even though government expenditures on the sector have trebled in real terms over the past ten years. About half of that spending is on public goods such as infrastructure and irrigation, while the other half consists mostly of measures that seek to make Chile’s poorer farmers more competitive.

This report suggests ways in which the effectiveness of these policies might be enhanced, including by systematic evaluation of policy performance, by closer co-ordination across government agencies, and by framing policies for smallholders and salaried farm workers in an economy-wide context, so that agricultural policies can focus on potentially competitive farmers and be effectively distinguished from other development and social policies.

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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.

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