A Note on the Impact of Economic Reforms on the Performance of the Agriculture Sector in Latin America Daniel Lederman * Rodrigo Reis Soares **

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1 A Note on the Impact of Economic Reforms on the Performance of the Agriculture Sector in Latin America Daniel Lederman * Rodrigo Reis Soares ** Introduction Economic reforms in Latin America have been followed by worries regarding the impact of economic openness on the performance of the agricultural sector. These worries encompass several issues, from the dynamism of the sector to the polarization of production and its effects on poverty. Most of these issues are discussed in some detail in Foster and Valdés (2001). In this note, we analyze the productive performance of the agricultural sector in Latin America before and after the reforms. We investigate whether the opening of the economy represented a structural break in terms of the behavior of productivity and competitiveness of the agricultural sector. Our results indicate that, in the aggregate for the region, reforms tended to have an immediate effect of reducing the productivity growth in agriculture, and that this reduction was recovered after approximately three and a half years. After this period, productivity kept growing at rates usually higher than the ones observed in the pre-reform period, compensating for the transition period of reduced growth. Also for the aggregate, reforms tended to have an immediate positive impact on the growth of exports per worker, and this impact tended to be progressively intensified over time. Disaggregate analysis, allowing for cross-country heterogeneity of the effect of the economic reforms, shows that the same pattern for productivity could be seen for each individual country, although a lot more heterogeneity was present in the behavior of exports per worker. * World Bank ** University of Chicago

2 Data and Methodology We choose to analyze the productive performance of the agricultural sector in terms of two variables: labor productivity and exports per worker. Labor productivity is a natural measure of the efficiency of the sector and a proxy for the returns to labor (marginal productivity) in agriculture. Exports per worker capture the competitiveness of the sector in the international market. We discuss the performance of these two variables for a group of 14 representative Latin American countries in the period between 1980 and Almost all countries included in the sample experienced liberalizing economic reforms at some point in this period. The countries are: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Peru, and Uruguay. The variables of interest are constructed using the series Value added on agriculture, forest, and fishing and Total exports of agriculture products (fob), 1 kindly provided by Foster and Valdés (2001). Since labor force in agriculture is not available on a systematic basis for most of the countries, we use the total Labor force from the World Development Indicators (World Bank) to construct the productivity (value added per worker), and exports per worker variables. 2 The variables indicating the timing of the reforms are based on Sachs and Warner (1995). We construct two variables to capture the effects of the economic reforms: a dummy with value 1 for every year after the implementation of the reform, and the time elapsed since the reform (a time trend starting one period after the reform dummy). These two variables try to capture the possibility of different short and long run effects. The interaction of the two terms allows the reforms to have impacts on both the level and the change over time of the variables of interest. Also, to control for the possibility that part of the effects attributed to the reforms are actually due to features of the stabilization processes that usually accompanied 1 The original sources for the value added and exports series are, respectively, Economic and Social Web Database (Inter-American Development Bank) and Agriculture Statistics (FAO). 2 The value added series were originally deflated to 1990 US$. The exports series were originally in nominal terms (current US$). We deflated this variable to 1990 US$ using the US Food Price Index, from the World Development Indicators (World Bank). Virtually identical results are obtained when the US Consumer Price Index is used. 2

3 economic openness, we control for the real effective exchange rate. This series is taken from the International Financial Statistics (IFS). Table 1 presents some basic information for the countries included in the sample. It indicates the year in which economic reforms were adopted in the different countries, and summarizes the behavior (average annual growth rates) of agriculture labor productivity and exports per worker, before and after the reforms. Besides, it indicates for each country the number of years pre- and post- reform included in the sample. A quick glance at Table 1 reveals that for the vast majority of cases, the performances of productivity and exports per worker were better or less worse in the period after the reform than they were before. Nevertheless, for individual countries, the difference in performances is statistically significant only for a handful of cases, probably due to the limited number of observations in the different periods. Table 1: Date of Economic Reform, Growth of Labor Productivity and Exports per Worker in Agriculture, Latin American Countries, country year of pre reform post reform reform productivity Exports N productivity exports N Argentina % -3.32% % 0.01% 8 Bolivia % % % 11.14% ** 14 Brazil % -8.67% % 1.63% * 8 Chile % 4.39% 19 Colombia % -5.15% % -7.90% 13 Costa Rica % -4.71% % -0.64% 13 Dominican Rep. no reform -0.97% -9.25% Ecuador % -3.15% % -1.05% 8 El Salvador % % % ** -0.75% ** 10 Guatemala % -8.98% % ** -2.09% 11 Honduras % -8.29% % -9.72% 8 Mexico % -1.53% % 0.98% 13 Peru % -8.74% % 4.41% 9 Uruguay % -1.40% % -1.07% 9 Total -1.16% -8.20% % * 0.47% * 143 Notes: * - Post reform average is significantly larger than pre reform average at 5%. ** - Post reform average is significantly larger than pre reform average at 10%. Variables are growth rates (difference in natural logarithms) of value added in agriculture, forest, and fishing per worker (labor force); and total exports (fob) of agricultural products per worker (labor force), both in 1990 US$. Reform dates from Sachs and Warner (1995). So, even though Table 1 suggests that efficiency-wise the reforms tended to benefit the agriculture sector, the evidence is far from conclusive. Therefore, we move on 3

4 to a more detailed empirical analysis of the impact of the economic reforms on the performance of the agriculture sector. The empirical model that guides our specification is the following: (1) PERFORMANCE it = α + βreform it + γtime it + ϕ t + X it + ε it. PERFORMANCE indicates our variables of interest, being the growth rate of either the value added in agriculture per worker, or total exports of agriculture products per worker (both calculated as differences in natural logarithms). REFORM and TIME are the variables related to the economic reforms: the first one is a dummy with value one for every year after the introduction of reforms, and the second is a time trend starting one period after the reform dummy. As mentioned before, these variables try to capture changes in levels and time patterns introduced by economic openness. ϕ is a time effect that affects all countries equally; it tries to account for common shocks related, for example, to changes in international prices, or international financial crises. X represents the variables correlated with economic reforms that may also affect the performance of the agriculture sector; in our case, this is taken to be the real effective exchange rate. Finally, ε is a random term, iid across countries and time, and α, β, and γ are the parameters of interest to be estimated. To deal with the common shock ϕ, we estimate the model using differences with respect to Chile, which was the first reformer among the countries included in the sample. Also, since we are dealing with growth rates, our concerns regarding stationarity of the variables or country fixed effects are reduced. If one thinks about the dependent variables in levels, our model is similar to a differences in differences estimator, although this idea does not apply to the variables related to the economic reforms (i.e., we do not difference the reform variables). Results Table 2 presents the results of the estimation. We estimate the model with and without the real exchange rate, for both productivity and exports per worker. The 4

5 estimation allows for country specific autocorrelation in the residuals and heteroskedasticity with cross-sectional correlation, to deal with the differencing with respect to Chile. The results show that the introduction of the exchange rate control has very little effect on the estimates. Generally, reforms have an immediate negative impact on productivity, which is recovered after roughly three and a half years. After that, productivity growth reaches levels higher than the ones observed prior to the reforms. In relation to exports, the reforms tend to have a positive effect, which grows larger in the years following the changes. Both results are statistically significant at 5% in all specifications. Quantitatively, the results imply that, 5 years after the reforms are introduced, growth in productivity and exports per worker will be, respectively, 0.6% and 6.8% higher than they were before. Table 2: Regressions Economic Reforms and Performance of Agriculture, Latin American Countries, productivity exports reform time exchange cons Log Likelihood N Obs N Countries N Years Notes: Standard errors and p-values below the coefficients. Difference in difference estimators, reference country is Chile. Dependent variables are ln of the value added in agriculture forest and fishing per worker (labor force), and ln of total exports (fob) of agricultural products per worker (labor force), both in 1990 US$. Independent variables are reform dummy (1 for years after reform), time after reform (time trend starting one year after the reform dummy), and real effective exchange rate. Equations estimated using GLS, allowing for within country specific autocorrelation (AR1) and heteroskedasticity with cross-sectional correlation. Dominican Republic excluded due to limited number of observations on the exchange rate. 5

6 But, even though these results are quite robust across the different specifications adopted, there are reasons to believe that the impact of economic reforms was distinct in the different countries. In the first place, the extent and scope of the reforms varied considerably from place to place. Second, heterogeneity regarding the agricultural and industrial structure existent before the reform would imply different effects even if exactly the same reforms were adopted in all countries. The precise form of restructuring that took place in any particular country depended heavily on the preexisting role of the different sectors in the economy and in the foreign trade. In order to analyze whether this heterogeneity is in any way affecting the results presented above, we re-estimate the model allowing for cross-country heterogeneity in the coefficients. We use a Seemingly Unrelated Regressions technique to estimate the equations for the different countries allowing for cross-country correlation among the residuals. A summary of the results obtained is presented in Table 3. For each of the endogenous variables, we estimate the model without and with the real effective exchange rates, and these results are presented, respectively, in columns (1) and (2). In relation to value added per worker, the effects discussed before are very robust across countries. Apart from Uruguay, all other countries present the same pattern: productivity growth is reduced in the immediate aftermath of the reform, but as time elapses this reduction is recovered until the previous level is attained again. It is interesting to note that the time necessary for the recovery estimated from this model is usually considerably longer than the one estimated from the single coefficient model presented in Table 2. In most of the cases in Table 3, the time necessary to attain the productivity growth observed before the reform is between 5 and 10 years, rather than the 3.5 years estimated without allowing for heterogeneity. On the other hand, the results in relation to exports per worker are very different across countries. Significance and sign of the effects vary from country to country. The reforms seem to have had an immediate positive impact on exports for countries like Bolivia and Brazil, while having an immediate negative effect for others (Costa Rica, Guatemala, Honduras, and Mexico). The time elapsed since reform also has different effects depending on the country: negative for Bolivia and Brazil, and positive for Colombia, Guatemala, and Mexico. The difference between the heterogeneity in these 6

7 results and the homogeneity in the ones related to value added per worker seems to be in accordance with the idea that the sector composition should be more important in determining the trade pattern than in determining the productivity observed in a particular sector. Table 3: Regressions with Country Specific Coefficients Economic Reforms and Performance of Agriculture, Latin American Countries, country productivity 1 2 reform time reform time exchange Argentina * * * * * Bolivia * * * * ** Brazil * * ** * Colombia * * * * * Costa Rica * * * * Ecuador * * * * * El Salvador * * * * Guatemala * * * * Honduras * * ** * Mexico * * * * * Peru * * * * * Uruguay * * * country exports 1 2 reform time reform time exchange Argentina Bolivia * * * * Brazil ** * * * * Colombia * * * * * Costa Rica * * * Ecuador * El Salvador Guatemala * * * * Honduras * * Mexico * * * * Peru Uruguay * Notes: * - Significant at 5%. ** - Significant at 10%. Difference in difference estimators, reference country is Chile. Dependent variables are ln of the value added in agriculture forest and fishing per worker (labor force), and ln of total exports (fob) of agricultural products per worker (labor force), both in 1990 US$. Independent variables are reform dummy (1 for years after reform), time after reform (time trend starting one year after the reform dummy), and real effective exchange rate. Equations estimated using SUR, allowing for country specific coefficients and cross country correlations in residuals. Domincan Republic excluded due to limited number of observations on the exchange rate. 7

8 Final Comments This note investigated the impact of the timing of economic reforms on the performance of agriculture in Latin American economies. Our results indicate that, in the aggregate for the region, reforms tended to have an immediate effect of reducing the productivity growth in agriculture, and that this reduction was recovered after approximately three and a half years. After this period, productivity kept growing at rates usually higher than the ones observed in the pre-reform period, compensating for the transition period of reduced growth. Also on average, reforms tended to have an immediate positive impact on the growth of exports, and this impact tended to be progressively intensified over time. Moreover, these results do not reflect changes in exchange rates induced by stabilization programs that followed the reforms. The disaggregated analysis, allowing for cross-country heterogeneity of the effects of the reforms, showed that the general pattern observed in the aggregate for productivity could also be seen in each individual country. The same was not true for exports per worker. The impact of the reforms on the exports of agricultural products per worker varied a lot from country to country, probably as a result of differences in the structure of production and the extent and scope of the reforms adopted. Overall, the results suggest that, efficiency-wise, the reforms tended to bring long run benefits to the agriculture sector. In this respect, concerns about the impacts of economic liberalization on the performance of agriculture seem to be misplaced. In fact, the performance of agriculture exports should not be the yardstick for evaluating policy reforms, because reforms can lead to beneficial structural adjustments, which consequently reduce the value of exports per worker even though efficiency is enhanced. References Foster, William, and Alberto Valdés Has reform failed Latin American agriculture? Unpublished Manuscript. World Bank, Office of the Chief Economist for Latin America and Caribbean, Washington, DC. 8

9 Sachs, Jeffrey, and Andrew Warner Economic reform and the process of global integration. In William Brainard and George Perry, eds., Brookings Papers on Economic Activity - V th Anniversary Issue. Washington, DC: Brookings Institution. 9