Policy concerns in middle income countries: a Brazilian perspective*

 

Rio de Janeiro, November 13, 2012.

 

Antônio Salazar P. Brandão**

1.    Introduction

Credit subsidies have been part of agricultural policy in Brazil since the mid of the 1960s and they were the backbone of the policy during most of the 1970s. In that period nominal interest rates were independent of inflation and real rates were consistently negative. Difficulties in monitoring the use of resources granted through this program and the large difference between market interest rates and the agricultural rates created arbitrage opportunities that reduced significantly the incremental volume of credit resources effectively devoted to agriculture.

Brandão and Carvalho (1990) have estimated the net transfers of resources through direct and indirect policies. According to their estimates, the average transfer during the period 1966 – 1983 was about 4.6 percent. However, when credit subsidies are excluded, the net transfer is -3.4 percent (p. 117).

2.    Current situation

PSE calculations by OECD show that after 1997 support to agriculture in Brazil became positive; the average PSE between 1998 and 2012 is 5.2 percent with no apparent trend. Nevertheless, the level of protection is still low compared to OECD countries and to some emerging countries such as China and Russia where PSEs are approaching the levels of those in OECD countries (OECD 2011, p. 52).

Nonetheless, current policies rely heavily on credit instruments to achieve their objectives. Despite the fact that the share of credit subsidies have declined since 2000, they are still a high percentage of PSE: 42 percent in 2010.

According to Plano Agrícola e Pecuário 2012 / 2013 in this agricultural year the Ministry of Agriculture plans to allocate R$ 133 billion to credit based programs. These include working capital, marketing and investment credit as well as special programs for small farmers.

At present agricultural credit subsidies are lower than they used to be in the 1970s and 1980s and, as such, are less prone to be used elsewhere in the economy. But it is a fact that up to now, commercial banks are reluctant in lending to agriculture and the large majority of loans to agriculture are made by Banco do Brasil, a commercial bank which is controlled by the federal government.

Despite the above considerations agricultural productivity has been growing at the rate of 2.27 percent per year between 1970 and 2006 (Gasques et.all (2010)). This is quite remarkable and is one of the main elements to explain the performance of Brazilian agricultural products in world markets. Nevertheless, there is still a duality in the sector as has been documented recently by Alves et. all (2012) with data from the Agricultural Census 2006. They argue that the difficulties faced by the 89 percent of farms which contributed with only 12 percent of the value of production are associated with lack of credit and lack of knowledge to adopt new technologies. From one hand this conclusion illustrates common difficulties of credit subsidy programs, namely access is restricted to few farmers. On the other hand the conclusion points to the need for the provision of more services to farmers, particularly education and extension. However this component of support to agricultural is declining over time, including those related to agricultural education.

Data taken from OECD (2011) show that the share of General Services Support Estimate (GSSE) in Total Support Estimate (TSE) declines from 35 percent in 2001 to 24 percent in 2010. The largest component of GSSE is expenditures with land reform which has increased from 7 percent of TSE to 12 percent in 2010. The highest value, 16 percent, was achieved in 2006. Research and development declined between 2000 and 2006, increasing slightly thereafter. Agricultural education is roughly constant after 2000, with a spike between 2003 and 2006. It is worth noting also that support for public stockholding under the minimum price program has been increasing steadily since 2000. In the year 2010 support to this activity is higher than support to education, research and development and inspection services.

3.    Concluding remarks

This note has argued that, despite the fact that agricultural support in Brazil is low relatively to other countries with similar income levels, it is increasingly based on direct transfers to producers and that credit subsidies comprise a large share of those transfers.

Despite the spectacular performance of agriculture in the last 30 years, the sector is still characterized by duality, with only a small proportion of farms been responsible for the bulk of the value of production (Alves et. all, 2012). The other group of farmers is not able to use modern technologies and is constrained by lack of credit[1].

Support for the provision of services to agriculture is decreasing as a proportion of total support. Rural education and rural extension in turn comprise a tiny part of services. Nevertheless, these are key services to address the problems that lead to the dual nature of the sector in Brazil.

As a consequence of the emphasis given to agricultural credit subsidies commercial banks are not engaged in providing credit to agriculture, with the exception of Banco do Brasil. This restricts competition among banks and limits the supply of credit almost entirely to the volume of resources allocated by the Treasury[2].

The challenge for Brazilian policy makers is to create an environment where the private sector finds it attractive to lend to agriculture. The fact that interest rates have been greatly reduced recently provides an ideal opportunity for the government to step out of the credit market and to redirect resources to the provision of education, extension and other decoupled forms of support to agriculture.

4.    References

Alves, Eliseu; Geraldo da Silva e Souza; e Daniela de Paula Rocha. Lucratividade da agricultura. Revista de Política Agrícola, vol. XXI, Nº 2, Apr/May/Jun 2012

Brandão, Antônio Salazar P. and José Luiz Carvalho (1990) Brasil, in Krueger, Anne O.; Maurice Schiff and Alberto Valdes (editors) Economia Politica de Las Intervenciones de Precios Agricolas em America Latina, Banco Mundial, Centro Internacional para El Desarollo Economico.

Gasques, J. G.; E. T. Bastos; M. R. P. Bachhi; e C. Valdes, C. Produtividade total dos fatores e transformações da agricultura brasileeira: análise dos dados dos censos agropecuários, in: Gasques, J. G.; J. Vieira Filho and Z. Navarro. (editors). A agricultura brasileira: desempenho, desafios e perspectivas. Brasília: IPEA - Instituto de Pesquisa Econômica Aplicada, vol. único, p. 19-64. 2010.

 

OECD (2011) Agricultural Policy Monitoring and Evaluation 2011: OECD Countries and Emerging Economies, OECD Publishing.

http://dx.doi.org/10.1787/agr_pol-2011-en

Ministério da Agricultura Pecuária e Abastecimento (2012) Plano Agrícola e Pecuário 2012 / 2013, Brasília, D.F.

---

* This is an abridged version of a note based on the presentation by the author at the  symposium Matching Agricultural Policies to Development Needs, organized by the OECD, at the International Conference of Agricultural Economists, Foz do Iguaçu, August 18-24, 2012. For the complete paper see:

http://sites.google.com/site/antoniosalazarpbrandao/artigos-selecionados

** Associate Professor of Economics, State University of Rio de Janeiro.

[1] This is so despite the fact that there are credit programs dedicated to family farms.

 

[2] There are situations where credit is advanced by input suppliers or by companies that purchase farmer’s output. These types of contracts however are not accessible to the great majority of farmers.