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May 31, 2008

How 'free-market' reforms triggered food dependecy in Honduras

Fidencio Alvarez abandoned his bean and corn farm in southern Honduras because of the rising cost of seeds, fuel and food. After months of one meal a day, he hiked with his wife and six children to find work in the city.

"We would wake up with empty stomachs and go to bed with empty stomachs,'' said Alvarez, 37, who sought help from the Mission Lazarus aid group in Choluteca in January. "We couldn't afford the seeds to plant food or the bus fare to buy the food.''

Honduran farmers like Alvarez can't compete in a global marketplace where the costs of fuel and fertilizer soared and rice prices doubled in the past year. The former breadbasket of Central America now imports 83 percent of the rice it consumes -- a dependency triggered almost two decades ago when it adopted free-market policies pushed by the World Bank and other lenders.

The country was $3.6 billion in debt in 1990. In return for loans from the World Bank, Honduras became one of dozens of developing nations that abandoned policies designed to protect farmers and citizens from volatile food prices. The U.S. House Financial Services Committee in Washington is now exploring the causes of the global food crisis and possible solutions.

The committee examined whether policies advocated by the bank and the International Monetary Fund contributed to the situation. Governments from Ghana to the Philippines were pressured to cut protective tariffs and farm supports and to grow more high-value crops for export, reports by the Washington-based World Bank show.

The IMF pressed Haiti, as a condition of a 1994 loan, to open its economy to trade, Raj Patel, a scholar at the Center for African Studies in the University of California at Berkeley told the committee. When trade barriers fell, imports of subsidized rice from the U.S. surged, devastating the local rice farmers, Patel said.

"hat is very odd,'' said committee chair Barney Frank, a Massachusetts Democrat. "For anyone to have looked at Haiti at that time and thought that it was a functioning economy is a sign I think of ideology going rampant.''

"Of course they got it wrong,'' said Robert S. Zeigler, director-general at the International Rice Research Institute, southeast of Manila. "It will work if you're an extremely wealthy country and you can import rice at any price. But if you're not an extremely wealthy country, I think that's very poor advice.''

The bank's strategy -- summed up in a 1989 article by its chief economist for South Asia, John Williamson --became known as ``The Washington Consensus.''

"The focus of the liberalization was on lowering domestic food prices,'' said Mark Plant, the IMF's deputy director of policy development in Washington. Governments' ``command and control'' policies increased consumer costs and cut farmer income, he said.

Williamson, now affiliated with the Peterson Institute for International Economics in Washington, said in a May 9 interview that the ideas are still sound, though they may have been pushed too hard by the World Bank.

``My own view is that all those things are good for countries,'' he said. ``But I'm not terribly sympathetic with the World Bank going in and laying down a list of things countries have to do.''

Honduran agriculture stagnated through the 1980s because of subsidies and market controls, prompting the bank to recommend economic changes, said Adrian Fozzard, the institution's manager for Honduras.

Rice farmers in Honduras were protected by the highest import tariffs in Central America when former president Rafael Callejas took office in 1990 with the economy stalled. The trade barriers that helped the country meet more than 90 percent of domestic demand were dismantled under an agreement for a World Bank loan in September that year, allowing cheaper imports to flood the market.

The requirements for the loan included eliminating import restrictions and surcharges and reorganizing the agricultural finance system, according to Eurodad, a network of 54 European non-governmental organizations that was granted access to the World Bank's loan database to monitor loan conditions.

Prices paid to farmers fell by 13 percent in 1991 and 30 percent more in 1992, according to the Food and Agriculture Organization in Rome.

In August 1993, the World Bank advised Honduras to adopt a second round of economic changes as part of another loan, according to Eurodad. Those conditions included eliminating all price controls and cutting tariffs further.

``Remaining trade and price controls should be eliminated,'' bank officials said in a 1994 internal report. ``The program of privatization of state silos should be completed; and the use of a grain reserve for price stabilization should not be reinstated.''

The report's author, Daniel Cotlear, now a World Bank economist for Latin American and the Caribbean, declined to comment for this story.

The bank pushed the policies because food prices fell in real terms for at least two decades, and few economists expected that to change, said Mark Cackler, manager of its Agriculture and Rural Development Department. Free trade and open markets remain the best path to competitiveness, he said.

``There are actually opportunities to reduce protectionism that have a beneficial impact,'' Cackler said.

World Bank spokesman Sergio Jellinek said it's impossible to connect today's food price crisis with 20-year-old free-trade policies.

``The price of food, especially grains, is determined in the international market and not in the local markets,'' he said. ``So if a country such as Mexico, or Colombia, or El Salvador or Honduras would have multiplied by three or four its grain production, that would not have significantly affected world supply. And food prices in local markets would be as high as they are today.''

There now are 1,300 rice farmers in Honduras, compared with more than 20,000 in 1989, according to human rights group FIAN.

``The international lending agencies have destroyed the basic grains industry in Honduras,'' said Gilberto Rios, executive secretary of FIAN Honduras. ``The best land now produces things like African palms, which are not for consumption.''

Last month, thousands of activists, students and farmers blocked highways and rallied in the capital, Tegucigalpa, to protest food prices and policies that made their country the most open to free trade in Latin America -- and one of the poorest in the Western Hemisphere.

Per capita income rose by 0.5 percent a year from 1990 to 2004, one of the slowest growth rates in Latin America, a January report by the International Food Policy Research Institute found.

``Trade liberalization does not appear to have been much of a boon to the Honduran economy,'' the Washington-based institute said in the report.

In the Philippines, the World Bank encouraged the country, the world's biggest importer of rice, to stop striving for self- sufficiency and instead to diversify into crops like tropical fruits which have greater export value.

It approved a $60 million loan in 2004 to help the Philippines' Department of Agriculture become more market- oriented, diversify crops and stimulate private investment.

A World Bank Group technical working paper in June 2007 said the government shouldn't stockpile grain to stabilize prices. Rather, it should keep enough on hand for disasters and social welfare programs. It also advocated opening the domestic market to competition by cutting tariffs.

Philippine President Gloria Arroyo now says the country has to change course toward being able to feed itself.

``We must move toward more self-sufficiency, not necessarily 100 percent, but more self-sufficiency, less import dependence on rice,'' she said last month.

African nations including Ghana and Mali similarly followed World Bank advice. In 1992, the bank required Ghana to cut tariffs on rice to 20 percent from 100 percent, leading to a tripling of cheap rice imports, Patel said.

In 2004, the bank advised Ethiopia to stop providing fertilizer and credit to small farmers as part of a debt relief package, and it persuaded Indonesia to dismantle its rice marketing board, according to Elizabeth Stuart in Washington, who is the head of relations with the World Bank and IMF for Oxfam International, the U.K.-based alliance fighting poverty.

Now farmers are asking the Honduran government to reverse policy and provide cheap, long-term loans to buy the seeds and fertilizers they need to survive.

The government of Honduras has asked the IMF to send a team to the country to examine how the rising food and fuel prices are affecting the economy and whether they should reconsider some aspects of a current economic program, the IMF said in a press release.

``We haven't seen the worst of it yet; that's to come,'' said Jarrod Brown, president of the Mission Lazarus. ``They need help now.''

For Alvarez and his family, help can't come quickly enough.

``We want to go back to our land, it's all we have,'' he said.


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