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Livestock: The Road to Market

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1970
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Donald J. Pryor

THE BURGEONING SUCCESS of efforts to improve livestock production, in which the World Bank is deeply involved in more than a score of countries, is helping to focus attention on important obstacles which clutter the road to market, all the way from the ranch gate to the customs offices of importing countries thousands of miles away. At least in the short term and medium term, the most formidable barriers are found in the developing countries themselves, and governments are taking increasingly determined steps to overcome them.

Some are physical. In parts of Bolivia’s Beni region, for example, protesting cattle must be prodded, coaxed, and shoved aboard ancient boats after a long trek overland, for transport to towns or distant roads by river. Others are slaughtered near landing strips, often in open-air abattoirs, and their quartered carcasses flown fresh to La Paz and the mining districts for processing and consumption. Some of the better cuts are chilled and flown again to markets in neighboring countries.

Paraguay, also landlocked, faces similar difficulties. There is no road to Asuncion from lonely ranches in the Chaco except for Highway 9, which slices through swamps and jungle some 400 miles to the Bolivian border, sometimes as straight as a laser beam for 50 miles or more. Even No. 9, which is part of the famous Pan-American Highway, stops short of the capital city some 15 miles to the north, where it encounters the Paraguay River and finds no bridge. There are more roads in the eastern region, but not many. So most cattle coming from ranches north of Asuncion, both to the east and west, must be trekked to the great river for shipment to the country’s three main slaughterhouses. From there, products destined for export, such as canned corned beef and meat extract, must be loaded again on river boats for the long trip to Buenos Aires, clearance through Argentine customs, and transshipment to their final destinations, perhaps in Europe or North America.

Determined men can surmount most natural barriers, though sometimes at excessive cost. To help bring costs down, governments are exploring the need for more efficient transport, processing, and marketing facilities. Bolivia, as one example, now has extensive plans to improve these aspects of the industry as it moves into a third and more comprehensive phase of a livestock development program with assistance from the International Development Asociation (IDA) and the Inter-American Development Bank.

Constraints on Production and Exports

Even more stubborn, however, are the artificial constraints on both production and exports that have been raised by governments themselves, sometimes for compelling political reasons. These often reflect the popular attitudes toward ranchers and ranching which were examined in the previous article. In some cases they consist of positive hindrances, in others simply a lack of action which could enhance the livestock industry’s contribution to development. A brief, generalized catalog of such constraints may be illuminating, without identifying individual countries concerned.

Official controls are often imposed on both consumer and producer prices. The object, of course, is to assure the availability of meat to those with low incomes; but this and related practices often have unintended results by reducing or eliminating incentives to invest in order to expand production. Where official prices are kept excessively low, beef is often hard to find and consumption by the poor does not increase. Export outlets may be available, but only a fraction of this demand can be satisfied.

Some governments that intervene to keep meat prices artificially low have also been inclined to impose high and often discriminatory taxes on livestock. Sometimes local jurisdictions exact their own levies as cattle move from one jurisdiction to another. In one country, provincial authorities take the hides of animals crossing their borders for slaughter. National governments, however, are usually more demanding. In a country which depends on livestock for more than four fifths of its exports, the industry was taxed until recently almost three times as heavily as the nonagricultural sectors.

The burden of such efforts to keep prices low, satisfy the resulting demand, and maintain a disproportionate flow of tax revenue from livestock often falls most heavily on exports, cutting into foreign exchange earnings and serving as a brake on development. In one country where livestock earns a third of export receipts and could readily account for much more, a quota system, a differential tax structure, and a limitation on the season for export slaughter reduced the volume of foreign sales for many years and inhibited investments to increase both production and exports. The same result is often achieved by taxes of various types imposed directly on exports and by burdening imports of essential production and processing equipment with heavy taxes, duties, and special charges. In some countries, these measures have prevented the modernization of packing plants to improve efficiency, raise hygienic standards, and meet the growing demand of major foreign markets for more fully processed cuts. Such negative effects have been further heightened by unrealistic exchange rates together with excessive import restrictions, maintained by some governments in order to encourage the growth of import substitution industries.

Both production and exports have been affected by the failure of many countries to establish and maintain adequate standards of animal health and hygiene. Mortality rates and the incidence of a wide range of animal diseases are unnecessarily high in most developing countries. Some of the more important export markets have been closed, either permanently or temporarily, because of endemic diseases, low hygienic standards, and poor inspection services. Until recently, inadequate attention had been given to these problems, which usually can be overcome successfully only through vigorous governmental intervention.

Effects on Employment

Perhaps the most perverse result of such policies is found in their effect on employment opportunities, especially in the countryside, and in the vicious circle that results. The fact that ranching requires relatively little labor contributes to the popular image which gives rise to special constraints on livestock production. The lack of jobs in rural areas has been one of the driving forces behind the farm-to-city migration of recent years. As political power and the rural poor have shifted to urban centers the already prevalent popular attitudes toward livestock have gained weight and found expression in policies which, in turn, have tended to foreclose the possibility of increasing employment in the livestock and related industries.

These possibilities are by no means insignificant. It is true that the type of extensive, inefficient ranching on unimproved natural grassland, which prevails in most developing countries, gives rise to very few jobs on the range itself. The labor component increases, however, as the industry shifts to more intensive methods of production, which result in greater output, more efficiency, and lower costs. This shift, which is essential to satisfy domestic demand and take advantage of already existing export opportunities, requires extensive investment in ranch development programs. The job-creating capacity of these programs themselves is considerable. Swamps are often drained and forest areas cleared. Fences, corrals, and water holes have to be constructed. Improved pastures must be planted. And with increasing production, of course, new jobs are created along the entire chain of transport, processing, and marketing activities. In one country, each new dollar of investment in livestock improvement is estimated to generate six dollars of additional income, compared with a ratio of one to two for industry. Before such results can be realized, however, the road to market within developing countries must be cleared of obstructions.

Attitudes toward private enterprise, foreign investors, and monopoly have also played a role in limiting the benefits obtained from the livestock industry. Efficiency, and with it the possibility of lower real prices and higher export earnings, has suffered in some countries from officially countenanced or encouraged monopoly arrangements in the processing industry, both public and private. In one country, plants variously owned by domestic investors, a producers’ cooperative, and a foreign packing company long operated under a “live-and-let-live” agreement on prices paid to producers. In another, a government-owned monopoly in the capital city became a model of inefficiency, with far more employees than its production justified, fully a third of whom had office jobs. Together with excessive taxes, price controls, and other handicaps, this contributed to processing costs three and a half times as high as those in Argentina, for example.

Another set of obstacles to growth of the livestock industry in developing countries, which for the present may be more psychological than real, is raised by the major importing countries to protect their own producers. In beef production especially, many developing countries have important advantages in land, climate, and labor costs. Their ability to exploit these efficiently is affected mainly by their own policies. Their policy decisions, however, have undoubtedly been influenced by those of the industrialized countries to which they must look, at least over the next decade or so, for their principal export markets. From their vantage point, import restrictions applied by the industrialized countries tend to cloud the prospect in these markets with uncertainty.

Growing Markets

Throughout the world, growing population and incomes have resulted in rising demand for meat. Since there is a pronounced income elasticity of demand for meat, the increase has been greatest in the industrialized countries of Europe and North America. Under pressure of demand, prices have moved generally higher in most of these countries over the last 15 years, though in the United States the trend has been erratic.

Most of the growing demand for meat in the industrialized countries has been satisfied by increasing domestic output. In response to rising prices and expanding markets, producers have turned increasingly to new, more capital-intensive techniques of high-volume production. Perhaps the most familiar example is the broiler “factory,” which has revolutionized the poultry industry, though similar methods shorten the road to market for pigs and other relatively fast-growing animals.

Beef (including veal), however, is the preferred food in a meat-hungry world. It accounts for about half of total meat production and 45 per cent of exports, which are based on low-cost, grass-fed beef. Exports have been growing at the rate of 6 per cent a year in volume and 10 per cent in value, amounting in 1965-67 to $1.2 billion a year. Even with the most advanced high-cost techniques, it takes much longer to expand the production of beef than of most other meats. Yet in this field also, the industrialized countries have been able to meet most of their demand by increasing domestic supply. This has been accomplished through the adoption of ever more sophisticated methods to reduce disease and mortality, improve calving rates, upgrade the meat-producing attributes of herds, and speed the processes of growth and fattening. Many of these techniques, including especially the use of feedlots for fattening on grain and silage, have been applied most intensively in the United States, which expanded output by about 45 per cent from 1952-56 to 1965-67. Between 1952 and 1967 the United States produced more beef than all developing countries combined excluding mainland China, and more than 28 per cent of the world’s supply. Comparable increases have been achieved in Western Europe, which produced a fifth of the world’s beef in 1965-67, and in the Soviet Union, which raised its share from 9 per cent to 11 per cent while the world total was expanding by nearly half.

Despite such increases in production, demand grew even faster during most of this period, leaving relatively small but significant gaps to be filled by imports. Exporting countries moved to fill them. Between 1961 and 1964, exports of beef to members of the European Economic Community (EEC) roughly quadrupled, exerting downward pressure on prices. Under the combined weight of rising domestic production and imports, wholesale prices in the United States fell by about a fifth.

EEC and U.S. Import Controls

At this point, governments intervened on behalf of their domestic producers. The U.S. Congress enacted the Meat Import Act of 1964, establishing a quota system which effectively limited imports to about 5 per cent of domestic output. In the same year, the EEC adopted its Common Agricultural Policy for beef, which was later buttressed by the establishment of a unified market. Under this scheme, imports are controlled through a system of duties, special levies tied to a variable range of producer prices, and official market intervention, adding major elements of instability to an already imperfect world market mechanism.

These actions restrained imports and cushioned prices, which rose above the high levels of 1962. It would be impossible to say with assurance, however, that they had any direct negative impact on exports from the developing countries. Most of these countries are barred from exporting unprocessed beef to the United States, not under quota provisions of the law but because of endemic diseases. Even so, they have seldom supplied enough beef to take advantage of opportunities available to them in the EEC, the United Kingdom, and other markets. Most import demand in the United States and much in other industrialized countries has been supplied, not by the developing countries but by exporters in Western Europe, Australia, and New Zealand. Furthermore, despite restrictions so far imposed, present indications are that total opportunities for beef exports from developing countries may exceed their ability to produce by a significant margin in the medium term. Nevertheless, the evidence since 1964 that even the principal market-oriented countries will not permit market forces to determine the level of their imports of beef has not escaped the notice of policymakers in the developing countries. It undoubtedly has inhibited the readiness of some, despite their comparative advantage, to adopt the positive policies that expanded production requires and to make the necessary investments.

This cloud over the future may eventually become an important practical, as well as psychological, constraint on efforts of the developing countries to realize their potential in livestock production. Meanwhile, the problem is being studied internationally. Perhaps by the time enough beef is produced under satisfactory standards of health and sanitation to overcome recurring world shortages, arrangements can be arrived at to assure more freedom and stability in world markets.

The developing countries appear to have a long way to go, however, before their export capabilities exceed import demand under existing restrictions. To travel that distance and establish a sound basis for further expansion, strong measures will be necessary in many countries to reorder priorities and clear away their own impediments to growth. In some, this will require a good deal of political courage. A few have begun to move in that direction and there is encouraging evidence that others may soon follow suit.

The Uruguayan Project

Uruguay may again prove to be the bellwether in this respect, as it was more than a decade ago when the World Bank first entered the field. It was the first country to borrow from the Bank for livestock improvement, establishing a prototype of the directed credit system which was described in the previous article and is now being employed in well over a score of other countries around the world. In many of these, as we have seen, the main barrier to faster growth has become the reluctance or inability of governments to provide adequate incentives for production, to reform obsolete or inappropriate processing and marketing systems, to adopt firm policies and programs for effective disease control, and to encourage exports. Until last year, this had been true in Uruguay.

Technically, the Uruguayan project has been successful. Project ranches now produce three and a half times as much beef per acre as the national average, as well -as twice as much wool and two and a half times as much mutton. These figures are especially significant in Uruguay, where livestock was and is the mainstay of the economy; it generates a higher proportion of national income than any other sector and accounts for well over four fifths of exports, of which a third consists of beef and beef products.

The striking success of participating Uruguayan ranchers under two World Bank loans stimulated many others to make similar investments and attracted the interest of cattle growers in a neighboring country. The benefits of this important demonstration effect, however, were greatly diminished by the impact of inflation any policies which, throughout most of the 1960’s, discouraged wider investment in livestock improvement. For example, growers with more than a fixed amount of capital were made ineligible by law to receive project assistance, while the cost of private loans for such purposes became prohibitive. Thus benefits of the program were effectively restricted to the smaller ranches, as reflected in the fact that more than 4,500 improvement plans that had been financed by early 1970 affected only 7 per cent of the pasture area.

Other impediments to production and exports included many of those already mentioned: controls on producer and consumer prices, high export taxes on meat, import levies on necessary machinery and equipment, an inefficient processing and marketing system, and inadequate meat inspection services. As a result of these and other constraints, total beef production had failed to expand. Domestic consumption, already among the highest in the world on a per capita basis, had increased while exports had declined. Per capita income, though still the third highest in Latin America, had remained virtually stagnant and may have actually fallen.

The turning point came last year. In May the United Kingdom, Uruguay’s largest customer, imposed an embargo on the country’s beef because of low hygienic standards and inadequate inspection. In October, Uruguay itself barred the export of even processed beef to the United States, which already barred fresh, chilled, and frozen beef from all Latin American countries south of Panama.

Policies for Improvement

The Government also took a series of politically difficult decisions on a wide front. The meat inspection service is being improved. Inspectors are being paid solely by the Government rather than by the meat packers, and are being trained in a special internationally assisted program. Consumer prices for beef have been raised, making more available for export. The beef export tax has been reduced. Import taxes and surcharges on farm machinery and packing house equipment have been removed. The Montevideo market has been opened to all meat packers, ending the Government’s own monopoly. With more competition, producer prices increased by some 30 per cent, providing incentive for borrowers, while a system for indexing loans to ranchers mitigated the effects of inflation on lending institutions. The Government has also embarked on a wide-ranging program to bring about the reorganization and modernization of the meat processing and marketing industries.

If such policies can be adhered to and successfully carried out, there is little doubt that Uruguay’s livestock industry can lead the country out of its long period of economic stagnation and decline. If so, it will not go unnoticed in other developing countries where governments have been feeling their way in the same direction, with varying degrees of trepidation and doubt.

BANK GROUP ANNUAL MEETING

The report in this issue of Finance and Development of the Bank Annual Meeting is greatly condensed, touching only upon a small portion of the speeches and activities.

A more complete record of the Meeting will be published shortly by the Bank in a volume entitled Summary Proceedings. It is available free on request from

Publications Office

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The Headline-Making Pearson Commission Report

The Report of the Commission on International Development

Lester B. Pearson, Chairman

The full report of the Commission established by the World Bank in response to the crisis of declining foreign aid appropriations. Under the direction of Lester B. Pearson, former Prime Minister of Canada, the Commission presents its findings and recommendations “with fresh clarity, candor and conviction. . . . The fate of this crucial report and of the world community for which it pleads depends on the response it evokes in Washington.”—lead editorial in The New York Times of Sunday, October 5, 1969.

“I am convinced that it will become one of the most important documents of the twentieth century.”—British Prime Minister Harold Wilson.

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