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.

Chile was a pioneer of liberalising reforms. The reforms introduced by the military government were swift and dramatic, and broke down rigidities associated with decades of import substitution policies. Resources shifted into more competitive sectors, and, with time, consistently stronger growth rates were achieved. However, the implementation of reforms was uneven, the process of adjustment was far from smooth and there were concerns about the social costs of liberalisation. Since the restoration of democracy in 1990, successive governments have adhered to orthodox macroeconomic policies, but attempted to balance this with a more pro-active social agenda. Over the last 20 years, Chile has recorded impressive income growth and the incidence of poverty has fallen dramatically. However, low incomes remain a concern, and – despite some recent improvement – the country’s distribution of income remains among the most unequal in Latin America and indeed the world. Agriculture as a whole has clearly benefited from improved macroeconomic stability and from the liberalised policy environment, but remains vulnerable to outside shocks, especially exchange rate fluctuations. The sector also remains a significant locus of poverty and underdevelopment.

Since the restoration of democracy in 1990, successive governments have kept faith with the broad commitment to open markets, notwithstanding some significant exceptions in import-competing agricultural sectors. At the same time, the Chilean government has been increasingly active in adopting policies to boost competitiveness, help poorer and less competitive farmers, and protect the country’s environment and natural resource base. Thus while Chile’s agricultural trade policy is essentially liberal, the overall approach to policy making is by no means laissez-faire.

Chile’s agricultural sector has grown rapidly in the past 20 years. This growth has been associated with important structural changes, notably in the agro-processing sector, the logistics of food distribution, and the system of food retailing (the rise of supermarkets). Not all farmers have been able to adapt to these changes, and as a consequence there has been a widening gap between the country’s commercial export-oriented sector and a traditional agriculture that produces staples for own consumption and importable crops such as wheat.