Diversification and Incentives Framework Paul Siegel Rural Economist, Consultant World Bank Prepared for IDB/WB/USAID Central America Coffee Crisis Workshop Antigua, Guatemala April 3-5, 2002

DIVERSIFICATION OPTIONS Changing how something is produced Changing how marketed and financed Changing form of final product  Changes to improve profitability Changing what is produced, and where  Switching to other enterprises

Rural Diversification: Principles Ag Specialization vs. Diversification (what is the level of analysis?) Don’t Pick the Winners or Losers Rural vs. Agricultural Diversification Rural Diversification as part of Rural Development Process

Incentives for Diversification Macro incentive framework Minimize market distortions Legal and regulatory framework Level playing field (domestic, international) Investments in infrastructure Investments in human capital (education, health) Support services: public and private sectors  Provide conditions for flexible resource allocation and decision making  Provide environmental and social safeguards

Some Lessons Learned Compete on quality not just quantity Seek partners that can provide technologies, inputs, finance, markets and share risks Target both domestic and foreign markets Maintain flexibility in production, finance, marketing Appropriate roles for public/private sectors and civil society, ngos Strengthen institutions/groups to help poor There is no “silver bullet”

Impacts of Rural Diversification Short term and longer term impacts  what about the poor and vulnerable? Economic (winners and losers by sector, firms, regions, individuals) Fiscal (tax revenues and budget expenditures) Social (changing relationships, migration) Environmental (changing natural resource use)  Political: how to facilitate the process and provide proper incentives, safety nets, safeguards?