Trade Liberalization’s Impact on Agriculture in Low Income Countries: A Comparison of El Salvador and Costa Rica

Abstract

Due to both deepening economic crises and pressure from external lenders, Costa Rica and El Salvador implemented trade and market liberalization reforms in the 1980s. This study explores whether these policy changes shifted production toward each country’s presumed comparative advantage in agriculture. For Costa Rica, trade and market liberalization strengthened the country’s ability to generate agricultural trade surpluses while liberalization caused a decline in El Salvador’s agricultural sector. Liberalization also affected how prices and exchange rates influence agriculture in both countries. The findings demonstrate that agriculture’s response to liberalization can vary widely among countries. Overall market conditions in the rural sector, including El Salvador’s postconflict challenges, during liberalization’s introduction partly explain the different responses. Other potential factors include the pace that governments implement policy reforms and that liberalization will only stimulate agriculture if the country has a clear comparative advantage in that sector.