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13. The agricultural sectors in the Region face a number of issues. coffee and bananas are the most important commodities in export agriculture in virtually all the countries in the Region. Coffee exports are regulated under the International Coffee Agreement. btagnation in world demand kept production increases to low levels despite yield improvements in coffee. In fact, Costa Rica's yields are one of the highest in the world. Cyclical changes in coffee prices exerted an important impact on money incomes. The large increase in coffee prices during 1976-77 and in 1986 provided large windfall foreign exchange revenues. Banana exports, however, grew very slowly. Because of labor problems and increases in transport costs. one international banana company left Costa Rica. Other traditional products, such as cotton, sugar, and cocoa faced difficulties as a result of reduced international prices, increases in costs and management problems. Overall, the performance of export agriculture has been mixed. On the other hand, basic grains production increased, benefiting from quantitative import restrictions and generous price and interest rate subsidies and credit allocation schemes, which favored basic grains production such as in Costa Rica. In particular, rice production grew substantially because of yield improvements based on new technology. However, since basic grains production is high-cost in the Region, rice had to be exported at a loss, subsidized by the public sector as in the case of Costa Rica. As a result, the increase in basic grains production was obtained at substantial economic and fiscal costs.

# C. Review of Experience In Central America

14. The experience in Central America as outlined above did not respcad to the requirements for a well-functioning common market. First, the trade diversion effect appears to have dominated trade creation. There have been some calculations on trade creation and trade diversion by Mr. Larry Wilmore. These calculations confirm that trade diversion dominated trade creation in the CACM. This has had significant implications for countries which have a relatively undeveloped productive capacity for exports. For example, within the common market, Honduras would import a large share of its requirements for final consumer goods from other Common Market member countries at prices higher than international prices, leading to a net loss of foreign exchange on its balance of payments. For a country like Honduras with a large disequilibrium in its balance of payments, this presents a serious problem. However, it is difficult to quantify the exact trade diversion and creation effects with any degree of precision without undertaking a serious study.

15. Second. large imbalences have occurred among the CACM member countries in their trade with each other since 1980. For example, by year end-1986, Costa Rica's creditor balances with other counties amounted to over US$350 million. A large part of this imbalance in trade resulted from Nicaragua's lack of payments for its net debtor balances. Nicaragua stepped up its imports from other CACM member countries in 1980-81, following destruction of some of its productive capacity after the 1979 revolution. However, since the country ran into balance of payments problems, it has accumulated large arrears with the rest of the CACH member countries, and could not sustain the same level of demand.