Abstract
Mexico, like many other countries, provides its agricultural sector with substantial protection from international competition. Income distributional considerations and concerns about transitional problems once liberalization starts explain much of the persistence of such policies. This paper argues four points: (i) substantial efficiency gains can be expected from liberalization; (ii) the income distributional effects of protection are in fact regressive; (iii) well targeted adjustment programs that help rather than delay adjustment can be designed once a careful analysis of the precise distributional impact has been made; and (iv) a comprehensive, two-sided liberalization by Mexico and its main export market, the U.S., would significantly reduce any adjustment problems. The latter point is made in the context of an assessment of the potential impact of the Free Trade Agreement (FTA) on agriculture.
Generated Summary
This journal article examines the impacts of agricultural liberalization within Mexico, particularly in the context of the North-American Free Trade Agreement (NAFTA). The study employs a model focusing on income distribution, employment effects, and migration patterns. The methodology includes analyzing the effects of removing protection on maize, a key crop, and the potential consequences of broader agricultural liberalization with the U.S. The research investigates the impacts on rural and urban labor markets, land values, and government adjustment policies. The core of the analysis involves a general equilibrium model that incorporates labor markets, migration, and the effects of various policy interventions such as subsidies and employment programs. The scope of the study focuses on assessing welfare and distributional implications, with a specific emphasis on the potential for reform and the design of effective adjustment programs. The study is conducted in the context of the Mexican agricultural sector.
Key Findings & Statistics
- The world price of maize was $132.50, while the domestic producer price was $226.60.
- Tortilla production costs with maize protection were $0.35, and with free trade in maize were $0.20.
- Average tortilla prices in urban areas were $0.31, and in rural areas were $0.26.
- The total subsidy to maize producers was $1.28.
- The fiscal cost of maize and tortilla subsidies was $0.32, and the fiscal cost of the ‘tortivale’ program was $0.33.
- 25% of total irrigated land was allocated to maize, 48% of total rain-fed land, and 42% of total arable land.
- 29% of rural employment was in maize production.
- The perfect compensation policy used in the model revealed substantial welfare gains.
- Without migration, the welfare gains from maize liberalization are almost $0.7 billion per year.
- With migration, the annual welfare gain increases to almost $1.0 billion.
- Without migration, the gains are U.S.$0.7 billion per year, or about 0.23% of 1990 GDP.
- With migration, the annual welfare gain increases to almost U.S.$1.0 billion.
- Without migration, the gains are almost U.S.$0.7 billion per year, or about 0.23% of 1990 GDP.
- Predicted migration falls from 692,000 workers down to about 492,000.
- Under the FTA scenario, deliveries of tortillas per household would increase by 69%, from 1 to 1.69 kilos of tortillas per day.
Other Important Findings
- Substantial efficiency gains can be expected from agricultural liberalization.
- The income distributional effects of protection are regressive.
- Well-targeted adjustment programs can be designed to mitigate negative impacts.
- A comprehensive, two-sided liberalization by Mexico and the U.S. would significantly reduce adjustment problems.
- The analysis highlights the importance of rural labor market impacts in adjustment programs.
- The study suggests that agricultural protection supports wage rates and rental rates on rain-fed land.
- The results indicate that removing protection on maize leads to softening the trade impact.
- Rural employment programs and an extension of existing infra-marginal food subsidies can completely eliminate any negative effects on rural and urban workers.
- The impact of urban income subsidies on migration is desirable given the over-employment in Mexican agriculture.
- The study highlights the importance of differences in the quality of land.
- The study established the importance of differences in the quality of land.
Limitations Noted in the Document
- The model does not explicitly model tortilla production.
- The study does not fully incorporate the gains flowing from any transfer program or tax reduction that the government could undertake with its gains.
- The study does not explicitly account for the real resource costs of migrating, which may affect the accuracy of migration patterns.
- The model assumes that most intermediate inputs are used in fixed proportions.
- The costs and time lags involved in developing irrigation infrastructure have not been taken into account.
- The study is conducted in the context of the Mexican agricultural sector, and the results may not be generalizable to other regions.
Conclusion
The study’s findings suggest that agricultural liberalization in Mexico, particularly within the framework of NAFTA, offers substantial benefits in terms of efficiency gains. However, the study also highlights the uneven distribution of these gains, with potential negative impacts on rural workers and owners of rain-fed land. The analysis emphasizes the need for well-designed adjustment programs, such as rural employment initiatives and expanded food subsidies, to protect vulnerable groups. The impact of trade liberalization in maize can be considerably softened, and the distributional effects can be better managed when simultaneous access to the U.S. fruit and vegetables markets is gained as part of a comprehensive FTA. The study concludes that while agricultural liberalization may pose challenges, the potential for reform and the design of effective adjustment programs are critical. The study emphasizes the importance of understanding the impact of urban income subsidies on migration and highlights the potential for efficiency gains within Mexican agriculture. It shows the importance of quality land and the direction that policies should take to help owners of rain-fed land by constructing the infrastructure needed for irrigation, drainage and so on. The authors state, “Thus agricultural protection, aside from its role of supporting the rural wage, is a mechanism to increase the returns to rain-fed land, and hence to support incomes of subsistence farmers and owners of rain-fed land.”