Mexico Agriculture Policy Review

An Expert's View about Food , Beverages and Tobacco in Mexico

Last updated: 26 Mar 2010

One in a series of policy notes on work of the OECD of interest to Canada. As a NAFTA partner and Canada's third largest export market for agri-food products, developments in Mexico are of direct interest to Canada. Rural poverty, low productivity, poor infrastructure and unclear property rights for both land and water still inhibit the efforts of Mexico's government to improve competitiveness of its agricultural sector.

Mexico Agriculture Policy Review One in a series of policy notes on work of the OECD of interest to Canada Context and Overview Box 1: Macro shocks affected growth Mexico?s pre-reform policies inhibited its integration into the multilateral trading system. The economy suffered two major crises, prompting domestic reform. In 1982, due to a huge fiscal deficit, Mexico was unable to service its foreign liabilities. The ensuing debt crisis pushed Mexico?s economy into a recession. Mexico?s government responded by tightening fiscal policy and implementing a more disciplined monetary policy to stabilize the exchange rate. Trade policy was liberalized as Mexico joined the General Agreement on Tariffs and Trade (GATT) in 1986. In addition, product markets became freer with the deregulation of transportation and communication and the abandonment of price controls. The Mexican government asked the OECD to review its agri-food polic The Mexican banking sector was hit by another ies to better inform crisis in 1995, requiring massive intervention, their policy framework in 2005. This policy including bank recapitalizations, take-over of some review summarizes the OECD?s findings. banks and debtor support programs. Mexico?s banking sector is on more solid footing today. Serious economic shocks in the 1980s and However, growth in domestic credit has been slow 1990s led Mexico to a more market-oriented to recover and many small producers still lack and outward macro policy framework (Box 1). access to credit services. The 1995 crisis also The North American Free Trade Agreement retarded economic growth and increased the (NAFTA) was an important milestone in incidence of poverty because of a loss of Mexico's turn away from a centrally directed, purchasing power. inward-looking economic system, towards a market-oriented economy. Focused monetary policy and fiscal discipline, together with further market liberalization, helped As in other OECD countries, the relative the economy rebound, while limiting inflation. The importance of agriculture to the Mexican creation of NAFTA and WTO membership economy has declined, such that it now combined with Mexico?s reforms to promote further openness and integration. This boosted both accounts for about 5% of Gross Domestic imports and exports and concurrently attracted Product and 15% of the workforce. Although foreign direct investment, creating new jobs. While much of the north of Mexico is arid or semi- living standards have improved, disparity and arid, the semi-tropical climate gives the poverty remain a challenge, especially in rural country a natural advantage in the NAFTA areas; most people living below the poverty line market for many commodities. Mexico?s live in rural areas and are employed in agriculture. agricultural sector however, is characterized Remittances from migrant workers in the U.S. and, by great disparities in farm types from highly increasingly, Canada continue to be an important commercialized to subs source of income for rural families. istence farmers and critical issues relating to the management of land and water resources. Mexico 2 Mexico has also undertaken significant More Decoupled Policy agricultural policy reform. In the early 1990s, main Mexico?s agricultural policies were a In the early 1990s, Mexico?s main agricultural combination of price support and general policies were a combination of price support consumption subsidies. Trade barriers and and general consumption subsidies. Trade direct market intervention prevailed. Since the barriers and direct market intervention mid-1990s, the Mexican government has prevailed. The Compa?ia Nacional de shifted away from commodity support to more Subsistencias Populares (CONASUPO, decoupled forms of support, while also National Company of Popular Subsistence) encouraging market liberalization. It has also was the main policy institution. It supported deregulated input markets and partially producers through price floors on staples like reformed land tenure. maize and beans. It also subsidized urban consumers. Since then, the Mexican Overall support to agricultural producers, government has shifted away from expressed in terms of Producer Support commodity support to more decoupled forms Estimate (PSE) percentage, has increased of support, while also encouraging market since the mid 1990s. It is high relative to liberalization. It introduced PROCAMPO, other emerging economies like Brazil, China deregulated input markets and reformed land and South Africa, but remains modest tenure. compared with an OECD average (Figure 1). Producers of sugar, maize and milk receive In 1993, Mexico introduced PROCAMPO, the the highest level of support. Program of Direct Payments to the Countryside, to help agricultural producers cope with lower trade protection and with Figure 1: Producers Support Estimates relative to gross farm removal of direct price support. By linking the receipts (% PSE) including non-member countries payments to historical use of land, the OECD (2003-2005) OECD (2003-2005) OECD (2003-2005) program was designed to aid producers in Mexico (2003-2005) Mexico (2003-2005) Mex switching to more profitable crops in the ico (2003-2005) Brazil (2003-2005) context of a more competitive economy. At Brazil (2003-2005) Brazil (2003-2005) the same time, by paying all land owners who China (2003-2005) China (2003-2005) China (2003-2005) grew one of the crops covered, the program Russia (2003-2005) Russia (2003-2005) Russia (2003-2005) benefits were also extended to small-scale, South Africa (2003-2005) South Africa (2003-2005) subsistence producers. South Africa (2003-2005) 0 5 10 15 20 25 30 35 0 5 10 15 20 25 30 35 0 5 10 15 20 25 30 35 Percent Percent Percent Figure 2: Estimated Transfer Efficiency of Mexican Agricultural Policy, 1990-2004 Source: OECD, PSE database, 1986-2005. 90 90 OECD Monitoring and Evaluation: Non-OECD Countries, 2007. 90 78 80 78 80 78 80 70 70 70 While improvements have been noteworthy, 60 60 60 significant challenges remain. Market price 50 50 50 support and input subsid 40ies ? the most 40 31 40 31 30 31 distorting types of support identified by OECD 30 30 20 ? remain the leading forms of support to 20 20 10 Mexican p 10roducers. Under-developed 10 0 0 transportation and telecommunications 0 1990 2004 1990 2004 1990 2004 infrastructure, low education levels, and problems in resource governance continue to Source: OECD. act as a drag on Mexico?s efforts to reduce within-country disparity and to close the gap Improvements in policy design are also vis-à-vis high income countries. How Mexico reflected in improvements in transfer deals with these challenges will have efficiency. Defined as the ratio of the change implications for the agri-food sector, the in producer welfare to the change in policy environment, and the rural-urban divide. expenditure, transfer efficiency is an important measure of agricultural policy efficacy. The effectiveness of Mexican agricultural policies at transferring income to Mexico Percent Percent Percent 3 agricultural producers has more than doubled associated ecosystems and leading to 1 over the last 15 years (Figure 2). While growing soil salinity. PROCAMPO was initially intended to be in place for 15-year transition period following The Mexican government has taken the establishment of NAFTA, Mexico recently important steps towards proper pricing of announced plans to continue the program access to water. In 2003, the government until 2012. ended farmers? exemption from water abstraction charges. In 2004, it amended the National Water Law to involve stakeholders Resource Governance Challenges more directly in the management of water quantity and quality. Lands and water resource governance issues are critical policy concerns in Mexico. A large Box 2: Ejido land reform part of the rural population is tied to small- scale farms; restrictions on land rental and Mexican agriculture is characterized by the two sales have retarded the expansion of both main forms of land ownership. One is private small-scale and commercial farms. The 1992 property where owners make productive decisions Ejido reforms were an attempt to address on an individual basis. The other form, the ejido some of the unintended adverse effects of system, is based on social property rights and these arrangements (see Box 2). accounts for more than a half of the Mexican territory redistributed during the ?Agrarian Reform? era (1917-1992). Water availability is a constraint on Mexico?s development, but policies have encouraged The Ejido Reform of 1992 was designed to the over-use of water resources by the strengthen private property rights by generating agriculture sector. The government has functional land markets and more efficiently provided agricultural water use exemptions allocating land. It allowed land rental and sales of from extraction fees. It has also provided land within community, but sales to outsiders still sizeable subsidies to energy needed for required permission of the assembly. Full irrigation. These subsidies have encouraged privatization requires a 2/3 majority vote among community members. overuse of both energy and irrigated water. When farmers do not bear the full costs for Less than 1% of community members have water, they have little incentive to ensure that chosen to privatize as a result of remaining irrigation systems function properly, leading restrictions, current tax treatment and the absence to over-use and low efficiency. of social safety nets. Still, by freeing up labor on ejidatarios with limited agricultural comparative Water allocation reflects the subsidies advantage, the reform may have contributed to an received, not necessarily the highest and best improvement in household welfare within use. OECD estimates that only one tenth of communities through the expansion of non- agricultural activities that now represent the the water used goes to high value activities greatest share of income in rural areas. Defining such as fruits, vegetables and oilseeds property rights more clearly and allowing land production, while half of total consumption is exchanges both within and outside ejido would used for production of low-value cereals and enable farmers in these communities to benefit still forages. further. The National Water Law (1992) aimed to regulate rights through concessions to specific quantities of water. However, due to a lack of monitoring and enforcement, extractions often exceed the amount permitted by water concessions. If concessions are not enforced, they do not limit water use, nor do they establish effective property rights. The number of aquifers known to be over-exploited has risen from 32 in 1975 to over 100 in 2005, endangering 1 These data relate only to the 202 aquifers measured and certified out of the existing 653, but are thought to accurately reflect national trends. Mexico 4 Agri-food Trade Grows Strongly ? Promote policies that create a level playing field with other NAFTA members; Both agricultural exports and imports have and dramatically increased since the inception of NAFTA, reaching 13.6 and 15.4 USD billion ? Enhance efforts to eliminate poverty. respectively in 2006 (Figure 3). The European Union?s share of Mexico?s total Rural poverty continues to be an ongoing imports is now much lower, while Canada?s challenge for Mexico as almost 60% of the share has doubled. The United States poor live in rural areas and household food remains Mexico?s main trading partner, security is tenuous. However, macro reforms providing more than two-thirds of Mexico?s and trade liberalization seem to have imports and purchasing the vast majority of improved matters since the mid-1990s, Mexico?s exports. Mexico now exports more promoting greater diversity within the rural fruits and vegetables, processed foods and economy and improving access to NAFTA higher value products. This, combined with markets. Data from a survey of rural an overall increase in exports, gives evidence households show that the most important of Mexico?s more market-oriented agri-food sources of rural household income now are sector. non-agricultural salaries and wages (41%), followed by farm production (18%) and Figure 3: Mexico?s Agricultural Trade, 1995-2006 migrant remittances (12%). Total income 18 generated by agricultural activities, including 18 18 16 agricultural salaries and wages, now 16 Imports 16 Imports Imports 14 Exports accounts for less than one-third of total rural 14 Exports 14 Exports 12 household income. 12 12 10 10 10 8 8 While Mexico continues to use agricultural 8 6 6 programs such as PROCAMPO to target rural 6 4 4 development and poverty, it realizes that 4 2 2 2 commodity programs are inefficient for 0 0 0 meeting poverty-focused objectives. Broader 199519961997199819992000200120022003200420052006 199519961997199819992000200120022003200420052006 199519961997199819992000200120022003200420052006 social programs such as Oportunidades, the Source: World Trade Atlas. Programa de Empleo Temporal (PET) and Piso Firme are more effective in reaching the poor (Figure 4). Policy Objectives Constant but Delivery Vehicles Improved Figure 4: Distribution of Selected Programs within the Rural Population Mexico?s policy objectives have remained 70 70 Poorest 40% 70 Poorest 40% relatively unchanged since the early 1990s, Poorest 40% Richest 40% 60 Richest 40% 60 Richest 40% 60 but targeting and efficacy have improved 50 50 greatly. Objectives still include: rais 50ing the 40 40 technical performance of both commercial 40 30 and non-commercial producers; improving 30 30 20 subsistence farmers? access to markets for 20 20 inputs and services; and reducing rural 10 10 10 poverty. 0 0 0 Oportunidades PET Piso Firme PROCAMPO Oportunidades PET Piso Firme PROCAMPO Oportunidades PET Piso Firme PROCAMPO In its 2001-06 agricultural policy framework, Mexico attempted to: Source: OECD. ? Raise agricultural production in an environmentally sustainable manner; ? Align productivity development programs with marketing opportunities domestically and abroad; Mexico US$ Billions US$ Billions US$ Billions Percent Percent Percent 5 Future Prospects coherent set of policies is put in place and The progress Mexico has made in the course implemented in a consistent, predictable way. of its reforms is evident. It provides a platform Mexico?s prospects at achieving sustainable from which to introduce further growth- growth depend on its ability to address these enhancing policy reforms. remaining challenges. Challenges remain howeve r ? notably rural poverty, low productivity, under-developed Mexico is Canada?s third largest export infrastructure, and unclear property rights for market for agricultural commodities. In 2006, both water and land. Improved incentives and total Canadian agri-food exports exceeded targeted efforts and investments in these $1.1 billion while agri-food imports exceeded areas could improve the structure and $800 million. The full implementation of consequently the competitiveness of the NAFTA on January 1, 2008 will put Canadian agricultural sector. exporters of maize and dry beans on a more equal footing with U.S. exporters (who Agricultural policies are insufficient to address previously received favourable treatment), as these challenges without coordinated these commodities cease to be subject to initiatives elsewhere. Coordination across tariffs and tariff rate quotas. government initiatives is essential to ensure a Sources OECD, Agricultural and Fisheries Policies in Mexico: Recent Achievements, Continuing the Reform Agenda. 2006. For a link to the report: OECD Agricultural and Fisheries Policies in Mexico: Recent Achievements, Continuing the Reform Agenda http://www.oecd.org/document/26/0,2340,en_2649_201185_37704090_1_1_1_1,00.html For more information contact: OECD: Carmen Cahill E-mail: carmen.cahill@oecd.org AAFC: Aleksandar Jotanovic Tel: 1.613.759.6691 E-mail: jotanovica@agr.gc.ca Cally Abraham Tel: 1.613.759.1915 E-mail: abrahac@agr.gc.ca Publication: 10565E ISBN: 978-0-662-47668-9 Catalogue: A38-4/13-1-2008E-PDF Project: 07-055-b Mexico
Posted: 25 March 2010, last updated 26 March 2010

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