Voluntary Report - public distribution

**Date:** 6/7/2004

**GAIN Report Number:** MX4070

MX0000

**Mexico**

**Agricultural Situation**

**Summary of Mexican Government Study on the Effects of NAFTA on Mexican
Agriculture**

**2004**

**Approved by:**

![](media/image1.wmf)William L. Brant

U.S. Embassy Mexico City

**Prepared by:**

Condesa Consulting Group

Mexico City

**Report Highlights:**

This report is a summary translation of the Government of Mexico (GOM)
study on the effects of NAFTA on Mexican agriculture \-- a study which
was mandated in 2003\'s National Agreement on Agriculture. The report
states that there have been mixed results in Mexico's agricultural
sector over the past ten years, but that these cannot be attributed
solely to NAFTA given the complexity of factors involved and certain
policies and conditions which predate NAFTA. The study concludes by
recommending that the GOM adopt a long-term rural policy aimed at
increasing the agriculture sector's share of GDP and ensuring greater
efficiency, productivity and international competitiveness.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Mexico \[MX1\]

\[MX\]

**Introduction:** This report summarizes and translates into English a
lengthier Spanish study done by the Government of Mexico (GOM) on the
effects of NAFTA on Mexican agriculture. This study had been mandated by
Mexico's National Agreement on Agriculture -- an agreement signed in
April 2003 by the GOM and various Mexican producer and campesino
organizations after a months-long spirited public debate on the state of
Mexican agriculture. This study was completed on April 4, 2004. Its
Spanish title is "Evaluación Integral de los Impactos e Instrumentación
del Capítulo Agropecuario del TLCAN" or "Full Evaluation of the Impacts
and Implementation of the Agriculture Chapter of the North American Free
Trade Agreement." The original Spanish study was done by José Romero y
Alicia Puyana, with the collaboration of R. Aceves, J. A. Ávila, F.
Cortés, and C. Heredia. The summary and English translation contained
herein were done by Condesa Consulting Group, SA de CV
([www.ccgamericas.com](http://www.ccgamericas.com/)).

\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>

## Executive Summary

This paper explores the North American Free Trade Agreement's (NAFTA)
effects on the Mexican agriculture sector. The authors emphasize the
difficulty in attributing trends solely to NAFTA, given the complexity
of factors that influence the sector and the continuing role of
conditions and policies that pre-date the Agreement.

The report describes the key characteristics of Mexico's agriculture
sector. One striking feature is the diversity of production models,
ranging from small-scale subsistence farms to large, sophisticated
operations. The bulk of producers fall into the subsistence or
semi-commercialized categories. The authors argue that small operations
have the potential to be as productive as large-scale farms. A chronic
shortage of credit and investment in rural Mexico, however, has
stagnated the productive capacity of smaller operations.

Mixed results have been achieved in the Mexican agriculture sector over
the past decade. Despite some setbacks and continued deficiencies,
several important gains have been made. Fruit and legume exports, for
example, have grown significantly thanks to greater access to the North
American market. Further, the degree of concentration of agricultural
exports has decreased. The country's level of "food dependence", as well
as total food consumption, has increased. Lastly, productivity gains
have also been achieved, although Mexico's productivity per worker is
still far behind that of competing countries.

The sector has also experienced some less positive trends. On the whole,
most rural workers and small producers are poorer at present than they
were at the beginning of the 1990s. Increased poverty in the sector is
the result of several factors. Sector exports and imports are highly
sensitive to exchange rate fluctuations. A steady appreciation of the
peso over the past decade has hurt exporting producers and encouraged
imports. Employment in the sector has fallen, as expected under trade
aperture. The rest of the economy, however, has been unable to fully
absorb newly unemployed agricultural workers. Those who are still
employed in the sector have suffered a decline in salary due mainly to
falling prices for agricultural goods.

The Mexican government, the authors argue, has not invested sufficiently
in programs to compensate subsectors harmed by open trade nor in
programs to stimulate economic activity in rural areas. Although
government support has increased, it remains insufficient or flawed,
and, importantly, inferior to that of competing countries. Foreign
governments that invest heavily in subsidies and technological advances
distort international markets by producing an excess supply of
agricultural goods and, consequently, artificially depress prices.

The authors recommend a long-term strategy aimed at streamlining and
enhancing government programs in order to boost rural employment,
agricultural productivity, and agriculture's share of the country's GDP.

## Report Summary

The report, "Full Evaluation of the Impacts and Implementation of the
Agriculture Chapter of NAFTA", provides an overview of the Mexican
agriculture sector and an analysis of its evolution since NAFTA was
implemented.

## 

## Key Characteristics of Mexico's Agriculture Sector

# Dual production model

Mexico's agriculture sector is characterized by a marked duality. The
vast majority of production is attributable to a large number of highly
fragmented producers engaged in semi-commercialized or subsistence
farming on small plots of land (principally in the south). The remainder
corresponds to a small number of large, modern operations active in
trade (mainly in the center-north). Mexico's Gini coefficient is 62
percent.

# Low productivity

Agriculture in Mexico is the least productive sector in the country's
economy. Historically, productivity in the sector has been a mere
one-sixth that of the U.S. Such low productivity is largely due to the
country's labor-intensive production at the subsistence and
semi-commercialized levels. These producers enjoy very little access to
capital and mechanization.

# Poor financing

Mexico's rural economy suffers from a credit shortage and a
disproportionately low share of the total credit supply. As such, small
and medium producers lack the resources to switch to more profitable
activities and adopt new technologies that could boost productivity. The
root of the problem relates to government-subsidized interest rates.
Government subsidization of interest rates generates excess demand for
credit, which in turn encourages financial institutions to ration
available credit by raising transaction costs (such as significant
collateral requirements and paperwork). The result is that small and
medium producers opt for informal sources of credit, which charge
elevated interest rates in exchange for reduced transaction costs.

# Rural poverty

Rural poverty in Mexico stems from a lack of productive resources,
technology, and infrastructure. For decades rural Mexico has received
relatively little investment. In 2001, the agriculture sector accounted
for 5.4 percent of GDP, but received less than one percent of total
investment in Mexico. Adverse natural conditions (the 1995-99 period,
for example, was the second driest in the last 55 years), civil
conflicts, corruption, and poorly functioning public institutions add to
the problem. Lastly, misguided government policies, including taxes on
exports, subsidized imports, and an overvalued currency, worsen rural
poverty by keeping internal prices for agricultural goods low.

# Long-term contraction of Mexican agriculture sector

Mexico suffers from the "Dutch Disease", or "de-agriculturalization,"
the premature shrinking of the agriculture sector relative to the total
economy, owing to faster rising prices for non-saleable agricultural
goods than for saleable goods. The agriculture sector in Mexico
represents a relatively low 4.9 percent of GDP---a proportion to which
developed countries' respective sectors did not descend until their per
capita GDP had reached at least four times that of Mexico. The Dutch
Disease emerged long before NAFTA was implemented, and arose mainly due
to prolonged periods of currency appreciation and an import-substitution
model which favored the manufacturing industry.

## 

## NAFTA Background

Broadly, it was expected that NAFTA would benefit fruit and legume
producers in Mexico, harm net grain and oilseed sellers, and improve the
overall well being of net food consumers.

With regard to agriculture, Mexico's key objectives under NAFTA were to:

-   guarantee free access for Mexican producers to the Canadian and U.S.
    markets

-   negotiate a sufficiently long transitional period to allow the
    sector to adjust

-   provide producers with long-term certainty and access to
    internationally competitive inputs

-   transition toward a direct support system for certain producers
    (rather than broad trade protectionism)

## 

## Post-NAFTA Analysis of the Agriculture Sector

#### Multiple influences

Numerous influences on the agricultural sector over the past decade make
it difficult to isolate the impact of NAFTA. These factors include:

-   The 1994-95 economic crisis in Mexico

-   Depreciation and subsequent appreciation of the Mexican peso

-   Insufficient investment in infrastructure

-   Subsidization policies of Mexico's trade partners

-   Agriculture products' international price volatility and overall
    downward trend

-   Highly fragmented land use

-   Underdeveloped and inefficient internal market

-   Decreasing access to credit

-   Flawed Mexican federal government support programs

-   Natural phenomena

In addition, the Mexican agriculture sector had been subject to several
reforms aimed at transitioning from the import substitution model to an
open market for roughly a decade prior to NAFTA. The overarching goal of
these reforms was to reduce poverty by lowering food prices and
stimulating exports. However, reform efforts have not always been
properly carried out, as some subsectors retained significant levels of
protection through non-tariff barriers such as subsidies. In short,
reforms that pre-date NAFTA, and which have not been always been fully
or properly applied, make it difficult to identify developments in the
sector owing exclusively to NAFTA.

# Trends in trade

Given the range of production models---from highly fragmented
subsistence farms to large, modern operations---trade aperture under
NAFTA has affected Mexico's producers to differing degrees.

In retrospect, it is evident that fruit and legume producers have indeed
benefited since NAFTA was implemented, while grain and oilseed
producers---particularly semi-commercialized and subsistence
producers---have been negatively impacted. This is in-line with
pre-NAFTA expectations, as outlined above.

Since NAFTA, the Mexican agriculture sector has achieved improved
international competitiveness and a more efficient distribution of its
factors of production. The degree of concentration in exported products
has decreased. Agricultural exports have grown significantly,
particularly in the fruit and legume category. This has helped raise
Mexico's share of total agriculture imports in the United States. In
2001, Mexico represented 14 percent of agricultural imports in the U.S.,
compared to 12 percent in 1993. In contrast, Mexico's imports have
become increasingly concentrated in grains, oilseeds, and beef.

Over the past decade, internal demand has grown faster than domestic
production. The difference has been made up with imports. The
agriculture sector's high sensitivity to exchange rates explains this
trade deficit: a strong peso has lowered the international
competitiveness of Mexican agriculture products and encouraged imports.
Following the devaluation of the peso in 1995, several factors have
contributed to a steadily appreciating peso, including strong levels of
foreign investment, high oil prices, and substantial remittances from
Mexican immigrants in the U.S. The trade deficit may also be traced, to
a lesser extent, to population growth in Mexico and higher per capita
animal protein consumption.

#### Trends in productivity

Since 1993, the agriculture sector's productivity---measured in output
per worker---has grown at twice the rate of that of the overall economy.
Nonetheless, productivity gains achieved in competing countries have
outstripped those in Mexico, and the country continues to lag
significantly by this measure. For example, in 1993, Chile and Mexico
produced the same value per capita. By 2000, however, Chile's
productivity had doubled. The authors express concern regarding the
productivity gap between Mexico and its trade partners, and assert that
raising the sector's productivity is of primary importance to the entire
economy.

**Trends in employment and salary levels**

A considerably high proportion of the workforce in the Mexican economy
(given the sector's relatively low share of GDP) is employed in
agriculture. In the 1997-99 period, the agriculture sector's share of
GDP in Mexico was 3.3 times that of the U.S., while employment in the
sector compared to the total workforce was 9.1 times higher. This
differential would suggest that, upon opening the sector to
international competition, and in order to equate Mexico's productivity
with that of the U.S., employment in the sector would have to be reduced
significantly.

Over the past decade, employment in the agricultural sector has indeed
fallen, from about 25 percent of the workforce in the early 1990s to 19
percent in 2001, a loss of 700,000 jobs. The low skill level of these
workers makes them difficult to employ in other sectors. However, it
should be stressed that many factors---both internal and
external---impact the sector and changes in employment cannot be
attributed to a single influence (such as NAFTA).

Lower prices for agricultural goods and the relatively small area of
land devoted to fruit and legume production (which have experienced
strong export growth since NAFTA) have reduced the demand for labor per
unit of production---resulting in lower salaries. The decline in wages
began long before NAFTA, however. Salaries in the sector, in real terms,
have decreased steadily over the past two decades, reaching a mere 40
percent of their 1980 levels in 2001. The rest of the economy has lacked
the dynamism to absorb excess workers, while compensatory government
efforts aimed at stimulating employment in rural areas and improving
infrastructure have been insufficient.

The loss of employment in rural areas coincides with increased
emigration to the U.S. and urban centers in Mexico. Again, however,
experts do not see a clear link between NAFTA and increased levels of
emigration. Indeed, emigration to the U.S. began to accelerate before
NAFTA was implemented.

#### Food dependence

Mexico's level of "food dependence" (as per the FAO measure of food
product imports as a percentage of total country exports) has decreased
since NAFTA was implemented. This trend is largely due to the strong
performance of Mexican manufactured good exports over the last decade.
Moreover, the total level of food consumption in the country has
increased over the past decade, after contracting in the 1980-90 period.

### 

### Challenges to Government 

### 

# Government support in Mexico

Studies realized prior to NAFTA's implementation suggested that targeted
public spending would be necessary to compensate certain subsectors and
promote market competitiveness. Compensatory measures aimed at less
fortunate groups in the sector were, in effect, bolstered (total
government support for farmers in Mexico has roughly quadrupled since
the late 1980s). However, the authors explain that support programs were
underfunded relative to competing countries' levels of government
assistance. Mexico's support of farmers is still relatively low at less
than one-third that of the U.S.---due in large part to the sheer number
of agricultural producers in Mexico. The effectiveness of Mexican
government programs, therefore, has been lower than originally hoped.

One such project is PROCAMPO, a direct compensatory payment program to
producers of certain agriculture goods. The authors report that only a
portion of needy producers received aid from PROCAMPO, as the program
tended to favor landowners with larger properties.

# Role of foreign governments

World prices for agricultural products have declined steadily since 1997
due largely to government subsidies in developed countries (principally
the U.S. and E.U.), yield-boosting technological advances, and the
emergence of new exporters such as Argentina and Brazil.

Government subsidies, in particular, distort international markets by:

-   isolating home producers from market signals (prices),

-   inducing excessive production and depressed prices,

-   creating uncertainty due to the discretionary character of agencies,
    such as the USDA.

However, prices for agricultural goods in Mexico had been falling since
the early 1980s. Hence, the authors point out that it is questionable
whether depressed prices in Mexico over the last decade are solely a
result of NAFTA, or whether they reflect a longer-term trend that began
many years before the Agreement's implementation.

## Study's Recommendations

Mexico requires a rural policy with a long-term horizon, aimed at
increasing agriculture's share of GDP while ensuring greater efficiency,
productivity, and international competitiveness. Rural policy should be
more comprehensive in scope and make greater provisions for the
historically neglected small producer. The potential for high levels of
productivity---contrary to common perception---also exists on small
plots of land.

Specifically, Mexico should work toward the following:

-   Increasing the level of investment in the sector

-   Providing individualized support to targeted producers based on
    specific needs

-   Enhancing and better coordinating government support programs in
    order to avoid overlapping benefits

-   Developing a long-term support program with stable financing that
    provides certainty and stability to all major economic agents

-   Fully applying those defense mechanisms allowed for agriculture
    under NAFTA

\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>\>

**For More Information:**

*Fax:* 011-52-55-5080-2130

*Email:* AgMexico@usda.gov

**Internet Connections:**

*FAS Mexico Web Site:* We are available at http://www.fas-la.org/mexico
or visit FAS headquarters' home page at http://www.fas.usda.gov for a
complete selection of FAS\' worldwide agricultural reporting.