Mexican Agriculture: Distribution and Efficiency Effects of Eliminating Price Distortions

1. Mexican Agriculture: Distribution and Efficiency Effects of Eliminating Price Distortions By: Alan Meyer

2. Two Models to Estimate Impact of Trade Liberalization • The Economy-Wide Model determines the optimal capital stock and employment in agriculture for each scenario • The Agricultural Model determines the optimal allocation of those factors among agricultural activities for the appropriate sets of prices.

3. The Economy - Wide Model • Evaluates the impact of NAFTA on the Mexican Economy • Requires the econometric estimation of 24 separate cost functions • Dynamics of the response of the Mexican economy to changes in relative prices is based on intertemporal optimisation by firms

4. Assumptions of Model • Assumes full employment but imposes restrictions on labor mobility • This assumption is due to the limited education opportunities in the sector, and by the limited absorption capacity of the rest of the economy

5. The Agricultural Model • Used to determine the optimal production mix that maximizes GDP for a given amount of resources • Information for the model came from the study: ‘Analysis of Productivity and Marketability for Seven Basic Crops’ (Represents about 80% of total production)

6. Assumptions • Constant returns to scale and perfect competition • Domestic price=world price+price distortion

7. Results • Trade liberalization results in a 2.4% increase in the capital stock devoted to agriculture

8. Returns to Production factors for the steady state. • Wage Rate decreased • Rental Prices of Irrigated land with and without credit, and Dry land with and without credit, substantially decreased with trade liberalization • Rental Price of Capital increased with trade liberalization

9. Value Added to Agricultural sub-sectors with trade liberalization • The value added in Corn, Sorghum, Wheat, Dry Beans, and Rice decreased • The value added in Soybeans, BSC, SUG,CAT, FOR, and OTH increased

10. Overall welfare effects of liberalization • Productions gains consisted of a 4.5% increase in agricultural GDP measured at world prices • The consumption gains consisted of a .23% increase after the domestic expenditure is returned to the Mexican economy from the removal of the tariff revenue

11. Conclusions • Overall welfare can be increased but these benefits are not distributed uniformly among factors of production • Rental prices of irrigated land and farmers with credit decreased the most suggesting that the wealthy are the main beneficiaries

12. Liberalization Effects on Labor • Gains in efficiency and increases output • Harmful to rural agricultural workers who are already in poverty due to low wages

13. Solution to Labor Problem • Employing programs of public works in rural area, providing desperately needed infrastructure, such as irrigation, roads, schools, hospitals, and housing. • Such expenditure would come with extensive costs to be successful

14. Labor in Agriculture • The supply of labor is too high regardless of trade liberalization and its problems needs to be solved through training and increased labor mobility.

15. Thank You Any Questions?