Agricultural Policy Failures in Mexico

During the last decades, the institutional framework of the agricultural sector in Mexico was transformed. The reform of Article 27 altered the property regime of farmland, allowing the creation of private farms instead of the ejido (a form of governmental property over the land). Through NAFTA, the domestic agricultural market was opened to international markets, increasing the correlation between internal prices with external ones. The structure of subsidies changed from indirect subsidies (low prices in inputs and fixed prices to producers) to a scheme of direct support (monetary subsidies and liberalization of prices in inputs and agricultural products).

It was expected that these changes could reduce the rural poverty by the improvement of the agriculture activity; one of the most important economic activity in these regions. The policies designers expected that the agricultural yields of poor states (namely, Chiapas, Oaxaca and Guerrero) would eventually converge with those states more efficient (as Sinaloa and Sonora), and even more, reduce the gap with those yields obtained in United States; increasing the productivity and so, the income of the farmers. This expectation was based on three factors: Technological access, decreasing returns in agricultural yields and markets of farmland.

The new regime of property rights in the farmland promoted by the reform of article 27 had a completely different approach than the ejido. The farmland, before to the reform, had a form of private property with limitations; it was almost impossible to use the land in any mercantile operation, not only in buying-selling operations but as collateral in loan credits. After the reform, the farmers gained plenty private rights, allowed them to sell, buy, or use as collateral their properties. Through this measure it was expected that the agriculture could have access to credit, and more important, allowing the consolidation of small agricultural units (minifundios) to wide agricultural surfaces, letting the introduction of new technological advances to exhaust the opportunities of scale economies.

It was expected that trough NAFTA it could be possible to have access to technologic advances, and therefore, reduce the technological gap not only intra-regions, but with the yields achieved in agricultural sectors of United States and Canada. The green revolution experimented in Asian countries, was driven principally by genetically improved seeds, fertilizer, machinery and equipment, and other chemical products; improvement importantly the yields, it was a key factor in poverty reduction of these countries, principally in China and India. It was expected a green revolution in Mexico.

In agricultural activity is very clear the law of increasing relative costs, which said that with fixed and variable inputs (say surface and labor) beyond some point, each additional unit of variable input yields less and less additional output. In this way, the policies forecasted that regions with low agricultural yields were more plausible see gains in its yields than the rich ones. This assumption was supported by the other policies, principally technological advances and the change in the property rights.

However, despite of these policies, there is not evidence of convergence. An analysis based on compound indexes, found that while Sinaloa was 14% more productive than the national average in 1980, in 2006 was 97% more productive. On the other hand, while Chiapas was 19% more productive in 1980 than the national average, in 2006 was 5% less productive than the national; these results are also observed in Guerrero, Oaxaca and Michoacán. The presence of divergence rather than convergence finds that the expected outcome was not reached, at least in the improvement of production conditions.

Recognizing the failures of these policies is important to promote a debate to redesign the agricultural policies. However, that is complex; the political economy of the agricultural sector limited the possibility of a discussion with objectivity. The way of doing politics in Mexico has led to farmer organizations as extensions of political parties; therefore, organizations are more linked to political platforms than a structure of economic interests themselves. The delayed this discussion can mean loss a opportunity to fight effectively against the high rates of poverty in Mexico.

Salvador Omar Rodríguez Hernández

salva.rguez@gmail.com

Mexican Problems in Inflation Targeting Framework

Mexican Problems in Inflation Targeting Framework
Date: February 6th, 2008
Originally posted in Spanish on: http://economiaregional.weblog.net/

Since Bank of Mexico established its inflation target in 3% during 2004, the central bank has had difficulties to achieve it consistently. In fact, the last inflation report, released in January 2008, indicates two important facts in prices dynamics during 2007: First, the inflation measured through the INPC, doesn’t fluctuate around the goal; and second, the core inflation climbed to 4%, a clear signal that inflation will not converge to the objective in the near future.

I think that the most important implication of this circumstance is that the central bank has not room to use monetary policy during lethargic economic periods, given its own constraints, because the bank fixed its inflation target below of a plausible level of inflation. Under the current situation, even though it’s expected that economic growth tracked below its potential during 2008, it expected that Bank of Mexico doesn’t establish expansive monetary policies as FED did, not only because of low elasticity of active interest rates respect to benchmark interest rates, but because it might erode the credibility of the central bank and create additional inflationary pressures.

However, despite of fact that the inflation has had resistance to low toward more “conformable” level, I think that there is a set of institutional measures to improve the nominal and structural factors that could be affecting the convergence of inflation to its target. I identified four factors of resistance and measures to limit their impact on inflation, as follow:

Non-Competitive Market Structure. If companies in Mexico have no incentives to bargain wages considering the inflation target because its ability to transfer wage increases to prices, then is required to improve the institutional framework to foment competition and avoid abuse of market position, namely those forms that threaten the purpose of the Federal Competition Law, established in its second article: "[P]rotect the process of competition and free competition, through prevention and elimination of monopolies, monopolistic practices and other constraints to the efficient functioning of markets for goods and services". These circumstances can be avoided if the lawmakers give more prerogatives to the Federal Competition Commission in improve the competition framework.

Contract Revisions are not linking with inflation target. The contractual revisions not converge with the inflation target. According to the Ministry of Labour and Social Welfare (STyPS), the reviews of wage contracts in Mexico had increased 5.4%, 4.6%, 4.6%, 4.4% and 4.7% per year during the period of 2003-2007; circumstances which mean higher inflationary pressures on prices setting by private organizations, particular whose that move to the final prices their increases in wages. In this sense is required to promote a proper understanding of the economic phenomena of society, through educational measures to improve economic literacy, such as media campaigns, public discussion forums and speeches; reinforce by the measure in the law of competition.

Credibility problems in INPC calculation. Assuming that the central bank has a strong commitment to achieving the inflation target of 3%, and that economic agents believe it, and assuming that supply shocks are temporary and do not contaminate the expectations of economic agents, and no gains in productivity; we might expect that inflation rates fluctuate around the inflation target, but this situation that has not happened consistently. In this context, an important source of inflationary rigidity could be associated with the incompatibility between inflation published and inflation perceived: lack of credibility in the estimation of INPC. It will eventually improve once it calculates INEGI and it will be enhanced credibility by its autonomy and a wider dissemination of meaning and methodology employed to calculate the indicator.

Central Bank does not exhaust the possibilities of communication with the public. Periodic release of announcements in monetary policy and monetary policy periodic reports by the central bank, can be reinforced with the publication of minutes and more frequent use of public forums by members of Bank of Mexico, in topics related to monetary policy, particularly on issues as the clarification of the cost-benefit of maintaining high reserves or mechanic adjustment of prices caused by temporary disruptions in supply. This measure not only improve the ability to achieve stable inflation rates, but as mentioned Bernanke, "the communication of a central bank in a democratic society is an important requirement for maintaining the democratic legitimacy and independence which are essential for maintaining a sound implementation monetary policy".

A set of measures of this nature will help to observe a statistical property in the index of inflation in Mexico: temporal variations of INPC around the inflation target, and thus benefits for the economy as a further reduction in component premium Inflation in interest rates and greater flexibility in monetary policy, besides the positive effects of the measures, such as enhancing competition within the country.

However, from the perspective of economic science, another question arises in terms of monetary policy given the problems faced by the central bank of Mexico during the last years: Is really an inflation targeting framework a scheme to employ in any economic circumstances? Or this scheme imposes some rigidness to monetary policy in determinate circumstances, particularly with structural and economic constraints such as I cited here.

Salvador Rodríguez Omar Hernández
salva.rguez@gmail.com

The State of the Art in Economics: Avoiding Prescription

During the last decade, economists and international agencies gave prescriptions to promote economic growth in developing countries. However, the economic performance has not matched with expectations, and more important, these prescriptions have been blamed as an important cause of economic crisis and market turmoil in the last years. It has generated an avalanche of criticism over the guidelines established by international organizations, materialized in an explicit set of economic policy goals, famously know as Washington Consensus. It has eroded the perception of these organizations as beacon to guide trough effective economic policies toward prosperity.

In this way, it looks like the economists and organizations are avoiding give recipes to promote economic growth to evade this class of disillusions. Instead, they have chosen a conservative approach by offering less strict economic guidelines, leaving governments to apply their economic policies with less political and ideological friction with international agencies, think takers, and public opinion leaders. This trend can be reading in the report titled: “The Growth Report: “Strategies for Sustained Growth and Inclusive Development”, dubbed as the new Washington consensus (http://www.growthcommission.org/).

Derived of this situation, the economic effect will be diffused, more linked to the economic logic behind the policies in each country, than the lack or presence of prescriptions. If politicians try to design an economic framework considering local traits and preserving the general economic fundamentals as fiscal responsibility, central bank fighting against inflation, or a real commitment of government to promote internal competition; then we could recurrently see economic miracles as Taiwan and South Korea in the future. However, if politicians have no idea in how the economy works and more important, if they have not the will to listen to economic advice, then we could see the kind of results that we’ve been seeing around the world, principally in Venezuela y Zimbabwe.

We think that the situation could be offset by market and institutional factors, but even though they limit the ability of the governments to engage heterodox policies, such as happened in Argentina conflict with taxes on grain exportation, the lack of advising activity in middle of this kind of debate to give intellectual support in one side the controversial spectrum, threat or delay the perspectives of the economic growth in the future.

Now as never before, it is require a new kind of leadership (maybe a new Washington consensus) to mitigate the lack of direction in economic policy, in the presence of empirical facts contradicting apparently the rules previously taught toward the economic prosperity. For example, a “superficial” reading leads us to conclude: China is growing fast and strong, even though has not an explicit capitalism system; and monetary and fiscal policy in United States is not as orthodox as they say. A new kind of leadership could help disperse the doubts, a true challenger to international institutions and economic science.

Salvador O. Rodríguez Hernández

salva.rguez@gmail.com

July 21, 2008