The Agricultural Puzzle in México

The extreme poverty in Mexico is increasingly concentrating in rural regions. According to CONAPO, “[w]hile in 1992 the percentage of rural poor […] was about 2.7 times that seen in urban areas, [..]in 2000, the ratio increased to 3.4 times”. This unfortunate outcome is partially linked to the poor performance of agricultural activity, the main economic activity in rural regions. During 1993-2006, the sector grew 1.9%  annually while rest of the economy did it by 3.7 percent. And most important, those states where the rural poverty is concentrated, as Chiapas, Oaxaca and Guerrero, this sector grew modestly, 1.7 percent annually (in per capita terms the growth was negative given that these estate have high rates of natural population growth).

 

This fact supports agriculture policies as tool to reduce poverty. For example, a crucial thesis that shares any agriculture policy is, to reduce poverty in rural regions is condition improve technological capabilities of farms. That will elevate agricultural yields, and it will cause a major agriculture surplus. The agriculture surplus, as Adam Smith wrote centuries ago, allows support other economic sectors, given the gains from agricultural activity that leave resources to be employed in other economic activities. That fact justify why the Mexican government support directly purchase of tractors by farmers (Acquisition of Productive Assets).  

 

The objective to improve the technological endowment of farm in Mexico has been partially achieved. According to agricultural census of 2007 and 2001; the quantity of tractors has raised very importantly in the period. The importation of fertilizer, in real terms, grew outstandingly. And other agricultural inputs grew heavily too. But its consequences, the desired growth in productivity and agricultural income, has not been achieved.  The corn yield in Mexico has grown steadily, 44 percent throughout the period 1992-2007 (without Chiapas, Oaxaca and Guerrero). However, corn yields in Chiapas, Oaxaca and Guerrero, where poverty principally is and main agriculture product is corn , has not shown any secular increase in their yields, the yield increased only 10 percent in the same period.

 

But it is not only the hypothesis of technological support to boost farm productivity that has not worked; there are more. There are many assumptions behind the underdevelopment in agricultural sector has been broken that has not worked yet. Principally those reforms started during the modernization of our economy, early 1990 decade. For example:

 

·        The constitutional reform related to the article 27, didn’t result in how it was predicted. Land tenure, despite being private (after a long period being a semi-estate ownership tenure), is still highly dispersed, causing that scale economies required to produce competitively corn, for example, has not been reached.

 

·        Minimizing price volatility through price coverage to reduce income uncertainty, has not allowed increase investments to produce more efficiently. Further, the scheme  has create incentives to produce those products that enjoy this support, limiting the diversification induce “naturally” by market --according to prices movements and other economic and natural advantages.

 

·        Hydraulic infrastructure. One of the main hydraulic project, supported during the tenure of Carlos Salinas de Gortari, the Aguamilpa Damn, was built not only to hydroelectrically energy purpose but to improve agriculture activity. Its results are very limited, in Nayarit, where the dam was built, irrigable area in the state dropped from 61,790 hectares in 1992 to 56,411 hectares in 2007, given lack of market opportunities to demand for water to irrigation, lack of complementary irrigation infrastructure, and geographic limitations.

 

Thus, the fight against rural poverty shows a very uncomfortable outcome. Given the relation between rural poverty and agriculture economy activity, is important make a deep revision of agricultural policy in Mexico and its assumptions. Maybe the incentives created to keep some prices artificially high --namely, corn and sugar cane, have limited the productive diversification. Maybe it requires more market rules. Perhaps, as government implicitly thinks, we need time to see results, the learning curve is very long and for better results we must waiting for and expect the culmination of the natural urbanization process in Mexico to see better figures in poverty fight. Or maybe we must evaluate the return of those old programs as technical assistance, subsidies to inputs, and remake our agriculture development banks with enough fund to finance intensively this activity, or create regional policies according to every region problematic, to solve this problem.

 

It is not enough offer the classical receipts to have quick results. As every current economic puzzle, from current financial crisis to the classical equity premium puzzle, solve low levels in agricultural yields demand extraordinary discussions, proposals, a serious commitment, and policy actions by government and private involved, because that is crucial to solve the poverty.

 

 

 

 

The Revival of Monetary Union Debate

European monetary union avoided currency crisis in "small" European economies such as Greece, Holland or Belgium. However, those economies that have not take the Euro as its currency; Denmark, Iceland and Swiss, have had serious currency problems. This fact has fortified the position that regional monetary unions are better than sovereign monetary systems. However, believe that monetary union will be consolidated as a principle of monetary theory with little controversy, like the principle of central bank autonomy as a tool to avoid high inflation, is still to be decided. The tension and distension between governments and central banks has changed according to the characteristics of the economic cycle. In Europe over the past three years we heard two very different expressions about its central bank policies:

First. Tight monetary policy damages the economic performance in some nations because it is not consistent with its economic traits.

Second. The presence of a single currency limited economic damage in those small economies by the absence of currency crisis.

The question is: will regional monetary unions be the long-term solution to confront the current economic crisis or is only a temporary solution proposed that will be dissipated in other phases in the business cycle?

The Financial Innovations that didn't Happened

An important trident behind of the current financial crisis is composed by the following factors: financial innovation, soft lending practices in mortgage market, and lax monetary policy. In Mexico, the initiative to use mortgages as collateral was only a promise. The mortgage market has eased smoothly its lending criteria, as remanent of the economic crisis of 1994. The high inflation has prevented an expansionary monetary policy, as happened in the United States. Given this economic context, the current financial crisis, we will not see an economic depression in Mexico thanks mainly to lags in our financial development. However, this lag of financial improvement, How much has it cost/benefited to our potential GDP? 

The Mexican Sources of Isolation from the International Financial Turmoil

The Mexican economic performance is linked to US Economy given its economic integration. In fact, the last US economic slowdowns have affected the economic growth prospects of Mexico. This is the reason why we should be worry about it. However, according to the government the effect of this disorder this time will be limited; the treasury secretary Agustin Carstens said: “Mexico is not involved in the current crisis in the United States; in addition to that, given the fiscal and monetary policy in Mexico, our country does not depend on external financing”.

Recent data supports the government lecture. The probability of grater monetary astringency has fallen because less inflationary pressures principally by the downtrend of house rents, low prices in vegetables, and less pressures form international commodity prices. The aggregate demand has not weakened; the retail sales show stable levels. On the supply side, the coincident indexes of service and agricultural sectors have shown stable variations (IGAE). In financial sector; the mortgage, private, and consumer credit interest rates keep its historically low levels; and in the case of the principal organization that provide mortgage credits (INFONAVIT) keep its peace to provide half million mortgages credits in 2008 (the highest level). The follow graph, based upon the most current of data, shows a set of indicators to see the recent evolution in aggregate demand, credit supply, output and prices dynamics.

Macroeconomic Indicators in Mexico
(Annual percentage rate)
	2007		2008
	June	July	June	July
Real Wages Increases	0.8	0.3	-0.7	n.d.
Home Rents	2.9	2.9	2.9	2.8
Retail Sales	3.7	4.1	1.5	2.8
Industrial Activity	0.4	3.2	-0.4	-0.2
Services Activity	3.7	5.6	1.8	4.2
Agricultural Activity	9	7.2	1.1	9.7
Mortgage Rate 1/	14.9	14.7	14.1	14.2
Private Credit Rate 1/	7.5	7.5	7.9	8.3
With Data of August
	July	Aug	July	August
Non-oil exports	13.3	9.8	15.9	-2.7
Total private financing	32.07	34.4	21.6	18.7

1/ Interest rate

Sources: INEGI (www.inegi.gob.mx ), Bank of Mexico (www.banxico.org.mx ), Department of Labor and Social Welfare (http://www.stps.gob.mx/).

According with this information, we are no longer seeing the typical sensibility to US business cycle. The industrial activity will be the most affected; however this time the Mexican economy has automatic stabilizers such as fiscal discipline; monetary policy room; relatively low levels of inflation; savings, private and public debt in local currency; an adequate pension system; less prices pressures from international markets; healthy financial organizations; and a dynamic services sector.

At the end, the weak US economic activity and the squeezed of international credit will have an important effect over the Mexican economic outlook. However, Mexico is more suitable to deal with this short of financial crisis and avoid the recession. And a set of economic reforms would supported and minimize its impact and the probability of recession; the kind of reforms to give alternative sources of economic growth could reached through improving the competition legal framework, giving more flexibility to labor market, encouraging better banking practices and competition, giving financial access to uncovered sectors, promoting infrastructure investments, improving the implementation of monetary policy and using appropriately the public expenditures.

Is important take in consideration that the institutional economic reforms materialized in the Washington consensus, have provide economic flexibility no only to Mexico but many countries in the world (particularly developing countries). This time internal forces in these countries will be the main factor to avoid a world recession. More importantly, in these countries there leeway to compensate the weak economic conditions that developed countries will face in the following years. 

The Likelihood of Succeed in US Financial Rescue

The Mexican Financial Crisis in 1994 had more negative characteristics than the US Financial Crisis have now; therefore, the likelihood of succeed of an eventual US financial rescue is high (The Mexican recovery was a relatively successful experience).

Mexican crisis was not only a banking system crisis, it was also a exchange rate crisis, a fiscal crisis, private sector crisis and central bank confidence crisis. Mexico find its way to overcome the recession (as conventionally is known), trough out adjustments in the way how the economic agents get financial credit, creating a productive sector more focused in external demand, and changing the financial architecture to recovery the financial health. The process was painful principally because the inflation eased very slowly.

In 1994, the bank system suffered by exchange rate policy failures, affecting all the credit flow toward the economy. The total loan bank portfolio showed a downtrend for ten years after the crisis; from 42% in proportion of GDP in 1994 to 9.8% in 2003. This drove our economy to asymmetric and inequality growth; the prosperity reigned among corporation dedicated to export, and high levels of inflation, benefiting those who were hedging instruments against inflation and affected the purchasing power of the working population. However, the net effect was positive; GDP growth 5% in average in the period 1996-2003 and the levels of employment growth too.

The US economy outlook show differences. The exchange rate pass-trough toward core inflation is not important, the debt levels is not increased exponentially as happened in México (the reference interest rate in México skyrocketed from its lowest point in February 1994 in 9.4% to its peak in November 1995 in 53%); the corporation debt has been well handle and not liked to other curries and they have been succeeded in the incursion of international markets.

What we will see in US economy is changes in the credit behavior of its economic agents; enterprises will use more interfirm credit (as usual in Mexico) and the consumers will adjust the way how they finance their purchases; the financial sector will become more small; and an important source of growth will be exportations (as the last quarters). At the end US economy will recovery and it will show sustainable growth rates in line with an adequate growth in all its sectors; including high levels of employment.

As Tomato price; Corn “crazy” price exists

Tomato price shows more volatility than other commodities. In fact, central banks in the short run don’t affect its behavior as supply conditions do, and in México, it eventually threat the central bank’s inflation target (due its high weigh in the consumer prices index; the estimator of inflation); phenomenon named as supply price shocks, very usual in prices of vegetal products.

Even though tomatoes market doesn’t have a future market as other markets have, it shows the kind of volatility as grain markets with different timing and regularity given its characteristics such as yield variability, meteorological sensibility, logistics circumstances and size of the market. In the world, Tomato market is not an unique integrate market. Its perishability imposes market constraints; it’s not easy export Mexican tomatoes to Argentina or Europe because it only exists weeks after its production. Therefore in the world we see a set of markets with its own behavior. For instance, a single test to measure the long-run relationship between tomatoes prices in Mexico and Chile (co-integration) resulted that there are not relationship (for results of Johansen co integration test, feel free to ask me for the information).

The prices of Tomates in México have also a seasonal behavior. The harvesting period in Mexico is during the second half of the year, between August and December, so the output is concentrated mainly in the period February-August (the season of low prices). However it has a stochastic seasonal behavior, because the output is conditioned principally to the degree of goodness of the weather, previous price, and price behavior of productive substitutes.

The cyclical behavior showed by grain market is similar to tomato markets but more ample. It is because its ability to be stocked, low costs of transportation and negative crops that can be compensated by positive crops in many parts of the world. In fact, in the last decades we have observed complete cycles of prices; with a dynamic pattern similar to business cycle.

We are not well accustomed to high prices phases, as we are not accustomed to recession phases. High prices in commodities could stay for long time given that its fundamentals had changed (higher energy and labor prices –the agricultural activity intensive in both economic factors), and the prospects of eased demand has not changed yet (even with financial turbulence the prospects of food demand for developing countries is high). We can’t blame financial markets as principal factor behind high prices, there are fundamental reasons. For example: oil reserves located in regions with geopolitics tensions and extracted by government companies with non market behavior; and agricultural prices controls, affecting the prices as prime incentive in any economy.

Graph Annexes

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