The Heritage Foundation

Backgrounder #753 on Latin America

February 12, 1990

February 12, 1990 | Backgrounder on Latin America

From the U.S. to Mexico: Friendly Advice on Ending the Farm Crisis

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753 February 12,1990 FROM THE US. TONIExI%or FRIENDLY ADVICEON ENDI NGTHE FARMCRISIS INTRODUCTION I Mexico has had the misfortune of having a geography and politics in hospitable to agriculture.This huge country of 85 million people has a hot and dry climate, poor soil, and little water for irrigating crops. Water flowing from the Mississippi River alone is greater than that of all Mexico's rivers combined. More than three-fourths of Mexico's territory is unsuitable for agriculture because of the arid climate and poor soil.

Adding to Mexico's natural problems are man-made ones. In no Western Hemisphere country does government policy do more harm to agriculture than in Mexico. State subsidies for food producers, distributors, and con sumers waste billions of dollars a year and undermine farm productivity by rewarding ineffi c iency. Agricultural production has failed to keep pace with This is the fourteenth in a series of Heritage studies on Mexico. It was preceded by Bac&gmtnder No 723 Improving US~Mexican-Economiic Relations August 4,1989 Bac&gmunder No; 700 A 15:Point Progr a m to Stem the Flow of Drugs from Mexico (April 12,1989 Backpunder No. 694 U.S.-Mexican Economic Ties March 6,1989 Bat-der No. 688 The Security Component of U.S.-Mexico Relations January 26,1989 Backpunder No. 679 A Review of 150 Years of US.-Mexican Relat i ons October 31,1988 Bac&punder No. 638 Evolution of Mexican Foreign Policy March 11,1988 Backgrounder No. 611 Privatization in Mexiax Robust Rhetoric, Anemic Reality October 22,1987 Backgrounder No. 595, "Keys to Understanding Mexico: The PAN'S Growth as a Real Opposition July 29,1987 Bac&gmunder No. 588 Deja Vu of Policy Failure: The New S14BiUon Mexican Debt Bailout June 25,1987 Bac&pun& No. 583 For Mexico's Ailing Economy, Time Rum Short June 4,1987 Backpunder No. Ssl Mexiw's Many Faces May 19,1987 Bac- d er No. SlS Mexico: The Key Players April 4,1987); and Bac&punder No. 573 Keys to Undemtauding Mwdco: Challenges to the Ruling PRI April 7,1987 Future papers will examine other aspects of Mexican policy and development population growth. Mexicos population grew 2.8 percent in 1988, while total crop production declined 4 percent.To fill the gap between consumer demand and crop shortages, Mexico spent a record $3.5 billion on food im ports last year.

It was not always this way. From 1940 to 1965, Mexicos agri culture was the envy of theThird World, increasing crop output each year by 6.3 percent. But since 1965 agricultural production has dropped steadily, primarily because of the inefficiencies caused by increased state intervention in the agrarian economy.

H uge Debts. Mexicos depressed agricultural economy contributes enor mously to the governments huge internal and external debts. State transfer payments to government-operated farm agencies totalled more than an es timated $2 billion last year, about one-ha l f of the budget deficit of roughly 4.5 billion for the same period. Mexicos agricultural trade surplus before 1970 earned foreign exchange to finance state programs. But since 1970 Mexicos use of foreign loans to pay for money-losing government-owned ente r prises and state subsidy programs, including agriculture, drove its foreign debt from $4.2 billion to more than $100 billion today tion for Mexicos economic revival. He has privatized a few state-owned enterprises, deregulated parts of the economy, and re m oved barriers to foreign trade. But if he fails to introduce legal and economic reforms that fun damentally alter the role of the state in Mexicos farm sector, Mexico will be unable to feed its people or honor its domestic and international debt obliga ti ons. Because of this, as well as for reasons of neighborly concern, the state of Mexicos agriculture is of great importance to the United States.

Washington thus should give Salinas friendly advice on how to end Mexicos agriculture crisis, Washington shoul d suggest that Salinas 0 0 Cease state ownership of land and tun it, with a clear title, over to peasants. Mexican farmers do not own their land, but till it with the states permission. Letting farmers own their land will give them the incentive en joyed by farmers around the world, to farm more efficiently 0 0 Privatize stateowned agricultural monopolies that produce fer tilizer, processed foods, retail goods, and control storage and farm credit.

This will attract foreign investment to Mexico, eliminate c ostly subsidies to state enterprise<-and make="" it="" easier="" for="" mexicos="" gove6ent="" to="" pay="" itfdebts="" lift="" state="" price="" controls="" on="" wholesale="" foods.this="" will="" make="" mexicos="" food="" producers="" and="" distributors="" more="" competitive="" with="" foreign="" producers,="" in="" crease="" farm="" output="" ,="" and="" reduce="" mexicos="" dependency="" on="" expensive="" food="" sub="" sidies="" and="" imports="" 0="" +="" remove="" legal="" restrictions="" on="" foreign="" investment="" in="" mexico.="" more="" foreign="" investment="" will="" attract="" desperately="" needed="" capital="" to="" agricultural="" development="" projects="" and="" increase="" confid="" e="" nce="" among="" domestic="" investors="" in="" mexicos="" economy="" mexicos="" president,="" carlos="" salinas="" de="" gortari,="" is="" building="" a="" solid="" founda="" 2="" sowing="" the="" seeds="" of="" mexicos="" farm="" crisis="" the="" causes="" of="" mexicos="" agricultural="" crisis="" are="" rooted="" not="" only="" in="" the="" countrys="" history,="" but="" i="" n="" a="" series="" of="" policy="" decisions="" made="" by="" governments="" over="" the="" past="" quarter-cen="" tury.="" they="" are:="" 1)="" attempts="" to="" use="" .agrarian="" reform="" for="" political="" rather="" than="" economic="" purposes;="" 2)="" a="" forced="" investment="" of="" capi="" tal="" and="" public="" funds="" into="" in="" dustry="" rather="" than="" agr="" icul="" ture;="" and="" 3)="" a="" heavy="" handed="" presence="" of="" the="" state="" in="" the="" production="" and="" distribution="" of="" agricultural="" goods.="">

Agrarian Reform After Mexicos conquest by the Spanish in the 16th century, much of the nations fertile land was owned by the Catholic Church, t he descendants of Spanish gentry, and wealthy Europeans who es tablished enormous feudal estates, or huciendas, some as large as several million acres. The lands owned by these wealthy hacendados were often left idle, but were the source of much prestige and political power. Another type of land holding, known as the didos, was held in com mon by small villages of In dians, who had the right to till, but not own, these tracts of land that averaged a few hundred acres in size.

ReVolu tionary Slogan 3ver the next two cen turies, Mexicos original In an population became a 3 C1 mass of destitute, landless laborers relying on landowners for credits, hous ing, and other necessities for survival. The concentration of land ownership in the hands of the few bred wi despread discontent in the countryside. By the start of this century, roughly half of Mexicos farm land was controlled by fewer than 3,000 families. Rural resentment of the economic system came to a head in the Mexican Revolution of 19

10. Peasants eager to secure land owpership rallied around revolutionary leader Emilliano Zapata and his dogan: the land belongs to those who work it. The Mexican Revolution top pled General Porfirio Diaz in large part because of peasant support.

One of the revolutionary gov ernments first tasks was to change Mexicos agricultural system.The Agrarian Reform Act of 1915 gave the government the authority to expropriate portions of large estates and to distribute rights of land tenure to applicants from the peasantry. Because the old feudal landlords had been seen as private exploiters of the land, which the revolutionaries believed rightly belonged to the people, the new system of land ownership was biased against private ownership and the free market.

The old feudal system of land ownership was mistaken for capitalism and the system of private property. As a result, the revolutionary government con cluded that the best safeguard against exploitation by private large land owners was for the state to own the land, and to divide it equally among the peasantry. had been redistributed, the state still retained the right to re-allocate land tenure rights until all claimants were satisfied. Roughly 6.3 percent of total farmland in Mexico, or 20.6 million acres , was distributed between 1917 and 1930 to state-run farms or ejihs.

Mandate for Intervention. The first wave of agrarian reform culminated in the Constitution of 1917.This revolutionary document provided the legal basis for land reform programs by grantin g the state the right to regulate and limit property rights, including the expropriation of private property. It also established the state as the rector of the Mexican economy and empowered it to establish organizations that protect its citizens from wha t it called ex ploitation, thus providing a legal mandate for government intervention in all sectors of the Mexican economy, including agriculture.

Out of these constitutional provisions and other agrarian reforms emerged a new system of-land tenure.-Land was-distributed to peasants-in-two ways:-lj as small private plots, orparcelas, which exist mainly in the southern states of Hidalgo, Mexico, Oaxaca, Puebla, and Tlaxcala; and 2) as government administered ejih, or cooperative villages, which are found th r oughout Mexico. The ejihs could be farmed collectively, by individually assigned plots, or by a mixture of both The land redistribution process was extremely slow. Once all available land 1 H.B. Parkes,A Hkmy ofMaco Cambridge Massachusetts: Riverside Pres s , 1930 p. 306 4tion of Mexiin under ejih manage ment rose from 6.3 percent to 22.5 per cent? As in the Lacking Legal Protection. Redistributed lands could not legally be bought or sold. But the government could repossess the land at any time, and tenants w ho left their assigned plots relinquished all rights to the land. In practice these ejh were sometimes rented and sold outside the law, but with no legal protection for buyer or seller because only possession of rights to the land, not legal title, was tr a nsferred. Only the state held legal title of ownership to the land This system of land tenure sukves until day.Itis the legal basis for the The next wave of agrarian reform came 25 years after the Mexican Revolu possession, and exchange of all ejih land i n the Mexican countryside tion. It was pushed by Lazaro Cardenas del Rio, who was President from 1934 to 19

40. He State-run Farma Private Farme Including Indian community farms representing roughly five percent of total farmland in Mexico. Sources: Americ an Embassy, Mexico City, Foreign Agricultural Service data; P. L. Yates,MericosAgriculncralDile~a; Alan Riding, Distunt Nei

bm. Heritage InfoCharl redistributed roughly 50 mil lion acres during his term, taking the land mostly from large private estates and organizing newly created eji&s in the form of Soviet-style collective farms.

Between 1930 and 1940 the por Distribution of Farmland in Mexico Z of total ana 1930 1940 1950 1880 1910 1980 1990 I 2 Paul L. Yates, Merdcos Agvicultuml Dilemma (Tucson, Ariz ona: University of Arizona Press, 1981 p. 155 3 Ibid.p.19 5 This Mexican miracle in agriculture was rooted in the countrys ad vantages following World War II. Mexico obtained capital investment for agricultural development through the sale of such raw mat e rials as food and basic metals to the U.S. and the other allied forces during the war. Ambitious irrigation programs and the introduction of new high-yield corn, wheat, and other crops fueled Mexicos success in the countryside. Better irrigation boosted p r oduction and more high-yield qops lifted farm exports bered the ejih. Between 1950 and 1960 the amount of land allotted to ejihs, roughly 27 percent of total farmland, remained unchanged.The best performers from the end of World War II to the mid-1960s we r e these private farms, whose output per acre during this time was nearly five times greater than that of the ejihs.4 Private producers were more successful for several reasons. First, unlike the collective farms, which were locked into farm managers produ c tion plans, private farmers could respond flexibly to new consumer demands, plant more profitable crops, and exploit modem machinery and farming techniques more efficiently. Second, large and medium-sized private farms could produce more crops, and theref o re more profits than could ejihs Mexicos population growth, which averaged 3.4 percent in the 1960s, created millions of new people wanting land. Yet new sources of arable land developed through both irrigation and deforestation, were exhausted by the mid - 1960s.The state met the greater demand for farmland by expropriating the property of private farmers. Moreover, the ejihs shrank in size, making them less productive. Population growth on the cooperative ejihs farms resulted in the subdivision of plots am ong family members, making them after the mid-1960s smaller than the state-run collectives established earlier.

Fewer than half of all ejihs plots exceeded ten acres by 1970, and the average income of cooperative farmers holding less than ten acres was less than half that of those who had larger plots of ten to 25 acres.

Fearing their land could be taken from them, farmers naturally failed to make long-term investments in their operations. The predictable result was lower productivity. Average annual crop production, for example, fell from 6.3 percent between 1945 and 1965 to 2.9 percent between 1965 and 1980 presidency of Luis Echeverria Alvarez, who held office from 1970 to 1976.

Echeverria expropriated 30 million acres of land from private farmers and r edistributed 16 million acres to the peasants. Roughly 14 million acres remained in the hands of the state or was transferred to political cronies within the ruling political party, known as the Partido RevoZucW& In Flexible Private Farms. Important too w a s that private farms still outnum Mexicos golden age of agriculture came to an end in the mid-1960s New Cooperatives. The largest land expropriation occurred during the I I 4 aid. p. 161 6 stitucional (PRI). Echeverria established hundreds of new cooperat ive ejihs managed by state agricultural specialists, or technkm, who were little more than government bureaucrats with a technical background in agriculture.

State-run cooperativ ejas accounted for roughly two-thirds of Mexicos in several ways. Farmers lac ked personal and economic incentives to produce because they generally received the same wages regardless of output. Further more, farm managers, not the farmers themselves, made all the important decisions, such as what crops to plant, what equipment to buy, and what farm ing methods to use. Unproductive ejas farmers could not sell their plots without losing all of their belongings, and skilled farmers could not capitalize on their superior talents by expanding the size of their plots.

Political Constituency. Although the ejih system was originally envisioned as a mechanism to break up large farm estates and prevent a future con centration of land ownership, it never made the peasants real landowners.

Government officials from the ruling PRI party instead exploited the land tenure system to gain favor with the more than 2 million applicants for farmland. For example, Echeverrias successor, President Jose Lopez Portil lo, declared in 1978 that there was no more land to be distributed. He then seized and re distributed 40 million acres to 300,000 peasants. The pressures to please his political constituency among newly created farmers was greater than his desire to keep his promise not to confiscate and redistribute land.

Says Mexican economist Luis Pazos: Bet ween 1915 and 1988 the govern ment redistributed more than six times the arable land Yet] there is no security of property ownership. The majority of the rural population have no title to their land; nor are they able to establish clearly the boundaries o f their plots. The bitter harvest of these ill-conceived policies has been low productivity, insecurity of land holdings, and low capital investment in agricul ture.

Favoring Industry over Agriculture One of the biggest problems facing Mexico is the diversion of scarce capital resources from agricultural production to develop such industrial sectors of the economy as steel, petroleum, and mining.The Mexican government in the mid-1950s adopted a strategy called stabilizing development, which used Mexicos agricultural export revenues to finance rapid industrialization. The proportion of-total food output-devoted to exportsjumped-from9 percent in 1950 to 14.7 percent in 1 9 60, as agricultural export revenues were used to finance the construction of steel plants, oil refineries, and other state-owned industrial enterprises. Agricultural export revenues were raided throughout the 1960s by the government to build industry, whi l e tariff barriers were es tablished to shield newly-formed industries from foreign competition arable land by 1976. 4h ese cooperative farms undermined farm productivity 5 Alan Riding, Distant Neighbors: A Portrcril of the Mexicum (New York A. Knopf, ID 1 !W p. 187 6 Luis Pazos, Huce Don& Vu Sulinus (Mexico City Editorial Diana, lW p. 139 7.

By the mid-1960s and 1970s, state-sponsored industrialization began to un dermine capital investment in Mexican agriculture. Deficit spending and foreign borrowing used to finance inefficient state-run industries drained capital that otherwise could have been used to clear land, irrigate crops, and buy fertilizers, pesticides, and farm machinery. Roughly 40 percent of public spending between 1960 and 1976 went to build Mexicos industrial plant whikless than, 14 percent went to agriqlture. Agriculmres share of total capiy investment in Mexico fell from 14 percent in 1960 to 4.5 percent by 19

70. Capital was made scarce, too, by the flight of money abroad by inves tors who feared Echeverrias open hostility toward the private sector as well as Mexicos rising inflation rate, which reached 27 percent in 19

76. Echever ria had spurred inflation by relying on deficit spendin! and foreign borrowing to finance more than 650 new s tate-owned industries. The peso, which had been fiied at a constant exchange rate since 1954, became critically over valued as the result of inflation. When these inflationary pressures forced Echeverria to devalue the peso by one-half in 1976, Mexican in vestors responded by sending over $4 billion abroad. The flight of Mexican capital to the U.S. and elsewhere deprived farmers and other investors of badly needed capital.

Government Intervention in Agriculture the Secretariat of Agriculture and Water Resou rces and the Secretariat of the Agrarian Reform. Branches of these agencies are based in urban areas and they set planning and production goals for agricu1ture.Their more than 200,000 bureaucrats oversee over 40 state-owned agricultural enterprises that c o ntrol production, distribution, subsidy, and farm credit programs. The largest state-run agricultural enterprises are the National Popular Subsis tence Company (CONASUPO) which distributes all basic food products, the National Rural Credit Bank (BANRURAL) which dispenses farm loans, and the Mexican Fertilizer Company (FERTIMEX) which makes and distributes fertilizer.

The National Popular Subsistence Company (CONASUPO CONASUPO is the primary agency for state intervention in Mexican agriculture. Formally Gov ernment agricultural policy is administered by two state bureaucracies 7 Daniel Levy and Gabriel Szekely, Mexico8 Pamdaxes of Stability and Change (Boulder, Colorado: Westview Press, 1983, p. 135; and, George Phillip, Mexicos Internal Conflicts (London: I n stitute for the Study of 8 In May 1973, Echeverrias finance Minister, Hugo Margain announced that MexicosTreasury lacked the resources to expand state spending programs. Echevema fired Margain and promised to hire someone who can find the money. The new M i nister, Lopez Portillo, found the money for state-industrialization projects such as the $1 billion Siwsta steel project by borrowing abroad. Predictably, Mexicos foreign debt jumped from $4.2 billion in 1970 to $19.6 billion in 1976 see Alan Riding, op. c it..pp. 205-6, Dale Story, Zndusby8 the State and Acblic Policy in Mexico (Austin: University of Texas, 1986); and Michael Dliedzic, Mako: Converging Challenges (London: IISS, Adelph; Papers, No. M2, Autumn 1989 pp. 10-12 c-o~c-t)--2-3 8established in 196 5 , it allocates state funds to purchase and distribute agricul tural goods throughout the country. CONASUPO spawned scores of new sub sidiary state companies at the local level, which became involved in purchas ing and processing corn and wheat, in retail food sales, and, in recent years, in importing grains and other commodities. CONASUPOs sprawling opera tions include 18,000 retail grocery stores, 32 manufacturing and food process ing plants and 70 percent of the cguntry3 foodstqrage and silo capacity?

CO NASUPO subsidizes farmers by purchasing &ops at fmed or guaran teed prices. By guaranteeing farmers a fixed price for their products, the state hopes not only to augment the farmers income, but to encourage production. In practice, it does not turn out th is way. High inflation often means that the guaranteed prices for crops are below their true market value.

CONASUPOs price-fixing offices cannot keep up with the fast pace of infla tion. CONASUPOs price controls therefore produce not only food shortages wh en guaranteed prices are below market rates, but expensive food subsidies when food prices are held below producers costs and the rate of inflation.

When farmers get below market prices for their goods, they cut back on production. This causes food shorta ges. Mexicos milk producers, for ex ample, have been subject to artificially low guaranteed prices and rising production costs since the 1970s. Many have been driven out of business as a result.This has caused a tremendous shortage of domestically produce d milk.

Mexico now, in fact, is the single largest milk importer in the world, buying over $220 million of dry milk last year.

Core Electoral Base. Roughly one quarter of CONASUPOs budget, or nearly $500 million, is used to subsidize the purchase of foods by urban con sumers.These subsidies are given to state-owned stores that sell food at below market prices. Retail food outlets, administered by CONASUPO bureaucrats and PRI officials, have been established in middle class suburbs as well as low-income ur b an areas primarily for political purposes. The suc cess of the ruling PRI party seems to depend heavily on the continued back ing of lower and middle income urban consumers accustomed to low food prices. CONASUPOs food subsidies and the resulting low food prices are seen by the PRI as a way maintaining the loyalty of this core constituency of urban-dwelling workers and bureaucrats. Over 7 million unionized workers in state companies and 3 million state bureaucrats represent the core elec toral base for the PRI.

These subsidies and other wasteful economic practices have created huge financial losses for CONASUPO. Last year the Ministry of Finance was forced to bail out CONASUPO by transferring an estimated $950 million to its account, which is over one half of that agencys annual budget. Only the I 9 Peter Young, Privatization in Mexico: Robust Rhetoric, Anemk Reality, Heritage Foundation Backpunder No. 611, October 22,1987, p. 8.

Cornision Federal de Electricidad (CFE the state electricity commission receives more state subsidies than CONASUPO.

National Rural Credit Bank (BANRURAL Created originally to service the credit needs of poor farmers, this state-run farm credit bank has 38,000 employees operating in 600 branch offices across the country is the main source of credit for the agricultural c ommunity in Mexico Agrarian reforms have transferred of more than two-thirds of Mexicos arable land from the private sector to state-run ej&.s. Since farmers on these state-run cooperative farms cannot offer their land as collateral for loans they must re l y instead on PRI officials and BANRURAL bureaucrats for government credit. BANRURAL and other credit agencies, such as the Na tional Farm and Livestock Insurance Agency (ANAGSA), have been criticized by Salinas for their lack of organization, inefficiency and even of corruption.

BANRURAL officials frequently favor political rather than commercially prudent objectives by lending to marginal producers or issuing living expen ses to cash-strapped farmers.This honors what PRI politicians call a social duty to an important constituency.This also, however, diverts financial resources from successful producers and assigns the administration of what essentially is a welfare program to a credit agency. Most BANRURAL credit is issued in short-term loans that contrib ute little to long-term investment in farm productivity. Money is lent on a short-term basis primarily because BANRURAL wants to recover its loans quickly, calling in the loan when the borrower sells his crops.

Mexican Fertilizer Company (FERTIMEX FERTIMEX is the state monopoly for producing seed, fertilizers, pesticides and insecticides. This agency provides subsidized credit and irrigation to producers and sells fer tilizers to farmers at artificially low prices. Mexico is well endowed with such mineral r esources as potassium, urea, and ammonium sulphate, which are necessary for manufacturing fertilizers. FERTIMEX was thus able to produce and sell 5.1. million metric tons of fertilizer last year ficient. A 1982 World Bank study noted that the price charge d by FER TIMEX for its fertilizers was 26 percent below the cost of production. The PRI-dominated government subsidized FERTIMEX to keep control over dis t?ibution and pricing of agricultural-goods; Ranking third after the-electricity monopoly (CFE) and CO N AST20, state subsidies to FERTIMEX last year totalled more than $500 million 51 I e Like most state industries in Mexico, FERTIMEX has been extremely inef IORiding, op. cit p. 190 11 President Carlos Salinas de Gortari, First State of the Union Adiims, No v ember 1,1989, p. 35 l2Reliable official data on state transfer payments to state agricultural monopolies, including FERWEX, are not available. Unofficial statements from Mexican government officials and American Embassy officials in Mexico City indicate t h at FERTIMEX subsidies exceeded s500 million in 1989 10 STATE-CONTROLLED AGRICULTURE: MEXICO'S BI"ER HARVEST More than seven decades of state intervention in Mexican agriculture have yielded a predictably bitter harvest. Mexican government statistics indic a te that from 1965 to 1982 agricultural growth declined sharply from an annual rate of 6.3 percent to 2.9 percent. Average annual agricultural production has grown only 1.46 percent-since 1982, far below the population growth of an average of 2.5 percent o v er the same period.13 The social and economic costs of government control over aghcultural production and distribution continue to rise. Examples Since 1967 Mexico has depended increasingly on imports to feed its rapidly growing population. In 1975 the co u ntry imported only 10 percent of the grain consumed, but by 1983 the figure jumped to nearly 40 percent where it now remains. According to the Bank of Mexico, crop production shrank 4.5 percent in 1988.14 Mexico spent a record-high $3.5 billion or roughly five percent of net government spending, on food imports in 19

88. Agricultural exports from the U.S. to Mexico last year totalled $2.7 billion, one-half the total of U.S. agricul tural exports to all of Latin America Roughly half of Mexico's im ports are financed by subsidies from such U.S. export promotion agen cies as the Com modity Credit Cor poration and the Export-Import Bank. These agen cies finance U.S exports by provid ing commercial credit guarantees, direct loans, and lo= inSuranCet0 countries p urchas ing goods from the Grain Production* and Population Growth 80 70 80 50 15 40 t 1 20 10 10 1980 1981 1982 1983 1984 1986 1986 1987 1988 1989 I I I I I 1 I I e- Omin Production Populstlon includes wheat, corn barley, sorghum, rice ource:-U;S;Departme n t of-Agriculture;Foreign-Agriculturd-Serivce Mexico CiM and 1989 estimates from government data confiied by 9rivate sources in Mexico City. Heritage Infochart l3Population ReferenceBureau Washington, D.C 14 Telephone interviews With U.S. Department of Agr iculture and American Embassy officials in Mexico City 11 AGRICULTURAL REFORM UNDER SALINAS U.S. Mexico last year received $2.3 billion in loan guarantees from the U.S.

Commodity Credit Corpora ion to purchase such basic agricultural goods as corn, wheat, and soybeans to 50 percent of its soybeans and oilseeds last year. Wheat imports are ex pected to reach 1.2 million tons (up 69 percent from last year soybeans, 1.4 J Mexico imported 35 percent of its corn, 25 percent of its wheat, and 40 million tons (up 44 percent and rice,-150,000 toe (up .l5Opercent).l6 Salinass academic and political experience should allow him to understand the causes of Mexicos declining agricultural productivity. Salinas served in 1981 under President Jose Lopez Portillo as directo r of the Institute for Political, Economic and Social Studies of the PRI, and in 1982 as economic policy director in President Miguel de la Madrids Secretariat of Planning and Budgeting. He has seen, first-hand, the costs of state intervention in the Mexic an economy. It is this, perhaps that has prompted Salinas to do what his predecessors have not: lay the blame for Mexicos economic crisis at the doorstep of state intervention in the economy.

In his State of the Union address last November 1, Salinas condemned what he calls state gigantism for suffocating social and economic initiative.

He declined that he does not associate statism with progress, as his predecessors did.That, he said, only defends the privileges of the old guard that clings to the status quo. Agricultural decline, he noted, represents the greatest challenge to economic modernization.

Forcing Competitiveness. Following these brave words, Salinas has started taking steps to halt further decline in Mexicos agricultural production. He has enc ouraged private investment in Mexicos large agricultural processing packing, and freezing plants and in the so-called agro-industrial corridors or road networks that link farmland with food processing and distribution centers. His new foreign investment r e gulations, announced last May, ease restrictions and expand opportunities for wholly-owned foreign investments in Mexico. What is very important, by reducing Mexicos maximum tariffs on agricultural and other imports to 20 percent, Salinas is forcing Mexic o s agricultural sector to become more competitive At a-ceremony in Veracruz on January 6~199O;commemorating-the Agrarian Reform Act of 1915, Salinas announced an agricultural modern ization program aimed at creating a new Green Revolution in the Mexican co u ntryside. The plan is intended to 15 Christopher Whalen, The limes of the Americas, November 29,1989, p. 12 16 World Agricultural Production, U.S. Department of Agriculture WAP-1-89, July 1989 12 1)hvide farmers with security of land tenure through what S a linas calls By this he means that farmers will be allowed to participate more in govern consensus and decentralization of agricultural decision-making ment land distribution and farm management policies, particularly at the local level. This is a welcome s tep. He backed away, however, from what would be a much more important step: privatizing the ejihs. Thus, state cooperative farms will retain control over roughly three-quarters of Mexicos farmland. A government-appointed arbitrator will be assignedto res olve land tenure disputes, but this is no substitute for land ownership 2) Decentralize state-run agricultural businesses and government farm agencies.

State-owned farm credit agencies ANAGSA and BANRURAL gradually are to be decentralized to give regional branches a greater voice in making loans. Financial resources, now controlled by the federal Secretariat of Agriculture and Water Resources, will be transferred to local state agencies be innin with northern areas such as Sinaloa,Tamaulipas and Aguascalie n tes. gl7 3) Boost government investment in the agricultural infrastructure As in past proposals, more money is pledged to be used to build irrigation works, technical research facilities, and roads that link cultivated areas to shipping ports and food pr ocessing centers 4) Raise government prices for farm produce.

Mexicos farmers have been discouraged from planting crops because government-guaranteed crop prices often have failed to keep pace with infla tion or world prices. Salinas believes that crop pri ce increases would en courage greater food production and reduce Mexicos dependence on costly food imports 5) Sell unprofitable and inefficient state-run companies.

Most of the 36 state-owned agricultural enterprises will face what Salinas calls selective privatization. Exempted, however, are the largest agricul tural bureaucracies, BANRURAL, CONASUPO, and FERTIMEX. Some processing plants and retail outlets owned by CONASUPO will be sold to farm cooperatives or the private sector and guaranteed prices for some food cZGxioditiesXll6e-liftedF 17Telephone interviews with Giullermo Ramos, Agricultural Counselor, Mexican Embassy in Washington D.C id Ana Vila-Freyer, PrOmises to Reactivate the Countryside, El Norte, Monterrey, Mexico, January 7 1990, p. 1 13 Loo m ing Disaster Salinass economic reforms have been modestly successful. Mexicos GNP last year grew 3 percent, export earnings jumped nearly 15 percent, and over 3 billion of money deposited abroad (called flight capital) has returned to Mexico as investors have regained confidence in their country.

As positive as these.signs.arc, they Wk.g deeper, ptgblem. Since 1982 federal deficit spending has-been financed largely by increasing the domestic debt. Interest payments on the estimated $60 billion in domestic debt last year absorbed roughly 45 percent of Mexicos public spending. State interven tion in agriculture has contributed to this budget crisis by increasing federal spending on food price support programs while discouraging domestic food production. Agri c ultural subsidies for producers and consumers and Mexicos 3.5 billion food import bill for 1989 dwarf the estimated $1 billion in annual savings from the highly-publicized debt reduction agreement Mexico reached with foreign commercial banks last year mon e tary policies since 1970 have driven interest rates above the reach of many credit-starved farmers. Farm credit rates, currently over 40 percent, in crease farm operating costs and discourage farmers from planting crops when production costs exceed guaran t eed crop prices. Interest rates may soar even higher when a Solidarity Pact between key government, labor, and business leaders, which has controlled wages, prices, and exchange rates since Decem ber 1987, is lifted. (Salinas last month extended the Pact to July The amount of idle farmland in Mexico will increase unless guaranteed crop prices are lifted to allow farmers to contend with the cost of farm credit.

Salinas could also reduce the burden of state agriculture on Mexicos budget by lifting price controls on agricultural products for urban consumers.

But the political cost of doing this could damage the PRI as it faces in the 1991 mid-term congressional elections. The beneficiary could be the leftist Party of the Democratic Revolution (PRD), led by the fiery populist Cuauh temoc Cardenas. Rising consu m er prices later this year will erode the PRIs political support among powerful steel, mining, and teachers unions who op pose Salinas privatization programs and wage controls. The consequence could be a shift of these traditional pro-PRI unions toward the far left and a boost for the PRD at the polls Discouraged Farmers. Moreover, Mexicos inflationary fiscal and WHAT SHOULD BE DONE Salinas so far has avoided the most dramatic and politically painful steps necessary for Mexicos agricultural reform. His farm reform package of January 6 is a good start, but only that. If he is serious about increasing Mt?xicos food production and ending dependen* on fore

imports and food subsidies, he must propose fundamental changes in the Mexican countryside that would privatize food production.The U.S. should urge Salinas to 14. e e Secure rural property rights for farmers.

History, with evidence from around the globe, teaches that property rights are the cornerstone of political and economic development.The central failur e of agrarian reform since 1917 has been the PRIs unwillingness to honor revolutionary hero Zapatas pledge that the land belongs to those who till it. Salinas should fulfill Zapatas promise by transferring rights of land ownership to rural peasants labori ng on small ej& plots throughout Mexico.

By providing farmers with property rights Salinas would eliminate politically motivated land redistribution and ease economic uncertainty within the farm community. Cash-starved farmers could use their land as secur ity to obtain bank loans or sell it. Either way, investment would flow toward profitable and productive enterprises.

Salinas should work to revoke the governments right, under Articles 27 and 28 of the Mexican Constitution, to exclusive ownership of strat egic and primary sectors of the economy. Article 25 also should be revoked; it estab lishes state planning of the economy as a constitutional right of government.

These provisions undermine investor confidence in Mexicos economy and restrict the flow of private capital to the agricultural sector. Until these con stitutional provisions are eliminated, institutional reform of Mexican agricul ture is impossible.

The Mexican government should grant peasants full title to the land they work. Fewer than one-fou rth of Mexicos farmers now have such a legally secure land tenure. The others thus are vulnerable to rival land claims by other farmers and PRI officials. Only when farmers really own their land will politically motivated land transfers come to an end and investment in agricul ture expand. Without clear title to their land, farmers have no incentive to modernize or improve their operations Privatize stateowned agricultural firms.

The continued operation of BANRURAL, CONASUPO, and FERTIMEX as government monopolies on banking, food distribution, and fertilizer production virtually ensures the continuation of Mexicos agricultural crisis.

State subsidies of these inefficient agricultural monopolies contribute to the public debt and reduce farm output by discou raging commercial risk and long-term investment BANRURAL should be restructured as part of an overall de-nationaliza tion of the banking system. It could be either sold, perhaps to private farmers farm communities, or liquidated entirely. Mexican economis t Luis Pazos proposes that shares in BANRURAL be sold to private Mexican and foreign investors holding Mexican government bonds and other debt securities.

These investors would exchange the Mexican debt that they hold for BAN RURAL shares.This would reduce Mexicos $60 billion domestic debt.

Mexicos Finance Minister, Pedro Apse, endorsed this concept last year, but powerful domestic political opposition has stalled movement on this 15 FERTIMEX, the state-subsidized seed and fertilizer monopoly serves no com mercially valuable role in Mexico. Fertilizer produced abroad is already available to Mexican farmers at prices below those of FERTIMEX. This money-losing state enterprise should be sold to private investors or local farm cooperatives Lift price controls on agricultural goods.

The Mexican government currently guarantees a farmer a specific price for his crops. These prices, because of inflation and other factors, frequently are below the crops market value. Guaranteed crop prices should.be terminated.

Cli mbing food prices will create incentives for farmers to produce more. As domestic food production rises, Mexicos bill for costly food imports would fall. Government food subsidies to consumers also should be ended. Initially this would cause retail food p r ices to increase. But the savings from reduced food imports and subsidies could be used to finance food stamps and other kinds of direct assistance for Mexicos poorest citizens to cushion the impact of rising food prices. Allowing the price of food to ris e to its market value will introduce more competition into food processing, importing and retailing.

This will reduce Mexicos costly dependency on food subsidies and eliminate shortages of food Remove legal restrictions on foreign investment.

The Foreign Investment Law of 1973 requires that the majority share (at least 51 percent) of domestic businesses must be owned by Mexicans.

Modifications to this law were announced last May 15.The new rules, im posed by Salinas, permit wholly-owned foreig n investments in businesses valued under $100 million and in some selected sectors of industries such as tourism.The original 1973 statute, however, still empowers the state to review and restrict foreign investment.The new regulations also fail to allow conversion of foreign debt into shares in Mexican companies. To modify the statute, Mexicos Congress must amend the 1973 law by a two-thirds majority.

Presidents following Salinas could rescind the new regulation without legisla tive approval.

Salinas sho uld encourage PRI legislators, as well as members of the center right National Action Party (PAN to modify the 1973 Foreign Investment Law. Executive authority to restrict foreign investment in Mexico should be removed. By doing this, Salinas would lure f o reign capital into vitally impor tant-agricultural-marketing-and shipping industries and-encourage Mexicans investing abroad to bring their capital home CONCLUSION Mexicokagricultural .system suffers from a crisis of productivity declining food production and the inefficient use of resources caused by state inter vention in the economy. Government price controls on wholesale and con sumer goods have produced farmers who are fleeing the land and urban con sumers who depend increasingly on subsidized food im ports. Excessive public 16 spending financed by domestic and foreign borrowing he stolen capital from the countryside. Constitutional restrictions on private property rights have robbed Mexican farmers of financial security and economic opportunity.

Restor ing Mexicos farm economy in effect is a struggle for the countrys economic and political independence. Mexico relies on food imports and foreign loans to sustain a population increasing by 25 percent each year.The agricultural crisis not only prevents the economy from supporting a growing population, it &ntributes to the illegal migrationof hundreds of thousands of Mexicans northward into the U.S. each year. Peasants looking to migrate to the U.S. or to Mexicos already overcrowded cities may reconsider if they could make a better living at home.

New Economic Revolution. Salinas can revitalize the economy if he is will ing to reform Mexicos agricultural system fundamentally. The success of his presidency, and of Mexicos entire economic reform program, depend s on his willingness to move against such vested interests as unions and the state agricultural bureaucracy.The place to start Mexicos new economic revolu tion, as in 1910, is on the farm.To do this, Salinas should lift state price con trols on wholesale f ood; privatize state-owned agricultural monopolies; end state ownership of farmland; and remove restrictions on foreign investment in Mexico. U.S. officials attending the upcoming U.S.-Mexico Commission meeting, to be held this summer in Washington, shoul d encourage Salinas to initiate these fundamental reforms.

Mexico is not blessed by nature with the agricultural resources of other na tions in North America, yet it does have the potential to significantly improve its food output. Property rights, free ma rkets and competition will empower farmers with greater self-sufficiency and economic choice. The consequence will be not only an improved standard of living for Mexicos poorest farmers but a stronger Mexico.

Thomas E. Cox Policy Analyst R. Christopher Whalen Senior Vice President Worldwide Information Resources, Ltd Washington, D.C 17

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