North American Free Trade Agreement ; Mexico ; Agriculture - Mexico

Ronald H. Schmidt

William C. Gruben

English

Research Papers in Economics

FABSF WEEKLY LETTER
Number 92-34, October 2, 1992
Ejido Reform and the NAFTA
The recently negotiated North American Free
Trade Agreement (NAFTA) among Canada, Mex-
ico, and the United States has received con-
siderable attention, which has overshadowed
somewhat the broad-based program ofeconomic
reform the Mexican government has been pur-
suing since the mid-1980s. These sweeping
reforms, though not part of NAFTA, still have
important implications for thecountry's trade
with the u.s.
Mexico has unilaterally attempted to restructure
its economy by allowing free markets to operate
in areas where government intervention had
dominated, as well as by deregulating other in-
dustries. Additionally, the Mexican government
hasvJorked to reduce uncertainty in the nation's
business community by pursuing stable fiscal
and monetary policies. Moreover, Mexico also
has sharply lowered import tariffs and greatly
reduced its import licensing program. Further-
more, reforms allowing foreign investment and
ownership have led to waves ofjoint ventures in
retailing and agriculture.
A recent change that has received little attention
in the U.S.-but which may ultimately have im-
portant effects-is Mexico's restructuring of its
agricultural land tenure policies. This restructur-
ing likely will lead to increased consolidation of
farming into larger, more efficient units, and to
significant movement of the Mexican workforce
out of agriculture and into other sectors. The
reform involves Mexico's ejido program.
In thisWeekly Letter, we examine the effects
of these reforms on Mexico and the u.s. The
sweeping nature of these reforms, we argue, will
have important impacts on agriculture in both
countries, and can be expected to have major
impacts on the Mexican work force. Moreover,
while NAFTA may accelerate the effects of land
reform, most of the predicted changes are likely
to occur even if NAFTA is rejected.
Ejidos
Ejidos are Mexican farms or ranches underthe
collective control of groups that work them.
Under the Mexican government's ejido program,
a group of peasants could petition the govern-
ment for access to farm land. The government
dedicated public land to ejidos, and also ac-
quired land for them from large private'holdings.
When the government formed an ejido, part of
the land was held as a group enterprise, with the
rest allocated to the use of individual farmers. By
now, nearly half of Mexico's total land mass is
held in 28,000 ejidos, occupied by more than
2.5 million farmers.
Although the ejido program did not become in-
stitutionalized until the 1930s, the government's
role in this system is an outgrowth of the Mexi-
can revolution that began in 1910. Under the
regime of Porfirlo Diaz (1876-1910), seizures of
lands traditionally held communally by indige-
nous peoples were commonplace. In many cases,
these seizures took place without due process
and the land turned up in the hands of President
Diaz' supporters. These abuses were among the
motivations for the revolution that broke out
against Diaz in 1910, when the chief advocate
for land reform was the revolutionary general,
Emiliano Zapata.
The new ejido system was designed to prevent
the re-emergence of large private rural estates
by making consolidation difficultor impossible.
Ejido land could be farmed only by members of
the cooperative or the individual farmer. Land
size was limited (and has become smaller with
further subdivisions by succeeding generations).
Ejido farmers did not have clear title to the land,
making it impossible to lease or sell the land, or
to use it as collateral to obtain capital.
Despite the noble intentions of the ejido pro-
gram, the result was a national agricultural
system dominated by uneconomically small,
undercapitalized farms. Although agriculture
absorbs more than one-fourth of Mexico's work-
ers, itis responsible for less than 10 percent of
the nation's gross domestic product. Average in-
come in this sector is only about one-third that
of the rest ofthe economy. Most farmers in Mex-
ico-inside or outside the ejido system-workFABSF
properties of less than 12 acres. Moreover, be-
cause ejido farmers do not own the land, they
have little incentive to invest in long-term capital
improvements..
Ejido reform
The Mexican government has begun to pur-
sue significant land reforms that have directly
affected the ejido program. For example, last
November, President Carlos Salinas de Gortari
presented to Mexico's Chamber of Deputies an
initiative for changes to the Mexican Constitu-
tion's Article 27, which covers agricultural land
tenure. Noting Mexico's "insufficient output,
low productivity;' and "unacceptable living stan-
dards" in the agricultural sector, President Salinas
proposed to open land ownership to greater mar-
ket discipline by better defining property rights.
Under the new rules, members of an ejido col-
lective can rent land to non-ejido members, and
can obtain full rights to the land-including the
right to sell to other parties. Moreover, to protect
those rights, the constitutional right to new ejido
land has been eliminated, reducing the threat
that newly private lands would be appropriated
by the government for new communally held
ejidos. Limitations on ownership are greatly re-
duced. Corporations now can own ejido land, for
example. Moreover, foreign investment now is
encouraged and foreign corporations can own
Mexican agricultural land.
Though still in its early stages, this modernization
of Mexican agriculture has already started to af-
fect its relationship with the u.s. Even before
President Salinas's initiative of last November,
California growers had aggressively expanded
into Mexico. Reforms removing many limitations
on joint ventures between Mexican and foreign
companies led to a large number of such ven-
tures, particularly in the production of a variety
of vegetables. While no firm statistics are avail-
able, informal surveys suggest that most large
California agribusinesses are pursuing some
operation in Mexico.
The implications of these reforms for Mexican
agriculture are dramatic. Because ejido collec-
tives can lease or sell their land, it will be pos-
sible to consolidate some ofthe fragmented ejido
plots into larger, more efficient farm units. Fur-
thermore, establishing private ownership rights to
the ejido members creates a collateral base upon
which to raise capital to modernize agricultural
production.
Impediments to modernization
Ejido reform faces strong opposition in some
regions. For example, agricultural reform is ex-
pected to prompt large relocations of Mexico's
work force. At present, about 26 percent of
Mexico's labor force is engaged in agricultural
production, compared to less than 2 percent in
the U.S. With increasing investment in Mexican
agriculture and falling trade barriers, competitive
forces are likely to motivate greater mechaniza-
tion and consolidation and convergence toward
U.S. levels of productivity per worker. As these
efficiencies are realized, Mexico's demand for
agricultural workers will fall, and it will be nec-
essary for larger numbers of current agricultural
workers to find other jobs. The large size of Mex-
ico's agricultural work force suggests that these
relocations are potentially very significant, and
will involve considerable social cost.
Modernization also is inhibited by the lack of
certain market institutions. Most grain in Mexico
is sold to a state-run monopoly, CONASUPO.
No commodities market exists. Moreover, while
rights to ejido lands are better defined, they are
still not completely defined, which makes it diffi-
cult to establish collateral values to raise capital
for investment.
Physical infrastructure also remains limited. U.s.
growers operating in Mexico report that while
labor costs are only a fraction of those in the
U.s., other costs, such as capital equipment,
chemicals, and transportation are far higher
because of current trade restrictions.
Role ofNAFTA
Dramatic changes in Mexican agriculture can be
expected regardless of the NAFTA's fate. Mexico
has embarked on a course of modernization, and
unless that whole effort is reversed, the process
will require a reallocation of resources away from
agriculture toward the production of other goods
and services.
NAFTA can have an impact on the adjustment
process, however. One of the strongest argu-
ments for an agreement is the concern about
waves of migrants leaving rural Mexico as agri-
culture is modernized. If NAFTA helps to speedRonald H. Schmidt
Senior Economist
development of Mexico's industry, through cap-
ital investments, joint ventures, and access to a
broader market, jobs will be created to allow the
farmers to retrain and stay in Mexico.
NAFTA also can speed the modernization of
Mexico's agricultural industry. Access to U.S.
machinery, pesticides, and fertilizers at signifi-
cantly lower tariffs also should help boost effi-
ciencyand production in Mexico. tv1oreover,
competition with highly mechanized U.S. corn
and grain producers will force small ejidos to
consolidate or change crops. Similarly, oppor-
tunities created by improved access to the large
u.s. market will encourage more investment in
vegetable and fruit production.
Implications for u.s. agriculture
Land reform poses a series of opportunities
and challenges to U.S agricultural producers.
Increased competitiveness of Mexican agri-
culture will keep pressure on u.s. firms to raise
productivity or shift crops to those in which the
u.s. has a comparative advantage, such as grains
and livestock. Modernization is likely to expand
J'/\exico's agricultural production and raise its
abilityto export vegetables and specialty
products to the U.S.
The expected decline in the rural population may
boost the availability of low-cost labor in the
short run. Potentially large dislocations of rural
Mexicans could lead to larger than normal im-
migration to the U.S., because other Mexican
industries have limited short-term capabilities
to absorb the displaced peasants.
Over the longer term, the supply of low-cost agri-
cultural labor from Mexico may be disrupted. As
more of the rural population moves to urban
areas in search of nonagricultural jobs, the avail-
able supply of potential migrant workers from
Mexican rural communities may be reduced.
Opportunities also are emerging, as California
producers already have discovered. With the
elimination of many of the restrictions on foreign
ownership, Mexico now offers U.s. producers
a way to diversify production geographically.
Because of differences in seasonal climates,
California vegetable growers, for example, can
produce vegetables in Mexico to fill gaps in the
growing season and provide supplies year-round.
Low-cost Mexican labor also can allow U.S.
growers to produce and process labor-intensive
crops in Mexico (hand-picked tomatoes), while
producing capital intensive varieties in the u.s.
(machine-picked canning tomatoes).
Moreover, lower tariffs are likely to be a major
boonto U.S. producers. Livestock and grain pro-
ducers are expected to benefit from an expanded
export market. Rising incomes in Mexico are
likely to boost the Mexican demand for fruits,
vegetables, and specialty crops. Because the
u.s. and Mexican growing seasons are staggered,
rising demand for such products will help pro-
ducers in both countries.
Conclusions
By turning to a more market-based economy,
running prudent fiscal and monetary policies,
and encouraging foreign investment, tv1exico
continues to restructure its economy in ways that
wiII allow it to benefit from trade with the United
States. Land reform, in particular, promises to
cause long-term changes in agricultural pro-
duction, and, more generally, in the role of
agriculture in Mexico's economy.
NAFTA may speed the transition of Mexico's
economy to the extent that it lowers trade bar-
riers and encourages capital flows into Mexico.
However, failure to reach agreement on NAFTA is
unlikely to reverse the forces already underway
in Mexico. Even without NAFTA, Mexico and the·
United States can expect to become increasingly
interdependent as businesses build ties that
straddle the border.
William C. Gruben
Senior Economist and
Policy Advisor
Federal Reserve Bank of Dallas
Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of
San Francisco, or of the Board of Governors of the Federal Reserve System.
Editorial comments may be addressed to the editor or to the author.... Free copies of Federal Reserve publications can be
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Index to Recent Issues of FRBSF Weekly Letter
DATE NUMBER TITLE AUTHOR
3/13
3/20
3/27
4/3
4/10
4/17
4/24
5/1
5/8
5/15
5/22
5/29
6/5
6/19
7/3
7/17
7/24
8/7
8/14
9/4
9/11
9/18
9/25
92-11
92-12
92-13
92-14
92-15
92-16
92-17
92-18
92-19
92-20
92-21
92-22
92-23
92-24
92-25
92-26
92-27
92-28
92-29
92-30
92-31
92-32
92-33
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The FRBSF Weekly Letter appears on an abbreviated schedule in June, July, August, and December.

Ejido reform and the NAFTA

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Ejido reform and the NAFTA

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