Eaton, David W.

Guerra, Manuel Zertuche

English

Research Papers in Economics

Journal of Agricultural and Applied Economics, 32,2(August  2000):203-207
© 2000 Southern  Agricultural  Economics Association
The Commanding  Heights  of
Mexican  Agriculture
Manuel  Zertuche Guerra and David  W. Eaton
V.I.  Lenin,  in  defense  of communism,  often
defended  governmental  control  over  the
"commanding  heights"  of the  means  of pro-
duction.  Upon consolidation  of the revolution
in the  1920s,  Mexican  leaders  wholeheartedly
adopted  Lenin's  approach  to  government  in-
tervention in the economy.  The revolution was
driven,  in part,  by a  widely accepted need for
land reform.  The  revolutionaries proceeded to
restructure  Mexican  agriculture  and adopt  so-
cialistic  policies  which  promoted  centralized
planning.  Also,  state-owned  enterprises
(SOE's)  began  to  participate  in  everything
from  the  production,  processing,  distribution
and  commercialization  of  agricultural  prod-
ucts.  In  recent  years,  policies  have  changed
and  Mexican  agriculture  is  currently  going
through  a dramatic  process of reformation.
SOE's  formed an important link in the gov-
ernment's  "full  employment"  strategy.  The
one-party  power  structure  which  emerged
from years  of instability  has been personified
by  over  70  years  of continuous  rule  by  the
Institutional  Revolutionary  Party  (PRI).  After
the revolution,  private  farms  were  allowed  to
continue. However,  many on the losing side of
the  revolution  were  forced  to  forfeit  their
lands.  The  PRI  rewarded  the poor campesino
revolutionaries  through  the creation  of ejidos.
An  ejido  is  a  communal  farm  based  on the
popular Soviet model of the time. For over 70
years  the  PRI-dominated  system  protected
Mexican  farmers  from  outside  competition
and used  agriculture  support mechanisms  as a
Center for Strategic Studies, Instituto  Tecnol6gico y de
Estudios  Superiores  de Monterrey
way  to  garner  votes  and  maintain  political
control.
Mexico's entrance  into the global  economy
highlighted the  inefficiencies  of the country's
closed-market  policies.  Mexican  farmers  and
governmental  officials have been forced to ra-
tionalize past practices in an effort to compete
in  today's  international  markets.  This  paper
will focus on the changing role of the govern-
ment  over  the  "commanding  heights"  of
Mexican  agriculture.  Special  attention  will be
paid  to  the  current  strengths  of the  Mexican
campo,  the  effects  of  free  trade  and,  finally,
barriers  which  inhibit  the  modernization  of
Mexican  agriculture.
Comparative Advantages  of Mexican
Agriculture
Mexico  has  been  blessed  with  some  of  the
most fertile land and abundant natural resourc-
es  of  any  country  in  the  world.  Mexico's
northern  deserts  and  central  plains  support
year-round  agriculture.  This  sometimes  harsh
environment  allows  Mexican  farmers  to  ser-
vice the U.S.  consumer  market  by taking  ad-
vantage  of strategic  production  windows.  For
example,  Mexican  farmers export  a large per-
centage of the fruits  and vegetables consumed
by  Americans  during the winter.  Mexico  also
is strong in the area of exotic fruits which are
gaining in popularity  in the U.S.  and Europe.
Finally,  Mexican  farmers  have  an  advantage
over many other foreign producers  as a result
of the  country's  proximity  to  the  U.S.  The
comparative  advantages  bestowed  on  Mexico
by its climate, product diversity and geograph-
ic  location  have  presented  growth  opportuni-Journal of Agricultural and Applied Economics, August 2000
ties  for  the  country  as  it  embarks  on  an  ag-
gressive  economic  liberalization  program.
Years  of  government  control  and  repudiation
of market  forces have led to an inefficient  sys-
tem which  is currently undergoing  substantial
reformation.
Economic  Liberalization in Mexico-
Opportunities for Growth
After  the devaluation  of 1982  and the ensuing
debt  crisis,  Mexico's  leaders  realized  that the
past  model  of  governmental  control  of  the
"commanding  heights"  of the  economy  was
unsustainable.  The leaders  urgently  needed to
rationalize  the existence of massive SOE's and
generous  subsidy  policies  which served polit-
ical rather than economic objectives.  The gov-
ernment  was  involved  in  every  aspect  of the
economy and industry was not subjected to the
pressures  of  outside  competition.  This  was
also  true  in the  agricultural  sector which  was
characterized  by  heavy government  price sup-
port  subsidies,  irrational  state-run  trading
companies  and  small  inefficient  farmers  who
were  not  accustomed  to competing  with out-
side companies.  All of this began to change in
1986.
Mexico  began  the  painstaking  process  of
modernizing  its  economy  in  1986 when  it be-
came  a member of the General  Agreement  on
Tariffs  and  Trade  (GATT).  Tariffs  on  foreign
goods  would  be  lowered  and  competition
would  become  a way of life.  For the first time
since  the  days  of  Porfilio  Diaz,  foreign  in-
vestment  was  encouraged  through  the  pro-
mulgation  of  the  1992  Foreign  Investment
Law.  Subsequently,  Mexican industry,  includ-
ing  the agriculture  sector,  would  be forced  to
compete  with  companies  from  the  U.S.  and
Canada under the auspices of the North Amer-
ican  Free  Trade  Agreement  (NAFTA).  NAF-
TA, by opening the doors to a flood of mostly
U.S.  products,  has  forced  the  entire Mexican
economy to take  drastic measures  designed  to
promote competitiveness.  This  change  in pol-
icy  has  given  rise  to  colossal  efforts  in  the
areas  of efficiency,  quality  control  and  "lean
thinking."
Mexico has also moved aggressively to ne-
gotiate  free  trade  agreements  with  a  long list
of  countries.  Agreements  have  been  signed
with  Colombia.  As  a  result,  Mexico  has
moved from a closed-almost monopolistic
economy  characterized  by heavy  governmen-
tal participation  to one of the most open  trad-
ing environments  in  the world.  As is custom-
ary, free  trade  has created winners  and losers
as well  as  supporters  and detractors.
For  Mexico,  free  trade has resulted  in im-
pressive  export growth,  the attraction  of more
foreign  direct investment  (FDI) and increased
imports.  Mexico  is  now  the  world's  eighth
largest  exporting  country  with  1999  exports
totaling  $126  billion.  FDI  has  also increased
substantially  as  a  result  of  free  trade-rising
from  $3  billion  in  1993  to  $10.5  billion  in
1999. However,  imports of foreign goods have
also increased dramatically, thus  subjecting lo-
cal industry to greater competition. The effects
of free  trade  can best  be demonstrated  by  the
impressive  growth  of  trade  between  the  U.S.
and  Mexico.  The  U.S.  does  more  business
with Mexico  than with Germany  and England
combined  with  total  bilateral  trade  reaching
$200 billion in  1999. Mexico is now the U.S.'s
second leading  trading partner,  surpassed only
by  Canada.
Free  trade has also reverberated throughout
the  agricultural  sector.  Since  1994,  Mexican
agricultural exports to the U.S. have grown by
over 70 percent.  In  1993,  8  percent of all U.S.
agricultural  imports  came  from Mexico.  That
total  increased  to  over  13  percent  in  1999
placing Mexico  as the second leading exporter
of  agricultural  products  to  the  U.S.  Mexico
represents  approximately  91  percent  of  all
U.S.  cucumber imports,  72 percent  of aspara-
gus  as  well  as  60  percent  of  cantaloupe  and
watermelon.  Mexico  is  playing  an  ever-in-
creasing  role  in the U.S.  consumer  market.
NAFTA  has  also  facilitated  the  export  of
U.S.  agricultural  products.  Mexico  is  a  sub-
stantial importer of U.S.  agricultural products.
With  over  100  million  inhabitants  and  rising
levels  of purchasing  power,  Mexico  is one  of
the  fasting  growing  export  markets  for  U.S.
agricultural products. Over 50 percent of Mex-
ico's  population  is  under  the  age  of 20.  Such
a  young  population  has led to  voracious  con-
204Zertuche and Eaton: The Commanding Heights of Mexican Agriculture
sumption  of U.S.  grains,  meats  and processed
foods.  In  fact, between  1993  and  1999 Mexi-
can  imports  of beef from the  U.S.  have risen
over 77 percent  while wheat  and corn exports
increased over 88 percent during the same pe-
riod.
On  balance,  Mexico  has been  particularly
successful  in  the  areas  of winter  vegetables,
coffee,  mangoes,  cucumbers,  tomatoes,  can-
taloupes,  and watermelons.  On the other hand,
the U.S. has an apparent advantage in the pro-
duction of wheat,  corn and  beef.
Currently,  over 80  percent of all  of Mexi-
co's  exports  are  to the U.S.,  thus demonstrat-
ing the country's  dependency  on the American
consumer  market.  As  a  result, Mexico  is also
moving  aggressively  to  diversify  its  interna-
tional  trading  relationships.  In  November
1999,  Mexico  signed  the text  of a  free  trade
agreement  with  the  European  Union  (EU).
The  agreement  is expected  to  enter into force
in June, 2000. The agreement with the EU will
allow  Mexico  to  diversify  its existing  export
markets  and  attract  more  FDI  from  Europe.
Nevertheless,  the  current  level  of  trade  be-
tween  the U.S.  and  Mexico,  especially  in the
agricultural  sector,  far  outstrips  future  trade
between  Mexico  and  the  EU.  Therefore,  the
importance of the agreement with Europe will
not be demonstrated through large increases in
trade flows and investment but as a symbol of
Mexico's commitment to creating  an open and
competitive  work  environment  controlled  by
transparent  rules.  This  enthusiasm  for  com-
petition,  quality  and efficiency  is also helping
redefine  the future  of the Mexican  agriculture.
Challenges  Facing Mexican  Agriculture
In  an  effort  to  improve  social  conditions  in
rural  communities  and reach  higher  levels  of
agricultural  productivity, the Mexican govern-
ment has  instituted several  important reforms.
Despite  these  impressive  efforts,  much  re-
mains  to  be  done.  This  section  will highlight
four  challenges  facing  Mexican  agriculture.
Without  comprehensive  solutions  to  these
challenges  it  will  be  difficult  for  Mexico  to
solve  endemic  problems  of rural  poverty and
agricultural  inefficiency.
Agricultural Subsidies
The  method  by  which  agricultural  subsidies
have traditionally  been applied has led to sys-
temic  inefficiencies.  The  government  has tra-
ditionally  awarded  subsidies  directly  to  indi-
vidual  farmers  instead  of  to  processing,
distribution  and  commercialization  activities.
More support for the  "down stream"  activities
would  lead  to  higher  earnings  for  Mexican
businesses  and  decrease  dependence  on  the
importation  of processed foods  from the  U.S.
A  vigorous  "down  stream"  market  requires
significant  investments  in  infrastructure  and
commercialization  networks.  For  example,  in
the state  of Sinaloa,  300  tons of tomatoes  are
thrown  away or used as feed  each day  due to
inefficient  distribution  and  commercialization
systems.  The areas of food processing and dis-
tribution-such  as cold  storage-represent  at-
tractive niche markets  for foreign  investors.
Many have argued that the policy of grant-
ing subsidies directly to the farmer is designed
to meet political rather than production objec-
tives.  The vast majority of people (and voters)
participating  in the agricultural  sector in Mex-
ico  are  individual  farmers.  Direct  subsidies
provide  for greater  voter  loyalty  and political
control.  Unfortunately, the diversion of limited
resources  directly  to  the  farmer  deprives  the
"down  stream"  activities  of the  support they
need  to  "gear up"  for international  competi-
tion.  More attention  should be paid  to the ar-
eas  of  processing,  distribution  and  commer-
cialization.  However, it is encouraging  to note
that  governmental  aid  programs  have  been
making  a  gradual  shift  from  crop  support  to
direct  production  assistance.  Thus,  instead  of
granting  a  farmer  a  fixed  subsidy  for  a  crop,
the  farmer  is  given  assistance  to  purchase
equipment and  supplies.
Poverty and Education in Rural
Communities
The  benefits  of  free  trade  and  globalization
have not trickled down to the vast majority of
Mexico's  rural population.  Small  farmers  and
ejiditarios  have  been  called  upon  to compete
with  large  multinational  farming  conglomer-
205Journal of Agricultural and Applied Economics, August 2000
ates.  Competition,  combined with drought and
years  of neglect,  has led to  difficult  times for
agricultural  workers.  Rural poverty  is extreme
in  several parts  of the country, contributing to
widespread  sentiment of social discontent. Lit-
erally  hundreds  of thousands  of campesinos
have been forced to abandon their native lands
in search  of opportunities in the cities or in the
U.S.  Rural  "refugees"  engage  in  activities
ranging  from  panhandling  in  the  streets  of
Mexico  City to assembly work in thriving bor-
der  maquiladoras. Also,  the  vitality  of  the
U.S.  economy  and  difficulties  in  agricultural
sector  have  served  as  a  magnet  for  undocu-
mented  workers.  The  above  factors  demon-
strate  that  rural  poverty  in  Mexico  is not  an
isolated  problem but rather  a contributing  in-
gredient to  social discontent,  overcrowding  in
border  cities,  and  an  increase  in  the  flow  of
illegal  aliens  to the U.S.
Greater  participation  in  processing,  distri-
bution  and  commercialization  of  agricultural
products  would lead to higher  salaries and im-
proved  standards  of living  for  Mexico's  rural
poor.  Greater  levels  of education  are required
to obtain  a job  in these  value-added  segments
of  the  production  chain.  Unfortunately,  the
Mexican  educational  system is not  adequately
preparing  students  to  seek  employment  in
"down  stream"  activities.
High Operating Costs
Running  a farm  in Mexico  is  much more  ex-
pensive  than  in the  U.S.  While  it is  true  that
labor  in Mexico  is cheaper  than  the U.S.  and
Canada,  just  about  everything  else-credit,
fertilizers,  pesticides,  machinery,  water,  and
seeds-is much more expensive.  For example,
cultivating  one  hectare  of  corn  in  Mexico  is
300  percent  more  expensive  than  in  the  U.S.
Likewise,  diesel  prices are 250 percent higher.
Mexico's  inadequate  infrastructure  further  in-
creases  transportation  and  warehousing  ex-
penses  while  also  contributing  to  the  unnec-
essary  spoilage  of product  and  late delivery.
The  acute  lack  of  competitive  financing
also  creates  difficulties  for  Mexican  farmers.
After  the  1994/95  crisis,  Mexican  banks  are
simply unwilling  or  do not have the means  to
make  loans  to  most  farmers.  Also,  Mexican
farms tend to be much smaller than operations
in  the U.S.,  which  does  not  allow  farmers  to
take advantage  of economies of scale. The fact
that Mexican  farmers  are  now forced to com-
pete  with  their  North  American  neighbors
while suffering from comparatively  higher op-
erating  costs  has  prompted  many  to  advocate
the need to restrict free trade  until costs begin
to  fall.  Such  opposition  could eventualy  lead
to further  trade disputes.
Transformation of the Ejido Regimen
In  1992,  then  president  Carlos  Salinas  ferried
through the congress  a change to Article 27 of
the Mexican constitution.  This change permit-
ted  the  disenfranchisement  of  the  country's
communal farms,  or ejidos. This represented a
fundamental  change  in  social,  economic,  ur-
ban  development  and agricultural  policies.
A  new  approach  to  the  communal  farms
was necessary  since  poverty  in the ejidos was
well  above  national  levels.  Ejidos were  inef-
ficient  and  a drag  on overall  agricultural pro-
duction.  Decisions  as  to  what  crops  to  plant,
pricing  and  where to  buy  vital  supplies  were
political  rather than business  decisions.  In the
early  1990s,  policy  makers  came  to  the  con-
clusion  that  the  past  socialist  regimen  could
not lift the ejiditarios  out of poverty.  After al-
most  seven  generations  of  often  conflicting
policies  such  as  massive  subsidies  and  then
egregious neglect,  the ejidos were in desperate
need of a large  dose  of market  reforms.
The  1992  changes  gave  the  ejiditarios  the
right  to  break  up  their  communal  lands  into
individual parcels and then sell them. The pro-
cess of incorporating  the ejiditarios  into an ef-
ficient  agricultural  system  has been  slow  and
painful.  The  legal  regimen  surrounding  ejido
disenfranchisement  is  confusing,  time  con-
suming  and devoid of legal  certainty. As  a re-
sult,  many of the investment opportunities  be-
tween  ejiditarios  and  the  private  sector  have
not  materialized.
The  ejidos are  also  presenting  challenges
for orderly urban development.  Many of Mex-
ico's  principal cities are  surrounded  by ejidos.
As the cities grow  and come into contact with
206Zertuche and Eaton: The Commanding Heights of Mexican Agriculture
the bordering  ejidos, problems have arisen due
to  the lack of legal  certainty  surrounding  for-
mer  ejido  lands.  Without  a  clear  legal  envi-
ronment,  the ejidos will continue  on the side-
lines  of agricultural reform.
Conclusion
Mexico is taking important steps to modernize
its  agricultural  sector.  Free  trade  has  allowed
the country  to  increase  its exports  while  also
subjecting  national  producers  to greater  com-
petition.  As  in  most countries,  the process  of
adaptation  to  the  rigors  of free  trade  is pro-
ducing  mixed  results  in  Mexico.  From  the
Mexican  perspective,  winners  in  the  agricul-
tural  area  include  fruits  and  vegetables  while
losers  include  wheat, corn  and  beef.  Expand-
ing  free trade  through  agreements  such as  the
one  with  the  EU will  further  subject  Mexico
to  greater  outside  competition,  forcing  the
country  to build  on its current  strengths  such
as  geographic  location  and  strategic  produc-
tion windows.  Mexican  agriculture  has  enor-
mous  possibilities.  Mexico's  rich  natural  re-
sources  and the government's  commitment to
agricultural  reform  have  set  the  stage for fu-
ture  growth.  Nevertheless,  several  challenges
must be addressed before Mexico  will be able
to take advantage of its production capabilities
and provide for higher standards  of living for
its rural  poor.
207

THE COMMANDING HEIGHTS OF MEXICAN AGRICULTURE

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