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Agricultural and Fisheries Policies in Mexico RECENT ACHIEVEMENTS , CONTINUING THE REFORM AGENDA

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30247 ISBN 92-64-03024-7 53 2006 06 1 P [email protected] -:HSTCQE=UXUWYY: http://www.sourceoecd.org/agriculture/92640 The full text of this book is available on line via this link: Those with access to all OECD books on line should use this link: http://www.sourceoecd.org/92640 SourceOECD is online the library OECD’s of books, periodicals and statistical databases. For more information about this award-winning service and free trials ask your librarian, or write to us at This This report analyses ambitious the reforms to effectsagricultural of Mexico’s and fisheries policies since and 1990 makes recommendations for further reforms. The is evaluation based on criteria for good agricultural and fisheries policy as agreed to by OECD countries. Such criteria, if would implemented, support economically sectors healthy that to the contribute wider economy, respect natural resources and use inputs effectively without resorting to distorting subsidies. RECENT ACHIEVEMENTS, RECENT CONTINUING ACHIEVEMENTS, Agricultural and Fisheries Policies in Mexico in Policies Fisheries and Agricultural THE THE REFORM AGENDA 532006061cov.indd 1

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Agricultural and Fisheries Policies in Mexico

RECENT ACHIEVEMENTS, CONTINUING THE REFORM AGENDA

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT Fx-titre.fm Page 2 Tuesday, November 21, 2006 11:55 AM

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

The OECD is a unique forum where the governments of 30 democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Commission of the European Communities takes part in the work of the OECD. OECD Publishing disseminates widely the results of the Organisation’s statistics gathering and research on economic, social and environmental issues, as well as the conventions, guidelines and standards agreed by its members.

This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries.

No reproduction, copy, transmission or translation of this publication may be made without written permission. Applications should be sent to OECD Publishing [email protected] or by fax 33 1 45 24 99 30. Permission to photocopy a portion of this work should be addressed to the Centre français d’exploitation du droit de copie (CFC), 20, rue des Grands-Augustins, 75006 Paris, France, fax 33 1 46 34 67 19, [email protected] or (for US only) to Copyright Clearance Center (CCC), 222 Rosewood Drive Danvers, MA 01923, USA, fax 1 978 646 8600, [email protected]. Foreword – 3

Foreword

This report on Mexico's agricultural and fisheries policies has been conducted at the request and with the financial support of the government of Mexico and with the approval of the OECD’s Committees for Agriculture and Fisheries. Part II reviews Mexico's agricultural policy from 1990 to 2005, with a view to providing recommendations for further policy reform. It was presented to the Working Party on Agricultural Policies and Markets at its meeting of 23-25 October 2006 for discussion and declassification under the authority of the Secretary General. Part III, the review of fisheries policies, was presented to the Committee for Fisheries at its meeting of 16-18 October 2006 for discussion and declassification under the authority of the Secretary General.

Acknowledgements Many people and institutions have contributed to this report. • Bénédicte Larre and David Haugh summarised the facts and judgments of surveys conducted by the OECD’s Economics Directorate. Their text, which is reproduced as Part I of this study, defines the context in terms of the macroeconomic setting, and other sectors and policies, such as banking, energy and education.

• Staff of the Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación (SAGARPA) of Mexico made significant contributions to the agricultural part of the project, although the OECD Secretariat is responsible for all information and analysis appearing in the report. SAGARPA administrators explained the programmes in detail, and provided available data. Staff of Unidad de Estudios del Sector Agroalimentario y de Apoyo a las Negociaciones Comerciales Internacionales of Apoyos y Servicios a la Comercialización Agropecuaria (ASERCA), in particular, advised OECD researchers and screened for errors of fact or omission. Mexico’s delegation to the OECD provided further assistance and co-ordination.

• StaffoftheComisión Nacional de Acuacultura y Pesca (CONAPESCA) of Mexico made significant contributions to the fisheries part of the project, although the OECD Secretariat is responsible for all information and analysis appearing in the report. CONAPESCA staff assisted the OECD with data and information on programmes, and reviewed the report for errors of fact or omission. Staff from the Instituto Nacional de la Pesca reviewed the technical information on the status of the stocks for errors of fact and interpretation.

• Researchers not associated with either SAGARPA or the OECD also contributed to the project. John Scott, Centro de Investigación y Docencia Económicas, provided text that defined much of the chapter about agricultural policies and poverty alleviation. Raul Abreu Lastra, Fundación IDEA, provided material that served as a basis for the background chapter on the agricultural sector and rural areas. Antonio Yunez-Naude,

AGRICULTURAL AND FISHERIES POLICIES IN MEXICO: RECENT ACHIEVEMENTS, CONTINUING THE REFORM AGENDA – ISBN-92-64-030247 © OECD 2006 4 – Foreword

Centre for Economic Studies and Coordinator of PRECESAM, El Colegio de Mexico, served as reviewer of an early draft of the agriculture text. Rolando Avendano provided assistance with data and translations.

• The fisheries part of the project also benefited from a number of background papers prepared by researchers outside OECD and CONAPESCA. Alonso Aguilar Ibarra, Universidad Nacional Autónoma de México, provided information on the institutional arrangements and challenges facing the fisheries sector. Claudia Beltran Turriago prepared background material on the linkages between rural policy and fisheries and aquaculture in Mexico. Francisco J. Martinez Cordero, Centro de Investigación Alimentación y Desarolles, Unidad Mazatlán en Acuacultura y Manejo Ambiental, provided material that served as the basis for the chapter on aquaculture policy. Felipe Eloy Sosa-Cordero, El Colegio de la Frontera Sur (ECOSUR), Unidad Chetumal, undertook an extensive review of the status of key fisheries.

• A team of staff members working in the Directorate of Food, Agriculture and Fisheries of the OECD contributed to this report. Overall guidance and direction on the review of agricultural policies, as well as reviews at a technical level, were provided by Carmel Cahill, Stefan Tangermann and Ken Ash. Roger Martini used PEM to provide the analysis of welfare effects. Céline Giner and Claude Nenert used AGLINK to provide the analysis of commodity market effects, with advice from Loek Boonekamp and Martin von Lampe. Michèle Patterson provided assistance with formatting and processing the document, and Marina Giacolone also assisted. Wyatt Thompson was project co-ordinator of the agriculture review and is the main author of the remaining sections.

• The review of fisheries policies was prepared in the Fisheries Division of the Directorate of Food, Agriculture and Fisheries of the OECD. Anthony Cox was the project coordinator and the main author. Carl-Christian Schmidt provided extensive reviews of the report, Elif Koksal provided assistance with data and translations, while Emily Andrews-Chouicha provided assistance with document processing.

AGRICULTURAL AND FISHERIES POLICIES IN MEXICO: RECENT ACHIEVEMENTS, CONTINUING THE REFORM AGENDA – ISBN-92-64-030247 © OECD 2006 Table of contents – 5

Table of contents

Glossary ...... 9

Executive summary...... 11

PART I. OVERVIEW OF THE MEXICAN ECONOMY...... 17

Chapter 1. An overview of economic performance and the structural environment in Mexico...... 19 Introduction ...... 19 The economy has become more open in the 1980s and 1990s...... 20 Macroeconomic performance...... 20 Structural environment...... 28 Conclusion...... 36

Bibliography ...... 37

PART II. AGRICULTURE...... 39

Introduction...... 41

Chapter 2. Background on agriculture and the rural economy ...... 43 Introduction ...... 43 Overall sector performance ...... 44 Land tenure...... 48 Agricultural activities...... 49 Rural population...... 53 Infrastructure, inputs and resources...... 61 Chapter 3. Main developments in agricultural policies 1990-2006 ...... 69 Introduction — the policy framework...... 69 International trade policy ...... 71 Domestic market intervention ...... 73 Income support — PROCAMPO...... 76 Input support measures ...... 77 Water and other natural resources...... 79 Policies to improve productivity ...... 81 Other policy measures...... 85 Total expenditures on agricultural policies ...... 85 Chapter 4. Agricultural policy transfers and welfare effects...... 87 Introduction ...... 87 Monetary transfers due to agricultural policies...... 87 Welfare effects of agricultural policies ...... 103 Conclusion...... 109

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Chapter 5. Agricultural policies and commodity markets...... 115 Introduction ...... 115 Brief overview of commodity production and consumption...... 115 Analysis...... 118 Conclusion...... 135 Chapter 6. Agricultural policy and rural poverty...... 139 Introduction ...... 139 Land: The ejido reform and agrarian institutions...... 140 Agricultural support and rural development ...... 144 Conclusion...... 157 Chapter 7. Inputs, natural resources and institutions...... 161 Introduction ...... 161 Infrastructure ...... 161 Finance ...... 163 Technology...... 165 Natural resources...... 166 Institutional structures of policy design and implementation...... 170 Conclusion...... 172 Chapter 8. Conclusions and recommendations...... 175 Directions of agricultural policy...... 175 Achievements of the reforms ...... 179 Priorities for the agricultural sector...... 181 Actions for further reform...... 182 Annex II.A. Exchange rate table...... 189 Annex II.B. Detailed programme information...... 191 Bibliography ...... 199

PART III. FISHERIES...... 203

Introduction...... 205

Chapter 9. Background on the fisheries and aquaculture sector ...... 207 Production trends...... 209 Markets and trade...... 213 Fleet structure...... 214 Employment ...... 217 Regional characteristics...... 218 Chapter 10. Fisheries management policy...... 221 Developments in institutional arrangements ...... 221 Current institutional framework ...... 226 Support programmes ...... 230 International engagement ...... 240 Key institutional issues...... 243

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Chapter 11. Review of fisheries management performance since 1990 ...... 255 Management instruments ...... 256 Status of major stocks ...... 257 Profitability and rent generation...... 267 Key fisheries management issues...... 268 Conclusion...... 274 Chapter 12. Aquaculture sector policy ...... 275 Institutional arrangements ...... 276 Environmental aspects of aquaculture policy...... 282 Stability of the policy regime ...... 283 Key policy issues...... 284 Conclusion...... 293 Chapter 13. Fisheries policy and rural development...... 295 Impact of fisheries management policies ...... 297 Aquaculture policy and rural development ...... 300 Impact of fisheries support programmes ...... 301 Conclusion...... 306 Chapter 14. Conclusions and recommendations...... 309 Conclusions ...... 309 Achievements of fisheries policy changes ...... 311 Recommendations ...... 316

Bibliography ...... 325

AGRICULTURAL AND FISHERIES POLICIES IN MEXICO: RECENT ACHIEVEMENTS, CONTINUING THE REFORM AGENDA – ISBN-92-64-030247 © OECD 2006

Glossary – 9

GLOSSARY

Acronym Spanish English

BANCOMEXT Banco Mexicano de Comercio Exterior Foreign trade bank BANPESCA Banco Nacional Pesquero y Portuario State-owned fisheries bank CONAPESCA Comisión Nacional de Acuacultura y Pesca Commission for Aquaculture and Fisheries DOF Diario Oficial de la Federación Government’s official diary ENSO El Niño-Oscilación del Sur El Niño-Southern Oscillation EEZ Zona Exclusiva Económica Exclusive Economic Zone FAO Organización de las Naciones Unidas para Food and Agriculture Organisation la Agricultura y la Alimentación FIRA-FOPESCA Fideicomisos Instituidos en Relación con la Trust Fund for Agriculture and Fisheries Agricultura-Fondo para la Pesca IATTC Comisión Internamericana del Atún Tropical Inter-American Tropical Tuna Commission ICCAT Comisión Internacional para la International Convention for the Conservación del Atún Atlántico Conservation of Atlantic Tuna INE Instituto Nacional de Ecología National Institute of Ecology INEGI Instituto Nacional de Estadística, Geografía National Institute of Statistics e Informática INP Instituto Nacional de la Pesca National Fisheries Institute LGEEPA Ley General del Equilibrio Ecológico y Law of Ecological Equilibrium and Protección al Ambiente Environmental Protection NOMs Normas Oficiales Mexicanas Mexican Official Standards PNDPR Plan Nacional de Desarrollo para la Pesca y National Programme for the sus Recursos Development of Fisheries and its Resources PROCAMPO Programa de Apoyo Directos al Campo Programme of Direct Payments to the Countryside PROFEPA Procuraduría Federal de Protección al Environmental Protection Agency Medio Ambiente PROMOAGRO Programa de Promoción Comercial y Funding Programme for Export Support Fomento a las Exportaciones de Productos of Agricultural and Fisheries Produces Agroalimentarios y Pesqueros Mexicanos PRONASOL Programa Nacional de Solidaridad Funding programme for poor communities PROPEMEX Productos Pesqueros Mexicanos State-directed fisheries firm SAGARPA Secretaría de Agricultura, Ganadería, Secretariat of Agriculture, Livestock, Desarrollo Rural, Pesca y Alimentación Rural Development, Fisheries and Food SEMARNAT Secretaría de Medio Ambiente, Recursos Secretariat of the Environment, Natural [SEMARNAP] Naturales [y Pesca] Resources [and Fisheries] SEPESCA Secretaría de Pesca Secretariat of Fisheries UNCLOS Convención de las Naciones Unidas sobre United Nations Convention on the Law of la Ley del Mar the Sea

AGRICULTURAL AND FISHERIES POLICIES IN MEXICO: RECENT ACHIEVEMENTS, CONTINUING THE REFORM AGENDA – ISBN-92-64-030247 © OECD 2006

Executive summary – 11

Executive Summary

This report analyses the effects of Mexico’s ambitious reforms to agricultural and fisheries policies since 1990 and makes recommendations for further reforms. The evaluation is based on criteria for good agricultural and fisheries policy as agreed to by OECD countries. Such criteria, if implemented, would support economically healthy sectors that contribute to the wider economy, respect natural resources and use inputs effectively without resorting to distorting subsidies.

Agricultural policy

We commend Mexico for the direction of its agricultural policy reform over the last 15 years, and we note Mexico’s achievements. The reforms have reduced the degree of commodity market distortion; improved the effectiveness of income transfers to producers; reduced consumer food costs; reduced the bias against rural areas in social programmes such as food aid; reduced the extreme regressivity of agricultural transfers; improved transparency of policies through decentralisation; have begun to recognise the mis-alignment of private and public incentives as regards use of land, water and other resources; and reduced the cost of agricultural policy in terms of total support in GDP, and the share of producer support in farm receipts. We identify the remaining obstacles that lie between Mexico’s current agricultural policy and a policy regime that is fully consistent with the principles defined by the OECD Ministers. The remaining restrictions to private land ownership prevent effective allocation of a critical asset, inhibit investment and limit the value of land to those with certified claims. The vast stretches of remaining communal land restrict development and resource management. Use of natural resources, such as water, remains mostly unmeasured and property rights are infrequently enforced, so the degree of exploitation is often not known and private decision-making is not aligned with public requirements. Most agricultural policy transfers are distributed regressively and even PROCAMPO, the least regressive of the large agricultural programmes, is not as redistributive as a poverty alleviation programme. Some of the highest obstacles are the remaining barriers to trade, payments tied to outputs (Target Income) and new energy subsidies. These policies do not provide much benefit to farmers for all their costs to consumers and taxpayers, and their unintended consequences include market distortions that tie producers to historically produced crops, resource depletion and a highly regressive distribution of benefits. We recommend the following actions towards further reform. A common theme is to target government support more directly to objectives that are better defined as a way to improve policy effectiveness and transparency, while at the same time reducing the severity of unintended negative consequences. • Eliminate remaining trade barriers, and replace Target Income and energy subsidies. Mexico should delineate clearly the objectives of these policies and target

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those objectives. Current practices create distortions that bias production towards historically planted crops, are not very effective as income support, are regressive, and provoke over-exploitation of natural resources.

• Identify the objective of PROCAMPO and target that objective. We find that this transitional programme represents a substantial improvement over pre-reform policies, if measured by its transparency and its effectiveness at transferring income with fewer distortions to production practices, but we recommend further improvements. Four possible objectives could be achieved more effectively by a better targeted programme as PROCAMPO expires: alleviate rural poverty, transfer income to producers, reward sustainable natural resource use, or facilitate land privatisation. The appropriateness of PROCAMPO as a poverty alleviation mechanism is questionable compared to non- sectoral, more targeted programmes, so this objective would be better served by a revised programme. Further producer income support tied to land continues to neglect the needs of landless labourers, and will eventually be capitalised in land rents and prices. Recipients are currently permitted to maintain land in good environmental condition without production, whereas a programme that targets sustainable resource use would reward producers for such practices — or, better still, their outcomes — rather than passively permitting sustainable resource use. Land privatisation is necessary, and could be supported by investment assistance, but requires that payments be delinked from land. It is for Mexico to choose what objective to target, and to re- orient PROCAMPO expenditures to achieve that objective.

• Restructure the institutional arrangements of policy-making. The formulation of agricultural policy is perceived by at least some observers as unpredictable and non- transparent. Mexico should consider reforming institutions to delineate responsibilities clearly among Ministries and levels of government, to co-ordinate among all public actors involved in a sector or a topic, to design programmes that establish clearly the environment in which investments and business plans can be made, and to assess or review policy effectiveness. Specific steps towards better institutional arrangements of policy-making would include reducing the impact of political cycles, such as the six- year federal cycle, and initiating regular processes – of which we propose agricultural censuses and environmental data collection as priorities – instead of the ad hoc arrangements currently in place.

• Measure resource use, and enforce private and public property rights. Having adopted “polluter pays” and “user pays” principles, it remains for Mexico to implement them fully. The first challenging steps are improved measurement of resource use, and enforcement of property rights. Agricultural policies could encourage water user associations, distribute water meters to farmers exploiting private wells and further help producers learn to use resources sustainably. The consequences of other government policies on resource use should be better recognised: communal land tends to be poorly managed, policies that encourage production also encourage over-exploitation of natural resources, and support to expanding irrigation systems encourages excessive water use.

• Privatise land. Shared ownership of land under the remaining elements of the communal land system is intended to serve certain societal needs in the absence of broader social safety nets that exist in other OECD members. As social policies are developed to meet these needs, Mexico should move towards eliminating communal

AGRICULTURAL AND FISHERIES POLICIES IN MEXICO: RECENT ACHIEVEMENTS, CONTINUING THE REFORM AGENDA – ISBN-92-64-030247 © OECD 2006 Executive summary – 13

land ownership, remove limits to private ownership of land, and help ejidos to privatise. Land privatisation might be facilitated by a bond-type payment that is not linked to land, and thus not capitalised immediately in the land value. Such a payment would provide capital as land markets developed, as well as providing an alternative to the social policy functions behind limits to private ownership of land.

• Support the development of the sector as a whole. Further development of Mexico’s agricultural sector requires public investment. Public investment could improve inspection services, information about markets and information technology, and research and technological development. Continued infrastructure spending may prove useful, but should be directed to the sector as a whole and not biased heavily towards irrigation, nor towards a particular commodity or commodity group.

Fisheries policy

Mexico has made progress since 1990 in reforming the policies governing the fisheries sector. The regulatory environment in the early 1990s was not conducive to developing a sustainable fishery sector and hampered the sector’s longer term economic prospects. Following multiple shifts in policy direction during the 1990s, the current policy framework is now more appropriate to helping the sector move towards a more sustainable and profitable future. The high value commercial tuna and shrimp fisheries are sustainably managed and the aquaculture sector is flourishing. There has been a marked success in reducing bycatch in the tuna and shrimp fisheries, and the negative environmental impacts of aquaculture have been significantly reduced. Transparency of stock assessments, resource status and management measures have continued to improve, together with the extent of fisheries surveillance. However, it is clear that more reform needs to be undertaken if the fisheries sector is to remain on a sustainable path and generate long-term net economic and social benefits for Mexico. The key areas for reform identified in this report cover the vision for the sector, management of fishing effort, stock recovery, controlling the artisanal fisheries, better targeting of support programmes, and strengthening institutional arrangements to more effectively undertake management and enforcement. This report recommends the following actions towards further reform. • Develop a vision for the sector in order to provide institutional stability over time. A major priority for Mexico is to develop a higher-level, long-term vision for the future of the fisheries and aquaculture sector in order to provide a sound basis for achieving a balance between industry development, resource sustainability and coastal poverty alleviation. A clearly articulated vision will ensure that the sector’s regulatory framework can transcend political administrations and reduce long-term uncertainty. The need for a stable policy framework is particularly acute for the fisheries sector where management policies should be geared to enable long term, sustainable utilisation of common pool resources. • Tighten controls on fishing effort. Further management reforms are required to control the effort that can be brought to bear on stocks in key fisheries. The heavy reliance on limited entry, technical measures, and closed seasons and areas is unlikely to be effective in the longer term due to input stuffing and effort creep. Market-based mechanisms, including transferable effort quotas and community-based management, should be introduced for those fisheries where feasible. Altering the economic

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incentives faced by fishers, and harnessing the power of the market to efficiently allocate resources, will improve the economic viability and adjustment capabilities of the sector. The use of decommissioning schemes could be extended, although considerable care needs to be taken in the design and implementation of such schemes to ensure they meet their objectives without creating perverse incentives for fishers. It is essential that decommissioning schemes be introduced together with other measures that will effectively prevent capacity and effort re-entering a fishery. • Institute fisheries management plans and stock recovery programmes. While a few fisheries have management plans in place, these have generally been ad hoc, fragmented and effective in only some cases. Mexico should introduce a system of legally enforceable, integrated fisheries management plans building on the current system of Normas Oficiales Mexicanas and the National Fisheries Chart, and the consultative framework that is already established and functioning for a number of fisheries. Stock recovery programmes for overexploited species should be an integral part of management plans, and should include measurable goals for stock recovery based on scientifically-derived reference points. Stronger enforcement of existing regulations for remaining fishers should be an integral part of stock recovery plans. • Bring the artisanal sector under stronger management. The continued use of artisanal fisheries as a social safety net will only exacerbate existing problems of resource conflict, stock degradation and rural poverty in the coastal regions: it is both poor fisheries policy and poor social policy. This is especially evident in the shrimp fishery where conflicts over access between different fleet segments continue unabated. Fisheries and rural development policies need to be mutually supportive. While broader social policies are necessary to address rural poverty and development concerns, fisheries policies can be part of the solution. A necessary first step is to determine the size of the artisanal fleet. The use of local co-management initiatives may be effective for localised stocks and area-based fisheries (such as abalone, oysters, and lobster), particularly if cooperatives and coastal ejidos can be incorporated into the management arrangements. • Better target support programmes. Subsidies to the sector have increased as part of a general push to develop the sector. While these have improved short-term profitability in some fisheries and helped to support some poorer fishing communities, many of the programmes will adversely affect the sustainability and economic profitability of the sector, and create a culture of subsidy dependence eroding flexibility and resilience. The majority of Mexico’s financial transfers are directed towards direct payments and cost-reducing transfers and this should be reduced and better targeted. In particular, Mexico should examine the regional and fleet destinations for subsidies in order to ensure that they effectively meet their objectives and target populations. Cost recovery for a range of fisheries services provided to the commercial sector should be considered. • Continue reform of the institutional arrangements to provide for more effective management of the sector. Mexico should examine the establishment of CONAPESCA as a functionally independent agency within SAGARPA, with an independent budget line, devolved decision making powers on fisheries issues, and a direct line of reporting to the Secretary for Agriculture. The decentralisation and regionalisation of institutional arrangements should continue. At the moment, this process is haphazard with no clear guidance as to the government’s intention. A clear plan and appropriate commitment to funding is required with the aims of increasing

AGRICULTURAL AND FISHERIES POLICIES IN MEXICO: RECENT ACHIEVEMENTS, CONTINUING THE REFORM AGENDA – ISBN-92-64-030247 © OECD 2006 Executive summary – 15

transparency, accountability, and stakeholder participation and empowerment. A key component in any change in institutional arrangements is the pressing need to unify fisheries enforcement functions under CONAPESCA. Enforcement efforts are currently hampered by a poor institutional structure and a lack of resources. The split in enforcement functions between government agencies and the inability of CONAPESCA to enforce its own regulations without referring them to the National Prosecutor significantly reduces the effectiveness of fisheries enforcement. Enforcement of regulations within the artisanal fisheries and many of the small scale fleets is virtually impossible with current levels of resources and without having a significant impact on the livelihoods of the poorer fishers. Plans to extend the use of vessel monitoring systems to small scale and artisanal vessels and observer coverage to parts of the shrimp fishery should be pursued. • Improve agency coordination for aquaculture projects. At present, there are too many overlapping and contradictory regulations governing aquaculture developments. A “one-stop shop” would be a useful innovation to reduce red-tape and streamline the approvals process. Further work is also required to develop a coherent, transparent, risk-based set of environmental parameters for aquaculture operations in order to reduce the costs and uncertainty that currently exists in relation to environmental compliance.

Conclusion

We recognise that agricultural and fisheries policy reforms are difficult to undertake in isolation. Reforms are probably more readily launched in the context of multilateral agreements. More importantly, overall economic management, including public services such as education, safety net provisions and health, must be improved in parallel with further reforms to agricultural and fisheries policies. It may appear premature to restrain agricultural and fishery policies that serve functions relating to rural poverty alleviation or which offset high costs imposed by finance or energy policy until and unless these objectives are met by other policies. However, the reforms outlined here are critical steps towards a regime that would support agricultural and fisheries sectors that contribute to overall — including rural — economic development, respond to consumer demand, compete effectively for inputs such as labour and capital without subsidies, are modern and productive, and draw on natural resources at a sustainable rate.

AGRICULTURAL AND FISHERIES POLICIES IN MEXICO: RECENT ACHIEVEMENTS, CONTINUING THE REFORM AGENDA – ISBN-92-64-030247 © OECD 2006

Part I. Overview of the Mexican economy – 17

PART I.

OVERVIEW OF THE MEXICAN ECONOMY

AGRICULTURAL AND FISHERIES POLICIES IN MEXICO: RECENT ACHIEVEMENTS, CONTINUING THE REFORM AGENDA – ISBN-92-64-030247 © OECD 2006

Chapter 1. An overview of economic performance and the structural environment in Mexico – 19

Chapter 1.

An overview of economic performance and the structural environment in Mexico

Introduction

This chapter provides an overview of the performance and the structural characteristics of the Mexican economy. It is divided into two main sections. The first section describes the performance of the Mexican economy over the past two decades and the current situation and prospects. While great progress has been made to achieve macroeconomic stability the rate of growth of gross domestic product (GDP) per capita remains insufficient for a rapid catching-up to the levels of other OECD members (Figure 1.1). The second section therefore discusses some framework conditions that are of key importance to raise growth potential of the Mexican economy and which would at the same time improve productivity in the agricultural and fisheries sectors.

Figure 1.1. Mexico's Growth performance in comparison

1. The average growth rate of GDP per capita is calculated in constant 2000 prices, USD (PPP), over the period 1996-2004. The level of GDP per capita is for 2004. Source: OECD, Main Economic Indicators database; OECD, National Accounts database.

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The economy has become more open in the 1980s and 1990s

The process of economic liberalisation commenced in the 1980s. Restrictions on foreign investment were reduced and trade policy was liberalised and in 1986 Mexico became a member of the General Agreement on Trade and Tariffs (GATT). A process of product market liberalisation also began in the 1980s with the lifting of price controls, including in agriculture, and the deregulation efforts in transport and communications. Financial market restrictions were lifted from 1988 with the elimination of credit quotas to high priority sectors, the lifting of interest rate ceilings and a limited reduction in ownership restrictions in the banking sector. The key step in the liberalisation in the early 1990s period was the North American Free Trade Agreement (NAFTA). Negotiations began in 1990 and concluded in 1992, with the treaty coming into force from the beginning of 1994. This continued the opening process and dramatically increased the size of markets available for free entry of Mexican goods and increased Mexico’s exposure to import competition from the United States and Canada, which enhanced efficiency of Mexican firms. With the opening of the economy, exports and imports combined have increased as a share of GDP from 39% in 1990 to 61% in 2005. Mexico’s major trading partner is the United States, which accounts for over 70% of Mexico’s agricultural exports and over 85% of exports of agricultural and fishery products. The United States also supplies more than two-thirds of Mexico’s imports of agricultural and fishery products. The main exports1 of Mexico to the United States are machinery and transport equipment (56%), other manufactures (22%), mineral fuels (12%), agricultural and fishery exports (including food, live animals, beverages and tobacco) (5%) and chemicals (4%). Following NAFTA, agricultural and fisheries exports have almost doubled and the range of products has diversified. Imports of agricultural and fisheries products are larger than exports and have more then doubled during the period since NAFTA.

Macroeconomic performance

From the debt crisis in 1982 to the currency crisis in 1995 During the past 25 years the Mexican economy has suffered two major crises, the debt crisis in 1982 and the currency crisis in 1995. In 1982 the fiscal deficit had reached 17% of GDP and Mexico was no longer able to service its increasing foreign liabilities. The government defaulted on its sovereign debt obligations, sparking the debt crisis, and necessitating a large consolidation of the fiscal position throughout the 1980s and into the 1990s. This consolidation was interrupted by a terms of trade shock resulting from an oil price collapse and a major earthquake in 1985, but then continued in earnest from the mid 1980s through to 1991. From 1988 to 1994 the central objective of monetary policy was to stabilise the exchange rate, first by fixing the peso rate to the US dollar, then by a crawling peg followed by a system of widening fluctuation bands, where the peso depreciated at a pre-announced daily rate. This implied setting a fixed limit on the appreciation of the peso vis-à-vis the dollar, but allowing a gradual depreciation of the peso, and a gradual widening of the fluctuation band. In the early 1990s Mexico was benefiting from earlier reforms in the 1980s with GDP growth of around 4% per annum that had begun in earnest in 1989 after seven years of stagnation. However, high population growth meant that per capita GDP growth remained below 2%.

AGRICULTURAL AND FISHERIES POLICIES IN MEXICO: RECENT ACHIEVEMENTS, CONTINUING THE REFORM AGENDA – ISBN-92-64-030247 © OECD 2006 Chapter 1. An overview of economic performance and the structural environment in Mexico – 21

The fiscal consolidation improved the fiscal position from a deficit of around 15% of GDP in 1986 to a surplus by 1991, mainly through a cut in the expenditure to GDP ratio. However, from 1992 onwards there was a return to a loosening stance with the fiscal balance returning to a small deficit. The effective loosening was greater as the government permitted rapid net lending growth by publicly owned banks, which generated a significant indirect fiscal stimulus to the economy. Nonetheless, the process of disinflation continued thanks to the exchange rate commitment which was successful in reducing Mexican inflation from over 100% in 1988 to 20% in 1989 and 7% by 1994 (Figure 1.2).

Figure 1.2. Inflation performance

Source: Bank of Mexico.

The return to solid growth and falling inflation was accompanied by an ongoing widening of the current account deficit reflecting a rising saving-investment gap. There was a sharp decline in private saving associated with financial market deregulation, increased confidence following fiscal consolidation and higher asset values, while public saving increased. Investment increased driven by the liberalisation of the economy, increasing competition and the prospects of NAFTA. The ongoing fall in private sector savings combined with a decline in public savings from 1992 onwards and the continued increase in investment led to a current account deficit of around 8% by 1994. The widening of the current account deficit meant that Mexico became increasingly dependent on capital inflows from abroad. With foreign direct investment (FDI) remaining broadly stable, a growing proportion of the current account deficit was financed by increases in short-term portfolio investment. The increasing size of the current account deficit and the reliance on short-term funding increased Mexico’s vulnerability to a sudden change in investor sentiment. This vulnerability was further compounded by a large change in the composition of Mexico’s public debt. Interest rates

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on government debt started to rise at the end of 1993 and it became difficult for the government to place short-term peso debt in the market. From 1993 to 1994 the proportion of US dollar indexed bonds (tesobonos) issued by the Mexican government rose from 4% to 74% of total government bonds as the government sought to take advantage of lower interest rates on these securities, but this made the government budget vulnerable to exchange rate changes. Triggered by political events investor sentiment deteriorated during the course of 1994, leading to large outflows of portfolio capital and a rapid run down in foreign exchange reserves. As reserve levels declined the central bank’s exchange rate commitment was no longer sustainable and the government was forced to devalue and then float the peso in December 1994. Confidence continued to deteriorate into 1995 with concerns about the health of the banking sector and the Mexican government’s ability to repay tesobonos. By the first months of 1995 the peso had fallen to around 50% of its pre- crisis level and with the withdrawal of foreign capital, interest rates had increased to over 80%. At the same time, the international community came to the rescue with USD 40 billion in financial support made available by the US Treasury, US Federal Reserve, the Bank of Canada, the BIS and the IMF, some of which was used to replace tesobono borrowings. The currency crisis was accompanied by a banking crisis. Following deregulation of the financial sector in the 1980s, an increasing number of commercial banks competed for market share without adequate procedures for credit control and banking supervision. This led to an explosion of credit to the private sector, which was followed by a large rise in non-performing loans from 2% of total loans in 1990 to around 10% in 1994. The effect of the currency crisis on the banking sector was mainly via a decreased capacity of borrowers to repay loans. The large rise in interest rates, the depreciation of the exchange rate (30% of commercial bank lending to the private sector was foreign- currency denominated) and the collapse in activity in 1995 severely constrained borrower’s ability to repay debt and the proportion of non-performing loans continued to increase. The rise in non-performing loans and inadequate bankruptcy laws put severe pressure on banks’ profitability and the banking system came under extreme pressure. The problems in the private sector were further compounded by large non-performing loans of state-owned development banks, including those of Banrural in the agricultural sector. To prevent a systemic collapse and ease the stress on the financial system, a range of bank assistance measures was taken, including temporary capital injections and a US dollar lending mechanism provided to banks through the Bank of Mexico using international support resources. Rescue measures continued over several years generating concerns about the emergence of moral hazard problems in the banking sector. The crisis forced a sudden readjustment of the economy, which had to fund investment almost entirely from domestic savings. As a result the current account deficit shrunk from -7% in 1994 to -0.6% in 1995 and GDP fell by 6% as investment and private consumption contracted sharply after the withdrawal of foreign capital and the sharp rise in interest rates. At the same time, the large fall in the exchange rate combined with previous policy reforms to open the economy, including NAFTA, allowed Mexico’s producers to switch their sales from domestic markets to abroad resulting in large increases in exports. Inflation jumped to over 50% following the depreciation of the peso. There was also a worsening of labour market conditions, with a significant decline in private sector insured employment2 and a rise in the open unemployment rate from 3.6% to 6.3%. In addition the scale of both informal labour and poverty increased.

Regaining stability and sustained growth In contrast to the long period of stagnation that followed the 1982 debt crisis, the economy quickly returned to growth following the currency crisis and recession in 1995, with GDP expanding 5% in 1996. A rebound in investment by export-oriented firms as well as public sector projects helped to drive this turnaround. The fundamental policy reforms taken after the 1982 crisis that had opened and liberalised the economy allowed it to adjust much faster than previously. The economy continued to grow vigorously for five years from 1996 to 2000, averaging growth of over 5% per annum. The increased openness of the economy led to an increase in the share of exports in GDP from 17% in 1994 to 32% in 2000. Openness also manifested itself in significant inflows of FDI, which continued even during the 1995 currency crisis, with the gross inflow of FDI around 3% of GDP per annum from 1996- 2000, representing a significant source of investment capital (Figure 1.3).

Figure 1.3. Gross foreign direct investment in Mexico PercentofGDP

1. Excludes the sales of Banamex in 2001 and of BBVA-Bancomer in 2004. 2. Includes the sales of Banamex in 2001 and of BBVA-Bancomer in 2004. Source: Secretaria de Economia, Dirreción General de Inversión Extranjera.

In the labour market approximately three million new jobs were created in the formal sector from 1996 to 2000 and the official unemployment rate fell back to 2.1%. However, rapid working-age population growth meant that informal employment also continued to absorb new entrants to the labour market, with its share remaining broadly constant at around 25% of total employment.

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Nevertheless, despite the quick recovery in GDP, the currency and banking crises still caused a significant set back to Mexican living standards. The level of GDP per capita did not return to its 1994 level until 1998 and private consumption per capita did not surpass its 1994 level until 2000. The loss in living standards was also evidenced by the significant fall in real wages that followed the crisis. While the post crisis fall in wages helped to improve competitiveness, exports, the recovery of the economy and a reduction in inflation, it also represented a large fall in the purchasing power of Mexicans.

Fiscal and monetary policy

During the currency crisis in 1995 the government tightened fiscal policy via expenditure cuts and achieved a nearly balanced budget despite large increases in interest payments (Figure 1.4). From 1996 to 1997 the financial balance was maintained close to zero. Oil accounts for about one third of total government revenues and in 1998, government revenue came under pressure when the oil price fell below original budget assumptions. The government responded swiftly, cutting expenditure, particularly investment, to keep the budget on target. In 1999 and 2000, when the oil price rose again significantly, the windfalls were used to lower public sector debt and contribute to a newly created oil stabilisation fund.

Despite the budget discipline, the crisis did affect the broader public finance position. The government’s commitments to support the financial sector came at a high fiscal cost, around 20% of GDP. These programmes contributed, along with public-private partnership commitments in the electricity and the oil sector (PIDIREGAS), to a public sector borrowing requirement (PBSR) that was around 6% of GDP from 1996 to 1999. While narrow public debt decreased as a percentage of GDP over this period, public debt including these wider obligations increased by around 5 percentage points to over 40% of GDP.

Consumer Price Index (CPI) inflation was gradually reduced over this period to 9.5% in 2000. Following the 1995 crisis, the central bank switched from its previous focus on the exchange rate towards an inflation targeting regime. Nominal exchange rate stability from the beginning of 1996 and moderate wage developments helped to reduce inflation initially and steadily reduced inflation expectations. As it continued to achieve its objective of reducing inflation, the Bank of Mexico also increased its credibility.

Figure 1.4. Public sector budget aggregates PercentofGDP1

1. The public sector comprises federal government and public enterprises under budgetary control. 2. The primary balance is the financial balance less net interest payments (such as PEMEX). Financial intermediation by development banks is not included. 3. Public sector borrowing requirement (PSBR) includes net costs of PIDIREGAS, inflation adjustment to indexed bonds, imputed interest on bank restructuring and debtor-support programmes and financial requirements to development banks. Non-recurrent revenues (privatisation) are not included. Further adjustment to include the net non-recurrent capital costs of the financial sector support programmes would increase the PSBR. 4. Includes oil extraction royalties, VAT and excise taxes on oil products. Source: Ministry of Finance; Bank of Mexico; OECD Economic Outlook database 79.

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Increased linkages between Mexico and the United States

In 2001 the economy began to slow significantly in response to a sharp slowdown in the United States, resulting from a decline in investment as profit expectations deteriorated and the stock market bubble burst. In contrast to the sharp decline in GDP in the 1995 crisis, this recession remained mild with GDP falling by only 0.2% in 2001. While the previous two crises in 1982 and 1995 were “home-made” the 2001 recession was caused by a negative shock originating abroad and reflecting closer integration of the Mexican economy with the US economy after the beginning of NAFTA. Exports slowed sharply from 16% growth in 2000 to -3% growth in 2001 (Figure 1.5). Since 1994, when NAFTA took effect, the correlation between US and Mexican annual growth rates (based on a sample of the previous five years) increased from -0.46 in 1994 to 0.42 in 2000 to 0.82 in 2005. Given the long-term strength and stability of the US economy, as evidenced by its long and stable expansions and relatively few and short recessions, this increasing synchronisation with the US economy is a positive influence on Mexico. Following the mild 2001 recession, the Mexican economy exhibited sluggish growth in 2002 and 2003 with growth below 1.5% in both years. This reflected very slow export growth and investment growth rates relative to the 1996-2000 period. In 2004 and 2005 the economy returned to stronger export and investment growth and consumption also picked up, with GDP growth of 4% in 2004 and 3% in 2005. Regulatory reform in the banking sector and the increase in foreign ownership have resulted in an increasingly solid banking system. With the stronger economy, bank lending also picked up to around 20-30% real annual growth in 2004 and 2005. The 2001 recession helped to reduce CPI inflation to 5% in 2002 and inflation continued to decline to 4% by 2005. Despite weak economic growth in 2002 and 2003, the government maintained the financial balance at around -1% of GDP. Continued increases in oil prices post 2003 have contributed to increasing revenue and a narrowing of the public sector financial balance to -0.3% of GDP. There has also been consolidation in the public sector borrowing requirement, which includes support programmes for the financial sector and PIDIREGAS, with a fall in the PBSR from 6% of GDP in 1999 to 2.4% in 2004. The broad-based expansion is expected to continue, with GDP growth around 4% in both 2006 and 2007 and employment in the formal sector expanding. Inflation is set to be on target and the current account deficit should remain close to 1% of GDP. Nevertheless, over the medium-term assuming unchanged policies, the Mexican economy is expected to grow at around 3½ to 4 %, but with ongoing population growth, rapid convergence to average living standards in the OECD would require faster GDP growth. From 1995-2004 Mexican GDP per capita grew at an average of 2.1%. This was a large improvement from the 1980s (-1%) and better than the early 1990s (1.6%). However, it was still lower than average GDP per capita growth in the OECD from 1995 to 2004 of 2.6%. Given the low level of average income of the Mexican population — about 1/3 of the US income level (in purchasing parity) in 2004 — it would be desirable to achieve a faster catching up.

Figure 1.5. Activity in the United States and Mexican exports Year-on-year change

How to achieve a faster rise in living standards? 3 The structure of the Mexican economy has changed significantly over the last 15 years. On the production side of GDP, services have continued to grow while manufacturing and agriculture continue to decrease in relative importance. In 2004 agriculture accounted for less than 6% of GDP, and fisheries accounted for about 0.1%. Despite their declining share of GDP, improving performance of the agricultural and fishery sectors has greater significance for the overall economy than this proportion would suggest. Labour productivity is low: agriculture accounted for a much higher proportion of employment, around 15%, than its share of GDP in 2004, and fisheries accounted for 0.3% of employment. Furthermore, income distribution remains very skewed in Mexico and a large share of the poorest deciles are employed in these sectors. This suggests that there is large scope for productivity improvements in this sector that have the potential to improve the incomes of the poorest members of Mexican society.

Strengths In the aftermath of the 1995 crisis, the introduction of inflation targeting monetary policy and fiscal discipline have created a stable macroeconomic environment in Mexico with falling inflation and solid growth. This provides a stable platform on which to introduce further growth-enhancing structural policy reforms. Mexico also has the advantage of being in close geographical proximity to the United States, one of the best performing economies in the world. This geographical proximity combined with Mexico’s high level of openness is a very important engine of growth for the Mexican

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economy, as demonstrated by the strong export performance of the Mexican economy over the last ten years. The United States is also a major source of FDI capital for the Mexican economy. In addition, Mexico’s banking system has become increasingly sound.

Weaknesses The main challenge is to raise growth potential and initiate a catching-up of GDP per capita towards countries with higher living standards. Raising potential growth will require improvements in the quality of labour, a higher and more efficient physical capital stock, and more innovation. The low level of labour productivity per hour worked is the main explanation for the income gap vis-à-vis higher income OECD countries. Productivity growth, except in the manufacturing sector, has been mediocre, despite the reform programmes of the past two decades. The evidence suggests that productivity growth is depressed in particular by: • low levels of human capital, with low educational attainment even for younger workers and scarce adult training, and • the slow pace of structural reforms in a number of areas including in some key network industries, such as telecommunications and transportation.

Further reform to fiscal policy To improve the country’s potential growth rate the government needs to increase its investment in human capital and this requires a stable revenue source. Fiscal revenue is currently very dependent on receipts from oil. Part of this oil revenue is subject to oil price volatility, which is influenced by a variety of very unpredictable forces including political uncertainty, the weather and high levels of speculation. A tax reform remains a priority. It should raise tax revenue, by enlarging the tax base. Non-oil related revenue is low relative to GDP and even with oil-related revenue the tax/GDP ratio is one of the lowest in the OECD. The following sections discuss various areas that influence growth potential and also the overall economic context in which the agriculture and fishery sectors operate. It provides a summary of the current situation and important policy reforms that are required in sectors that are highly relevant for agricultural and fishery production, including banking, infrastructure and education.

Structural environment

Banking4 A well-developed financial system, which efficiently channels resources towards the most rewarding activities and stimulates investment, is important to support stronger growth. After coming close to collapse in the 1995 banking and currency crisis, the banking sector required massive government support including bank recapitalisations, take-over of some banks and debtor support programmes. In 1998 restrictions on FDI in Mexico’s largest banks were lifted and in 2001 a raft of reforms including the banking, securities market and savings and loans laws were enacted to improve supervision, corporate governance, accountability and transparency. In 2003 the bank guarantee law was reformed to improve the enforceability of contracts. Following these wide ranging reforms and the lifting of restrictions on FDI and increased foreign ownership, Mexico’s

banking sector is increasingly sound. Profitability is now comparable to other OECD countries and bank supervision and regulatory frameworks are much closer to best practice.

Foreign investment improved efficiency The banking sector remained hampered by significant restrictions on foreign ownership until 1998. The removal of restrictions led to a rapid increase in foreign ownership of Mexican banks, with the percentage of total commercial banking assets owned by foreign firms rising from 7% in 1995 to 25% in 1998. Within three years, the three largest commercial banks, representing about half of total bank assets, were foreign owned with investments by the United States’ Citibank and Spain’s BBVA and Santander. In total, foreign ownership accounted for 85% of commercial bank assets. With this high level of foreign ownership, Mexico’s banking sector has excellent access to human capital, including foreign management expertise, and leading international technology and practices. This should ensure continued improvements in productivity and ongoing soundness of key parts of the overall system. After the 1995 crisis bank profitability recovered and non-performing loans declined. However, growth in domestic credit to the private sector was slow to recover with small and medium enterprises facing the greatest difficulties in accessing bank finance given their higher risk and lack of access to foreign borrowing that large firms have at their disposal. Bank credit to the private sector exhibited negative real annual growth, except for a brief period in 1998, throughout the late 1990s and into the early 2000s. With the return to stronger growth in 2004 and 2005 real credit growth turned positive again (Figure 1.6). Credit growth remains partly constrained by problems lending institutions face in enforcing contracts involving collateral. There have been improvements but more will need to be accomplished. In 2003 legislation relating to bank guarantees (collateral) was amended to improve the mechanisms for recovery of collateral by lending institutions in the case of debt repayment default. It is designed to prevent debtors from engaging in practices that delay or obstruct the creditor’s repossession, for example by selling the collateral. The new framework is better, but in practice it still has not led to full enforceability of contracts as debtors often make abusive use of amparo proceedings to block enforcement. These proceedings delay decisions and even if the creditor is successful the collateral may have depreciated significantly in the mean time. To increase lending to the private sector further measures need to be taken to increase the enforceability of credit contracts. Initiatives to improve small saver access to secure savings instruments and liberalise investment rules for government pension funds would also help to improve credit growth by increasing the supply of funds available for lending to the private sector.

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Figure 1.6. Recent trends in domestic credit to the private sector Year-on-year percentage change in real terms1

1. Direct credit by commercial banks. Source: Bank of Mexico.

Public development bank lending to the agricultural sector Development banks have traditionally had an important role in financial intermediation including in agriculture. After being badly affected by the 1995 crisis, they curtailed lending even more sharply than commercial banks. By early 2001 their share of total bank assets had fallen to only a third of total banking system assets and the share continued to fall. They have become more concentrated in providing funds to commercial banks (second–tier) lending, which limits capital market distortions. Their share of direct non-bank private lending fell to less than 10% of lending by 2001. Nevertheless, despite repeated capital injections by the government, the development banks continued post 1995 to make losses over the business cycle indicating distortion inducing subsidisation, which has continued to constrain the development of private banking. Lending efficiency was further hampered by overlaps between various state- owned financial intermediaries, including in agriculture where the trust fund FIRA and

Banrural (the agriculture sector development bank) were both targeting the agricultural sector. The presence of development banks prevented the development of a well functioning rural financial market and credit programmes undermined repayment discipline due to poor debt recovery and large scale debt forgiveness. In the early 1990s credit to the agricultural sector was growing but it fell sharply following the 1995 crisis and the reduction in development bank operations. Commercial banks did not fill the gap because of the high default rate of farmers, and the limited supply of credit in the second half of the 1990s was directed towards large farmers. In 2002 a new institution, Financiera Rural, was opened to replace the insolvent Banrural. Its purpose is to provide access to credit to acquire machinery, equipment and technology to increase productivity in the agricultural sector. It aims to fill gaps not covered by the private sector.

Infrastructure needs to be improved

Regulatory obstacles to private investment and FDI

Although demand for electricity has been met and the frequency of power cuts has declined, prices for industry users were relatively high vis-à-vis other OECD countries in 2003 and continue to be so (Figure 1.7). To meet expected demand, the electricity sector requires large scale investment for expanding and modernizing the transmission and distribution network. Removing legal obstacles to private investment in the electricity sector would help to ensure that business and households have access to a low-cost and reliable energy source.

Lack of effective competition There are also areas which are in principle opened to competition, but where application of the law is impaired so that there is no effective competition. Improving transport and communications infrastructure is crucial for maximising the gains that Mexico can obtain from having an open economy, including within NAFTA. In rail freight transportation, the restructuring and privatisation process in the late 1990s has made the sector more productive, but inefficiencies are still constraining the use of rail. Because of large cost structure discrepancies initially and the lack of clear and objective regulations, the private concession holders have been involved in serious disputes. Some have undertaken anti-competitive practices, setting excessive and discriminatory rates, limiting access conditions and refusing to provide interconnection and right of way. The Ministry of Communication and Transport has been unable to resolve the disputes between private railroad companies and to stop anticompetitive practices. The companies under investigation by the Federal Competition Commission CFC are using judicial procedures (amparos) to avoid resolution. Enforcement of the competition law will not suffice to solve the problem. Because of the weaknesses in the regulations initially established, the entire regulatory framework should be reviewed.

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Figure 1.7. Energy indicators

2000 2000 TUR 27 HUN 27 A. Electricity prices in industry (1) SVK 25 In USD per 100 KWh , using PPPs ITA 25 CZE 23 PRT 23 JPN 21 POL 21 MEX 19 KOR 19 NLD 17 GRC 17 OECD 15 GBR 15 CHE 13 ESP 13 BEL 11 USA 11 IRL 9 DNK 9 NZL 7 DEU 7 FRA 5 FIN 5 AUT 3 AUS 3 NOR 1 1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 2003

B Business opinion survey (2)

Iceland Austria Denmark Germany Switzerland France Finland Belgium Luxembourg Czech Republic Netherlands Norway Japan Sweden Canada Chile Australia Slovak Republic Portugal United States Spain Hungary Greece United Kingdom Poland New Zealand Ireland Turkey Argentina China Brazil Italy Mexico 0246810 1. Ranking for 27 OECD countries excluding Canada, Iceland, Luxembourg and Sweden. Countries in the shaded area have below average progress. Although comparable data are not yet available, several OECD countries have recorded substantial declines in electricity prices since 2003. 2. “Is the energy infrastructure adequate and efficient?” Value 10 indicates the most positive perception. Source: IEA database; IMD World competitiveness Yearbook 2004.

In road infrastructure, an important problem is the lack of co-ordination between the states and with the Ministry of Communication and Transport. Inadequate co-ordination between levels of government creates problems in the planning of the network; and the fact that responsibilities are not clearly defined contributes to poor maintenance of existing roads. Mexican ports, which were privatised in the late 1990s, suffer from efficiency problems and are relatively expensive by international comparison. Poor coordination in customs, sanitary controls and other formalities are important factors in the high costs of handling and storage. Despite large declines in telephone charges over past years, Mexico remains one of the OECD countries with the highest charges, and although the number of users has been

increasing rapidly, the density of services (for the combined fixed and mobile telephony) is one of the lowest in the OECD. In common with other infrastructure sectors, in the telecommunications sector, many of the difficulties slowing the development of effective competition stem from the abusive use of amparos, to block the implementation of decisions by regulators and the Federal Competition Commission.

Low cost recovery and investment in water infrastructure5 Mexico’s water infrastructure is inadequate, both in quantity and quality. Over 11 million inhabitants lack access to piped water and over 21 million to sanitary drainage. Furthermore, much of the existing infrastructure is in poor condition, with around 40% of water supplied being lost through leakage. Current policy under the 2001-2006 National Water Programme is to increase water supply coverage to 89% nationally and 71% in rural areas. This implies connecting an additional 1.5 million people a year to the water supply and has been estimated to cost USD 1.6 billion. Spending on water infrastructure, both private and public, amounted to 0.2% of GDP in 2001, well below that in most OECD countries. Public funding should be supplemented by increased user charges. At present user charges only cover around 30% of the capital and operational costs. Concern is often expressed that poorer households cannot afford higher water charges. However, in Mexico’s case the poorest households are not connected to the water supply and purchase it from individual vendors. They are paying much higher proportions of their income for water than connected households (15- 30% of income compared to 1-4% for connected households). As well as being used to upgrade the quality of water systems, higher user charges could be used to fund increased infrastructure to the poorer households. Even when connected, poorer households would pay only a fraction for water compared to the cost from purchasing water from individual vendors. Water usage could also be progressively priced with a basic water block being charged at lower rates and extra blocks being charged at higher rates. The implementation of higher water charges must be carefully timed. OECD work suggests that the public are often only willing to accept higher water charges if there is a significant improvement in service. Careful consideration needs to be given to timing increased water charges so that Mexico can break out of its current vicious circle where households are unwilling to pay much for water because the service is of low quality and utilities do not have the funds to improve service efficiency. Charge increases need to be accompanied by significant quality improvements.

Water in the agricultural sector The agricultural sector currently accounts for 76% of Mexico’s water usage. There has been a zero fee (currently under review) on water use in the sector and there are even subsidies for electricity used to pump ground water. The efficiency of agricultural irrigation needs to be improved and measures taken to halt over-exploitation of groundwater aquifers. Water management and water services provision are too fragmented and in some cases poorly co-ordinated. There needs to be a clearer distinction of functions with municipalities setting policies and utilities concentrating on water service delivery. Contracts should be used to define clearly the responsibilities of each party and regular public performance reports issued to increase accountability.

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Education6 Very rapid population growth means that a high proportion of the Mexican population is currently of school age, with close to 30 million students or nearly 1/3 of the population enrolled from preschool to upper secondary education in 2001. This means Mexico faces both a greater challenge in meeting the education needs of its population than other OECD countries, but can also potentially reap greater rewards from improving its education system. Human capital is the lowest in the OECD and the education system does not perform well enough to reduce the lag at an acceptable pace. Over the past decades Mexico has made great progress in increasing school enrolment and there has been a deliberate increase in public spending on education. However, while the volume of educational services has increased, there are doubts about whether the additional funding is actually delivering the expected improvements. Both the coverage and quality of education services remain far behind OECD best practices even though, on paper, average teacher- pupil ratios are not out of line. Mexican children still spend comparatively few years in formal education, and do not profit from it as much as they should, so that poor educational attainment is reproduced from one generation to the next, and with it poverty (Figure 1.8). Many children, especially the poor ones, still drop out before completing compulsory education and school-leavers have poor literacy and numerical skills. Educational resources need to be better allocated. Teachers’ pay absorbs a high proportion of total education spending by international comparison, while spending on infrastructure and teaching aids is low (Figure 1.9). Although low in absolute terms, teachers’ wages relative to GDP per capita are already among the highest in the OECD, as is usual in a lower-income country, but also among the highest in Latin America. A greater proportion of future spending needs to be directed towards non-wage items. Value for money could be improved. Actions are needed to: (1) improve further the selection and training of teachers; (2) include teaching standards that foster comprehension skills and communication; (3) match better curricula with student and labour market needs; and (4) find alternatives to the systematic use of class repetition whichisaninefficientwaytocorrectlagsinlearning.Mexicohasyettointroduce efficiency enhancing policies, introducing credible mechanisms for sanctions and rewards for teachers and principals and giving more responsibilities to schools so that they better adapt to local conditions and needs. The authorities at the federal government and state level are aware of the weaknesses of the educational system, and some reforms have been launched to improve its performance and accountability. However, these efforts are spread among many programmes with sometimes conflicting priorities. In some states, interesting experiments are taking place to improve quality and efficiency, reflecting successful negotiations with the local sections of the teachers’ union. The next step should be to evaluate these experiences and find ways to generalise the most successful ones to other states. To facilitate implementation, the required reform should be launched as a package, mixing measures with an immediate and visible impact with deeper efficiency and quality, enhancing reforms that have more diffuse benefits and are likely to raise opposition. Once they are well informed, parents could also contribute by putting pressure on the authorities and teachers for a higher quality education for their children.

Figure 1.8. Educational attainment of the working-age population Population with at least an upper-secondary qualification, 20031

Non-OECD Non-OECD Indonesia Indonesia Malaysia Malaysia Brazil Brazil OECD countries OECD countries MEX MEX TUR TUR PRT PRT ESP ESP ITA ITA ISL ISL LUX LUX GRC GRC OECD OECD NLD NLD AUS AUS IRL IRL BEL BEL FRA FRA HUN HUN NZL NZL AUT AUT DEU DEU DNK DNK USA USA FIN FIN CHE CHE CAN CAN POL 55-64 years old POL 35-54 years old SWE SWE 25-34 years old GBR GBR CZE CZE SVK SVK JPN JPN NOR NOR KOR KOR

0 102030405060708090100 Per cent 1. Per cent of each age group. Year 2002 for Czech Republic, Iceland, Italy and Netherlands. Source: OECD, Labour Market Statistics database.

AGRICULTURAL AND FISHERIES POLICIES IN MEXICO: RECENT ACHIEVEMENTS, CONTINUING THE REFORM AGENDA – ISBN-92-64-030247 © OECD 2006 36 – Chapter 1. An overview of economic performance and the structural environment in Mexico

Figure 1.9. Distribution of total and current expenditure on educational institutions By resource category in primary, secondary and post secondary non-tertiary education1

1. In 2001. Brazil: 2000; Argentina: 2002. 2. Public institutions only. 3. Excludes post-secondary non-tertiary. 4. The breakdown of compensation of teachers and compensation of other staff is not available. Source: OECD, Education at a Glance (2004), Table B6.3.

Conclusion

The Mexican economy has transformed significantly over the last 15 years, becoming increasingly open and outward orientated. At the same time macroeconomic stability has improved markedly with relatively low levels of inflation, small current account and fiscal deficits and solid and reasonably steady rates of GDP growth. However, GDP growth remains inadequate to rapidly close the gap with other OECD countries. The current favourable global outlook, combined with a stable macroeconomic environment, provides a solid platform for Mexico to introduce a wide range of urgently needed structural reforms. These reforms are required to prepare Mexico for increases in global competition and raise overall GDP growth rates and living standards, as well as improve performance in the agricultural and fisheries sectors.

NOTES

1. SITC rev3 2004. 2. Insured employees are registered with the social security institutes and are the best available indicator of formal employment. 3. This section is based on OECD Economic Surveys: Mexico, 2005 and previous issues. 4. This section is based on OECD Economic Surveys: Mexico, 2002 and previous issues. For further details, see Bonturi (2002). 5. This section is based on information and analysis provided by the OECD Environment Directorate. 6. This section is based on OECD Economic Surveys: Mexico, 2005. For further details, see Guichard (2005).

AGRICULTURAL AND FISHERIES POLICIES IN MEXICO: RECENT ACHIEVEMENTS, CONTINUING THE REFORM AGENDA – ISBN-92-64-030247 © OECD 2006 38 – Bibliography

Bibliography

Bonturi, M. (2002), “The Challenges in the Mexican Financial Sector”, OECD Economics Department Working Paper, No. 339, August. Guichard, S.(2005), “The Education Challenge in Mexico: Delivering Good Quality Education to all”, OECD Economics Department Working Paper, No. 447, September. OECD (2005), OECD Economic Surveys: Mexico, Vol, 2005/18, OECD, Paris. OECD (2003), OECD Economic Surveys: Mexico, Vol, 2003/Supp. 1, Paris. OECD (2002), OECD Economic Surveys: Mexico, Vol, 2002/7, Paris. OECD (2000), OECD Economic Surveys: Mexico, Vol, 2000/13, Paris. OECD (1999), OECD Economic Surveys: Mexico, Vol, 1999/10, Paris. OECD (1997), OECD Economic Surveys: Mexico,Paris. OECD (1995), OECD Economic Surveys: Mexico,Paris. OECD (1992), OECD Economic Surveys: Mexico,Paris.

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PART II.

AGRICULTURE

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Introduction – 41

Introduction

The focus of this analysis is on agricultural policies and on the agricultural sector. An assessment of the distribution of benefits to rural areas is also undertaken. At the request of the Mexican government, the OECD is conducting other studies that address education, rural development and other types of policies. Fisheries policies are addressed in Part III of this report. The results of this study have been widely shared within the OECD to ensure consistency, but interested readers are encouraged to turn directly to those publications for further information about the relevant topics. The benchmark for the assessment presented here was defined by the OECD Council meeting at Ministerial level when, in 1998, shared goals and policy principles for the agricultural sector were defined (see box on following page). These goals and principles of policy design serve as the benchmark against which the direction of Mexico’s agricultural policy reforms has been evaluated.

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OECD Ministers’ shared goals and policy principles Shared goals Ministers outlined a set of shared goals, stressing that these should be viewed as an integrated and complementary whole. There was broad consensus that OECD governments should provide the appropriate framework to ensure that the agro-food sector:

• is responsive to market signals; • is efficient, sustainable, viable and innovative, so as to provide opportunities to improve standards of living for producers; • is further integrated into the multilateral trading system; • provides consumers with access to adequate and reliable supplies of food, which meets their concerns, in particular with regard to safety and quality; • contributes to the sustainable management of natural resources and the quality of the environment; • contributes to the socio-economic development of rural areas including the generation of employment opportunities through its multifunctional characteristics, the policies for which must be transparent; and • contributes to food security at the national and global levels. Ministers stressed that agro-food policies should seek to strengthen the intrinsic complementarities between the shared goals, thereby allowing agriculture to manifest its multifunctional character in a transparent, targeted and efficient manner. The challenge in pursuing the shared goals is to use a range of well-targeted policy measures and approaches which can ensure that the growing concerns regarding food safety, food security, environmental protection and the viability of rural areas are met in ways that maximise benefits, are most cost- efficient, and avoid distortion of production and trade. Policy principles Ministers agreed to seek innovative ways and appropriate institutional frameworks to integrate public, private and co-operative initiatives, which take into account local and regional conditions. They agreed that in designing and implementing cost-effective policy measures, these should be regularly monitored and evaluated with respect to their stated objectives. Ministers also agreed that policy measures should seek to meet a number of operational criteria, which would apply in both the domestic and the international context, and should be:

• transparent: having easily identifiable policy objectives, costs, benefits and beneficiaries; • targeted: to specific outcomes and as far as possible decoupled; • tailored: providing transfers no greater than necessary to achieve clearly identified outcomes; • flexible: reflecting the diversity of agricultural situations, be able to respond to changing objectives and priorities, and applicable to the time period needed for the specific outcome to be achieved; and • equitable: taking into account the effects of the distribution of support between sectors, farmers and regions.

Source: OECD Council at Ministerial Level, April 1998.

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Chapter 2.

Background on agriculture and the rural economy

Introduction

Mexico’s agricultural sector is characterised by positive economic growth that is slower than the growth of the wider economy, great disparities in farm types from subsistence to highly commercialised, and inefficient use of some natural resources such as land and water. Economic development in rural areas of Mexico is a critical priority, but also an enduring challenge that has thwarted decades of efforts. Extreme poverty is mainly found in rural areas — a reflection that such areas are disconnected from commodity, financial and labour markets, as well as of low productivity and a lack of public services such as education. The land tenure system of Mexico is a fundamental characteristic of the country’s agricultural sector and rural areas. Called the first agrarian reform, the process of redistributing land and the system of communal land were initiated at the start of the 20th century as part of the 1917 Constitution. The consequences set the initial context of this study: a large part of the rural population was tied to a great many small-scale farms with tenuous claims to specific plots of land, and efforts of commercial farmers to expand were bound by limits placed on their access to land. Mexico’s agricultural policies evolved in parallel to wider policy trends.12Until the middle 1960s, economic policies were characterised by import substitution and trade protection, and primary agricultural policy objectives were to improve productive capacity, offer employment and generate export earnings. Domestic food consumption began to exceed domestic production from the middle 1960s, and agricultural policy sought to provide cheap food to poor consumers while also supporting urbanisation and industrialisation. An even greater effort to re-attain self-sufficiency of certain staples through an array of producer and consumer subsidies was initiated in 1980 as part of the Mexican Food System. The debt crisis in the early 1980s that followed the collapse of oil prices in 1982 undermined this plan by rendering unsustainable the high costs of subsidising policies, leading Mexico to re-orient fundamentally its agricultural policies. This history sets the stage for the agricultural policy reforms put in place — whose effects are analysed in this study. Since the crisis of the middle 1980s, Mexico embarked on a gradual but dramatic reform of agricultural policy mechanisms, from a regime of state intervention with tariffs and government agents active at all stages of commodity distribution to a more targeted set of programmes. A part of the reform process in the last 15 years has been intended to remove some of the rigidities of the land tenure system. In the context of the mixed performance of the country’s agricultural sector and its rural development needs, however, agricultural policies target objectives that have remained

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largely unchanged: helping commercial and non-commercial farmers improve technical performance, increasing access of subsistence farmers to markets for goods and inputs such as credit, and raising incomes of the poorer people. A subtext to this last objective is to discourage migration from rural areas. The combination of reorienting agriculture towards liberalised markets and easing restrictions on land are principal components of what has been called Mexico’s second agrarian reform.3 These reforms, most of which were put in place in the period from 1990 to 2006, are the subject of the analysis described in later chapters. Before looking forward at the next phase of reform, it is important to understand the past and the present.

Overall sector performance

Since 1990, growth in the Mexican agricultural sector has been slower, but less variable, than in the economy overall (Figure 2.1). Throughout the years preceding the currency crisis of the middle 1990s, primary agricultural (excluding forestry and fisheries) GDP grew at 1.2% per year and food and beverages GDP at 2.3%. During the crisis, primary agriculture did not contract, and even grew by 2.0% in 1996. In contrast, the general economy contracted by 6.2% in 1995. In subsequent years, agricultural GDP growth was 2.4% per year and growth of food and beverages GDP was 2.7%. At times, these sectors grew at a faster rate than the rest of the economy. The trend growth rate of the agricultural sector was 1.9% from the start of the 1990s to 2004 and the trend rate was 2.6% for food and beverages GDP over the same period, as compared to an overall economic trend growth rate of 3.0% per year. The averages hide a great deal of volatility, with peaks in 2001 and 2003, and slightly negative growth in 2002. The contribution of primary agriculture to overall GDP has decreased steadily from 6.3% in 1990 to 5.4% in 2004. The share of food and beverages increased from 4.9% to 5.2%. Total primary agricultural GDP for 2004 was valued at nearly MXN 246 billion, and food and beverage GDP was MXN 368 billion in that year.

Figure 2.1. Rates of overall and agricultural real GDP growth in Mexico

-2% National -4% Food and beverages -6% Primary agriculture excluding forestry and fisheries -8% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: INEGI, Sistema de Cuentas Nacionales de México.

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Primary agricultural and fisheries goods trade has expanded since policy changes lowered barriers to trade starting in 1994, measured in nominal USD, and trade in food, beverages and tobacco has increased more rapidly (Figure 2.2). Primary agricultural and fishery exports have grown 4.6% per year. Agricultural imports also increased since the early 1990s, at a trend rate of 7.1% per year. The trend growth in Mexico’s trade of food, beverages and tobacco over the period was 9.5% for imports and 12.6% for exports. The corresponding growth rates of exports and imports of primary and processed agricultural goods in real terms over the period exceed the rate of growth of real agricultural GDP, implying growing integration with foreign markets. The relative growth rates have led to a widening of the gap between the values of imports and exports of the aggregate of primary and processed agricultural over the period. Notwithstanding the increase in this gap over the period in absolute (USD) terms, the size of the gap relative to the level of exports decreased by half, or more, from 45% in 1993 and 59% in 1994 to 22% in 2005.

Figure 2.2. Agricultural trade balance, in USD billions Panel A: Primary agriculture and fisheries

9 8 Exports Imports 7 6 5 4

USD billion 3 2 1 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Panel B: Food, beverages and tobacco 9 8 Exports Imports 7 6 5 4

USD billion 3 2 1 0

Source: Bank of Mexico.

The direction of trade flows in primary agricultural and fisheries products has changed only little since the early 1990s, implying that the increase in trade has been distributed fairly evenly among trading partners (Figure 2.3). The exceptions are the European Union, whose countries now provide a much lower share of Mexico’s total

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imports, and Canada whose share has doubled. The United States has been Mexico’s main trading partner throughout this period, providing more than two-thirds of Mexico’s imports and buying the vast majority of Mexico’s exports.

Figure 2.3. Main agricultural and fisheries trading partners (based on trade valued in US dollars)

Destinations for agriculture and fisheries exports Destinations for agriculture and fisheries exports average 1990-93 average 2003-05

USA EU* Japan USA EU* Japan Canada Mercosur G3 Canada Mercosur G3 North Triangle* Switzerland Rest of the World North Triangle* Switzerland Rest of the World

Suppliers of agriculture and fisheries imports Suppliers of agriculture and fisheries imports average 1990-93 average 2003-05

USA EU* Japan USA EU* Japan Canada Mercosur G3* Canada Mercosur G3* North Triangle* Switzerland Rest of the World North Triangle* Switzerland Rest of the World

Exports 1990-1993 2003-2005 Imports 1990-1993 2003-2005

(per cent) (per cent) World 100.0 100.0 World 100.0 100.0 United States 88.2 85.0 United States 68.0 71.7 European Union* 5.9 4.1 EU* 13.3 6.0 Japan 1.6 1.3 Japan 0.1 0.0 Canada 0.7 1.3 Canada 3.3 7.0 Mercosur 0.3 0.3 Mercosur 4.2 3.5 G3 0.2 0.7 G3* 0.1 0.5 North Triangle* 0.4 1.8 North Triangle* 0.6 0.6 Switzerland 0.4 0.9 Switzerland 0.4 0.1 Rest of the World 2.2 4.7 Rest of the World 10.0 10.6 European Union data are for all 25 current members; G3 countries are Colombia, Honduras and Venezuela; North Triangle countries are Guatemala, El Salvador and Honduras. Source: SAGARPA and Secretaría de Economía.

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The top ten exports by value account for about half of the total exports of agricultural products, but there have been some changes in the composition of this list (Table 2.1). While several goods appear on the list in 1993-95 and in 2003-05, such as beer, tomatoes, live cattle, and frozen prawns, their order has shifted and new goods, such as tequila, have been added. At the same time, while fruits and vegetables remain important, the composition within this broad aggregate has changed. The share of coffee in the total is lower in 2003-05 than in 1993-95. In recent data, beer exports have amounted to nearly 13% of the total and tomatoes account for just under 10%, but most shares are well below these levels implying a wide array of exported products. Overall, the evolution of the composition of exports has been a shift towards higher value products, such as processed products and fruits and vegetables. This, together with the rising exports overall, gives evidence of the dynamism of market-oriented agriculture in Mexico.

Table 2.1. Main exports of agriculture and fisheries goods from Mexico

million Share million Share 1993-1995 2003-2005 USD (%) USD (%)

Tomato 458 9.3 Beer 1 342 12.8 Coffee 439 8.9 Tomato 1 002 9.6 Live cattle 376 7.6 Live cattle 527 5.0 Frozen prawns 364 7.4 Tequila 524 5.0 Beer 246 5.0 Frozen prawns 337 3.2 "Bell" chile 152 3.1 Fresh or frozen vegetables 301 2.9 Onion 135 2.7 Cucomber and gherkin 298 2.9 Cucomber and gherkin 124 2.5 Candy products 283 2.7 Corn cob 117 2.4 Avocado 277 2.6 Mango and guava 106 2.2 Pepper 257 2.5 Alcoholic beverages 97 2.0 "Bell" chile 253 2.4 Frozen broccoli and cauliflower 91 1.8 Onions 239 2.3 Banana 86 1.7 Food preparation 194 1.9 Milk cows 72 1.5 Coffee 184 1.8 Watermelon 50 1.0 Broccoli and cauliflower 160 1.5 Chickpea 48 1.0 Frozen broccoli and cauliflower 160 1.5 Asparagus 46 0.9 Pork meat 151 1.4 Fresh grapes 46 0.9 Seedless lemon 139 1.3 Candy products 45 0.9 Watermelon 138 1.3 Melons 39 0.8 Fresh grapes 136 1.3 Fish preparations 39 0.8 Watermelon 122 1.2 Seedless lemon 39 0.8 Bakery products 121 1.2 Bakery products 38 0.8 Mango and guava 110 1.1 Strawberry 32 0.7 Cookies 94 0.9 Cigarettes 32 0.7 Sauce preparations 93 0.9 Honey 31 0.6 Asparagus 85 0.8 Fresh or frozen vegetables 30 0.6 Strawberry 84 0.8 Avocado 28 0.6 Wheat 73 0.7 Others 1 527 30.9 Others 2 765 26.5 Total 4 935 100.0 Total 10 452 100.0 Source: SAGARPA with data from the Secretaría de Economía and BANXICO.

The top ten imported agricultural and fisheries goods by value account for 41% of the total in 1993-95 and in 2003-05 (Table 2.2). As in the case of exports, many goods have consistently played an important part in Mexico’s imports, such as soybeans, beef, coarse grains (maize, sorghum), wheat, cotton and powdered milk. However, imports tend to be diversified in composition: no single category of goods accounts for even 10% of the total; and the share of “others” is about 40% of agricultural imports, which is equivalent to the share of the top ten goods.

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Table 2.2. Main imports of agriculture and fisheries goods to Mexico

Share Share 1993-1995 million USD 2003-2005 million USD (%) (%)

Soybeans 566 9.5 Soybeans 1 041 7.8 Sorghum 343 5.8 Beef 816 6.1 Powder milk 313 5.3 Maize 686 5.1 Maize 236 4.0 Wheat 599 4.5 Beef 225 3.8 Unprocessed cotton 518 3.9 Unprocessed cotton 220 3.7 Pork 471 3.5 Wheat 213 3.6 Sorghum 388 2.9 Sunflower or other oil 139 2.3 Powder milk 344 2.6 Turnip or rape seeds 128 2.2 Cracked maize 326 2.4 Animal fat 100 1.7 Food preparations 301 2.3 Turkey 92 1.5 Turnip or rape seeds 290 2.2 Food preparation 87 1.5 Soup preparations 243 1.8 Chicken 84 1.4 Milk preparations 219 1.6 Cattle leather and fur 81 1.4 Turkey 213 1.6 Pork 74 1.2 Soybean meal 212 1.6 Apple 71 1.2 Chicken 200 1.5 Soybean meal 58 1.0 Animal fat 168 1.3 Dehydrated butyric fat 57 1.0 Apple 149 1.1 Water 54 0.9 Paddy rice 141 1.1 Preparations for animal feeding 46 0.8 Dehydrated butyric fat 129 1.0 Bakery products 42 0.7 Palm oil 117 0.9 Chicken sausages 40 0.7 Hard or semi hard cheese 113 0.8 Hard or semi hard cheese 39 0.7 Cattle leather and fur 108 0.8 Animal guts, bladders and stomachs 39 0.7 Preparations for animal feeding 107 0.8 Other edible parts from cattle 38 0.6 Fresh grapes 95 0.7 Filled chocolates 38 0.6 Dog and cat food 94 0.7 Turnip, rape-seed or mustard oil 36 0.6 Sauce preparation 91 0.7 Pork skin 35 0.6 Animal guts, bladders and stomachs 89 0.7 Others 2 446 41.2 Others 5 158 38.7 Total 5 940 100.0 Total 13 334 100.0

Source: SAGARPA with data from the Secretaría de Economía and BANXICO.

Land tenure

A key characteristic of the Mexican agricultural sector is the existence of two basic forms of land ownership as a result of the agrarian reform of the 20th century. One form is private property, where owners make productive decisions on an individual basis. The other form is social property (ejidos and comunidades agrarias), that accounts for over half of the Mexican territory, or 105 million hectares out of 197 million hectares in total.4 Agrarian communities include both parcels granted to individuals (34 million hectares), commonly owned property (69 million hectares) and a smaller part used for living areas (2 million hectares).5 The communal land is mostly open land, with or without vegetation, although a quarter of it is forest land, but is in any case of much lower quality: 52% of communal land is arid or semi-arid, whereas only 7% of individually held parcels are arid or semi-arid.6 All categories of social property are nevertheless controlled in some sense by an asamblea ejidal, whose traditional powers related to the allocation of parcels and other resources within the community. Now, property rights of individual members are more clearly defined as land within agrarian communities is legally permitted to be rented or sold within the community. Also, this land can be rented or sold to non-members – privatised fully — according to either of two procedures: a particular plot can be transferred with the approval of a two-thirds vote of the asamblea ejidal in which all ejidatarios in the given agrarian community have the right to vote; or the ejido may vote to privatise entirely.

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Currently, the agrarian sector includes approximately 30 000 communities, of which over 96% are labelled as agricultural, and around 3 million ejidatarios.7 That population is aging: while 70% of the rural population is under 40 years, the average age of ejido membersis55yearsandoverathirdoftheejidatarios are older than 65 years. The Constitutional provisions governing land also impose limits on commercial operators’ access to land. They are not permitted to control more than the equivalent of 100 hectares of irrigated maize area. This limit corresponds to 100 hectares of irrigated land for most crops, but 150 hectares of irrigated land used for cotton. The limit of rain- fed land used for staples is 200 hectares. The limit rises to 300 hectares if producing banana, sugar cane, coffee, henequen, rubber, palm, grape, olive, cinchona, vanilla, cocoa, agaves, nopal or fruit. A commercial operator’s access to good quality grassland is restricted to 400 hectares, and for livestock more generally the limit is the amount of land needed to raise 500 head of cattle, or the equivalent. Finally, if the land is characterised by forests or woodlands, or else is grasslands in an arid area, then the limit for a commercial operator is 800 hectares.

Agricultural activities

The 30 million hectares of crop land represent around 16% of Mexico’s total territory (Figure 2.4). Of the area devoted to crop production in 2002, about 71% was rain-fed and the other 29%, or as much as 9 million hectares, was irrigated.8 Although the amount of irrigated land is relatively small, over the past 20 years productivity of this land has increased to the point that irrigated area accounts for 55% of the total agricultural production — and 70% of agricultural exports are produced on irrigated land.9 Most of the cultivated land is devoted to annual crops, with four main crops, maize, beans, wheat and sorghum, accounting for most of the total land used for crop production.10 The amount of land allocated to raising livestock is large, but may be underestimated.11 There are only 28 million hectares of grasslands, but it has been estimated that 55% of the country’s total area — around 107 million hectares — is actually dedicated to livestock.12 Of the 28 million hectares of grasslands, 18 million hectares, or about two-thirds, is cultivated or improved in some way, whereas the remaining 10 million hectares are not improved in any significant way. A considerable amount of arid land is used for livestock and subsistence agricultural activities, but is mostly covered by desert vegetation. The lands covered by forests are also significant, and they account for 69 million hectares (Figure 2.4). However, more than 40% of forest areas have been degraded as the vegetation has been reduced or altered.

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Figure 2.4. Land use, 2002

Urban Other 1% Crops 4% 16% Forests 35%

Grasslands 14%

Arid Zones 30%

Source: SEMARNAT. Compendio de Estadísticas Ambientales, 2002.

The area used to produce crops and the real value of crop production for the period 1990-2005 differs in levels and in trends (Table 2.3). While cereals remain the largest crop in terms of area, the share peaked in the last 15 years at just under 50% in 1994 before falling to just over 40% in recent data. Maize continues to dominate among cereals in terms of area planted – and its share has risen to well over 90% in recent years – although the share of maize in total crop area is declining. The number of hectares devoted to maize exhibits no tendency to increase or decrease over time, whereas total area devoted to crops has grown. The trend rate of growth of 0.9% per year in total area planted to crops in Mexico is driven by greater planting of forage crops, although not the traditional sorghum, and increases in the numbers of hectares planted to fruits, vegetables, industrial crops and medicinal crops. In contrast, producers have switched away from certain other crops, such as dry legumes (including dry edible beans) and oilseeds over the last 15 years. Cereals have historically accounted for the highest share of real crop production value but, even though the area devoted to cereals has changed little, the real value of cereal production has fallen (Table 2.3). While in 1990 the real value of cereal production was over a quarter of the total value of crop production, in 2005 they generated less than a fifth of the total. The real value of crop production fell over these 15 years by about MXN 5 billion (adjusted to 2005 prices), corresponding to a -0.7% trend rate of change. The value of fruit and vegetable production has increased over this period to surpass cereals. Although growth in these categories stalled during the currency crisis, it recovered thereafter and, over the total period, real production value of fruits increased by 3.4% per year and real production value of vegetables by 5.2% — corresponding to an increase of about two-thirds in the real value of fruit production and more than double the real value of vegetable production over the 15 years. The real value of production of ornamental crops, tubers medicinal crops, forage crops and industrial crops also grew at trend rates of 3% to 7% per year. Sugar real value production trend growth was nearly 5%, for example, doubling during the last 15 years. Finally, the real value of oilseeds production decreased by MXN 2 billion. Dry legume real production value is extremely volatile, so comparing the first and last year of any time period may be misleading, but the overall

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pattern exhibited no strong trend over the 15-year period. The total value of crop production rose in real terms between 1990 and 2005 at a trend rate of 2.5% per year.

Table 2.3. Area planted by crop and value of production by commodity

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Area planted (million hectares) Cereals 9.08 8.91 9.10 9.28 10.36 10.17 9.65 10.15 9.49 9.38 9.34 9.23 9.04 8.89 9.10 8.78 of which maize 7.92 7.73 8.00 8.25 9.20 9.08 8.64 9.13 8.52 8.50 8.44 8.40 8.27 8.13 8.40 7.98 Medicinal crops 0.01 0.01 0.01 0.01 0.02 0.02 0.02 0.01 0.02 0.02 0.03 0.02 0.02 0.02 0.02 0.03 Forage crops 3.50 3.16 3.76 3.26 3.76 3.68 4.58 4.76 5.11 5.20 5.41 5.45 5.58 5.84 5.77 6.00 of which sorghum 1.92 1.51 1.46 0.97 1.43 1.58 2.34 2.12 2.20 2.14 2.18 2.21 2.03 2.10 1.95 1.90 Fruits 1.02 1.10 1.13 1.11 1.14 1.16 1.19 1.19 1.23 1.24 1.26 1.28 1.28 1.31 1.36 1.35 Vegetables 0.46 0.46 0.53 0.51 0.45 0.45 0.47 0.53 0.57 0.60 0.57 0.58 0.57 0.58 0.62 0.62 Industrials 2.35 2.51 2.35 2.24 2.24 2.51 2.60 2.47 2.57 2.42 2.41 2.39 2.38 2.45 2.50 2.50 of which sugar 0.68 0.64 0.64 0.62 0.63 0.63 0.68 0.67 0.69 0.69 0.67 0.65 0.66 0.68 0.70 0.71 Dry legumes 2.43 2.33 2.00 2.26 2.47 2.47 2.36 2.46 2.48 2.58 2.30 2.19 2.42 2.20 1.93 1.89 of which dry beans 2.27 2.20 1.86 2.15 2.39 2.35 2.20 2.32 2.38 2.41 2.12 1.95 2.23 2.04 1.82 1.75 Oilseeds 0.71 0.63 0.58 0.43 0.48 0.37 0.37 0.44 0.39 0.44 0.36 0.37 0.26 0.34 0.45 0.36 of which soybeans 0.30 0.35 0.33 0.24 0.30 0.15 0.06 0.17 0.10 0.09 0.08 0.08 0.06 0.07 0.10 0.11 Ornamentals 0.010 0.015 0.009 0.010 0.011 0.012 0.016 0.015 0.014 0.015 0.015 0.014 0.014 0.014 0.014 0.015 Othercrops 0.060.060.010.020.010.010.020.010.050.020.020.010.020.030.030.03 Seeds for sowing 0.010 0.008 0.006 0.004 0.002 0.013 0.001 0.001 0.002 0.003 0.001 0.002 0.008 0.001 0.003 0.003 Tubers 0.09 0.08 0.08 0.07 0.06 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07 Total area 19.73 19.26 19.56 19.21 21.00 20.94 21.34 22.11 21.98 21.98 21.78 21.61 21.66 21.75 21.87 21.64

Value of production (billion 2005 MXN) Crops Cereals 41.3 39.5 44.0 45.3 40.6 56.5 53.5 44.1 41.6 38.3 40.0 41.6 39.1 43.1 43.0 36.3 of which maize 33.0 31.3 36.9 38.6 32.8 47.9 42.3 35.6 34.7 32.1 32.9 36.1 33.9 38.0 38.1 30.5 Medicinal crops 0.1 0.1 0.1 0.1 0.1 0.3 0.3 0.1 0.2 0.4 0.2 0.2 0.2 0.2 0.2 0.2 Forage crops 21.4 19.0 24.4 20.7 25.2 30.2 35.6 32.2 38.4 36.0 37.8 39.7 36.4 39.6 39.5 33.2 of which sorghum 7.5 5.7 6.7 3.1 4.1 9.4 12.7 8.4 8.6 7.0 7.6 8.0 7.3 9.9 9.8 6.6 Fruits 26.0 29.4 27.3 28.6 28.4 32.6 29.3 30.5 32.9 43.4 37.5 38.7 38.1 41.3 41.5 41.8 Vegetables 18.7 20.9 24.1 24.7 21.3 23.4 24.2 33.6 36.6 35.4 33.7 34.4 31.8 37.7 45.0 38.1 Industrials 23.0 22.7 18.4 19.2 23.6 34.9 34.8 34.8 32.0 30.4 30.6 32.1 29.1 32.9 30.3 30.8 of which sugar 8.9 8.5 9.9 10.3 11.9 13.1 12.9 14.1 13.6 13.8 13.4 16.2 16.0 16.9 16.8 18.8 Dry legumes 10.3 9.6 5.0 8.4 7.5 7.7 11.1 9.1 10.4 7.9 7.3 10.2 11.6 9.0 7.9 6.8 of which dry beans 9.5 8.8 4.7 7.7 7.1 6.6 9.4 7.9 9.9 6.9 5.8 8.2 10.4 8.1 7.0 5.7 Oilseeds 3.3 4.0 2.6 2.1 1.9 2.0 1.8 1.9 1.9 2.0 1.6 1.5 0.8 1.7 1.8 1.2 of which soybeans 1.7 2.9 1.7 1.4 1.2 0.7 0.2 0.6 0.4 0.4 0.2 0.3 0.2 0.4 0.4 0.4 Ornamentals 1.1 1.1 1.2 1.3 2.3 2.3 1.2 2.4 2.3 2.7 2.6 5.2 2.9 3.5 3.8 3.6 Other crops 3.3 3.6 0.2 3.3 4.2 3.4 0.5 0.5 0.4 0.5 0.4 0.4 0.4 0.5 0.6 0.5 Seedsforsowing 0.12 0.11 0.10 0.10 0.06 0.02 0.04 0.11 0.29 0.29 0.12 0.08 0.07 0.06 0.06 0.12 Tubers 2.9 3.9 3.4 3.3 5.6 5.5 5.2 4.4 5.4 6.8 6.9 6.8 7.8 8.5 7.1 7.8 Total crops 152 154 151 157 161 199 198 194 202 204 199 211 198 218 221 200 Livestock products Meat Beef 31.6 31.3 29.2 29.1 30.4 35.8 29.0 35.1 34.0 36.8 38.2 40.3 38.1 40.3 42.9 46.9 Pork 18.4 19.1 16.8 16.6 16.0 21.3 20.3 25.4 19.8 21.6 25.8 28.8 25.4 25.1 27.6 29.4 Sheep 1.0 1.0 0.8 0.9 0.9 1.1 1.0 1.1 1.1 1.1 1.3 1.5 1.6 1.8 1.8 1.9 Goat 1.4 1.6 1.3 1.3 1.2 1.1 1.1 1.2 1.3 1.3 1.5 1.5 1.6 1.6 1.5 1.5 Poultry 17.4 17.3 13.4 17.2 18.6 22.0 19.9 24.4 27.5 26.5 33.4 35.9 36.9 37.1 41.0 43.7 Turkey n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.6 0.7 0.8 0.9 0.9 0.8 0.8 0.7 Milk Cow 25.4 22.8 19.7 21.3 21.6 26.1 29.1 30.4 30.9 32.9 36.9 37.5 35.6 35.7 36.2 37.1 Goat 0.5 0.5 0.5 0.5 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.6 0.6 0.7 0.7 0.8 Other Egg 9.7 9.3 8.6 10.2 10.9 13.9 15.3 15.7 13.6 13.5 16.2 18.4 16.7 18.7 20.8 17.0 Wool 0.10 0.10 0.06 0.04 0.02 0.02 0.02 0.02 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.02 Honey 1.4 1.3 0.6 0.7 0.9 0.9 1.1 1.4 1.1 1.1 1.2 1.2 1.2 1.4 1.4 1.3 Wax 0.080.070.030.060.060.050.060.060.080.070.100.110.140.130.120.11 Total livestock 107 104 91 98 101 123 117 135 131 136 156 167 159 163 175 181 Total value 259 258 242 255 262 321 315 329 333 340 355 377 357 382 396 381 n.a. indicates that no data are available. Nominal values of production are deflated by agricultural GDP deflator, the 2005 value of which is calculated using the per cent change in the national GDP deflator in the absence of final official data. Sources: crop data are from Servicio de Información y Estadística Agroalimentaria y Pesquera; livestock data are from the Servicio de Información y Estadística Agroalimentaria y Pesquera.

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Trends in the real value of livestock products are mostly unpronounced, and levels vary considerably (Table 2.3). The most important product by a narrow margin is beef, which accounted for 9% to 12% of the value of production between 1990 and 2005. In fact, the value of beef production has grown by 2.8% per year, but this rate has been exceeded by most other livestock products. At 7.8% per year, the real value of poultry production has increased most quickly over the past 15 years, but sheep meat value of production has increased at 5.4% per year and pork at 3.8% per year. The real value of milk production has also climbed steadily, rising by 4.3% per year in the case of the cow milk. The egg industry has also expanded rapidly, at 5.4% per year, and wax and honey production values have also increased, albeit from lower starting levels. In contrast, the real value of goat meat production, although positive, has been lower, and wool has dwindled. The increasing volume of production explains more than half the change in real production value since 1990 for most products (Figure 2.5). The level of beef produced was 1.11 million tonnes in 1990 and, in 2005, 1.56 million tonnes. The trend growth rate of 1.8% per year in volume explains much of the change in the total value. Regarding poultry meat, there has been strong growth in the quantity of production, apart from a pause in 1996: starting from a production volume 750 thousand tonnes in 1990, by 2005 poultry production surpassed 2.4 million tonnes, easily exceeding the volume of beef production; poultry meat production more than tripled over the past 15 years. The volume of pork and sheep meat production also increased more quickly than beef production over the 1990 to 2005 period, but at less than half the rate at which poultry production climbed. Milk is also an important livestock product that has grown over the period, particularly cow milk which grew at 3.2% per year. During the period from 1990 to 2005, the quantity of milk production grew nearly two-thirds, going from 6.3 billion litres in 1990 to almost 10.1 billion litres in 2005. Egg production trend growth was almost 5% per year during the last 15 years, resulting in a doubling of the volume of eggs. Of all livestock products, only honey, wool and wax production volumes declined since 1990. Comparing growth in production volume and real value, on the order of two-thirds of the greater real value of beef and pork, three-quarters for milk, and most of the change in poultry and egg real value of production comes about due to higher volume rather than rising average real values per unit. Figure 2.5. Trend growth rates of production, selected commodities, 1990-2005

Poultry

Eggs

Sugar

Cow milk

Pork

Beef

Sorghum Real value of production

Maize Volume of production Dry edible beans

-1%0%1%2%3%4%5%6%7%8%9% Source: Servicio de Información y Estadística Agroalimentaria y Pesquera and the Servicio de Información y Estadística Agroalimentaria y Pesquera.

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Rural population

Characteristics of rural households In 1990 the population in rural areas was 23 million, or 29% of the total population.13 Although the population in these areas has been increasing, it has done so at a lower pace than the urban population. According to recently published estimates, there were 24 million people living in rural areas, accounting for 24% of the total population, in 2005.14 By one estimate, the proportion of the population living in rural areas will continue to decrease, but the actual number of people will continue to increase such that, by 2030, the rural population will be 27 million, but the share of total population living in rural areas will have fallen to 21%.15 In 2005, there were 5.5 million rural households with, on average, 4.4 family members each.16 Almost 60% of these households had four or more members. The total rural population is comprised of 49% men and 51% women. The average monthly income per capita is MXN 1 447.17 In general, the rural population is young: the median age is 20 years and 70% of the rural population is younger than 40 years. Not all rural households derive income from agricultural activities, nor are all members of all farm households engaged solely in agricultural activities.

Education Rural education is generally considered to be deficient. Overall educational achievement is still low as compared to other OECD members (Part 1), but also education in rural areas is inferior compared to urban areas of Mexico (Table 2.4). Illiteracy in rural areas, at 21%, is more than twice the national average, and seven times higher than in Mexico City. The obvious immediate causes are the lower average amount of time spent in school and the lower share of children in school: average schooling is less than five years in rural areas, half the average for Mexico City; and almost three-quarters of the population in Mexico City and over half of the national population have completed post- primary education, but not even a quarter of the population in rural areas has attained this level. Education lags most in smaller rural communities.18

Table 2.4. Education gap of rural areas

Rural National Mexico City Population 15 years and older Illiteracy rate (%) 21.0 9.6 3.0 Average schooling (years) 4.8 7.6 9.7 Share with post-primary education (%) 24.2 51.6 71.6 Population 15-19 years Share in School (%) 28.9 46.7 64.8 Source: Population Census 2000.

Income source Rural household income is not solely, or even mostly, dependent on agriculture.19 Data from a survey of rural households (which uses a narrow definition of rural) show that the most important sources of rural household income are non-agricultural salaries and wages, accounting for 41%, followed by farm production activities, with 18% (Table 2.5). Migrant remittances also represent a substantial share, 12%, of income.

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Income generated by agricultural activities, including agricultural salaries and wages, is 31% of total rural household income. With respect to agricultural income, these survey definitions and data show that the most important source is agricultural salaries and wages, accounting for 13%, followed by commercial crops and plantations, at 10%. In contrast, income from livestock and staple crop production account for only a very small share of income.

Table 2.5. Composition of rural household net income, average shares, 2002

Source of Income Share

Farm production activities 18.2% Livestock 3.7% Staples 2.4% Commercial Crops and plantations 10.0% Other agricultural activities 2.1%

Local non-farm activities 8.3% Commerce 6.0% Services 2.2% Handicrafts 0.1% Renewable resource extraction 2.3% Public transfers 4.4% Migrant remittances 12.7% Internal 1.7% Mexico to U.S. 11.0%

Salaries and wages 54.2% Agriculture 13.0% Non-Agriculture 41.2% Source: Ceron Monroy, 2004, with data from ENHRUM.

According to a survey that employs a much broader definition of rural, the role of agriculture in rural household income has declined between 1992 and 2004 (Figure 2.6).20 Official data reveal that the share in income of independent farming fell from nearly 30% in 1992 to less than 10% in 2004, and the share of agricultural wage labour fell slightly as well, so income from agriculture fell from 38% of all income in 1992 to 17% in 2004. The sum of public and private transfers to rural households has grown significantly and now accounts for 17% of rural income, a similar share as agriculture. The share of public transfers in rural incomes increased from 1.7% to 7.9% in the last decade, though there may be some crowding out of private domestic transfers, whose share has fallen by almost half.21 While international transfers have grown, they still represent only about 4% of household incomes in the rural sector. The composition of rural income varies between the poorer and richer people, as well as over time (Table 2.6). The share of non-monetary income of the poorest decile of the rural population was 40% in 2004, which was twice the national average. Moreover, whereas the share of non-monetary income of the poorest decile has changed little over the previous ten years, the share of non-monetary income fell by more for other groups, and particularly for those in the centre of the income distribution. The part played by business income, which is particularly large for those with higher income, has also been falling for all groups, but is still important. Rising shares are associated with wage and

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salary income for all but the poorest, and transfers, whether payments from government or remittances from migrants.

Figure 2.6. Principal sources of rural monetary income, 1992 and 2004

100%

11.6 11.2 Property income and other 90% 1.6 3.7 0.1 2.0 4.1 8.6 Pensions 80% 4.2 4.6 70% International transfers 9.1

28.7 60% 8.2 Oportunidades and Procampo transfers

50% Domestic inter-household transfers 18.5 9.0 40% Independent Farming

30% 15.5 Agricultural Wage Labour 20% 36.3 Independent Non-Farm Activities 22.8 10%

Non-Farm Wage Labor 0% 1992 2004

“Rural” refers in this Figure to localities with less than 15 000 people, as opposed to the common definition of localities with less than 2 500 people. “International transfers” refers to remittances. “Independent farming” refers to non-wage farm income. Source: Ruiz Castillo (2005).

Table 2.6. Rural income composition, by decile, 1994, 2000 and 2004

Income Deciles Average of All IVXRural Housholds 1994 2004 1994 2004 1994 2004 1994 2000 2004

(per cent) I. Current Monetary Income 55 60 66 80 79 86 72 77 81 I.1. Work remunerations 22 20 34 46 33 41 34 37 43 I.1.1. Wages and salaries 22 18 33 44 30 38 32 34 40 I.1.2.Others 021233232 I.2. Business income 18 15 19 14 34 24 24 25 19 I.2.1. Agriculture business 13 9 13 5 22 7 16 12 6 I.2.2. Other business 5 6 6 10 12 18 8 13 13 I.3. Property income 1 0 0 1 1 3 1 1 1 I.4. Transfers 15 26 13 19 10 18 12 14 18 I.4.1. Retirement and pensions 0 0 1 1 1 7 1 2 4 I.4.2. Other transfers 14 26 12 18 9 11 11 13 14 I.5.Otherincomes 000010100 II. Non-monetary income 45 40 34 20 21 14 28 23 19 II.1. Self-consumption 13 7 9 2 5 3 7 4 3 II.2.Others 323326181712221916 Source: Encuesta Nacional Ingreso-Gasto de los Hogares, INEGI.

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The number of people employed in agriculture has been declining unsteadily and the nature of their employment has also changed since 1990 (Table 2.7). The total number, nearly 8 million in 2003, has decreased by about 2% per year. The number of producers has declined more quickly and the number of people working in agriculture in communities such as ejidos has fallen by more than half a million. Since the mid-1990s, at least, a greater number of people active in this sector are paid labourers, and this category has grown at about 1% per year. Unpaid workers, although fewer, continue to account for well over a quarter of all people active in agriculture.

Table 2.7. Activities of individuals engaged in agriculture

1991 1993 1995 1996 1997 1998 1999 2000 2002 2003

(millions of people) Total 9.8 10.5 9.7 9.2 10.4 9.8 9.5 8.7 8.2 7.7 Producers 4.3 4.8 4.1 3.7 4.0 3.9 3.8 3.4 3.5 3.3 Owners 1.2 1.2 1.1 1.1 1.5 1.2 1.2 1.0 1.1 1.0 Ejidatarios and joint owners 2.1 2.5 2.1 1.8 1.6 1.8 1.8 1.6 1.6 1.6 Occupants 0.5 0.5 0.4 0.3 0.3 0.3 0.3 0.3 0.2 0.2 Tenants and sharecroppers 0.4 0.4 0.3 0.3 0.4 0.4 0.3 0.3 0.3 0.3 Livestock producers (not owners) 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.2 Workers 5.5 5.7 5.6 5.4 6.4 6.0 5.7 5.3 4.8 4.4 Laborers and unskilled workers 2.2 1.9 2.2 2.1 2.8 2.3 2.5 2.3 2.4 2.2 Employees and operators 0.1 0.2 0.2 0.2 0.3 0.1 0.2 0.1 0.1 0.2 Unpaid workers 3.2 3.6 3.3 3.2 3.4 3.5 3.0 2.8 2.2 2.0 Source: Encuesta Nacional de Empleo, various years, INEGI - STPS.

Migration Migration from rural areas is mostly directed towards cities within Mexico as people seek opportunities in urban areas, but there is an international component, as well. INEGI estimated that about 1 million people from rural areas immigrated to the United States from 1990 to 1995 of whom two-thirds were men and one-third were women.22 This Figure declined by 10% to 0.9 million immigrants for the period from 1995 to 2000 of whom 70% were men and 30% were women. On average, according to these data, during the 1990s, about 4% of the rural population left the country every five years. The outflow of workers from rural areas to urban areas in Mexico or to other countries gives rise to transfers back into these rural areas from those workers in the form of remittances. In 2004, Mexico received MXN 166 billion in remittances of which 34% was received by rural households.23 These MXN 56 billion are equivalent to over one fifth of the value of total agricultural production. These data do not measure the number of migrants from rural to urban areas within Mexico.

Incidence of poverty In 1989, 53% of the total population, 39 million people, was in a situation of income poverty, including many in even more dire poverty conditions (Box 2.1). As of the middle 1990s the first half of the 1990s the situation had worsened and the rate of poverty increased, but the problem was likely exacerbated by the currency crisis as, in 1996, the income poverty rate reached a peak at 69% of the total population, or 66 million people.24 Since the end of the currency crisis, the share of people living in poverty has declined in Mexico. This reduction has likely been caused by economic growth in the period 1995 and 2001, but has also been attributed to increased spending on poverty reduction programmes, such as PROGRESA/Oportunidades. Spending on these programmes went

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from 0.7 to 1.2% of GDP in 2002. By at least some measures, Mexico has been more successful in reducing poverty in recent years than other Latin-American countries: the share of population living below USD 2 per day fell from over 25% in 1998 to about 15% in 2004, as compared to 18% in 1992, whereas the Latin American average remained at about 25% throughout the period.25

Box 2.1. Definitions of poverty SEDESOL has defined three broad levels of poverty: (1) alimentaria,alsocalledfoodor extreme poverty, when members of a household are not able to attain an acceptable level of food intake; (2) capacidades, capacity or moderate poverty, when they attain an acceptable level of food intake but cannot invest in health or education; and (3) patrimonio, income poverty, when they can invest in health and education but cannot afford housing, clothing or transportation. These definitions are cumulative in the sense that any person in food poverty is also in capacity and income poverty, and any person in capacity poverty is also in income poverty. Various definitions of “rural poverty” are available; rural poverty may refer to poverty in municipalities with a population less than 15 000, although this includes “semi-urban” localities with a population between 2 500 and 15 000, or may be limited strictly to municipalities with less than 2 500 people. It is not always clear which definition is applied, but the meaning is noted where possible.

Despite some recent reduction in poverty, poverty remains all too common (Table 2.8). In absolute terms, national income poverty decreased by 7% during the 2000- 2004 period. Other dimensions of poverty fell further; extreme poverty fell by nearly one- quarter from 2000 to 2004. Nevertheless, poverty still affects a large number of Mexicans: 20% live in extreme poverty, and just less than 50% live in capacity poverty. Moreover, although poverty in aggregate has decreased in recent years, there is some evidence that the fall in the rural poverty rate in this period reflects income gains for households close to the poverty line rather than large increases in income among those who are far below the poverty line.26 Poverty is also found to be more extreme for certain types of populations, and in particular in areas with large indigenous populations that are concentrated in the South-eastern states.27 Judgments about the trends in rural poverty since 1991 are not unanimous. To some extent, differences of opinions may reflect differences in the time periods being considered: some observers point to the reduction in rural poverty by nearly one half from the middle 1990s to 2004, whereas other observers consider the 1992-2002 period to be a “lost decade” in terms of rural poverty-reduction (Table 2.9). The incidence of poverty in rural areas rose substantially in the middle 1990s during the macroeconomic crisis: approximately one-half of the rural population may have been in extreme poverty in the aftermath of that event. Poverty worsened even more quickly in urban areas at that time, however. In any case, whereas the rural poverty rate has decreased by about one-half since the middle-1990s, comparing the situation at the start of the reform period with the more recent data suggests that the reduction in extreme poverty in rural areas has been on the order of one quarter, from 36% to 28%.

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Table 2.8. Population in poverty, national, urban and rural since 1992

1992 1994 1996 1998 2000 2002 2004

Absolute: number of people in millions National Extreme (food) 20 19 35 33 24 21 18 Capacity 25 27 43 40 31 28 26 Income 46 51 65 62 53 51 49 Urban Extreme (food) 8 7 7 Capacity 12 11 12 Income 26 26 26 Rural Extreme (food) 16 13 11 Capacity 19 17 14 Income 37 25 23

Relative: share of relevant population, in per cent National Extreme (food) 23 21 37 34 24 20 17 Capacity 28 29 45 41 32 27 25 Income 53 56 70 64 54 51 47

Urban Extreme (food) 14 10 27 21 13 11 11 Capacity 18 17 35 29 20 17 18 Income 44 44 62 56 44 42 41

Rural Extreme (food) 36 37 52 52 42 35 28 Capacity 42 46 60 58 50 44 36 Income 65 72 81 75 69 65 57 Note: See Box 2.1 for the relevant definitions. Source: Anexo Estadístico, V Informe de Gobierno, Government of Mexico.

Table 2.9. Incidence of extreme poverty

National extreme Rural extreme Share of national extreme poverty poverty rate poverty rate in rural areas

1950 62% 1956 64% 1958 61% 1963 46% 1968 24% 1977 25% 1984 23% 1989 23% 1992 23% 36% 66% 1994 21% 37% 73% 1996 37% 52% 57% 1998 34% 52% 62% 2000 24% 42% 68% 2002 20% 35% 66% 2004 17% 28% 60% Source:Cortéset al. (2002); Comité Técnico para la Medición de la Pobreza (2005).

In Mexico, poverty is a far more serious problem in rural areas. As of 2004, about 60% of the extremely poor and nearly half the population in income poverty live in rural areas (Table 2.8). As only a quarter or so of the total population lives in rural areas the incidences of all types of poverty are much higher in rural areas. The difference is greatest in the case of extreme poverty: the extreme poverty rate in rural areas is 28% according to 2004 data, as compared to 11% in urban areas. Moreover, this difference has

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narrowed only gradually over time; the share of people in extreme poverty living in rural areas has remained at about two-thirds at least since 1992. Extreme poverty rates vary significantly by region as well as degree of “rurality”: 12% of the population living in the rural areas of Northern states are in extreme poverty, as compared to 47% in the rural South; and the rate doubles going from urban to semi-urban localities, and doubles again from semi-urban to small rural localities (Figure 2.7).

Figure 2.7. Variations in extreme poverty by region and size of localities in 2002

50% 47% 45% 42% 40% 35% 30% 25% 21% 20% 15% 12% 11% 10% 5% 0% Rural North Rural South Urban Semi-urban Dispersed Rural (>15 000) (2 500 - 15 000) (< 2500)

Source: World Bank (2005).

Poverty is associated with the low skilled labour that characterises Mexican agriculture.28 Comparing wages to the legislated minimum wage, shows the share of persons engaged in agricultural activities with low earnings in 2004 (Table 2.10). In 2004, 40% of contracted workers received up to one minimum wage, 20% between one and two, 13% up to five and 2% more than five times the minimum wage. Over time, fewer in absolute and relative terms receive 1-2 times the minimum wage. While there has been some increase in the numbers receiving higher multiples of the minimum wage, there has also been a fairly constant number – and rising share – who receive less than one minimum wage. A decreasing number of people engaged in the sector receive no monetary income at all, and in any case this number may include family members whose earnings are reflected in some way in household income nevertheless. In 2002, 4.6 million agricultural labourers were classified as being in extreme poverty.29 Rural poverty is also related to the large dispersion of the rural population. The cost of providing basic public services and infrastructure tends to be higher for a scattered population. For example, 15% of the rural population does not have access to electricity, 37% does not have access to sanitation and 60% does not have access to piped water.30 Education services also tend to be more expensive when populations are dispersed and, as indicated earlier, education in rural areas is deficient (Table 2.4). In the case of health, municipal infant mortality rates (IMR) vary directly as a function of municipal marginality measured by a multi-dimensional poverty indicator (CONAPO marginality index) which is highly correlated with the degree of “rurality” (Figure 2.8). Comparing the extremes of this distribution, the IMR of highly rural – dispersed – municipalities was as high as 67 infant deaths per 1000 live births, whereas the metropolitan municipalities at the other end had an IMR as low as 17 in 2000.31 The distance between the municipalities with the highest and lowest IMR in Mexico has been reported to be as high as 103 to 9 in 1999, a gap comparable to the difference between the national average IMRs of Bangladesh and the United States.32

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Table 2.10. Distribution by income levels of population employed in agriculture

Total Less than 1 mw to 2 mw to 3 mw to 5 mw over No Not Total with 1 mw 2 mw 3 mw 5 mw 10 mw 10 mw income stated Income (number of people, millions) 1991 8.11 2.59 2.35 0.43 0.16 0.05 0.02 2.20 0.30 5.91 1993 8.75 2.81 2.09 0.33 0.13 0.06 0.02 2.95 0.36 5.80 1995 8.30 2.30 1.59 0.34 0.19 0.08 0.07 3.37 0.35 4.93 1996 7.89 2.10 1.53 0.33 0.19 0.11 0.05 3.28 0.30 4.61 1997 8.93 2.55 1.80 0.38 0.23 0.14 0.06 3.54 0.23 5.39 1998 7.48 2.16 1.35 0.34 0.22 0.09 0.05 3.03 0.25 4.46 1999 7.79 2.18 1.62 0.40 0.18 0.11 0.04 3.07 0.18 4.73 2000 7.10 2.06 1.62 0.45 0.20 0.10 0.05 2.40 0.22 4.70 2001 7.04 2.98 1.50 0.45 0.20 0.09 0.03 1.61 0.18 5.44 2002 7.18 2.84 1.55 0.58 0.17 0.10 0.04 1.74 0.15 5.44 2003 6.79 2.67 1.47 0.62 0.19 0.09 0.05 1.57 0.13 5.22 2004 6.91 2.75 1.40 0.67 0.20 0.07 0.04 1.56 0.22 5.35

Data include only contracted workers, and exclude those individuals starting a new job; mw = minimum wage; data from 1998 to 2004 are preliminary estimates. Source: Encuesta Nacional de Empleo, various years, INEGI - STPS.

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Figure 2.8. Infant mortality rate by municipality ordered by level of marginality 2000 80

Infant deaths per10 1000 live births

0 -3 -2 -1 0 1 2 3 Index of marginality

Source: Calculations based on Consejo Nacional de Poblacion (CONAPO, National Council of Population) municipal infant mortality data.

Infrastructure, inputs and resources

The agricultural sector’s capacity to grow is strongly related to its structural characteristics. In addition to low crop and livestock productivity, there are inefficient marketing systems, problems in access to and possible overuse of resources, irrigation systems with limited coverage and an underdeveloped financial system. The incidence of these problems varies: large producers or corporations have access to financial, insurance and input markets that allow them to remain competitive, but small-scale farmers and agricultural workers face limited access to production factors. This section reviews some of the constraints to economic growth. Access to input and output markets is not uniform, and a common distinction is drawn between commercial and subsistence farmers. For example, Deininger and Lavadenz (2001) identified two groups of agricultural producers. The first is commercial farmers and rural entrepreneurs. This group includes the 2.6% of private farmers who own 30% of total land (around 60 million hectares, not only for agricultural uses). Members of this group have access to insurance companies and other factor markets, and their production is intended for commercial markets, including exports. The second group identified by Deininger and Lavadenz is small holders of low productivity. This group includes the private farmers not in the first group and over 3 million ejidatarios that produce for local markets or for subsistence. Some members of this group are covered by government programmes for financing and insurance (described below). However, the poorest section of this group of producers has no access to insurance, or financing, and only limited access to output and input markets. Most agricultural producers own small portions of land. The average land holding may be about five hectares per producer, but with a high variance. 33 Moreover,eventhe smallest holdings may be divided into plots that are even smaller.34 Some households

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have greater than 100 hectares, while 88% of the rural households’ landholdings are smaller than ten hectares. Limited access to financial markets may explain only a small part of this structure. The social property regime, which accounts for half of Mexico’s territory, is a major barrier for agricultural producers to increase their landholdings and to land consolidation and trading within ejidos, and restricts private ownership of land. Regarding marketing channels, overall, transaction costs are high and distribution systems are inefficient. The physical infrastructure leads to costly losses “with evidence that up to 30% of production is lost owing to inadequate transport and storage”.35 In some instances, there is high concentration. For instance, six traders account for all the throughput of fruits and vegetables at one of the most important markets in the country, Mexico City’s Central de Abastos. Non-competitive behaviour, if it occurs, and high distribution costs lead to lower producer prices for a given retail price; a substantial share of buyers’ costs may be lost to the high-cost distribution network. In the market for fruits and vegetables, producers receive 35% to 45% of the retail price as compared to 50% for farmers in other Latin American countries, and 65% to 75% for some Central American producers.36 An underdeveloped financial sector limits banking services, thereby raising the cost of credit and investment funds. Low participation of private lenders in rural areas, due to a wider dispersion of potential clients and systematic risks associated with some agricultural activities, adds to the deficiencies noted in Part I. The large number of small- scale farms and the tenuous claims of individuals on land within the communal land structure such as the ejidos are widely perceived to be handicaps for banking in rural areas. The land reform initiated in the 1990s was intended, in part, to establish property rights so that land could be used as collateral for bank loans. Nevertheless, recent survey data indicate that 5% of rural households have never had access to credit, and only 10% have a bank account.37

Water Water is a critical input to many agricultural activities, but water availability in Mexico is unequal and, in many areas, current use is unsustainable. The defining characteristics are the dominant role agriculture plays in water use, and the great variation of water supply among regions. Water pollution caused by agricultural activities is mainly associated with irrigation, but livestock effluents are increasingly polluting water as well.38 The annual renewable supply of water of 450 billion m3 is sufficient for an ample water supply per person of nearly 5 000 m3 per year, but there is great disparity among regions — particularly between the dry Central and Northern areas and the wet Southeast.39 Agriculture consumes 75% of total water consumption and, of the total water used by agriculture, 80% is used for irrigation.40 (Recall the disproportionate share of output of the sector that is produced on irrigated land: the 9 million hectares of irrigated land represented 29% of total area in 2002, but accounted for over half of production.) Agriculture in many regions of Mexico is dependent on irrigated water; more than half of agriculture takes place in arid or semi-arid zones.41 Although the northern and central regions of the country have only 28% of the water, they contain 92% of Mexico’s irrigated area.42

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Where measurements are available, water extraction often exceeds renewable supplies, leading to the steady depletion of Mexico’s water resources. The number of aquifers known to be over-exploited has risen from 32 in 1975 to over 100 in 2005, endangering associated ecosystems and leading to growing soil salinity.43 These data relate only to the 202 aquifers that have been measured and officially certified, but these represent a minority of the total number of aquifers as another 451 out of 653 have not yet been measured and certified.

Deforestation, soil erosion, pollutants44

Water is not the only natural resource affected negatively by agriculture in Mexico. Severe soil erosion affects about 40% of the total area of Mexico, and 60% or more is subject to soil erosion to a lesser but still important extent. Fully 80% of the area suffering soil erosion is used in agriculture; agricultural activities, principally over- grazing, excessive irrigation and certain tillage practices, cause or exacerbate soil erosion. The use of pesticides in Mexico has grown 22% over the 1990s, but the number of poisonings caused by pesticides has decreased since bans were adopted in 1998 prohibiting chlordane and in 2002 prohibiting DDT, although these pesticides may remain in use illegally. The agricultural sector also contributes to air pollution. About a tenth of greenhouse gases emitted in Mexico are caused by agricultural activities, with livestock-generated methane the chief component. Vegetable production practices, particularly soil fumigation using methyl bromide, emit ozone-depleting chemicals. Mexico has been deforested at a rate of 1% per year during the 1990s, often as a consequence of clearing land for livestock grazing. The loss of temperate and tropical forests jeopardises further wild species.

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Box 2.2. Mexico's agricultural sector in a global context The description of Mexico’s agricultural sector provided here may contradict some stereotypes about OECD agriculture. Whereas agricultural sectors of OECD members might be expected to be characterised by high levels of capital intensity and productivity – and many producers in Mexico access readily capital markets and achieve excellent productivity – some part of Mexico’s agricultural sector is neither capital intensive nor highly productive. International comparisons emphasise the standing of Mexico’s agriculture sector in a broader context. The share of agriculture in total GDP in Mexico, about 4%, is well below the 17% average (Panel A), but is nevertheless higher than the shares seen in many other OECD countries. According to these data, employment in agricultural activities plays an average part in total employment in Mexico, even though Mexico has above average GDP per capita. While economic development can follow many paths, these comparisons highlight the potential to sustain the current share of agriculture in the overall economy, if not the level of employment, during the course of future evolution in Mexico’s economy. Panel A. Agriculture’s share in total GDP

Agriculture (% of GDP)

60 Guinea-Bissau 55

40 Mali 35 Nigeria 30

Côte d'Ivoire 25 India Vietnam 20 Kenya Senegal Indonesia 15 China Ukraine Turkey Brazil Argentina United States 10 MEXICO France Japan 5

0 South Africa Korea 0 4 000 8 000 12 000 16 000 20 000 24 000 28 000 32 000 36 000

GDP per capita

Panel B. Agriculture’s share in total employment

Employment in agriculture as % of total employment 60

China 50 Thailand Indonesia

Turkey 30

Uk r aine 20 Br az il Ke nya MEXICO United States

Kor e a Japan 10 France

0 0 4,000 8,000 12,000 16,000 20,000 24,000 28,000 32,000 36,000 GDP per capita

Source: OECD (2005) Review of Agricultural Policies: Brazil, based on World Bank data and national sources.

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NOTES

1. Assessments of the state of Mexico's agricultural sector are imprecise due to the lack of a regular agricultural census. Thus, although general information about output markets and trade are available, information about the structure of Mexico's agricultural sector and input markets are drawn from the last census in 1991 and surveys in subsequent years that are either partial or not focused on agriculture. The relevance of much of these data is questionable and they are represented here only sparingly. 2. For more details about the development of agricultural policies, see OECD 1997, and the series of alternating OECD publications Agricultural Policies in OECD Countries: Monitoring and Evaluation and OECD Agricultural Policies: at a Glance. 3. Gordillo et al. 1999. 4. Censo Ejidal 2001, INEGI. 5. Censo Ejidal 2001, INEGI. 6. Censo Ejidal 2001, INEGI. 7. Deininger and Labadenz, 2001. 8. SEMARNAT (2002), Compendio de Estadísticas Ambientales. Another source (Programa Especial Concurrente para el Desarrollo Rural Sustentable, 2002) gives a lower estimate of 6.3 million hectares. 9. Alvarado and Kemper, 2001. 10. Deininger and Lavadenz, 2001. 11. Unless otherwise noted, data of this paragraph are drawn from SEMARNAT, Compendio de Estadisticas Ambientales 2002. 12. Deininger and Lavadenz, 2001. 13. Instituto Nacional de Estadística, Geografía e Informática (INEGI). 14. II Conteo de Población y Vivienda 2005. 15. Consejo Nacional de Población (CONAPO). 16. Unless otherwise stated, data of this paragraph are from II Conteo de Población y Vivienda (2005). 17. INEGI (2004) Encuesta Nacional de Ingreso y Gasto en Hogares. 18. OECD (2003) Territorial Review Mexico. 19. Data of this paragraph are drawn from the Encuesta Nacional de Hogares Rurales de Mexico (ENHRUM), unless otherwise noted. ENHRUM is a survey representative of Mexican households located in rural areas, except for those living in hamlets with a population under 500 inhabitants. By excluding these populations, the analysis risks

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excluding households living under the extreme conditions of poverty and isolation. The data also exclude areas with more than 2 500 people, but these areas are usually not considered rural in Mexico by definition. 20. Apart from normal differences in survey data, different definitions may lead to apparent discrepancies between rural income data. In particular, ENHRUM data are based on a definition of “rural” that includes only communities with 500 to 2 500 people, whereas the definition used by Ruiz Castillo is for localities with less than 15 000 people. 21. These data must be evaluated with caution: the underlying source, the ENIGH survey, is designed to be representative for income as a whole, but not necessarily for small income sources. Ashraf, McMillan and Zwane note that some authors have estimated substantial under-reporting of income, likely by the wealthier respondents (p. 27). 22. INEGI sources: II Conteo de Población, and Vivienda 2005z II Conteo de Población y Vivienda 2005. Survey data indicate that there may have been a higher rate of international migration in more recent years (ENHRUM). 23. ENIGH 2004 and Central Bank of Mexico. 24. Szekely, 2005. 25. World Bank calculations based on household surveys. 26. Cortés et al., 2005. These authors find that poverty measures sensitive to the depth of poverty and the distribution of the poor (poverty gap and squared poverty gap) show no statistically significant change. 27. OECD (2003), Territorial Review. 28. The OECD Territorial Review (2003) uses INEGI data to show that not only are average nominal wages lowest for employees in agriculture, forestry and fisheries during the 1990s, but also the rate of wage growth in that sector is the lowest during that period (p. 40-41). 29. Procuraduría Agraria: Procuraduría Agraria (2003), Tendencias del Campo Méxicano en 2003,Mexico,D.F. 30. Instituto Nacional de Población y Vivienda, XII Censo General de Población y Vivienda 2000. 31. Secretaría de Salud, 2001. 32. Bangladesh and USA IMRs are from World Bank, World Development Report 2000/2001. 33. Based on the PROCAMPO roster. 34. For example, Bellon and Berthaud (2006) summarise a sample from southeastern states: the number of fields per household average as high as 3.4 in one area and as low as 1.1; and hectares per field averages as low as 0.9, in the same region as reported the highest number of fields per household, and as high as 4.2 in a different region. 35. World Bank (2001a), p. 81. 36. Brizzi (2001). 37. ENHRUM. 38. OECD (forthcoming 2007).

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39. Garduno, 2005. 40. OECD (forthcoming 2007). 41. OECD (forthcoming 2007). 42. Alvarado and Kemper (2001). 43. OECD (forthcoming 2007). 44. Material of this section is drawn from OECD (forthcoming 2007).

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Chapter 3. Main developments in agricultural policies 1990-2006– 69

Chapter 3.

Main developments in agricultural policies 1990-2006

Introduction — the policy framework

Since the beginning of the 1990s, Mexico has undertaken an important shift towards market-oriented policies. In particular, there were four major changes in agricultural policies: (1) steps towards commodity market liberalisation, (2) introduction of a new payment tied to historical entitlement to support income, (3) steps toward deregulation of inputs markets, with greater support for introducing and using technical improvements, and (4) reform to the land tenure system. Many agricultural policies, before and after the start of the reform period, are to spur economic development in rural areas and to limit migration on the one hand, and to increase productivity of individuals and of the sector on the other. The objectives of agro-food policy in Mexico are derived from the National Plan of Development elaborated by each federal administration early in its six-year mandate. In the Programa Nacional de Modernización para el Campo (National Programme of Countryside Modernisation) 1990-1994, the emphasis was on “increasing the well-being of the rural population and the efficiency of resource use, as well as improving the agricultural trade balance, particularly through greater market orientation, less regulation and improved targeting of policy.” In the period 1995-2000, the National Farming and Rural Development Programme defined the objectives of farming policy as: “To increase producers’ incomes, to increase agricultural production faster than population growth, to balance agricultural trade, to obtain self-sufficiency in basic foods, to reduce regional differences in productivity, employment and income, and to contribute to the reduction of rural poverty, the conservation of natural resources, and better use of the land.” Finally, and most importantly in the context of this analysis, the Programa Sectorial de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentaición (Sectoral Programme of Agriculture, Livestock, Rural Development, Fishing and Food) 2001-2006 established the following general objectives. • To align current productivity development programmes with marketing opportunities and the needs of domestic and export markets. • To ensure cohesion between incentives to increase agricultural production on the one hand, and the sustainability of resources and the environment on the other. • To promote public policies that create a level playing field for competition with other NAFTA members.

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• To improve efforts to fight poverty with a view to eliminating and not just reducing it. • To adjust and modify existing programmes to ensure that the stated objectives are met.

The Ley de Desarrollo Rural Sustainable (LDRS, Law of Sustainable Rural Development) was promulgated in December 2001 and the detailed regulations needed to implement it were published in October 2004. This is an important framework law that seeks to create a unifying and harmonising framework within which policies oriented towards productive development, improving social welfare, and preserving the environment are brought together. This law has several stated objectives: • To ensure that rural areas are able to fulfil their role of providing sufficient and safe food. • To ensure that rural areas offer a certain quality of life to all their inhabitants while also acknowledging the need for welfare programmes to meet the needs of the most vulnerable groups. It also establishes the importance of supporting all kinds of productive activities that generate employment and income in rural areas. • To ensure the long-term preservation of natural resources by promoting their rational use in primary production activities. An administrative structure has been put in place for the implementation of the LDRS (Figure 3.1). One main feature is the establishment of consultative bodies (Consejos Mexicanos para el Desarrollo Rural Sustentable, Mexican Councils for Sustainable Rural Development) at every level of government. These are designed to ensure the participation of all agents in rural society in the establishment of priorities for public policies. As shown, the Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación (SAGARPA, Secretariat for Agriculture, Livestock, Rural Development, Fisheries and Food) is one of several sectoral agencies whose activities comes under the umbrella of the LDRS. The LDRS also establishes Product System Committees at national, state and local levels. These Product System Committees are a mechanism for planning, communication and coordination between the different economic agents involved in the productive chains. The Product System Committees also come under the umbrella of the Mexican Councils for Sustainable Rural Development. The overarching purpose of the LDRS is to coordinate the actions of the different agencies in rural areas and, by doing so, to avoid duplication of effort, to eliminate possible contradictions, and to create synergies between the private and public sectors. To achieve this, the Intersecretarial Commission for Sustainable Rural Development developed the Programa Especial Concurrente para el Desarrollo Rural Sustentable (PEC, Special Concurrent Programme for Rural Sustainable Development). (Annex Table II.B1 shows the evolution of PEC expenditure in real terms since 2000 and the shares of the main policy categories.) In 2005, the PEC budget was MXN 144 billion, 47% higher in real terms than in 2000 and there is a noticeable increase in the importance of programmes counted as rural development under PEC (up by 82% in real terms over the period and now accounting for 28% of all rural expenditures). SAGARPA, in 2005, accounted for about one-third of the total expenditures of the PEC programme.

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Figure 3.1. Administrative structure for the implementation of the Law on Sustainable Rural Development

LDRSLDRS STRUCTURESTRUCTURE

LAW OF SUSTAINABLE RURAL DEVELOPMENT Consultative Bodies FEDERAL GOVERNMENT

Regional Interstate Intersecretarial Mexican Council Co ununcils cils ((when for the several st at e co uncil s Commission for thethe for the several st at e co un cils Sustainable work inin aa regionregion) Sustainable Ru ral Sustainable Sustainable Ru ral Rural DevelopmDevelopment ent Development

State Council forfor thethe Rural STATES Sustainable Development Concurrent Sectorial Special Program Programs Rural District Council Development Districts SAGARPA

Municipality Council forfor thethe MUNICIPALITY Sustainable

Another important institutional change that has affected agricultural and rural policies in recent years has been decentralisation. The role of the Federal government is diminished. This change has manifested itself most clearly in the following areas: • The decentralisation of operational structures: programmes are now administered by agencies located in the areas where the activities occur and decisions are, in general, taken at the local level. • A number of powers stemming from the Administrative Law of the Federal Public Administration that were previously under SAGARPA have been delegated to the states and municipalities, and, where legally possible, to producer organisations. • A percentage of budget resources have been transferred from SAGARPA to state governments which now directly manage certain programmes. • Where possible, municipalities also receive sums that were previously allocated to SAGARPA. This initiative began in 2004 and relates specifically to those programmes that target rural development. The following sections give a brief description of the evolution of the main policies and programmes in place in Mexico, highlighting the most important changes that have taken place during the period studied. A section on international trade policy is followed by an account of the main domestic market interventions, followed by a section on income support programmes. Input subsidies, measures relating to water and natural resources, and the wide range of policies in place to improve sectoral productivity complete this chapter.

International trade policy

During the 1980s, Mexico started a process to transform the economy from being trade-protected and inward looking towards market openness. One of the first steps towards opening borders to trade was taken by joining the General Agreement on Tariffs and Trade (GATT) in 1986. As a consequence, trade barriers were reduced on a multilateral basis. During the 1986-1990 period policy was oriented to diminish inflation

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rate; in this context, several import permits of agricultural products were replaced by a maximum tariff of 20%. Among these commodities were: beef meat, pork meat, dairy products (cheese, butter and yogurt), sorghum, oilseeds, vegetable oils and tropical products. However, the agricultural sector remained heavily protected up until the late 1980s, with tariff and non-tariff barriers limiting integration with world markets. Import licenses still covered 38% of agricultural products, which accounted for 66% of all import licences. At the beginning of the 1990s, the process of agricultural trade liberalisation advanced more rapidly. The quantitative restrictions on imports of 12 traditional crops were eliminated by 1991, except for maize and beans. With the inception of the North American Free Trade Agreement (NAFTA) in 1994, all the import barriers insulating the agricultural sector against trade with Canada and the United States became tariffs or tariff quotas, and were scheduled to be eliminated gradually for all commodities. As of 2006, most of the NAFTA tariffs on agricultural product imports either have been phased-out, or are close to zero (Table 3.1). However, transitional tariffs for the four products deemed most sensitive – maize, dry edible beans, milk and sugar – are to be phased out by 2008. Export licences were phased-out and completely eliminated by 1994. Although these tariff eliminations apply only to bilateral trade with Canada and the United States, they mark a significant step towards trade liberalisation given the importance of these trading partners: in 2005, 78% of total agro-food imports came from NAFTA countries, and 86% of Mexico’s agricultural and food exports were destined for those same countries.

Table 3.1. Tariffs on imports of selected agricultural products

MFN bound Applied NAFTA NAFTA in 2006 MFN 2006 2006 tariff (from US) zero in Wheat 67% 67% 0% 2003 Maize *194% *194% *18% 2008 Barley 115% 115% 0% 2003 Sorghum 45% **0% - 15% 0% 1994 Rice 45% 20% 0% 2003 Soybeans 45% **0% - 15% 0% 2003 Sugar 0.36 USD/kg 0.36 USD/kg 0.078 USD/kg 2008 Dairy products (except milk powder) 38% - 45% 10% - 15% 0% 2003 Milk powder *125% *125% *24% 2008 Beef 45% 20% - 25% 0% 1994 Pigmeat 45% 20% 0% 2003 Poultrymeat ***234% ***234% 0% 2003 Eggs 45% 45% 0% 2003 Dry edible beans ***125% ***125% 12% 2008 Tomatoes 36% 10% 0% 2003 Potatoes ***245% ***245% 0% 2003 Apples, pears and other fruit 45% 20% 0% 2003 * Intra-quota tariff is zero. ** The tariff rates depend on the dates in the year. *** Intra-quota tariff is 50%. Sources: Secretariat de Economia, New Import Tariffs 2006; WTO and EU Commission, Applied Tariffs database.

Mexico has continued to conclude trade agreements with other countries during this period. To date, twelve Free Trade Agreements have been signed with countries or blocks of countries within North America, Central America, South America and Europe. Most recently, trade agreements with Uruguay and Japan entered into force in 2004 and 2005 respectively.

Domestic market intervention

The oldest and principal form of agricultural support implemented in Mexico, from the mid 1960s to the beginning of the 1990s, was an expensive combination of price support and general consumption subsidies based on trade barriers and direct intervention in the market. The principal institution involved in implementing this policy was the Compañía Nacional de Subsistencias Populares (CONASUPO, National Company of Popular Subsistence), supporting producers through a price floor on basic crops, especially maize and beans, while subsidising urban consumers, especially of tortillas.Federal transfers to CONASUPO absorbed close to half a percentage point of GDP annually, on average, over a quarter of a century (Figure 3.2).

Figure 3.2. Budgetary transfers to CONASUPO as a per cent of GDP

1.4%

1.2%

1.0%

0.8%

0.6%

0.4%

0.2%

0.0% 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Source: Anexo Estadístico, Informe de Gobierno, various years.

Until 1990, CONASUPO would purchase, at government determined prices, all major grains and oilseeds production for which no buyer had been found. In 1991, CONASUPO ceased its activities of direct intervention in the marketing of agricultural products and, between 1990 and 1998, made maize and bean purchases only, and discontinued such purchases for all other crops. Following this period during which the role of CONASUPO in the market was gradually reduced, it was dismantled in 1999. As a way to help producers and traders to adjust to this transition, the government introduced Apoyos y Servicios a la Comercialización Agropecuaria (ASERCA, Agricultural Marketing Support and Services) in 1991 with the purpose of giving assistance to wheat, sorghum, rice, soybean and other oilseeds producers through a “marketing payment” that covered the difference between an announced policy price and a price equivalent to the import price of the commodity (called the indifference price as a buyer would be equally willing to buy domestic or imported goods at that price). The

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marketing support given through ASERCA, from its creation until 2000, was not national in coverage; its scope was limited to states with an historical surplus1 of one of the products mentioned above. Following the dismantling of CONASUPO, maize was incorporated into the ASERCA marketing support scheme, again with support given only to those states with surplus production historically. “Marketing payments” were made to buyers who would pay the producer an agreed price superior to the regional indifference price. With the objective of streamlining the programme and reducing its cost, as of 1998 ASERCA made payments to first time buyers who bid for them at auction. In return for the payments, the buyers undertook to pay an administered minimum price to the producers. In December 2000 this system was stopped and ASERCA made direct payments to producers. The intention was to make producers themselves responsible for selling their products and thereby to make them more responsive to market signals. Through 2000-2001, support was calculated on the basis of average costs of production by state (Apoyos a la rentabilidad). It was deemed that this method did not offer the best results, and as of the spring-summer 2002 season calculations based on the indifference prices were reinstated. As of 1998, new states were incorporated in the ASERCA marketing support scheme. In 2003, the focus on “states with surplus harvests” was replaced by “producers with surplus production”. In other words, coverage was expanded to include the whole country. In that same year, product coverage was expanded to include all grains and oilseeds — with the exception of dry edible beans — with the aim of eliminating distortions among crops. In addition, the practice of announcing an agreed price for each season on a year-by-year basis was replaced by a multi-year commitment over a five-year period for each product in the programme. This new scheme, adopted in 2003, is known as “Target Income” (Ingreso Objetivo). The provisions of the programme vary according to each commodity covered as shown in Table 3.2.

Table 3.2. Target Income programme: main parameters

Product Target income Target income US price 2005/2006 (MXN / tonne) (USD / tonne) (USD / tonne) Wheat 1 800 166.28 131.5 Triticale 1 800 166.28 n.d. Fodder wheat 1 525 140.88 n.d. Maize 1 650 152.42 82.4 Sorghum 1 270 117.32 74.3 Cotton - 1 410.96 1 042.8 Rice 2 100 194.00 168.0 Soybean 3 000 277.14 207.02 Safflower 3 300 304.85 278.0 Canola 3 500 323.33 207.23

Exchange rate of 10 8250 MXN/USD from Banco de México fixed exchange rate for obligations in foreign currency, 15 July 2006; USDA-ERS for US price data, estimated for 2005/2006 in August 2006. Source: ASERCA.

The Target Income scheme operates as a deficiency payment, so that when the market price is lower than the Target Income minimum price per ton, ASERCA calculates a “complementary support” price. The complementary support is calculated before harvest

and is based on the estimated price that potential buyers would be willing to pay, in that production region, as compared to the alternative of importing the same product (the indifference price which is the international price plus transport and storage). As the complementary support is determined before the harvest period, the price per ton ex post can differ from the Target Income. In order to encourage producers to be more responsive to market signals it is a condition of the support that the producer must show that the harvest has been sold. This scheme pays only up to a government set maximum yield per hectare that is determined for each region. If a producer reports a higher yield, the support is truncated. However, the maximum yields can change from one year to the next. In this way the programme recognises advances made in productivity, so the limits imposed on payments increase over time. In addition to the Target Income Subprogramme, ASERCA operates a series of measures designed to deal with surplus production, and to improve market integration under the general heading of Programa de Apoyos Directos al Productor por Excedentes de Comercialización para la Reconversión Productiva, Integración de Cadenas Agroalimentarias y Atención a Factores Críticos (Programme of Direct Support to Producers for Marketing Surplus for Productive Re-orientation, Integration of Food Supply Chain and Attention to Critical Factors). The most important measures relate to price hedging and generally to the promotion of the knowledge and skills necessary for risk management. There are also measures for crop conversion. An instrument for temporary withdrawal of seasonal surpluses from the market is made available to producer and buyer organizations, through assistance to cover storage and financial costs. Figure 3.3. Evolution of agricultural marketing support 1991-2005 2005 Million MXN

9 000 8329 8 000 7404 7290 7 000 6812 6 393 6502

6 000 5816 5351

5 000 4377 4 138 4 000 3501 2528 3 000 2502

2 000 1471 635 1 000

0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year

Source: Direction General of Marketing Policy - ASERCA; Informes de Gobierno 2001, 2005 and 2006.

Overall the marketing programmes operated by ASERCA accounted for MXN 6 502 million, representing 14% of the SAGARPA budget, in 2005. ASERCA spending on marketing support since its inception in 1991 is shown in Figure 3.3. The distribution of

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the spending between programmes and among commodities within the Target Income programme is shown in detail in Annex Table II.B2.

Income support — PROCAMPO

The Programa de Apoyos Directos al Campo (PROCAMPO, the Programme of Direct Payments to the Countryside), operated by ASERCA, started in 1993, before the inception of NAFTA, to help farmers cope with lower trade protection and with the removal of direct price support programmes. The objectives of PROCAMPO were fivefold: • To improve competitiveness at the domestic and international levels in order to improve the living standards of rural families and to modernize the marketing system. • Facilitate land conversion where it is possible to use the land for activities with higher returns that will provide economic certainty to rural producers and improve their capacity to adapt to change. • Encourage adoption of advanced technologies and introduce production methods based on efficiency and productivity. • Raise the incomes of rural producers, particularly those of the poorest producers. • Contribute to the recovery and conservation of forests, reduce land erosion and water pollution, and develop an awareness of the importance of natural resources conservation.

Initially, PROCAMPO covered land owners who grew any of nine selected crops (maize, wheat, beans, rice, sorghum, soybeans, cotton, safflower and barley) during the three agricultural seasons previous to August of 1993. The programme was established for a 15-year period, and is to be phased out by 2008. By linking the payment to historical use of land, rather than current production, it was intended to help farmers switch to more profitable crops in the context of a more competitive economy. Moreover, by paying all land owners who grew one of these crops, rather than only those who sold their output, the programme’s scope extends to subsistence farmers. The programme’s benefits to poor land-owners were increased by a modification that introduced a minimum payment size equivalent to the payment for one hectare that applied even to those who own less land. In 1995, PROCAMPO was further modified to expand the number of eligible crops. Nevertheless, there remain some restrictions: recipients must allocate the land to producing crops on this list, other crops, fruits or vegetables, to pasture for livestock or in an approved environmental programme. The various changes to the conditions and provisions of PROCAMPO are described in detail in Annex Table II.B3. The annual payment rates that have applied since the scheme began in 1994 are recorded in Table 3.3. Expenditure under the PROCAMPO programme has varied little in real terms in recent years, accounting for about 14 billion MXN in 2005 and about 40% of all SAGARPA spending. One of the changes made recently allows, by arrangement with certain financial institutions, for a producer to receive the present value of future entitlements, in exchange for which he must submit an investment plan. In 2005, 12% of PROCAMPO spending was capitalised under this provision. On average, since 1994 programme spending is equivalent to 5% of agricultural GDP.

Table 3.3. Programme of Direct Payments to the Countryside (PROCAMPO)

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 (payments are expressed in real MXN pesos per hectare) Autumn- Winter 1 416 1 254 1 060 995 980 958 974 1 012 999 979 948 963 Spring- Summer 1502 1379 1166 1143 1104 1083 1071 1079 1052 - - - Preferential Payment ------115611741160 Normal Payment ------1015980963 Deflated using the implicit price index of the aggregate GDP, base 2005; the “preferential payment” refers to a preferential payment for rain fed area during the spring summer season established in 2003. Source: Sexto Informe de Gobierno, 2006.

Input support measures

Before the 1990s, the Mexican government participated actively in the agricultural inputs market mainly through state-owned corporations. This included fertilizers, handled by FERTIMEX; seeds, by PRONASE; and other inputs such as pesticides, machinery and diesel fuels. The companies were privatized during the 1990s, and some of these subsidies have been reduced or completely eliminated. Subsidies to insurance and irrigation have been provided in all years since 1990, as have subsidies to interest, capital or credit.

Energy subsidies In 2002, the Ley de Energía para el Campo (LEC, Law of Energy for the Countryside or Field Energy Law) was enacted; this act established a special programme to support electricity and fuel used in agricultural activities. Electricity in Mexico is subsidised for all sectors, but agriculture pays a lower price than any other sector. Prior to 2003, there were two prices charged for electricity for agricultural pumping: one for low tension and another for medium tension. After the LEC in 2002, two additional prices were introduced: the first one is a preferential, single price that applies at all times. The second, lower price is available for pumping during the night. There is an annual limit to the number of kilowatts that benefit from these low prices, based on the level of extraction permitted. Also within the LEC framework, a programme of preferential pricing for diesel was started in 2003. The programme attempts to lower production costs by setting a preferential price for diesel that fuels machinery and equipment used in agricultural and livestock production. The US diesel price is taken as the reference in setting the preferential price. Beneficiaries of this programme receive a magnetic pre-charged chip card, for use at authorised gas stations, containing data concerning the number of litres that users are allowed to buy at the lower price.

Rural and farm credit support policy Towards the end of the 1990s there were severe problems in the agricultural and fisheries credit system. This was due in part to the high interest rates that resulted from the 1995 crisis, in part from the prevailing culture of defaulting on loans in the expectation that the government would step in with re-financing or “forgiveness” measures, but also to basic structural deficiencies in the agricultural finance system. At

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that time, the agriculture credit scheme included commercial banks; trusts like FIRA (Trusts related to Agriculture, Bank of Mexico) and Fideicomiso de Riesgo Compartido (FIRCO, Trust of Shared Risk); Nacional Financiera (NAFIN, National Financier); some credit institutions with specific aims like the Mexican Bank of External Trade (BANCOMEXT); and the Bank of Rural Development (BANRURAL). FIRA operated at one remove from producers, channelling credit through the commercial and development banks. Banco Nacional de Comercio Exterior (BANCOMEXT, Mexican Bank of External Trade), since the beginning of its operations, has been oriented to exports activities. Credit activities in Banrural mainly depended on the public purse and offered interest rates below market rates; Banrural experienced financial problems with 57% of its outstanding loans unpaid and restructuring was necessary in 2003, Banrural was replaced by Financiera Rural (Rural Financier), which is organised with the same objectives as FIRA, although Financiera Rural can grant credit directly to producers. The creation of rural financial intermediaries has been promoted, especially in less developed rural areas where they did not previously exist. The objective is to grant rural credit through rural sector financial intermediaries such as credit unions or savings banks or SOFOLES (Financial Societies of Limited Purpose). These organisations also provide financial services to non-agricultural, low income households in rural areas. In this way, FIRA’s resources are not exclusively channelled through commercial banks, but also, through new financial intermediaries, who accounted for between 15% and 20% of the credit granted to the rural sector in 2005. Other non-banking financial intermediaries, such as factoring agencies and leasing agencies, have also been given access to FIRA credit. In April 2006, the Chamber of Deputies approved a new law to create Multi-Purpose Financial Societies (SOFOMES) in order to diversify the sources of credit to those currently outside the system. This law will help leasing and factoring agencies to grant credits, increase competition, reduce market interest rates and eliminate excessive regulation. Because the sector is perceived to be a high risk one, the traditional practice of financial agents has been to grant credit only when the funds can be secured through a mortgage arrangement, endorsement or other funding guarantee. These procedures exclude many producers. SAGARPA encourages the use of cash guarantees through a transition scheme. The Programa de Apoyo para Acceder al Sistema Financiero Rural (PAASFIR, Support Programme for Access to the Financial Rural System), provides a cash guarantee in addition to those guarantees supplied by FIRA. Under PAASFIR rules, producer’s organizations have to establish a trust know as a Fondo de Inversión y Contingencia para el Desarrollo (FINCAS, Rural, Investment and Risk Trust for Rural Development) which is established with a mixture of private and public resources. In order to establish FINCAS, producers’ organisations have to guarantee at least 10% of each credit line they contract. SAGARPA (PAASFIR) through FIRCO or other financial intermediaries, provides up to 19.5% of the total amount of the credit contracted by producers, as a complement of the FINCA’s initial capital. During the period 2002 to July 2006, PAASFIR transferred resources of MXN 1 270 million to 452 FINCAS, which support 20 Product Systems. In 2005 under the FINCAS credit lines, FIRA and Rural Financier gave credit of approximately MXN 5 896 million to a total of 165 445 producers in the rural sector. At the end of 2005, credit to the agriculture, forestry and fishing sectors was MXN 82 335 million, similar to the level reached in 2001. Between 2001 and 2003, due

to the restructuring of the credit system, the levels were much lower but have been growing (Figure 3.4).

Figure 3.4. Credit granted to the agriculture, forestry and fishing

(MXN 2005 million)

85 000 82 335

79 977 80 000 78 102 76 187 74 421 75 000

69 141 70 000

65 000

60 000 2000 2001 2002 2003 2004 2005 Year

Policies for water and other natural resources

The Comisión Nacional del Agua (CNA, the National Water Commission), is responsible for co-ordinating water policy since its creation in 1989. In 1992, the National Water Law replaced earlier legislation with the overall objective to achieve sustainable water resources management and development at the river basin or aquifer level, with participation by major water users and other stakeholders. This law was amended in 2004 to add agencies responsible for individual water basins and to impose higher penalties on illegal behaviour. These new laws did not completely replace the previous system; claims to water concessions have continued throughout these reforms, albeit with amendments in the direction of establishing measurable and tradable property rights. Water policy has long subsidised agricultural users relative to others, although some of this support has decreased in recent years. Since 1982, when water abstraction charges were established, farmers have been exempt, although this exemption was terminated in 2003. In addition, farmers could be charged for water pollution since 1992.2 Thus, while the CNA reduces costs associated with agriculture, particularly irrigation, the share of operating and maintenance costs that farmers are expected to pay has increased from 20% in the early 1990s to 80% now.3 As regards the electricity used to pump this water for irrigation, however, agriculture is the most heavily subsidised sector with a 28% cost recovery (price/cost ratio) in contrast to 94% for industry and 43% for domestic use (Table 3.4).4 More generally, the strengthening of hydro agricultural infrastructure and projects for increasing efficiency in water management have been priorities for some

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time. In 2005, investment for hydro agricultural infrastructure reached MXN 4 843 million. However, public spending on hydro agriculture infrastructure has been uneven through the last decade, with falling support until 2002 followed by an increase in subsequent years. Subsidies for the agricultural sector have been relatively stable since 1995, however, with an average level of MXN 7 074 million in the last decade.

Table 3.4. Public expenditure in hydro agricultural infrastructure and the agricultural electricity subsidy

Public spending Subsidy Agricultural electricity subsidy on hydro agricultural Cost recovery Beneficiaries Subsidy infrastructure per user (2005 (2005 (Price/Cost) (Thousand) (2005 MXN) MXN million) MXN million) 1995 6 675 5 482 0.33 79 69 388 1996 7 509 7 423 0.28 81 91 641 1997 6 047 7 312 0.28 84 87 044 1998 4 078 6 787 0.30 87 78 016 1999 3 607 6 887 0.29 90 76 523 2000 3 802 7 408 0.28 92 80 521 2001 2 709 6 616 0.29 95 69 638 2002 2 405 6 665 0.31 97 68 450 2003 4 087 7 473 0.28 100 74 732 2004 6 164 7 529 0.27 103 73 098 2005 4 483 8 235 0.28 105 78 429 Source: Anexo Estadístico, 5° Informe de Gobierno, Government of Mexico, and Luna.

The irrigation infrastructure for agricultural activities has been improved over this period.5 First, in terms of irrigation facilities, the incorporated area for irrigation between 2001 and 2004 was nearly 43 000 hectares. Since 2005, two important projects, Baluarte Presidio and El Tigre, facilitate irrigation on an area of 22 500 hectares. Also, the rehabilitated and improved area since 2001 has reached more than 545 000 hectares, 32% more than in the period 1995-98. In addition, other programmes are being implemented, such as the Programme of Irrigation Districts Transfers to Organised Users to support training and education for future administrators that must be completed before granting subsidies for irrigation infrastructure improvements. Second, investment in “temporal areas” has been significant, especially during the period 1995-98. Third, works for the protection against floods in productive areas has increased in the last two years by over 35%. Water policy is largely the responsibility of the CNA, or split among different levels of government. However, a SAGARPA programme, Programa de Adquisicion de Derechos de Uso de Agua (PADUA, Water Rights Acquisition Programme) started in 2003 whereby owners of water concessions are offered a one-off payment to relinquish voluntarily their right, or part of their right, on a permanent basis. In practice, due to lack of information and inability to enforce strict controls widely, the programme targets unused water concessions, providing the owner with money to convert to activities that are less water-intensive, such as livestock production, or out of agriculture. The budget of

this programme is modest, particularly compared to spending on programmes that are oriented towards increasing productivity or income. Irrigating land requires electricity, as well as water, so the agricultural policy component subsidising energy is relevant. The level of energy subsidies provided to each producer is based on that producer’s production practices, so, as indicated earlier, operations relying on irrigation will be paid more than those that do not, all else equal, although the higher subsidy would not offset fully the energy costs associated with irrigation.

Box 3.1. Water concessions Although the state’s exclusive property right over water resources is defined clearly in the relevant passages of the Constitution and laws, the conditions for granting concessions have not always been very stringent.a Generally speaking, the government is not in a position to refuse a claim for a concession unless the relevant aquifer has been certified and that certification process proves that the aquifer is over-exploited. If there is no basis for asking people to limit their access, then there are no controls on extraction. In such untracked or uncharted areas, any wells that are found and registered typically must be given a concession if ownership can be established. In 2002, the 327 thousand individual concessions summed to 218 billion m3 by volume and, of these totals, 186 thousand individuals in the agricultural sector held concessions for 56 billion m3 by volume.b Rising pressure on water supplies around cities that accompanies urbanisation is met by a combination of administrative fiat and expenditures. The drain of Mexico City on its aquifer, for example, is three times the reload capacity, so the city buys water drawn from other aquifers. Revenue from these sales is not required to be used to buy water from neighbouring aquifers and, in any case, the administrators responsible for other aquifers that provide water to urban areas cannot buy water as there is no legal market for water. Instead, these administrators must make water available by granting fewer new concessions – which is permitted only if the aquifer is certified – or by encouraging concession owners who are not using their rights to renounce their unused concessions. Thus, the money collected by urban water consumers cannot be passed to water rights owners in rural areas, except if somehow incorporated into a programme like PADUA that provides payments for concession-holders to relinquish their rights.

Sources: a. Interviews with SAGARPA officials unless otherwise noted; b. Garduno (2005), based on CNA data.

Other natural resources Policies relating to other natural resources are in early stages of development, although measures are incorporated in other policies. Mexico conducted a survey of biodiversity in 1998 and an inventory of soil in 2001, but these efforts provided data of only limited use for policy makers.6 Many investment support programmes developed since the middle 1990s have provisions intended to ameliorate natural resources. Recipients of PROCAMPO payments are permitted to maintain land according to an approved environmental plan, without producing any crops or livestock. Most payments under PROGAN, a programme to improve grassland management which is described in a later section, relate to environmental stewardship.

Policies to improve productivity

Alianza – productive development

Alianza (Alianza para el Campo) began in 1996 and was revised in 2003 (Alianza Contigo) to serve as an umbrella for around 100 programmes, including many that focus on increasing agricultural productivity and helping farmers to add more capital to their

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operations. The basic objectives of Alianza elements that focus on agricultural productivity are to increase productive infrastructure, combat animal diseases, transfer relevant technology and promote integrated development of rural communities. The composition of sub-programmes implemented has changed over time, but in general terms some of the most important have been devoted to improving rural equipment, livestock and agricultural product quality and to increasing investment in capital goods. In general, Alianza’s yearly expenditures since its inception are around 3% of agricultural GDP, which includes rural poverty alleviation as noted below. Final beneficiaries are required to provide matching contributions in order to access certain programmes.

Until 2000, Alianza’s operational rules were complicated and support was concentrated in certain states and on a limited number of producers. Programmes did not always respond adequately to market needs. After 2000, several changes were made to the programmes and more resources have been channelled in real terms. One of the main changes was to link capital investment with the development of efficient marketing mechanisms.

In 2003, Alianza’s objectives highlighted the fostering of agribusiness in rural areas and the strengthening of competitiveness in the agri-food chains through capitalization. This was done to improve producers’ income as well as to diversify employment sources in the countryside. The Alianza rules adopted in 2003 (Alianza Contigo) simplified the programmes and grouped them in three main areas of endeavour: capitalization, product chain enhancement and creation of technologies for supporting the agri-food system. The purpose, provisions and target populations of the main programmes and sub-programmes of Alianza are described in detail in Annex Table II.B4.

Alianza currently accounts for about 16% of total spending by SAGARPA, a smaller share than in some recent years but much higher than at the beginning when only 6% of SAGARPA spending was devoted to it. Current total expenditure (2005) and its composition among the main programmes and sub-programmes is detailed in Table 3.5, which also indicates the share of federal expenditures in total spending under the different headings. The Agriculture Enhancement Programme integrated and re-structured previous programmes. The main objective is to enhance production, productivity and competitiveness through research, technology transfer, training, capitalisation, diversification and the consolidation of product systems. The Agriculture Enhancement Programme has three sub-programmes: development of investment and capitalisation; strengthening product systems; and research and technology transfer. The first subprogramme channels support for capital goods acquisition and for infrastructure improvement, while the second seeks to strengthen managerial capacity in the product systems. The research and technology transfer component supports the creation, validation, transfer and adoption of technology. The Livestock Enhancement Programme, on the other hand, is aimed at the capitalisation of livestock production units through the improvement of infrastructure; the acquisition and modernisation of equipment; and the adoption of new technologies. This programme includes two subprogrammes: livestock development (Desarrollo Ganadero) and development of integrated agricultural and livestock projects (Desarrollo de Proyectos Agropecuarios Integrales).

Table 3.5. Alianza Contigo expenditures in 2005

Share of federal Total* Federal Programme title spending in (thousand MXN) (thousand MXN) total spending TOTAL 9 362 180 7 234 014 77.3 Agriculture 2 489 396 1 907 599 76.6 Investment and capital strengthening 1 609 913 1 120 999 69.6 Product systems strengthening 68 346 54 871 80.3 Research and technology transfer 514 609 435 201 84.6 Other 296,528 296 528 Livestock 1 455 535 1 072 701 73.7 Livestock development 1 227 529 909 314 74.1 Development of integrated agricultural 144 401 79 782 55.3 and livestock projects Other 83 606 83 606 Rural development 3 155 790 2 545 174 80.7 Support to rural investment projects 2 069 041 1 619 473 78.3 Development of capacity in the rural sector 467 881 378 270 80.8 Strengthening of enterprises and rural 352 655 281 218 79.7 organizations Fish 266 213 266 213 Aquaculture and fisheries** 908 904 836 803 Animal and plant health and food safety 1 214 145 772 837 63.7 Other programmes 138 410 98 900 71.5 * Includes resources from both federal and state levels. ** For further explanation in Alianza’s fisheries and aquaculture programmes, see Part III. Source: VI Informe de Gobierno, 2006.

Box 3.2. Alianza and decentralising policy implementation Operation of Alianza programmes is designed to decentralise the decision-making and implementation, and to provide more safeguards against waste and corruption. Priorities are set at local levels by consultative bodies, typically organised around a particular commodity. Moreover, while funding for some programmes may go to individuals, as well as to groups of producers, precedence is given to projects that are supported by the consultative body. To provide support more effectively, support for projects tends to be provided in stages leading from gathering information and planning to purchases of productive assets for farms or for infrastructure to technical assistance to exploit best new equipment and techniques – with subsidies provided at each stage on a cost-sharing basis. Design mechanisms to limit the potential for corruption include payment schedules that correspond to intermediate and final targets, transparency such as by published tendering for work and the greater number of participants in decision-making. State and municipal governments are encouraged to participate actively. Lower levels of government are able to supplement the federal subsidies for most projects to improve technology, infrastructure or conservation or to develop better their poorer rural areas. The formula governing allocations of federal money under some programmes depends, in part, on expenditures by the lower levels such that their participation is rewarded with some additional federal money. Moreover, consultative bodies are defined at these levels, and the corresponding body at the national level is comprised in part of representatives drawn from the lower bodies. Thus, with these reforms the priorities and mechanisms to achieve these targets are being integrated among levels of government. Additionally, in order to improve the equity of the Programme, the budget is assigned by means of a formula, which considers: the importance of the agriculture sector in the State economy; its contribution to the national agricultural GDP, as well as some indicators of relative development in order to attenuate the regional disparities. Source: Interviews with SAGARPA officials unless otherwise noted.

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Alianza – rural development The scope of Alianza extends beyond support to commercial producers, as sub- programmes grouped under the Programa de Desarrollo Rural (PDR, Programme of Rural Development) are intended to help poor farmers. Four sub-programmes of Alianza target rural development objectives, explicitly with a tertiary goal to limit migration. Their focus is on (1) human capital, (2) physical capital such as infrastructure and natural resources, (3) economic development, and (4) social capital in the form of organisations or participatory frameworks. Eligibility is determined by poverty: the first criterion is individual poverty, and the second criterion is regional poverty. Other criteria include the potential to generate local economic activity and employment. Areas suffering droughts may also be targeted for improvements to water infrastructure, such as dams and water collection equipment, and to grasslands. The first priority of rural development spending under Alianza is to help producers to build social capital, which entails organising groups and creating councils that then serve as the forums in which further priorities can be established within the legal framework. Subsequent support is provided to help the producers purchase capital investments or technical assistance — or, more commonly, both — identified by the consultative body. The step-by-step process, and particularly the initial phases to decentralise decision- making, raises costs and introduces delays, but builds local support and helps better target spending (Box 3.2). Of all components of Alianza, the rural development thrust is most clearly integrated among ministries. SAGARPA, with less than a third of the overall budget in 2005, shares responsibilities with seven other Ministries. The Undersecretary of Rural Development plays the lead role in these programmes. Nevertheless, approximately 40% of the expenditures are on projects related to agriculture, and some of the rest, such as spending on information technology, finance or environmental tourism, may overlap with agricultural activities. Consistent with the underlying emphasis on decentralisation, states and municipalities are encouraged to participate and typically contribute a further 25% to federal expenditures. The Programme for Animal and Plant Health and Food Safety supports campaigns for the control and eradication of pests and diseases, protection of the sanitary status, and promotes and develops food safety programmes.

PROGAN – Programme to Improve Livestock Productivity (Programa de Estímulos a la Productividad Ganadera) In 2003, the Programme to Improve Livestock Productivity (PROGAN) was created with the objective of improving productivity by increasing the production of forage from pasture lands and the adoption of technological practices that improve yields. This generates a virtuous circle for the environment as it discourages extensive livestock systems and generates increased vegetation cover which in turn improves the retention and infiltration of ground water. The livestock producer undertakes to implement certain practices to improve vegetation and to respect sanitary regulations. The operational rules of PROGAN require cattle to be registered in the National System of Individual Cattle Identification (SINIIGA). This allows individual cattle to be identified, strengthens sanitary control and facilitates movement of cattle, better technical handling of the herd, genetic improvement and better marketing, contributing to actions in favour of public health, and helps to prevent cattle rustling. Registration of cattle in the

System offers certainty and legal security to the owner. PROGAN support consists of a payment per animal over four years (Table 3.6).

Table 3.6. PROGAN payments

Year of support Support (MXN per cow) 1 300 2 400 3 500 4 600

Source: Diario Oficial de la Federación (DOF), 17 June 2003.

Other policy measures

Commercial promotion and agro- business development With the purpose of improving the integration of producers in both domestic and international markets, a programme has been put in place to strengthen and consolidate supply, and to stimulate the demand for Mexican agro-food products. Marketing is supported through generic campaigns at the national level (Mexico Calidad Selecta,or Mexico Selected Quality) and the promotion of exports through participation in domestic and international exhibitions that promote quality Mexican products. The Marketing Links System and the Direct Marketing Programme seek to develop links between suppliers and buyers and between producers, packers and buyers in supermarket chains. The Programa de Fomento a los Agronegocios (FOMAGRO, Agri-Business Promotion Programme) stimulates the creation of new businesses through risk sharing and by assisting with the development of business plans, providing technical advice and training, infrastructure and equipment. It also helps with the constitution of liquid guarantees.

Weather-related disasters Two programmes are available to deal with weather-related disasters. The beneficiaries of the programmes are different. The programme of sustainable agriculture in areas subject to climatic disasters take a preventive approach by supporting construction and other works aimed at improving the fixed assets of the rural population. This programme is aimed at areas in each state where production is affected by recurring weather problems. The other programme, Fondo para atendar a la Población Afecta por Contingencias Climatologicas (Fund to Assist Rural Populations Affected by Weather Related Disasters, or FAPRACC) supports low income producers in areas of rain fed grassland by granting a payment per hectare or per animal. It also helps affected producers to find temporary employment and with the acquisition of insurance.

Total expenditures on agricultural policies

Figure 3.5 shows the evolution of spending (by SAGARPA) on the main agricultural support programmes in Mexico since the mid 1990s. Together, PROCAMPO, Alianza and Marketing Support Programme have provided some MXN 30 billion in 2005. Expenditures on these programmes have been growing in real terms, particularly from

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2001. However, budgetary expenditures are only a partial measure of support provided to agriculture and to producers because transfers from consumers are excluded. The OECD indicators of support presented and analysed in the next chapter overcome these limits.

Figure 3.5. Expenditures by agricultural support programmes, in 2005 MXN millions

35000 PROCAMPO Alianza para el Campo (federal + state) ASERCA (Apoyos a la Comercialización)

30000

25000

illions 20000

15000

10000 2005 MXN m

5000

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 p

Source: Quinto Informe de Gobierno, Anexo Estadístico, 2005.

NOTES

1. This refers to those states where regional supply exceeds regional demand historically. 2. OECD (forthcoming 2007). 3. OECD (forthcoming 2007). 4. Anexo Estadístico, 5º Informe de Gobierno, Government of Mexico. 5. Data of this paragraph are drawn from Anexo Estadístico, 5º Informe de Gobierno, Government of Mexico, unless otherwise stated. 6. OECD (forthcoming 2007).

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Chapter 4.

Agricultural policy transfers and welfare effects

Introduction

The OECD provides estimates of the support generated by agricultural policies.1 These data include estimates of the transfers from consumers and taxpayers to producers, from taxpayers to consumers, and from taxpayers to the overall sector that can be presented on an absolute or on a relative basis, depending on the purpose. The data can be disaggregated according to the basis of payments — whether linked to production, to land or to some other criterion — to understand better how the reforms have led to a re- instrumentation of support. This chapter presents these data for Mexico in order to assess the changing level and composition of support provided to producers, to consumers and to the sector overall during the reform period. Thesedatadonotprovideestimatesoftheeconomiceffectsofpolicies,butare commonly used as an input into economic models that do provide such estimates, including one maintained by the OECD. The results of simulations to understand how these transfers affect the income of commercial farmers, the welfare of subsistence farmers and other agents are also presented in this chapter. The analysis in this chapter is limited to the welfare effects of changes in agricultural policies. The next chapter provides a detailed representation of commodity markets and how they would evolve over time in response to the policy reforms. The link between agricultural policy and rural poverty, including institutional changes associated with the land tenure system, are addressed in a later chapter, as are the effects of agricultural policies on market infrastructure and natural resources.

Monetary transfers due to agricultural policies

The evolution of Mexico’s agricultural policies since 1991 has been described in the preceding chapter as a radical shift from market intervention, with domestic prices raised relative to world prices using tariffs and import quotas, to a mixture with some remaining price support supplemented by support provided directly on the basis of land. Throughout these past fifteen years, additional support has been provided on the basis of the inputs used by commodity producers, such as energy and capital. One way to evaluate policies before and after the reforms is to identify the transfers that they generate – transfers from consumers or taxpayers to producers, and from taxpayers to consumers.

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Producer Support Estimates The Producer Support Estimate (PSE) measures the value of transfers to producers from consumers and taxpayers. The PSE is expressed as the absolute value, nominal or real, or in the form of the %PSE, which is relative to gross farm receipts. If expressed in absolute terms, the PSE provides a measure of the overall policy effort. Stated relative to gross farm receipts, the %PSE indicates the share of gross farm receipts explained by agricultural policy – with the rest being explained by the value of production at world prices – and is particularly useful for comparisons. The PSE can be decomposed according to the criteria that a producer must meet in order to be eligible for a transfer (Table 4.1). Often, eligibility depends only on selling domestically produced agricultural commodities. Policies that raise domestic prices relative to border prices impose higher costs on domestic consumers of goods, and provide domestic producers with higher revenue. This form of support, Market Price Support (MPS), requires border measures, tariffs or import quotas, to prevent arbitrage that would otherwise occur in the presence of differences between domestic and border prices. Transfers from taxpayers to producers take the form of payments that producers receive directly or indirectly on the basis of the amount of output they produce, the amount of land they own, the amount of inputs they use or on some other basis.

Table 4.1. Selected agricultural policies and their classification in OECD support estimates

Producer support estimate Market price Payments based Historical Inputs Other support on output entitlement Import license Target price PROCAMPO* Energy subsidies PROGAN* Tariffs Target Income Fertilizer subsidies Disaster payments Guaranteed Alianza fondo del cafe Irrigation subsidies producer prices Capital subsidies

General services support estimate Research and Inspection Infrastructure Marketing and Other development promotion INIFAP* SENASICA* Irrigation subsidies ASERCA market CONASUPO* Rain-fed area development* stock holding subsidies

Consumer support estimate Transfers from consumers to producers Transfers from tax-payers to consumers Market price support generated by trade CONSASUPO* subsidies barriers ASERCA apoyos comercializacion* * ASERCA market development = Programa de Apoyos Directos a la Comercializacion y Desarollo de Mercados Regionales; CONASUPO = Compañía Nacional de Subsistencias Populares; INIFAP = Instituto Nacional de Investigaciones Forestales, Agricolas y Pecuarias; PROCAMPO = Programa de Apoyos Directos al Campo; PROGAN = Programa de Estímulos a la Productividad Ganadera; SENASICA = Servicio Nacional de Sanidad, Inocuidad y Calidad Agroalimentaria.

The effect of the major policy changes over the last fifteen years on transfers to producers is evident from these data (Figure 4.1). The absolute nominal level of transfers to producers as measured by the PSE, rose from over MXN 20 billion to MXN 87 billion in 2002, before falling to MXN 60 billion in 2005. The drop in 1995 relates to the financial crisis and the peso devaluation: the sudden rise in border prices expressed in pesos to levels that exceeded domestic prices led to a negative transfer from consumers to producers for some commodities — implying that consumers were paying less than border prices, and producers receiving less, for a brief period of time. Ignoring 1995, growth in the PSE averaged 12% per year.

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Figure 4.1. Producer Support Estimate, MXN billion (PSE) and relative to gross farm receipts (%PSE)

160 35% 140 30% 120 25% 100 20% 80 15% 60 10% of pesos 40 Nominal PSE (left axis) 5% 20 Real PSE (left axis) (%PSE), in per cent 0 %PSE (right axis) 0% -20 -5% PSE relative to gross farm receipts -40 -10% Producer Support Estimate (PSE), billions 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

The PSE can be adjusted to take account of inflation. If considered in terms of purchasing power, then the real (2005) PSE was highest in the early 1990s. Moreover, the 12% trend growth of the nominal PSE corresponds to a trend decrease of 3% per year in the real value of transfers to producers. However, the data do not show a stable downward trend, but rather a shift in the level; the decrease in real PSE appears to be from one level before the currency crisis and the start of the reforms to another level that has prevailed since the middle 1990s. Whereas the PSE in nominal terms peaked in 2002, the %PSE was highest in 1993 when policy-induced transfers accounted for 30% of gross farm receipts. The %PSE fell dramatically during the currency crisis of the middle 1990s, but has increased afterward. However, the sharp decrease at the time of the sudden peso devaluation does not explain the sustained difference in the %PSE: the share of policy induced transfers in gross farm receipts has decreased from levels of 25-30% at the start of the 1990s to a range of 12- 26% after 1996. Although these ranges overlap, these estimates of the share of support in farm receipts suggest that the reforms have caused an important shift away from intervention and towards market-orientation. Changes in the composition of the %PSE for crops follow directly from the major policy initiatives outlined in the last chapter (Figure 4.2). These support estimates are composed of two broad categories, MPS and budgetary support, and the latter can be further disaggregated according to the basis of the payments. In Mexico, important categories of budgetary support are payments based on commodity output, payments based on historical entitlements and payments based on input use. Other forms of support (payments based on input constraints, on overall farm income or for other reasons) are expressed here as a single aggregate. By examining the composition of the %PSE, the contribution of important policy initiatives becomes more apparent and, as will be shown later in this chapter, the transfers can be associated more directly to economic incentives of different agents in the agricultural sector. The composition of the %PSE reveals the re-instrumentation of support brought about by Mexico’s agricultural policy reforms over the last 15 years, in particular regarding the shift from price support to direct payments. At the start of the 1990s, all policy transfers were associated with MPS – the higher domestic prices caused by barriers to trade – and payments based on input use as state-owned agencies and other mechanisms were

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employed to deliver agricultural inputs to producers at costs lower than market prices. Institutional reforms, chief of which was the constitutional amendment that introduced land reform, do not directly create transfers that can be measured by the PSEs and, hence, do not directly show up in the %PSE composition. However, if they are closely related to changes in policy instruments that do generate transfers, then the institutional reforms would be reflected indirectly in the %PSE composition. In any case, the implementation period may be long and the effects may relate more to the distribution than to the magnitude of transfers.2

Figure 4.2. Evolution of the crop Producer Support Estimate (%PSE)

MPS Output Historic Input Use Other

Relative to crop production value

-25% 0% 25% 50%

1991 ASERCA created

1992 Land reform initiated

1993 Import permits abolished

1994 NAFTA enters into force; PROCAMPO payments begin

1995 URAA implementation begins

ALIANZA starts 1996 Currency crisis 1997

1998

CONASUPO closed 1999

2000

Target Price; Field Energy Law 2001

2002

NAFTA tariff reductions mostly implemented; Target Income 2003

2004

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The composition of support changed significantly as a consequence of reforms introduced in the 1990s. The largest shift occurred in 1994, when the import barriers began a rapid decline and PROCAMPO was introduced. PROCAMPO payments are based on historical area planted to any of a list of crops, as explained in the previous chapter, so this form of budgetary support is categorised as a payment based on historical entitlements. While the %PSE in 1994, at 47%, was only marginally higher than the 45% observed in 1993, the share of gross crop farm receipts explained by the MPS fell by half, from 40% to 20%, and the share of payments based on historical entitlements in gross crop farm receipts rose from nothing to 21%.3 The currency crisis of the mid-1990s affected MPS strongly, explaining more of the decrease in support in 1995 and 1996 than the policy reforms. MPS is responsive to market conditions, particularly to the gap between domestic prices, over which policy makers have some control, and border prices that depend on prevailing conditions in world markets and exchange rates. In contrast to a budgetary payment that may be fixed — indeed, must be planned in advance for the purpose of government accounting — the level of support generated by barriers to trade may vary substantially from year to year. This reflects the fact that a rising border price that is not transmitted to domestic markets implies that producers sell at a lower price than they would if the higher price signal was transmitted, and a falling border price that is not transmitted to domestic markets implies that producers are selling at a higher price than they would if the price signal was transmitted. The macroeconomic stability achieved soon after the currency crisis is apparent in the composition of the %PSE. Since 1998, the MPS has fluctuated from about 15% to 30% of gross crop farm receipts, still well below the levels of 35% to 40% of the early 1990s. Payments based on historical entitlements have remained at 15% to 18%. This period is dominated by the implementation of the reforms to tariff levels, putting downward pressure on MPS, and by institutional reforms which are not discussed here. A major policy initiative apparent in recent years is the introduction of ASERCA payments based on output in 2001, initially in the form of Target Price but by means of the Target Income programme from 2003. Before 2001, the support was tied to the marketing of crops through intermediaries who committed to paying a minimum price to farmers, as discussed in Chapter 3, and was consequently a consumer subsidy – albeit one that helped to sustain market price support. The mechanism has since been amended to pay directly to farmers, so the programme is categorised as a payment based on output as the support is linked to the volume of crop sales.4 Payments based on input use is a small but stable component of support to crop producers. Since 1990, payments based on input use have ranged between 2% to 9% of gross crop farm receipts, with the lowest values observed in the mid-1990s. This type of support was more important when the government provided inputs at discount in the early 1990s — although substantially lower than during the 1980s — and again in recent years. The recent increase in payments based on input use has been associated with programmes, including some under the umbrella of Alianza, that attempt to help farmers access credit or to improve their operations, both of which are clearly motivated by efforts to overcome obstacles to rural development as noted before and analysed in greater depth in Chapter 6. A large part of recent expenditures are related to subsidised energy use, namely payments based on purchases of electricity and fuel under the Field Energy Law (Ley de Energía para el Campo).

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The support to producers of livestock and livestock products can be assessed in the same way. The share of gross livestock farm receipts generated by policy-induced transfers for livestock products was 24% to 34% in the early 1990s, fell dramatically during the currency crisis and then rose to 27% in 2002, but has otherwise been well below the levels at the start of the period, falling to as low as 4% in 2004. The share of MPS remains important and, as evident from the %PSE data for crops, the livestock %PSE shows the implementation of reforms to trade measures: the MPS declines dramatically after 1994. Prior to these reforms, until 1994, the share of livestock producer gross receipts explained by MPS was 21% to 26%, whereas the share was less than 20% in all subsequent years but one. Payments based on input use were larger in the early 1990s, equivalent to as much as 9% of gross farm receipts from livestock in 1994, but have been lower since then at 2% to 3%. In recent years, payments based on animal numbers have grown with the introduction of the PROGAN programme, but remain less than 2% of the value of gross livestock farm receipts. The livestock %PSE is lower than the crop %PSE overall, in part because of the mechanisms used to support crop producers. MPS, as stated above, generates a transfer from consumers to producers. In the case of crop MPS, some of the consumers are other producers. Livestock owners must pay more than border prices for crop and crop products that they feed to their animals. These higher costs, called excess feed costs in the OECD’s PSE method, are taken into account in the calculation of PSEs. In the absence of higher feed costs, the net transfer to producers would be higher throughout the period — the PSE would be raised by 7% on average — although the magnitude of excess feed costs fluctuates from year to year with changing market conditions. While not fully offsetting, the reduction in border measures for crop products reduced the excess feed costs at the same time that lower tariffs for livestock products lowered the transfers to livestock producers. The level and composition of total PSE for the aggregate of all commodities highlights further the reforms to Mexico’s agricultural policies over the last 15 years (Figure 4.3). As noted in Chapter 2, the nominal value of agricultural production has risen, but the share of agriculture in the total economy has fallen from 8% on average in 1991-93 to an average of 5% in 2003-05. Over the same period, the %PSE has fallen from 28% to 15%. Relative to GDP, then, the average share of transfers to producers induced by policies has fallen further, from over 2% to less than 1%. The share of MPS in the PSE has fallen dramatically as border measures to restrict trade have been relaxed, or even eliminated. Although falling relative to total PSE from 83% in 1991-93 to 45% in 2003-05, this category of support nevertheless rose in nominal terms: MPS averaged MXN 21 billion in 1991-93 and rose to MXN 27 billion in 2003- 05. However, the 27% growth between these two periods was slower than the rate of inflation, implying a decline in MPS of 74% in real terms.

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Figure 4.3. Composition of the OECD Producer Support Estimate for Mexico

1991-93 2003-05 Value of agricultural production 1991 Market price support Billion Mexican Pesos 86.5 366.6 1992 Relative to Gross Domestic Product 7.8% 4.8% Payments on output

1993 Producer support estimate (PSE) Payments on area or animals Market price support 1994 Billion Mexican Pesos 21.2 27.0 Payments on historical entitlement Relative to PSE 83.4% 44.7% 1995 Payments based on output Payments on input use Billion Mexican Pesos 0.2 2.2 1996 Relative to PSE 0.6% 3.6% Other payments Paymentsbasedonareaoranimals 1997 Billion Mexican Pesos 0.0 2.6 Relative to PSE 0.0% 4.3% 1998 Payments based on historical entitlement Billion Mexican Pesos 0.0 13.7 1999 Relative to PSE 0.0% 22.7% Payments based on input use 2000 Billion Mexican Pesos 4.1 14.9

Relative to PSE 16.0% 24.6% 2001 Payments based on overall farm income Billion Mexican Pesos 0.0 0.1 2002 Relative to PSE 0.0% 0.1% Total PSE 2003 Billion Mexican Pesos 25.5 60.5 Relative to the value of production 28% 15% 2004 Relative to Gross Domestic Product 2.3% 0.8% billion pesos 2005

-25 0 25 50 75

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The share of other forms of support in the PSE have increased during this period. The largest increase is in payments based on historical entitlements due to the introduction of PROCAMPO as part of the reform process. There was effectively no budgetary support of this type in 1991-93, but the 2003-05 average was MXN 14 billion or 23% of the PSE. Payments based on output provided by ASERCA, which averaged MXN 2.2 billion or 4% of the PSE in 2003-05, are another new form of support. Payments based on area or animal numbers have also been developed, rising from almost nothing to MXN 2.6 billion as PROGAN was introduced and expenditures associated with disaster payments became important. Payments based on farm income or on input constraints are quite small or zero. Payments based on input use have always been an element of support in Mexico, at MXN 4 billion or 16% of the PSE in 1991-93 and MXN 15 billion or 25% of the PSE in 2003-05, although the underlying policies changed over time. In the early 1990s, the dominant policy of this type provided interest concessions of more than MXN 1 billion of transfers in each year until 1996, when capital grants were introduced. These grants, including some associated with Alianza, have risen steadily in value since then to MXN 4.8 billion on average in 2003-05, representing the second largest form of payment based on input. In contrast, MXN 0.9 billion in subsidies to irrigation and MXN 0.7 billion to animal feed in 1991-93 were peaks in absolute and relative terms. In subsequent years the support to feed use that was provided via CONASUPO and ALBAMEX was abolished. Support to irrigation provided directly to farmers has fallen to MXN 0.6 billion in 2003-05, and now represents a much smaller share of the total PSE. The new categories that explain much of the increase in payments based on input are based on energy use, MXN 5.8 billion on average in 2003-05, and another MXN 2.5 billion on average that went to producers for pest and disease control measures.

Consumer Support Estimates MPS is associated with transfers to producers from consumers, who are required to pay higher prices than they would if they purchased goods at world prices. The consumer support estimate (CSE) is the balance of these transfers and any direct budgetary support provided to consumers, and measures the transfers to consumers valued at farm-gate prices. In most OECD members, including Mexico, the CSE is negative as the costs of transfers to producers associated with MPS are greater than subsidies to food consumption. The CSE amounted to MXN -18 billion in 1991-93 and MXN -34 billion in 2003-05 on average (Table 4.2). These figures are equivalent to MXN -91 billion and MXN - 36 billion in real terms (base 2005), or to 22% of the value of consumption in 1991-93 and 9% of the value of consumption in 2003-05. The cost of agricultural policies to consumers would have been much higher at the start of the 1990s but for the presence of large offsetting subsidies at the expense of taxpayers. These transfers averaged MXN 4.7 billion in 1991-93, equivalent to nearly 6% of the value of consumption. Subsidies to consumers peaked at over MXN 10 billion in 1996, during the currency crisis, with maize consumption subsidies alone accounting for over MXN 7 billion. Since then, transfers from taxpayers to consumers provided by agricultural policy have fallen to average less than MXN 0.4 billion, a fraction of a per cent of consumption in 2003-05, and largely limited to providing subsidised milk. These changes reflect the reforms discussed previously: transfers from consumers associated with MPS have been reduced, but not eliminated, by the reduction in barriers to trade; and the policies intended to

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achieve social objectives are no longer part of agricultural policy. These new programmes, including PROGRESA/ Oportunidades, are, thus, not counted in the CSE.

Table 4.2. Consumer, General Service and Total Support Estimates

1991-93 2003-05 Ratio Value of consumption at farm-gate prices Billion Mexican Pesos, nominal 80.6 356.8 4.43 Billion Mexican Pesos, in 2005 prices 417.8 374.8 0.90 Relative to GDP 7.3% 4.7% 0.65

Consumer support estimate (CSE) Billion Mexican Pesos, nominal -17.7 -33.5 1.90 of which, consumer subsidies 4.7 0.4 0.08 Billion Mexican Pesos, in 2005 prices -91.2 -35.5 0.39 of which, consumer subsidies 24.0 0.4 0.02 Relative to the value of consumption -21.9% -9.5% 0.44 of which, consumer subsidies 5.8% 0.1% 0.02

General services support estimate (GSSE) Billion Mexican Pesos, nominal 3.4 9.4 2.77 Billion Mexican Pesos, in 2005 prices 17.5 9.9 0.57 Relative to the TSE 10.2% 13.4% 1.32 Relative to GDP 0.3% 0.1% 0.40

Total support estimate (TSE) Billion Mexican Pesos, nominal 33.5 70.3 2.10 Billion Mexican Pesos, in 2005 prices 173.1 74.2 0.43 Relative to GDP 3.0% 0.9% 0.31

General Services Support Estimates Not all the transfers associated with agricultural policies are provided to specific producers or consumers, but some are instead provided to the sector as a whole. For example, public expenditures on research and education, market infrastructure or inspection services that do not accrue to individual producers or consumers instead benefit the sector overall. The General Services Support Estimate (GSSE) is an indicator of these transfers. In the case of Mexico, whose agricultural sector is less well integrated with global markets for some goods, due to a high-cost distribution system, product quality or for other reasons, the GSSE might be expected to represent an important element of agricultural policy; many of the policies noted in the previous chapter that are intended to improve sectoral performance, rather than individual farmers’ income, are counted here. In fact, the GSSE accounts for a tenth or more of the transfers to the sector as a whole. The total nominal value of MXN 3.4 billion in 1991-93 and MXN 9.4 billion in 2003-05 implies a near tripling, but corresponds to a reduction by 43% in real terms (Table 4.2).

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Figure 4.4. Composition of General Services Support Estimate (GSSE)

1991-93 2003-05

Research Schools Inspection Infrastructure Marketing Public stocks Other

1991-93 2003-05 Research and development 10% 17% Agricultural schools 16% 21% Inspection services 0% 19% Infrastructure 24% 13% Marketing and promotion 9% 28% Public stockholding 36% 0% Miscellaneous 5% 1%

Transfers to agriculture as a sector can be disaggregated to understand better how the emphasis of this type of agricultural support has evolved (Figure 4.2). In 1991-93, the largest category was public stockholding, with 36% of the total GSSE, owing entirely to the activities of CONASUPO in the marketing of goods – a role which has since vanished completely. At 24% of the GSSE, infrastructure spending represented the second largest component at the start of the 1990s, but the share decreased to 13% in the most recent years. In both time periods, infrastructure spending is comprised almost entirely of support to irrigation systems and rain-fed areas for crop production, but the emphasis has increasingly been on irrigated crops. These programmes are regional in nature rather than farm specific and therefore are counted under the GSSE, not the PSE. Research and schools are two categories of some importance both before the reforms, and after: research and development programmes accounted for 10% of the GSSE in 1991-93 and 17% in 2003-05, with some of the increase explained by the introduction of programmes under Alianza; and agricultural schools accounted for 16% of GSSE in 1991-93 and 21% in 2003-05. In fact, schooling represents the second largest component of the GSSE in recent data — but these data relate only to transfers caused by agricultural policies, and do not measure the effects of other policies or spending by other Ministries. The largest category in 2003-05 is marketing and promotion, with 28% as opposed to 9% of the GSSE in 1991-93, with most of the increase explained by the introduction of ASERCA programmes to facilitate the marketing process.

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Figure 4.5. Evolution of the General Services Support Estimate (GSSE)

Research Agricultural schools Inspection Infrastructure Marketing Public stocks Other

Real (2005) MXN billion 0 10 20

ASERCA created;ASERCA promotion starts 1991

1992

1993

1994

1995 CONASUPO stockholding mostly ends

1996 Federal inspection expenditures start; ALIANZA promotion starts

1997 Additional inspection services start

1998 CONASUPO closed 1999

2000

2001

2002

New promotion and payments to agricultural organisations start 2003

2004

2005

The evolution of GSSE over time is a direct consequence of the programmes and agencies in place, and the expenditures on each programme (Figure 4.5). In real terms, the expenditure on research and development has remained fairly stable and, during the 1991-2005 period, the largest change in programmes has been the addition of an Alianza programme to facilitate technology transfer alongside growing expenditures under INIFAP. Agricultural school programmes have likewise been fairly stable in composition and level of real expenditure. Expenditures on inspection services, at least at the federal level, began in 1996 with the introduction of the main programme that accounts for most of the expenditures and most of the growth in expenditures on inspection services since then, but some smaller programmes were added in 1997. The decrease in real infrastructure spending was associated largely with a cut in spending focused on rain-fed

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areas and on support not tied to irrigation, including a reduction in expenditures on infrastructure relating to livestock production. Promotion and marketing expenditures were dispersed through several programmes over the period, but were dominated by ASERCA since 1991. A programme introduced under Alianza in 1996 began with small real expenditures initially, but has since increased to account for a large portion of the promotion and marketing effort. Even more recently introduced programmes also contribute to this effort, including payments channelled through agricultural organisations. Public stockholding of CONASUPO, as noted above, was largely eliminated in 1995, well before the agency itself was closed in 1999.

Total Support Estimate The total transfers to the sector, the Total Support Estimate (TSE), is the sum of PSE, GSSE and the taxpayer costs of consumer subsidies, less import tariff receipts.5 The TSE was MXN 33.5 billion in 1991-93 and rose to MXN 70.3 billion in 2003-05 — an increase in nominal terms but a decrease in real terms by more than half. The share of TSE in GDP fell over the review period from 3.0% in 1991-93 to 0.9% in 2003-05.

Relative to other OECD members

Producer support estimates The general trends of support over the recent past are indicated by comparing three year averages, so as to smooth year-to-year fluctuations (Figure 4.6). The reforms have lowered the share of support in gross farm receipts so that, according to the latest data, Mexico belongs to the group of OECD members providing less than average support, but even before the reforms the %PSE of Mexico was below the OECD average. While the OECD average fell from 37% in 1986-88 to 30% in 2003-05, the %PSE of Mexico fell from 28% in 1991-93 before reforms started to 15% in 2003-05. Agricultural policy explains a smaller share of gross farm receipts in Mexico than on average among OECD members, but is high if compared to at least some non-member countries (Figure 4.7). Recent data compiled by the OECD indicate that the transfers generated by agricultural policies of China represent 8% of gross farm receipts in China and 7% in South Africa, about half the 15% share in Mexico. The relative importance of agricultural policy is even lower in Russia, at 5%, and Brazil where agricultural policy transfers account for 3% of gross farm receipts.

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Figure 4.6. Producer Support Estimate relative to gross farm receipts (%PSE) among OECD countries

1986-88 2003-05

0 New Australia Mexico (2) United Canada Turkey OECD (3) European Japan Korea Iceland Norway Switzerland Zealand States Union (1)

1. EU12 for 1986-94 including ex-GDR from 1990; EU15 for 1995-2003; EU25 from 2004. 2. For Mexico, 1986-88 is replaced by 1991-93. 3. Austria, Finland and Sweden are included in the OECD total for all years and in the EU from 1995. The Czech Republic, Hungary, Poland and the Slovak Republic are included in the OECD total for all years and in the EU from 2004. The OECD total does not include the six non-OECD EU member states. Source: OECD, PSE/CSE database, 2006.

Figure 4.7. Producer Support Estimates relative to gross farm receipts (%PSE) including non-member countries

OECD (2003-05)

Mexico (2003-05)

Brazil (2002-04)

China (2002-04)

Russia (2002-04)

South Africa (2002-04)

0% 5% 10% 15% 20% 25% 30% 35%

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The forms of support differ among OECD members. As discussed above, the share of the PSE of Mexico that is delivered by means of MPS has been reduced, the share provided on the basis of input use is more or less the same and new forms of support have been introduced that generate important transfers based on historical entitlements and on output. Mexico was not the only OECD member to shift to new support mechanisms in recent years (Figure 4.8). The total share of support provided in the form of MPS, payments based on output or payments based on input use has fallen in almost all OECD members, including Mexico where this total fell from 100% to 74%. For the OECD as a whole, the share fell from 91% to 72%. Payments based on historical entitlements in Mexico — PROCAMPO — account for 23% of the PSE, and have also become an important mechanism of support in the OECD, with 7% of PSE in 2003-05, including 14% in the United States and 10% in Canada, as well as 6% in the European Union as the Single Payment Scheme is introduced. Payments based on area or on animal numbers, account for 4% of the 2003-05 PSE in Mexico. Their share is larger in other OECD members, accounting for 15% of support. However, it has fallen in the United States from 31% in 1986-88 to 6% in 2003-05 and in Canada from 16% in 1986-88 to 8% in 2003-05.

Figure 4.8. Composition of Producer Support Estimate among OECD members

MPS, payments based on output or on input use Payments based on area planted/animal numbers Payments based on historical entitlements Payments based on input constraints, income, etc.

% 100

a a s ) d y ) ) y d a d n i 1 3 2 l d e ( n a ( ( e n e n a a t k r r a a la w r la la p t n t n r r D o o a s o o c u e K a a S i e C i c e J u z x T I C n t N Z A d i E e e U O it w M w n S e n a U e N p o r u E

For each country the first vertical bar relates to 1986-88, the second to 2003-05. Countries are ranked according to 2003-05 levels of market price support and payments based on output or on input use. 1. EU12 for 1986-94 including ex-GDR from 1990; EU15 for 1995-2003; EU25 from 2004. 2. For Mexico, 1986-88 is replaced by 1991-93. 3. Austria, Finland and Sweden are included in the OECD total for all years and in the EU from 1995. The Czech Republic, Hungary, Poland and the Slovak Republic are included in the OECD total for all years and in the EU from 2004. The OECD total does not include the six non-OECD EU member states. Source: OECD, PSE/CSE database, 2006.

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General services Support Estimates The GSSE, as noted above, measures transfers to the sector overall, reflecting the focus of many agricultural policies in Mexico and other OECD members on improving the infrastructure and technology applied in the sector, as well as to provide inspection, marketing and other services. OECD countries spent about USD 40 billion on general services in 1986-88, and USD 66 billion in 2003-05. Of this total, Mexico accounted for about USD 1 billion, on average, in each period. Such absolute measures do not reflect the magnitude of such support relative to the agricultural sector, nor to the economy overall. The importance of general services in overall agricultural policies in Mexico, as measured by the share of GSSE in TSE, is below the OECD average (Figure 4.9) Whereas the GSSE represented 13% of TSE for the OECD overall in 1986-88 and 18% in 2003-05, the share in Mexico was lower, at 10% in the 1991-93 period and 14% more recently. Mexico’s share trails particularly far behind certain countries that allocate more than a third of their support to general services. In contrast to the rising importance of GSSE measured in absolute terms or relative to TSE, the size of GSSE relative to the overall economy is declining throughout the OECD, including in Mexico (Figure 4.9). On average, the OECD members allocate less than a third of a per cent of GDP on general services to the sector overall. Mexico spending in 1991-93 was roughly equal to the OECD average of 1986-88, 0.3%, but has fallen below the average to 0.1% as compared to the 0.2% OECD average.

Figure 4.9. GSSE among OECD members

OECD OECD

Australia Australia

Canada Canada

European Union European Union

Iceland Iceland

Japan Japan

Korea Korea

Mexico Mexico

New Zealand New Zealand 2003-05 2003-05 Norway Norw ay 1986-88 1986-88 Switzerland Sw itzerland

Turkey Turkey

United States United States

0% 10% 20% 30% 40% 50% 0.0% 0.2% 0.4% 0.6% 0.8% relative to total support estimate relative to GDP

EU12 for 1986-94 including ex-GDR from 1990; EU15 for 1995-2003; EU25 from 2004. For Mexico, 1986-88 is replaced by 1991-93. Austria, Finland and Sweden are included in the OECD total for all years and in the EU from 1995. The Czech Republic, Hungary, Poland and the Slovak Republic are included in the OECD total for all years and in the EU from 2004. The OECD total does not include the six non-OECD states. Source: OECD, PSE/CSE database 2006.

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Decomposing the GSSE shows that Mexico, like many other OECD members, spends more on marketing than any other GSSE category, but that spending in Mexico focuses as well on research, education and inspection, while OECD members overall prioritise infrastructure (Figure 4.10). In the OECD as a whole, marketing and promotion accounted for 42% of GSSE in 2003-05 – equivalent to 8% of TSE – and this category represented more than half the GSSE in two countries. In Mexico, this share was lower, at 28%. The share of agricultural schools, research and development in GSSE in Mexico is three times the OECD average, but several OECD members place even greater priority on programmes of this type, at least as measured by share of TSE. The share of inspection services in GSSE is also higher than the OECD average in Mexico, at 19% as compared to 4%. Infrastructure spending associated with agricultural policy as a share of GSSE in Mexico, which was 13% in 2003-05, was less than the OECD average of 32%.

Figure 4.10. Mexico and OECD GSSE composition in 2005

Mexico OECD Research and Development Agricultural schools

Inspection services

Infrastructure

Marketing and promotion Public stockholding

Miscellaneous

Mexico OECD Research and development 17% 10% Agricultural schools 21% 3% Inspection services 19% 4% Infrastructure 13% 32% Marketing and promotion 28% 42% Public stockholding 0% 3% Miscellaneous 1% 6%

What these data omit Institutional arrangements that do not generate transfers directly are typically excluded from the OECD support estimates. Thus, the data do not reflect the structure of land tenancy determined by the constitution, nor the changes introduced in the course of land reform, although agricultural policies that provide support to facilitate the process of land reform or to help small farmers adapt are included. The presence of state-owned enterprises is included in these support estimates to the extent that they provide transfers among different agents, and in the event that they implement any import barriers, but any inefficiencies or distorting practices embodied in their activities in the market are not measured as such. Institutional arrangements relating to resource use may not yet be fully captured in the OECD support estimates; the transfer embodied in privileged access to

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resources such as water that producers receive are currently not included from the PSEs. Institutional arrangements, including those relating to land reform and water use, are addressed in Chapter 6 of this study. The TSE, PSE, CSE and GSSE are not measures of the effects of policies on production, consumption, trade or welfare, nor on the distribution of the transfers and effects. In economics, the term “welfare” is not a reference to social security; economic welfare has a specific meaning that goes beyond the first incidence of transfers generated by policies. Thus, whereas PSE data describe to and from whom transfers take place as a result of agricultural policies, questions of welfare must be addressed by considering how agents respond to the signals given by these transfers. Relevant agents are producers, consumers and traders of the commodities, and their activities are conditioned by other factors as well, including general conditions in the market and in the economy overall. The next section of this chapter discusses the effects of agricultural policies on welfare.

Welfare effects of agricultural policies

A common goal for agricultural policy is to improve economic welfare generally and farm income in particular. The remainder of this chapter is dedicated to evaluating the impact of Mexican agricultural policy on the welfare of those participating in the sector. Other important impacts of policies, such as those on commodity markets, rural poverty and natural resources are addressed in later chapters. In this context, economic welfare is defined as the extent to which benefits of a policy change exceed the costs that are paid. For consumers and producers, welfare can be defined more explicitly as the consumer surplus, the utility valued in monetary terms that consumers receive from the goods they buy in excess of the total costs they pay for them, or producer surplus, which is the profit of owners of inputs, such as labour, capital and land. Agricultural commodities are the output of activities undertaken by a wide set of agents that include any seller of inputs into agricultural product, such as fertilizers and capital goods, and the taxpayers who fund agricultural programmes, and not only farmers (who provide their own labour and capital). For calculations of welfare to be inclusive, they must include the effects of changes in agricultural policies on all sector participants. Agricultural commodity production may affect the environment in negative and positive ways that lead to benefits for which no payment is made and costs for which no compensation is provided in the market. Measuring these benefits and costs — positive and negative externalities — is beyond the capacity of current OECD modelling tools, and so they are not included in the assessment provided here. However, wider impacts of agricultural policies and institutions on poverty and on natural resources are considered in a later chapter. As mentioned above, Mexico’s agricultural policies have moved from being predominantly market price support that increases domestic producer prices to being predominantly budgetary payments. The most significant of these in terms of the welfare implications of this change is the PROCAMPO programme. Programmes such as PROCAMPO, which are based on historical rather than current aspects of agricultural production, have been shown in previous OECD documents to be some of the most efficient at generating positive welfare benefits for producers for a given level of transfers.6 In general, it has been shown that MPS, payments based on commodity output, and payments based on input use are the forms of support least efficient at transferring

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income to producers, while payments based on area and payments based on historical entitlements (e.g. PROCAMPO) are the most efficient means for governments to increase aggregate farm income.

Box 4.1. Brief summary of the Policy Evaluation Model (PEM) The OECD Policy Evaluation Model was used for the analysis in this chapter. The PEM models the agricultural sectors in six OECD regions, namely Canada, the European Union, Japan, Mexico, Switzerland and the United States, representing in an aggregate manner the production of wheat, coarse grains, oilseeds, beef, and milk. PEM is an equilibrium displacement model, Starting from an equilibrium state where supply equals demand in every represented market, the model is solved by returning all markets to an equilibrium after the introduction of a policy shock. The model is calibrated to match observed production and trade in a specific base period and makes use of estimates of supply and demand responsiveness in each market (elasticities of demand and supply), information on the production technology (elasticity of substitution of factors of production), and information on relative factor intensity. The PEM measures welfare changes to the different participants in the agricultural sector by measuring the changes in producer and consumer surplus that result from any policy scenario. The change in budgetary expenditure is also tracked — taxpayers benefit when government expenditures decline. A technical note describes the modifications made to this model specifically for its use here (Technical Note to the OECD Study of Agricultural Policies in Mexico available at www.oecd.org). In brief, edible dry beans were added to the model, as was subsistence maize production, and improved input market representation.

Transfer efficiency A key measure of agricultural policy is its transfer efficiency. This is defined as the ratio of the change in producer welfare to the change in policy transfers. It measures the proportion of agricultural policy transfers that actually accrue to agricultural producers. Transfer efficiency is always less than perfect (value of one) because the suppliers of purchased inputs are able to capture some proportion of the benefit of any policy.7 Consumers and taxpayers also gain or lose from policy changes. Deadweight losses also reduce the potential benefit to producers. These losses are a result of allocative inefficiency – the reduction in consumer and producer surplus resulting from policies that distort output away from its efficient level. To the extent that raising farm income is an objective of agricultural policies, higher transfer efficiency is critical to achieve that end with least costs and fewest unintended consequences. In order to evaluate the impact of the evolution of Mexican agricultural policy on farm welfare, a simulation model was used to estimate the total transfer efficiency of the mix of agricultural policies in place in each year between 1990 and 2004. To generate welfare estimates, it is assumed that producers earn the producer surplus from the factors of production that they own — their land, their own labour, and their livestock. This means that changes in producer welfare are driven by changes in the rental rate of land, the (implicit) wage rate of the farmer’s labour, the value of the livestock herd and the changes in the respective quantities used of each of these factors. The changes in welfare of other agents, namely the suppliers of purchased inputs, consumers and taxpayers, are calculated in a similar manner. Simulation results from models such as that used here represent just one of many possible outcomes, and are intended to illustrate the implications of the economic assumptions and reasoning that they contain. Simulation results show that the estimated transfer efficiency of Mexican Agricultural policy has improved steadily, from an initial level of around 30% in 1990 to in excess of

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70% in 2004 (Figure 4.11).8 That is to say, an additional MXN 100 transferred through the array of agricultural support existing in 1990 would raise farm income by only MXN 30, whereas MXN 70 of an additional MXN 100 spent on the policies existing in 2004 would find its way to farmers. Thus, the effectiveness of Mexican agricultural policy at transferring income to farmers has more than doubled over the study period, from an initial condition where less than one peso in three was actually captured by producers in the form of a net income increase. This reflects mainly the reduced importance of MPS in the total PSE — and the increasingly narrow base of MPS which mostly relates to milk in recent years — and the increasing importance of the PROCAMPO programme.

Figure 4.11. Estimated transfer efficiency of Mexican agricultural policy 1990-2004, per cent

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

0 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 2001 2002 2003 2004

Source: OECD PEM model.

Transfer efficiency is a good measure of the cost-effectiveness of policies whose intent is to improve the welfare of agricultural producers, the ultimate intent of a large proportion of agricultural policy in most countries. High transfer efficiency can be taken to be a characteristic of good agricultural policy. Many factors determine the transfer efficiency of a policy or set of polices, but the most important of these is the extent to which policies alter production decisions in commodity markets. Generally speaking, the more a policy distorts production, the lower its transfer efficiency. Typically, a policy is more production distorting the more transfers are affected by the level of production, and the more concentrated the policy is on specific commodities. As the link between payment and production strengthens, a producer is encouraged to increase output even more.9 If the economically optimal response to a certain policy is to increase production, the farmer will do so and bear the increased costs of such an expansion. Moreover, as all farmers respond by producing more, they purchase greater quantities of inputs, so the prices of inputs is assumed to rise with demand and further increase costs on farms. Those increased costs must be subtracted from the benefits the producer sees from the policy in question, such as a higher price for the producer’s output. The most transfer efficient policies do not greatly influence the production decisions of producers, and thereby accrue more directly to their income. Designing programmes to maximise transfer efficiency usually also leads to less distortion of production and trade, which is an important part of minimising the negative effects of agricultural programmes

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on trading partners and is a key goal of multilateral trade negotiations. In other words, policies that succeed at raising efficiency of transferring income to farmers also tend to be more benign in terms of distortions to production and to international trade.

Deadweight loss Another measure of the cost effectiveness of policies is the amount of deadweight losses they impose. Where agricultural polices lead to large distortions in production and trade, society as a whole pays a price due to misallocated resources. Measured as the difference between the gains to producers and input suppliers and the losses to consumers and taxpayers arising from agricultural support, for Mexico, this indicator is relatively high in the early 1990s and lower after the 1995-1996 currency crisis (Figure 4.12).10 Interpretation of this measure in 1995 and 1996 is difficult because of the large negative MPS for several commodities in those years. The data problems for these years make estimation of deadweight loss unreliable.

Figure 4.12. Estimated deadweight loss due to agricultural policies, real MXN billion, base 2004

-60

-50

-40

-30

-20

-10

91 92 94 95 97 98 00 01 03 04 999 002 1990 19 19 1993 19 19 1996 19 19 1 20 20 2 20 20

Source: OECD PEM.

The decline in this indicator after 2000, indeed its value in general, is strongly determined by MPS levels in each year. The increase in payments based on input use (the most distorting form of support) that took place in 2003 and 2004 raised the value of this indicator relative to what would otherwise be the case, but the greater decline in MPS over the same period results in an overall decline.

Benefits and costs The main beneficiaries of the increase in transfer efficiency and reduction in deadweight loss are consumers and taxpayers (Figure 4.13). While the benefits to producers in real (2004) terms have been relatively flat over the period, ranging from MXN 27 billion in 1990 to MXN 21 billion in 2004, with a high of 40 billion in 1994, costs to consumers have fallen from an average of almost MXN 50 billion in the early 1990s to 12 billion in 2004. Tax expenditures too have fallen by nearly half from MXN 50 billion in 1990 to MXN 24 billion in 2004, following the elimination of the

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substantial consumer subsidies associated with the MPS in the early to mid-1990s but ignoring the introduction of PROGRESA/Oportunidades.11 Benefits to input suppliers fell from an average of around MXN 10 billion in the early 1990s to around MXN 4 billion in the last part of the study period.

Figure 4.13. Estimated distribution of benefits and cost of support, real MXN billion, base 2004

Consumers Taxpayers Input suppliers Producers

-120 -100 -80 -60 -40 -20 0 20 40 60

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Calculated as the negative of the welfare changes from removal of support. Figures for 1995 and 1996 exceptional due to negative MPS. Source: OECD PEM.

Subsistence producers Many producers grow crops for their own consumption. These producers are not participating in the marketplace, and so are not greatly affected in their capacity as producers by programmes that affect market price. They may not use a great deal of purchased inputs such as herbicides or fertilizer to producer their crop, doing so mainly

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by virtue of their own labour on small plots of land. To investigate the likely impact of agricultural policies on this community, it is assumed that a fixed amount of land is planted to maize for own consumption each year (1.4 million hectares) and that this amounts to some 17% of total production of coarse grains in Mexico (Box 4.2).12

Box 4.2. Subsistence maize production The model used for the policy experiments made in this chapter treats subsistence farmers differently from commercial farmers, as does the model used to estimate commodity market effects in the next chapter. In both cases, the models are adapted to the current study by treating subsistence farmers as a distinct group, and assuming that they do not change production in response to market signals. This assumption has the virtue of being simple and offers a clear, if extreme, look at the most important distinction between commercial and subsistence farmers: their degree of connection to commodity markets. Moderating this assumption would change the simulation results but likely not the conclusions drawn from them. There is a body of literature studying subsistence agriculture in Mexico, focusing on subsistence maize production. Data from all sources indicate that subsistence producers overall are net buyers of maize; subsistence production must be supplemented by further purchases in order to meet household needs. However, the impacts of changing price signals on subsistence farmers in Mexico is a matter of debate that goes beyond the present study’s scope. Ashraf, McMillan and Zwane, for example, note that even though subsistence production is not sold, the implicit value represents a large share of imputed household income, so a price reduction could lower seriously their income, but they find that the effects of falling prices historically has not had any important effect on subsistence farmers. On the other hand, other authors find evidence of price links and important effects of market changes on subsistence farmers, if sometimes indirectly as in the case of Dyer, Boucher and Taylor.

These producers do not sell into commercial markets, and so do not benefit from MPS. They may be net consumers of maize, but their benefits from consumer subsidies are likely to be small. Their labour is unpaid; the maize they produce is the only return to their labour. This limited connection to markets means that reaching subsistence producers with agricultural policies in a meaningful way is difficult. However, programmes that offer a direct payment to these producers based on their landholdings have the potential to be effective. These producers do not participate in markets, either for their output, or for inputs, including their own land and labour, so only direct payments in the style of PROCAMPO will reach them, and these will act like a lump-sum transfer, where the producer’s benefit is equal to the full value of the payment. Accordingly, the benefits to subsistence producers of maize is calculated as the proportion of PROCAMPO payments they are expected to receive based on the proportion of land used for such production. Benefits to other producers of maize are calculated in the usual fashion as the producer surplus to the owned factors of labour and land. For these producers, payments based on land such as PROCAMPO increase the producer surplus for land. Taking this approach, subsistence maize producers, who gain nothing from policies in the early 1990s, receive between 13 and 27% of the benefits of this programme to all maize producers (Figure 4.14). As the rate of payments is fairly steady, variations in the proportion of benefits result from market effects impacting returns to commercial maize production.

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Figure 4.14. Distribution of estimated policy gains, subsistence and commercial producers of maize, real MXN billion, base 2004

Subsistence producers Commercial producers

0246810121416

1990

1991

1992

1993

1994 16

1995 27

1996 26

1997 23

1998 20

1999 Subsistence, 18 percentage 2000 of total 14

2001 15

2002 13

2003 17

2004 23

Source: OECD PEM.

The change in the composition of support, both in terms of the instruments used and their degree of targeting toward specific commodities, brought about a distribution of benefits of agricultural programmes that is more balanced across commodities (Figure 4.15). In the early years of the study period, support is targeted mainly towards maize, milk, and beef production. Moving away from commodity-specific MPS payments improved the distribution of support to crops other than maize. That said, support to milk remains mainly in the form of MPS; by the end of the study period, this commodity received more than half of total MPS.

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Figure 4.15. Distribution of estimated programme benefits, percent of total, 1990-94 and 2000-04

Average 1990-1994 Average 2000-2004

Other Crops

Maize

Dry beans

Milk

Beef

1990-94 2000-4 Total, MXN billions 33.9 26.2 Other Crops 17% 33% Maize 38% 23% Dry beans 1% 9% Milk 22% 24% Beef 23% 12%

Source: OECD PEM.

Alternatives The above results demonstrate that the transition from an agricultural policy characterised mainly by market price support to one based on more decoupled budgetary payments such as PROCAMPO as the main form of policy support has led to improvements in the effectiveness and efficiency of Mexican agricultural policy as far as farm incomes are concerned. What is the scope for further changes in the policy mix to lead to additional improvements? Significant use of input support is still being made, and remaining tariffs generate market price support for many commodities, particularly milk. Input support is taxpayer funded, whereas consumers pay for market price support (MPS) to producers, but the use of historical entitlements to smooth the phasing out of tariffs on bilateral trade with NAFTA partners was an important feature of reform. In this section, input subsidies and MPS are also removed and replaced by an increase in the PROCAMPO programme of the same value. This simulation would lead to increased benefits for producers and for the agriculture sector in general – or, alternatively, re- instrumentation of this sort could be used to achieve a given objective relating to commercial producer income at lower cost (Table 4.3) These scenarios are not intended to suggest an expansion of PROCAMPO as such, but rather as an indication of the potential benefits available from continued reform. Currently, input support is mainly directed at the use of energy for fuel and to provide irrigation, while MPS is directed mainly at milk (68%) and maize production. If the support provided on the basis of input purchases had been shifted into PROCAMPO, the result would be an increase in total welfare by MXN 196 million, and producer welfare by MXN 751 million. This re-instrumentation would disrupt the existing pattern that

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shifts most of the benefits to input suppliers, as producers would no longer be encouraged to purchase subsidised inputs. Eliminating the remaining MPS and making these transfers instead a part of PROCAMPO increases net welfare by MXN 6 209 million, and the welfare of producers by MXN 4 376 million. Consumers, who pay the cost of transfers via MPS, save over MXN 12 billion, while taxpayers who bear the cost of the shift to budgetary payments, are made worse off by over MXN 9 billion. Hired labour and other input suppliers are made worse off as removing the production distorting effects of MPS reduces output and therefore demand for factors of production. In either case, the effect on subsistence farmers is positive: whereas land-owners may be eligible for PROCAMPO without selling goods, the benefits of MPS and input subsidies accrue primarily if not exclusively to commercial producers.

Table 4.3. Some alternative policy scenarios, 2004

Welfare effects on agents

Size of Policy Input Hired transfers Producers Taxpayers Consumers Total situation suppliers labour affected MXN million Moving input 1 579 751 -479 -29 -16 -31 196 support to PROCAMPO Moving MPS to 10 675 4 376 -713 -165 -9 410 12 120 6 209 PROCAMPO Source: OECD PEM.

Conclusion

The transfers from consumers and taxpayers to producers generated by Mexico’s agricultural policies fluctuate substantially during the 1990-2005 period, but are now somewhat lower relative to gross farm receipts than at the start of this period. The reforms caused a more important re-orientation in the mechanisms by which support is delivered. In particular, barriers to imports that create market price support – higher prices in the domestic market that consumers must pay to producers – has been partly replaced by payments based on historical entitlement in the form of the transitional PROCAMPO programme. This re-orientation is not complete: market price support remains in place as tariffs for several key products are still being phased out and, moreover, tariffs are being eliminated as a result of bilateral rather than multilateral agreements so barriers to other countries’ trade remain in place. At the same time, subsidies to producers’ purchases of inputs have been shifted to emphasise different inputs, focusing more on financial and energy inputs in recent years, but in any case account for a roughly constant share of the total transfers. Mexico’s support for the sector as a whole has been affected by the termination of CONASUPO and its direct intervention in the market, and growth in programmes to support markets and information often under the umbrella of Alianza or operated by ASERCA. As a consequence, general support for agriculture is no longer dominated by public stock-holding. Instead, marketing and promotion expenditures now dominate general support to the sector. Research, education and especially inspection services

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account for large shares of the total, as well. Infrastructure support, with a falling share of these general expenditures, is at present comprised largely of subsidies to irrigation projects. Mexican agricultural policy has moved from being dominated by market price support and payments based on input use, the two forms of support that are most distorting and least effective at increasing producer welfare, to its current situation where an important means of support (PROCAMPO) is quite effective and efficient at improving farm welfare. This evolution in the composition of Mexican agricultural support has improved farm welfare at lower (deadweight) cost to society. Moreover, subsistence producers of maize have benefited from this transition, from an early situation where they were not helped by agricultural support, to a situation where they receive real benefits from agricultural policy. Further consolidating this process by replacing the remaining (significant) amounts of input support and MPS with targeted payments would continue this course of improvement. The welfare results of this analysis presented here focus on the impacts of agricultural policies only, and only upon the actors in the agricultural sector. Within the set of included policy options, payments based on historical entitlements such as PROCAMPO are the most effective at improving farm incomes. This does not mean that PROCAMPO or similar programmes are always the best approach, not without specifying more clearly the objective. For example, rural poverty alleviation and rural development are also important policy goals. While agriculture and farm income is a part of the rural economy, the path to faster rural development does not necessarily lie in improved agricultural income via PROCAMPO, nor in increased agricultural production. The interaction of agricultural policies and rural poverty, with special attention given to the distribution of benefits, is addressed in Chapter 6.

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NOTES

1. The OECD estimates measures of support for all OECD members as reported in the OECD’s annual Monitoring and Evaluation Report. A full explanation of the concepts, method, interpretation and guidelines for the use of the OECD support indicators in policy evaluation can be found in Methodology for the Measurement of Support and Use in Policy Evaluation [http://www.oecd.org/dataoecd/ 36/47/1937457.pdf], and a less technical discussion is available in Agricultural Support: How Is It Measured and What Does It Mean? [http://www.oecd.org/ dataoecd/ 63/8/32035391.pdf]. 2. These considerations are discussed later in and the following chapters. 3. With respect to the PROCAMPO payments, it is important to note the problem of allocating payments based on historical entitlement to specific commodities in PSE calculations. In fact, the restrictions on these payments are that the land be used for crops, livestock, forestry or an approved environmental use. In the OECD’s method for PSE calculations, the payments in each year are divided among crops based on current planting on eligible land, but are not allocated to livestock products. Allocation methods are also applied for similar programs in other OECD members, but this practice is under review at the time of writing of this publication (Agricultural Policies in OECD Countries: at a Glance, OECD, 2006.) 4. Since 2001, there have been two limits imposed on the amount that an individual crop producer may receive. First, there is a maximum payment amount that may be received per agent and, second, there is a reference yield set at a regional level beyond which no payments are made. However, these limits are ignored in the present assessment as difficulties of enforcement are assumed to prevent stringent application of these constraints. 5. The calculation of TSE prevents double-counting certain components of CSE. 6. See OECD (2001), Market Effects of Crop Support Measures. 7. The model holds as a basic tenant that there are no or only minimal imperfections in the market, but some researchers posit that there is evidence of incomplete markets for rural finance to small-scale producers. This argument is noted again later, in the context of input market policies, and the potential for multiplier effects is ignored here. 8. These results, as with those for all simulation models, hinge on the assumptions that underlie its workings. In particular, the OECD Policy Evaluation Model used here assumes that prices operate to clear well-operating markets, both for commodities and factors of production. Some modifications of the model have been made to accommodate, for example, non-commercial producers. However, the complexities of the land tenure system, such as the system of eijidos, are such that the results should be interpreted with due care.

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9. In practice, Mexico’s current payments based on output for most crops, namely the Target Income Programme, and the subsidies to input use are subject to certain limits that are intended to place an upper bound on the amount a single producer can receive. The analysis here ignores the potential that these limits could reduce the production-enhancing effect on an individual beyond a certain point, which could indeed occur if these limits were binding, although there would nevertheless be effects on decisions about which crops, if any, to produce. 10. Including consumer subsidies made as a part of agricultural policy, which benefit consumers as well as producers and input suppliers, and amounted to about 6% of the value of consumption in the early 1990s. These subsidies do not include payments made under PROGRESO/Oportunidades, which are not agricultural policies. 11. PROGRESA/Oportunidades are not components of agricultural policies, so expenditures under these programs are not included in PSE data and the effects are not estimated in the analysis of this chapter. 12. These assumptions are maintained in the AGLINK analysis of Mexican commodity markets in the following chapter.

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Chapter 5.

Agricultural policies and commodity markets

Introduction

This chapter deals with agricultural policies and their impact on the evolution of the commodity markets in Mexico between 1995 and 2005. The aim is to assess how the different policy reforms undertaken in Mexico may have affected the markets of key agricultural products by identifying the contribution of policies to key market outcomes: production, consumption and trade. First, a brief overview of agricultural markets in Mexico is presented. Then, analysis based on simulations carried out with the Mexican module of the OECD AGLINK model is provided to show how policy changes have affected commodity markets. The specific policies in question are those that are considered to have affected the evolution of commodity markets most directly, namely the phasing out of price supports and consumer subsidies and the concurrent introduction of PROCAMPO and of payments provided by ASERCA under the Marketing Support Programme and output support schemes mostly via Target Price and Target Income. The focus of the analysis is on certain important commodities in Mexico: coarse grains (including maize and sorghum), dried edible beans,1 wheat, pigmeat and beef. This analysis does not cover all policies, nor all effects of these policies. Programmes that address rural poverty, market infrastructure and input markets are addressed in later sections of this report. The previous chapter describes the implications of policy changes in terms of economic welfare and of the efficiency of the overall policy mix in increasing the net incomes of farmers.

Brief overview of commodity production and consumption

Commodity production and consumption in Mexico were mirror images of one another in the early 1990s. This may have been the intended outcome of policies that prevented substantial trade, or the inevitable outcome for a country where subsistence farming accounts for a large share of agricultural activity. In any case, maize and beans, the primary staples in Mexico, were the principal crops grown, as well as consumed. Nor have these conditions changed fundamentally as a consequence of the reforms, as discussed below. Maize was and is the main agricultural commodity in terms of production, value and crop area. Throughout the 1990s and up to 2005, more area was allocated to maize production than to the sum of other coarse grains, wheat, beans, rice, oilseeds and sugar. Between 1995 and 2005, consumption of many crops and livestock products increased (Figure 5.1). This increase in consumption was met in many cases by

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both an increase in domestic production and in imports as for maize, barley, beef, pigmeat and poultrymeat. Over this period, domestic production decreased for wheat and beans. However demand was met by increasing imports. Commodity trade data over the period shows an increasing role of imports and exports following liberalisation. Of the commodities considered here, large changes were often observed, and often in the direction of greater imports of crops and livestock products. For some commodities, such as tomatoes and sugar, exports increased over the reform period.

Figure 5.1. Contribution of production and imports to the growth in supply of main Mexican agricultural commodities between the periods 1992-1994 and 2003-2005

Source: imports 160% Source: domestic production 142% 140% Supply growth

120% 95%

100% 80% 80% 61% 37% 60% 51% 51% 42% 36% 36% 18% 40% 24% 26% 7% 20%

0% -10%

-20%

-40%

y s s e at ze e m ar e ef at at e i rl u ice g e e h a a R B Milk* Eggs W M B rgh Su Coffe o Pigme S oyabeansDry bean Tomato S Poultrym

* Data for milk (fluid milk) include only domestic production.

Mexico’s shares of maize, beans, sugar cane and beef production in world production are mostly below 5% and often much smaller (Table 5.1) Beans are the exception: Mexico accounted for 7% of world bean production, on average, between 1990 and 2005. Nevertheless, for all the commodities discussed here, Mexican production levels probably are not large enough to strongly influence world market prices.2

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Table 5.1. Share of Mexican commodities in world production

1990-2005 2001 2002 2003 2004 2005 Production Sugar cane 3.7% 3.7% 3.4% 3.3% 3.4% 3.5% Dry Beans 7.1% 6.4% 8.0% 7.5% 7.6% 7.3% Maize 3.1% 3.3% 3.2% 3.1% 3.0% 3.0% Wheat 0.6% 0.6% 0.6% 0.5% 0.5% 0.5% Beef 2.5% 2.6% 2.5% 2.6% 2.6% 2.6% Pork 1.1% 1.1% 1.1% 1.1% 1.1% 1.0% Poultrymeat 2.5% 2.7% 2.8% 2.8% 2.9% 3.1% Source: FAOSTAT.

Looking at food consumption for some important commodities, the importance of maize in the Mexican diet stands out (Table 5.2). Maize consumption per person is more than six times higher than the world average and is slowly rising, whereas in most other countries maize consumption has fallen. Another particularity in Mexico is that per capita consumption tends to be substantially higher for beans and lower for wheat than is the case at the world level. Whereas pork per capita consumption at world level exceeds that of beef, their shares are reversed in Mexico. Beef and pork consumption per capita in Mexico were together about the same as elsewhere in 1992-94, but rose by 4 kilograms by 2001-03 faster than in the world generally. Poultry meat consumption in Mexico, which was already 5 kilograms higher than elsewhere in 1992-94, rose by 75% by 2001- 03 versus 35% elsewhere. Mexican fluid milk consumption was about 50% higher than is the case at the world level, both over the period 1992-94 and the period 2001-03, and it increased between 1992-94 and 2001-03 by 6.5 kilograms.

Table 5.2. Food consumption per capita (kg per person)

Mexico World 1992-94 2001-03 1992-94 2001-03 Maize 122.6 126.4 19.1 18.5 Beans 10.9 10.8 2.5 2.4 Wheat 43.0 37.0 72.4 69.8 Sugar 0.5 0.5 3.9 4.5 Beef 15.9 18.0 10.2 9.9 Pork 10.7 12.7 14.2 15.8 Poultrymeat 13.8 24.3 8.8 12.1 Eggs 11.8 15.8 7.0 8.8 Milk 85.8 92.3 55.1 59.9

Source: FAOSTAT.

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Analysis

Using simulations, it is possible to compare the actual evolution of Mexican commodity markets with “hypothetical” ones had agricultural policies evolved differently. This leads to an ex post evaluation of the effects of policies on commodity markets. This chapter focuses on explaining the difference between a “No Reform” scenario and the actual “Historical” scenario by looking at the contribution of the different elements of agricultural policy reform introduced by the Mexican government over the period on key market outcomes. The total difference between these two scenarios can be explained incrementally by analysing the outcomes of different scenarios.3

Box 5.1. White and yellow maize Maize is often treated as a single good in commodity models, based on the assumption that varieties can be substituted as relative prices change. While a generally accepted practice for studies of most policies and international trade, the prevalence of white maize in Mexico, rather than the more common yellow maize, calls into question this assumption. Zahniser and Coyle study the degree to which white maize and yellow maize are substitutable. These authors observe that white maize has softer starch that is more suitable to traditional methods of tortilla production – the maize is first soaked in water and lime, then worked into a wet mass of dough from which tortillas are formed for baking – and can be used for contemporary methods of drying the dough into flour that can be more easily shipped. In contrast, yellow maize is more appropriate for animal feed. However, they find scope for substitution at the margin: white maize can be used as feed, and some yellow maize is of suitable quality to serve as an input into products for direct human consumption, such as chips, flakes and beer.

A succinct description of the four policy scenarios underpinning the analysis of the present chapter is presented below. The scenarios are ordered from a hypothetical “No Reform” scenario to the “Historical” scenario that reflects actual market developments. The focus in the present analysis is on the impact on commodity markets of Mexican agricultural policy reforms. Subsistence agriculture is taken into account for maize but the impact of policies on subsistence farming is not the central point of the analysis. Policies that are not directly linked to agriculture, such as PROGRESA and Oportunidades,are not included in the analysis. Finally, any impacts on the prices of goods in foreign markets that might be caused by reforms in Mexico are ignored, which is a reasonable assumption in view of the small share of world production that is directly affected. The analysis presented in this chapter is organised around a stepwise approach. A “No Reform” scenario has been constructed to reflect what would have happened had certain policy reforms not taken place. Then reform elements are added one after the other to finally reflect the “Historical” scenario, i.e. policies that were actually in place during the period 1995-2005. The three intermediate scenarios each corresponding to the introduction of one of the reform elements are the following: “Reduction of Market Intervention”, “Progressive Termination of Consumer Subsidies”, “Introduction of payments under PROCAMPO”. All the scenarios are presented in details below.

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Box 5.2. A brief description of AGLINK (model used for analysis in this chapter) The OECD AGLINK model was used for all subsequent analysis in this chapter. AGLINK is a partial equilibrium model that focuses on the medium-term dynamics of main commodity output markets (of which, wheat, coarse grains, rice, oilseeds, oilseed meals and oils, beef and pork are discussed here) in OECD countries: Australia, Canada, European Union (25), Japan, Korea, Mexico, New Zealand and the United States and in four non OECD countries: Argentina, China, Russia and Brazil. It is a dynamic supply-demand model with special emphasis on how government policies affect the evolution of prices and quantities. Changes in supply and demand decisions because of changes in prices and other factors are determined by elasticities. Starting from an equilibrium where markets are completely determined by world prices and existing policies in a base period, the model is solved by returning all markets to an equilibrium after the introduction of a policy shock (scenario). The present study focuses on the impact of agricultural policy reforms in Mexico between 1990 and 2005 on agricultural commodity markets. Several changes and improvements to the Mexican module have been undertaken to get a better representation of the Mexican agricultural sector during the period 1990-2005 (See the technical document) and thus to calibrate the model on what actually happened over the period 1990-2005 (“Historical” baseline later called “Historical Scenario”). Several policy shocks in Mexico were carried out to understand the impacts of agricultural policy reforms on Mexican domestic commodity markets. The results of the experiments presented in this chapter must be interpreted carefully. The historical facts are clear: there is no real dispute about how production, consumption, trade and prices have evolved since 1995. Model-based analysis allows researchers to experiment with counter-factual policy environments in the sense that a certain policy or policy set is imposed in the model that did not occur in fact. All other explanatory factors, such as macroeconomic variables and weather-induced variability in yields, are held at their true, historical values. Thus, the model simulation results can be compared to what actually did occur to estimate the effects of that policy or policy set, without incorrectly attributing the effects of other factors to these policies. In this analysis, the observed historical outcomes are compared to counter-factual simulations with different policy sets to identify the contribution of each component of commodity policies studied here, resulting in comparative statements about the evolution of production, consumption and trade.

Scenario 1: “No reform” In general, this scenario assumes that elements of the 1992 policy system in place that intervene most directly in specific commodity markets are continued through 2005. This scenario is the most extreme counterfactual case. The market outcomes generated within this policy framework constitute the basis for the comparison for the other four scenarios. In particular: • Continuation of the system of market intervention with tariffs, import quotas and guaranteed or concerted prices used to maintain domestic prices above world prices, thus generating producer price support.4 • Continuation of the system of CONASUPO consumer subsidies for maize, beans, feed products and milk powder. • No PROCAMPO payments. • No Payments provided by ASERCA under the Marketing Support Programme and output support schemes, namely Target Price and Target Income.

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Scenario 2: “Reduction of market intervention” When compared to the “No Reform” scenario, this experiment assumes that the system of agricultural policies based on market intervention with price support generated through tariffs, import quotas and guaranteed or concerted prices is progressively reformed according to what actually happened over the period 1995-2005.

Scenario 3: “Progressive termination of consumer subsidies” When compared to scenario 2, this scenario assesses the impact of a progressive termination of the system of consumer subsidies for maize, beans, feed products and milk powder according to what actually happened over the period 1995-2005. As in previous chapters, only those consumer subsidies associated with agricultural policies are included in this analysis; PROGRESA and Oportunidades are not agricultural policies and are not assessed here (see next chapter for a comparison).

Scenario 4: “Introduction of payments under PROCAMPO” The change in this scenario relative to the previous one involves the introduction of payments under PROCAMPO.5

Scenario 5: “Historical” Finally, scenario 5 assumes the introduction of payments provided by ASERCA under the Marketing Support Programme and output support programmes (Target Price and Target Income). This scenario included all policy changes associated with the reforms that are considered in this chapter – namely reductions in support prices and subsidies to consumption, and introduction of PROCAMPO, Marketing Support Programme and output support. Thus, the market outcomes are those that actually prevailed during the period 1995 to 2005. After a brief overview of Mexican commodity markets, the remaining part of the chapter will discuss the impacts on different commodity markets of policy reform. First, crops (coarse grains, beans and wheat) will be presented. Second, the evolution of livestock markets (beef and pork) will be reviewed. The contribution of each policy reform to the evolution of key market determinants is described for each commodity.

Crop markets

Coarse grains Historically, coarse grains have been Mexico’s leading commodity both in terms of production and consumption. Coarse grains consumption went up by almost 3% per annum between 1995 and 2005.6 Two-thirds of rising demand was met by increased production and one-third by imports. Over this period, producer prices fell in real terms for all coarse grains, on average per annum by about 6% for sorghum and almost 8% for maize.7 Agricultural policy changes over the period 1992 to 2005 have resulted in lower support to maize production than would have been the case in the absence of reform. The analysis suggests that in 2005, maize production would have been more than 10% higher in the absence of reforms (Figure 5.2.A).8 The bulk of the difference is explained by the

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termination of the producer price support system of border protection and guaranteed producer prices, which eliminated the additional incentives to produce which are inherent in such a system. However, as underlined in the previous chapter this supply response occurs in a context of positive overall welfare implications for Mexico of the elimination of this type of policy. The termination of producer price support had particularly noticeable effects from 1997 onwards. In fact, in 1995 and 1996, actual producer prices were at relatively high levels due to bad weather conditions and the effects of the economic crisis, so the supported producer prices assumed for this experiment would have been below market prices and consequently would have had little effect. Coarse grain production is estimated to have declined further when the progressive abolition of CONASUPO consumer subsidies is added to the elimination of price support (scenario 3) in comparison with a situation of no policy reform. This is because withdrawing maize consumer subsidies reduces coarse grain demand9. The progressive reduction of consumer subsidies at the end of the 1990s implied an incremental decrease in maize production of about 2% in 2005 relative to actual historical performance (Figure 5.2.A). In 1994, PROCAMPO payments were introduced. These are based on the historical area planted to a specific list of crops, which includes all coarse grains. The effect of PROCAMPO payments is estimated to have been relatively stable and tending towards an increase in production over the period 1994 to 2005. The increase however was relatively small as noted in previous chapter, about 1.5% on average. Whereas other reforms removed incentives to produce maize, PROCAMPO reintroduces at least some incentive and, hence, offsets part of the effect on production. The Marketing Support Programme run by ASERCA until 2000 provided payments to the first buyers of many crops contingent on their paying a minimum price to producers. The analysis suggests that this programme was more advantageous to other crops than to coarse grains. Thus, according to simulation results, coarse grains demand was reduced slightly. After 2001, payments provided by ASERCA took the form of output support programmes. The Target Price programme was introduced in 2001, and in 2003 was revised and renamed Target Income.10 Payments under this programme were made not only to coarse grains but also to wheat, oilseeds and other crops. The analysis suggests that their net impact was to reduce maize production. Payments made to other commodities are larger and hence more attractive than the payments to maize. The simulation results suggest that the output support policy has provided an incentive for farmers to move some land into other crops (such as wheat). According to the analysis, the effect of agricultural policy reforms on total coarse grains consumption (Figure 5.2.B) remains small. The largest impacts are an increase due to the lower prices brought about by lowering tariffs and eliminating the guaranteed prices, and a more or less offsetting decrease due to the gradual abolition of the system of consumer subsidies. Payments under PROCAMPO and output support do not have a direct impact on consumption as they are not consumer-financed. The results of the scenarios suggest that consumption growth over the period 1995 to 2005 would have been relatively similar when compared between the “No Reform” and the “Historical” scenarios. Another reason for the small consumption impacts of policy reforms is that subsistence consumption is an important part of Mexican coarse grains consumption in total. Its response to these policy changes is uncertain and, here, is held unchanged as the focus is on commercial markets. This share is assumed to represent almost one fifth of domestic production over the period.11

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Figure 5.2. Simulated impacts of the main agricultural policy reforms between 1995 and 2005 on coarse grains market

Figure 3. Coarse Grains Markets 4% A. Maize production 25 4% B. Coarse grains consumption 40

2% 24 3% 35

23 2% 0% 1% 30 1% 0% 0% 22 0% 0% -2% 1% 0% 0% 25

21 in million tonnes -4% -1% in million tonnes 0% 20 20

scenario -2% -6% -5% 19 -2% -2% -1% -2% -3% 15 scenario -8% -7% 18 -8% -4% -8% 10 -10% -8% Maize production -9% 17 Cumulative % changes to "No-5% Reform" -10% 5 Coarse grain consumption -12% 16 -6% Cumulative % changes to "No Reform" -11% -11% -6% -14% 15 -7% 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

40% C. Coarse grains net trade 0 % change due to reforms in payments provided by ASERCA (Marketing 30% Support Program, Target Price and Target Income Programs) (left axis) -2 16% % change due to the introduction of Procampo (left axis) 20% 15% 15% 12% -4 6% 9% 7% 8% in million tonnes % change due to reforms in Consumer Subsidies (left axis) 10% 6% -6

0% % change due to the reduction of Market Price Support (left axis) scenario -8 -10% Total cumulative % change from "No Reform" scenario to "Historical" -9% -10 scenario (left axis)

-20% Coarse grain net trade

Cumulative % changes to "No Reform" Value for the "Historical" scenario (right axis) -12 -30% -28% Simulated value for the "No Reform" scenario (right axis) -40% -14 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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Reforms are estimated to have increased coarse grains imports over the period 1995 to 2005, reflecting the underlying changes in domestic supply and demand (Figure 5.2.C).12 Most of the increase in imports is due to the termination of the system of producer price support. The negative effects on coarse grains supply resulting from output support lead to a further small increase in imports between 2002 and 2004. The progressive reduction of CONASUPO consumer subsidies and the introduction of PROCAMPO payments somewhat offset the tendency towards greater imports resulting from other reforms. To sum up these simulation results, the reforms of agricultural policies have had consequences for the evolution of the coarse grains markets and especially for Mexican domestic coarse grains production. Maize production increased over the period 1995- 2005, but is estimated to be more than 10% lower in 2005 than what it would have been in the absence of reform. Again this point has to be seen in the context of the overall beneficial welfare effects of the policies and their reform. On the demand side, coarse grains consumption increased substantially over the same period and reforms did not change this tendency by very much. As a consequence of these trends in supply and demand, Mexico has increased coarse grains imports.

Beans Like maize, beans are a basic element of the Mexican diet, and are widely grown for subsistence consumption.13 Bean consumption and production between 1995 and 2005 decreased respectively by 1% and almost 4% per annum. Historically, bean trade has been small. The simulations suggest that agricultural policy reforms initially lowered bean production compared to what would have been the case in the absence of the various policy changes, but had the opposite effect in later years (Figure 5.3.A). Interactions among commodities in terms of changes in production incentives due to the reforms are the main factors behind these results. Farmers’ decisions to produce beans or other commodities are influenced by expected relative returns per hectare, and thus by the evolution of prices among commodities. The reform reduced real crop prices overall, but initially the drop was larger for beans than for other commodities like wheat, drawing resources out of bean production. But as time went by the relative price changes between beans and cereals were reversed and from 2002 onwards, bean production has become relatively more attractive compared to wheat (see Figure 5.3.C for the evolution of bean prices). Thus, according to simulation results, the termination of price supports had the effect of reducing bean production up to 2001 relative to what would have occurred otherwise but, from 2002 onwards, the opposite effect occurred. The simulated effects on bean production of the historical entitlements payments resulting from the introduction of PROCAMPO are similar to those for coarse grains. These payments give some incentive to increase production, which rises by about 2% on average compared to what would have occurred in their absence. As beans are not included in the commodities covered by the output support schemes, the Target Price and Target Income programmes tend to lower bean production.

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Figure 5.3. Simulated impacts of the main agricultural policy reforms between 1995 and 2005 on bean market

Figure 3. Coarse Grains Markets 20% A. Bean production 1.8 8% B. Bean consumption 1.8

15% 1.6 1.6 6% 7%

1.4 1.4 10% 7% 7% 4% 1.2 1.2 5% 1% 6% 2% 1.0 1.0 in million tonnes 4% in million tonnes 0% 0%

scenario 0.8 0% 0.8 0% -5%

scenario -2% 0.6 -2% -1% -1% 0.6 -4% -1% -1% -4% -2% -1% 0% -10% 0.4 Bean production -4% 0.4 Cumulative % changes to "No Reform" -9% Bean consumption -10% -4% -15% 0.2 0.2

Cumulative % changes to "No Reform" -12%

-20% 0.0 -6% 0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

C. Bean producer price % change due to reforms in payments provided by ASERCA (Marketing

0% 12000 Support Program, Target Price and Target Income Programs) (left axis)

-2% -2% % change due to the introduction of Procampo (left axis) -10% -4% 10000 % change due to reforms in Consumer Subsidies (left axis)

-20% 8000 in MXN/tonne -21% % change due to the reduction of Market Price Support (left axis) -30% -25% 6000 scenario -30% Total cumulative % change from "No Reform" scenario to "Historical" -33% -32% -40% -35% 4000 scenario (left axis)

-41% Bean producer price Value for the "Historical" scenario (right axis) -50% 2000 Cumulative % changes to "No Reform" -52% Simulated value for the "No Reform" scenario (right axis) -60% 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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The simulation results indicate that bean consumption was not significantly influenced by policy reforms (Figure 5.3.B). The total cumulative impact is estimated to be slightly negative for almost all years in the period 1996 to 2005. In 1995, the important positive differential between bean consumption in the “Historical” case and in the “No Reform” case reflects a particularly strong drop in producer prices in the first year of the reform. For all other years, bean consumption is actually at a lower level than what it would have been without the reforms. Prices of substitutable products like maize remain more attractive even if consumer subsidies are gradually removed. To sum up, the estimated effects of policy reforms on beans are very much related to the impacts of these same reforms on other crops due to the substitutability in production and consumption. As far as bean trade is concerned, it is difficult to assess the effects of reforms as most of the consumption tends to be produced domestically. In the given policy context, the changes in cereal markets have been bigger that those in the beans market.

Wheat Wheat products are mainly consumed by urban households as an alternative to maize tortilla. Between 1995 and 2005, in context of a fall in prices, wheat consumption increased by more than 2% per annum, while wheat production declined by almost 3% per annum. Most of the consumption increase was thus met by increasing imports. Over the same period, real prices declined by more than 8% per annum. Reforms are estimated to have slowed the decline in domestic wheat production, but did not eliminate the long term downward trend (Figure 5.4.A). In these simulations, the overall effect of all the policy reforms, in most years, is to increase production. Although the elimination of producer price support reduced returns to wheat production from 2000 onwards, wheat production levels in Mexico have been higher relative to what they would have been in the absence of reforms. To explain the main driving forces behind that result, it is necessary to distinguish two periods: the period from 1995 to 1999 and the period from 2000 to 2004. In the first period, until 1999, the termination of producer price support meant that growing wheat became more attractive than growing coarse grains. This is because wheat prices were less affected than maize prices in the first years of reform. The introduction of historical entitlement payments under PROCAMPO is estimated to have had small effects, similar to those for other commodities in that it pushed production about 1.5% higher. In the second period, from 2000 onwards, the simulated decrease in wheat producer prices was almost as high as that for maize, and relative returns to growing wheat fell. According to the simulations, the progressive elimination of CONASUPO consumer subsidies for maize and beans caused demand for wheat to rise, which led to a small increase in wheat production relative to what would have taken place without these subsidies (Figure 5.4.A). The output support under the Target Price and the Target Income programmes are very favourable to wheat relative to other crops, and explain why the total impact on wheat production of all policy reforms remains slightly positive. Indeed, these payments more than offset the decreasing impact on wheat production of the elimination of producer price support.

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Figure 5.4. Simulated impacts of the main agricultural policy reforms between 1995 and 2005 on the wheat market

Figure 3. Coarse Grains Markets 30% A. Wheat production 4.0 40% B. Wheat consumption 7.0 33% 25% 25% 3.5 27% 27% 30% 24% 25% 6.0 20% 17% 21% 3.0 19% 16% 14% 20% 15% 5.0 15% 2.5 10% 7% 4.0 10% in million tonnes 6% in million tonnes 5% 2.0

4% scenario 5% 2% 0% 3.0 1% 0% 1% 1.5

scenario 0% -10% 2.0 1.0

-5% Wheat production

-2% Cumulative % changes to "No Reform" Wheat consumption -20% 1.0 -10% 0.5 -18% Cumulative % changes to "No Reform"

-15% 0.0 -30% 0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

130% C. Wheat net trade 115% 0.5 % change due to reforms in payments provided by ASERCA (Marketing 110% 0.0 Support Program, Target Price and Target Income Programs) (left axis)

90% 77% 63% 75% 60% -0.5 % change due to the introduction of Procampo (left axis)

70% 48% -1.0 % change due to reforms in Consumer Subsidies (left axis)

50% 28% in million tonnes -1.5 30% 11% % change due to the reduction of Market Price Support (left axis) scenario -2.0 10%

-2.5 Total cumulative % change from "No Reform" scenario to "Historical" -10% Wheat net trade scenario (left axis)

-3.0

Cumulative % changes to "No Reform" -30% Value for the "Historical" scenario (right axis)

-50% -22% -3.5 -45% Simulated value for the "No Reform" scenario (right axis) -70% -4.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

For net trade, the values for the cumulative % changes for the different policies from “No Reform” scenario to “Historical” scenario for 1995 are out of scale.

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Ontheconsumptionside,reformsareestimatedtohaveanevenlargerimpactthanon production, and in any case an impact that is much larger than that for consumption of coarse grains and beans (Figure 5.4.B). Indeed, because of the reduction of producer prices, the elimination of consumer subsidies given to products substitutable with wheat and the Marketing Support Programme until 2000, domestic wheat consumption was almost 20% higher on average for all years over the period 1995-2005 in comparison to a “No Reform” scenario. This effect, in turn, is reflected in growing imports of wheat over the period 1998 to 2005 to meet the increase in demand (Figure 5.4.C). Overall, the simulated impacts of agricultural policy reforms on wheat markets have been large. This is due to the fact that wheat is a substitute for other crop products and that the relative price differentials, due to reforms, between wheat and these other products has been in favour of substantial adjustments in Mexico’s wheat markets. Crops at the aggregate level So far the simulated effects of the main agricultural policy reforms on some important Mexican crops have been underlined. This section is intended to extend the analysis by looking at a broader set of crops.14 The total value of production for certain crops (coarse grains, wheat, beans, rice, oilseeds and sugar), expressed in real 2000 MXN, is estimated to be on average more than 35% lower during the period 1995-2005 than what it would have been in the absence of reforms (Table 5.3). The main factor behind this result is the end of the system of producer price support brought about by reductions in multilateral tariffs and phasing out bilateral tariffs, as well as the end of the guaranteed price system. The average decrease of prices expressed in real term of at least 30% for all crops lowered the value of production relative to what would have been observed without the reforms although, as discussed in the preceding chapter, the effect on net farm income was smaller. Reforms did not change much the total area devoted to crop production according to these simulations; on average, over the period 1995-2005, area planted to these crops was 2% lower than what it would have been in the absence of reforms. In fact most of the changes in production took place through the reallocation of land between different crops: the area harvested for wheat, sugar and other coarse grains grew at the expense of maize and beans. Thus, not only were farmers compensated by more effectively targeted transfer payments as discussed in the last chapter, but the direct effect on production decisions through output prices did not cause agricultural output to fall. The termination of the system of producer price support decreased prices paid by consumers for crops while the progressive elimination of consumer subsidies for some crops had the opposite effect. As a result, according to the simulation results, the total value of consumption for crops was on average, over the period 1995-2005, 20% lower due to reforms as compared to what would have occurred otherwise. For some crops, policies offset each other and thus consumption levels for maize, beans, rice and sugar are simulated not to have changed. For others, like wheat and oilseeds, reforms implied a noticeable increase in consumption. These simulated results for crop demand show how the consumer welfare effects of policies examined in the previous chapter were manifest in individual commodity markets; lower costs to consumers allowed them to buy at least as much of each crop as they would have without reforms, but at a vastly lower total cost. As a consequence of trends in supply and demand for all crop commodities, Mexico was likely to be a net importer of these crops. According to the simulation results agricultural policy reforms increased Mexico’s imports of all the crops analysed, except sugar, compared to the levels that would have been imported if the old policy regime had continued.

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Table 5.3. Simulated impacts of the main agricultural policy reforms between 1995 and 2005 on the level of production, area harvested, consumption and net trade for certain crops

Maize Other Coarse Grains Wheat Dry Beans Rice Oilseed Sugar Crops

Average Average Average Average Average Average Average Average

95-05 1995 2000 2005 95-05 1995 2000 2005 95-05 1995 2000 2005 95-05 1995 2000 2005 95-05 1995 2000 2005 95-05 1995 2000 2005 95-05 1995 2000 2005 95-05 1995 2000 2005

PRODUCTION VALUE OF PRODUCTION *

Mio tonnes Mio tonnes Mio tonnes Thousand tonnes Thousand tonnes Thousand tonnes Mio tonnes Billion real 2000 Mxn

20,6 18,2 19,0 24,3 6,18 4,62 6,09 6,08 2,97 3,43 3,55 2,88 1 132 1 256 921 574 236 239 249 281 128 197 92 131 5,29 4,60 5,15 6,33 91,2 82,2 86,1 96,7

19,2 18,4 17,6 21,6 6,78 4,69 6,59 6,88 3,16 3,47 3,49 3,02 1 111 1 271 888 611 223 242 250 201 133 200 103 141 5,28 4,67 5,24 5,97 58,4 73,2 48,3 43,6

AREA HARVESTED Mio ha Mio ha Thousand ha Mio ha Thousand ha Thousand ha Thousand ha Mio ha

8,1 7,9 7,7 8,0 2,00 1,61 2,04 1,79 654,5 918,7 719,5 556,2 1,68 2,02 1,54 0,70 79 77 83 80 82 133 73 71 589 573 570 592 13,08 13,14 12,68 11,71

7,5 8,0 7,1 7,1 2,19 1,64 2,21 2,03 697,1 929,3 707,8 583,3 1,63 2,04 1,48 0,74 75 78 84 58 85 136 80 76 626 573 618 639 12,76 13,28 12,24 11,16

CONSUMPTION VALUE OF CONSUMPTION

Coarse Grains Wheat Dry Beans Rice Oilseed Sugar Crops

Mio tonnes Mio tonnes Thousand tonnes Thousand tonnes Mio tonnes Mio tonnes Billion real 2000 Mxn

35,3 28,9 35,2 38,9 4,73 3,43 4,82 4,79 1 288 1 320 1 160 926 798 574 884 884 2,26 2,40 1,36 1,52 4,89 4,49 4,82 5,00 98,8 89,6 92,7 102,2

34,9 27,2 35,2 38,3 5,50 4,26 5,74 6,08 1 282 1 414 1 164 919 797 570 888 885 4,73 3,00 5,11 5,11 4,88 4,44 4,68 5,11 77,7 77,1 75,2 69,2

NET TRADE

Mio tonnes Mio tonnes Thousand tonnes Thousand tonnes Mio tonnes Thousand tonnes

-8,4 -6,8 -9,9 -8,5 -1,75 0,00 -1,27 -1,91 -113 136 -19 -352 -565 -347 -598 -615 -2,13 -2,21 -1,26 -1,40 311 467 36 199

-8,9 -4,9 -10,9 -9,8 -2,34 -0,79 -2,25 -3,06 -128 57 -56 -308 -577 -336 -614 -698 -4,59 -2,80 -5,01 -4,98 319 467 21 324

* The value of production and consumption for crops is the aggregate value of production and consumption of all crops presented in the table. The value of production is computed as the sum of quantities multiplied by producer price plus eventual output support payments (from the Target Price and Target Income programmes) for each commodity. The value of consumption is computed as the sum of quantities multiplied by producer price minus eventual consumer subsidies for each commodity.

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Box 5.3. Regional commodity market effects of agricultural policies The analytical results presented here are based on national data that represent the national markets for these commodities. The results at the regional or state level may differ from these national effects. In some cases, differences are likely because agricultural policy provides greater or lesser subsidies to agents in different parts of the country. The policy regime in place at the start of the 1990s imposed higher costs on consumers in rural areas who were forced to pay the higher prices caused by tariffs but who did not benefit from the subsidies. Moreover, the interventionist regime of that era tended to harmonise prices among regions despite differences in transportation costs. The Target Income programme in place now differentiates by region only to a limited extent. This programme provides a payment equal to the difference between the announced policy price and the estimated regional price, if any. The nine regions are broadly defined, and the degree to which the estimated price reflects the situation in each area may be questioned. More importantly, the policy price for each commodity is the same everywhere. The benefits are skewed towards a handful of states. Sinaloa received 30% of the total payments between 2000 and 2005. Of the total payments, 62% went to this state, Sonora or Tamaulipas. The ten states receiving the greatest amount of payments accounted for 92% of the total. Thus, the benefits provided by this programme tend not to be equally distributed, and they also mask the price signals that might otherwise encourage better infrastructure linking regional and national markets. Direct support to producers under marketing support, target price and target income

10 9 8 2000 2001 2002 2003 2004 2005 7 6 5 4

billion MXN 3 2 1 0 Jalisco Región Puebla Colima Nayarit Sonora México Sinaloa Hidalgo Oaxaca Morelos Chiapas Durango Yucatán Tlaxcala Tabasco Coahuila San Luís Veracruz Guerrero Querétaro Zacatecas Chihuahua Campeche Michoacán Guanajuato Tamaulipas Nuevo León Quintana Roo Baja California Baja California Distrito Federal Aguascalientes

Fiscal year data. Source: SAGARPA.

Livestock markets15 For the main types of meat consumed and produced in Mexico, no system of purchasing at guaranteed prices was in place in the 1980s and 1990s. Producer prices were mainly influenced by border measures which took the form of import licenses (in the 1980s) and later of import tariffs leading to market price support, as noted in the preceding chapters. The reductions of barriers to trade and of subsidies to feed purchases and to final consumers have changed the evolution of markets for beef and pigmeat over the period from 1994 to 2005.

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Beef

Beef production increased by more than 1.5% per annum over the period 1995 to 2005, while over the same period, beef consumption increased by almost 1.5% per annum. Real market prices decreased by almost 3% per annum.

The difference in beef production between the “No reform” scenario and the “Historical” scenario since 1995 can be explained incrementally by the same elements of the policy reforms (Figure 5.5.A).16 The reduction of market price support and the progressive reduction of consumer subsidies have cumulative downward effects on beef production relative to what would have occurred without these policy changes, according to the simulation results. In 2005, actual beef production was 22% lower than what it is estimated to have been without reforms. The decrease in market price support, and thus in beef market prices, explains most of the production differential. Subsidies were given until 1999 for feed: this policy was intended to offset some of the higher input costs livestock producers faced as a consequence of the high crop prices These subsidies were gradually eliminated from 1995 to 1999, and their removal explains a further small decrease in beef production when compared to the “No reform” scenario (a further reduction of 0.2%, on average, over the period 1996 to 2005).

Beef consumption during the period 1994 to 2005 has also been strongly influenced by the change in the policy package, according to these results (Figure 5.5.B). Reforms have increased beef consumption on average by more than 8%, relative to what would have occurred without the policy reform, as the reduction of market price support lowered costs to consumers. As maize and beef are substitutable products, the elimination of consumer subsidies for maize creates further incentives to increase beef consumption, although own-price effects are more important.

In the absence of reform, the simulations suggest that Mexico would have remained a net beef exporter and that in any case beef trade would have stayed small in comparison to total production (Figure 5.5.C).17 Imports would have been lower over the entire period. Ending price support was the most important policy change for beef markets of those considered here. The reduction of consumer subsidies on other agricultural products like maize had the effect of increasing beef demand because prices of substitutable products were higher as a result. As a consequence of these elements of the policy reforms, Mexico is estimated to have increased beef imports relative to what would have been imported if the earlier policies had been maintained.

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Figure 5.5. Simulated impacts of the main agricultural policy reforms between 1995 and 2005 on the beef market

Figure 3. Coarse Grains Markets 5% A. Beef production 2.5 14% B. Beef consumption 1.8 12% 11% 12% 11% 1.6 0% 11% 2.0 10% 9% 1.4 10% 9%

-5% 7% 1.2 8% -5% 1.5 1.0 in million tonnes in million tonnes -10% -8% -9% 6% 5% scenario 4% 4% 0.8 -10% 1.0 -12% 4% -15%scenario 0.6 -14% 2% -16% Beef production 0.4 Cumulative % changes to "No Reform" 0.5 Beef consumption -20% -18% 0% -20% -20% 0.2 Cumulative % changes to "No Reform" -22% -25% 0.0 -2% 0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

50% C. Beef net trade 0.7 % change due to reforms in payments provided by ASERCA (Marketing 0.6 Support Program, Target Price and Target Income Programs) (left axis) 0% 0.5 % change due to the introduction of Procampo (left axis)

0.4 -50% % change due to reforms in Consumer Subsidies (left axis) 0.3 in million tonnes

-100% -84% -85% 0.2 % change due to the reduction of Market Price Support (left axis) scenario -102% -100% -101% 0.1 Total cumulative % change from "No Reform" scenario to "Historical" -150% -125% -128% -138% 0.0 Beef net trade scenario (left axis) -146% -157% -0.1 Value for the "Historical" scenario (right axis) Cumulative % changes to "No Reform" -200% -189% -0.2 Simulated value for the "No Reform" scenario (right axis) -250% -0.3 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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Pigmeat

In the past, pigmeat prices for producers and consumers were controlled through border measures and retail price ceilings. Real pigmeat market prices decreased by more than 3% per annum over the period 1995 to 2005. Pigmeat consumption and production increased by more than 4% and 1.5% per annum, respectively, over the same period with imports more than tripling to meet the increasing demand.

The growth in pigmeat production in the period 1995 to 2005 was lower, by about 10%, than what is simulated to have happened in the absence of reforms (Figure 5.6.A). The main contributors were the decrease in market price support and the progressive termination of feed subsidies, with the latter becoming the most important factor over time. The progressive termination of subsidies given for the use of feed products increased costs of production, and reduced some incentives to pigmeat production. According to simulation results, the ASERCA run Marketing Support Programme in place until 2000 had the opposite effect. By decreasing the cost of feed during the transition period, it increased pigmeat production by 2.5% on average over the period 1995-2000. Even after the Marketing Support programme ended in 2001, pigmeat production was still slightly influenced by the programme because of lagged effects on production incentives.

The growth in pigmeat consumption was not affected fundamentally by reforms over the period 1995 to 2005 (Figure 5.6.B). However, the increase in consumption has been smaller than what it would have been without reforms. According to the simulation results, the reduction of market price support had the consequence of lowering consumption by 4%, on average over the period 1995-2005 in comparison to what would have been the case in the absence of reforms, reflecting the lower prices of substitutable products like beef and poultry that stimulated consumer demand for those types of meats.

Reforms are found to have lowered the actual production and consumption levels for pork over the period without changing established trends. Nevertheless, the gap between production and consumption tended to widen as a result of reforms. When compared to what would have occurred without the reforms, imports increased somewhat as a consequence over the period from 1995 to 2005 according to these results (Figure 5.6C).

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Figure 5.6. Simulated impacts of the main agricultural policy reforms between 1995 and 2005 on the pigmeat market

Figure 3. Coarse Grains Markets 6% A. Pigmeat production 1.4 1% B. Pigmeat consumption 1.6

4% 1.2 0% 1.4 2% 2% -1% 1.2 1.0 0% -2% -2% 1.0 0.8 in million tonnes -2% in million tonnes -3% -3% 0.8

-2% scenario -4% -3% -3% 0.6 -3% -4% -4% 0.6 scenario -6% -4% -5% -4% -4% -6% -6% -6% 0.4 -5% -4% -5% 0.4 -8% Pigmeat production Cumulative % changes to "No Reform"

-5% -5% Pigmeat consumption 0.2 -6% 0.2 -10% Cumulative % changes to "No Reform" -9% -6% -9% -12% 0.0 -7% 0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

60% C. Pigmeat net trade 0.0 % change due to reforms in payments provided by ASERCA (Marketing -0.1 Support Program, Target Price and Target Income Programs) (left axis) 40% % change due to the introduction of Procampo (left axis) -0.1 12% 14% 20% 9% 8% 3% 2% % change due to reforms in Consumer Subsidies (left axis)

-0.2 in million tonnes 0%

-0.2 % change due to the reduction of Market Price Support (left axis) -4% scenario -6% -20% -14% -0.3 Total cumulative % change from "No Reform" scenario to "Historical"

-40% Pigmeat net trade scenario (left axis) -0.3 Value for the "Historical" scenario (right axis) Cumulative % changes to "No Reform" -60% -53% -0.4 Simulated value for the "No Reform" scenario (right axis) -67% -80% -0.4 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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Other commodities The preceding analysis explores at length the effects of policy reforms on certain commodity markets but has not dealt with some other important commodities. The re- orientation of policies has also affected directly and indirectly the production, consumption and trade of these commodities which also compete for resources, including land and labour.

Sugar There have been important developments in markets and policy for sugar. During the period from 1995 to 2005, sugar production has risen by more than 2% per year and exports have increased by more than 0.6% per year. In total, production is 18% higher and exports 6% higher in 2005 relative to 1995. Consumption has risen by almost 15% in total. Sugar policy reform during this period has not been as profound as for other commodities. Market price support caused by barriers to trade continues to represent an important share of total gross farm revenue from sugar, and input support continues as well. There is no inconsistency between growing exports of this commodity and a domestic price in excess of world price levels: agreements to reduce bilateral tariffs have generated preferential opportunities for Mexican sugar exports to markets where prices are also supported.

Poultry and eggs Poultry meat production has grown steadily since the currency crisis of the middle 1990s, rising by almost 7% per annum over the period 1995 to 2005. As noted earlier, Mexico has become an important producer in world terms, and almost all of production is consumed domestically. Consumption of poultry in Mexico has doubled from 1995 to 2005. Prospects for export growth may be significant if the final steps to meet standards of major foreign poultry markets are completed, as some observers expect. As in the case of sugar, poultry policy continues to provide some market price support and input subsidies, although the sum of these transfers represent a much smaller share of gross farm income. Egg production has increased by more than 60% between 1995 and 2005. As in the case of poultry meat, eggs are produced mainly for domestic consumption. However, policies directed to producers are limited to some subsidies to inputs, without any contribution from market price support. The reduction of producer price support for crops which, in turn, lowered the cost of feed, which is a key input for poultry operations affected the incentives of poultry and egg producers In light of the large decreases in real prices noted earlier, some part of the increase in production of these goods is attributable to the reforms to tariffs and guaranteed prices on feed products.

Fruits and vegetables Production of fruits and vegetables in Mexico has grown over the period, as noted in Chapter 2. By 2005, fruit production had grown by more than 15% and vegetable

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production by more than 35% relative to 1995, corresponding to 1.5% and almost 3% growth per year. Also noted in Chapter 2, the value of exports of certain fruit and vegetable products is large – tomato, fresh and frozen vegetables, avocado and pepper are all in the top ten exports in recent years – likely in part a result of multilateral and bilateral tariff reductions. Other than barriers to imports, fruit and vegetable policies were limited even before reforms took hold: CONAFRUT support to the industry ended in 1993, but was largely restricted to disseminating information by that time in any case; and until 1990 exports of most fruits and vegetables required permission from the National Confederation of Horticultural Producers (CNPH) which sought to control quality of exports and quantities sown. Policy reforms relating to other commodities may also have indirectly encouraged fruit and vegetable production. Whereas lower trade barriers for these products may not have had very strong effects on domestic prices, the larger price reductions caused by reform to more distorted commodity markets may have encouraged producers to shift resources towards fruits and vegetables.

Impacts further down the food chain Chapter 2 noted that the growth in the primary commodity sector is less than growth in the agro-food sector, indicating stronger growth in food and drink processing. The links between reforms to commodity policy and that growth are not explored here.

Conclusion

Results of this chapter identify the effects of the main elements of the agricultural policy reforms on selected commodity markets. The policies examined are the lower producer price support brought about by the reductions to barriers to trade and termination of the guaranteed price system, the elimination of consumers subsidies and the introduction of payments run by ASERCA (the marketing support programme and output support programmes, namely Target Price and later Target Income, and PROCAMPO). The main conclusions that can be drawn from this chapter are the following. Without these elements of the reforms, the evolution of production and consumption would have been similar to those that actually prevailed during the period 1995 to 2005. According to estimated results, reforms changed the actual levels of Mexican production and consumption for most commodities, but not the directions. The overall effects of these agricultural policy reforms have been to lower production levels for most commodities when compared to what they are estimated to have been without reforms. These lower levels of production have to be seen in the context of the positive welfare implications of policy reforms underlined in Chapter 3. The reform of the system of market price support is the main contributor to the overall impact of policy reforms. This element of the reform decreased incentives to plant maize and beans, and to produce beef and pork. In contrast, the effect on wheat production was positive on average because of the smaller effect of reforms on wheat producer prices compared to other crops between 1995 and 1999; or, alternatively, because wheat prices were less distorted by the pre-reform policies. The progressive withdrawal of consumer subsidies under CONASUPO has mostly had an effect on pigmeat production because some of these subsidies were actually feed subsidies. By increasing livestock costs of production, ending subsidies to feed use has decreased incentives to produce pork. Payments based on historical entitlements under PROCAMPO had small effects on increasing the level of

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production of crops, the greater effect being on bean production. Finally, output support payments under the Target Price and Target Income provided the greatest support to wheat production; they thus skewed incentives towards wheat production rather than other crops. These agricultural policy reforms had little effects on consumption of most commodities, except wheat, oilseeds and beef. Where consumption fell, as in the cases of coarse grains and beans, the quantity at the end of the period was less than 1% lower than it is estimated to have been without the reform. In these two cases, the reduction of market price support reduced prices, but the termination of the system of consumer subsidies under CONASUPO cancelled out this effect. Indeed, the end of the system of concerted prices has lowered prices of other crops substantially more than those for beans. But the resulting negative effect on bean consumption has been counterbalanced by the termination of consumer subsidies, which benefited maize consumption more than that of beans. Changes in agricultural policies caused an increase in wheat consumption: wheat prices fell relative to prices of other staples (due to the reduction of consumer subsidies in favour of other crops, due to the general reduction of market price support and due to the introduction of the Marketing support Programme that was favourable to wheat), and consumers responded accordingly. Consumption of beef was significantly greater than what it would have been without reforms whereas pork consumption was significantly smaller. This result once again reflects relative price movements and the substitutability of meat products in consumption. The simulated changes in production and consumption levels due to agricultural policy reform have resulted in Mexico increasing net imports of most of these commodities relative to what would have otherwise taken place. The analysis of this chapter focuses on policies that intervene most directly in commodity markets, but these results are not all inclusive: many policies are excluded from this analysis, as are many benchmarks of performance. The analysis of the previous chapter also assessed the effects of certain other important policies, such as input subsidies, and provided measures of welfare, including net farm income. Later chapters address policies relating to natural resource management and infrastructure development. Another measure of success, the distribution of benefits and the contribution of agricultural policy to rural poverty alleviation, is reserved for the next chapter.

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NOTES

1. Dry edible beans are called beans in this chapter. 2. The analysis presented in this chapter therefore is based on the “small country” assumption. 3. In this chapter, as in the previous one, subsistence maize farmers are treated differently than commercial maize farmers. Subsistence farmers are not assumed to respond to prices when deciding their production quantity; a change in market prices is not necessarily transmitted to subsistence farmers, and it is difficult to know how these net maize buyers would adjust their production decisions in response. Thus, in the analysis of this chapter, subsistence maize production is held exogenous, or unchanging, with respect to market prices and policy signals. 4. Producer prices are maintained at their average 1990-1994 levels in real terms. Obviously this assumption on prices is not economically and politically realistic, but it is a proxy for what could have happened in the absence of reform of the system of market intervention in Mexico. The technical note to this document describes how the scenarios have been constructed. 5. Payments under PROCAMPO are classified as payments based on historical entitlement. As already mentioned it is important to note the problem of allocating payments based on historical entitlement to specific commodities. The technical document describes how this payment has been taken into account in AGLINK. 6. The growth rate used here and in the rest of this chapter is the least square growth rate. This growth rate, r, is estimated by fitting a linear regression trend line to the logarithmic annual values of the variable in the relevant period, as follows: Ln(xt)=a+r*t. 7. The source of all data presented in this chapter is the AGLINK database unless otherwise specified. 8. Figures 5.2 to 5.6 use the same template and focus on the evolution of a specific commodity outcome (production, consumption, net trade or price) over the period 1995-2005. The doted and full lines represent, respectively, the value of the outcome for the “No Reform” scenario and the actual value of the outcome (“Historical” Scenario). The bars indicate the contribution of policies (in percentage change) to the difference between the “Historical” scenario and the “No Reform” scenario. 9. As a result, over quota import demand through import licenses is also affected negatively. 10. As noted in Chapter 2, output support program per individual per crop is subject to certain limits. However, as in the previous chapter, the potential that these limits are binding is ignored. Should such limits effectively curtail the amount an individual is paid, then that individual’s incentive to increase production of that crop further would be limited and the effects would be reduced.

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11. See details in the technical note on the determination of the share of maize production that is used for subsistence. It is important to note here the paucity of data – as the 1991 census is the only source apart from various subsequent surveys – and that there is a range of legitimate definitions of “subsistence agriculture”. 12. In this figure, a negative sign for the net trade number indicates a net importer situation. 13. An extensive variety of beans is grown across Mexico. The preferred varieties are the most commonly traded. In the present study, the different varieties of beans are aggregated in a single commodity. Consequences of policy reform could vary for different varieties to the extent that there is little substitution in production or consumption with other beans. 14. Model results for all coarse grains (including maize and sorghum), wheat, beans, rice, oilseeds and sugar are presented here. The evolution of certain other commodity markets, as well as the sugar market, is discussed in general terms later in this chapter. 15. Poultry and eggs are important livestock products for Mexico in terms of production and consumption. However, as the structure of the Mexican module of the AGLINK model does not permit the study of the consequences of the different reform scenarios on poultry and eggs trade and production, the impacts of policy reforms on poultry and eggs markets are not included in this analysis. However, the evolution of poultry and eggs markets between 1995 and 2005 is presented later in this chapter. 16. Land for which there is an entitlement to PROCAMPO payments may be used for pasture and retain eligibility, but there is little evidence that much conversion has taken place, as noted in the next chapter, and any positive effect is likely small, and ignored. 17. Trade of beef includes live animals and meat.

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Chapter 6.

Agricultural policy and rural poverty

Introduction

There are several reasons to expect that agricultural policies have an impact on rural poverty in Mexico, and this view is widely held. First, the high incidence of poverty in rural areas and the fact that agriculture is a rural activity means that the two overlap in spatial terms. Consequently, many poor people are involved in agriculture, and a part of total agricultural output is provided by poor land-owners and poor labourers. Second, the historical role of the land tenure system in Mexico to redistribute wealth is closely connected to the agricultural sector for which land is a critical input: the process of dividing land holdings has an impact on agriculture, and the evolution of agriculture affects returns to land. These associations give rise to an expectation that agricultural policies can, should or do alleviate poverty in rural areas. Thus, while the focus of this study is on agricultural policies, and previous chapters have discussed their effects on the agricultural sector and commodity markets, in this chapter the effects of agricultural policies on rural poverty is explored in terms of the incidence of support. The focus on agricultural policy is maintained, save in those cases where programmes provided outside the confines of sectoral policy provide an important benchmark, so this assessment is strictly relevant to the impacts of agricultural policies on rural poverty.1 Moreover, the direct effects of income transfers are addressed, not second-round effects; the potential that an agricultural policy would generate greater regional short- or long-run economic growth that helps poorer people indirectly, by raising their wages for example, is not entertained here.2 Evidence shows that the reforms to agricultural policies brought about substantial improvements in the distribution of transfers, but this success is relative to a basis that, as of the early 1990s, exhibited a pronounced bias against the rural poor. Judged by the incidence of payments — to whom the initial transfers are made — agricultural policies after the reform are still found to be regressive in an absolute sense and, with the exception of PROCAMPO, are likely regressive relative to income as well. That is to say, the share of expenditures under most agricultural policies that accrues to the wealthy is greater than their share of income. In contrast, programmes that target clearly poverty alleviation, of which PROGRESA/Oportunidades are archetypes, are progressive in an absolute sense; a majority of expenditures made under programmes whose primary aim is poverty alleviation goes to poor people. Recent reductions in the rate of rural poverty were likely caused by these targeted programmes and to broader economic growth, rather than by agricultural policy.

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The land tenure system must also be considered as a policy that relates to both agriculture and to rural poverty. The second agrarian reform has not led to profound changes because of the limited scope. Despite important changes to the property rights in the early 1990s and more than a decade of adjustment, there are still limits to the property rights and serious disincentives to fully private ownership of land that perpetuate the existing structure of ejidos.

Land: the ejido reform and agrarian institutions

Following the Mexican Revolution, the Agrarian Reform (1917-1992) redistributed more than 100 million hectares — half of the country’s present land — to 3.8 million producers organised in the ejido or comunidades of the social property system.3 The antecedent concentration of land is difficult to imagine today. In 1905, when Mexico was 70% rural, of the total population engaged in agriculture, the 8 431 hacendados represented 0.2% of the total population but owned 87% of the land, while the 3.2 million peones accounted for 91% of the population and owned no land. Today, Mexico has the lowest land concentration (Gini coefficient 0.6) in the Latin America and Caribbean region, comparable to the land concentration coefficients reported for East and Southeast Asia.4 This distribution was achieved by 1940 and sustained through half a century of continued agrarian reform despite rapid rural population growth (Figure 6.1).

Figure 6.1. Land concentration curves — the Mexican Revolution and agrarian reform 100% 1905 90% 1940

80% 1991 2002 (PROCAMPO Beneficiaries) 70%

60%

50% Land

40%

30%

20%

10%

0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Population in agriculture

Sources: Scott (2006b), based on the 1905, 1940 and 1991 Agricultural Censuses and PROCAMPO’s Beneficiary Register (the latter as reported in Székely 2003, Table 5). “Population in agriculture” refers to all population engaged in agricultural activities, including all land-owning producers as reported in the Agrarian Census plus all landless rural workers (jornaleros agrícolas) as reported in the Population Census.

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Contrary to expectations, land reform in Mexico did not initiate equitable economic development. Several explanatory factors may be at work, of which three are noted here. First, considering the crop conditions of Mexico relating to geology and climate, land equity was achieved at the cost of an excessive atomisation of plots relative to efficient scales of production, with much of the land distributed of limited agricultural quality. This problem was exacerbated over time as land redistribution continued apace with the goal of limiting inequalities in land distribution even as rural population grew, but the total land of Mexico did not. In addition to 1.9 million landless agricultural workers, in 1991 there were 2.2 million farmers with less than 5 hectares, and 1.3 million farmers with less than 2 hectares.5 Only 32.8% of ejido land today is for individual use (parcelas); of the rest, allocated to “common use”, only 1.6% was cultivated in 2001.6 The average size of individual farms in the ejido sector is only 5 hectares.7 Second, the limited individual property rights of the ejido system, at least prior to the reforms of 1992, severely restricted agricultural land markets, as it was designed to do, and thus the efficient allocation of both land resources and complementary non-labour inputs. These limits lead to less than full property rights: conditionality on sustained use, non-transferability and incapability to use land as collateral to access credit. Compared to similar private lands, ejidos were consequently hampered by low investment rates and high levels of poverty. Third, the generous agricultural support commitments of post-revolutionary governments, sustained to the 1982 crisis, through expensive price support and input subsidies such as credit, irrigation, energy, fertilizers and technical assistance, were highly distortionary and inequitable. Most of the benefits were concentrated in the larger Northern commercial farmers, fully by-passing subsistence farmers. The Constitutional Ejido Reform of 1992, Article 27, was designed to strengthen property rights, generating a functional land market and efficient allocation of land resources. It aimed to achieve this through three principal means. First, the Agrarian Reform process came to an end, thus reducing uncertainty on land tenure associated with discretionary powers to expropriate land. Second, restrictions on ejido property rights were relaxed, completely freeing land rental and sales within the ejido. However, sales to outsiders require permission of the ejido assembly, and inherited land cannot be parcelled out to multiple beneficiaries. The possibility of a full privatisation of an ejido was also introduced, although this conversion requires a two-thirds majority vote of its members (dominio pleno). The third means to strengthening property rights in 1992 was a set of independent land titling and judiciary institutions (PROCEDE, Registro Nacional Agrario, Procuraduría Agraria, Tribunales Agrarios) that was established to implement the constitutional reforms to land property rights. Contrary to both expectations and fears8,theejido reform led neither to a significant rise in agricultural productivity through a more efficient allocation of land resources and complementary inputs9, nor to massive outflows of the newly landless into the cities. There is little evidence of a significant impact on the access of ejidatarios to complementary agricultural inputs through better functioning rural factor markets. There are no signs of even a gradual transformation of the social sector into private lands: a decade after the reform, less than 1% of ejidos had chosen to self-privatise, and these few cases have mostly involved peri-urban land intended for housing development. On the other hand, by allowing the rental of land and freeing up the labour of ejidatarios seeking non-agricultural opportunities, the reform appears to have contributed to the expansion of non-agricultural activities (noted in Chapter 2). There is some

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evidence of increasing integration of ejido households to non-agricultural activities performed within the ejido and non-ejido agricultural and non-agricultural activities, which "will ultimately erode differential returns to land, labour and capital across the sectors and reduce rural poverty in Mexico".10 There are several possible explanations for the limited impact of the reform on agricultural land and input markets and productivity. First, as noted, the reform left some important restrictions of ejido property in place, still limiting in particular the use of ejido land as collateral to access credit and the allocation of land to the most productive producers. Second, many of the market transactions which the ejido reform did sanction and formalise (like rentals), appear to have been widely practiced informally before the reform. Third, to the extent that the reform was not accompanied by changes in the tax treatment and support programmes benefiting the ejido sector, these incentives to improve performance of ejidos represent disincentives to privatisation. More generally, the ejido organisation represents a valuable asset not only for the internal organization of producer units, but also for the political representation of producer interests (Box 6.1).

Box6.1.Whyleaveanejido? Many observers have been surprised at the small numbers of ejidatarios who chose to privatise fully their land and leave the ejido since that right was established in 1992. In retrospect, however, it is possible to evaluate their incentives and disincentives. First, social incentives encourage the ejidatarios to stay in a group so that they can apply greater political power, and for a reliable support network in the absence of a credible public safety net. Second, financial incentives to stay in the ejido are strong: members have access to 42 social programmes that operate with little co-ordination, thus providing overlapping benefits, and that tend to favour ejido members even if technically available for everyone; ejidatarios are largely exempt from commercial land taxes and only pay a tax on their parcel, whereas they would pay taxes on income and land if they privatise; and the opportunities to earn income outside the ejido may be limited, particularly for older ejidatarios with less than average education. Third, they would face a difficult process to privatise land — a two-thirds majority of the ejido assembly — that would be costly to overcome. Fourth, if successful, they may end up with the non-contiguous parcels of land to which they have certified a claim and would lose access to the ejido’s communal land. Fifth, and most obviously, the benefits of leaving the ejido are uncertain, which, in the absence of social safety nets, means that leaving may be seen as risking self-preservation. The unsurprising retrospective: there have been very few sales of land and these sales are mostly explained by a few ejidos that have privatised as a group to take advantage of local land market booms attributable to nearby urban expansion. Source: Interviews with PROCEDE officials.

Fourth, the design and allocation of most agricultural output and input subsidies do not provide adequate incentives to increase productivity and shift from traditional to more profitable crops. On the one hand, these resources fail to reach those who would most depend on them to be able to risk venturing out of traditional crops, namely the smaller, poorer and most vulnerable producers. On the other hand, most of these instruments fail to give their beneficiaries (poor or non-poor) incentives to produce alternative crops, and they often actually support traditional crops. For example, more than 40% of Target Income resources have been allocated to maize producers on average over the last decade (1997-2005), excluding PROCAMPO.11 The general point being that only a small number of traditionally produced crops are eligible for output-linked payments under the dominant Target Income programme. More indirectly, this is also the case of the one main programme reaching poorer farmers, PROCAMPO, which is less directly tied to

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current planting decisions – yet is not designed to induce these farmers to convert – but, by transferring a valuable payment on the basis of land, may be a disincentive for these farmers to sell to better equipped and more competitive producers who would be better able to achieve this conversion (Box 6.2).

Box 6.2. Capitalisation of PROCAMPO payments into land values The OECD is currently conducting research on the effect of agricultural support, including payments like PROCAMPO, on asset prices. Although in a preliminary stage, this research leads to the expectation that while payments granted on the basis of land do not determine land prices by themselves, their values tend to be capitalised quickly into land values. Thus, benefits tend to accrue to land owners: the price of land will increase by up to the present value of the expected future payments and, if the payment was given to renters, the rental prices would increase by up to the amount of the payment. Anecdotal evidence of capitalisation is present in Mexico: producer group representatives refer to a ‘tax” on their members who find themselves paying more to rent land as a consequence of this programme. This increase in rent is expected to equal roughly the annual PROCAMPO payment associated with the land – and the payment is to the land owner, not to the government – but this nevertheless suggests that the payment is being reflected in rents and, consequently, should also be apparent in land prices. Capitalisation of payments to land depends on the efficiency of the land market. The rules governing communal land in Mexico impair the operations of a land market and, in the absence of meaningful prices or rental rates, there may be no asset price into which these payments are capitalised. More generally, there is probably even less scope for market returns or transfers associated with other programmes to be capitalised as ejido members stereotypically do not participate in the market and, consequently, any rental rates of plots traded formally or informally within the community probably only very indirectly reflected commercially-oriented policies and prices, if at all. Thus, although it is premature to judge the degree of capitalisation of PROCAMPO payments and other policy transfers into ejido land values, the historical absence of any meaningful value associated with that land likely precludes capitalisation.

Finally, there is a fifth factor which is often noted in passing, but rarely analyzed at any depth in terms of its policy implications. This is the role of subsistence agriculture as a safety net for poor households in the absence of formal social security.12 Less than 5% of the elderly (65 and older) in the rural sector are currently covered by any of the public social security institutions in Mexico (Figure 6.2).13 The country compares unfavourably to others in Latin American and the Caribbean in this indicator, just below Bolivia and Ecuador and well below the 92% covered in Brazil. It is not surprising in these circumstances that ejidatarios cling to their land as they grow old instead of passing it on to younger, more productive generations: the average age of right holders in certified ejidos is 54 years, with 60% over 50 years, and a 29% over 65 years14 in a country where the latter age group still represents only 5% of the population.15 Land reform, social insecurity and migration are interdependent to a certain extent. Some young people respond to the limited access to ejido land by seeking opportunities elsewhere. Migration from rural areas erodes informal support networks that provided care in the absence of any credible public social security services that provide some protection for the rural poor. As older people become increasingly dependent on themselves, without recourse to public services or younger workers, they cling more tightly to land holdings and rely even more on subsistence farming. Thus, the constraints on land transactions and the absence of any social security lead to a three-stage cycle that reinforces rural poverty: limited land opportunities for young people leads to migration, migration erodes informal support networks, eroded informal support networks leads older people to cling that much more tightly to land, and so on. However, there are other

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factors at play, such as remittances from migrated workers. Moreover, this cycle exists within a wider context; there are other reasons that young people may leave rural areas – such as pursuing perceived higher wages in other areas – and other reasons older people may choose not to sell their land. But minifundio subsistence farming is not only functional as a safety net. Perhaps surprisingly, it also still appears to have an important poverty-escaping potential. Finan, Sadoulet and de Janvry (2002) find that for households with little land (less than one hectare of rain fed maize equivalence), “an additional hectare of land increases welfare on average by 1.3 times the earnings of an agricultural worker” (p. 1). The realisation of this potential is, however, strongly sensitive to access to complementary assets like education and roads, in addition to household ethnic characteristics: “For non-indigenous small farmers with at least primary education and access to a road, the welfare benefit of additional land is on average seven times higher than for those without these attributes” (p. 1). These high returns to marginal increases in land at low levels of land ownership are partly explained by associated gains in the returns of other assets in the multi-sectoral economy of subsistence farming units.16

Figure 6.2. Social security coverage in old-aged population (65+) in rural areas

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Peru Chile Brazil Bolivia Rep. Ecuador Panama MEXICO Colombia Paraguay Nicaragua Costa Rica Guatemala El Salvador Dominicana

Source: Rofman (2005).

Agricultural support and rural development

The evolution of agricultural support has already been described in the first two chapters. The policies before the reform period included state intervention to the extent of guaranteeing high producer prices, subsidising inputs and assisting consumers. As noted earlier, the reform is not complete: while the transitional PROCAMPO payments are more neutral relative to markets, there remain substantial amounts of payments tied to inputs, such as energy, and output that are not market-oriented. The net incidence of pre-reform policies was to the benefit of urban consumers up to the 1980s, implying a net tax on agriculture in the context of an overvalued exchange rate.17 This situation was reversed by the early 1990s, when the internal price of maize was 70% above international prices,18 and the tortilla subsidy — which had been cut after the 1983 crisis — was insufficient to compensate urban consumers for this differential. The broad consumer subsidy was gradually replaced by tortilla and milk subsidies intended to go to the poorest consumers, but these were costly to operate and not well

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targeted in actual practice. The general tortilla subsidy, and with it CONASUPO, was finally eliminated in 1998, and food subsidies have since then been reallocated to rural areas with the creation and expansion of PROGRESA (as discussed below). The policies in place before the reform period were antithetical to the needs of subsistence farmers and landless rural workers in two ways: first, the rural poor are net buyers of maize and thus paid higher food costs due to the pricing policies that extended even into the reform period; and, second, the consumption subsidies did not extend to rural areas, so rural poor had to buy at the higher government price without recourse to the subsidies available to urban consumers. Maize and coffee pricing policies in the 1980s and early 1990s have been estimated to have imposed implicit taxes on small agricultural producers in the poorest regions of 15-30%, redistributing the proceeds to large farmers in richer regions.19 Against this historical background, the rural poor had little to lose and potentially much to gain from the opening up of agricultural markets in the early 1990s. The liberalisation of basic crops markets (maize and beans) would negatively affect commercial producers of these crops to the extent that prices fall, but lower staple prices would benefit subsistence producers — two-thirds of all maize producers in Mexico — who are net consumers of these products. On the other hand, it could also have regressive effects through agricultural wages and land prices,20 although these have been limited by seasonal migration and the noted restrictions on land markets. Moreover, as discussed before, the liberalisation is not complete as transitional and other payments continue. PROCAMPO is a producer compensation mechanism tied to land rather than to commercial sales with few limits on current practices, as discussed before. Initiated in 1994 and scheduled to be phased out by 2008, the programme covered around 2.7 million agricultural producers and 13.3 million hectares in 2005. By paying a uniform amount per hectare per season (between MXN 963 and MXN 1 160 in 2005) independently of production or marketed output, in contrast to earlier price support policies, as well as to other current support instruments, PROCAMPO is both less distortionary and accessible to subsistence farmers, as noted in previous chapters. Almost half of all beneficiary producers have less than 2 hectares, although they obtain only 13% of transfers, while 3.8% of producers with more than 18 hectares obtain 33% of benefits (Figure 6.3).21 In terms of population deciles ordered by income per capita, large-scale producers in the top rural decile obtain a disproportionate share of the programme’s transfers (35%), but the distribution is flat for the other 90% (Figure 6.4). This might not appear especially progressive, but PROCAMPO is seen here to be more equally distributed than income or land. Moreover, it will be shown later to be by far the least regressive among the principal agricultural support programmes operating in Mexico. PROCAMPO may in fact be the first policy in the post-revolutionary agrarian history of the country of which subsistence farmers have obtained a large share of transfers.22

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Figure 6.3. PROCAMPO coverage: distribution of beneficiaries and land

35% Producers Hectares 30%

25%

20%

15% Share in total 10%

0% 0to1 1to2 2to5 5to18 18to100+ Scale of land holdings

Source: ASERCA, cited in World Bank (2005).

Figure 6.4. Distribution of PROCAMPO transfers, income and agricultural land, by rural decile

60% Procampo Land (1991 Census) Income

40%

20%

0% 12345678910 Rural population deciles

Source: Estimates using Encuesta Nacional de Ingresos y Gastos de los Hogares (ENIGH) 2002 and the Agricultural Census 1991. Rural population deciles ordered by income per capita net of public transfers.

Despite its comparative pro-poor incidence among agricultural support programmes, PROCAMPO excludes important segments of the population that are poor, namely landless agricultural workers, and includes other segments that are not poor, principally large commercial producers. Considering the distribution nationally, rather than within the rural sector, not only do a third of PROCAMPO payments go to the richest rural decile, but in fact 23% of PROCAMPO transfers are concentrated in only 2.6% of producers who are in the top national income decile, revealing that the producers with the largest scale are among the richest households in the country (Figure 6.5). Indeed, evidence presented for other programmes later indicates that this small group at the top of

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the national income distribution absorbs the majority of all agricultural support transfers in Mexico.

Figure 6.5. Distribution of PROCAMPO transfers and beneficiaries by national population, in 2002 45% Transfers Beneficiaries

30%

15%

0% 12345678910 National income deciles

Source: calculations using ENIGH 2002. National population deciles ordered by income per capita net of public transfers.

PROCAMPO represents a significant addition to the finances of poor farmers – setting aside its role as a transitory payment to compensate commercial producers as tariff reductions take hold. While appropriately market-oriented and neutral with respect to output, save that land must be used for agriculture or kept in an environmentally approved conditions, few producers have diversified from the traditional list of activities. A recent evaluation of PROCAMPO finds that more than a decade after the initiation of the programme almost half of all beneficiaries, small-scale and large-scale producers alike, state that they are unaware that they are permitted to plant any crop without losing the benefits, and only 5.8% report having switched crops.23 Alianza and Apoyos a la Comercialización (ASERCA) have gained in importance, and since 2001 together absorb a budget roughly equivalent to PROCAMPO’s (MXN 15 billion in 2005).24 Alianza, as described earlier, serves as an umbrella over three principal groups of programs, the Programa de Desarrollo Rural (PDR), the Programa de Fomento Agrícola,andthePrograma de Fomento Ganadero, financed by federal government and through matching grants by lower-level governments. In contrast to the other two programmes which have no equity objectives, the sub-programmes grouped under the PDR are formally intended to benefit low-income and other vulnerable groups and include explicit, though imperfectly enforced, targeting criteria. The evidence suggests that PDR fails to achieve its distributive priorities. For example, the programme is required to allocate at least 70% of its resources to Very High or High marginality localities (as defined by CONAPO’s marginality index), but in 2004 only 32% of the expenditures associated with PDR were spent in these localities, and less than 2% in Very High marginality localities (Figure 6.6). In the context of a recent evaluation of the programme, FAO (2005) used a survey and typology of beneficiaries based on socioeconomic and productive variables to evaluate the distribution of PDR benefits (Figure 6.7).25 The FAO finds that 36% of PDR beneficiaries are in the poorest

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group (Type 1) and 43% in the second poorest (Type 2), whereas just over half of recipients of total Alianza beneficiaries are one of these two groups, and concludes that the PDR “is targeted to low income producers” (p. 3). However, “low income” is a relative measure defined here within the set of beneficiaries only, not in the rural population at large. World Bank (2006) uses a rural population survey (ENHRUM) to place these types within the wider population, obtaining very different results: almost 75% of PDR funds are received by the richest 20% of the rural population (Figure 6.8).

Figure 6.6. Distribution of PDR funds by marginality of localities in 2004 80%

70% Rural population PDR Benefits 60%

50%

40%

30%

20%

10%

0% Very high High Medium, Low, Very Low Source: FAO (2005) and World Bank (2006).

Figure 6.7. Distribution of PDR funds by marginality of producer socioeconomic "type" in 2004 90%

80% Rural Population PDR Benefits

70% PDR Beneficiaries Total Alianza Beneficiaries

60%

50%

40% 78% 30%

20% 38% 35% 27% 10% 20% 2% 0% Type I Type II Type III-IV

Source: FAO (2005) and World Bank (2006).

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Figure 6.8. Concentration curves for Oportunidades,PROCAMPOandAlianza transfers, income and agricultural land in the rural sector, in 2002

100% Oportunidades 90% Procampo

80% Alianza - Desarrollo Rural Income 70% Land (1991 Census)

60%

50%

Resources 40%

30%

20%

10%

0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Rural Population

Source: Scott (2006b), based on ENIGH 2002 data, Scott (2006a), and World Bank (2006).

To evaluate the distribution of benefits provided by these programmes, they must be examined in the appropriately broad context; concentration curves for the PDR, PROCAMPO and Oportunidades must be compared to one another, and to concentration curves representing the distribution of income and land (Figure 6.8). This comparison assumes that the ordering criteria for PDR (based on the socioeconomic characteristics and assets of the FAO typology) are reasonably correlated with the criteria used in the case of the other two programmes (income per capita). Another limitation is that the FAO typology is biased towards the top of the rural income distribution, and does not provide information on PDR shares below the eighth decile. But the distance between the curves seems large enough to draw broad inferences despite these uncertainties in the data. Oportunidades and PROCAMPO are progressive programmes relative to the distribution of income, according to these data. Oportunidades, in particular, is progressive in an absolute sense: the poorest half of the rural population receives two- thirds of the total benefits, whereas the richest 10% of the rural population receives less than 4% of the benefits. Although regressive in absolute terms, in contrast to Oportunidades, the distribution of PROCAMPO transfers is progressive relative to the distribution of income, and therefore redistributive. In other words, while it is true that the poorest half and the richest 10% of the rural population receive the same share of PROCAMPO transfers — a third in either case — these payments still tend to redistribute

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income, which is even more concentrated in that the richest 10% account for more than 40% of rural income whereas the poorest half of the rural population have less than a fifth of rural income. In contrast, the PDR curve lies clearly below the rural income curve, is therefore regressive even in relative terms, contributing actually to increase income inequality in the rural sector. The curve representing the distribution of the PDR benefits follows the agricultural land distribution curve remarkably closely. Given that the rest of Alianza is not targeted towards poorer recipients, and is thus even more regressively distributed than the PDR, the latter distribution may be reasonably interpreted as a lower bound for the (absolute) degree of regressivity of other agricultural policies that target objectives unrelated to development, more generally. That is to say, the other two sub-programmes of Alianza are regressive relative to income, and almost certainly regressive relative to land. Given the focus of these elements of Alianza that target investment and commercial development, this result is unsurprising: a large part of the rural population — at least the poorest 50% — is excluded simply because they are landless or have plots which are too small to be reached by such programmes, except for PROCAMPO, and in the upper half of the land distribution there are probably strong economies of scale in the capacity to attract agricultural support resources, unless some explicit targeting is applied as in the case of the PDR.26 Moreover, although many elements of Alianza are targeted to include ejidatarios, only around 10% were able to take advantage of these programmes, possibly because poorer producers tend to lack resources to provide matching funds.27 In addition to Alianza as a whole, the latter hypothesis would certainly apply to the Target Income and other programmes that are oriented towards commercial producers operated by ASERCA. Target Income, in particular, provides a subsidy that equals the difference between a guaranteed and local price for certain crops, albeit with certain limits on the amount paid to an individual producer. It has been shown to have direct effects on the types and amounts of crops produced. The programme has also been shown to generate transfers that do not accrue to subsistence farmers nor, to any great extent, to hired labour. Moreover, unlike PROCAMPO and the PDR, but like the rest of Alianza, this programme has no equity objectives; by design, benefits are concentrated on larger commercial farmers and the richest agricultural states. For example, in 2002, there were 67 000 beneficiaries with an average support per producer of USD 5 200.28 Such programmes are regressive relative to the rural income distribution. Considering the distribution of the three programmes at the state level, the level of benefits per rural capita varies dramatically, with a broadly regressive distribution of benefits (Figure 6.9). The richer agricultural states of Sonora, Sinaloa and Tamaulipas obtain benefits per rural capita some seven to eight times higher than the poorest seven states (Chiapas, Guerrero, Oaxaca, Veracruz, Hidalgo, San Luis Potosí and Puebla). None of these seven states with the worst marginality receives a per capita level equivalent to the national average, and several of them receive well below half the national average.

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Figure 6.9. Distribution of principal agricultural support programmes by state ordered by degree of marginality, MXN per rural capita, in 2002

4000

3500 Apoyos a la Comercialización (ASERCA)

3000 Alianza

PROCAMPO 2500

2000

1500 MXN per rural capita

1000

500

0 Jalisco Puebla Colima Nayarit México Sonora Sinaloa Hidalgo Oaxaca Morelos Yucatán Chiapas Tlaxcala Tabasco Durango Coahuila Guerrero Veracruz Querétaro Zacatecas Michoacán Campeche Chihuahua Guanajuato Tamaulipas Nuevo León Quintana Roo Baja California Aguascalientes San Luis Potosí Baja California Sur

Source: World Bank (2004). States ordered from poor to rich by the CONAPO marginality index.

Effectively targeted rural anti-poverty programmes Complementing the reforms in land and agricultural support policies analyzed above, social policy in the rural sector underwent a similarly radical transformation since 1990. Although somewhat tangential to the focus of this report, the impacts of these programmes must be considered to provide the appropriate context for assessing rural development objectives of agricultural policies. After deep budgetary cuts following the 1982 crisis, social spending only regained pre-crisis levels (as a proportion of GDP as well as in real per capita terms) by the end of the 1990s, but in contrast to the former peak, this was financed through a reallocation of public spending from administrative and economic functions (including agricultural support) to social programmes, doubling the share of social spending in programmable public spending,29 from 30% to 60% in the 1990s.30 As reported above, this tendency can also be observed in rural spending, where “social” programmes have commanded a large share of resources, as compared to “productive” programmes, in the last decade. The most important reform in anti-poverty policy in this period was the creation of PROGRESA, offering direct monetary transfers to poor rural households conditional on basic school attendance and use of public health services. Beyond the innovation of using transfers to induce human capital investment decisions by households with the aim of reducing intergenerational poverty traps, in addition to immediate poverty reduction, this was the first programme in the history of Mexico to apply effective and transparent targeting mechanisms at the household level. The programme was rapidly expanded and covers 5 million households with a budget of MXN 35 billion in 2006. In 2001, it was

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extended to urban areas and upper secondary education, and renamed Oportunidades, while retaining its original design and mainly rural coverage. A second important innovation was the creation in 1996 of the Fondo de Aportaciones para Infraestructura Social (FAIS), a large (MXN 27.6 billion in 2006) decentralized fund for basic infrastructural investment transferred to state and municipal governments through transparent targeting criteria at both levels, using explicit and public formulas based on poverty and infrastructural and development shortfalls. This replaced and absorbed most of the budgetary resources of the Programa Nacional de Solidaridad (PRONASOL), the anti-poverty and rural development programme in place at the start of the 1990s that was designed to by-pass local governments and respond to the organised demands of local communities directly. Reform had a notable effect on the distribution of resources of these programmes both among states, and within them: the budget share obtained by the six poorest states (Veracruz, Chiapas, Estado de México, Puebla, Oaxaca and Guerrero) expanded from 29% to 36% between 1988 and 1994, but increased to 54% by 2000.31 On the other hand, the community-level participatory element of PRONASOL was lost without compensatory gains in transparency and equity in the final allocation of resources within municipalities, as this last allocative decision is barely regulated and monitored. This last point is illustrative of a broader history of failures of local, participatory and inter-agency development initiatives in rural Mexico. An ambitious new programme of this kind, Microregiones, failed to attract the necessary public and private resources to take off, given the complex vertical and horizontal co-ordination challenges involving three levels of government, multiple government agencies and programmes, and local economic initiatives and communitarian demands, often competitively rather than co- operatively motivated. Finally, a rural temporary employment programme, the Programa de Empleo Temporal (PET), was introduced in 1995, with the joint participation of four Ministries (SCT, SEDESOL, SAGARPA, and SEMARNAT). It was designed as a self-targeted programme by offering a very low wage, 90% of the official minimum wage, calculated to attract temporarily unemployed workers in the season of low agricultural activity. Originally intended as a transitional programme following the 1995 crisis, it was one of the principal anti-poverty programmes in the Zedillo administration (1995-2000), though its budget has been sharply reduced since then. Thanks to the self-selection mechanism, the programme is as effectively targeted as Oportunidades, without incurring administrative targeting costs. However, in actual practice the programme has failed to deliver its resources counter-cyclically, reducing its net benefits by as much as 50% of the wage paid due to the high opportunity cost of participating in periods of high agricultural activity.32

Pro-rural allocation Against a general context of urban bias in most social programmes during previous decades, social expenditures were redirected in part towards rural areas in the reform period. This shift in targeting was most effectively achieved in the case of food subsidies: elimination of the general tortilla subsidy that benefited urban areas in 1999; reduction of the targeted tortilla (Tortibono) and milk (LICONSA) urban subsidies; and creation and expansion of PROGRESA/Oportunidades, whose food component represents at present the principal food aid instrument in Mexico.33 The effect of these reforms was an increase in the rural share of food subsidies from 31% to 76% by official estimates34 (1994-2000),

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or from 40% to 55% using ENIGH data35 (Figure 6.10). Before these changes, 70% of food subsidies were concentrated in Mexico City where only 7% of undernourished children live, while only 7% reached the Southern states with 50% of the undernourished children (Figure 6.11). By 1999, this regional distribution of food subsidies was in line with the regional distribution of undernourished children in the country. In terms of the national distribution of households, as a result of these reforms in the allocation of food subsidies, the poorest decile increased their share of food subsidies from 8% in 1994 to 33% in 2000, and the share of the poorest fifth of the population rose from less than 20% to over one-half (Figure 6.12).36 Important pro-rural shifts in access to public social resources were also achieved in the case of health services for the uninsured.37 The share of health service expenditures going to rural areas increased from 20% to 28% between 1996 and 2002, and lower secondary education services, where the rural share increased from 16% to 26% between 1992 and 2002. This may be explained in part by expansions in the physical coverage of these services and the demographics and natural inertia in the coverage of educational services (coverage rates in primary education had already approached 100% by the early 1990s), but it also reflects the impact of PROGRESA, as its transfers are conditioned precisely on the use of these services.

Figure 6.10. Rural share in public expenditures in education, health and social security, 1990s and 2002

31% Food programs (SHCP) 76% 40% Food programs (ENIGH) 55% 20% Health Total 28% 19% Education Total 22% middle 1990s 9% IMSS Pensions 8% in 2002 14% IMSS Health 18% 44% SSA Health 52% 8% Upper Sec Edu 12% 16% Lower Sec Edu 26% 31% Primary Edu 33%

0% 40% 80%

Source: Calculations based on the ENIGH 1992, 1994, 1996 and 2002. "Food programmes (SHCP)" are reported in Secretaria de Hacienda y Crédito Público (2000). "Food programmes (ENIGH)" are estimated in Scott (2004b) using the "Social Module" of the ENIGH 2002. Households ordered by income per capita. Starting date: education and pensions (1992), food (1994), health (1006).

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Figure 6.11. Regional distribution of food aid and undernourished children, 1988 and 1999

1988 1999 70% 70% Low hight/age Total food subsides 60% 60%

50% 50%

40% 40%

30% 30%

20% 20%

10% 10%

0% 0% South Centre North Mexico City South Centre North Mexico City

Source: Scott (2003).

Figure 6.12. National distribution among households of food subsidies in 1994 and 2000, PROCAMPO in 2002

35%

30% Food Subsidies 1994 Food Subsidies 2000 25% PROCAMPO 2002

20%

15%

10%

0% 123456789

National household data are ordered by income per capita. Source: Scott (2004b).

The critical failure in this pro-rural trend, as illustrated above, has been the absence of social insurance. Even in the case of currently active workers, the rural share in the principal formal sector pension system (IMSS) is small and declining from 9.5% in the middle 1990s to 8% in 2002 (Figure 6.13). In the case of health insurance, an ambitious initiative, Seguro Popular (SistemadeProtecciónSocialenSalud) was launched in 2004, aiming to achieve full coverage of the currently uninsured by 2010. The scheme offers a basic health package, including free provision of selected medicines. Financing is to be provided by the federal and state governments, although at present it is mostly federally financed, and by the beneficiaries themselves through a progressive contributory schedule from which the poor are fully exempted. The programme faces formidable financial and

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logistical challenges — the capacity of the health system to absorb the new resources and deliver the expected benefits to half of the Mexican population by 2010 — but the rural poor may gain substantially.

Figure 6.13. Distribution of selected targeted "social" and "productive" programmes within the rural population

80%

70% Poorest 40% Richest 40% 60% 50% 40% 30% 20% 10% 0% Oportunidades PET Piso Firme Crédito a la PROCAMPO PDR (Alianza) Palabra & Oportunidades Productivas

Source: Scott (2004b). PDR: based on data presented in FAO (2005) and World Bank (2006).

In contrast to the case of public health services, non-contributive old aged pension programmes for the poor have appeared on the policy agenda in Mexico only recently. A modest rural programme, Atención a los Adultos Mayores en Zonas Rurales,was introduced in 2003 as part of the Acuerdo Nacional para el Campo. Also, a new old age pension has been incorporated as part of Oportunidades in 2006, and is expected to benefit up to a million elderly participants in Oportunidades. These programmes offer very modest pensions: half a dollar a day in the former case, and 75 cents in the latter, equivalent to 37% and 25% of the food poverty line, and equivalent to between 1% and 2% of the subsidies currently paid to support the state worker pension systems. As a result of the above reforms, the rural share in total public social expenditures in Mexico is at present close to 30%, and 65% in the case of targeted programmes.38 Considering the latter, the most pro-rural are Crédito/Apoyos a la Palabra, a rural credit programme which originated as part of the discontinued PRONASOL and is presently classified as part of Oportunidades Productivas,PET,Piso Firme, a recent programme pouring concrete floors in rural houses with earth floors to reduce health risks, and Oportunidades, which concentrate between 80% and 88% of their resources in the rural sector. The relative targeting of the social programmes as compared to agricultural policy programmes is apparent when studying the distribution among recipients of the two types of programmes. Oportunidades and PET provide 57% of their benefits to the poorest 40% in rural areas, in one extreme, and Alianza, concentrating 80% of benefits on the richest 40%, represents the opposite extreme (Figure 6.13). PROCAMPO tends in the direction of Alianza,withsome60%totherichest40%,and27%–lessthanhalfthatshare–tothe poorest 40%. Jointly, the targeted monetary and quasi-monetary transfers represent more than 80% of income of the poorest rural decile before taxes and transfers (Table 6.1). Together, the components of Oportunidades amount to nearly 50% of income of the poorest rural decile before taxes and transfers, and PROCAMPO is equivalent to 15% and PET to 13%. The size of all these programmes relative to income before taxes and

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transfers declines as recipients become less poor, falling nearly to zero for all of them except for PROCAMPO. In total, the contribution of these transfers to the average income of the extreme (“food”) poor is significantly higher in rural areas than in the urban areas – equal to an increase of 45% over autonomous income of the extreme poor in rural areas as opposed to 9% in urban areas – but falls short of what would be required to close the gap as rural income of the extreme poor remains more than 20% less than their urban counterparts (Figure 6.14).

Table 6.1. Average incidence of targeted transfers in rural population

Crédito Palabra/ Scholarship Food transfer Health Other School breakfast Decile PROCAMPO PET Oportunidades TOTAL opportunities opportunities Opportunities scholarships (DIF) Product.

(per cent of income before taxes and transfers income in 2002) 1 23.9% 17.5% 14.6% 13.4% 6.6% 3.8% 2.7% 0.8% 83.3% 2 10.8% 8.3% 8.5% 10.3% 3.1% 0.4% 1.8% 0.7% 44.0% 3 8.4% 6.7% 6.0% 2.7% 2.5% 0.4% 1.1% 0.5% 28.3% 4 5.9% 4.2% 5.7% 1.6% 1.6% 0.4% 0.9% 0.4% 20.8% 5 4.3% 3.4% 3.5% 2.5% 1.3% 0.2% 0.6% 0.2% 15.9% 6 2.9% 2.1% 3.4% 1.5% 0.8% 0.3% 0.6% 0.2% 11.8% 7 2.3% 1.7% 3.3% 1.4% 0.7% 0.3% 0.4% 0.4% 10.4% 8 1.6% 1.2% 2.2% 0.4% 0.5% 0.2% 0.2% 0.2% 6.5% 9 0.6% 0.5% 2.2% 0.5% 0.2% 0.1% 0.1% 0.1% 4.3% 10 0.1% 0.0% 2.7% 0.0% 0.0% 0.1% 0.0% 0.0% 3.0%

Source: Scott (2004b). Population deciles ordered by income per capita net of public monetary transfers. Includes monetary and quasi- monetary transfers.

Figure 6.14. Public social transfers in income of extreme poor, urban and rural, 2002, real (08/2004) MXN/month

500 Autonomous income Public transfers 450 39 400 350 300 112 250 200 429 150 251 100

Average monthly income per capita 50 0 Urban poor Rural poor

Source: Calculations based on ENIGH (Módula Social), 2002.

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Box 6.3 Why the reduction in poverty between 2000 and 2004? Chapter 2 reported a decrease in poverty between 2000 and 2004. There has been debate on the causes of this recent reduction in rural poverty in Mexico, which offers insight into the potential contributions of various factors, in particular the role of public transfers and private transfers. Public transfers are comprised mostly of PROGRESA/Oportunidades and PROCAMPO, described below, but also pensions, and their contributions to poverty reduction should be duly noted. Transfers represent a large share of income for the poor, and the amount of transfers rose by about 22% for people at the edge of extreme poverty in 2002 relative to 2000 (see figure below). Thus, the expansion of Oportunidades probably played an important role in the fall in poverty between 2000 and 2002.1 On the other hand, the reduction in poverty in 2004 relative to 2002 is mostly explained by the increase in rural labour incomes – by 30% for those at the food poverty line – whereas transfers rose very little during this period. Setting aside estimates of the relative roles of transfers, such as Oportunidades, as compared to opportunities brought about by economic growth or by changes in rules or infrastructure that permit more easily rural poor to participate in labour markets, this evidence highlights the positive effects both factors have in the direction of poverty alleviation.

Principal sources of rural income per capita at the food poverty line, real (08/2004) MXN/month

2004 233 173

2002 180 168

2000 174 138 Labor income Transfers

0 50 100 150 200 250 300 350 400 450 rural income per person at the poverty line (35th centile)

1. Székely and Rascón, 2004. Source: Cortés et al. (2005). Property income and non-monetary income are excluded.

Conclusion

Contrary to expectations, the ejido reform and associated institutions created to regulate agrarian property rights have led neither to a significant rise in agricultural productivity through a more efficient allocation of land resources, nor to massive flows of landless migrants into the cities. There is no evidence that ejidatarios have gained better access to private credit as a result of the reform, and less than 1% of ejidos have opted out of the social property regime — a direct consequence of perpetuated disincentives against privatising land. On the other hand, by freeing up the labour of ejidatarios with limited agricultural comparative advantages through the land rental market, the reform has probably contributed to the notable expansion of rural non-agricultural activities that now represent the greatest portion of income in rural areas (as reported in Chapter 2). Reforms of the last decade have re-oriented public expenditure on human capital and basic infrastructure towards the rural poor, reversing the strong urban bias in the allocation of public resources for education, health and food programmes prevalent up to the mid-1990s. Nevertheless, the large share of public spending associated with agricultural policy is allocated towards “productive” programmes does not contribute to

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poverty alleviation. The principal agricultural output and input support programmes, namely PROCAMPO, Alianza, Target Income and water and energy subsidies, like the older price support mechanisms, do not target directly poverty alleviation, although there is sometimes a broad rural development element. Many of these programmes have contributed to the entrenchment of traditional crops. Moreover, with the exception of PROCAMPO, the benefits of these programmes are overwhelmingly concentrated on the wealthiest part of the population, and even PROCAMPO is not progressive as compared to non-sectoral policies that target poverty alleviation. Rural poverty has fallen by a half between 1998 and 2004, but this apparent success must be qualified in several respects. First, most of this fall represents a recuperation from the dramatic increase in poverty following the 1995 currency crisis; the 1992-2002 decade has been called a “lost” in terms of rural poverty-reduction. Second, rural areas still account for a disproportional share of the extreme poor and, more generally, large gaps remain between rural and urban localities, north and south, and indigenous and non- indigenous communities within rural areas. Third, the reduction in poverty may reflect progress of households close to the poverty line, rather than at the lower end of the income distribution. Fourth, most of those who have escaped rural poverty in this period have done so through rural non-agricultural activities and migration, rather than agriculture. The broader conclusion must be to question the primacy of agricultural policy in alleviating rural poverty. The benefits of even the new programmes tend not to improve subsistence farm welfare very much, as shown in the second chapter, and the distribution of the initial transfers are found in this chapter to be highly regressive. Suggestions that agricultural policies foster growth in the sector that indirectly reduces poverty raise rather than resolve questions. Noting the small impacts of agricultural policies on the welfare of hired labour estimated in Chapter 3, the likelihood that benefits accruing to commercial farmers will lead them to expand labour-intensive techniques is uncertain. How much further investments in agriculture leads to higher wages for unskilled workers, as opposed to the potential for investments in other sectors to lead to higher wages, is also uncertain. But three facts, namely that agricultural sector wages are the lowest, that the role of non- agricultural activities in rural income is greater than that of agriculture and that earned income plays a large role in poverty alleviation, suggest an answer. The net contribution to poverty alleviation brought about by continuing to regulate land use under the land tenure system is also questionable: the redistribution increased the endowments of the poorest, but these beneficiaries are disallowed from trading these endowments to capitalise on them or to rationalise production practices. In addition, the effect of the land tenure system on access to education must be considered in the modern age in which middle classes of OECD members are built on human capital, rather than on equally distributed land holdings that cannot be traded. Whereas the scope for agricultural policies to alleviate poverty is uncertain, PROGRESA/Oportunidades has proven successful at providing poverty relief with compliance requirements that seek to improve human capital in the form of greater education and better health. These uncertainties about the role of agricultural policy in poverty alleviation are best considered in a broader context that enables explicit comparisons among policies, but the analysis of the preceding pages leads to the conclusion that agriculture does not have primacy in poverty alleviation and a tentative conclusion would be to question its role as compared to other, more targeted programmes.

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NOTES

1. Discussions more specific to rural development are available in a forthcoming reports by the OECD, the Rural Policy Review relating to Mexico, and the Interamerican Development Bank. 2. Yet, taking this example farther, any effects on hired labour would probably be small, as the analysis Chapter 3 found small consequences of the agricultural policies that account for the largest part of expenditures on hired labour. 3. According to the 2001 Ejido Census, there were 2.9 million ejido communities and 1 million comuneros. 4. Deininger and Olinto, 2002. 5. Agricultural Census, 1991. 6. Censo Ejidal 2001, INEGI. 7. Censo Ejidal 2001, INEGI. 8. For example, Levy (2004), chapters V-VII. 9. World Bank, 2005. 10. World Bank, 2000. 11. Quinto Informe de Gobierno, Anexo Estadístico, 2005. 12. Hertel and Reimer note in their survey that some analytical studies found self-employment in rural areas adjusts quickly to changes in opportunities in the formal economy. 13. The World Bank includes expanded social security for the old, and for the unemployed, among the list of policy initiatives that would help to overcome poverty and inequality in Mexico (2001a). 14. Censo Ejidal 2001, INEGI. 15. The historical persistence of subsistence agriculture in Mexico, despite better economic opportunities, has also been explained by cultural factors and limits to the scale of production feasible in rain-fed land worked by a single farmer using traditional methods – conditions typical of the Southeast. 16. For a broader analysis of transport infrastructure as a critical bottleneck for the development of Southern rural regions, see Dávila et al. (2004). 17. Lustig (1989), p.108. See also Friedman et al. (1995), Levy (2004). 18. Levy (2004), chapters V-VII. 19. Deininger and Heinegg (1995). 20. Levy (2004), chapters V to VII. 21. The number of eligible hectares per producer is only caped by the constitutional limit on land holdings, which is 100 hectare of irrigated land equivalent. At the lower end, the minimum payment to PROCAMPO is now set to one hectare, even if the individual owns less than one hectare of land.

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22. Cord and Wodon (1999), using the 1994 and 1997 Ejido Surveys, have estimated PROCAMPO transfers to represent up to 40% of the income of ejidatarios in the poorest decile. 23. GEA, 2005. Ashraf, McMillan and Zwane also reference data showing that most farmers grow corn still, so there is little diversification in production or, for that matter, in consumption, from 1992 to at least 2000 (p 29-30). 24. Although PROCAMPO is formally under ASERCA, all references to ASERCA’s budget here relate to Apoyos a la Comercialización, and exclude PROCAMPO. 25. Data of the table below represents average values of some of the principal variables in the FAO typology based on a survey of PDR beneficiaries. Typology of PDR Beneficiaries Selected variables I II III IV V Education (Years) 4.8 6.3 8.9 14.3 19.0 Value of Assets (MXN) 1 799 56 557 208 853 662 765 512 000 Number of Equivalent Cattle Units 5.6 8.3 13.8 28.6 71.0 Irrigated land Equivalent (hectare) 0.8 3.0 11.1 33.1 10.0 Source: FAO (2005).

26. These estimates only consider the direct (partial equilibrium) effect of these benefits. In a general equilibrium setting, agricultural workers may share some of the benefits from the agricultural support transfers obtained by large commercial producers, through higher wages and land prices. On the other hand, however, by lowering the production costs of large producers, these transfers undermine the competitiveness and income of smaller commercial producers. 27. Denininger and Lavadenz, 2001. 28. World Bank, 2005. 29. Programmable public spending is net of debt payments and fiscal transfers to the states. 30. Poder Ejecutivo Federal, 2000, Sexto Informe de Gobierno, Anexo Estadístico. 31. Scott, 2004a. 32. Scott, 2002. 33. Davis et al find that more targeted transfers of PROGRESA have a stronger positive impact on school expenditure than PROCAMPO, and that whereas PROCAMPO payments tend to increase more investment in agriculture PROGRESA has a broader investment effect. 34. Secretaría de Hacienda y Crédito Público, 2000. 35. Scott, 2004b. 36. Distribution by households differs systematically from distribution by average income per person because poorer households tend to have more people so, for example, the poorest decile of households includes more than the poorest decile of individuals. 37. There are two principal health systems serving the rural uninsured: the Health Ministry (SSA), and the IMSS-Oportunidades program (before IMSS-Solidaridad, and originally IMSS-Coplamar), covering mostly poor rural localities (around half of Oportunidades beneficiaries). As noted below, a separate initiative, Seguro Popular, eventually to provide health services to the uncovered poor was launched in 2004. 38. See Scott (2004b) for material in this paragraph, or for more details on targeting and rural areas.

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Chapter 7.

Inputs, natural resources and institutions

Introduction

Many agricultural policies in Mexico focus on inputs to the sector, defined widely to encompass infrastructure, as well as finance, technology and energy. Some of these policies have already been addressed. The first part of Chapter 3 showed the size of transfers provided on the basis of input use, and the size and composition of support to the sector overall, including for research and technology. The second part of Chapter 3 assessed how subsidies tied to inputs are redistributed by interactions of agents in the market place – economic behaviour, such as farmers increasing the use of an input on the basis of which they receive a subsidy – as measured by welfare gains, showing that energy subsidies, for example, generate very little welfare for commercial farmers, none for subsistence farmers and do little or nothing for hired labourers. The preceding chapter showed that input subsidies oriented towards production are regressive with respect to income, so they do not tend to equalise income or alleviate poverty directly. Below, programmes supporting inputs are considered again, with a view to highlighting likely impacts, many of which are possibly unintended consequences, on input markets and on natural resources. Assessments relating to natural resources are necessarily limited by the absence of data, as explained in Chapter 2. Water over-exploitation is commonly perceived to be a barrier to sustainable development in rural areas, particularly in arid northern and central regions if not in the south. However, data concerning a large number of aquifers are not gathered, and therefore one can only speculate. Gradual expansion of the knowledge base by measuring more aquifers and surveys of soils is a precursor to good policy. But so too would recognition that an unintended consequence of many policies, particularly those intended to help commercial farmers expand, may be improper uses of natural resources. The institutional structure of policy design and implementation is not a primary focus of this study. However, some important insights have emerged during the course of the research and related consultations with industry and government officials that warrant consideration. Effective policy-making can be helped or hindered by the associated institutional arrangements, and a number of general observations are offered.

Infrastructure

The primary objective of many agricultural policies is to develop the market infrastructure. Inspection services are an important element of the market infrastructure, and guaranteeing a minimum level of safety and quality of food and agricultural products

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is widely seen as a public service. In Mexico, in addition to the basic service provided at various levels of government, a federal initiative is intended to raise standards above the minimal level (Box 7.1). Information collection and distribution is also an element of the market infrastructure, one that is being met by means of publicly available data from SIAP and a recognition in the value of investing in communication technology in rural areas.

Box 7.1. SENASICA and voluntary standards Federal standards support the market infrastructure by assuring buyers that goods will be of a certain quality and safe.1 A programme at the national level provides the information, inspection and labelling services that meet foreign standards. One example is meat. In Mexico, three different inspection systems for meat production exist: national animal health legislation, local regulations that are in place at constitutionally mandated municipal slaughter facilities, and informal or illegal. Since 2001, a fourth system involving a higher voluntary standard that producers may achieve has been put in place which may be accepted in existing or potential export destinations, such as the European Union, Japan, Korea and the United States. To encourage participation, the government charges only half the costs of the service and other government agencies subsidise the costs, including interest, of eligible capital projects. A second example is avocado exports to the US, as described by Ardavin and Beckwith (2004). With the assistance of SENASICA, Mexican avocado producers in a certain region formed an association to work with the inspection service of the United States to permit fresh avocado exports to all the United States in 1997, for the first time since 1914. Producers of avocados for export were certified by a regional industry organisation in Mexico to ensure that they met USDA standards. As a consequence, these authors find, industry profits are higher and the certification process grants to the regional industry organisation substantial control over the economic rent – and strong incentive for member producers to police their own actions. Government provided voluntary standards may compete with private voluntary standards. Thus, SENASICA offers no voluntary standard for poultry because the exported goods are produced by large multinational firms whose practices result in a widely tradable product that exceeds the base level of Mexican regulations already. In the longer term, the government service risks crowding out private initiatives, but this risk is less serious in the short term. Moreover, the programme uses foreign standards as a lever with which to encourage improvements in domestic practices. In the case of meat, regulations dating back 50 years to efforts to eradicate foot-and-mouth disease, albeit with subsequent revisions, compare poorly to the higher voluntary standards of this programme. As a result, the bulk of sales that achieve this voluntary standard (possibly 90%) are sold domestically and represent perhaps a third of domestic sales. 1. Interviews with SAGARPA officials.

Many agricultural policy programmes have market development as a tertiary objective. Some ASERCA programmes are operated with a view not only to meet their main objective, but also to help producers operate in competitive markets. For example, the subsidy for producers to buy options that hedge their price risk encourages producers to look to private mechanisms for reducing price risk. On the other hand, the Target Income programme that subsidises sales of certain crops in the even that price falls below a given level provides concurrently a certain level of protection against price risk for many commodities, as well, likely offsetting some of the effect of the hedging programme. Still, the major Alianza sub-programmes for investment look to producers to organise consultative bodies with the ability to identify projects to improve local infrastructure, as well as for other investments. To some extent, these policy initiatives are trying to spark the generation of private markets that were suppressed by the interventionist policies implemented by

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CONASUPO. Prior to the reforms of the 1990s, functions relating to distribution and storage, as well as purchasing and selling, of outputs and inputs were handled in part or in whole by agencies, which displaced private agents – and the regime of common guaranteed prices for all areas, irrespective of transportation costs or proximity to markets, displaced production.1 The effect of flat pricing and rigid government purchasing necessarily gave rise to a non-entrepreneurial sector, which did not reward comparative advantage across regions, nor reward producers for innovations in production and marketing that might have led them to pursue activities that met better consumer demands. The OECD Territorial Review (2003) establishes several deficiencies in Mexico’s infrastructure that hamper its ability to compete, and to develop. Distribution systems for electricity and communication are poorly developed. The public services infrastructure also remains poor: education, as has been noted, lags in rural areas, and other services relating to health-care are not available in many rural areas. The north-south road networks are poor, with such transport particularly costly due to the centralisation on Mexico City. Port facilities and railways require improvement. These and other factors inhibit Mexican firms’ ability to compete in international markets.2 More generally, however, these policies delay economic development in Mexico, and decrease the pace at whichgrowthinonearea,orinurbanareas,willbesharedwithotherregions. Some agricultural policies are intended to offset these disadvantages. For example, agricultural policy provides subsidies to energy use in the sector based, in part, on a formula that considers the degree to which Mexico’s broader energy policy raises domestic prices. Likewise, some part of the funding under Alianza, although not strictly an agricultural policy alone, target investment in rural area infrastructure. These policies offer at best remedy for the symptoms; the fundamental factors are not the target of these policies. As such, they patch, instead of solve, the problem and, in doing so, may risk unintended consequences as noted below.

Finance

The array of agricultural policies that support investment and help producers to establish credit lines have achieved successes in the sense that many individual projects have been facilitated by public subsidies. At the same time, however, the development of a private banking sector in rural areas will depend critically on financial regulations that lie beyond the scope of agricultural polices. The long term objective of shifting producers to private market suppliers of banking services may be served to the extent that agricultural policies apply subsidies as part of a wider policy that enables private banking and eliminates direct public banking. The currency crisis and the banking rescue (FOBAPROA) were barriers to the evolution of private financial institutions devoted to the rural sector.3 Moreover, the availability of subsidised financial services must necessarily inhibit the development of private services. Some programmes that address rural banking seek to avoid this unintended consequence by targeting second-tier bank services through subsidies granted to private rural lenders, instead of providing individual services that compete directly with those private lenders. One of the objectives of the land reform was to provide ejido members with stronger claims over land that could then serve as collateral for bank loans, but the success of the land reform process has been somewhat limited, noted in Chapter 6. The remaining

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barriers and disincentives to complete ownership and tradability of land limit the willingness of banks to accept ejido land as collateral. Moreover, of course, by limiting tradability of land the land reform rules may deprive farmers of a primary motive for seeking capital: trading land to unify disconnected small plots, or buying new land. A system that identifies spending projects may bias public spending towards supporting certain types of investments. While recognising the advances embodied in the decentralised decision-making of Alianza, the consultative body system likely leads to greater expenditure on large projects that have widespread support. This focus may lead to investments on regional or community initiatives that have lower returns than smaller projects involving individual firms. Some Alianza sub-programmes support expanded irrigation projects, but facilitating water extraction seems at odds with objectives relating to water conservation – excluding those instances where the project is narrowly defined to improve efficiency or reduce costs of existing structures without providing incentives for greater water extraction from any depleted water supplies. Moreover, except in those cases where the programmes encourage or require diversification, the results of agricultural policies that support finance and banking may be greater risk held by individuals, regions and financial service providers for whom subsidies encourage reinvestment in the same commodity, subset of commodities or sector.

Box 7.2. PAASFIR and rural credit A sub-programme in operation since 2003 subsidises farmers’ access to credit (PAASFIR).1 Groups of farmers organise to pool their credit needs. Farmers with access to this support report paying annualised interest rates on the order of 15% for very short-term credit, as compared to informal market rates of four times higher from suppliers.2 The share of credit past due reported by development banks is less than 3% at Financiera Rural, as compared to 60% reported by Banrural prior to its termination. Four reasons may explain the improvement: (1) banks are paid directly; (2) the focus is on crops and area eligible for PROCAMPO or Target Income payments that generate automatically a resource with which to pay, whereas fruit and vegetable farmers have little access to this programme; (3) banks look to physical assets as an additional source of collateral; and (4) farmers’ groups police their fellow members’ behaviour, and the bank will seize their pooled collateral if any group member defaults. In fact, perhaps as many as 80% of participating farmers are black-listed by financial institutions for having failed to repay loans before. 1. Interviews with SAGARPA officials. 2. The OECD reports that the few banking services available to small enterprises leads them to rely on supplier credit (OECD 2005, p.79).

It is not only the sub-programmes of agricultural policy that target rural banking that affect investment in rural areas. Sadoulet et al. (2001) find that PROCAMPO payments generate income multipliers for ejido members because farmers use the payments to fund investment opportunities which they could not otherwise afford. By this argument, the inability of farmers to borrow from banks represents a failure in the market that can be overcome if farmers use the PROCAMPO money in place of loans. This research suggests that the multiplier of PROCAMPO is 1.5-2.6 for ejido households, and is higher for medium and larger ejido operations. The provisions of PROCAMPO were changed in 2003 to permit capitalisation of benefits into a single payment. Recipients were able to convert the remaining payments before 2008, the scheduled termination of the programme, into a single immediate payment. This innovation permits producers who lack access to lending services to convert future payments into their present value. Evidence indicates that only a small part of PROCAMPO, equivalent to 17% of the payments, has been capitalised. It is difficult to

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draw any conclusions based on the small number of producers who choose to capitalise future payments. This may be evidence that producers were not well informed of this option, that there are few opportunities for investing a one-off payment, that capital markets work well enough, that the implicit discount rate the government applies exceed producers’ own or that producers expect that capitalising payments would jeopardise future benefits in the event that the payments are continued in some form beyond 2008. Moreover, the weight of different factors explaining the low rate of capitalisation likely varies among recipients. The agricultural policies that target credit and banking services in rural areas are directed at symptoms of more fundamental problems. The legal framework governing the banking system, particularly the amparo that served as a procedural mechanism to block lenders’ claims to collateral and the limits to foreign direct investment, was identified in Part 1 as crippling limits to the development of banking in general. While steps have been taken during the reform period to liberalise banking, many changes are only occurring now and, as noted in Part I, there remains scope for further reform. Moreover, as regards agriculture, remaining and dis-incentives imposed by the land tenure system such as the continuing inability of ejidatarios to free their land from communal control and the bounds on private ownership of land, noted above, largely preclude expansion of scale. Taking into account that the process of granting a loan imposes at least a minimum transaction cost on the bank or other provider of credit, then it may very well be the case that, at least during the period preceding the most recent reforms to the banking sector, potential loans to the agricultural sector were too small to cover even these fixed costs, let alone the sum of fixed costs and a risk-adjusted return on capital.

Technology

Chapter 3 noted that an array of programmes exist to help farmers determine their technological needs, to make required investments and to adopt techniques that use better technologies. Most of this type of support is provided by programmes under the Alianza umbrella. These programmes are differentiated by the sort of operations they target: fully commercial and technologically progressive; large but not yet fully commercialised or modernised; and small-scale with very basic practices. As a mechanism of improving targeting and transparency, many of these programmes require participation of producers at all levels of the project, even when setting priorities and raising funds. Matching requirements vary such that a smaller share is required from poorer recipients. A key element of Alianza is to organise producers in consultative bodies based on the commodity they produce, a difficult process that the government supported. These bodies, which also include representatives of other groups, such as buyers, set priorities for public investment. The consequence of this programme is allocation of public funds to improve production infrastructure and links along the chain from producer to consumer based on a consensual process. Support to research and technological development may be seen as a public service for the sector. Targeting and transparency are improved by decentralisation (as discussed below), but there is a risk that the focus of these investments is excessively narrow. For example, maize is an historically important crop in terms of the number of commercial producers, the number of subsistence producers, the value of production and its role as a staple in consumption, so this crop stands out among the consultative bodies organised on a commodity basis and a substantial part of public investment in research and technology is directed to increasing the maize production capacity. More generally, by proactively

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supporting the coalescence of producers on the basis of a particular commodity and providing support along lines recommended by that body, the support seems likely to tend to favour the research, applied technology and infrastructure of that commodity and tying producers ever more closely to a single commodity. Such a narrow focus of public investment risks reinforcing existing commodity production patterns — an opposite result to the steps towards liberalising producers’ decision-making. Moreover, narrowly focused investments on traditional crops may direct public investment towards a crop in the production of which Mexico may not have a comparative advantage, or may be counter- productive with respect to other policy objectives. Public investment in production technology must be carefully targeted; efforts to increase productivity of poor subsistence farmers in the sector require different tools than helping commercial farmers to advance. Alianza programmes to support production technology, at least, recognise the varying capacity of producers and varies matching funds as a consequence although, as noted in the previous chapter, much of this support remains out of reach of the poorest. More generally, public investment programmes must also overcome the difficulty of choosing the best technology that could be advanced to the greatest benefits for a targeted group at least cost to others or the widest possible benefits to all — a task that may well involve considering the comparative, rather than simply competitive, advantages of the country. To this task, however, must be added consistency with other objectives, such as reducing rural poverty and sustainable use of natural resources like water.

Natural resources

Below, the effects of policies that affect natural resource use are discussed, with special focus on water. Indirectly, policies that were found to tend to expand production consequently tend to exacerbate negative impacts of agriculture on natural resources. For example, support policies that create incentives for production of maize lead to greater use of water for irrigating maize. Broadly speaking, then, the replacement of market price support brought about by the elimination or reduction of tariffs since the early 1990s should be seen as likely a positive step: removing some of the policy-related incentives for commodity production led to lower commodity production, as discussed in the preceding chapter. Conversely, the introduction of payments based on output and input subsidies that tend to encourage greater production likely put more pressure on natural resources. Communally held land remains a serious impediment to good resource management. The majority of agricultural area is held under the responsibility of ejidos of which two- thirds is held by the community as whole rather than being certified as an ejidatarios’ own land. Communal land ownership leads to the problem of the commons: shared access leads to over-exploitation. Thus, communally controlled areas are more likely to suffer from over-grazing, deforestation, soil erosion or chemical pollution than privately held land, or even certified land. Moreover, policies intending to improve resource management in these areas are impeded as no individual is responsible, so the benefits and costs cannot be assigned or apportioned to individuals. The ability to assess the environmental status of Mexico is impaired by lack of information. Initial efforts have begun to identify the status of soils and biodiversity, but these are as yet insufficient for policy makers.4 Out of 653 total aquifers in the country, less than a third have been studied and certified. Findings of over-exploitation or

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salinisation among many of the 202 certified aquifers should not be extrapolated to the remaining 451 aquifers. Agricultural policies recognising the impacts of the sector on natural resources have been introduced recently, as noted in Chapter 1, but these objectives are apparently of secondary importance at best, and progress is consequently limited. Although permitting PROCAMPO payments to go to land even if it is not used for production as long as it is well maintained is better for the environment than requiring production, this represents a passive approach of permitting, rather than proactively rewarding or requiring, environment-friendly practices. Other programmes that include environmental objectives often target a broad range of other objectives, of which reducing rural poverty often emerges as the dominant priority. While exceptions exist, such as PROGAN which has worked to improve grassland management, the expenditure under these programmes is substantially smaller than for others that encourage production, as discussed in Chapter 3. As long as environmental objectives are tertiary to the main thrust of Mexican agricultural policy, the current impacts of agriculture on the environment, including the deleterious effects on soil and deforestation, will continue.

Water As stated in Chapter 2, the agricultural policies relating directly to water use support irrigation and, at the same time, some payments are made to buy concessions. The bulk of water policy falls under the responsibility of the CNA. Further subsidies to agricultural use of water are provided in the form of fees for water used for agricultural purposes that until recently accounted for only part of maintenance and operating fees, but in any case no fee for the water itself. The observation in Chapter 2 that water availability in Mexico is quite high, but spatially not equal to demand, is supported by CNA data (Table 7.1). In fact, overall concessions amount to 16% of water available. In Northern and Central regions, however, concessions often amount to more than half of water availability, sometimes considerably more, whereas little of the available water is assigned to concessions in the South – as little as 1% in Frontera Sur which has a third of the available water. Agriculture accounts for three-quarters of concessions by volume and, in fact, tends to worsen slightly the spatial disparity of water supplies and concessions.5 Two-thirds of agricultural concessions are to surface water, with the remaining third tied to underground water supplies. Thus, it seems from these data, the concessions are vastly less than water availability, and most concessions are to surface water rather than to underground water. Concessions, however, may not be well enforced. Actual extractions often exceed the amount permitted by the concession. Moreover, there is evidence that over-extraction is most common for holders of smaller concessions – the scale that is typically associated with agricultural activities. The costs of policing water access by scattered small-scale users in rural areas is substantial, so the first priority is likely to be large users in easier to reach areas. However, if concessions are not enforced, then they do not serve to limit water use, nor to establish a property right. Water use subsidies, whether in the form of exemptions from fees or subsidies to energy needed for irrigation, give producers incentives to over- or mis-use water. Over- exploitation of aquifers, as noted before, has tripled over the last three decades from 32 to over 100 of the 202 certified aquifers in the country. Depleting aquifers leads to increased extraction costs, particularly energy use, as water levels fall. As producers do not bear the full costs of the water, they have less reason to ensure that irrigation systems function

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properly, leading to average efficiency in agricultural water use as low as 43%.6 Within agriculture, allocation of water reflects in part the subsidies received, not necessarily the economic incentives. For example, only 10% of the water used in agriculture goes to high value activities, such as fruits, vegetables and oilseeds production, while 50% is used to produce low-value cereals.7 In light of these problems, the decision to end farmers’ exemption from water abstraction charges from 2003 represents an important step towards proper pricing of access to water. Likewise, the 2004 amendment mandated water basin agencies that may improve water management as stakeholders are more directly involved in decisions about their water quantity and quality.

Table 7.1. Volumes of water available and concessions, 2004

Available Concessions Agricultural Concessions Region Total Total to Agriculture Surface Underground (cubic hectometers) Peninsula Baja California 4 423 3 807 3 108 1 711 1 397 Noroeste 8 213 6 419 5 505 3 214 2 291 Pacífico Norte 24 389 10 491 9 881 8 900 981 Balsas 28 924 10 417 6 179 5 113 1 066 Pacífico Sur 32 508 1 264 983 772 211 Río Bravo 14 182 8 539 7 072 3 791 3 281 Cuencas Centrales del Norte 6 841 3 745 3 275 1 223 2 052 Lerma-Santiago-Pacífico 36 977 13 210 10 920 6 398 4 522 Golfo Norte 23 347 4 503 3 500 2 719 781 Golfo Centro 102 544 4 622 2 205 1 790 415 Frontera Sur 158 260 1 999 1 499 1 138 361 Peninsula de Yucatán 29 646 1 708 1 078 28 1 050 Aguas Valle de Mexico y Sistema Cutzamala 3 934 4 706 2 257 1 932 325 Total 474 188 75 430 57 462 38 729 18 733 Source: Estadísticas del Agua en México (2005), Comisión Nacional de Agua y Secretaría de Medio Ambiente y Recursos Naturales, Chapter 3.

Garduno judges the regulatory system to be insufficiently developed, although the direction is appropriate. The emphasis began gradually to shift at the start of the liberalisation process, with the adoption of “user pays” and “polluter pays” principles. The authorisation of the CNA to enforce water rights was consistent with the overall liberalisation process. These and other reforms brought some clarity to the property rights provided by a concession, and provided administrators with some of the basic information required to assess the use of this natural resource. Even so, the exemptions granted to agriculture from many fees and from reporting, the system of water concessions, and the lags between the adoption of principles and the creation of an effective bureaucracy with sufficient information and powers, Garduno concludes, necessarily delay implementation of “user pays” and “polluter pays” principles. Subsidised access to water may be intended as an element in the broader strategy to reduce rural poverty, but water subsidies are unlikely to serve objectives relating to poverty elimination well. Water subsidies are heavily concentrated in the rich northern states, Sinaloa, Taumalipas, Sonora, and Baja California, whereas the three poorest states, Chiapas, Oaxaca and Guerrero, receive only 1% of this input support (Figure 7.1). In this case, the distribution of irrigation infrastructure reflects regional differences in water resources and geo-climatic conditions; it is difficult to imagine a redistribution of water subsidies to areas where irrigation is unnecessary. At present, electricity subsidies benefit 105 000 agricultural users, with average yearly subsidies per user of MXN 78 000 a year.

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Figure 7.1. Distribution of public spending on hydro-agricultural infrastructure and agricultural electricity subsidies, by state ordered by level of marginality

2500

2000 Agricultural electricity subsidy Hydrological Infrastructure 1500 Hydroagricultural Infrastructure

1000

MXN per rural capita 500

0 Jalisco Puebla Colima México Nayarit Sonora Sinaloa Hidalgo Oaxaca Morelos Yucatán Chiapas Tlaxcala Tabasco Durango Coahuila Veracruz Guerrero Querétaro Zacatecas Michoacán Chihuahua Campeche Guanajuato Tamaulipas Nuevo León Quintana Roo Baja California Aguascalientes San Luis Potosí Baja California Sur

Source: World Bank (2004). States ordered from poor to rich by the CONAPO marginality index.

There are very few agricultural policies targeting water use. More importantly, there is only limited information. The failure to collect information about the nation’s water resources makes it impossible to go very far beyond anecdotal information in assessing policies (Box 7.3). In the absence of systematic reappraisals, knowledge of how agriculture uses water, or affects any other natural resource, is limited by the many years that have passed since the last census of agriculture in 1991. Surveys or other alternative data sources may not be very representative.

Box 7.3. Three examples of water rights Example 1: a Northern district. In the 1960s, concessions for 600 million m3 of water were outstanding, but studies by the Mexico Institute for Water Technology (IMTA) estimated aquifer reload capacity of 150 million m3, implying 450 million m3 over-extraction. Originally, a well 8- 10 meters deep could extract water but now wells must drill down 130-160 meters, and the salinity is higher. Energy costs rise as the water must be pumped farther. Administrators estimated the value of the concession at MXN 2500/1000 m3 (in terms of a one-off payment) as, in many cases, rising costs of pumping the water rendered many activities that rely on water unprofitable. Example 2: an area in Chihuahua. Ground water is used for 150 thousand hectares of agricultural area, leading to 942 million m3 of concessions, but the sustainable level is estimated to be 738 million m3 based on the availability of rain water. Irrigation channels were built that, due to extreme water deficit, never carried any water at all. Example 3: settlers in a North-Central region. Settlers typically dig wells when they move into an area, increasing pressure on the local aquifer. Two studies of extraction and sustainable rates were conducted: CNA estimated an extraction rate of 400 million m3 and a sustainable level of 129 million m3, and IMTA estimated the extraction rate at 300 million m3 andasustainablerate of 147 m3. Concessions for the region are known to be 140 million m3, but this figure is well below the actual extraction rate due to unregistered wells that are estimated to number 470 – more than two-thirds as many as the 656 registered wells. Enforcement to prevent over-extraction by unregistered wells is needed, but would be highly unpopular. The black market price of a concession may be MXN 3500-6000/1000 m3. Source: Interview with SAGARPA officials.

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Institutional structures of policy design and implementation

The institutional arrangements governing agricultural policy design and implementation in Mexico have evolved considerably over the period of this study, and a number of important improvements have been noted. For example, public support for commercial agriculture under Alianza is tied to a strong push towards decentralising decision-making, allocation of funds under Alianza’s rural development arm is based on mostly clear and transparent formulas, and the mechanisms of direct intervention through state entities such as CONASUPO have been replaced by a greater reliance on market signals. Industry participants, though, continue to express concerns that suggest flaws in institutional structures. These concerns include the proliferation of overlapping programmes in various Ministries and agencies, tension between legislative and executive branches of government, and uncertainty among agents active in the sector about the nature and direction of present and future policies.

Formulating and implementing policies At the highest level, an explicit government-wide view regarding economic, social and political priorities for the medium-term should provide the logical starting point for policy review and development. Within this broad frame-work, all relevant Ministries and agencies need to work together to ensure that their individual efforts to contribute to the government’s stated goals for the sector are as well coordinated, effective and efficient as possible. It is unclear to what degree this currently occurs. There is a widely held view that current policies related to agriculture, natural resources, rural development and rural poverty alleviation are not sufficiently co-ordinated and coherent. To the extent that this is the case, conflicting government efforts will lead to higher costs, failure to achieve objectives and an uncertain business environment. The Ley de Desarrollo Rural Sustentable (Law of Sustainable Rural Development) of 2003 was an effort to improve the mechanisms of policy making. The law created a body, Programa Especial Concurrente para el Desarrollo Rural Sustentable (PEC, Special Competition Programme for Rural Sustainable Development), to review the goals and strategies of various federal agencies or actors encompassing all public policies towards the rural sector. The Comisión Intersecretarial para el Desarrollo Sustentable (Intersecretarial Commission for Sustainable Development) was empowered to formulate programmes for the rural sector, and shares control over the budget of PEC. While not yet thoroughly analysed, this law appears to have increased bureaucracy but not worked quite as intended; these new bodies have not exerted much apparent influence over rural policy as compared to the various Ministries, and co-ordination consequently remains insufficient. Further consideration needs to be given to alternative approaches that ensure that a more holistic view is taken of development opportunities and challenges for the sector. Broad strategies and plans also need to be translated into clear and transparent policies and programmes that provide some measure of certainty to private agents. The overall business environment in which industry operates is determined by the cumulative impact of all policy measures, both economy-wide and sector specific, whether intended or unintended. Government policy making must recognise this reality. Policies and programmes should be designed to target objectives precisely and be tailored to provide the right amount of public support necessary to achieve those objectives. Policies and programmes should be constructed in a way that retains flexibility to adjust to changing

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circumstances and at the same time establishes clearly the role policy will play so that agents will be able to plan accordingly. The one-year budget and planning cycle currently leads to unpredictable changes in allocations to major programmes such as PROCAMPO, and allocations to some programmes even change from month-to-month. Policy design and implementation can also benefit from consultation with those affected by policies, and by systematic review and evaluation of policy performance. To the extent that consultation processes are in place in Mexico, they seem to be somewhat narrowly focussed and to serve to encourage special interests, but these mechanisms enable a positive dialogue concerning best policy approaches if only among a subset of people active in the sector. Information and review systems to monitor and revise policies, in light of practical experience, are seldom evident.

The political cycle The six-year political cycle at the federal level has a profound impact on institutional arrangements and policy making in Mexico. A new President is elected every six years, and has the authority to replace the majority of federal government staff. At frequent intervals the appointed, as well as the elected, officials responsible for all levels of agricultural policy change. The result is a massive loss of institutional knowledge and expertise that unnecessarily handicaps policy design and implementation. While the other extreme of permanent employment with no conditions should not be viewed as a good alternative, the total rebuilding of bureaucracies at six-year intervals must be viewed as a serious impediment to good policy-making. This situation is compounded as similar processes takes place at lower levels of government as state governments, too, are generally replaced at six-year intervals – and on a three-year cycle for most municipal governments.

Decentralisation and information The innovative decentralisation of decision-making to direct and monitor Alianza transfers has already been noted, and praised. More broadly, policy performance is improved by clear delineations of responsibility among levels of government, and even assigning certain responsibilities to bodies that do not correspond to the usual government levels such as entities to manage resources in a water catchment area. There is no institutionalised process to conduct an agricultural census. This study, like most others, has had to rely at times on data relating to the circumstances and characteristics of Mexico’s agricultural sector in 1991, when the last agricultural census was undertaken. Surveys, such as those referenced in this study, provide more current information, but are insufficient. The survey supporting World Bank research on ejidos should not be extrapolated to the entire rural population. Broad judgments about the status of rural Mexico based on ENHRUM may be questioned as only rural communities with 500 to 2 500 people are covered. Surveys by other Mexican Ministries focus on particular questions that may not provide necessary information specific to the sector. Firm and comprehensive statements about how the agricultural sector has evolved over the fifteen years since the last agricultural census – a critical period of reforms to border measures, market intervention and land tenure, and of such as Alianza – are consequently subject to doubt, and critical decisions relating to policy design and implementation are made on the basis of partial, or no, information.

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Conclusions

The role of government investment in developing input and output market infrastructure must not be overlooked, and many aspects of the infrastructure in Mexico are deficient. Agricultural policies to support information systems and inspection services improve the environment for trading goods, domestically or abroad, but account for a small share of overall support to the sector. There is also a role for private investment, as noted in Part 1. Some input market deficiencies are explained by less than satisfactory performance of other, non-agricultural sectors, such as limited access to credit in rural areas or high costs to producers caused by energy policies. In these cases, agricultural policies may alleviate symptoms, but do not address fundamental problems and, as such, offer at best patches rather than solutions. At worst, they may create new problems: public finance replaces private finance; energy subsidies encourage overuse of energy and irrigated water; or policies intended to increase revenues of poor land-owners by increasing their technological capabilities in traditional activities fail as land privatisation remains incomplete. It is difficult to draw conclusions about natural resources given the information available. Knowledge about the condition of water, both availability and quality, and other natural resources such as soil and biodiversity is incomplete. Nonetheless, however, the drain on water supplies is widely believed to be unsustainable, particularly in the arid and semi-arid regions, despite the present command-and-control system. Not only must concessions be limited, they must also be policed if property rights are to have meaning and a water market that matches sustainable supply and demand of water is to become possible. Recent amendments to water policies represent steps in this direction as farmers are no longer exempt from water abstraction fees, although they still do not pay for the water, and the water management structure may be improving. On the other hand, the conflicting outcomes of programmes addressing problems in input markets stands out: objectives relating to energy and investment seem to result in greater use of irrigated water, indicating inconsistency among policies. Programmes that take into account, or even focus on, environmental conditions are commendable, but account for a much smaller share of expenditures than programmes that encourage production. Policies intended to encourage investment and technology in the agricultural sector benefit from decentralisation, by reinforced policing against corruption, and the likely effect on programme longevity as compared to the six-year political cycle at the federal level. The effect of decentralised decision-making on allocation of public funds is not so unambiguously positive in the long-run; the shift to local decision-making probably brings its support to bear on local problems much more quickly, but the structure of consultative bodies may cause over-investment in certain types of projects. The institutional arrangements that govern agricultural policy in Mexico can be improved and warrant much greater attention. Meaningful co-ordination among officials whose activities affect the sector is essential to ensure a coherent set of policies is put in place. Responsibilities among Ministries, agencies and levels of government should be clarified in light of the over-arching priorities of government. Policies and programmes need to be targeted to explicit objectives, and implemented in a consistent and predictable manner. In the absence of institutional reform, current symptoms of weaknesses in policy-making will persist: programmes of different Ministries or levels of government will continue to overlap or conflict; expectations about future policies will vary widely, and will be perceived to be open to influence by the political interests of the moment; and public trust may be undermined by insufficiently transparent processes.

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Policy decision making must be taken with a longer planning horizon in view. One step in this direction would be to lessen the defining nature of the six-year cycle at the federal and state levels, and the shorter municipal political cycle to maintain, in part, an objective and professional public service. And, of course, both elected and appointed officials would be well served by the systematic provision of relevant information and data on economic and social developments in the sector.

NOTES

1. Ávalos-Sartorio, 2006. 2. OECD Economic Survey of Mexico, 2005, p. 26. 3. Brizzi, 2001. 4. OECD (forthcoming 2007). 5. The correlation between total concessions and water availability is -0.24, and the correlation between agricultural concessions and water availability is -0.27, according to these data. 6. Programa Especial Concurrente para el Desarrollo Rural Sustentable, 2002. 7. Alvarado and Kemper, 2001.

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Chapter 8.

Conclusions and recommendations

This study provides an assessment of the effects of agricultural policy reforms in Mexico since 1990 on the basis of the shared goals and policy principles of OECD Ministers.1 These goals and principles constitute a framework of policies that address a range of societal needs that can be met by the agricultural sector with the least cost and least unintended consequences. Typical unintended consequences of agricultural policies that fall short of these principles are distorted markets, economic inefficiencies, inequitable redistribution of incomes, and unsustainable use of resources. At the international level, unintended implications are distorted world markets and trade. The focus of this study on the agricultural sector, and more specifically on production agriculture, limits the scope of the conclusions and recommendations. Many further reforms in agricultural policy must be taken in tandem with improvements in policies of other sectors or nation-wide.

Directions of agricultural policy

The direction of agricultural policy reform in Mexico since the early 1990s is broadly consistent with the shared goals and policy principles of the OECD Ministers. Highly interventionist policies of the past have been curtailed, with objectives more effectively met by policies that target better the intended outcome while generating fewer distortions to trade and to resource allocation. However, there remains scope for further reforms. The policies in place at the start of the 1990s clearly did not correspond to OECD Ministers’ shared goals, nor did they effectively address the policy aims of Mexico. • Import barriers and the government’s intervention in markets, chiefly through CONASUPO, dictated prices and handled much of the distribution of commodities, so pre-reform policies prevented responsiveness to market signals. • Because they depended on barriers to imports, pre-reform policies did not promote integration into the multilateral trading system, for most commodities. • Pre-reform policies did not help consumers to access adequate and reliable food supplies. Public expenditures to subsidise consumption were not well targeted, and the rural poor — the majority of the poor — paid the higher prices prevailing in rural areas due to the price support system. • Pre-reform policies did not lead producers to improve efficiency, nor to innovate, and failed to provide opportunities to improve their standards of living. As support to agriculture was delivered through output and input prices, the benefits were not available to subsistence farmers. Commercial producers were tied to the narrow range of traditional commodities that were supported with little scope

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to diversify to other crops or activities, or to adapt directly to consumer needs. At the same time, much of the benefits leaked away from producers, and the plight of hired labourers was not much improved. The land tenure system limited efficiency and innovation by disallowing renting and selling of land, therefore perpetuating small-scale farming. • Pre-reform policies did not contribute to sustainable management of natural resources. As agricultural support was tied to outputs and inputs such that support would rise with the level of agricultural activity, producers were encouraged to over-exploit resources, exacerbating the pressure on water supplies, the erosion of soil and the already alarming rate of deforestation. • Pre-reform policies did not contribute to food security at the household, national or global level. Mexico was disconnected from trade and thus prevented from exploiting its own comparative advantage, reducing purchasing power in Mexico and its trading partners. Higher food costs for poor people undermined a critical element of food security. The failure to respect natural limits on exploitation of the environment undermined long-run food security. • The potential for agricultural policies to contribute to the socio-economic development of rural areas including the generation of employment opportunities is not a primary focus of this study. Nevertheless, the urban bias of many pre-reform policies, including agricultural policies, the narrow focus of agricultural policies on a few commodities, and the rigidities of the land tenure system hampered the agricultural sector in contributing to broad economic growth in rural areas. Mexico’s ambitious agricultural policy reform actually began in the 1980s, but the most important steps were taken since 1990. Direct government intervention in pricing and distribution processes was gradually eliminated. Commitments were made to bind and reduce barriers to agricultural trade in the multilateral setting of the Uruguay Round, and Mexico agreed to even steeper cuts in bilateral agreements – including the eventual elimination of such barriers under the North American Free Trade Agreement (NAFTA). By means of PROCAMPO transitional payments, however, the effects of these cuts on the income and well-being of producers was at least partly offset. Mexico allowed internal consumer prices to fall, while at the same time re-orienting poverty alleviation measures towards the rural poor. Mexico adopted principles fundamental to good resource management, namely “user pays” and “polluter pays” principles, and took steps towards implementing them. The marked progress Mexico has made in the course of its reforms to agricultural policies is evident, though so too are some remaining problems – policy areas where OECD principles could be more rigorously applied. Major programmes can be ranked from those that correspond most closely to the OECD Ministers’ shared principles to those that correspond least. • The use of payments based on historical entitlement, PROCAMPO,asanincome transfer programme during the transition period of NAFTA ranks well. Relative to market price support, this programme performs particularly well by increasing the sector’s exposure to market prices and integration with multinational trade, efficiency and sustainability, and contribution to development. However, PROCAMPO falls somewhat short of the ideal: land prices would be affected in the event that a land market was developed, and it provides an incentive to increase production. PROCAMPO is transparent, particularly in contrast to tariff-generated

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market price support. PROCAMPO is better targeted than previous policies, even though it has two different objectives: commercial farmers are provided adjustment assistance during the implementation period of NAFTA as reflected by the requirement that one of the crops whose prices were likely to be affected was grown on the land; and subsistence farmers’ needs are addressed because they are not required to have sold commodities, as well as by the minimum payment. PROCAMPO also provides greater flexibility, as the land-owner is permitted to engage in any one of a long list of agricultural activities or even to leave land idle as long as it is in an environmentally friendly condition. PROCAMPO is the least regressive of the major agricultural programmes, and is actually progressive relative to income. • The array of programmes to facilitate access to financial markets address objectives that were formerly addressed using BANRURAL, a government agency that intervened directly in rural finance. They offer innovative mechanisms to encourage farmers to invest to improve productivity and efficiency. These programmes also offer substantial improvements in transparency. Equity, though, may vary widely among programmes. Many of the largest programmes target commercial producers of varying sizes whereas poorer applicants cannot provide the required matching funds. Another government effort at direct intervention continues in the form of Financiera rural. Finance programmes that are limited to the agricultural sector or even to a specific commodity, may not be sufficiently flexible, thereby discouraging diversification of investment and activities in rural areas. Finally, although seemingly well targeted and tailored in terms of recipients and their needs, the real target would seem to be the under-developed private financial sector in rural areas, and agricultural programmes are unlikely to be the best mechanism to address this fundamental deficiency as compared to financial sector policies. • Agricultural policy reform has addressed certain institutional arrangements with success, chief among these being the decentralisation of decision-making and policy implementation. Decentralisation has brought about greater transparency through rules that require public notices of the planned uses of funds and of bids sought and bids won. Basing allocations of federal funds among regions on formulae that use observed data also increases transparency, as well as targeting, tailoring and equity because the amount of money available to a region depends on its measured needs. But deficiencies in the institutional arrangements governing policy design remain. Even decentralised decisions may lead to over-investment in areas that benefit relatively few, such as large irrigation projects, at the expense of investments that offer greater but more dispersed benefits, such as investments in roads or schools. Priorities and responsibilities among Ministries and across levels of government could be more clearly enunciated, co-ordination of policy design and implementation improved, and management, administration and information systems enhanced. • The performance of policies addressing the use of natural resources in agriculture is also beginning to improve, although the goal of sustainable management of these resources remains distant as water is overused in some areas, soil erosion continues, biodiversity is threatened and deforestation persists. Targeting and flexibility have been improved in the case of water, for example, as the CNA and locally organised bodies that focus on a particular water catchment area or river have been given increasing responsibility and authority. Tailoring and

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equity, too, are being improved as the “polluter pays” and “user pays” principles are starting to be applied. However, implementation is still in progress, leaving scope for further improvements, and water property rights for agricultural users often remain ill-defined and poorly enforced even in areas where water is used at unsustainable rates. • The land tenure system has been significantly improved since the early 1990s, although problems remain that continue to put a break on structural change and therefore threaten long-term viability of the sector and rural development. The certification process has allowed ejidatarios to exercise some degree of ownership over their parcels, thus increasing transparency in land rights. Equity has improved in the sense that claims are more secure and there is some flexibility with respect to land uses, including some potential to rent or trade land or to use land as collateral. This allows ejidatarios’ greater access to non-agricultural labour markets. However, progress is constrained by continued disincentives to privatisation of ejido land, residual authority and power of the ejido structure, the uncertain status of the two- thirds of ejido land that remains communal, and Constitutional limits to private ownership of land. These rules hamper privatisation and are preventing much needed farm consolidation and adjustment from occurring. • Many features of Target Income deficiency payments fall short of agreed policy principles, particularly with respect to the role of market signals but also by limiting the scope for innovation. In terms of transparency and equity, Target Income does represent an improvement over the market price support generated by the import barriers in place in the early 1990s as the costs are no longer borne by consumers but instead by taxpayers. They are therefore more easily measured and less regressive. Limits to individual payments may help to mitigate in part the shortcomings of the policy. However, the programme is not well targeted: the poor transfer efficiency of payments based on output means that only a small portion of the benefits is captured by producers. Target Income is not tailored to observed deficiencies in producer income, as the basis of payment is the quantity sold and the payment rate is based on prices. Only a restricted list of crops is covered, and guaranteed prices are set at a national level without respect to regional comparative advantage. Target Income benefits accrue to agents involved in commercial agriculture, and only those producing the crops covered. All these features result in significant distortion of market signals. In addition, the narrow range of crops covered, by excluding many producers, also makes the programme inequitable. • Policy reforms have not yet been applied in full to input subsidies, particularly energy subsidies so that this highly distorting category of policy intervention continues to be important in the overall policy mix. Limits on payments to individuals notwithstanding, subsidies to energy use influence producers in their production choices and induce more energy use by the sector, results that cannot be considered desirable from the point of view of good policy practice. Any positive effects of energy subsidies on farm income are small and regressively distributed. For similar reasons, subsidies to expand irrigation systems, whose costs are not recovered by higher fees to water users, significantly reduce efficiency and sustainable resource management. In conclusion, the overall direction of Mexico’s policy reforms from 1990 to 2006 is to be commended. The programmes initiated as part of the reform tend to conform well to the OECD Ministers’ shared policy principles and clearly perform better than the regime

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in place before reforms began. The reform process is not yet complete, however, and some recent policy initiatives diverge from these principles. Further policy improvements are possible and desirable.

Achievements of the reforms

Mexico’s agricultural policy reform since 1990 has helped the country to achieve lower rural poverty, lower costs of food consumers and higher quality products, greater benefits to subsistence producers and more flexibility for commercial producers, but not all policies work in this direction, and others could be improved. Land reform has enabled greater participation of ejidatarios in the wider economy, but achievements here remain limited. The delays in actually implementing “polluter pays” and “user pays” principles have likewise postponed the benefits these principles could bring; resource depletion remains a problem. While the importance of agricultural policy is recognised here, agricultural policy alone does not determine all these outcomes. Other factors, such as wider economic growth and policies in other sectors, may play a more important role. Mexico’s agricultural policy reforms have probably helped to lower rural poverty, which is lower than in the early 1990s in relative terms. Moreover, the rate of poverty has fallen more quickly in rural areas than in urban areas. Reforms in agricultural policy have also reduced the urban bias of pre-reform policies. Some elements of Alianza are less regressive than most other agricultural policies and, more importantly, PROCAMPO’s benefits are shared by the poorest farmers. The reduction and even elimination of tariffs associated with multilateral and bilateral agreements has reduced food costs to consumers which, along with the elimination of guaranteed prices that once prevailed in rural areas, allow the rural poor to buy food more cheaply – even without considering the contribution of anti-poverty programmes that are not part of agricultural policy, such as PROGRESA/Oportunidades. The reforms to the land tenure system have allowed more ejidatarios to participate in labour markets, facilitating higher and more diversified incomes from wages that have now replaced agricultural income as the largest source of rural income overall. The effects of agricultural policy reform on subsistence farmers have been positive, often for the same reasons that these policy changes have helped to lower poverty. Subsistence farmers have clearly benefited from the re-orientation of support away from market price support which affects the revenues of only those producers who sell their goods, to PROCAMPO payments based on planted area irrespective of sales. They have also benefited from the later amendment to increase the smallest PROCAMPO payments to a farmer up to a minimum amount even if the actual land holding is less. Moreover, ending market price support lowered food prices in rural areas to the benefit of subsistence farmers who, as a group, are net food buyers. The introduction of PROGESA/Oportunidades represents one of several steps to remove the pre-reform urban bias, so that subsistence farmers are more likely to have access to poverty alleviation programmes. Land tenure reform has allowed subsistence farmers in ejidos a formal process for renting or even selling land, and thus permitted more of them to seize opportunities for wage employment, often outside of the agricultural sector. However, neither Target Income nor input subsidies bring much benefit to subsistence farmers; also, both forms of support tend to be regressive. The net effect of agricultural policy reform on commercial farmers is more difficult to assess. Whereas subsistence farmers who tend to be net food buyers benefited from the

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elimination of market price support, commercial farmers of protected goods did receive higher revenues in the pre-reform period. This widely observed result must be assessed carefully: whatever the effect of market price support on commercial farmers’ revenue may have been, the effect on net income was much smaller as much of the transfer associated with market price support in any case slips out of their hands in the form of higher costs. In addition, transitory PROCAMPO payments linked to land, with benefits transferred more directly to farmers, were also part of the reform. At the same time, payments based on output were re-introduced in the form of the Target Income programme, although with effects on net income no better than for market price support. Moreover, like market price support, these subsidies are associated with only a limited range of traditional crops, thus discouraging innovations that might favour Mexico’s comparative advantage, such as planting tropical crops, fruits and vegetables. The subsidies to inputs also continued. Over the course of the reform period, transfer efficiency — the share of every dollar spent that shows up in farmers’ net income — rose, implying that more of the support, whether from taxpayer or consumer, reached farmers. Agricultural policy reforms have benefited consumers overall. Increased integration with world markets through the reduction or elimination of barriers to imports, allowed Mexican consumers to buy foods at lower prices. Moreover, while subsidies to consumers provided by means of agricultural policies have largely been phased out, the introduction of better targeted subsidies such as PROGRESA/Oportunidades have permitted the poorest consumers to continue to receive support. The reforms have benefited poor rural food consumers most, a group missed by the earlier consumer subsidies and penalised by price guarantees in rural areas. Consumers have also benefited from the greater emphasis placed on food safety and food quality, as voluntary standards at the federal level have provided the opportunity for foreign and domestic consumers of Mexico’s agricultural output to choose to buy better quality products. Land tenure reform has relaxed the constraints on land use, but serious limits and disincentives continue to restrict the evolution of a private land market. The certification process achieved important adjustments: certification established property rights on the basis of claims, often conflicting, to community-held areas; the link between PROCAMPO and area was used effectively as a lever to encourage certification; certified land may be rented and sold within the community; and land can be privatised completely under certain conditions. These achievements, however important, represent only a partial step towards liberalisation of land as there remain substantial procedural barriers and disincentives to an individual seeking to privatise land. The most obvious procedural barriers are the requirement that two-thirds of community members support privatisation, even of an individual’s certified plots, and the uncertainty surrounding the area that is still communally held, and which accounts for two-thirds of total ejido property. Apart from outright obstacles, some policies also generate disincentives as exiting the ejido cuts access to a variety of programmes and exposes the individual to greater tax liabilities. In the absence of any social safety net policies, this represents significant costs for those seeking to privatise. Thus, the achievement of land reform falls short of full privatisation. The over-exploitation of natural resources has been reduced, although overall the net effect of the policies in place is still to exacerbate depletion of these resources and pollution of the environment. The improvement in policy targeting, particularly the replacement of market price support with PROCAMPO during the NAFTA transition period, reduces the negative unintended consequences of agricultural policies. By de- linking support from current production, there is less incentive for producers to increase production and, as a consequence, they are less inclined to over-draw scarce water, to

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apply polluting chemicals or to cut further into forests. At the same time, these benefits are offset by policies that encourage further production in much the same manner as the market price support associated with the trade barriers of old. These include Target Income, and subsidies to energy which clearly encourage greater use of irrigated water by reducing electricity costs. Subsidies to infrastructure mostly take the form of irrigation projects which also facilitate increased water use, but may not improve efficiency. While the achievements of agricultural policy reform in this area have been to reduce the harmful environmental consequences through the re-orientation of policy, there are only a few, small programmes that actively promote better resource management. As in the case of poverty alleviation, however, another achievement of the reforms has been the recognition that non-agricultural policies address better many of the effects of the sector on the environment. The gradual implementation of “polluter pays” and “user pays” principles by means of new bodies, such as the CNA and regional bodies governing water use, and the collection of data – albeit slowly – with which to judge the state of environmental resources are important achievements, even if not the result of agricultural policy. These achievements validate the difficult decisions that were made to initiate the reforms and the associated period of transition and uncertainty. In any case, the pre- reform policies were unsustainable in a fiscal sense as noted in Part I. The changes that have been implemented constitute a distinct move away from the old ineffective and inefficient policy set, towards the shared policy goals and principles of the OECD ministers. A more demanding test of Mexico’s reforms is to ask how much further Mexico needs to go in the reform process in order to achieve the ideal implied by those shared policy goals and principles.

Priorities for the agricultural sector

Any recommendation for further adjustments in Mexico’s agricultural policy should be framed by a vision of Mexico’s agricultural sector in the future. Specific recommendations can then be tailored to the achievement of the objectives expressed for the sector. In line with the OECD Ministerial principles, the agricultural sector of Mexico should: • contribute to overall economic growth; • develop beyond subsistence, while leaving room for profitable small-holders and for part-time workers in the sector; • be the equal of other sectors in its ability to attract workers and investors, and other resources, without dependency on government subsidies; • reflect the societal benefits and costs of impacts on the environment in the decisions of its agents; and • respond to consumer demand, domestic or foreign.

This vision is of an agricultural sector that is no longer the only recourse for unskilled labour in the absence of a social safety net; no longer a low-technology, low-wage industry; no longer dependent on subsidies from taxpayers and consumers; no longer permitted to over-exploit and deplete natural resources; and no longer the exclusive provider of — and exclusively a provider of — staple crops for domestic use.

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Many of the changes needed to bring about this change in the role and structure of the agricultural sector do not come within the remit of agricultural policy. It is not the goal of this study to identify the causes of economic development. Yet some general lessons from OECD work point to contributions that may be made by non-agricultural policies. Macroeconomic policy is critical: the negative effects of the currency crisis in the middle 1990s show the vulnerability of the poor, whereas the growing role of non-agricultural activities in rural income shows the potential for broader economic growth to alleviate poverty. The need to improve education and natural resource use extends throughout the economy, and requires nation-wide action. Agricultural policies to address limits in rural finance and high energy prices are attempts to fix the consequences of deficiencies in other sectors, likely an inconsistency of effects brought about by poorly targeted and ill- tailored policies. Agricultural policy is not the best instrument to address widespread poverty concerns. Social policy is much better suited to this purpose. Considering a sector specific response would only be appropriate if society-wide income support systems are inadequate and the prevalence of poverty is directly linked to farming. Improvements in institutions and governance that could offset the negative effects of the six-year political cycle by providing for greater continuity in the public service might be best addressed directly, not by re-designing programme implementation to generate transparency and long-term support. The agricultural policy regime that will bring about the vision defined here is one that recognises the potential for private markets to work, while finding the correct points of insertion for subsidies and taxes that will align private and societal benefits and costs. Economy-wide effects would be positive: market allocation favours improved resource use relative to demand, domestic and foreign, raises value-added and, thus, GDP. Agricultural policies that attempt to increase producer income or to improve growth in the sector using subsidies on output and inputs of a crop based on its historical role as a staple food, could have the opposite result. Such policies can penalise long-term development and delay the eventual achievement of this vision for Mexico’s agriculture by failing to exploit, or even undermining, its own comparative advantage. Conversely, agricultural policies will help to achieve this vision if they work to improve the operation of the market, or to increase access to human and financial capital, or if they are directly targeted to societal benefits and costs not normally reflected in price signals. This vision of agriculture depends critically on further evolution of the entire policy regime and economy of Mexico. As such, realistic recommendations for further policy reform must reflect the context; agricultural policy may offer an alternative for meeting important objectives that would otherwise be left unaddressed. Nevertheless, based on the achievements to date and taking into account the broader context, Mexico is well placed to make further reforms in agricultural policies in the direction of the vision given above.

Actions for further reform

The existing array of policies can be amended further to consolidate and strengthen what has already been achieved by the reforms undertaken to date, and to optimise the role of the government in the realisation of the long-term vision for the sector. Immediate improvement in agricultural policy would result from reform to Target Income, the deficiency payment scheme, which could be re-instrumented or replaced. The programme has very low transfer efficiency, so most of the benefits do not go to producers, and the effects on net farm income are much smaller than the cost to

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taxpayers. Moreover, the benefits are tied to output and, although there are some limits on individual payments, the effect is to encourage excess production of the eligible crops, distorting resource allocation. Incentives to expand production indirectly encourage natural resource use, even in areas where these resources are already strained. As Target Income is linked to commercial sales, it does not reach subsistence farmers, and the programme is not progressive. A better mechanism should be found. The first steps in this process would be to define better the objectives of the programme, and then to target explicitly those objectives. For example, a better way to handle income risk would be to link payments to income in the form of a net income insurance scheme, which would recognise that both prices and yields determine crop revenues, and that input cost variability can also play a part. Moreover, such an insurance scheme could be linked to total agricultural net income, rather than prices of a few crops, so there would no longer be a bias in the programme towards the limited list of eligible crops. Of course, such a programme would still focus on agricultural income when, in fact, the real concern is probably overall income, including labour income from non-agricultural activities, implying that the long-run solution to income risk lies in a more general social safety net. Despite the reductions in tariffs following multilateral negotiations and the gradual elimination of certain bilateral tariffs, Mexico continues to protect producers by means of market price support – barriers to trade that raise domestic prices relative to border prices. Market price support shares all the failings of the deficiency payment system described above. In addition, however, the cost of market price support is borne by consumers, including poorer people who spend a higher proportion of their income on food; market price support is therefore regressive. Market price support should be progressively eliminated. The stated purpose of energy subsidies is to offset the higher cost of Mexico’s energy regime, particularly the costs imposed by the state-endorsed monopoly. Regardless of their justification, energy subsidies to producers encourage excessive use of natural resources, particularly water, and distort production practices in favour of those activities that receive greater subsidies. If a secondary objective is to raise producer net income, then the very low transfer efficiency of this type of input support – the small effect on farmer net income – must be taken into account. The objective of the programme should be defined clearly and addressed: the best solution may lie in a reform of the energy regime. PROCAMPO was intended to facilitate the transition period of NAFTA, which ends in 2008. PROCAMPO has widespread support likely due to the great improvement in transfer efficiency that it has brought about, the coverage of both subsistence and commercial land-owning farmers, and the reduced pressure on the environment resulting from the programme. As the transition period ends, the objectives to be met must be defined in the light of what has already been achieved and in light of developments in the agricultural sector and the economy more widely. If income support is the objective, then the payment should be linked to income, not land, and available regardless of the potential recipients’ agricultural activities. The “income” objective to be tackled must be carefully defined: a programme that aims to alleviate poverty would be quite different from one that aims to smooth income variability. If encouraging environmentally sustainable practices is the objective, then the payment should reward producers for adopting such practices, retaining forests and soil for example, and complement the application of the “polluter pays” and “user pays” principles. Payments could be contingent on whether or not producers report their water use. The payment could be used to reward the planting of varieties that protect a certain level of biodiversity, or the idling

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of marginal land that is vulnerable to soil erosion. If the objective of future support is to facilitate the privatisation of land, as discussed below, then it must cease to be an area payment as soon as possible. As 2008 approaches, the precise nature of the desired objective should be explicitly stated so that programmes can be carefully targeted and tailored. The institutional structure within which policy formulation takes place is an essential element in good policy design and implementation. A clearly stated development strategy, supported by well articulated, adequately resourced and appropriately targeted policies, would do much to improve the productive capacity of the sector. It is important that an appropriate balance be found between responding to unexpected developments in the sector and providing a stable environment in which businesses can plan and invest. In many OECD countries, framework legislation covering a multi-year period attempts to achieve such a balance, and this approach might usefully be considered, adapted of course for the specific circumstances in Mexico. Governments should also resist the temptation to replace appointed officials in the context of the political cycle, so as to build an independent and professional civil service to advise upon andtoimplementitspriorities.Asimpleandusefulstepforwardwouldbetoputinplace routine and long-lasting policy planning processes, with the obvious first choices relating to data collection and analysis. Data collection should be institutionalised; for example, a regular agricultural census is needed so that the sector can be better understood and decision-making improved. This would be preferable to current practice which depends on various other sources, which are often ad hoc and partial. Care should be taken that programmes that are put in place in response to market failures of different types do not crowd out needed private development. In particular, direct or indirect public provision of financial services or cost-sharing on producers’ hedging strategies should be transitory mechanisms to alleviate existing deficiencies, but should not compete with or crowd out private firms. Staged withdrawal from some of these activities could be built into programmes, allowing private provision to take over as and when defined benchmarks are reached. For example, programmes that are intended to overcome deficiencies in private services could be set on a declining budget, with safeguards in place to return to a previous level in the event that public services were not eventually replaced by private services. Alternatively, such programmes could be restricted to only those regions where market failures are clearly evident. The absence of an active private sector does not indicate that the private sector could not carry out the functions currently undertaken by the government, as it may simply be the case that the activities of public agencies have eliminated the scope for profitable private sector involvement. Implementation of the “polluter pays” and “user pays” principles to agriculture involve actors outside the agricultural sector, such as local associations that are formed to manage water in a particular locality. Nevertheless, there is scope for contributions from agricultural policy. Agricultural policy, instead of subsidising further extensions to the irrigation network, might contribute better to overall societal needs by, for example, encouraging creation of and participation in water user associations, and distributing water meters to farmers exploiting private wells. More programmes could educate, train and disseminate information to Mexican farmers on sustainable farm management practices that are beneficial both from an economic and environment perspective. Communal land ownership could be ended to help align private and public incentives for that land. Re-orienting existing policies to end subsidies that encourage production would represent a substantial contribution to environmental sustainability. Where agriculture

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generates positive or negative environmental effects, then subsidies and taxes might be introduced to so that private decisions take societal needs into account. If possible, systems that reward the provision of environmental services with direct payments and grants for environmentally-beneficial investments, or charges and regulations in the event of negative effects, should be considered rather than linking the payment to an agricultural production activity. For example, the ecological services provided by forests, such as soil and water conservation, might be rewarded with public support, while unsustainable forest management would be penalised. Another mechanism is to impose cross-compliance requirements by demanding that producers who receive benefits of a programme engage in environmentally sustainable activities. Examples of cross- compliance exist, as some programmes do require that producers obey certain restrictions or adopt methods that are intended to improve the quality of land, but programmes with cross-compliance requirements account for a very small share of total expenditure. The allocation of property rights for water must be clarified, completed, and enforced. The current practices of granting concessions in areas where the level of sustainable water use is not yet estimated is too permissive. In any case these concessions seem to be exceeded frequently. The status of water supplies must be established, requiring scientific surveys of aquifers and water catchment areas to determine their capacities and also the drawdown on these supplies already in progress. Concessions must evolve into property rights that are enforced. Once established, owners of concessions should be permitted to rent or sell their property rights, so water can be distributed more efficiently now and be re-distributed by market processes in the future as needs change in different areas and sectors of the economy. Agricultural policy is not the primary mechanism to clarify property rights for water, but there is scope for agricultural policy to play a supportive role. As noted, continued agricultural policy reforms help by reducing incentives to increase production and draw more water in areas where extraction already exceeds the sustainable rate, and may also help by imposing cross compliance requirements: access to agricultural programmes – and certainly to any support for irrigation – could be contingent on a producer respecting limits imposed by water property rights. Constraining migration from rural areas is an objective that seems to underlay many agricultural policies. This reflects a widely held perception that migration from rural areas to urban areas within Mexico, which is more common than migration abroad, is bad for the rural areas themselves, for over-crowded urban areas and for society as a whole. However, as the net effects of migration are quite complicated, the premise on which this objective is formulated should be subject to more critical assessment. Migration from rural to urban areas might be seen as a sign that economic processes to distribute the gains of growth are at work, as labourers opt to move to areas where real wages are higher. It would be damaging to long-run economic growth to prevent workers from responding, even more so if other policies tie them to small plots of land that can only provide a subsistence standard of living. If one reason to limit migration is to minimise taxpayer costs, then the costs of providing public services must be assessed by comparing the costs of providing public services in urban areas to the costs of providing the same level of services in rural areas. If the result of such an assessment is that costs of public services per inhabitant in rural areas is less than in urban areas, this may be an indication that there is scope to expand the provision of services in rural areas. Conversely, if the opposite result is found, then this objective of agricultural policy should be reviewed. Further land tenure reform will be crucial in the achievement of the goals that have been outlined for the sector. Small and often scattered plots of land suffice for subsistence

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farming, but are no basis for a viable economic activity. Small plots will not attract investment: banks cannot cover loan-related costs, individual land-holders cannot reap enough additional rewards to justify investment in machinery, technology or human capital. Tying millions of people to small and scattered communities in rural areas makes it extremely difficult for them to access public services, such as education and health, or to increase their incomes. On the contrary, recent improvements in living standards in rural areas appear to be associated with growing wage income from non-agricultural activities. Land privatisation is therefore an urgent need. The current rules governing private land holdings should be relaxed, communal land in ejidos that has escaped certification must be assigned and all ejido land should be converted into a tradable and rentable asset. The continued prevalence of communally held land generates the “problem of the commons” – overuse and uncertain distribution of benefits. This should be ended by defining property rights clearly. Whereas the most recent agrarian reform gave to the many ejidatarios land which was once concentrated in the hands of the very few, by disallowing land trading it prevented them not only from getting the full benefit possible from this asset, but also from rationalising land distribution and use. Ejidatarios would benefit from the development of a land market by having options to rent or sell land to people not in the ejido, with the greater number of potential buyers likely leading to rising prices that would compensate the ejidatarios who choose not to own land. They would have the option not to sell, as well. Further reforms to land tenure are controversial; the process must be carefully considered. So, too, must the overlapping effects of various policies. For example, continuing land-based payments as land is privatised would lead the expected payments to be capitalised in land prices, with the dubious long-term effects of creating an asset – a perceived right to subsidisation – that, experience shows, leads to protracted intervention in the sector and costly compensation packages. At the same time, however, converting the existing land based payment into a one-time grant or a bond with an associated payment stream that is granted to current land owners, but not contingent on their keeping the land, might facilitate land privatisation by infusing some financial capacity into rural areas. Agricultural policies could support investment in a variety of general services that would support a productive agriculture and food system, such as the physical infrastructure of the sector; plant, animal and human health systems; inspection and certification services; agricultural schools, training and extension services; research, development and technology transfer; the provision of environmental services and control of environmental degradation, when not addressed by broader policies; and perhaps insurance against unavoidable risks not covered privately or by other policies. Whereas historical spending on infrastructure has focused on irrigation, this support could be re- oriented towards infrastructure necessary for trading agricultural goods, and perhaps allowing markets for water to develop, as well. Spending on information and communication technology, inspection services that ensure the quality of the product, and the human capital of the sector would have a place, if carefully defined not to displace private initiatives. Very practical measures are possible. For example, a technician might be provided in areas that are characterised by high rates of illiteracy – a practice that is used to improve many technology programmes of Alianza now. Nationally recognised inspection services help support the development of national markets, and also serve most the poor who are otherwise more vulnerable to low quality or unsafe foods. Programmes to address systemic risks could be used to provide insurance to producers, perhaps based on their net income. Likewise, consequences of agricultural activities for the environment

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that are not recognised in broader environmental policy could be addressed by taxes and subsidies that align private incentives and societal needs. Agricultural policy should also help to establish and enforce property rights. Agricultural policy reforms must not be considered in isolation. The subsistence farming that characterises many rural communities provides a safety net that, in the event of misfortune, limits human suffering. Likewise, inherent in the land tenure regime, including limits on private ownership of land, is the objective of a more equitable distribution of wealth. These objectives may be better met by other mechanisms. An economy-wide safety net is subject to less risk, does not limit opportunities in the way that subsistence farming does and also extends to all people. Similarly, a progressive tax to address wealth, or income, distribution directly would be more effective. The time path of evolution towards these policies is not clear, nor is it a matter of agricultural policy; progress towards an improved regime of agricultural policy should be made in parallel with progress made in other sectors, and in macroeconomic policy more broadly. Thus, while clearly the best policy initiative to address the absence of a social safety net is to construct such a programme and the best programme to address income distribution is a progressive programme based on all income, it may be within the scope of agricultural policy to achieve second-best solutions until these better alternatives are designed and implemented more broadly. Government has an important role to play in the long-run, even after economy-wide reform is complete and an economically and environmentally viable, competitive agricultural sector is achieved. A functioning market requires that property rights are established and enforced. Even with a well functioning market, the provision of public goods will still require government intervention. Natural resources provide public benefits while at the same time the effects of many activities on those resources are reflected in price signals only if property rights and policies have been carefully constructed. Information services are needed to facilitate public and private decision- making. Government activity in the area of inspection services is a public good that protects the health and well-being of all, but especially of the poorest who may otherwise be vulnerable to unscrupulous providers of unsafe goods. Public subsidies, too, may have a part; the success of PROGRESA/Oportunidades has demonstrated the potential for carefully crafted subsidies that help simultaneously alleviate poverty and meet long-run objectives of equity in development. The actions recommended here represent steps toward an agricultural sector that is healthy, independent, sustainable and productive. These actions are continuations along the path towards liberalisation along which Mexico has already made great strides since the early 1990s. To date, these steps have resulted in some reductions in rural poverty, less damage to the environment and lower societal costs for raising producer welfare, as well as some improvements in financial markets and inspection services. It remains for Mexico to define the kind of agricultural sector it would like to have in the future, to translate that vision into specific objectives and to act to put in place the agricultural policies needed to achieve them.

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NOTE

1. See box in Introduction to Part II for the relevant passages of the OECD Council at Ministerial Level, April 1998. In summary, the shared goals are an agricultural sector that is characterised as responsive to market signals; efficient, sustainable and innovative; integrated with multilateral trade; provides adequate and reliable food that is safe; consistent with good environmental resource management; contributes to rural development; and contributes to global and national food security. The operational criteria for policies instruments put in place in pursuit of the shared goals are that they should be transparent, targeted, tailored, flexible and equitable.

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Annex II.A. Exchange Rate Table

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Mexican exchange rate MXN/USD 2.841 3.022 3.095 3.115 3.389 6.421 7.601 7.924 9.153 9.553 9.453 9.344 9.660 10.790 11.281 10.896

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Annex II.B. Detailed programme information – 191

Annex II.B. Detailed Programme Information

(as relevant to Chapter 3)

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Annex Table II.B1. Concurrent Expenditure for Rural Development (PEC) Annual grow 2000 2001 2002 2003 2004 2005 rate billions of real (2005) pesos I. Productive programs 37.7 40.7 43.4 44.6 43.0 45.0 3.1% PROCAMPO 14.6 16.2 15.0 15.9 15.1 14.9 -0.2% Marketing payments 4.5 4.5 6.8 6.1 5.4 6.5 6.6% Alianza para el Campo 1.5 2.6 2.8 3.6 4.4 4.5 22.7% Hydraulic infrastructure 3.1 2.8 2.5 4.1 3.7 4.7 10.5% PROCEDE 1.3 0.7 0.4 0.6 0.2 0.8 -16.1% Forestry 0.2 0.2 1.0 1.1 1.1 1.1 50.2% SAGARPA 9.7 10.6 11.9 10.2 10.1 9.6 -1.1% Agrarian sector 2.7 3.0 3.1 3.0 2.9 2.9 0.6% II. Income programs 13.7 15.6 16.5 13.2 14.3 13.3 -1.8% Agriculture Education ramo 11 3.7 4.4 3.8 3.8 3.9 3.7 -0.9% STPS Probecat 1.0 1.1 0.8 1.0 0.9 0.1 -34.2% Program for temporal Work 5.5 5.4 4.9 2.0 2.0 1.5 -25.5% Conaza 0.1 0.2 0.2 0.1 0.1 0.0 -22.4% Forestry Development 0.2 0.2 0.3 0.3 0.4 0.4 17.1% INI 1.0 1.3 1.3 2.7 3.1 3.7 32.2% Rural Development Programs 2.1 3.1 5.1 3.4 3.7 3.7 8.7% Rural Aquaculture 0.0 0.0 0.0 0.0 0.2 0.1 81.3% III. Capital programs 7.8 8.1 7.1 6.2 8.1 7.0 -2.0% Hydraulic Infrastructure in marginal areas 0.3 0.7 0.3 0.1 0.2 0.2 -22.4% Funds for micro, small and medium enterprises 1.2 1.1 1.1 0.7 0.9 0.9 -6.9% Fund for Municipality Infrastructure 3.2 3.9 3.9 3.8 4.1 4.4 4.8% Phones on rural roads 1.6 1.1 0.9 1.2 2.1 1.0 -0.8% Program of potable water in marginal areas 1.0 0.8 0.3 0.1 0.3 0.0 -49.3% National reforestation program 0.4 0.5 0.6 0.4 0.5 0.5 1.7% IV. Rural poverty programs 22.0 33.1 31.0 35.6 32.3 40.0 9.1% Social infrastructure 6.0 7.2 7.3 7.0 7.6 7.8 4.2% Micro regions 0.0 0.0 0.4 0.5 0.5 0.4 Food Program 2.8 3.3 4.1 8.6 4.8 4.8 13.8% PROGRESA / OPORTUNIDADES 13.2 22.6 19.2 19.5 19.5 27.0 9.4% V. Other programs 16.6 14.9 20.7 31.7 28.4 38.6 20.7% Total expenditure for rural development 97.9 112.5 118.7 131.4 126.2 143.9 7.0% The implicit price index of GDP is used; food programmes includes school breakfasts, rural supplies, social milk supply programmes, etc. Source: Data from the Budget of the Programa Especial Concurrente.

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Annex Table II.B2. Agricultural marketing support (Million pesos)

Concept 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Direct Marketing Support 108.5 1 446.5 1 568.5 1 940.8 806.6 555.4 2 068.1 1 930.6 1 573.6 1 784.2 3 796.7 3 358.9 3 072.1 2 125.3 4 260.0 (Target Income) 1/ Rice 17.6 0.0 0.0 0.0 28.2 18.8 25.5 50.9 42.2 69.1 126.8 92.0 16.9 72.1 91.5 Wheat 2/ 1.2 1 186.2 1 320.0 1 713.6 541.6 17.5 707.3 844.6 831.1 766.5 951.1 1 219.0 910.1 64.3 458.7 Sorghum 19.0 117.9 101.2 25.9 3.2 358.4 366.8 264.7 200.9 123.4 700.7 299.3 543.9 37.0 543.4 Maize 64.1 935.7 770.5 368.1 825.2 2 018.2 1 404.3 1 069.8 1 336.8 2 196.4 Soybean 70.6 104.7 106.3 174.5 29.2 50.5 4.3 76.0 Safflower 6.5 54.9 44.4 182.0 228.8 175.6 Cotton 37.7 40.0 26.8 129.9 32.0 131.3 257.9 206.6 3.2 381.5 713.4 Peanut 4.0 Barley 1.0 4.3 0.2 Canola 1.1 0.1 0.4 4.9 Copra 15.0 Triticale 1.0 0.0 Bean 1.0 511.2 198.1 Other support/ 68.0 64.6 32.8 89.0 146.9 Direct support for 75.0 22.2 69.5 surplus withdrawal Direct support to 12.8 100.1 148.3 208.7 2.5 conversion Support for price 55.3 61.2 54.9 61.8 77.7 101.6 435.2 498.0 557.5 496.8 hedging Support for use of TIF 366.4 203.9 173.3 slaughterhouses4/ Special programme of 79.7 78.0 68.1 maize support Other support 5/ 1 144.3 428.4 546.0 1 459.3 2 353.7 1 432.1 schemes TOTAL6/ 108.5 1 446.5 1 568.5 1 940.8 806.6 610.8 2 129.3 1 985.5 1 635.4 3 006.3 5 235.2 4 440.2 5 698.9 5 549.4 6 502.2 TOTAL 2005 pesos 635.3 7 404.4 7 290.2 8 329.3 2 527.8 1 470.8 4 377.1 3 500.9 2 502.0 4 137.6 6 811.9 5 350.6 6 393.3 5 815.7 6 502.2 See notes on following page

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Notes to Annex Table II.B2. Agricultural marketing support

1. From 1991 to 1994, Consumption Support (wheat for bread) and Marketing (wheat, sorghum, soybean, cotton and rice) are included; from 1995 to 1997, Marketing Support payments for fiscal years 1998 to 2001 are included, the expenditure relates to support given to: rice, wheat, sorghum and maize (only to cottonin1999);in the fiscal year 2002 the expenditure is related to Direct support to basic grain and oilseeds; in the fiscal year 2003, the expenditure is related to Direct Marketing Support; in the fiscal years 2004 and 2005 the expenditure relates to Direct Support to Target Income.

2. In 1996 support to wheat ceased. Payments made that year were based on 1995 applications.

3. Support given to fertilizers (1995) and pork producers (1996 and 1997) are included.

4. From 2005, support has been given through SENASICA.

5. For the fiscal years 2000 and 2001, the expenditure is called Other Regional Markets Development (in 2001, the products not included in Direct Support, such as cotton, peanuts, safflower, canola, barley, copra, soybean, beans and Other Support Schemes are added; here we present the difference of the subprogrammes not specified in the table); for the fiscal year 2002, the expenditure is related to Complementary Support and for the fiscal years 2003, 2004 and 2005 the expenditure relates to Other Support Schemes.

6. The data cannot coincide with other sources. The real total amount of Marketing Support can differ from the Informe de Gobierno of 1996-2000 period because this source did not include the Support for the Acquisition of Coverage.

Source: General Directorate of Marketing Policy - ASERCA; Informes de Gobierno 2001, 2005 and 2006.

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Annex Table II.B3. Main modifications to PROCAMPO, 1993-2006

Year Objective Support Characteristic Creation of the Direct Support to the Countryside Programme Consists of a single payment to producers by hectare or fraction (PROCAMPO), direct payment programme for the transfer of federal of a hectare for the season for which eligibility has been verified. 1993-1994 government funds to support rural producers. The programme was The eligibility criteria are based on crops (maize, bean, wheat, implemented as of the autumn-winter 1993-1994 season. rice, sorghum, soybean, cotton, safflower and barley) sown in The programme was established for 15 years. the three agricultural seasons prior to August 1993. Conversion of production methods to those based on ecological Up to the 1994-1995 autumn season, planting was required for principles. all crops that served as the basis to qualify for PROCAMPO payments. As of spring-summer 1995, farmers can plant any crop that is 1995-1996 legal. As of the autumn-winter 1995-1996 season, producers participating in ecological conservation projects are eligible for PROCAMPO payments. Preferential treatment to producers with the lowest income. Producers with less than five hectares of rain fed lands receive payment in advance of planting for the spring/summer season. 2001 Those properties with a surface smaller than one hectare receive payment corresponding to a complete hectare. Implementation of advance payments (Capitalised PROCAMPO) — Producers will develop a project, for which an investment plan financial institutions were allowed to make advance payments to has been proposed on a short or medium term basis, which is producers equal to the net present value of future entitlements technically viable and financially profitable, and which is directly 2001 related to primary production, processing, the supply of inputs and equipment, or to other economic activities tied to the agricultural, forestry and fishing productive activities. Preferential treatment to producers at lower income levels. Producers with less than five hectares of rain fed land receive a 2003 preferential payment for the spring-summer season. Source: PROCAMPO information @ www.procampo.gob.mx.

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Annex Table II.B4. Main programmes of Alianza Contigo

Programme name Objective Target population

I. Agricultural development To increase production, productivity and agricultural competitiveness through research and technology transfers, resource sustainability and the consolidation of product-systems, capitalization and diversification of productive units, development of professional skills and focussing on critical factors, in order to increase producers income and achieve food security. Subprogrammes Investment promotion and To stimulate investment and capitalisation in the agricultural sector and its capitalization by supporting for the capitalization acquisition of capital goods and improving infrastructure. Communities, organizations Strengthening of product systems To promote integration and competitiveness of Product-Systems (productive chain) by means of additional or associations at national, support to producers, to strengthen the organisation of production and to improve planning, communication state, regional, district, or and coordination among the different links of the chain. municipal level or producer grouped in rural areas. Research and technology Meet the needs of the agro-food and fisheries chains by supporting the creation of technology, validation, transfer transfer and adoption.

Support livestock producers through investment in construction and infrastructure rehabilitation, acquisition II. Livestock development and modernisation of equipment, adoption of new technologies in primary production units, and with respect to food, genetic and sanitary, as well as investment in industrial projects. Ejido, communal, small Livestock development Increase fodder availability, improve productive efficiency of the production units through capitalization and holders, producer groups infrastructure investment, machinery and genetic improvement. involved in livestock Development of integrated Support and promote livestock development by contracting development coordinators and promoters, through livestock projects projects to create producer groups and to favouring integration in the livestock chains.

To strengthen the creation of employment and income for people in rural areas To orient rural development policies, strategies and instruments towards the capitalization on family production units. III. Rural development To promote sustainable management of natural resources in projects to develop primary production. Incorporate transformation and valued-added processes. Subprogrammes Support to rural investment Support, through investment incentives, the creation of productive projects for the integration of the rural programme (papir) population and the creation of micro companies. Stimulate investment by the lowest income segment of the rural population. Promote the use of technical, commercial, organizational, management and financial knowledge, among Low income producers in Capacity development in the marginal, area and in rural sector (prodesca) production units and rural organizations, through training, education and micro financing. Establish mechanisms to encourage the development of professional services. transition. Strengthen rural companies and Promote the creation, conversion and organizational integration of rural producers. organizations (profemor) Support the consolidation of the structure and administration of the Rural Sustainable Development Councils.

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Annex Table II.B4. Main programmes of Alianza Contigo (continued)

IV. Food health and safety To strengthen the control and eradication of pests and/or agricultural, livestock and aquaculture diseases. Preserve and protect sanitary status. Promote and develop national food safety programmes. Certify the health, safety and general quality of food and aquaculture products. Subprogrammes At state and regional level, monitoring of the animal health situation in the context of disease eradication Animal health campaigns, bio security, animal health diagnosis laboratories, inspection of slaughterhouses i, checks on animal movements and controls at strategic points of sanitary or phytosanitary cordons Aquaculture and agriculture Respond to contingencies and compensations producers, vulnerable to pests and/or diseases, and those Plant health Support the development of national campaigns and plant health prevention campaigns. needing a food safety Support, training and technical assistance for the implementation of minimal risk methodologies in production, programme Food Safety processing and packing units, such as Good Agricultural Livestock and Aquaculture Practices. Stimulate Good Manufacturing Practices and Operational Procedures for Health Standards. V. National information system Support the establishment and implementation of the National Information System for Sustainable Rural Agricultural and fishery for sustainable rural Development (SNIDRUS), with the collaboration of federal bodies and INEGI, in order to provide timely producers, state governments, development (SNIDRUS) information to producers and other economic agents involved in production, supporting decision taking and SAGARPA delegations to contributing to the integration of fisheries, agricultural and food chains. federal organizations, the Agro-food and Fishing Statistics and Information Service, Rural Development districts, as well as institutions that make up the National Technical Committee for Statistical and Geographical Information for Sustainable Rural Development and State Committees for Statistical and Geographic Information for Sustainable Rural Development VI. Stabilization fund, Through a target income system, to partially compensate for falls in producers’ incomes. All the coffee producers who Strengthening and Provide support to producers during periods when the international coffee price is below expected levels. are members of the National reorganising coffee Promote actions to stimulate coffee consumption and improve the quality of Mexican coffee Coffee Committee production

Source: Diario Oficial de la Federación. Tercera sección. Reglas de Operación de la Alianza para el Campo para la Reconversión Productiva; Integración de Cadenas Agroalimentarias y de Pesca; Atención a Factores Críticos y Atención a Grupos y Regiones Prioritarios. Friday, 25 July 2003.

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Ruiz-Castillo, J. (2005), An evaluation of “El ingreso rural y la producción agropecuaria en México 1989-2002”, published in 2004 by the SIAP (Servicio de Información y Estadística Agroalimentaria y Pesquera) of SAGARPA (Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación). Sadoulet, Elisabeth, Alain de Janvry and Benjamin Davis (2001), Cash Transfer Programs with Income Multipliers: PROCAMPO in Mexico, FCND Discussion Paper 99. IFPRI, Washington DC, January. SAGARPA. Sistema de Información Agroalimentaria y Pesquera. Series 1980 – 2004. Secretaría de Hacienda y Crédito Público (2000), El Presupuesto de Egresos de la Federación 1995-2000, Subsecretaría de Egresos, SHCP. Secretaría de Salud (2001), Programa Nacional de Salud 2001-2006. SEMARNAT (2003), Compendio de Estadísticas Ambientales, 2002,México,D.F. Scott, J. (2002), Programa de Empleo Temporal (PET): Una evaluación preliminar,Documento de Trabajo 237, División de Economía, CIDE. ___(2003), PROGRESA: Origins, Political Economy, and Implications,FAO,Rome. ___(2004a, “La descentralización, el gasto social y la pobreza en México”, Gestión y Política Pública, Vol. XIII, 3: 785-837. ___2004b), “Eficiencia redistributiva de los programas contra la pobreza en México”, Documento de Trabajo 330, División de Economía, CIDE. ___(2006ª), “Desigualdad de Oportunidades y Políticas Públicas en México”, in México en la Perspectiva de la Modernización, E. Florescano and H. Aguilar-Camín (eds.), FCE- CONACULTA. ___(2006b) “Pobreza Rural y Políticas Públicas.” Presented at Seminario Internacional sobre Desarrollo Rural y el Sector Agroalimentario. March, 2006. Székely, M. (2003), Es posible un México con menor pobreza y desigualdad,Documentosde Investigación, 5, SEDESOL. Székely, M. (ed.) (2005), Números que Mueven al Mundo: La Medición de la Pobreza en México, ANUIES-CIDE-SEDESOL-Miguel Ángel Porrúa. Székely, M. and E. Rascón (2004), México 2000-2002: Reducción de la Pobreza con Estabilidad y Expansión de Programas Sociales, May. VII Censo Ejidal 2001, Instituto Nacional de Población y Vivienda. World Development Indicators. World Bank. Warman, A. (2001), El Campo Mexicano en el Siglo XX. World Bank (2000), Mexico Ejido Reform, Avenues of Adjustment - Five years later,Washington D.C. World Bank (2001b), Mexico Land Policy - A decade after the Ejido Reform, Report No. 22187- ME, 15 June, Washington D.C. World Bank (2004), Mexico Public Expenditure Review,WashingtonD.C. World Bank (2005), A Study of Rural Poverty in Mexico,WashingtonD.C. World Bank (2005), World Development Report 2006: Equity and Development, Washington D.C. World Bank (2006), Decentralization, Poverty, and Development in Mexico,WashingtonD.C. World Bank (2001a). Mexico: A Comprehensive Development Agenda for the New Era, edited by Marcelo Giugale, Olivier Lafourcade and Vinh H. Nguyen.

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AGRICULTURAL AND FISHERIES POLICIES IN MEXICO: RECENT ACHIEVEMENTS, CONTINUING THE REFORM AGENDA– ISBN-92-64-030247 © OECD 2006 Part III. Fisheries – 203

PART III.

FISHERIES

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Introduction – 205

Introduction

As with a number of other OECD countries, the fisheries sector has played an important role in the economic development of Mexico. While the contribution of the sector to the whole Mexican economy is relatively small in terms of GDP, it has a prominent position in regional terms with regard to economic, social and environmental issues. With a large aquatic biodiversity and valuable marine resources, it is important that Mexico has strong and enduring institutions, capable of coping with challenges faced by fishers and their communities. This is not an easy task since institutions are permanently confronted with preserving fisheries resources and at the same time as encouraging economic development and alleviating poverty. As observed by Bailey and Jentoft (1990), these are the “hard choices in fisheries development”. Part III provides a review of a Mexico’s fisheries policies over the past fifteen years. The purpose of the review is to assess the effectiveness of the policies governing the fisheries sector and to identify areas in which the policies could be adjusted to more effectively meet the government’s objectives for the sector. The objectives of the Programa de Acuacultura y Pesca for the period 2001-2006 are contained in the broader Plan Nacional de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación (Programme on Agriculture, Livestock, Rural Development, Fisheries and Food) 2001- 2006 which is under the authority of the Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación (SAGARPA). The agency within SAGARPA which is responsible for fisheries is the Comisión Nacional de Acuacultura y Pesca (CONAPESCA). The objectives of CONAPESCA under the Programa de Acuacultura y Pesca are:1 • to use fisheries and aquaculture resources in a sustainable way; • to promote the increase of the economic and social rent from fisheries and aquaculture; • to grant and encourage legal certainty to fishing and aquaculture activities; and • to promote support programmes and services to fishing and aquaculture activities (SAGARPA 2001)

The focus of the report is on those areas of government policy that have a direct impact on the sustainability and profitability of the sector. The effectiveness of government policies in supporting the overall objectives for the sector is assessed with reference to the impacts of policies on economic efficiency; resource sustainability; economic profitability; cost effectiveness; transparency; and community resilience. These criteria form the cornerstone of the shared principles of OECD countries as articulated at the annual meetings of the OECD Council at Ministerial Level (OECD, 2006). These can be summarised as a shared commitment to:

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• achieve sustainable economic growth and employment, and rising standards of living in member countries while maintaining financial stability, so contributing to the development of the world economy; • assist sound economic expansion in member countries and other countries in the process of economic development; and • contribute to growth in world trade on a multilateral, non-discriminatory basis.

The scope covers Mexico’s wild capture and aquaculture fisheries sectors, including the inland fisheries. This is a very diverse sector and covers a wide range of physical, production, marketing and institutional issues. The period covered in the review is 1990- 2005, with the emphasis on the evolution of policies and the current policy framework. The analysis has been undertaken in the OECD Secretariat and has been supported by a number of consultant reports that provided background on particular aspects of Mexico’s fisheries policies. These consultant reports cover the evolution of the institutional framework, the status of the resource stocks, aquaculture sector issues, and rural development issues. In addition, OECD staff undertook consultations with a number of stakeholders in the Mexican fisheries and aquaculture sector, including officials in CONAPESCA and the National Fisheries Institute (INP), and producer organisations for the wild harvesting, aquaculture and processing sectors. Part III is organised as follows. Chapter 9 provides an overview of the key characteristics of the Mexican fisheries sector including production, trade, fleet structure, employment and regional characteristics. The institutional framework governing the sector is reviewed in Chapter 10 and covers the evolution of management policy over the period 1990-2005, international engagement, and type and extent of financial support provided to the sector. The effectiveness of the management of wild capture sector is assessed in Chapter 11, focusing on the status of the key fish stocks, the effectiveness of the management instruments in place and the profitability of the sector. Chapter 12 provides a review of the aquaculture sector, a sector which is widely regarded as having very good prospects for growth. The links between rural development and fisheries policies are discussed in Chapter 13 where the role of the fisheries sector in alleviating rural poverty is assessed and policy challenges identified. The final part of the report brings together the conclusions from the analysis and provides a number of recommendations about the future direction of fisheries policy.

NOTE

1. Note that the National Fisheries Institute (Instituto Nacional de la Pesca,INP)also has objectives under the Sectoral Program. These are discussed in Chapter 10.

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Chapter 9.

Background on the fisheries and aquaculture sector

Bordered by the Pacific Ocean, the Gulf of Mexico and the Caribbean Sea, Mexico has a rich biological diversity in its marine areas and inland waters. Along Mexico's coastline, tropical and subtropical marine currents favour the existence of a wide variety of fishery resources, many of which command high commercial values. The regions in which marine fishing takes place in Mexico are characterised by a high diversity in terms of bio-geographical factors and social aspects, reflecting strong regional differences. Figure 9.1 provides an overview of the marine biodiversity in different areas of the marine environment of Mexico. The coastal lagoons, reservoirs and ponds of the inland areas support important wild capture and aquaculture production activities. Mexico has one of the longest coastlines of any of the world’s countries, stretching for 11 500 km (including its offshore islands), of which the Pacific accounts for 73.7% and the Gulf and the Caribbean for 26.3%. The Exclusive Economic Zone (EEZ) of Mexico covers almost 3 million square kilometres with a Continental Shelf measuring 358 000 km2 (Table 9.1). Mexico has 2.9 million hectares of continental waters, of which 1.6 million hectares are lagoons and coastal waters that are highly suitable for aquacultural activities.

Table 9.1. Physical data for Mexico’s fisheries sector

Region Area Proportion km2 % EEZ Pacific Ocean 2 175 325 74 Gulf of Mexico and Caribbean Sea 771 500 26 Total 2 946 825 100 Continental Shelf Pacific Ocean 158 190 44 Gulf of Mexico and Caribbean Sea 199 605 56 Total 357 795 100 Coastline Pacific Ocean 8 475 79 Gulf of Mexico and Caribbean Sea 3 294 21 Total 10 769 100 Coastal Lagoons Pacific Ocean 89 260 57 Gulf of Mexico and Caribbean Sea 67 450 43 Total 156 710 100 Source: CONAPESCA.

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Figure 9.1. Biodiversity marine provinces in Mexico

Area Province Key features 1 California This is a transition region between temperate and tropical regimes. Reproduction areas of grey whales, sardines, anchovies, chub mackerel, skipjack, lobsters, abalone, and clams. 2 Coast of the High biodiversity areas with high productivity. Very important areas for Gulf of California reproduction of a number of species, like sardines, squids, lobsters, turtles, and marine mammals. The eastern coast has very large and important shrimp nursery areas, within mangrove forests. 3 Central Pacific Important area for inshore fisheries, sport-fishing, and marine turtles nesting. Coast 4 Panamic High diversity for both species and habitats with notorious upwelling areas in the Gulf of Tehuantepec. 5 Coast of the Large coastal lagoons which are important habitats for species caught by western Gulf of inshore fishers. These lagoons constitute important nurseries for shrimp and Mexico marine turtles nesting. 6 Campeche Wide and extended continental shelf with large reserves of crude oil and with sound diverse and productive fisheries such as snappers, groupers, octopus, shrimp, and lobsters. 7 Caribbean coast Reproduction areas for lobsters, octopus, queen conch, and reef fish. Important stocks of seagrass, mangrove forests, and a number of coral reefs. 8 Pacific North Part of migratory paths of marine mammals, tunas, marlins, and large sharks 9 Gulf of California Upwelling allows high productivity of small pelagic fish like sardine, northern anchovy, and giant squid. 10 South Pacific The convergence of the north pacific gyre and the equatorial counter current gyre in this area makes it of high productivity for tuna, pelagic sharks, and sport-fishing. 11 Gulf of Mexico Low diversity area but presenting large stocks of yellow fin tuna, blue fin tuna and sharks. 12 Caribbean Sea High biodiversity but low productivity area for fisheries. Sport-fishing associated to tourism is rather frequent. Source: Adapted from Arriaga-Cabrera et al. (1998).

In general discussion of the fisheries and aquaculture sector, it is useful to divide Mexico into four regions as these are very distinctive in their fisheries resource endowments, fishing and aquaculture activities, policy interests and poverty issues. The regions are also used in many aspects of fisheries research and management, as will be discussed later in the paper. The marine regions are given in Figure 9.2. The inland areas

of Mexico (Region V) also contain important fishing areas in terms of mojarra, carp, tilapia, etc., and are generally referred to as the inland fisheries.

Figure 9.2 Fishing regions

Source: CONAPESCA, from FAO Fisheries website.

Production trends

The commercially exploitable products in Mexico's territorial waters and continental seas can be classified into four groups: • Pelagic or mass species: tuna, sardine, anchovy. • Demersal species: red snapper, mullet, snapper, shark, dogfish, king mackerel, grunt. • Crustaceans and molluscs: shrimp, lobster, abalone, oyster, clams, sea snail, octopus, sea cucumber, urchin. • Farmed species: tilapia, carp, trout, catfish, crawfish.

Production levels in Mexico’s fisheries sector have fluctuated significantly over the years (Figure 9.3). Until the 1970s, catches were consistently small, averaging around 200 000 tonnes a year.1 The industrialisation of the fishery sector began in the early 1970s with rapid increases in the catches of sardine and anchovy and total production rose to just under 1.4 million tonnes in 1981. The collapse of the anchovetta fishery brought about by an El-Nino Southern Oscillation (ENSO) occurrence was the main factor behind a sudden decline in catches to around 1 million tonnes in 1983. Catches since then have fluctuated between 1.1 and 1.4 million tonnes a year, with an average annual growth rate of 1% for the period 1990-2004. Sardines and anchovy still account

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for the largest proportion of wild capture production, followed by tuna, molluscs and shrimp (Figure 9.4).

Figure 9.3. Mexico’s wild capture fisheries production

1 600 000

1 400 000

1 200 000 Total catches

1 000 000

800 000 Tonnes Sardine and anchovy 600 000

400 000

200 000 Tuna Shrimp

2 70 71 75 78 8 83 90 91 95 02 03 972 979 980 984 985 987 992 996 997 999 000 004 19 19 1 1973 1974 19 1976 1977 19 1 1 1981 19 19 1 1 1986 1 1988 1989 19 19 1 1993 1994 19 1 1 1998 1 2 2001 20 20 2

Figure 9.4. Wild capture production by species group

100%

80%

60%

40%

20%

0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Inland Shrimp Tuna Pelagics Molluscs Other

Figure 9.5. Location of catches, 1993 - 2004

100%

80%

60%

40%

20%

0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Region I Region II Region III Region IV Inland

Source: CONAPESCA.

Catches are concentrated in the Pacific region, with the northern Pacific area (Region I) being the most productive (Figure 9.5). The share of production in the Gulf of Mexico and the Caribbean (Regions III and IV) has been declining since the early 1990s. Aquaculture production has grown at a rate of 1.2% a year since 1990 and accounted for 12% of Mexico’s total fish production in 2004. While this is relatively low compared to the average OECD proportion of 31%, the Mexican aquaculture sector is still in the early stages of development. The main species cultivated are shrimp, mojarra, oysters and carp, with shrimp accounting for 32% of total aquaculture production (Figure 9.6). The importance of shrimp aquaculture has been increasing rapidly with an average annual increase of 22% since 1990 (albeit from a low base), and there are high expectations amongst government and industry for the continued expansion of shrimp aquaculture. In terms of the value of production, Mexico’s total fisheries and aquaculture production was valued at MXN 12.9 billion in 2001 at the point of first sale (the latest year for which data are available). As can be seen in Figure 9.7, sardines and fish for reduction account for a high proportion of the volume of production, but a relatively small proportion of the value of production. In contrast, the wild and aquaculture shrimp and crustacean sectors are relatively smaller in terms of volume but are much higher in terms of value.

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Figure 9.6. Aquaculture production by species, 1990-2004

250 000

200 000

150 000 Other Carp Oysters Mojarra Shrimp 100 000

50 000

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: CONAPESCA.

Figure 9.7. Volume and value shares of fisheries and aquaculture production, 2004

100% Aquaculture shellfish Aquaculture fish

Aquaculture shellfish

80% Fish for reduction Aquaculture fish Fish for reduction Molluscs

60% Molluscs

Crustaceans Crustaceans

Tuna

40%

Sardines and pelagics Tuna

Sardines and pelagics

20%

Other fish Other fish

0% Volume Value

Source: CONAPESCA.

Markets and trade

Of the total catch in 2004, 77% was directed to human consumption (47% frozen and 30% canned), 23% for fish meal, and less than 1% for other industrial uses. About 14% of the total catch was exported, primarily to the United States (about 52% of the volume of exports), Japan (14%) and Spain (11%). Mexico has always been a net seafood exporter and the fish trade balance in terms of export/import ratio was around 2:1 in 2003 (Figure 9.8). From Figure 9.8, the steep decline in exports from 1988 to 1994 was largely a result of the anchovy stock crisis. The recovery in exports was due to the peso crisis in the mid-1990s. Over 60 % of the total value of exports in 2003 was accounted for by just two products, shrimp (47%) and tuna (16%) (Table 9.2). In the case of shrimp, the larger sizes are exported and the smaller shrimp remain for the domestic market for which the per capita consumption was 0.66 kg in 2002. However, since the price per kilo is between USD 12 and USD 18 wholesale, only a small fraction of the Mexican population can afford to eat shrimp on a regular basis. Instead, the most consumed products are canned tuna, canned sardines, fresh carp, and fresh tilapia, having these the lowest prices in the market. Domestic fish products consumption in Mexico was 12.4 kg per person per year in 2004, down from 15.8 kg per person per year in 19932.

Figure 9.8. Volume of exports and imports of fisheries products

250 000

200 000

150 000 Tonnes

100 000

Exports 50 000

Imports

0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 7 7 7 7 7 7 7 7 7 7 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2

Source: CONAPESCA.

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Table 9.2. Exports and imports of fish and fish products, 2003

Product Exports Imports Volume Value Volume Value tonnes MXN 000 tonnes MXN 000 Fresh fish 16 113 1 175 302 2 538 42 614 Tuna 5 544 796 566 10 1 054 Frozen fish 74 428 494 154 26 498 314 604 Tuna 29 797 261 451 32 2 068 Sardines 35 155 170 985 125 1 268 Fish fillets and other fish meat 1 814 134 005 20 237 632 441 Fish, cured and smoked 369 79 777 2 260 198 693 Crustaceans 29 219 3 700 608 7 624 369 916 of which shrimp 26 280 3 249 123 7 450 342 554 Molluscs 14 399 404 500 5 077 129 730 Seaweeds and other algae 18 539 6 863 1 761 30 814 Fish oils 2 179 9 145 834 9 756 Preserved fish 6 776 106 397 8 693 269 617 Preserved crustaceans 12 559 564 423 5 404 318 143 Fish meal 19 021 119 693 14 169 91 136 TOTAL 195 418 6 794 872 95 095 2 407 468

A number of fisheries have received or are seeking certification from the Marine Stewardship Council (MSC). The Baja California red rock lobster fishery in Baja received MSC accreditation in 2004. The fishery is currently exploited by about 500 fishers belonging to nine fishing co-operatives and spread over ten villages. Management involves a combination of limited entry, strict delineation of co-operatives fishing areas, and community-based self-regulatory measures (including area closures, minimum legal size, fishing gear restriction and protection of gravid females). The accreditation was sought by the Baja California Regional Federation of Fishing Co- Operative Societies which funded 80% of the cost of accreditation (the Federal government contributed the remaining 20%). Ninety percent of the fishery’s products are exported (primarily to Asia, France and the United States). MSC accreditation is also being sought for the Gulf of California sardine fishery. In this case, the industry is providing 40% of the funding while the Federal government is providing the balance. Mexico has signed free trade agreements with different countries and regions and the fisheries sector has been an important element of the negotiations. Those agreements are with United States and Canada (NAFTA); The European Union; Colombia and Venezuela in the Group of Three3; Japan; Costa Rica, Nicaragua and with the Northern Triangle (Guatemala, Honduras and el Salvador); Chile; and with the European Free Trade Association (EFTA) composed of Switzerland, Norway, Liechtenstein and Iceland.

Fleet structure

The Mexican fleet can be broadly divided into small- and large-scale boats (Table 9.3). Small-scale boats (locally known as “pangas”) are used for inshore fishing by the artisanal fishers and have a maximum of one tonne of carrying capacity and are generally less than 10 m in length. They are the most numerous type of boat in Mexico with 102 807 vessels being reported by CONAPESCA in official statistics (Figure 9.9). Of these, 56 412 vessels are reported as being on the Pacific coast and 43 392 vessels in

the Gulf of Mexico and Caribbean Sea coast in 2003. In reality, however, there is no clear understanding of the exact number of small-scale vessels in Mexico. This is evident from Figure 9.9 where there are clearly concerns over the validity of the data from 1990 onwards. The official statistics on the number of small scale vessels have not been adjusted since 1997, following a 40% increase in the number of estimated vessels from 1996. A direct result of the increasing number of small scale vessels, improvements in the power of their out-board engines, and an increase in the number of small-scale fishers is that the catch per person employed in the fisheries sector has dropped from 12 tonnes per person per year in 1980 to about six tonnes in 20014.The uncontrolled and uncharted expansion of the small-scale fleet is a major issue for fisheries policy and will be addressed later in this report The large-scale fleet has fluctuated in size over the last two decades (Figure 9.10). In 2005, this segment of the fleet consisted of 2 182 shrimp trawlers (1 551 in the Pacific and 631 in the Gulf of Mexico), 104 tuna purse seiners in the Pacific, 32 tuna long-liners in the Gulf of Mexico, and 1 121 smaller boats. The latter are 98 small purse seiners in the Pacific area, which catch sardines, pilchards and anchovies, and 1 023 diverse boats devoted to grouper, sharks, snappers and other fisheries (218 in the Pacific and 805 in the Gulf of Mexico) (Table 9.4). The tuna fleet is composed of two kinds of vessels: the purse seiners fishing in the Pacific waters, and long-liners fishing in the Gulf of Mexico. Most of the purse seiners weigh more than 750 tonnes while the long-liners weight between 20 and 400 tonnes. The Pacific shrimp trawlers weigh more than 80 tonnes, while the smaller (between 10- 80 tonnes) are more common in the Gulf of Mexico. Sardine purse seiners are very similar to shrimp trawlers in weight and length.

Table 9.3. Number of vessels by type

1970 1980 1990 2000 2003 2004 2005 Shrimp trawlers 1 375 2 713 2 285 2 383 2 409 2 411 2 182 Tuna purse seiners 11 51 85 123 131 134 136 and long-liners Other boats 179 767 796 1 060 1 094 1 097 1 121 (20-60 tonnes) Small boats (less 14 881 32 510 71 406 102 807 102 807 102 807 102 807 than 10 m in length) Total 16 446 33 328 72 287 106 373 106 441 106 449 106 246 Source: CONAPESCA.

Table 9.4. Number of vessels by type and location, 2005 Tuna purse Shrimp Small Region seiners and Sardine Other a trawlers scale long-liners Region I (NW Pacific) 1 369 98 98 189 24 304 Region II (SW Pacific) 182 6 0 29 32 108 Region III (NE Gulf and Caribbean) 329 22 0 106 32 161 Region IV (SE Gulf and Caribbean) 302 10 0 699 11 231 Inland waters 0 0 0 0 3 003 Total 2 182 136 98 1 023 106 246 a. 1997 data. Source: CONAPESCA.

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Figure 9.9. Reported number of small scale vessels in Mexico, 1980-2005

120 000

100 000

80 000

60 000 Number of vessels

40 000

20 000

8 9 1 2 83 84 8 8 96 97 0 0 985 986 987 990 991 992 998 999 000 003 004 005 1980 1981 1982 19 19 1 1 1 19 19 1 1 1 1993 1994 1995 19 19 1 1 2 20 20 2 2 2

Source: CONAPESCA.

Figure 9.10. Structure of large-scale fleet, 1980-2005

4 000

3 500

3 000

2 500

2 000

Number of vessels 1 500

1 000

500

0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Shrimp Tuna Sardine Other vessels

Source: CONAPESCA.

The number of boats of the large-scale fleet has not dramatically increased in the last decades in comparison to small-scale boats. However, the large-scale fleet fishing effort has been significantly augmented by improvements in capture efficiency, the adoption of new fishing gear, new devices for navigating, larger carrying capacity, multiplication in the number of fishing days and trips, and movements among fishing grounds. These trends have been more frequently observed for the tuna and shrimp fleets. For example, in 1995 the federal government set up a programme for the renewal of the shrimp fleet, although there was limited funding made available in the programme. Trawlers were ageing as no substantial investment were devoted to its improvement since “La Cooperativización” (Chapter 10), when the whole fleet was transferred from the private sector to the fishers’ cooperatives in 1981-1982. Nor was there substantial reinvestment when the fleet was resold to the private sector ten years after. Private fishers asked the government for help in the 1990s and, although the number of trawlers has not changed for years, many of these have been replaced by newer and better equipped vessels. Fernández-Méndez (2001b) and Ramírez et al. (2001) note that, even when the number of trawlers in the Gulf of Mexico fleet has slightly diminished, the levels of fishing mortality of shrimp stocks have been kept the same over the years and, due to recruitment overfishing, catches have steadily declined.

Employment

Employment in the sector has increased by around 1% a year since 1990, reaching 297 422 persons employed in 2004 (Table 9.5). As expected due to the concentration of vessels, most of the employment is on the Pacific coast where Region I accounted for 30% of total employment and Region II for 25%. The coastal marine fisheries on both coasts accounted for almost 60% of the total employment.

Table 9.5. Employment by sector and region, 2004

Sector Total number Harvest sector 255 248 Region I 67 864 Region II 69 822 Region III 70 029 Region IV 35 985 Inland fisheries 11 549 Aquaculture 23 497 Region I 15 512 Region II 2 264 Region III 1 175 Region IV 149 Inland fisheries 4 396

Processing 18 677 Total 297 422

Source: CONAPESCA.

Figure 9.11 provides a profile of employment in the fisheries and aquaculture sector from 1994 to 2004. This refers to registered workers and does not include a number of artisanal fishers, the magnitude of which is not known. Note also that the last two years are CONAPESCA estimates. As with the vessel data for the small-scale fleet, this reflects

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a lack of solid statistics and a high degree of uncertainty about the size of the artisanal sector. The overall registered employment has been growing at an average annual rate of 1%, with Region IV (South Gulf of Mexico and Caribbean) and the inland water areas experiencing the strongest growth of 4.4% and 5.2% a year, respectively. Registered employment in Region III (North Gulf of Mexico) has declined at an average annual rate of 1%.

Figure 9.11. Number of registered employees in fisheries and aquaculture (excluding processing), by region

300 000

250 000

200 000

150 000

100 000

50 000

0 1994 1995 1996 1997 1998 1999 2000 2001 2002 /e 2003 /e 2004 /e

Region I Region II Region III Region IV Inland

e. Estimates Source: CONAPESCA.

Regional characteristics

While the contribution of the fisheries sector to Mexican Gross Domestic Product (GDP) is only 0.15%, the importance of the fishery industry in Mexico is rather regional. In fact, there are certain regions where fisheries activities are more significant in terms of economic and social issues, most notably in NW Mexico (Table 9.6). For example, states where fisheries have the highest relevance in terms of its participation to the state GDP in 19965 was 5% to Baja California Sur’s GDP, 4% to Sinaloa’s GDP, and 2% to Sonora’s GDP. In fact, just three states (out of 17 coastal states) comprised 51% of the fisheries GDP in 1996. These are Sinaloa and Sonora in the Pacific coast and Veracruz in the Gulf of Mexico. The participation of the fisheries sector to the state GDP almost doubled in both Sinaloa and Sonora states (NW Mexico) during the period 1993-1996, while for Tamaulipas and Campeche (Gulf of Mexico) their contribution slightly diminished (INEGI, 1997). In addition, the coastal states account for 46% of the total Mexican population, with the southern Mexican Pacific region accounting for the largest proportion (Figure 9.12).

Table 9.6. Relative contribution of selected fisheries to indicators by region, 2004 (%)

Contribution to total North Mexican South Mexican Gulf of Mexico and Pacific (Region I) Pacific (Region II) Caribbean Sea (Regions III and IV) Fisheries GDP (1996 data) 39.5 14.5 42.1 Catch volume 70.7 8.4 18.9 Catch value 56.9 9.9 30.3 Small-scale boats 28.8 27.7 43.5 Large-scale boats 51.1 5.8 43.1 Jobs in fisheries sector 35.9 23.2 40.8 Aquaculture production a 44.0 41.7 14.2 a. Includes freshwater, brackish and marine waters. Totals may not add to 100% because inland states are not included. Source: INEGI (1997), CONAPESCA.

Figure 9.12. Shares of coastal state population, 2000

Region I 8%

Region II 23%

Rest of Mexico 54%

Region III 12%

Region IV 3%

Source:INEGI.

States surrounding the Gulf of California contribute to about 71% of the total catch volume and 57% of total value. In the Gulf of Mexico catches amount to almost 19% of volume but have a share of 30% in value. This is explained in terms of the catch composition. Small pelagic fish (i.e. sardine, pilchard and anchovy) fisheries, which are low-valued species, are caught almost exclusively in the north Mexican Pacific. In contrast, highest values are made up in states where shrimp fisheries take place: Sonora, Sinaloa and Nayarit in the Pacific, and Tamaulipas and Campeche in the Gulf of Mexico. Investment and therefore income from fisheries are strongly regionalised. For example, industrial fisheries do not take place in the south Mexican Pacific region, a fact that is reflected by the small proportion of large-scale boats (less than 6%). In contrast, a

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little more than one fifth of the small-scale fleet is located in the south Mexican Pacific. It is interesting to note that standardising the number of small-scale boats by the coast line, the ratio for the north Mexican Pacific is 4.5 boats/km, for the south Mexican Pacific is 13.4 boats/km and for the Gulf of Mexico and Caribbean Sea is 13.9 boats/km. In fact, most fishers in the south Mexican Pacific belong to poor communities in the poorest regions of Mexico, where electricity and running water services are not provided. Furthermore, income is unevenly distributed as well. Nadal (1996) found that small-scale fisheries derive less than 3% of the total fisheries income. Indeed, fisheries income in the north Mexican Pacific is five-fold higher than in the south Mexican Pacific6. Although fisheries are less industrialised in the south Pacific, it is the fleet interaction (i.e. inshore- offshore) elsewhere, which brings most of the conflicts in Mexican fisheries.

NOTES

1. Note that all volumes are given in terms of landed weight, not live weight. 2. Includes both direct and indirect consumption. 3. Note that Venezuela left the Group of Three in 2006. 4. www.fao.org/countryprofiles: last accessed on 20 March 2006. 5. Latest available figures per state (INEGI, 1997). 6. www.fao.org/countryprofiles: last accessed on 20 March 2006.

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Chapter 10.

Fisheries management policy

The Mexican fisheries sector has witnessed a number of significant institutional changes since 1990 which have deeply influenced both the state of fish resources as well as stakeholders’ incomes. This chapter reviews developments in Mexican fisheries management policy, focusing on institutional arrangements and fisheries policy formulation. The first part of the chapter reviews the evolution and present status of the institutional arrangements, while the second part provides an assessment of the key issues confronting the policy development process. A more detailed review of fisheries management arrangements in terms of the types of fisheries management instruments beingusedisprovidedinthefollowingchapter.

Developments in institutional arrangements

The globalisation of world fisheries has been influenced by three distinct phases: the globalisation of fish production and the growth of distant-water fleets (1945 to mid- 1970s); the globalisation of trade which was accompanied by extended fisheries jurisdictions (EFJ) and deregulation policies (1970s to 1990s); and the globalisation of regulatory control due to growing concerns over the sustainability of fish resources (1990s to date) (Thorpe and Bennett, 2001). The development of Mexico’s fisheries has broadly followed these phases of international developments, with some variations. Mexico’s fisheries development in Mexico may be divided in the following periods: • before 1977, a period of fisheries development until the adoption of the Extended Fisheries Jurisdiction; • 1977-1991, when government support boosted fish production and exports, ending just before the Fisheries Law of 1992 authorisation; • 1992-2000, when private investment and environmental concerns shaped both institutions and management; and • 2000 to date, which corresponds to the new administration.

This section summarises developments over these periods as background to the current institutional arrangements for the sector. Table 10.1 provides a summary of the key developments in the Mexican fishery sector. More in-depth reviews can be found in Ibarra et al. (2000a, b; 2005), Thorpe et al. (2000); Thorpe and Bennett (2001) and Hernández and Kempton (2003).

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Table 10.1. Main events which have influenced contemporary fisheries developments in Mexico

Period Institutional arrangements Legal provisions The fishing industry International context Other events

1972: Creation of the Under- 1972: Federal Law for the Increase in the number of 1976: Adoption of extended 1976: peso crisis Secretariat of Fisheries and Promotion of Fisheries vessels fisheries jurisdiction 1970-1977 PROPEMEX. The latter included Ocean Garden Products

1980: creation of BANPESCAb 1986: Federal Fisheries Law 1981-1982: transfer of the 1982: UNCLOS III 1982: peso crisis shrimp fleet from the private 1982: Upgrading to Secretariat sector to co-operatives 1982-1983: strong ENSO level (SEPESCA) 1978-1991 1980-1986: 1st tuna embargo 1986: Mexico joins GATT 1990 onwards: 2nd tuna embargo

1992: shut down of 1992: Fisheries Law and 1991-1992: privatization of the 1992: Conference of Rio, 1992: land tenure reform PROPEMEX and BANPESCA. creation of standards (NOMs) shrimp fleet Agenda 21 and UN Ocean Garden Products Conference on Responsible 1994-1995: peso crisis 1993: installation of TEDs by bought by BANCOMEXT. Fisheries 1994: NAFTA implementation Creation of CONABIO, the shrimp fleet PROFEPA and INE 1993: La Jolla Agreement 1997-1998: strong ENSO 1992-2000 1995: creation of SEMARNAP, 1995: Adoption of the Code of and SEPESCA is downgraded Conduct for Responsible to an Under-Secretariat Fishing 1995: UN Fish Stock Agreement a

2001: CONAPESCA replaces 2004: Discussion of the Law of 2006: Sale of Ocean Garden 2000: Mexico joins Agreement 2004: Free Trade Agreement the Under-Secretariat, Sustainable Aquaculture and on the International Dolphin with Japan becomes part of SAGARPA Fisheries begins in Congress Conservation Programme and its offices moved to 2000 to date Mazatlan 2006 Adoption of new 2002: Earth summit Fisheries Law 2002: Mexico joins ICCAT a. Mexico has not signed the UN Fish Stocks Agreement. b. Between the 1960s and 1980, this was called BANFOCO. AGRICULTURAL AND FISHERIES POLICIES IN MEXICO: RECENT ACHIEVEMENTS, CONTINUING THE REFORM AGENDA– ISBN-92-64-030247 © OECD 2006 Chapter 10. Fisheries management policy – 223

Before 1977 A key historical feature of Mexican fisheries for many years was the exclusive access rights granted to fishers’ co-operatives. These were granted by the government in 1938 for catching shrimp, abalone, lobster, oysters, cabrilla, Pismo clam and totoaba, which were highly valued fisheries. At the time, the Fisheries Department was part of the Forestry, Hunting and Fishing Division of the Secretariat of Agriculture and Development. While investment in fisheries was not a priority, an increasing interest in fish stock levels, and the possibilities of their increased utilisation, led to the creation of the National Institute for Fisheries Research (INP) in the early 1960s. The fisheries sector did not grow in a substantial manner until the first National Fisheries Programme in 1970 strengthened co-operative rights to inshore fisheries and encouraged the expansion of fishing fleets. In 1972 the government enacted the Federal Law for the Promotion of Fisheries and started focusing on the export market. This concerned 500 shrimp trawlers through the BANFOCO programme. PROPEMEX, a state company, was created in that year with the aim of regulating domestic prices and developing export markets. It incorporated Ocean Garden Products, a monopsony based in La Jolla, California which had been created in 1957 for marketing shrimp exports in the US. The adoption of the Extended Fisheries Jurisdiction (EFJ) in 1976 affirmed this support for the sector and allowed a faster growth of the fisheries sector. A peso devaluation in the same period served to favour export-oriented activities, such as fishing.

1977-1991 The National Plan for Fishing Development that was developed during the late 1970s and early 1980s demonstrated a strong interest in securing benefits from fishing catches under the newly implemented EFJ. Catches reached a record high in 1981 of about 1.5 million tonnes, although later stabilised around this level. Important institutional changes followed. The Department of Fisheries was upgraded to a Secretariat level (SEPESCA) in 1982 in order to ‘foster national productivity and exports’. A state- directed fisheries bank, BANPESCA, was also set up for supporting both co-operatives and the private sector. However, BANPESCA loans mostly favoured co-operatives, playing an important role in the transfer of the privately-owned shrimp fleet to cooperatives in 1981-1982 in what was known as la cooperativización.Thiswas,infact,a way to “formalise” the rights of co-operatives on shrimp fishing since there was an informal arrangement between co-operatives and private investors under which the latter operated their vessels disguised as co-operatives. This transfer to the cooperatives brought about more debts to co-operatives (and consequently to BANPESCA), diminishing returns, and a migration of investors from shrimp fisheries toward tuna fisheries, taking advantage of government subsidies (see below). Moreover, both PROPEMEX and BANPESCA were ill-managed and exports were not substantially increased. Three events marked the development of the Mexican fisheries sector in the early- 1980s: a strong El Niño-Southern Oscillation (ENSO), the tuna embargo, and another peso crisis. The incoming administration that took office in 1982 faced serious trouble. First, fisheries production fell about one-third by 1983 due to the impact of a strong ENSO, hitting mostly the Californian pilchard and Pacific anchovy fisheries.

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Second, the 1980-1986 tuna embargo brought negative consequences to the whole industry as the government directed immense financial resources to rescue the tuna fleet. Indeed, heavy reliance on the US market and failure to develop alternative export markets created problems and, in order to protect tuna investors, PROPEMEX purchased all the tuna production from Mexican vessels and redirected it towards the domestic market. Massive inventories started to accumulate in PROPEMEX storehouses and prices fell. PROPEMEX ceased granting financial aid to vessel owners and consequently they were unable to meet their commitments, with the risk of leaving BANPESCA with an estimated USD 1 billion in non-performing loans. Thus, the government resumed its subsidy programme by 1985, supporting the entire tuna fleet, even when one-third of it remained inactive. The embargo was lifted in 1986 but another one started in 1990 under the Marine Mammal Protection Act principle: tuna products from all nations fishing in the eastern tropical Pacific whose dolphin mortality rates were 1.5 times the mortality register for the US fleet for the eastern spinner dolphin (stenella longirostris) and 2 times the mortality register for the US fleet for the spotted coastal dolphin (stenella attenuate). It is noteworthy that these two species are more abundant in Mexican waters than in US waters. Third, the 1982 peso crisis provoked a debt crisis as oil export earnings collapsed. In spite of severe financial problems, the government carried on granting subsidies to the sector. It sustained the level of landings and maintained exports but contributed, at the same time, to increase the debt of both BANPESCA and PROPEMEX, which had as well to support the high costs of the shrimp fleets. In addition, several joint ventures on processing plants (e.g. the tuna plants, Pescado de Colima and Pescado de Chiapas) and large trawlers bought in Spain failed in achieving economic efficiency at a high financial cost. Large debts borne by co-operatives were expected to be somewhat alleviated by the new Federal Fisheries Law in 1986. The Law aimed in practice to strengthen co-operative access rights through concessions and permits for both fishing and aquaculture, confirming the la cooperativización move. As with capture fisheries, only co-operatives were allowed to cultivate shrimp, however, pressure from the private sector in order to have a share from shrimp earnings was constant during the 1980s (Cruz-Torres, 2000). The administration responded to this pressure during its reforming process of the Mexican economy, which started in 1988. The previous administration’s strategy had entailed a high cost and a priority was to restructure the sector and to curb fiscal deficits. This included privatisation to encourage inward investment in the fisheries sector. PROPEMEX and BANPESCA were both shut down, and the privatisation of canneries, processing factories and vessels began in 1988. Without BANPESCA, the government- owned foreign-trade bank (BANCOMEXT) was empowered to support export-oriented fisheries. Subsidies through the PRONASOL programme were made available for the development of domestic fisheries, pin-pointing poor fishing communities.

1992-2000 Given all the financial problems faced by both the government and co-operatives, the National Programme for the Development of Fisheries and its Resources (PNDPR) which was developed in 1992 stressed the need to improve the efficiency of both fleet performance and infrastructure development. To facilitate this process, a new Fisheries Law was passed in 1992, only six years after the enactment of the former law. One of its main features was the withdrawal of the co-operatives’ historic preferential exclusivity to

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exploit valuable fisheries. The co-operatives' access rights were replaced by the system of permits and concessions, which was already in force for other inshore fisheries. In addition, a system of standards was put in place under the name of Mexican official standards (NOMs). These define and regulate permits and concessions, gear specifications, closures, quota levels and other management instruments. A feature without precedent in Mexico was the fact of stakeholders (including NGOs and universities researchers) participation in the development process of each NOM. The message of the PNDPR was well anticipated by the private sector. In 1991, 63 shrimp trawlers were bought and by 1992, when the new Fisheries Law was being enacted, private investors already had 450 vessels. By 1993-94, 90% of the offshore fleet in the North Pacific was already private, and the trend continued throughout the country. During this time, the shrimp fishery faced the threat of an embargo justified on the grounds of marine turtle by-catch. In contrast with the tuna embargoes, both the government and the industry took swift action: a total closure on turtle fishing was declared in 1990 and by 1993, the whole fleet of Mexican shrimp trawlers was equipped with turtle-excluder devices (TEDs), obtaining the US authorities certification. Aquaculture was promoted as well, and private investors mainly took over shrimp farming. The central objective was to encourage export earnings through shrimp productivity. Within this context, Ocean Garden Products was initially deemed to be privatised, but it was brought under the administration of BANCOMEXT, remaining therefore under government control until it was sold in 2006. Privatisation and deregulation processes in the new administration were accompanied by an increased focus on environmental concerns. This was not a Mexican initiative, but rather came about through the influence of international trends. Mexico played an active role in the 1992 UN Conference on Responsible Fisheries held in Cancun, where the Precautionary Approach of the Rio Declaration was adopted. This led to the endorsement of the UN Code of Conduct for Responsible Fisheries three years later. Several environmental-related institutions were created in 1992, chiefly the Mexican biodiversity commission (CONABIO), the environmental enforcing agency (PROFEPA) and the Institute of Ecology (INE). Although concerns arose relating to North American Free Trade Agreement (NAFTA) and fisheries trade, Chomo and Ferrantino (2000) demonstrated that NAFTA did not significantly influence North American fisheries sustainability. However, in spite of all efforts concerning environmental issues and legal provisions set up by the administration, the second tuna embargo was not lifted. The Inter-American Tropical Tuna Commission (IATTC), under the context of the Panama Declaration, played a central role in achieving conciliation between importing countries, US authorities, the tuna industry and environmental organisations to revise US laws (Constance and Bonanno, 1999). However, other NGOs, such as the Earth Island Institute, opposed the Panama Declaration. Another peso crisis in late 1994 arrived with the new administration. Although exports were facilitated by the peso devaluation, environmental concerns remained a significant influence on policy. This was demonstrated in both fisheries policy and institutional arrangements. The policy principles underlying the “sustainability discourse” were adopted and featured prominently in the 1995-2000 Fisheries and Aquaculture Programme. This programme emphasised the need to “halt the tendency towards environmental deterioration”, to “reverse the process of over-exploitation of resources”, and to “promote responsible fishing practices in conformity with resource availability”.

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To facilitate this, the former Secretariat of Fisheries, SEPESCA (along with other departments), was merged into the new Secretariat of the Environment, Natural Resources and Fisheries (SEMARNAP) but was downgraded to the level of an Under- Secretariat. The loss in federal hierarchy confirmed the trend in broadening of regulatory control flowing from growing concerns over the sustainability of fish resources (Thorpe and Bennett 2001). NGOs had a more prominent role in government programmes and, as a result, conservation issues were given a higher profile, leading to the increased implementation of marine reserves and the promotion of eco-tourism as alternative income options for local fishing communities. Less emphasis was placed on the development and implementation of fisheries management instruments, although the use of the NOMs was continued and extended.

Current institutional framework

Comisión Nacional de Acuacultura y Pesca (CONAPESCA) Current fisheries-related institutions and policy have a more production and export orientation and are less environmentally directed than was the case under the previous administration. Although the Secretariat of the Environment (SEMARNAP) remained, it was renamed as SEMARNAT. The reason was that the Fisheries Under-Secretariat was moved into the Secretariat of Agriculture (SAGARPA), becoming the Commission of Aquaculture and Fisheries (Comisión Nacional de Acuacultura y Pesca or CONAPESCA). Some commentators noted that this movement in the federal hierarchy caused a loss of presence for the fisheries sector within SAGARPA and within the Federal government more generally (Hernández and Kempton 2003). Indeed, the fisheries industry accounted for a little less than 7% of the primary sector GDP (covering agriculture, forestry and fisheries) during 1993-1996 (INEGI, 1997). Thus, objectives to boost the GDP share of the fisheries sector have most probably influenced the decision of changing fisheries-related agencies into SAGARPA, leaving environmental issues apart. PROFEPA was exempted from enforcing fisheries regulations, thus creating a void in fisheries management enforcement. It remained that way until 2004 when CONAPESCA created an enforcement department. The Federal Fisheries Law (decreed in June of 1992, amended in January 2001) has as its objective “to warrant the conservation, preservation and rational use of fisheries resources and establish the basis for their adequate development and management”. The Aquaculture and Fisheries Programme (Programa de Acuacultura y Pesca) for the period 2001-2006, under the Programme on Agriculture, Livestock, Rural Development, Fisheries and Food 2001-2006 of SAGARPA, endorses the following strategic guidelines: “to establish management schemes for aquaculture and fishing resources based upon technical and scientific knowledge as well as to promote the participation of the academia, the producers and the government in both the definition and assessment of opportunities for the development of fishing and aquaculture” (SAGARPA, 2006, p.6). These guidelines are translated into the following objectives for the sector: • to use fisheries and aquaculture resources in a sustainable way; • to promote the increase of the economic and social rent from fisheries and aquaculture; • to grant and encourage legal certainty to fishing and aquaculture activities; and

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• to promote support programmes and services to fishing and aquaculture activities. In addition, the Programa de Acuacultura y Pesca provides the following objectives for the Instituto Nacional de Pesca (INP): • involve stakeholders in fisheries research; and • optimise the commercial use of fisheries products. CONAPESCA operates together with the National Consultative Committee on Responsible Fishing and other State Consultative Committees (wherever they are in place) which define more specific policy and planning measures for several of the fisheries of both the Pacific Ocean and the Atlantic Ocean coasts (Chart 10.1). The management measures are developed to comply with Mexico’s natural protected areas regulations which are devised and enforced by the SEMARNAT and more specifically by the CONANP (or Comisión Nacional de Areas Naturales Protegidas) for areas under federal jurisdiction or by the Secretariats of the Environment at the sate level for those protected areas within a state jurisdiction.

Chart 10.1. Organisation chart of CONAPESCA

Technical Council National Fisheries National Institute (INP) Commissioner

National Consultative Committee for Responsible Fishing

State Consultative Committees

Director General Director General Director General Director General Director General Planning, Infrastructure Inspection and Organisation and Fisheries and Programming and Surveillance Promotion Aquaculture Evaluation Management

Federal Officials of Administration Unit Legal Affairs Unit Fisheries (Inspectors)

Source: CONAPESCA.

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With the transfer of fisheries management to the Secretariat of Agriculture, the now Secretariat of Environment and Natural Resources (Secretaría del Medio Ambiente y Recursos Naturales, SEMARNAT) retained the functions of sanctioning the National Fisheries Chart 2000 (CNP) to ensure compatibility with resource conservation and sustainability strategies and determine such measures like closed seasons. SEMARNAT also is in charge of managing Protected Natural Areas (Áreas Naturales Protegidas, ANPs). Fishing takes place in some marine ANPs (such as in the upper Gulf of California) and in those areas SEMARNAT and CONAPESCA each has responsibilities and must coordinate their actions, with the latter responsible for regulating fishing in the ANPs. CONAPESCA undertakes fisheries surveillance but has limited enforcement powers. It must refer legal actions to the National Prosecutor for further action which reduces the ability of CONAPESCA to respond to fisheries violations in a timely manner. PROFEPA has enforcement powers in relation to tortoises, endemic species and endangered species. The state governments and local municipalities play a limited role in fisheries. The major role that State governments have is in the provision of funding for regional fishing support programmes where they are responsible for allocating a portion of Federal funds. Up until recently, the role of a State fisheries officer was to provide a liaison between the State governor and the fishing industry. Now the States have expanding fisheries offices with increasing responsibility for allocating funding. This reflects the conflicting objectives that sometimes underlie the provision of funding under the fisheries support programmes, as they attempt to meet both fisheries development and rural development objectives. Major stakeholders are organized into various industry and social organizations. Most of the large scale commercial fishers are grouped under the National Fisheries and Aquaculture Industry Chamber (Cámara Nacional de la Industria Pesquera y Acuícola, CANAINPESCA). Some farmers form independent associations. Artisanal fishers are usually organized in fishing cooperatives, grouped under the National Confederation of Fishing Cooperatives (Confederación Nacional de Cooperativas Pesqueras, CNCP). However, there are many cooperatives not affiliated to that organization. Many fishers belong to “Social Solidarity Societies” (SSS) and many “free fishers” do not belong to any group so the representativeness of the CNCP is not as complete as that of CANAINPESCA. The political organization and power of the commercial fishers tends to be significantly greater than that of the cooperatives, with more coordinated policy positions supported by access to scientific expertise. However, the cooperatives retain an element of regional influence, particularly in the poorer coastal states where artisanal fishing plays a stronger social role in the rural economy.

New fisheries law A new “General Law for Sustainable Fisheries and Aquaculture” was unanimously passed by both Chambers of the Mexican Congress in 2006 although it is not yet in force. It builds on the existing objectives under the PADF, expanding them to more explicit objectives covering a wide range of fisheries and aquaculture management issues. The objectives in the new General Law are to: • Establish and define principles to promote and regulate all of the management and sustainable use of fisheries and aquaculture resources, by taking into account social, technological, biological and environmental aspects.

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• Promote the improvement of national fishers’ and fish farmers’ well-being through programmes on the fisheries and aquaculture sector. • Fix the basis for the regulation, conservation, protection, restocking and the sustainable use of fisheries and aquaculture resources, as well as protecting and rehabilitating the related ecosystems. • Fix basic norms for planning and regulating the sustainable use of fisheries and aquaculture resources in selected, controlled, natural or artificial environments so that the partial or complete biological cycles take place in maritime, inland or brackish water in both public or private lands. • Provide the right of access and use of fisheries and aquaculture resources preferably for indigenous communities and villages mentioned in this law. • Establish basis and coordination mechanisms between Federal authorities, entities and municipalities. • Determine and establish basis for the creation, operation and functioning of participation structures for fisheries and aquaculture producers; • Support and facilitate scientific and technological research in fisheries and aquaculture. • Establish concession rules and licences for the fisheries and aquaculture activities. • Establish basis for the development and implementation of hygiene measures for fisheries and aquaculture resources. • Establish basis for the certification of the hygiene, safety and quality of fisheries and aquaculture products, from capture to processing; as well as all related activities and establishments in which the production and the conservation take place. • Establish the National System of Fisheries and Aquaculture Information and the National Registry of Fisheries and Aquaculture. • Establish basis for the inspection and enforcement in Fisheries and Aquaculture activities, such as coordination mechanisms with competent authorities. • Determine offences and related penalties for failures to recognize or violations of this law, its regulations and the Official Mexican Norms. • Propose mechanisms that guarantee the orientation of fisheries and aquaculture towards nutritional goods.

Research In 1962, Mexico established the National Fisheries Institute (INP), the main functions of which include undertaking activities related to the examination of and research into the country’s marine resources in order to propose and formula the appropriate strategies and measures for their exploitation and use. The National Fisheries Institute (INP) bears responsibility for, among others, assessment of the status of national fisheries as well as the evaluation of fishing gear and assessment of aquaculture projects (Alvaro-Torres et al. 2002). The organization is entitled by law to give the scientific and technical basis for decision making and gathering the required data. It has a decentralized network of 14 Regional Centers of

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Fisheries Research (Centros Regionales de Investigación Pesquera, CRIPs). It has no direct vertical hierarchical link to the present CONAPESCA, as both are subordinated to SAGARPA. Due to retirements and difficulties in attracting new well-qualified recruits, among other reasons, this institution has also reduced in size with 250 researchers and technicians remaining out of the former 400. A recent review of INP by the FAO has highlighted this capacity issue and has recommended that the funding of INP be increased to allow it to undertake the mandate for scientific analysis with which it is charged (FAO 2005). Universities and technical centres are additional sources of research into fisheries and aquaculture scientific issues. There is very little work done in Mexico on economic and social aspects of fisheries management policy and the literature in this area is very small. The interest in such studies at the policy level appears slight, yet it is these types of studies which will provide essential information on the socio-economic impacts of fisheries policy changes. Such studies have the potential to improve the ability of fisheries managers to better design and target management measures in order to improve economic efficiency, cost-effectiveness and coherence with other policy areas. This is an area in which further work should be undertaken by the government, either on its own behalf or through the INP and university research networks.1

Support programmes

The Mexican government provides financial support to the sector through a number of programmes overseen by CONAPESCA and SAGARPA. The Progama de Alianza Contigo is the major programme run by CONAPESCA and is part of a larger programme of the same title run by SAGARPA for the agricultural sector (see Part II). A major public works programme and diesel and gasoline fuel subsidy scheme are also run by CONAPESCA. Financial support is also given to the sector in the form of soft loans and loan guarantees provided through Fideicomisos Instituidos en Relación con la Agricultura-Fondo para la Pesca (FIRA-FOPESCA), BANCOMEXT and Financeria Rural. This section reviews the nature and extent of support provided to the sector, based on the OECD’s definition of government financial transfers (GFTs) (Box 10.1).

Box 10.1. Defining government financial transfers The standard framework used by the OECD for collating and presenting data on support programmes for the fisheries and aquaculture sector is the concept of government financial transfers (GFTs). GFTs are defined as the monetary value of government interventions associated with fisheries policies and covers transfers from central, regional and local governments (OECD, 2006). They include transfers which are directly provided from government budgets; which are a potential direct transfer of funds or liabilities (such as loan guarantees); and which consist of foregone government revenue (such as tax exemptions). Transfers which provide support to the sector but which are not made directly to the sector, such as payments for fisheries management, research and enforcement, fisheries specific infrastructure, and fisheries access agreements, are also included. The classification of financial support programmes within the GFT structure provides a useful organising framework that allows comparisons to be made over time and between countries. Source: OECD (2006).

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Overview of government financial transfers Government financial transfers (GFTs) to the Mexican fisheries sector have fluctuated in recent years. Total transfers to the sector in 2004 amounted to MXN 1.7 billion, a decrease of MXN 410 million from 2003 (Table 10.2). Around 66% of the GFTs were directed to the marine capture fisheries sector in 2004 (83% in 2003), 16% to the aquaculture sector (10% in 2003) and 18% to the marketing and processing sector (7% in 2003). Transfers to the marine capture fisheries sector represented 19% of the value of production in the sector in 2003. This is marginally below the OECD average of 21% in 2003, the last year for which comparable data are available (Figure 10.1). This has increased from 14% of the value of production in 1996. A notable difference between Mexico and the rest of the OECD is the relative shares of GFTs provided to direct payments, cost reducing transfers, management, research and enforcement services, and infrastructure (Figure 10.2). In Mexico, 72% of the GFTs in 2004 provided to the marine capture sector were given as direct payments and cost reducing transfers, primarily in the form of subsidised loans, grants and diesel subsidies. This compares to an average of 24% for the OECD as a whole.

Table 10.2. Government financial transfers to Mexico’s fisheries sector

2002a 2003 2004 MXN 000 MXN 000 MXN 000

Marine capture 1 218 765.0 1 907 625.8 1 285 147.8 Direct Payments 14 606.5 19 931.5 19 188.8 License payments 2 500.0 2 500.0 2 500.0 Liquid guarantees (PAASFIR-FINCAS) 12 106.5 17 431.5 16 688.8 Cost Reducing Transfers 1 110 759.5 1 631 653.4 906 600.2 b Unspecified transfers 535 236.6 786 237.1 436 856.2 Marine diesel programme 575 522.9 845 416.3 469 738.0 General Services 93 399.0 256 040.9 359 358.8 c Research expenditure 6 500.0 6 777.5 53 089.5 d Management expenditure 9 810.0 7 305.0 17 816.0 e Enforcement expenditure - 45 921.7 54 677.4 f Infrastructure 77 089.0 196 036.7 233 775.9 Aquaculture 40 411.4 127 986.1 194 266.9 Direct Paymentsg 124.8 207.9 250.4 Cost Reducing Transfers 40 286.6 59 179.1 32 881.7 General Servicesh - 68 599.1 161 134.8 Marketing and Processing 71 145.8 217 403.2 Direct Payments -- - Cost Reducing Transfers -- - General Servicesh - 71 145.8 217 403.2 GRAND TOTAL 1 259 176.4 2 106 757.7 1 696 817.9 a. Data are for June to December. b. Includes payments made under the Programa de Alianza Contigo. c. Transfers to the InstitutoNacionaldelaPesca. For 2004, they include investments for research through the Programa de Alianza Contigo. d. Does not include salaries and wages. Includes investments for programmes of observers on board of the major fleet and expenditures of the regional management plans. e. Refers to the costs of inspection and enforcement operations. Wages are not included. f. Payments under the Programa Normal de Inversion en Materia de Obra Publica. g. Payments for culture of species in federal jurisdiction waters, such as the commercial aquaculture or the restocking (investigation, experimentation or prospecting). h. Aid granted by the Federal government for the development of projects within the framework of Programa de Alianza Contigo. Source: CONAPESCA.

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Figure 10.1. Comparison of GFTs as a proportion of production for marine harvest sector for OECD countries, 2003

100

60 %

l y y s s y d d a ia k l a e d o U D n y n d in a e d d e n m n m l r a e c n c a n e n d e c n u g o a a r i E C a t n k a i a a It w n a x p a d a a e a r l l u d r r o l E l p a l la e lg a t t m a o e a e e n t e n r u r g s o K r J m S r i T c e e o n n O r w Ir a S e I i u e N F P M e G F B Z P S C d th K A D G te e w d i e n N te N i U n U

Figure 10.2. Shares of GFTs to marine capture fisheries for Mexico and total OECD, 2003

100%

Direct payments and cost reducing transfers

80%

Direct payments and cost reducing transfers 60% Infrastructure

40%

Management, research and 20% Infrastructure enforcement

Management, research and enforcement 0% Mexico OECD

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Some caveats are in order for the data in Table 10.2. First, the data are for the Federal government transfers only; state government transfers are not included. Secondly, the wages and salaries of operations for enforcement and management are not available. Third, the funds provided to the INP for research represent only a portion of the funding for INP, which also receives funding from SAGARPA. Finally, the cost to the government of the provision of soft loans under FIRA-FOPESCA, BANCOMEXT and Financeria Rural are not included in the table. For these reasons, the GFTs reported in the table are an under-estimate of the total support provided to the sector.

Programa de Alianza Contigo and Programa de Inversion en Materia de Obra Publica The Programa de Alianza Contigo is a cluster of programmes that were formerly operating under the Alianza para el Campo, which was begun in 1996. It serves as an umbrella for a number of programmes including many that focus on increasing fisheries and aquaculture productivity and improving production facilities. The basic objective of the Alianza Contigo programme is to “promote and increase the integrated development of the fisheries and aquaculture sector through the rational and sustainable use of fisheries and aquaculture resources in order to increase the level of well-being of producers, their families and the fisheries and aquaculture communities.” The programme focuses on improving productive infrastructure, combating aquatic diseases, transferring relevant technology and promoting the integrated development of rural communities. Projects under Alianza Contigo are partly financed by the Federal government but the projects are approved at the State government level, even though the States do not always contribute to the funding. The beneficiary producer completes the remaining part of the expenses either by themselves or by a financial institution. The percentage of the Federal government’s financial participation depends on the operation rules indicated on the related programme. In 2005, a total of MXN 836 million was provided to the fisheries and aquaculture sector under Alianza Contigo through a number of programmes (Table 10.3). These were related to: the development of production projects and action plans; infrastructure; aquaculture support through Programa Nacional de Acuacultura Rural (National Programme for Rural Aquaculture, PRONAR); and effort reduction (Figure 10.3).

Table 10.3. Expenditure under Alianza Contigo, 2005

Sector Total expenditure a Federal expenditure MXN 000 MXN 000 Agriculture 2 489 396 1 907 599 Livestock 1 455 535 1 072 701 Rural Development 3 155 790 2 545 174 Fisheries 908 904 836 803 Health and innocuity 1 214 145 772 837 Other programmes 138 410 98 900 Total 9 362 180 7 234 014 a. Includes expenditures at both State and Federal levels. Source: SAGARPA.

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The production projects and action plans focus on the research, technological development and fisheries modernisation. This includes projects for: • research and provision of selective catch systems for shrimp and freshwater scale fish; • social and economic studies; • fishing effort assessment; • onboard observers; • management plans; • gear replacement and modernisation; and • provision of safety and communications equipment for commercial vessels.

Figure 10.3. Distribution of support to aquaculture and fisheries under Alianza Contigo, 2005

Reduction of fishing effort 26% Production projects 30%

PRONAR 10%

Infrastructure Action plans 11% 23%

Source: SAGARPA.

The infrastructure expenditure under Alianza Contigo is coordinated with state governments and private sector participants. It is used in conjunction with Federal funds from the Programa de Inversion en Materia de Obra Publica. The objective of the Programa Normal is to increase the economic and social rent from the sector through investment of financial resources and subsidies. The programme takes place as part of the National Development Plan of SAGARPA and includes the Programa de Rehabilitación de Sistemas Lagunares Costares covering the rehabilitation of coastal lagoons. Together, these programmes provide for the construction, extension, maintenance and rehabilitation of a range of infrastructure and other facilities for the fisheries and aquaculture sector including:

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• Dredging of coastal lagoons and creation of canals between lagoons and the mouth of estuaries. • Construction of breakwaters at the entrance to coastal lagoons to improve access and reduce sedimentation and artificial banks for lagoons. • Construction of borders and feeding canals for aquaculture ponds. • Water pumping facilities. • Construction of artificial reefs. • Construction of infrastructure such as wharves and handling facilities (including cold storage networks and shrimp processing facilities) for rural communities. • Construction and maintenance and operation of the Centros Acuicolas (Aquaculture Centres). • construction, maintenance and operation of fishing ports. • environmental, biological, technical, economic and social studies of coastal environment. Over the period 2001-2006, 590 infrastructure-related projects have been undertaken under Programa Normal and Alianza Contigo (Table 10.4). Most of the projects related to the establishment of the Aquaculture Centres in 2001-03, followed by engineering studies and public construction works (dredging, etc). Over the period, 2001-2006, CONAPESCA estimates that the programme has resulted in 8.8 million cubic metres being dredged from lagoons, 174 km of canals being constructed, 4.3 km of breakwaters and 65 990 hectares of rehabilitated coastal areas. These works directly benefited an estimated 14 147 fishers and 56 092 people indirectly (fishers’ families). Over the period 2001-2006, a total of MXN 1.555 billion has been spent on infrastructure for the sector. This includes expenditures under Alianza Contigo, Programa Normal, and contributions from state governments and producers (Table 10.5).

Table 10.4. Infrastructure-related projects under Alianza Contigo and Programa Normal, 2001-2006

Type of project Programa Normal Alianza Contigo Dredging 15 38 Breakwaters 4 4 Control structures for canals 1 Wharves 20 67 Aquaculture Centres 67 Supervision of works 104 Cold storage networks 7 Centres for Acopio 16 Shrimp processing facilities 124 Electrical equipment 7 Artificial reefs 7 Various studies 71 38 Total 282 308 Source: CONAPESCA.

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Table 10.5. Total expenditure on infrastructure-related projects 2001-2006 (MXN million)

Contributor 2001 2002 2003 2004 2005 2006 Programa Normal 30.76 76.69 191.74 154.91 161.16 194.99 (Federal government) Alianza Contigo 71.15 60.42 48.59 5.89 (Federal government) Alianza Contigo (State 159.30 93.64 38.18 governments) Producers 28.29 108.45 49.56 3.50 State governments 57.69 19.37 1.12 (outside Alianza) Total 30.76 76.69 291.18 540.78 372.32 243.68

Source: CONAPESCA.

Alianza Contigo also funds the Programa Nacional de Acuacultura Rural (National Programme for Rural Aquaculture, PRONAR), studies, organisations and development plans developed by the States, and the construction of common-use infrastructure (piers, cold-storage rooms). Priority is also given to sanitary and disease issues. Around MXN 81 million was spent under PRONAR in 2005.

Shrimp vessel decommissioning scheme A recent policy development has been the introduction of a vessel retirement scheme, funded under Alianza Contigo. This was introduced into the shrimp fishery in both the Pacific and the Gulf of Mexico in response to a persistent excess of vessels, declining resources and poor profitability. The government initiated vessel retirement at the end of 2004 and the first vessels were retired in 2005. The scheme operated on a voluntary basis and no targeted decommissioning was undertaken. A fixed payment of MXN 100 000 was given for a vessel and its attached permit. The eligibility requirements for the scheme were that the vessel had to have a valid permit, a catch landing document for the immediate prior season (that is, it had to be an active vessel), and no outstanding fines. In 2005, 222 vessels were retired under the scheme, representing around 10% of the total shrimp fleet. This was a trial scheme and dependant on future funding to continue. There are plans to extend the decommissioning scheme within the shrimp fishery or to other fisheries.

Marine diesel subsidy programme As part of the Sectoral Plan introduced by SAGARPA in 2000, a programme of subsidies for the use of diesel by fishing vessels (as well as other agricultural producers) was started. This was intended to assist in the achievement of the objective to improve the social and economic profitability of the fisheries sector. A programme was put in place by CONAPESCA in 2002 to replace the former mechanism known as “Vale pesquero” which was coordinated by Petroleos Mexicanos and the Secretaria de Hacienda y Credito Publicio.

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In order to improve the efficiency of the programme, a new operating scheme was implemented in July 2004 in which the beneficiary fishery producers are assigned a quota for diesel though the use of an electronic card. This latter is also used for establishing more reliable control mechanisms with respect to the diesel consumption. The enterprise INBURS, which is in co-charge of this functioning with CONAPESCA, is able to monitor each beneficiary by registering the consumption place, date and quantity. In this way, authorities can check the destination and the use of the assigned quota. This “intelligent card” system allowed an important data creation that is currently used by CONAPESCA to support several priority policies and programmes. From the beginning of the “Vale Pesquero” in 2002, until the end in 2004 with the “Intelligent Card” system, the total support granted to fishery and aquaculture producers amounted to some MXN 1 780 million that relates a total consumption of 1 144 million litres of marine diesel (the average support is then being MXN 1.55 per litre). More than 3 200 producers benefited from this programme in Mexico. In addition to the marine diesel subsidy programme, a marine gasoline subsidy programme is also in place. Known as Gasolina para pesca rivereña,thisprogrammeis directed towards reducing fuel costs for inland fishers. No details on expenditure under the programme are available at the time of preparing this report and so are not included in the data on government financial transfers.

FIRA-FOPESCA and BANCOMEXT The Fideicomisos Instituidos en Relación con la Agricultura (FIRA) programme was established about 50 years ago in order to provide credits and guarantees to the agricultural, forestry, fisheries and rural sectors. This second-tier, government-owned fund is managed by the Banco de Mexico, Mexico’s central bank. The fisheries sector is supported through the specific fund, FIRA-FOPESCA. This programme allocated MXN 1 575 million (USD 146 million) to the sector in 2003 (Figure 10.4). While the nominal growth rate in expenditure has been very high at an annual average rate of 16% between 1994 and 2003, expenditure has actually declined in real terms by an annual average of 1% over the period. The shares of the activities financed under FIRA-FOPESCA have changed significantly between 1994 and 2003 (Figure 10.5). The shares devoted to aquaculture and the small scale fishing sector have increased to 39% and 14%, respectively, while the shares directed towards the processing sector and the large scale fleet have declined to 19% and 28%, respectively. Over the period 1994-2003, most of this financial aid was provided to the NW Pacific region, primarily the states of Sonora and Sinaloa, in order to support both the offshore shrimp fishery and shrimp aquaculture facilities (Figure 10.6). The share of expenditure directed towards shrimp aquaculture development and artisanal fishing in the poorer SW Pacific region (primarily Colima, Nayarit and Jalisco) has increased. The expansion in expenditure in the Pacific coast has occurred at the expense of the east coast and inland fisheries.

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Figure 10.4. Expenditure under FIRA-FOPESCA, 1994-2003

1800

1600

1400

Processing 1200

1000

800 MXN millions Aquaculture

600

400 Large scale fisheries

200

Small scale fisheries 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: CONAPESCA.

Figure 10.5. Shares of funding for different activities under FIRA-FOPESCA, 1994 and 2003

100%

Processing

80%

60% Aquaculture

40%

Large scale fleet

20%

Small scale fleet 0% 1994 2003

Source: CONAPESCA.

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Figure 10.6. Destination of FIRA-FOPESCA funding, 1994 and 2003

100% Inland Inland SE Gulf of Mexico and Carribean NE Gulf of Mexico SE Gulf of Mexico 80% and Carribean SW Pacific

NE Gulf of Mexico

SW Pacific 60%

40% NW Pacific

NW Pacific

20%

0% 1994 2003

Source: CONAPESCA.

BANCOMEXT is Mexico’s foreign trade bank and seeks to encourage Mexican exports by providing assistance with financial requirements to exporting companies. This occurs through the provision of discounted, direct and government loans and pre and post-export guarantees. In 2003, BANCOMEXT granted a total of USD 193 million in loans to the fishery sector, consisting of USD 30.5 million in short-term loans and USD 162.5 million in long-term loans (CONAPESCA 2003). The amount of loans has increased significantly over the last decade from USD 44.9 million in 1995 to almost USD 200 million in 2003 (Figure 10.7). The dramatic increase in the long term loans reflects government efforts in promoting the industry as well as greater confidence on the part of private companies in the long term future of the industry. Finance is also available to small-scale aquaculture operators and artisanal fishers through the government institution, Financiera Rural, which replaced the troubled agricultural development bank, Banco Nacional de Credito Rural (BANRURAL) in 2003. Unlike BANRURAL, Financeria Rural is not a bank but disperses funds through the branches of several affiliated banks. The primary objective of Financeria Rural is to make loans available to make loans to producers and rural financial intermediaries, to facilitate capacity building among producers, and to foster the development of rural financial intermediaries. The main mechanisms of support through this programme are subsidised interest rates, subsidised credit guarantees, and debt forgiveness and restructuring. The aquaculture sector is making some use of the facilities under Financeria Rural, but there is scope for increasing participation in the programme, particularly with respect to the development of financial intermediaries.

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Figure 10.7. Loans to the fishery sector by BANCOMEXT

250

200

150 USD million 100

Long term loans

Short term loans

0 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: CONAPESCA.

International engagement

Mexico is actively engaged internationally. It is a signatory to the key international agreements governing the sea and fisheries resources, with the exception of the UN Fish Stocks Agreement (Table 10.6). It is also an active member of the two major regional fisheries management organisations (RFMOs) affecting its fisheries policy: the Inter- American Tropical Tuna Commission (IATTC) and the International Convention for the Conservation of Atlantic Tunas (ICCAT) (Table 10.7). The regulations developed under these RFMOs are translated directly into Mexico’s management measures for its tuna fisheries. In 1992, Mexico and the FAO organized the International Conference for Responsible Fisheries in Cancun. At that Conference, the FAO began the process of formulating the Code of Conduct for Responsible Fisheries which was negotiated over the next four years and finally agreed in 1995. Since then, Mexico has been actively engaged in FAO activities to support the implementation of the Code of Conduct. In 2005, a Free Trade Agreement with Japan was approved. This had an impact on the fisheries sector as it was possible to liberalise 207 tariff lines for fisheries products, representing 63% of fishing products tariff lines. This will make it easier for Mexican fisheries products to enter the Japanese market. Mexico is the main source for tuna imports into Japan.

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Table 10.6. Membership of international fisheries-related organisation

International Bodies of which Mexico is a member Date of entry into force

International Whaling Convention 1949 Inter-American Tropical Tuna Commission 1950 International Convention for the Conservation of 1969 Atlantic Tunas (Mexico joined in 2002) Western Central Atlantic Fisheries Commission 1973 Agreement on the International Dolphin Conservation 1999 Programme Inter-American Convention for the Protection and 2001 Conservation of Sea Turtles Latin American Fisheries Development Organization 1982 (OLDPESCA) Information Services Center for Fishery Products 1994 Marketing in Latin America and the Caribbean (INFOPESCA) Source: Internet Guide to International Fisheries Law, www.intfish.net.

Mexico has been actively participating with Latin-American countries, Canada and the United States in progress towards establishing an Aquaculture Network in America (ANA). The purpose of the ANA is to establish a regional mechanism to support aquaculture sector development in North and South America, improving the sanitary and quality of aquaculture products, and strengthen capacity building and exchange of technology. The network has similar objectives as the NACA network established in Asia. A major feature of Mexico’s international fisheries policy concerns has been the use by some countries of trade measures to promote conservation measures. This has been particularly evident in relation to the tuna-dolphin disputes and the use of turtle excluder devices in shrimp fisheries. Mexico, along with other countries, has promoted the development of cooperative multilateral instruments in order to enhance the conservation of fisheries and marine resources, seeking to ensure that fish caught in a sustainable manner can receive the benefit of access to the international markets. For example, Mexico has played a leading role in the development of the InterAmerican Convention for the Conservation of Marine Turtles. Mexico is also a founding member of the Agreement on the International Dolphin Conservation Programme (IADCP), an organisation set up in the wake of the tuna- dolphin disputes between Mexico and the United States. The IADCP, and its predecessor the La Jolla Agreement, has been very successful in reducing the mortality of dolphins in tuna fishery operations.2 During 2003, 94% of all sets made on tuna associated with dolphins were accomplished with no mortality or serious injury to the dolphins. Furthermore, the total mortality of dolphins in the fishery has been reduced from about 132 000 in 1986 to less than 1 500 in 2004 — about 0.015% of the estimated population. The Tuna Tracking System established under the AIDCP tracks the tuna caught in each set from the time it is captured until it is unloaded. Tuna caught in sets in which dolphins are not killed or seriously injured is defined as “dolphin-safe.”

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Table 10.7. Mexico’s engagement with key international governance arrangements

Treaty Signature Ratification International Convention for the Regulation of Whaling 8 June 1937 1 July 1937 Refers to the proper conservation of ‘whale stocks’ Convention on the Law of the Sea 10 December 1982 18 March 1983 The Convention establishes a legal order for the seas and oceans that defines use of the seas, utilization of resources, conservation of living resources and the study, protection and preservation of the marine environment Agreement Instituting the Latin American Organization for Fisheries 14 June 1983 2 November 1984 Development To provide adequately for the food needs of Latin America and the Caribbean using the potential of fishery resources for the benefit of people in the region La Jolla Agreements April 1992 n/a To reduce dolphin mortality in the Eastern Pacific Ocean and seek ecologically sound means of capturing large yellowfin tunas not in association with dolphins Panama Declaration on the Reduction of Dolphin Mortality in the Eastern 4 October 1995 n/a Pacific Ocean Reaffirming the La Jolla Agreements Code of Conduct for Responsible Fisheries 31 October 1995 n/a The Code sets out principles and international standards of behaviour for responsible practices with a view to ensuring the effective conservation, management and development of living aquatic resources with due respect for the ecosystem and biodiversity. Agreement on the International Dolphin Conservation Programme 15 May 1998 n/a To ensure the long-term sustainability of tuna stocks in the eastern Pacific Ocean as well as living marine resources related to tuna fisheries, to seek ecologically sound means of capturing large yellowfin tunas not in association with dolphin, progressively reduce incidental dolphin mortality, and to avoid, reduce and minimise incidental catch and the discard of juvenile tuna and non-target species. Rome Consensus on World Fisheries 15 March 1999 n/a Action is required to eliminate overfishing, rebuild and enhance fish stocks, minimise wasteful fisheries practices, develop sustainable aquaculture, rehabilitate fish habitats and develop fisheries for new and alternate species based on principles of scientific sustainability and responsible management. Agreement for the Implementation of the Provisions of the United Nations -- Convention on the Law of the Sea Relating to the Conservation and Management of Straddling Fish Stocks and Highly Migratory Fish Stocks (Fish Stocks Agreement) The aim of this Agreement is to ensure the long-term conservation an sustainable use of straddling fish stocks and highly migratory fish stocks through effective implementation of the relevant provisions of the UN Law of the Sea Convention Convention for the Strengthening of the Inter-American Tropical Tuna 14 November 2003 14 January 2005 Commission To ensure the long-term conservation and sustainable use of the fish stocks covered by the Convention Source: Internet Guide to International Fisheries Law, www.intfish.net.

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Key institutional issues

Mexican fisheries development has witnessed a number of institutional changes in few years which have deeply influenced both stakeholders’ incomes and the condition of fish resources. In this section the consequences of institutional reforms are assessed. The analysis is focused on: the stability of the institutional structure, decentralisation of management; dealing with conflicts among stakeholders; improvements to coordination; and improvements to support programmes for the sector.

Institutional stability and long-term vision

A defining feature of Mexico’s fisheries policies over the last couple of decades is the lack of stability in the institutional framework for the sector. It is clear that successive administrations have not been able to settle on an appropriate place for fisheries policy development and management functions within the Federal bureaucracy. The consecutive shifting of responsibility for fisheries has lead to significant shifts in both policy directions and regulatory oversight.3 These changes in policy direction experienced since 1990 have not been conducive to maximising the potential for the fisheries sector to generate long-term net economic benefits for the country. The need for a stable policy framework is particularly acute for the fisheries sector where management policies should be geared to enable long term, sustainable utilisation of available resources. Multiple changes in policy direction over the last 15 years has led to incoherent policies and compromised the resource and economic sustainability of the sector over the longer term. Under the Mexican political system, such shifts are, to some extent, unavoidable where new plans are put in place with each change in administration. However, they should reflect minor course corrections rather than wholesale shifts in policy priorities. One of the main causes of such policy shifts is the lack of a clear vision for the long- term future of the fisheries and aquaculture sector that is shared by government and stakeholders alike. Multiple sets of objectives for the fisheries sector are contained in the former Fisheries Law, the SAGARPA Programme for Fisheries and Aquaculture and CONAPESCA’s objectives and strategic guidelines. While these objectives are a step in the right direction, they do not constitute a coherent and directed vision for the future of the sector and do not provide the basis for sound long-term planning and development. This increases the incentive for successive administrations to put their own stamp on the sector, reduces the stability of the regulatory framework, and increases the uncertainty faced by industry participants and other stakeholders. Importantly, it leaves the sector vulnerable to policy shifts that are motivated by short-term political priorities, further eroding stability and stakeholders’ perceptions of the legitimacy of policy changes. It is necessary, therefore, for the Mexican government to develop a higher-level, long- term vision for the future of the fisheries and aquaculture sector in order to provide an opportunity for ensuring that the vision and strategies can transcend political administrations and reduce long-term uncertainty in the sector. Recommendations for further adjustments in Mexico’s fisheries policies need to be framed by a vision of Mexico’s fisheries sector in the future. The objectives articulated in the new Fisheries Law provide a sound basis for the future as they include an array of resource sustainability, economic and social concerns, building on the advances made in recent years. However, an over-arching vision for the sector is still required.

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From the various policy statements and objectives produced in recent years, coupled with the objectives under the FAO Code of Conduct for Responsible Fisheries and the OECD’s guiding principles, it is clear that the articulation of such a vision can be readily developed and would centre around the following goals: • contribute to overall economic growth; • ensure sustainable resource use; • increase the economic resource rent from fisheries and aquaculture; • ensure resilient fishing communities, without dependency on government subsidies; • reflect the societal benefits and costs of impacts on the environment in the decisions of its agents; and • be responsive to market signals in both input and output markets.

This vision is of a fishery sector where, amongst other things, regulations are based on sound scientific and economic advice; effort is effectively controlled (and preferably “self-regulated” through the use of market mechanisms); fisheries are not the only recourse for unskilled or displaced labour in the absence of a social safety net; fishers are not dependent on government subsidies to maintain profitability; biological diversity is respected; illegal fishing is an exception and not commonplace; and stakeholder consultation and empowerment is a central feature of the institutional framework. The fisheries policy regime that will bring about this vision is one that recognises the potential for private markets to work, while finding the correct policy levers that will align private and societal benefits and costs. Fisheries policies that attempt to increase producer income or to improve sectoral growth by using subsidies, failing to reduce effort or inadequately enforcing regulations could have the opposite result. Such policies may penalise long-term development and delay the eventual achievement of this vision for Mexico’s fisheries by failing to exploit or even undermining its own comparative advantage. It is important to recognise that some of the necessary policy changes do not come within the remit of fisheries policy. Some general lessons from OECD work point to contributions that may be made by non-fisheries policies. Macroeconomic policy is critical: the negative effects of the currency crisis in the middle 1990s show the vulnerability of the poor. The need to improve education and reduce poverty extends throughout the economy, and requires nation-wide action. Improvements in institutions and governance that could offset the negative effects of the six-year political cycle by providing for greater continuity in the public service are best addressed directly, rather than by re-designing programme implementation to generate transparency and support.

Decentralisation of decision-making A significant feature of the institutional arrangements for the sector under the current administration has been an increased emphasis on decentralisation of fisheries administration and management. There has been an increased focus on the development and implementation of mechanisms for consultation and stakeholder involvement. Consultative mechanisms are in place for improving dialogue between Federal, state and municipal governments in setting NOMs, allocating funds under the various support

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programmes, and implementing management arrangements. Stakeholders also have a number of forums in which they have limited potential to influence policy development. However, the decentralisation of decision making power and management responsibility has occurred at a very cautious rate and lacks a cohesive long-term plan. A regionalisation process for fisheries based on biophysical and social characteristics has the potential to improve transparency, increase accountability, increase stakeholder involvement and empowerment, enhance enforcement efforts, and better target financing and priorities for research and support. At the same time, regionalisation needs to be carefully designed and well-resourced within an overall institutional framework that works to support a well-articulated vision for the industry and to avoid political interference in management. This will require a robust and resilient institutional structure at Federal, regional and state levels. An allied concern expressed by industry and others in the course of preparing this report is the incorporation of CONAPESCA into first SEMARNAP and now SAGARPA at the level of an Under-Secretariat. This largely reflects a concern about a perceived lack of influence on fisheries matters within the Federal Government as a result of having to compete to be heard within a large department covering many (mostly agricultural) sectors. These concerns were exacerbated by the transfer of CONAPESCA from Mexico City to Mazatlan in 2001. There are, of course, costs and benefits associated with this institutional arrangement and it is incumbent on the government to determine which arrangement best meets their objectives. However, the location of CONAPESCA in Mazatlan suits the objective of bringing decision making closer to the stakeholder communities. Its location within the major fishing region of Mexico is appropriate, although care needs to be taken to ensure that its decision making processes and consultation is seen as inclusive across the other fishing regions, most notably on the eastern coast of Mexico. Further efforts are required to develop a truly decentralised and regionalised system of decision making. Three features of the current, partial, decentralisation are worth noting. First, the relocation of CONAPESCA from Mexico City to Mazatlan merely changed the place where centralised decision making was being undertaken. As can be seen in Figure 10.8, the decision making power still resides centrally with SAGARPA and CONAPESCA. The state offices for CONAPESCA are small in number, are co-located in SAGARPA state offices, and have low staffing and limited responsibility. Moreover, the fisheries officers in the state officers report to the local SAGARPA Under-Delegate rather than to CONAPESCA, a situation which compromises the lines of authority within SAGARPA and hampers effective monitoring and enforcement of fisheries regulations. Second, earlier attempts to delegate decision power to coastal states through committees ran into difficulties for structural and political reasons. In responding to the guidelines of the FAO’s Code of Conduct for Responsible Fisheries which encouraged meetings between government and stakeholders, SEMARNAP started to organise joint meetings with fishers, enforcers from PROFEPA, and scientists from INP during the 1990s. The purpose of the meetings was to move forward the process of setting up management measures in the form of NOMs for several fisheries. Initially, however, fishers were not motivated in participating because the committees’ recommendations were often not taken into account by decision-makers at SAGARPA’s and CONAPESCA’s head offices (Hernández and Kempton, 2003). The fact that many of these meetings took place in Mexico City limited the effectiveness and perceived legitimacy of the eventual accords between authorities and fishers’ representatives.

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Decision making was still centralised, even when CONAPESCA’s offices were located in Mazatlan. These meetings became increasingly politicised and dominated by powerful fishing industry lobbies, as has been the case in many other Latin American countries (Thorpe and Bennett, 2001). This has improved in recent years and increased consultation is now taking place. The key lesson from the experience is that it is necessary to ensure that the influence of short-term political pressure is minimised within the institutional structure for fisheries management decision making. Third, the states are not necessarily the most appropriate geographic unit for decentralised decision making and management. Their boundaries reflect factors other than ecosystem considerations and neglect the fact that fish resources and inland waters are often shared across state borders. A biophysical basis for determining boundaries for fisheries management based on marine biodiversity patterns would be more appropriate. Otherwise, there is the potential for coastal states to compete against each other in a local race-for-fish, with the consequent risk of over-fishing and over-capitalisation.

Figure 10.8. Current institutional structure and decision making zone

President

Other government SAGARPA agencies and Secretariats

Decision making zone CONAPESCA

INP State authorities

SAGARPA State fisheries state offices committees Stakeholders

One of the major aims of decentralisation is to provide local fishers with a more active role in fisheries management and increase incentives for resource stewardship (Young, 2001). As small-scale fishers have little political power, one development option is to strengthen fishers organisations, introducing a more efficient trading system to reduce the power of intermediaries (Hernández and Kempton, 2003), or in certain cases, by providing contingency funds for small-scale fishers (Lobato, 1996). Empowering fishers and encouraging local decision-making through some degree of co-management can also alleviate conflicts among stakeholders in Mexico. This has already started to take place in some local fisheries. Castilla and Defeo (2001) have demonstrated that an effective institutional arrangement for Latin American shellfish fisheries is a combination of co-management, self-government and property rights. They argue that one important

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feature of co-management is communal ownership which encourages co-operation among fishers. For example, enforcement costs are a major obstacle in achieving sustainable management measures but might be eased by stakeholders under a co-management regime. Such a system has been observed only in a few cases, such as abalone and lobster fisheries: fishers share costs not only for stock assessments but for surveying and enforcing illegal fishing. As Hernández and Kempton (2003) stated, if fishers were more knowledgeable and more empowered, they would be more likely to act responsibly to the new regulations. Decentralisation always bears the risk of empowering local interest groups who seek to collude with local authorities to improve short term profits at the expense of long term resource sustainability and rent (Breton et al. 1998). Moreover, it has been argued that decision-making power must remain centralised, as it would be difficult to set up a unique national fisheries policy if decisions were to be made in coastal states. However, a well- designed institutional structure based on an agreed vision and strategy for the sector, with well-defined parameters of responsibility, accountability, transparency and inclusion can address such concerns. Effective decentralisation should only devolve fisheries management decisions to coastal regions within a coherent long-term sustainable fisheries policy set up and audited by the federal government. Fisheries management programmes should take into account local particularities of both fish resources and stakeholders organisation (Rivera-Arriaga and Villalobos, 2001). Some of the ingredients to further decentralisation are already in place in Mexico. First, the country can be naturally divided into the four coastal regions (Regions IIV) and the inland waters, each with distinctive regional ecological characteristics and policy issues. Second, regional consultative mechanisms are in place for some fisheries, and functioning with varying degrees of effectiveness. Third, the INP currently has a regional network through the CRIPs which will assist in the provision of scientific advice at local levels. Fourth, regional fisheries offices exist, although these are mostly in name only as they consist of a single fisheries officer located in the SAGARPA regional offices and reporting through the SAGARPA hierarchy rather than directly to CONAPESCA officials. This basis could be further developed to provide an appropriate level of regional management that is representative, transparent, responsible and responsive, allowing for fishers to be empowered within the decision making system. Concerns over corruption or biased decision making can be addressed by ensuring a wide stakeholder involvement (including environmental NGOs and community groups as well as fishers’ representatives), transparency of analysis and advice, and accountability mechanisms for advice given and decisions taken. The major risk to be wary of is the creation of an unwieldy hierarchical structure that is essentially maintains a top-down, command and control structure. This will very quickly lose legitimacy amongst fishers and other stakeholders. The benefits of decentralised decision making lie in improved stakeholder input to scientific analysis and regulatory design, increased acceptance of regulations, and potentially lower enforcement costs. The major cost involves an up-front investment in institutional capacity building.

Potential alternative institutional structure A possible alternative institutional structure that is more conducive to decentralised decision making is depicted in Figure 10.9. The main feature of this structure is that it locates the decision making zone at the regional level, while maintaining central policy

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making, auditing and enforcement responsibilities at the central level. Several points on the possible structure should be noted.

Figure 10.9. Possible alternative framework for a decentralised institutional structure

President

SAGARPA

CONAPESCA

Other Central office Other government Secretariats agencies

INP State Regional Local research authorities offices centres

Stakeholders Decision making zone

First, long-term planning and management responsibilities for the fisheries sector may be best served by making CONAPESCA a more functionally independent body within SAGARPA, with an independent budget line, devolved decision making powers on fisheries issues, and a direct line of reporting to the Secretary for Agriculture. Under such an arrangement, CONAPESCA would have responsibility for long-term sustainable fisheries policy formulation, co-ordinating policies among other ministries (e.g. environment, agriculture, economy, and navy), other government agencies and its regional offices, central administrative functions (vessel registries, etc), enforcement standards and mechanisms (e.g. VMS), international engagement, and auditing fisheries management outcomes. It would also be responsible for fisheries that cross the different regions, such as the tuna fisheries. Second, decentralised decision-making could be organised by ecological regions rather than by political boundaries. The regional division of Mexico into the four regions based on CONABIO’s marine areas, plus inland waters, as used in this report and elsewhere, would be an appropriate level of decentralisation for regional level policy implementation and management. Third, decision-making processes with respect to fisheries management instruments, enforcement mechanisms could take place in regional offices. These processes should be accompanied with the participation of stakeholders, the INP and local research agencies (e.g. universities). The latter two should advise fishers in order to give them recommendations on sustainable management. Participation of these actors will facilitate feedback on fisheries policies based on practical experiences. A wide range of stakeholders should be part of the process, including NGOs and community groups. Transparency, accountability, responsibility and responsiveness should be the key features of the charter for these groups.

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Fourth, INP should continue to be a key element of the structure, acting as a provider of scientific advice on stock assessments and management options, and as an auditor of fisheries management outcomes.

Clearly, further work is required to more fully elaborate any plan for a more decentralised institutional structure. However, there are likely to be significant benefits from doing so, especially as the government has already (cautiously) embarked upon this path. It is important that any such process be nested within a longer-term vision and strategy for the whole sector, as discussed in the previous section. It should also be noted that such institutional changes do not come free of charge. It is clear that some investment in institutional capacity building is required. This will involve short-term costs, but can be expected to generate long-term benefits.

Coordination among agencies and stakeholders Whether or not a more decentralised institutional structure is pursued, there is a need to improve coordination amongst agencies with responsibilities for various aspects of Mexico’s fisheries and aquaculture sector. Frequent changes in policy direction and institutional framework have led to overlapping duties and weak coordination between and within institutions and levels of government. This can be seen in several areas. First, there are overlapping responsibilities at the Federal level. For example, eight agencies at different levels of the federal administration, comprised in four different ministries, along with offices of each coastal state, are involved in coastal management, including fisheries. While SEMARNAT is charged with setting up co-ordinated coastal management programmes (Planes de Ordenamiento Costero), their practical implementation remains a major challenge (Rivera-Arriaga and Villalobos, 2001). Second, there is a need to improve agency coordination for the approval and supervision of aquaculture projects. At present, there are too many overlapping and contradictory regulations emanating from different government agencies, increasing the costs and uncertainty associated with environmental compliance in aquaculture operations and delaying development. Part of the problem is that a coherent, transparent, risk-based set of environmental parameters for aquaculture operations is lacking at the moment due to the multiple pieces of (sometimes contradictory) legislation governing the industry. These include regulations overseen by CONAPESCA, SEMANART, PROFEPA, the Water Commission, and soil conservation authorities. Rationalising and harmonising these regulations is essential and a “one-stop shop” would be a useful innovation to streamline the approvals and oversight process. Third, there have been gaps in agency coordination, resulting in some management functions falling by the wayside. This has occurred, for example, in the case of enforcement functions. In 2000, PROFEPA was discharged from enforcing fisheries regulations, in order to concentrate its efforts on other environmental issues. Nevertheless, marine reserves enforcement remained as a competence of PROFEPA. Fisheries were left without any enforcement authority until 2004 when CONAPESCA created a department to undertake the enforcement function. Supervision of fishers’ transgressions in surrounding areas of marine reserves remains unclear. There also appears to be scope for improving co-ordination between different stakeholders in the whole fisheries sector, including government, industry, universities and NGOs. This would be a central feature of, and indeed essential to, a more decentralised institutional structure and requires commitment from both government and

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other stakeholders to actively engage in a mutually reinforcing and constructive dialogue. Stakeholders will quickly lose faith in such mechanisms if there is a perceived lack of responsiveness, empowerment and legitimacy on the part of government. A priority area for improved coordination is scientific research and policy analysis. In spite of INP’s acknowledged expertise on fisheries research, a strong co-operation link with both fishers and academic institutions is still missing (FAO, 2005). A contributing factor is that fisheries research is financed almost entirely by federal funds: Secretariat of the Treasury regulations do not allow INP to receive neither non-governmental nor private funding. As a result, it is unable to supplement its sources of revenue or establish stronger formal links with fishers and universities. Given the lack of trained staff to replace the qualified personnel leaving the INP (through retirement for the most part), it is important for the INP to be able to establish such links to expand its operating options. Involving industry and local universities in fisheries research would help to develop a common strategy and common set of priorities on fisheries research. In addition, there is a lack of research on alternative instruments for fisheries management and the socio-economic impacts of current management arrangements and future management options. Multidisciplinary research in the sector is largely lacking and will tend to restrict the management options being considered by authorities. If the government wishes to pursue its decentralised management strategy, it will need to consider that a larger role for social scientists in both fisheries research and decision- making.

Conflicts among stakeholders The current institutional arrangements do not adequately deal with conflicts between stakeholders in the sector. This is most apparent in the conflicts between small-scale and large-scale fleets in particular fisheries, between wild capture and aquaculture operations, and between fishers and other users. Social problems derived from conflicting access claims are quite frequent in both developed and developing countries, with the lack of clearly defined and enforceable access rights being one of the central causes (Panayotou, 1982; Willman and Garcia 1985; Stonich and Bailey, 2000; Thorpe et al. 2000). Shrimp fisheries in Mexico are a clear example of such problems. Changes in the 1992 Fisheries Law led to a number of conflicts between co-operatives and private investors in important fishing states like Sinaloa and Sonora, as co-operatives remained in the inshore fishery catching smaller shrimp, directed mainly to the domestic market, while the private-owned vessels caught shrimp for export (Vasquez-Leon and McGuire, 1993). In fact, the coexistence of offshore and inshore fleets in the shrimp fishery is a real challenge for fisheries managers. Economic and social interests seem to be in conflict as private investors seek profit maximisation, while unemployment is a major concern among inshore fishers. In fact, certain features of shrimp fisheries, including both social and biological aspects, impede to establish and achieve long-term management objectives, having serious consequences for the fishery as a whole. One of these features is that the shrimp fishery is sequential, which means that early stages of life-cycle are exploited by inshore fleets in either coastal lagoons or near shore, while juveniles and adult shrimp are caught by the offshore fleet. Maximum yield per recruit is obtained offshore, which implies that the higher the inshore catch, the lower the offshore catch. However, co-operatives have steadily been fishing further offshore, invading the large- scale fleet areas. Not surprisingly, hostility between both fleets frequently arises and, as Cruz-Torres (2000) puts it, a “pink-gold rush” starts, with the predictable outcome of

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over-capitalisation of both fleets. In the case of the shrimp fishery, however, the small- scale fleet has been the one with the most capacity to expand and has done so quite rapidly. Conciliation between objectives of the two fleets is very difficult to achieve and fisheries management measures are thus limited to allocating catch levels between fleets using fishery closures (Fernandez-Mendez et al., 2000). However, such a management measure neglects resource rent distribution and does not prevent over-exploitation of fish stocks. Potential conflicts are present as well when activities from different users overlap in the same area. This has been the case of shrimp aquaculture (Cruz-Torres, 2000; Stonich and Bailey, 2000). Private shrimp culture has been actively encouraged since the 1992 Fishery Law reform, giving yields of 61 704 tonnes with a value of about 2 600 million pesos in 2003. However, it is well documented that mangrove deforestation, reduction of wild shrimp and water quality degradation have boosted conflicts among different stakeholders, not only in Mexico, but elsewhere (Stonich and Bailey, 2000). Marine reserves and eco-tourism have been another source of concern. Marine reserves are of special interest for biodiversity conservation and for limiting fishing, urban development, and water pollution (Bostford et al., 1997) and have been promoted as management instruments in Mexico since the mid-1990s. Problems arise, however, when displaced fishers have no alternatives or these are poorly implemented (see Chapter 13). A similar outcome happens when eco-tourism is not compatible with coastal fisheries. For example, Young (1999) cites the case of grey whale watching off Baja California peninsula, where the absence of effective community-based institutions allows tourism companies to impose their priorities and interests over those of local residents, such as lobster fishers.

Better targeting of support programmes Government financial transfers to the marine capture industry account for the bulk of the transfers to the fisheries and aquaculture sector, accounting for two-thirds of total transfers to the fisheries and aquaculture sector. The value of transfers to the marine capture sector as a proportion of the value of landings increased from 14% 1996 in 1996 to 19% in 2004 and is marginally below the OECD average. Most of the transfers in this sector (72%) are directed towards direct payments and cost-reducing transfers, primarily payments for diesel subsidies, direct grants and a decommissioning scheme for the shrimp fleet. There is a major concern that some of the transfers, particularly those provided for diesel subsidies, engine purchase and vessel modernisation, will adversely affect the long term sustainability and profitability of the sector in the absence of effective constraints on effort and capacity. In addition, while decommissioning schemes are generally regarded as central to capacity reduction efforts, it is essential to ensure that they are carefully designed so as to avoid providing perverse incentives to fishers which hamper further capacity reduction efforts. In particular, it is essential that there is no expansion in fishing effort following the removal of vessels through the decommissioning scheme. This would negate the effects of the scheme on the sustainability of the resource base and dissipate any resource rent that might be generated. There is a significant risk of such a situation occurring in the case of Mexico’s shrimp fisheries where the management regime is based on limited entry and season and area closures, but with few controls on other effort parameters. Extension of the decommissioning scheme either within the shrimp fishery or to other fisheries should be accompanied by other management changes to ensure that effort does

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not expand or leak back into the fishery. Efficient design and targeting of such schemes is essential if they are to be effective. While a first priority is to remove GFTs other than those that are essential for managing fisheries, this may not always be politically feasible. In this case, the better targeting of financial support should be a priority. The majority of Mexico’s financial transfers that are directed towards direct payments and cost-reducing transfers should be reduced. Authorities should also re-examine the regional and fleet destinations for expenditures. In particular, it is not clear why commercial fisheries require financial support, particularly if they are generating resource rents and making profits. The use of diesel subsidies is a clear example of government policy providing perverse incentives to the sector. Given that Mexico’s major fisheries are regulated by limited entry with few constraints on expansion of other inputs, such subsidies will encourage fishers to increase effort. This is occurring at a time when most fisheries are under pressure to constrain or reduce effort. If particular fleets are not generating rents or profits, then the problem is the more fundamental one of inadequate management, and the provision of subsidies will merely delay and exacerbate the underlying problem. Spending on the aquaculture sector has increased significantly in recent years through the Alianza Contigo programme and, reflecting increasing government focus on the development potential of the sector. The increase in expenditure is evident in the establishment of the network of aquaculture centres and improving understanding of aquatic health management. However, it would be appropriate for the government to institute some degree of cost recovery for government transfers to the aquaculture sector, particularly those related to the establishment, maintenance and operation of infrastructure facilities. The ability and willingness of the sector to gain access to financial markets has increased and companies are beginning to make increased use of the loans and guarantees provided by BANCOMEXT to facilitate export-led developments, and the soft loans and credit guarantees available through FIRA-FOPESCA. However, equity may be an issue as the programmes tend to target larger commercial operators in the fisheries and aquaculture sectors and poorer applicants often cannot provide the required matching funds to take advantage of the programmes. These types of programmes will only partially address this deficiency and further attention needs to be paid to the use of more innovative financial mechanisms for the sector, as well as to broader financial sector policies. Finally, it is important to note that fisheries policy changes do not come free of charge. It is clear that some investment in institutional capacity building is required. This will involve short-term costs, but can be expected to generate long-term benefits. Reforms that are directed towards more profitable commercial fisheries should be accompanied by cost recovery to ease the financial burden on the government.

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NOTES

1. CONAPESCA has recently begun some research into socio-economic issues. 2. In the eastern tropical areas of the Pacific Ocean, schools of yellowfin tuna often swim beneath schools of dolphins. When tuna is harvested with purse seine nets, dolphins are intentionally encircled in the nets but, with the procedures established under the AIDCP, the dolphins are successfully released in more than 95% of the sets. 3. The changes are from a separate Secretariat (SEPESCA) to an Under-Secretariat in the Environment Secretariat, and now to an independent body under SAGARPA (with a level of Under-Secretariat but without its own legal entity).

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Chapter 11.

Review of fisheries management performance since 1990

Mexico’s wild capture fisheries were, in general, in relatively poor condition at the start of the 1990s. A strong government emphasis at the time on the industrialisation of Mexico’s fisheries was not accompanied by suitable management policies to ensure sustainable exploitation of fisheries resources. As a result, the start of the 1990s saw the sector characterised by:

• Over-capitalisation and excess fishing effort which had been assisted by government subsidies for fishers and minimum controls on fishing effort.

• Declining catch rates in many fisheries and resource stocks under pressure due to the de facto open access regimes in place and the limited incentives to conserve the resource.

• Poor profitability across the sector as a result of inefficient economic operating conditions, exacerbated by the strong role played by the cooperatives which effectively stifled efficiency and masked price signals.

• Considerable uncertainty regarding access rights for fishers in the sector, compounded by the dominant role of the cooperatives.

As discussed in Chapter 10, there have been several changes in policy direction since that period with increasing emphasis on resource sustainability as well as industry development. Today, CONAPESCA has the responsibility for setting management measures, monitoring compliance with the measures, evaluating the success of the management, and proposing alternative strategies. This chapter reviews the effectiveness of fisheries management since 1990. This is done with reference to the types of management instruments that are used in wild capture fisheries, the current status of the key fish stocks, changes in stock status in recent years, and the enforcement of regulations. Key issues that are addressed are measures to control fishing effort (particularly with respect to the artisanal fleet), stock recovery planning, fisheries management plans, the choice of management instruments, and the adequacy of stock assessment and socio-economic analysis.

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Management instruments

Fisheries regulations are based on three main components: the enacted Fisheries Law; the Federal government plans for fisheries and aquaculture; and the Mexican Official Standards (NOMs). The last of these, the NOMs, specify the management measures to be followed in each fishery for which a NOM has been issued. These regulations are agreed upon by the social, private, and public sectors, and are published in the Government’s Official Diary. Once a NOM is published in the Official Diary, there is a 60-day period for comments by any stakeholder who has observations or remarks on the text. The promulgation of the NOMs is the central mechanism for regulating fishers’ actions and the pace of the development of NOMs has increased in recent years. The main advantages of the NOM system are the legal force they provide to the regulations and the consultative nature of their development. The key disadvantage is that they are not particularly flexible and the process of modifying them is lengthy and cumbersome. For this reason, the role of the National Fisheries Chart (CNP) as a means of regularly updating management settings is essential. The CNP is updated annually and has some legal force in terms of defining fishing effort, catch limits, season closing dates and so on. Such flexibility is essential in order to be able to respond to changing environmental and economic circumstances.

In general, fisheries management measures used in Mexico consist of: technical measures governing the types of gear used, size limits and bycatch technologies; input controls relating to allowable effort, area closures, and season closures; and output controls in the form of catch limits and quotas. Table 11.1 summarises the main management instruments used in the fisheries for which NOMs have been issued, including the inland fisheries. The main mechanism for applying these measures is the system of permits. These are licences to fish a given resource at a given place and are valid for between one and four years. Permits are transferable in principle under the legislation but a system for allowing transfer has not been formally introduced. There is a degree of informal transfer among fishers, generally including in exchange for money, but the extent of this is unknown. A system of concessions is also in place. These are longer term than permits and may be issued for up to 20 ears. A number of concessions have been issued in the tuna, sardine and anchovy fisheries, as well as for some area- based fisheries such as abalone and coastal lagoons. The latter set of concessions has usually been issued to cooperatives in the artisanal sector. Concessions are transferable with the permission of CONAPESCA, but the extent of such transfer is unknown. No concessions have been issued for the past decade.

Specified measures which may be comprised in the NOM are either permanent or open-ended. For example, once agreed, mesh sizes, legal sizes, or permanent closures are rather difficult to modify. In contrast, annual quotas and closure dates for certain fisheries are revised every fishing season in response to stock assessments performed by the federal government through INP.

In the case of tuna, Mexico follows the catch limits and management regulations recommended by the regional fisheries management organisations governing tuna resources in the Pacific and Atlantic coasts (ICCAT and the IATTC). Mexico actively participates in the meetings of these organisations. Furthermore, Mexico is part of the Inter-Government Agreement for Dolphin Conservation for reducing the incidental catch

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of dolphins in the Eastern Pacific. This agreement has had considerable success in reducing dolphin mortality through the use of technical measures and gear changes.

The key point from Table 11.1 is the predominance of input controls as the main means of regulating fisheries. These focus on effort limits and season and area closures, all of which are widely used. These are generally supplemented by technical measures relating to gear type, mesh size and so on. Catch limits are used in inland fisheries and for recreational fisheries where they consist primarily of bag limits. Quotas are used for some shellfish species, including abalone and some species of clams. The use of management measures based on economic instruments has not been tried in Mexico to date, either in relation to output controls (such as individual transferable quotas) or input controls (for example, transferable effort quotas).

The general range of management instruments presented in Table 11.1 is complemented in some cases by additional management measures outside the system of NOMs. These relate to the use of community based management in some of the small- scale fisheries around the coast. These are supplementary to the use of effort limits, area closure and season closure and have been developed and implemented on a case-by-case basis, usually at the initiative of the local fishers through their co-operatives. Such management arrangements tend to be used for sedentary species such as lobster, oyster, and mussels. For example, the case of the Baja California red rock lobster has been cited earlier. These arrangements sometimes start out as informal agreements amongst groups of fishers that are later formalised or at least recognised by authorities.

Status of major stocks

The INP undertook stock assessments for 54 marine fisheries in 2004. Of these, 34 are fully exploited (63%), 11 are over-exploited (20%) and nine are under-exploited (17%) (Table I.2). There are no collapsed stocks. The management advice from this assessment is clear: no increase of fishing effort should be allowed. Moreover, recovery plans including effort reduction should be implemented for the over-exploited stocks as a priority. Among the most threatened stocks are: abalone, certain shrimp species in both the Pacific and Gulf of Mexico coasts, sea urchin, grouper and Caribbean lobster. A common feature of these stocks is that they are high-value, sedentary species, a combination which makes them very vulnerable to overexploitation. Several stocks, however, have potential for development: Atlantic tunas, giant squid, common octopus in Yucatan peninsula, and seaweeds although care should be exercised in any expansion of effort.

Table 11.3 provides a summary of the changes of the stock status between 2000 and 2004 for those stocks for which assessments were undertaken in both years. As the CNP was only introduced in 2000, and still clearly evolving, such a short time span between stock assessments clearly does not provide the long term changes in stock status that is often necessary to see significant changes in response to management measures. Nevertheless, the comparison serves to highlight progress in management of key stocks and identify course corrections required.

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Overall, the change in stock status for the assessed stocks between 2000 and 2004 has been marginal. Of the stocks surveyed in this report, two overexploited stocks recovered to sustainable levels (blue shrimp in Sonora, lobster in Yucatan) while four stocks deteriorated to being overexploited (brown shrimp in Sinaloa-Nayarit, lobster stocks in the northern and southern areas of the Baja California Peninsula, red sea urchin in the Pacific, Queen Conch on the Banco Chinchorro). Given that the recovery of fish stocks is generally a long term process, it is not unexpected that there is little change over the four year period examined. However, there remains considerable benefit in undertaking annual reviews of stock assessment data, particularly in relation to fishery recruitment and fishing mortality in the different age cohorts.

The management advice from the CNP is unambiguous for most stocks: further efforts are clearly required to reduce the number of overexploited stocks and reduce fishing pressure on the large number of stocks that are currently fully exploited (Table 11.3). However, for a few species, the CNP states that an increase in effort can be contemplated, but only at a cautious rate and with regular reviews to determine impacts on stock status. As a result, it is unlikely that large increases in Mexico’s wild capture production will be seen in the future and total catches are likely to oscillate around the 1.5 million tonnes level of the last few years.

In relation to efforts to reduce bycatch, there has been marked success in some fisheries. This has been particularly evident in the Pacific tuna fisheries where there has been a 99% decline in the number of dolphins caught per set between 1986 and 2003 through the use of selective fishing practices and technologies. The rapid and proactive introduction of turtle-excluder devices in the shrimp fisheries ensured that Mexico was not drawn into lengthy trade disputes, as was the case with the dolphin-tuna issue, and was able to maintain production and exports of this high value species. In other fisheries, bycatch reduction measures are gradually being introduced, although more remains to be done.

The status of inland fisheries remains a concern. The constant increase in fishing effort in river basins, coastal lagoons and protected areas is a direct consequence of the growth in the working age population who have few employment alternatives in communities bordering inland water zones. The river fishers tend to concentrate on the more profitable species, which permanently increases the fishing effort brought to bear on those resources. Addressing the inland fisheries issues should be a priority but will require the involvement of other policy areas, particularly with respect to rural development.

Table 11.1. Summary of fisheries management measures in Mexicoa

Abalone Baja California NOM-005-1993 X X X X X Peninsula Clam Baja California NOM-004-PESC- XXX and Baja 1993 California South

Crab Pacific Ocean, NOM-039-PESC- XXX including the Gulf 2003 of California Lobster/Crawfish Gulf of Mexico, NOM-006-PESC- XXX Caribbean Sea, 1993 Pacific Ocean (modified in 1998) including the Gulf of California Mullet Gulf of Mexico, NOM-016-PESC- XX X X Caribbean Sea, 1994 Pacific Ocean including the Gulf of California Octopus Gulf of Mexico, NOM-008-PESC- XXX Caribbean Sea 1993 Oyster All coastal NOM-015-PESC- XX X lagoons and 1994 estuaries Red Sea Urchin West Coast of the NOM-007-PESC- XXX Pacific Ocean (the 1993 State of Baja California) a. Includes measures under NOMs as well as measures recommended by INP.

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Shrimp United States of NOM-002-PESC- XX X X XX Mexico 1993 (modified in 1997) NOM-EM-007- PESC-2004 Top shell/ Campeche, NOM-013-PESC- XXX Sea-shell Quintana Roo and 1994 Yucatan Tuna Pacific, Gulf of NOM-023-PESC- XXXX Mexico, 1996 Caribbean sea Inland fisheries Nuevo Leon NOM-031-PESC- XXXXXX at the “José 2000 Lopez Portillo” area Inland fisheries Nayarit NOM-026-1999 X X X X X X at “Aguamilpa” area Inland fisheries Nuevo Leon NOM-001-PESC- XX at “Cuchillo- 1994 Solidaridad” area Inland fisheries Nuevo Leon NOM-035-PESC- XXXXXX at “José S. 2004 Noriega” area

Output Input controls Technical measures controls Name Location Reference Turtle By-catch Effort Season Area Quota Size Gear specifi- excluding excluding limits closures closures limits limits cations devices devices Inland fisheries Sinaloa, Sonora, NOM-025-PESC- XXXX X at “Luis Donaldo and Chihuahua 1999 Colosio Murrieta” area. Inland fisheries Michoacan and NOM-027-PESC- XXXXXX at “El Infiernillo” Guerrero 2000 area. Inland fisheries Jalisco, NOM-032-PESC- XXXXXX at the “Lake of Michoacan 2003 Chapala”. Inland fisheries Tamaulipas NOM-034-PESC- XX XXX at “Emilio Portes 2003 Gil” area Inland fisheries Hidalgo and NOM-028-PESC- XXXXXX at “Ing. Querétaro 2000 Fernando Hirriart Balderrama” area. Inland fisheries Tamaulipas NOM-033-PESC- XX XXX at the 2003 “Champayan Lagunar System and River Tamesi”. Inland fisheries Tamaulipas NOM-024-PESC- XX XXX at “Vicente 1999 Guerrero” area, its leeway and principal canal.

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Inland fisheries Tamaulipas NOM-042-PESC- XXXXXX at “Falcon” area. 2003 Inland fisheries Tamaulipas NOM-043-PESC- XXXXXX at “Marte R. 2003 Gomez” area Inland fisheries Coahuila NOM-046-PESC- XXXXXX at La Amistad” 2005 area Inland fisheries Hidalgo NOM-050-PESC- XXXXXX at Tecocomulco 2004 Lake. Season and United States of NOM-009-1993 X X area closures Mexico Recreational United States of NOM-017-PESC- XXXX fisheries Mexico 1994 Source: Adapted from Hernandez and Kempton (2003) and updated by OECD.

Table 11.2. Overview of marine fisheries according to fish stock assessments results in 2004a

Under Fully Over- Species Main management measures exploited exploited exploited

Gulf of Mexico and Caribbean Sea Tuna 1 0 0 Fishing gears specification Shrimps 1 1 1 Fishing gears specification, closure, area closures Crab 0 1 0 None Queen conch 0 0 1 Fishing gears specification, minimum size, quota Blue crab 1 1 1 Minimum size Spiny Lobster 0 1 1 Closure, minimum size Other fishes 2 7 1 Closures, minimum size Grouper 0 0 1 Fishing gears specification, area closures Octopus 1 1 0 Fishing gears specification, minimum size Sharks 0 1 0 Fishing gears specification, closures Total 6 13 6

Pacific Ocean Abalone 0 0 1 Quota, closure, minimum size Gelidium 0 1 0 Fishing gears specification, area closures seaweeds Clams 0 1 0 Quota, closure, minimum size Fishing gears specification, closed season, effort Yellowfin tuna 0 1 0 limits Giant squid 1 0 0 Permit limit Shrimps 0 1 1 Fishing gears specification, closure, area closures Crab 0 1 0 Fishing gears specification, minimum size Conch 0 1 0 Quota Sea urchin 0 0 1 Fishing gears specification, quota, area closures Blue crab 1 1 0 Closure, area closures Rock lobster 0 1 0 Closure, minimum size Mussels 0 1 0 Minimum size Other fishes 0 8 2 Closures, minimum sizes Small pelagic fish 0 1 0 Area closures, minimum size Octopus 0 1 0 Closure Seaweed 1 0 0 Closure, area closures Coastal sharks 0 1 0 Closure, area closures Pelagic sharks 0 1 0 Fishing gears specification

Total 3 21 5 Grand Total 9 34 11

a. Some caution needs to taken in interpreting these data as they generalise across species. Source: SAGARPA (2004).

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Table 11.3. Summary table of changes in resource status for key stocks between 2000 and 2004

Resource Resource Resource Region Species status status Change Issues 2000 2004 Tuna Pacific Yellowfin At MSY At MSY .. Overcapacity in international fleet Pacific Bluefin Above MSY Above MSY .. Uncertainty on current exploitation level Pacific Skipjack Below MSY Below MSY .. Potential for development Gulf of Mexico and Caribbean Yellowfin Below MSY Below MSY .. Potential for development (under ICCAT rules) Shrimp (Pacific) Pacific All shrimp At MSY At MSY .. Catches have doubled since 1992. Concerns over individual stocks. Sonora Blue shrimp Overexploited At MSY + Sonora and upper gulf Brown shrimp AT MSY At MSY .. Sinaloa-Nayarit Brown shrimp At MSY Deteriorating – Stock exhibiting signs of deterioration Sinaloa-Nayarit Pacific white, blue, Overexploited Overexploited .. blanco shrimp Gulf of Tehuanutepec Pacific seabob, Overexploited Overexploited .. blanco sur Western coast of Baja Calif. Brown, blue, rock Overexploited Overexploited .. Stocks showing signs of recovery Sur shrimp Shrimp (Gulf of Tamaulipas and Veracruz All shrimp At MSY At MSY .. Mexico and Campeche Bank All shrimp Overexploited Overexploited .. Catches decreasing steadily Caribbean) Campeche-Tabasco, coastal All shrimp At MSY At MSY .. areas Quintana Roo: Contoy Island All shrimp Overexploited Overexploited .. Edge of stock distribution as it is shared with southern countries and also experiences natural stock fluctuations. Sardines and Pacific Pooled species Populations Populations .. minor pelagics steady steady Gulf of Mexico and Caribbean Pooled species At MSY At MSY .. Catches declined significantly since 2000. Need to diminish current fishing effort and apply precautionary principle. Lobster (Pacific) Baja California Peninsula, All species At MSY At MSY .. Recommended to not increase nominal central region fishing effort

Baja California Peninsula, All species At MSY Deteriorating – northern and southern areas Other states Pooled stocks At MSY Undetermined .. Effort could increase gradually

Resource Resource Resource Region Species status status Change Issues 2000 2004 Lobster (Gulf of Yucatan Pooled stocks At MSY Stabilised at + Recommended to not increase current Mexico and level below fishing effort Caribbean) MSY Quintana Roo Pooled stocks Overexploited Overexploited .. Recommended to not increase current fishing effort and reduce fishing mortality. Abalone Pacific Green, pink Abalone Overexploited Overexploited .. Catches have declined 80% since early 1990s. Recovery plan in place with some local successes. Octopus Pacific All species n.a. n.a. No NOM in place Gulf of Mexico and Caribbean Maya octopus At MSY At MSY .. Recommended to not increase current fishing effort Gulf of Mexico and Caribbean Common octopus At MSY Below MSY + Potential for further development. Clams and Pacific Scallop At MSY, but At MSY in .. Recommended to not increase effort. scallops overexploited in Sonora, Baja California overexploited Sur in Baja California and Sinaloa Gulf of Mexico and Caribbean All species n.a. n.a. .. No NOM in place. Potential for development but no increase in fishing effort is recommended until stock assessments undertaken. Sea urchin Pacific Red sea urchin At MSY Overexploited – Need to reduce fishing effort and not grant new permits. Purple sea urchin At MSY n.a. .. Recommended to not increase current fishing effort Crabs Pacific All species At MSY At MSY .. Recommended to not increase current fishing effort Gulf of Mexico and Caribbean All species At MSY At MSY .. Recommended to not increase current fishing effort Skates Pacific All species n.a. At MSY .. No NOM in place. Gulf of Mexico and Caribbean All species n.a. At MSY .. No NOM in place.

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Resource Resource Resource Region Species status status Change Issues 2000 2004 Queen Conch Gulf of Mexico and Caribbean Cozumel Island stock At MSY At MSY .. Gulf of Mexico and Caribbean Banco Chinchorro At MSY Overexploited – Recommended to not increase current stock fishing effort Oyster Pacific All species n.a. At MSY .. Gulf of Mexico and Caribbean American, mangrove n.a. At MSY .. Recommended to not increase current oyster fishing effort and to not grant new permits. Sharks Pacific All species At MSY At MSY .. No NOM in place (previous one cancelled in 2000). Recommended to not increase effort. Gulf of Mexico and Caribbean All species At MSY At MSY .. Recommendation to not increase effort. Concern over declining catches and accuracy of stock assessment. Red grouper Gulf of Mexico Red grouper and Deteriorated Deteriorated .. Recommended to not increase effort. associated species Recreational Pacific Dorado, dolphinfish Potential for Close to MSY – Potential for marginal development, but fisheries development recommended to not increase effort. Pacific Marlin At MSY At MSY .. No increase in effort recommended within 50 miles of coastline and take measures to reduce bycatch of other fleets. Pacific Swordfish Potential for Potential for .. Possibility to gradually increase effort development development according to technical assessments Pacific Sailfish At MSY At MSY .. Do not increase current fishing effort

+ Indicates improvement in stock status; – indicates a decline in stock status. Source: INP 2000, 2005.

Profitability and rent generation

Increasing the economic rent from fisheries is a stated objective of the government’s programme for the fisheries and aquaculture sector. However, there is no empirical evidence with which to assess the success of fisheries management policies in meeting this objective. No government surveys have been undertaken of the economic performance of the various fleets, even in the high value commercial fisheries for tuna and shrimp. Nor have any such surveys been undertaken by universities or research agencies. This deficiency is best explained by the fact that the authorities have focussed on improving stock assessments and underlying data and have directed available resources into that area. The need for economic surveys may therefore appear to be a secondary order of importance. However, there is clearly a need to generate such socio- economic data in order to better inform decision makers about the consequences of current policy and management settings for fishers. This will assist in better identifying how different management settings affect fishers’ behaviour and, thus, their impact on resource sustainability. Despite the lack of formal analysis, a number of observations can be made about the likely level of resource rent and profitability being generated in the wild capture sector. First, the fact that most fisheries are fully or overexploited, coupled with the recognition that there is too much effort in these fisheries, indicates that resource rents are being dissipated by excess effort. The level of resource rent in these fisheries would be close to zero. Some vessels will be able to earn intra-marginal profits, but most vessels will be just covering their operating costs. The commercial shrimp fishery is of particular concern as the excess capacity in this high value fishery is reducing the resource rent below the level that could be generated. The use of limited entry and season closures in this fishery exacerbates this situation because the fishing season becomes shorter and less predictable as management authorities attempt to maintain stocks. This in turn creates an incentive to further increase effort, with further impacts on resource rent and profitability. The use of a vessel decommissioning scheme in the shrimp fishery is an attempt to break this cycle and reduce fleet size to levels which may generate resource rents. It is too early to judge whether the scheme has been successful. Around 400 applications were received from vessel owners and only 222 vessels were given payouts. So there is clearly a strong demand for assistance to exit the industry, indicating a low level of resource rent and profitability in the fishery. It is unlikely that the decommissioning scheme will be sufficient to restore resource rents in the fishery without the use of additional management measures to restrict expansion in effort following the exit of the scrapped vessels and the introduction of measures to control the artisanal fleet (see below for further discussion of decommissioning schemes). Second, there is anecdotal evidence from industry interviews that the tuna industry is generating intra-marginal profits and many vessels have good prospects for maintaining profitability in the future. The characteristics of the tuna fishery management measures tend to support this observation. There is limited entry into the fishery, the fleet is well regulated with respect to fleet numbers and the size of vessels, although there is scope for input stuffing, technological creep and effort expansion within these limits. This combination of management measures effectively closes the fishery and creates conditions within which rents can be generated. Rent generation potential could be increased further if an element of permit transferability was introduced into the fishery. Indeed, the tuna fishery has potential for the introduction of individual transferable quotas

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to further improve efficiency and rent generation in the fishery. This underscores the importance of economic surveys of costs and earnings in key fisheries and fleets. Third, it is highly unlikely that any resource rent or profits are being generated in the artisanal fisheries. The open access nature of these fisheries, with little control on vessel numbers, effort and catches, almost ensures that resource rents are fully dissipated. Rent generation may not necessarily be a primary objective in this sector, with rural poverty alleviation being the major focus for broader government policy (see Chapter 13). However, ignoring rent generation possibilities in the sector may be short-sighted and governments should investigate the use of alternative management mechanisms (such as area-based or community-based management). This is starting to be developed in some artisanal fisheries with some successes, most notably in the Baja California rock lobster fishery.

Key fisheries management issues

The review of the effectiveness of fisheries management since 1990 has raised a number of important issues that need to be addressed by fisheries management authorities. These include the need to take further measures to control effort, institute stock recovery planning, develop integrated management plans, and expand the choice of management instruments (particularly the potential for the greater use of market instruments). Clearly, these issues are inter-related to varying degrees, and are also linked to the broader fisheries policy issues raised in the previous chapter.

Controlling fishing effort Measures to more effectively control fishing effort are urgently required in order to reduce the fishing pressure on overexploited stocks and ensure that pressure does not increase on the stocks that are currently fully exploited. The implementation of such measures is made more difficult by the current heavy reliance on the use of limited entry, technical measures, and area and season closures as the major means of regulating fisheries. It is well recognised that these types of input controls suffer from a number of flaws that make it harder for management authorities to effectively predict and control the impact of fishing activity on stocks (Beddington and Rettig, 1984; OECD, 2006). Input stuffing and the expansion of effort along uncontrolled dimensions results in effort creep in the fleet. This has been estimated to be as much as 3% a year (Cunningham and Greboval, 2001; FAO, 2004). The situation becomes even more difficult in the case of the open access regime that governs the artisanal fishery. Conflicts over access to resources between the artisanal fleet and other fleets that are regulated will exacerbate competition for resources and accelerate increases in fishing pressure. There are five key steps that the government can take to more effectively control fishing effort. First, there is a need to permanently reduce the size and power of some fleet segments. This can be accomplished through the use of decommissioning schemes and the retirement of permits. A decommissioning scheme was trialled in the shrimp fishery in 2005 and the experience from this trial can pave the way for extending decommissioning schemes to other parts of the sector (Chapter 10 provides a description of the shrimp vessel decommissioning scheme). Decommissioning schemes are widely regarded as a panacea for excess capacity problems. However, they need to be carefully designed and implemented as they can quickly become embedded in the expectations of fishers, resulting in perverse incentives to stay in the industry to wait for a government

payout to leave and thereby reducing industry flexibility. The schemes should be credibly announced as being “one-off” schemes for each fishery and the availability of decommissioning payments should be strictly time-limited. Cost-effectiveness of the schemes can be improved by using auctions, rather than fixed payments per vessel, to identify vessels to be scrapped. The cost to government of decommissioning schemes can be reduced through the use of innovative financing arrangements including, for example, industry co-financing (perhaps through soft loans under FIRA-FOPESCA or BANCOMEXT). Such arrangements have been successfully used in other OECD countries, but in conjunction with management changes that ensure the remaining industry participants reap the benefits from their investment in capacity reduction (OECD, 2006). The retirement of permits is more problematic. There are legal problems with such a process in relation to compensation and issue of rights, making it difficult and expensive for the government to revoke or resume permits. The existence of a large number of inactive permits compounds the problem. The fact that most permits are of short duration (generally two years), are almost automatically renewed, and have no formal market value makes it difficult to undertake a permit buyback programme. The government also faces political difficulties in not renewing permits unless the permit holder has been found to have engaged in illegal fishing activity. Second, it is very important that decommissioning schemes are introduced together with other measures that will effectively prevent capacity and effort increasing in a fishery once the initial impact of the decommissioning scheme has finished. The current reliance on input controls in Mexico flags this as a potential problem. Limited control over total effective effort in many fisheries, coupled with effort creep in the more regulated fisheries, means that the benefits from decommissioning schemes may be quickly dissipated. Ideally, the management regime should encourage fishers to “self- regulate” their investment and participation in a fishery following a decommissioning scheme by responding to market signals about entry and exit from the fishery. This will be facilitated if the access right in the form of the permit, quota or vessel was transferable, but this is not possible under the current management settings. An interim solution would be to also retire the permit that is attached to a vessel as was done in the case of the shrimp fishery decommissioning scheme. As the permit is not formally attached to a vessel at the moment in Mexico, some changes to management regulations wouldberequiredtodothisinotherfisheries. Third, there appear to be few rules on the replacement of vessels. This increases the scope for effort creep as permit holders can replace older vessels with more modern vessels with greater catching power. While fleet modernisation has been seen as a desirable process in the past, it is appropriate to consider introducing restrictions on the allowable increases in engine and catching power of new vessels, including elimination of subsidies for engine purchase and modernisation. Linking permits to vessels would also be a good step towards instituting restrictions on vessel replacement. Fourth, enforcement efforts can be augmented through the increased use of observers and vessel monitoring systems (VMS). The use of observers could be extended within the high value fisheries, with the costs being at least partly recovered from the industry. In principle, the use of observers should only be instituted where the societal benefits in terms of improved compliance with management measures outweighs the cost of the schemes. The innovative financing schemes used to run observer programmes in the tuna, swordfish and shrimp fisheries provide a good model and should help ensure the cost-

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effectiveness of such programmes. The tuna fishery has 100% observer coverage which is funded from a financial foundation. The cost of the private observer programme is around USD 1.5 million a year, and the Pacific tuna fleet provides USD 1 million a year, the Gulf of Mexico fleet USD 0.4 million and the Mexican government USD 0.1 million. Around USD 1 million in government financing helped to establish the foundation. The swordfish fishery has 25% observer coverage while the Pacific and Gulf shrimp fleets have a target of 10% coverage with vessels being monitored by observers on a random basis. In addition, the use of VMS should be made obligatory in the commercial fisheries. VMS has recently been introduced in several fisheries on a limited basis, covering around 450 vessels, of which around 280 vessels are located in the Gulf of Mexico. The current VMS system links to control centres and databases in CONAPESCA and in the Navy (Mexico City). Cost recovery for the installation and operating costs (estimated at USD 2 500 initially plus USD 650 a year) should be instituted to ease the cost to government. Fifth, better targeting of financial support should be a priority. The use of funding under Alianza Contigo for engine purchase and modernisation for some fleet segments tends to work against other management efforts to control effort. In 2005, a total of MXN 21.5 million was provided for engine modernisation to fishers in Baja California Sur, Sinaloa and Sonora under the Plan de Acciones para el Ordenamiento. While the total amount appears quite small relative to the total expenditures of Alianza Contigo,the effects on resource sustainability can be disproportionately high. The existence of the diesel subsidy programme also contributes to excessive effort and reforms to this subsidy programme are clearly warranted. An overarching concern in the issue of controlling effort is the growth in the number and power of the artisanal fleet. This is especially the case in the shrimp fishery, but also in many fisheries in the poorer coastal regions and inland waters. This is a classic case of too many fishers chasing too few fish, as well as a high level of illegal, unreported and unregulated (IUU) fishing. As will be discussed in Chapter 13, the current policy of keeping these fisheries as de facto open access fisheries will only serve to augment rural poverty in these dependent populations and will lead to long-term resource depletion. Regaining adequate control of the artisanal sector requires a long-term approach as there is no quick fix to the problem. Nevertheless, there are a number of steps that the government can take to begin addressing the issue: • Institute a nationwide vessel register to determine the size of the problem. At the moment, there is no clear data on the artisanal fleet and this would be a necessary first step in determining the magnitude of the task confronting the government. • Extend the process of installing VMS on small scale and artisanal vessels with cheaper, new generation VMS units. This will assist in monitoring this segment of the fleet, and will help support future efforts to control the location and intensity of effort. • The use of decommissioning schemes for the artisanal sector is unlikely to be successful without some means of restricting those who leave the sector from re- entering. The cost of pangas is so low that such re-entry is quite feasible. Indeed, it is possible that any payments from decommissioning will be reinvested in the fishery.

• The feasibility of local governance mechanisms should be closely examined in particular fisheries as discussed below with respect to community based management.

Stock recovery planning In addition to measures to control overall fishing effort, immediate attention should be paid to the development of recovery plans for overexploited stocks. There is nothing to be gained in delaying action on this important resource sustainability issue. Declining catches and catch rates will merely further reduce fishers’ profitability, generate pressure for financial support, encourage a shift of effort to other fisheries, and increase pressure on other stocks. To achieve stock recovery, the government should develop and implement integrated management plans for overexploited fisheries with specific, measurable goals for stock recovery based on scientifically-derived reference points. Stronger enforcement of existing regulations for remaining fishers should be an integral part of stock recovery plans. Such management plans should also incorporate measures to permanently reduce effort and fishers in these fisheries as discussed above. So, while immediate effort reduction measures should be undertaken (including, where appropriate, extended closed seasons, fishing moratoriums and suspension of licences), further management reforms for affected fisheries are required, such as strengthening access rights and introducing time-limited vessel decommissioning and licence buyback schemes (see below for further discussion of decommissioning schemes). The fact that five of the 11 overexploited stocks are sedentary species should make the development and enforcement of stock recovery plans and enforcement of regulations more feasible. Indeed, some of these fisheries have already had been subject to recovery plans and this experience, though unsuccessful to date, will facilitate the development of further recovery plans. In particular, the concept of recovery plans is now embedded in the mindset of some fishers and this can be used to advance stock recovery efforts. The development of stock recovery plans for shrimp, grouper and other fishes is more challenging as they are subject to greater conflicts between users. The Pacific shrimp fishery, in particular, has a large artisanal component that increasingly competes directly with industrial fishers. While the fishery has a management plan in place, it has not proved to be particularly effective in reducing conflict and easing fishing pressure. The use of more innovative management measures is required to address fundamental resource conflicts in this fishery. Consideration should be given to the use of transferable effort quotas and co-management arrangements, coupled with significant control on further expansion of the artisanal fleet and the introduction of more innovative management measures (such as co-management) for the artisanal sector.

Integrated fisheries management plans More generally, a system of fisheries management plans should be instituted. A few fisheries have management plans in place (Planes de Manejo), including the Gulf of Mexico lobster, shark and Pacific shrimp fisheries and some inland reservoirs. A number of other management plans are being developed by CONAPESCA. However, these are developed on a voluntary basis and are not legally recognised as yet. As a result, they have generally been ad hoc, fragmented and effective in only some cases (especially in some inland waters).

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A system of comprehensive management plans could build on the current system of NOMs and the National Fisheries Chart, and would provide a mechanism for long-term planning for individual fisheries. Their development and implementation could be undertaken within the consultative framework that is already established and functioning for a number of fisheries. They would, however, require some legal status in order to be meaningfully enforced. The major benefit to such an initiative would be to unify the sources of management advice, provide a holistic approach for managers, and improve transparency and certainty for fishers.

Choice of management instruments ThereisaheavyrelianceinMexicoontheuseoflimitedentry,seasonclosures,area closures and technical measures to control effort in fisheries. This is unlikely to be effective in the longer term. In a number of fisheries, this has resulted in a regulated open access situation where technological creep and input stuffing have increased fishing pressure. Altering the economic incentives faced by fishers, and harnessing the power of the market to efficiently allocate resources, will improve the economic viability and adjustment capabilities of the sector. However, at present, there are no examples of market-based instruments being used within the formal management system, although limited informal market-based arrangements have developed in some areas and fisheries. Neither institutional reform nor legislative changes in Mexico have tackled this problem of poorly defined access rights to fish resources. Market-based instruments could therefore be introduced for those fisheries where the necessary biological, economic, legal and social conditions combine to increase the probability of a good management outcome. It should be recognised that there is a wide range of market-based instruments and that individual transferable quotas are not the only available economic instrument for managing fisheries. A range of innovative management mechanisms have been successfully used in other OECD countries and the conditions are ripe for their selective use in Mexico’s fisheries. Some stakeholders may consider it premature to consider the introduction of market based management into the Mexican fisheries sector, particularly given some of the challenges currently presented by the issues of judicial enforcement, overfishing, and excess capacity. However, experience has shown that there are significant benefits in combining capacity reduction programmes with market based management measures as they tend to be mutually reinforcing if properly designed. A necessary condition for the use of market-based instruments is a strong system of clearly-defined access rights that are exclusive, transferable, and legally enforceable. Such a system is currently lacking in Mexico at the moment where the access rights are vaguely defined, relatively short term and unenforceable. Improvements in this area may need to be part of an economy-wide reform process to improve the legal regime surrounding productive assets in general. One of the challenges facing the Mexican fishing industry in this regard is the very large artisanal fleet in the poorer regions where the application of property rights concepts may be difficult to enforce. Variants of market-based instruments, such as community based management approaches, may be useful in such circumstances. More specifically, the tuna fishery could potentially benefit from the use of individual transferable quotas. It is a single species fishery with well-defined stocks, a small fleet, and a sound resource base. Introducing transferability into the existing quota system, perhaps with limits on quota concentration to allay fears about industry concentration,

would improve the efficiency of the fleet, enhance short and long term adjustment and improve resource rent generation. The use of individual transferable effort quotas (based, for example, on vessels or gear units) could be considered in fisheries where the species characteristics mitigate against the use of output based quotas (for example, the commercial shrimp fishery and some single and multi-species fisheries). Sedentary fisheries would also be good candidates for such a system. For example, lobster fisheries could be managed around transferable rights to use lobster pots with the pot as the unit of management. Such schemes are successfully used elsewhere in the OECD (OECD, 2006). Community-based management is another form of market-based management that has significant potential in Mexico. This arrangement bestows a community with exclusive long-term rights of access to a defined fishery resource, and the community then manages the resource within its members through allocating access, determining rules for exploitation, and enforcing those rules (Box 11.1) (Jentoft, 1989, 2004). Community- based management could be introduced in fisheries with well-defined access grounds, mostly fisheries of sedentary organisms such as sea urchin, abalone, sea cucumber, octopus, and lobster as these are well-suited to area-based management. Such management arrangements already exist informally in a number small Mexican fisheries and the concept could be formalised and extended. For example, a few communities have developed systems of individual transferable fishing areas on the Yucatan Peninsula that are now at least recognised, if not formalised. Miller (1994) and Castilla and Defeo (2001) describe several Caribbean lobster fisheries where co-operative fishers are granted exclusive rights to harvest within ‘transferable parcels’ boundaries, and although formal titles do not exist, fishers can sell, barter or trade them. Within this informal arrangement, the allocation of property rights has resulted in high catch rates and reduced conflicts over access. The key community characteristics that will assist the development of community- based management include: the existence of a defined and contained group; no outsiders entering the fishing area (exclusivity); strong local leadership (human capital); and strong social bonds allowing for effective enforcement (social capital).

Box 11.1. Ten tracks towards implementing market mechanisms A recent OECD study on the use of market based mechanisms to manage fisheries identified ten tracks that can help governments smooth the introduction of the mechanisms: 1. Making all stakeholders comfortable with the concept of market-like instruments. 2. Preferring an incremental or gradual implementation. 3. Not necessarily adopting a “one size fits all” strategy. 4. Carefully designing the allocation issue. 5. Pragmatically using market forces. 6. Overcoming the excessive consolidation question. 7. Using the demonstration effect and drawing on other countries’ experiences. 8. Involving stakeholders in the reform process. 9. Integrating fisheries characteristics into instrument design. 10. Dealing pragmatically with tradeoffs. Source: OECD (2006).

Experience with market-based instruments in other OECD countries indicates that the introduction of such management changes requires the active support of industry to be successful. Indeed, in many cases, industry has been one of the major proponents of reform, working in concert with government to establish a more sustainable and

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profitable industry (Senqnd and Nielsen, 1996). This highlights the need for institutional arrangements to allow for extensive stakeholder consultation, with the expectation of a high degree of government responsiveness to issues raised during consultations.

Adequacy of stock assessments and socio-economic data The transparency of stock assessments, resource status, and management measures has continued to improve. The National Fisheries Chart is now an established feature of the management landscape and serves a crucial role in improving the access of various stakeholders to information of fish stocks in Mexico. The coverage and detail of the Chart is extensive, providing comprehensive data on 96% of the species captured in marine waters. The effectiveness of the Chart could be further improved by more closely integrating it with management plans for individual fisheries. Moreover, the body of analysis that underpins the CNP can usefully be supplemented with data on key economic indicators for key fleets and fisheries. In particular, there is a strong need to undertake surveys of costs and earnings in selected fisheries. While from a pragmatic perspective, such surveys may not be perceived as the highest priority for authorities at this stage, they would nevertheless provide important information about the economic effectiveness of different management regimes.

Conclusion

In summary, fisheries management policies in Mexico have had mixed results with respect to the status of fisheries resources and the generation of resource rent. Of the 54 stocks for which stock assessments were available in 2004, 11 stocks are assessed as being overexploited while 34 stocks are fully exploited. The change in stock status for the assessed stocks in recent years has been marginal. Of the stocks surveyed in this report, three overexploited stocks recovered to sustainable levels while four stocks deteriorated to being overexploited. Further efforts are therefore clearly required to reduce the number of overexploited stocks and reduce fishing pressure on the large number of stocks that are currently fully or over-exploited. In order to address these problems, fisheries managers need to focus on changing the incentives currently facing fishers. The use of innovative capacity reduction schemes, integrated management plans, extension of enforcement programmes (including observers and VMS), market-based management instruments and community management will all help in this regard and the advantages in their application in Mexico have been noted in this chapter. However, when contemplating the introduction of one or more of these types of policy changes, it should be recognised that fisheries are a system. Changing one component of the system will have consequences for other components. This means that careful analysis is required in order to avoid perverse policy outcomes and ensure mutually supportive policies.

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Chapter 12.

Aquaculture sector policy

Aquaculture is a relatively recent industry in Mexico and is still considered to be at a development stage. However, there is a high degree of optimism about the prospects for growth in the sector, particularly for high value species such as shrimp. Mexico is well- endowed with coastal lagoons (156 710 km2), rivers and inland lakes, many of which are characterized by high productivity and are suitable for aquaculture. According to the National Fisheries Chart, a total of 64 species were cultured in Mexico in 2003 (Table 12.1).Most of these are freshwater fish, followed by freshwater and marine molluscs, although marine crustaceans (shrimp) is the main high value species.

Table 12.1. Number of aquaculture species produced in Mexico

Exotic or Category Total Native Hybrids introduced Freshwater fish 26 9 14 3 Marine fish 5 5 Freshwater and marine molluscs 14 12 2 Freshwater crustaceans 6 4 2 Marine crustaceans 7 7 Amphibians 6 5 1 Total 64 42 19 3 Source: CONAPESCA.

Aquaculture production grew at an average rate of 1.2% a year between 1990 and 2004, reaching a total production of 224 249 tonnes in 2004. Growth in more recent years has been much stronger, averaging 4% a year since 1995. Aquaculture accounted for around 12% of the total production volume for the fisheries sector in 2003. There has been strong growth in aquaculture shrimp production, averaging around 23% a year since 1990 (albeit from a low base), reaching 72 279 tonnes in 2004 (Figure 12.1). Unofficial data from different sources in the country report that total shrimp production in 2005 reached an historical record of more than 90 000 tonnes with the States of Sonora and Sinaloa achieving historical State production records. Production of most other major aquaculture species, such as carp, mojarra, oysters, has declined over the same period. This shift is due to the conversion of some aquaculture operations to the more highly valued shrimp, restrictions due to environmental regulations, and a shift to fishing operations by small scale producers in some parts of the country.

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Figure 12.1. Aquaculture production in Mexico, 1990-2004a

250 000

200 000

Other

150 000 Carp

Tonnes Oysters

100 000

Mojarra

50 000

Shrimp

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

a. Carp and tilapia are indigenous species in lakes and rivers where they are caught. Source: CONAPESCA.

If the aquaculture sector is to continue expanding in line with industry and government expectations, it is necessary that the policy framework governing the industry provide an appropriate enabling environment. Without such policy conditions, the industry will struggle to take full advantage of the favourable resource and environmental conditions it faces in Mexico. At the same time, the policy framework must balance industry development objectives with environmental and social policy objectives. Aquaculture can have adverse impacts on the environment without appropriate management, and it is important that this be fully factored into the policy framework. Similarly, aquaculture has the potential to play a role in poverty alleviation but such potential will only be realized through careful development of sectoral policies across a range of policy areas. This chapter examines a range of issues in aquaculture sector policies and identifies a number of measures that the Mexican government can usefully pursue to ensure that the aquaculture sector can continue to grow in a sustainable way.

Institutional arrangements The development goals and the main policies for the aquaculture industry are set at the national level by SAGARPA and CONAPESCA. In addition, each of the Federal States selects and discusses its own development policies at the state level with the federal government, carries out its own promotion of aquaculture, and assists CONAPESCA in regulating and setting standards for the industry. The importance of aquaculture varies considerably at the state level. In only four States (Chiapas, Oaxaca, Campeche and Baja California Sur), aquaculture is administered at a Secretariat level

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Table 12.2. Mexican official laws, regulations and standards related to aquaculture

Legislation or NOM Description and objective Date

059-SEMANART-2001 Determine all flora and fauna terrestrial and aquatic species, subspecies that are endangered, Amended treated, facing extinction, rare or under special protection and establishes specific rules for its 6 March 2002 protection. PROJECT 089-ECOL-1994 Establishes maximum allowed limits for pollutants contained in residual waters discharged from 20 September 1994 aquaculture activities into receptor water bodies. Federal Law for Fisheries It is the legal framework for fisheries and aquaculture, oriented towards sector sustainable Amended development. 25 June 1992 Federal Law Fisheries Chapter III. Specifically related to aquaculture Amended Regulation 29 September 1999 NOM-009-PESC-1993 Mexican Official Standard (NOM), to establish procedures to determine zones and duration of close 4 March 1994 fishing season and capture of aquatic species in federal waters of Mexico. NOM-010-PESC-1993 Establish sanitary requirements for the importation of aquatic organisms in any development stage to 16 August 1994 be used for aquaculture or ornamental culture in the country. NOM-011-PESC-1993 Regulate application of quarantine, to prevent introduction and dissemination of certifiable disease 16 August 1994 during importation of live aquatic organisms in any stage of development to be used for aquaculture or ornamental culture in the country. NOM-EM-001-PESC-1999 Modification and extend validation of the emergency official standard, to prevent and control the Amended introduction and dissemination of pathogenic agents causing the disease named White Spot Viral 22 February 2000 Syndrome (WSSV) and Yellow Head Virus (YHD). NOM-EM-003-PESC-2000 Emergency norm to regulate requirements to determine presence of viral disease in live, dead Amended crustaceans and their products or sub-products, in any presentation, and the artemia (Artemia spp) 25 April 2000 to introduce and move into the country. NOM-EM-001-PESC-1999 Requirements to prevent and control introduction and dissemination of viral diseases named white 17 March 1999 spot virus (WSBV) and yellow head virus (YHV).

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Legislation or NOM Description and objective Date

EM-05-PESC-2002 Establish requirements and measures to prevent and control dissemination of high impact disease 19 July 2002 and for the use of antibiotics in shrimp culture in the country. PROJECT 020-PESC-1994 Explain approved techniques for the identification of pathogens causing diseases in live cultured and 7 December 1994 wild aquatic organisms and the ornamental ones in the country. PROJECT 021-PESC-1994 Regulate artificial feeds, manufacture ingredients, feeding non-conventional products used in 20 January 1995 aquaculture and ornamental culture, imported and national for their commercialization and consumption in Mexico. PROJECT 022-PESC-1994 Establish regulations for hygiene and control and the application of Hazard Analyses of Control 26 January 1995 Critical Points (HACCP) procedures in farming and culture infrastructure. Notification To acknowledge zones and duration for closed fishing season for aquatic fauna species and its 4 March 1994 complementary to NOM-009-PESC-1993. NOM-030-PESC-2000 Requirements to determine presence of viral diseases in aquatic crustaceans alive, dead, their 15 January 2002 products and sub-products in any form and Artemia (Artemia spp), for their introduction to national territory and movement within the country NOM-003-ECOL-1997 Establishes maximum allowed limits of contaminants for treated residual waters that are re-used in 21 September 1998 services to the people NOM-EM-006-PESC-2004 Emergency norm that establishes the sanitary aquaculture requirements for the production and 20 January 2004 movement of aquatic crustaceans, alive, dead, their products and sub-products, and for their introduction in national territory Source: Adapted and modified from Alvarez-Torres (2003); CONAPESCA (2005).

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within the State’s government. In all others, aquaculture is administered at the Department or Under-Secretariat level. As is the case for the wild capture fisheries sector, CONAPESCA also issues Mexican official standards (NOMs) for the aquaculture sector. A list of the NOMs for the aquaculture sector is shown in Table 12.2. Within the Federal Fisheries Law, CONAPESCA’s main objective is to administer the use of aquaculture resources in a sustainable manner, promoting the development of value chains that put together activities and players in the production, distribution and consumption of aquaculture products. The development and promotion of production chains is seen by CONAPESCA and SAGARPA as a key way for individual producers to increase competitiveness.

Support programmes Prior to 2003, the essential role of CONAPESCA in relation to the aquaculture sector was primarily normative. While there was strong support for the sector in principle, government actions to promote an industrial and high-yield aquaculture sector had little success as there was never a strong federal budget to support initiatives. This changed in the second half of 2003 when a funded programme, Alianza Contigo (alsoknownas Alianza para el Campo), was initiated at the national level to promote and support the development of fisheries and aquaculture projects. Alianza Contigo is the first programme of this kind in a decade in Mexico and through it, financial support is given to economically-feasible aquaculture projects that focus on the industry development goals set by the government: species diversification, systems intensification, and integration of chains. Alianza is a capitalization programme, which funds infrastructure and equipment but excludes support for operating costs. Alianza is based on an alliance among different parties to fund projects: the producer, the federal government and other complementary sources like state governments, other sectoral programmes, etc. The Federal government does not provide 100% of the cost of projects. The stated goal in the Alianza Contigo operational rules developed in 2003 is: “To promote and support the integral development of the fisheries and aquaculture sectors, through the rational and sustainable use of resources, in order to achieve higher standards of living for producers, their families, and the fisheries and aquaculture communities in the country.” Specific objectives of the Programme were further elaborated as: • To optimize and organise the administration and use of fisheries and aquaculture resources, based on the development of studies and projects which guarantee their sustainability. • To encourage the integral development of aquaculture and fisheries through strengthening productive organization, capacity building and technical assistance, for individuals and groups of producers, in coordination with the Sub-Secretary of Rural Development of SAGARPA. • To reactivate investment and capitalization of fishers and aquaculture producers, granting them support for the modernization of fisheries and aquaculture infrastructure, strengthen production chains, and increase competitiveness by means of production projects that help reduce pressure on several traditional fisheries stocks.

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Under the Alianza Operation Rules and criteria for eligibility, an applicant has to submit among other documents, a full, detailed project (for the case of application for support for a production project in aquaculture, mariculture or fisheries) including a technical and financial feasibility analysis, and the authorized Environmental Impact Assessment (EIA) if necessary. Although not listed as a requirement, many aquaculture production projects also have to receive approval for the use of water with the Comisión Nacional del Agua (National Water Commission, CNA). Financial support is given to economically-feasible aquaculture projects that focus on the following development goals: species diversification; systems intensification; integration of chains; and value added. Reflecting the complexity and varied characteristics and needs of the aquaculture and fisheries industries of the country, Alianza Contigo also funds among other things the Programa Nacional de Acuacultura Rural (National Programme for Rural Aquaculture, PRONAR), studies, organisations and development plans developed by the States, and the construction of common-use infrastructure (piers, cold-storage rooms). Priority is also given to sanitary and disease issues: CONAPESCA, through Alianza Contigo, assigns funds for the operation of the State Committees of aquaculture sanitary issues, who carry out work focused to monitor and control safety and sanitary issues of farms and aquaculture products. In every state, aquaculture producers organise meetings and vote for the President and Secretary of these State Committees. Figure 12.2 depicts the shares of the different parts of the Alianza Contigo programme in 2005, from a total budget of around MXN 836 million in 2005.

Figure 12.2. Distribution of support to aquaculture and fisheries under Alianza Contigo, 2005

Reduction of fishing effort 26% Production projects 30%

PRONAR 10%

Infrastructure Action plans 11% 23%

Source: CONAPESCA.

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As well as the direct support provided by PRONAR, the aquaculture industry also receives support from the infrastructure and action plan (Plan de Acciones para el Ordenamiento) components of Alianza Contigo. Many of the projects under the infrastructure programme, such as dredging of lagoons and canals, will benefit the industry. Around 21% (MXN 40 million) of the expenditure under the action plans was directed towards the aquaculture sector in 2005, primarily directed towards the modernisation and improvement of a number of aquaculture centres and studies into intensive aquaculture and marine ranching. Through Alianza Contigo, CONAPESCA also addresses issues of sustainable shrimp farming and “productive conversion”. The policy for sustainable development of the aquaculture shrimp industry focuses on system intensification for shrimp farming, which is only approved for locations and farms where it is technically feasible and does not increase the risk of introduction or spreading of diseases. Support for new shrimp farms was provided in the first two years of the programme, but later the policy was modified and now only supports the incorporation of innovative, environmental-responsible technologies to already-established farms, or the implementation of sanitary biosecurity measures, processes and technologies. During the three years of operations, Alianza Contigo has favoured shrimp, tilapia and marine fish projects, following CONAPESCA’s development priorities. Productive conversion, although not one of the main development goals for aquaculture, is a joint fisheries-aquaculture policy objective of high priority within CONAPESCA’s policy at the national level. Productive conversion is regarded as a long term strategy to alleviate stock overfishing and the social pressures from coastal fishing communities, many of whose livelihoods have been declining in recent years. For the successful achievement of the policy goals of productive conversion (fisheries) and species diversification (aquaculture), there is an urgent need to develop biotechnologies to rear new species, mainly of marine species. Some success has been achieved already. Conversion for these fishermen means to initiate experiences as aquaculture farmers, with a double challenge: first, to understand, learn and adopt the behaviour of a farmer, who has to take care of a farm every day; and second, to be efficient and with increased productivity. CONAPESCA coordinates the National Programme of Aquaculture Sanitation, and the National Network for diagnostic and disease prevention of aquatic organisms (PRONALSA). The network incorporates 13 different laboratories in the country specialized in aquaculture pathology, including CIAD (Centro de Investigación en Alimentación y Desarrollo), CIBNOR (Centro de Investigaciones Biológicas del Noroeste), CICESE (Centro de Investigación Científica y de Investigación Superior de Ensenada), Centro de Ciencias de Sinaloa, CINVESTAV (Centro de Investigación y Estudios Avanzados del Instituto Politécnico Nacional), and others. The network is coordinated by the Metropolitan Autonomous University (Universidad Autónoma Metropolitana, UAM), with headquarters in Mexico City. The final objective is to build up a System of Epidemiologic Surveillance. Currently the network evaluates diseases on shrimp, bivalves and fish.

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Box 12.1. Achievements in aquaculture Bullseye puffer (Sphoeroides annulatus), by Centro de Investigaciòn en Alimentaciòn y Desarrollo. About 20 000 fry produced and stocked into floating marine cages, in a Project with social groups. August 2006. Octopus (Octopus maya), by Universidad Nacional Autònoma de Mèxico UNAM biological station in Sisal, Yucatán. Production of octopus fry to supply a social project (wives of fishermen), and others. June 2006. Pink shrimp (Farfantepenaeus duorarum) by Instituto Tecnològico del Mar de Campeche, Campeche. Production of enough postlarvae to supply commercial ponds up to 20 hectares. June 2006. Bullseye puffer (Sphoeroides annulatus) in Centro de Desarrollo Tecnològico de Especies Marinas in Jalisco. About 70 000 fry, 3.5 mm length, to be stocked in ponds and floating cages, projects with social and private farmers. September 2006. Flatfish (Paralychtus californicus) by Centro de Investigaciòn y Educaciòn Superior de Ensenada, in Baja California. Production of about 30 000 fry in 2006, to stock in tanks with private farmers. Totoaba (Totoaba macdonaldi) by Facultad de Ciencias Marinas, Universidad Autònoma de Baja California. Production of fry in 2006, to begin experiences at pilot level. White shrimp (Litopenaeus vanammei) cultured in floating cages, many sites in Sinaloa. Yield average is twice the intensive pond production. White fish (Pescado blanco, Chirostoma estor) by Centro Regional de Investigaciones Pesqueras in Pàtzcuaro, Michoacán. About 30 000 fry are to be stocked in ponds, tanks and floating cages in 2006, by social groups and private catfish producers. Native cichlydae (mojarras) by Universidad Juàrez Autònoma de Tabasco. By 2007, five commercial social and private enterprises will be running, and UJAT Hill supply the fry. Rainbow trout (Oncorhynchus mykiss) in Centro Acuìcola El Zarco, in Estado de Mèxico. Beginning 2007, photoperiod techniques Hill allow commercial production eight months a year, of sanitary and genetic certified eyed eggs. CONAPESCA and Instituto Nacional de la Pesca. Source: INP (Personal communication, September 2006.

Environmental aspects of aquaculture policy

The Secretariat of Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales, SEMARNAT) is in charge of formulating and implementing environmental policies in the country, and several of them apply to fisheries and aquaculture. Mexican environmental legislation has been established in the General Law of Ecology Equilibrium and Environmental Protection, which clearly states prevention as the main means to diminish ecological damage. In June 2006, SEMARNAT published the National Environmental Policy for the Sustainable Development of Oceans and Coasts in Mexico. This New Environmental Policy is based on the following principles: • Development in harmony with nature. • Growth with human and environmental quality. • Respect for legality and accountability. • Alliances with social actors.

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The six mainstays of the New Environmental Policy are (SEMARNAT 2006): • Integrality: joint and coordinated management of natural resources. • Commitment with the sectors: sustainable development is a task shared by several Federal Governmental Agencies. • The new environmental management: to stop, reverse and restore the ecosystems deterioration including the three aspects of sustainable development. • Social and economic assessment of natural resources: so they can be used in a rational manner. • Fight against environmental impunity: without exceptions. • Social participation and explanation of accounts: the civic society participates in preparing and executing the policies and programmes (NGO’s, private sector, and academia).

While CONAPESCA promotes and supports production, establishes bans for fisheries and issues Mexican official norms related to aquaculture and fisheries, SEMARNAT develops policies seeking to protect marine resources. As is the case in many other countries in the world, both agencies disagree at times on an issue or decision related to aquaculture and fisheries in the country. When State Governments are involved, things become more complex and a multi-objective, multi-criteria problem arises. These days more than ever, and following the mainstays of integrality and commitment with the sectors of the National Environmental Policy for the Sustainable Development of Oceans and Coasts in Mexico, it is recognized that a greater coordination is required between CONAPESCA and SEMARNAT to identify and agree at the highest level of government, joint policies and procedures for the sustainable development of aquaculture and fisheries, which promote both industries but constrain their environmental impacts and externalities to society and the environment.

Stability of the policy regime

The policy regime for aquaculture has changed in recent years. Production and productivity improvements remain a priority. However, more attention is now being paid to production chains, added value, development of market channels, and sustainable development. Actions to promote aquaculture of an industrial and high-yield nature continue and actually could be further advanced through Alianza Contigo. Species diversification, productive conversion and systems intensification are objectives recently introduced in the framework to plan the sustainable development of the fisheries and aquaculture industries in Mexico. With regard to the marketing and processing activities, the goal is to restructure traditional forms of marketing, promoting added-value activities and systems, and increase compliance with safety, health and hygiene requirements. Alianza Contigo was created in 2003 as a national Programme with funding decisions and project evaluations carried out by the central authority, CONAPESCA. This has changed in 2006 and, while it remains a federal programme, it is now one where the States will take the responsibility of the evaluation process and decision for allocating support, according to local priorities for aquaculture and fisheries development. How much funds from Alianza Contigo each State receives is based on, among other things, equity and the State’s contribution to national production. CONAPESCA still sets the

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development goals for the industry at a national level, but will resume a normative (regulatory) role in the Alianza Contigo. Alianza Contigo has been sufficiently flexible so as to allow CONAPESCA to undertake adjustments to the support policy regime. For example, in 2003 and part of 2004, shrimp farming received the biggest share of support. More recently, CONAPESCA’s policy for sustainable aquaculture development has shifted from this species, towards tilapia and others (diversification), reflected in the number of projects and share in total subsidies. The tilapia farming sector has been the fastest growing in the country in the last two years, responding to a strong, local market that is demanding larger quantities of tilapia every year. It is foreseen that the policy regime in the near future will have to consider the development of marine aquaculture, as a promising new use of offshore waters in Mexico. The first ocean ranches are already established in the country, like the successful ones for tuna on-growth in Baja California (Panorama Acuicola, 2005). Ocean, marine aquaculture needs to be developed in an environmentally sustainable manner taking into account impacts that may result for ocean resources, environments and users. At present, there is no explicit policy framework at the federal level in Mexico for managing and providing guidance for the development of offshore marine aquaculture. It is therefore necessary for actions to be taken for the integration of marine aquaculture in State Coastal Zone Management.

Keypolicyissues

Sustainability and environmental issues Under Alianza Contigo, aquaculture production projects have to comply with environmental requirements and rules as a condition for project evaluation and approval. Environmental impact assessments are the main tool for SEMARNAT to evaluate the environmental impact of production projects, and are a requirement for project evaluation. In addition, the National Water Commission evaluates and issues permits for water use in aquaculture projects; and there are indications that this has proved a difficult task to solve in several cases to date. Hence, it is likely that water use in aquaculture projects will be more strictly evaluated in the future, and the aquaculture industry has to be prepared for such a challenge. The promotion and development of recirculation systems and reduced-water exchange systems will be very important. Questions of using resources in a sustainable fashion will become central with the years. Aquaculture for food security will increasingly be tested and demanded. There is still a lack of clarity with regard to the development of long-term framework conditions, including the integration of aquaculture in Coastal Zone Management. Aquaculture development in Mexico has not come to a point yet, where it conflicts with other activities or industries for site availability (e.g. with tourism). Mangrove depletion was an important issue in the past, when the boom in the development of shrimp farms in the north-western region of the country took place. This problem has been addressed through a number of policy measures including a ban on mangrove clearing (except in a few limited cases where extensive reseeding is required to be undertaken for an area grater than the cleared area). Sustainable development in aquaculture requires an effort to increase productivity and efficiency, while reducing environmental impacts. Worldwide, aquaculture production

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performance is measured in terms of yields. In an effort to evaluate the aquaculture industry with more robust economic indicators like productivity and efficiency, CONAPESCA is conducting in 2006 for the first time a study to estimate productivity and efficiency indicators for the shrimp farming industry. These will be done at a regional level following methodology already reported and applied in aquaculture elsewhere (Martínez-Cordero and Leung, 2004, 2006). It is expected that after this initial study, the indicators will be reported on an annual basis and, at a later stage, complemented with the environmentally-adjusted indicators. Both sets of performance indicators will assist government decision makers in undertaking a better assessment of the industry as a basis for planning its sustainable development. It is expected that economic performance statistics based on efficiency and productivity for Mexico’s aquaculture industry will be produced on an annual basis in the near future.

Trade and markets While disaggregated trade statistics for aquaculture are not available, Mexico is clearly a net supplier of aquaculture products to the world. The main export markets are limited to the United States, with some product going into Europe and Canada. The main market for shrimp is the United States where the bulk of exports consist of frozen product. In the last four years, the volume and value of Mexican shrimp exports to the United States have increased by 16% and 21%, respectively. The bulk of the exports are frozen product. The estimated per capita direct consumption of seafood was 9.6 kg year in 2003. The local market for seafood is growing, and aquaculture farmers sell a sizable proportion of their fresh product locally, not necessarily in big wholesale markets of larger cities. Farmers often prefer local markets since size is not as strict a requirement as in export markets and yet they can still achieve very good prices, similar –in the case of shrimp- to the ones for export during Easter and Christmas. Long chains of middlemen characterize the distribution of seafood in Mexico. The Mexican shrimp is a product with a high reputation and quality in the world market, but which had not been sufficiently supported and advertised. As a consequence, at the end of 2003 the Mexican Shrimp Council (Consejo Mexicano del Camaron, CMC) was established by the main shrimp producers and marketers. The purpose of the CMC is to further position the Mexican shrimp in world markets, to obtain better prices and a faster distribution of the product. The CMC has developed its own seal for the Mexican shrimp, which guarantees a product of the highest quality to purchasers and consumers, complying at the same time with all required standards of the US market. Presently the Council’s promotion takes place only in the United States, but there are plans are for expanding the area of action to European and Asian markets, and also considering the domestic market. An important decision that will affect the trade market for shrimp in the future is the sale of Ocean Garden Products, the federal government-owned main shrimp exporter to the United States. After several failed attempts, the government finally sold Ocean Garden Products to a consortium of Sonora shrimp producers. It is expected that this sale will unlock the growth potential of Ocean Garden Products and greatly improve its competitive position in the US and Mexican market, improving the export possibilities of Mexican farmers.

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At this stage, no problems have been encountered regarding to technical barriers to trade or sanitary and phytosanitary (SPS) measures. Mexico has set its own SPS standards and regulations for the introduction and movement of aquatic organisms into the country and quarantine requirements which are reflected in several official norms (Table 12.1). These standards concur with international agreements, are not barriers to trade, but allow protection of the industry from sanitary and safety-related risks.

Rural development and poverty alleviation The social role of aquaculture in Mexico is becoming increasingly important. Aquaculture accounts for the creation of many new direct jobs all year around, and many other indirect jobs related to links to the processing and marketing activities. The Mexican aquaculture sector in year 2003 included a total of 1 451 enterprises. Official statistics of CONAPESCA show that in 2003 the total population employed in controlled aquaculture systems in the country was 23 028 persons, with another 250 159 persons engaged in aquaculture fisheries (inland fisheries). Aquaculture has been linked to the establishment of cooperatives and societies (organisations of producers, many of them rural). Official figures report that in 2003 there were 5 565 total cooperatives and societies for both fisheries and aquaculture, with 187 087 members in total. CONAPESCA assists rural development through aquaculture by means of two programmes: Alianza Contigo and the National Programme for Rural Aquaculture (Programa Nacional de Acuacultura Rural, PRONAR). This latter has traditionally been the aquacultural program focused to support rural communities at federal level. In the last two years CONAPESCA has allocated similar amount of funds (around MXN 77 million to the States for rural aquaculture projects and actions (CONAPESCA, 2006). One of the main characteristics of Alianza Contigo is its focus on communities of high and very high marginality in the country. The difference between this Programme and the old programmes with the same social goal is the fact that in this case there is no interest in promoting isolated actions of subsistence aquaculture, but rather the goal is to support new commercial producers at different levels of intensity and investment, seeking to generate development poles in rural (coastal and inland) communities. Recognizing the relevance of capacity building, the Programme seeks that supported projects are accompanied by training and extension services, both in technical and management aspects, while also reinforcing the capabilities of the social (public) organizations.

Research and development extension The federal government assigns funds for aquaculture research and technology development (R&D) to PROs through the National Council for Science and Technology (Consejo Nacional de Ciencia y Tecnología, CONACYT). The share of Mexico’s gross national product that goes to PROs for research and development is the lowest among OECD member countries (OECD, 2006) (Figure 12.3). In Mexico, funds assigned to the development of research still fall short of the needs of the industry. In aquaculture, most of the applied research projects that receive support are in areas such as pathology, nutrition, and development of new production systems.

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Figure 12.3. Expenditure on total R&D as a percentage of country GDP

3,5

2,5

% 2

1,5

0,5

0 OECD Average Sweden Japan USA France Italy Spain Poland Mexico

Source: OECD (2006)

Funds to aquaculture research and development are allocated in two ways: sectoral and mixed funds. Under the sectoral funds, the total money allocated to the fund is shared between CONACYT and a Federal Secretariat, like SAGARPA. In SAGARPA’s sectoral fund, CONAPESCA, CONACYT and the INP determine lines of support for fisheries and aquaculture R&D at the federal level, according to development policies and priorities. The sectoral funds of SEMARNAT and SEP (Secretariat of Education) have also occasionally approved support for research projects in aquaculture. The Secretariat of Economy has also set a sectoral fund with CONACYT to promote the generation of applied research and mainly, technology development, at the industry level. In this case, a research institution or a company is the responsible of the research. Very few aquaculture enterprises have applied to this fund. SAGARPA’s funds allocated to research reached MXN 1 936 million in 2004. However, this is an aggregated figure for research in agriculture, livestock, rural development, fisheries and food. It was not possible to trace back the specific funding to fisheries and aquaculture. Under mixed funds, the support is allocated to a specific State, with complementary contributions from the State government. In this case the State Government and CONACYT set together the priorities for aquaculture and fisheries research and technology development. Mixed funds with support to aquaculture projects typically correspond to States where this production activity is important for the State government. Several States have established State Councils of Science and Technology, who intervene in the process of priorities selection and proposals evaluation of CONACYT´s mixed funds. These State Councils also have their own budgets to support research at

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State level, issuing their independent call for research proposals in aquaculture and fisheries (e.g. the State Council of Science and Technology in the State of Sinaloa). On the other hand, CONAPESCA, through Alianza Contigo, has also in recent years directly funded technology development and specific scientific studies of their interest. In 2005 MXN 7.3 million was allocated to support the development of ordering plans, studies, and to support technology development required by the aquaculture and fisheries industries in Mexico. The role of the commercial aquaculture industry as a supporter of R&D is very small. It is very uncommon to find private entrepreneurs funding R&D at PROs. Currently, the biggest commercial shrimp hatcheries are conducting their own research programmes, mostly for genetics. The industry must establish closer and stronger links with research centres and universities to assure its growth and sustainable development. If the share of Mexico’s gross national product that goes into research and development (R&D) is low, the amount of money invested by the aquaculture industry in R&D at research centres and universities is much reduced. However, research by itself won’t solve all problems, and it is expected that all the actors (the federal and State governments, the industry and PORs) agree on how to coordinate investment in research with the strategies for business and trade development. It is also important that research from different fields is connected and ensure synergies.

Availability of feed and larvae Production of seed and fry in CONAPESCA’s hatcheries and laboratories is shown in Figure 12.4 for the period 1999-2003. Total production of 39 production centres has been declining as a result of old infrastructure and lack of operating funds. Production in 2003 was only half of the amount it was five years before. For the same production centres, Figure 12.5 shows that carp fry production was the only one increasing in the period 1999-2002, before declining in 2003. The development of the commercial aquaculture industry of high valued species is based on fry produced in private hatcheries or laboratories. Government owned hatcheries and laboratories are run by CONAPESCA and provide fry for carp, trout, catfish and tilapia production in inland waters, or stock enhancement activities in natural and artificial reservoirs as part of a drive to sustain small scale aquaculturalists. They also undertake research and development on new species and quality improvement techniques as well as develop brood stock for sale to the private hatcheries. Several of these laboratories or hatcheries have been ceded to private investors for a certain period of years. These production facilities have been modernized and maintained with funds from Alianza Contigo although further work and funding is required to continue modernisation. There is scope for rationalising the number of hatcheries in Mexico to improve efficiency.

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Figure 12.4. Aquaculture seed and fry production units and total production

41 180

160

140

39 120

100

80 Million organisms Number of centres

37 60

35 0 1999 2000 2001 2002 2003

Production centres Production of fry

Figure 12.5. Aquaculture seed and fry production (million organisms) in CONAPESCA´s hatcheries and laboratories, by species

100

Million organisms 40

0 1999 2000 2001 2002 2003

Carp Tilapia Other

Source for above figures: CONAPESCA (2005).

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On the high-valued species side, commercial shrimp hatcheries supply 100% of the postlarvae required by the ongrowing farms in the country. Data from the National Association of Shrimp Larvae Producers (ANPLAC) indicate that by August 2005, 8.48 billion post-larval fry were stocked in shrimp ponds for the 2005 season in Sonora, Sinaloa, Nayarit and Baja California Sur. This represents a 10% increase from 2004 figures for Sonora, Sinaloa and Nayarit. ANPLAC groups 19 commercial shrimp hatcheries in Mexico, which produce 90% of the total larvae of the country. It is important to keep in mind that in this northwestern region of Mexico, where more than 90% of the total shrimp produced by aquaculture takes place, the shrimp growing season is limited to 8-9 months per year; a farm’s typical on-growing cycle is six months long. Accordingly, production from shrimp hatcheries is supplied only for three to four months during the year. CONAPESCA’s Master Aquaculture Plan is in the process of being developed. The plan identifies priority cultures and species to develop, according to three criteria: • By value and volume: tilapia, trout, carp, catfish, tuna, ornamental fish, oyster, Pacific white shrimp. • By potential for expansion: tuna, abalone, clams, pearls, mussels, redclaw. • By development potential: many marine fishes including the following: Lutjanus peru, Mycteroperca rosacea, Paralichthys californicus, Totoaba macdonaldi and Lutjanus argentiventris in the Pacific coast; Lutjanus campechanus, Trachinotus carolinus, Scienops ocellatus and Centropomus undecimali in the Atlantic coast.

Sources of finance FIRA-FOPESCA and BANCOMEXT development funds have been the main source of finance for the aquaculture sector for some years (Chapter 10). Table 12.3 shows amounts allocated by both sources to the fisheries and/or aquaculture sectors in the period 1994-2003, obtained from official information. FIRA-FOPESCA’s support had been increasing steadily until 2003, assigning most of the money to projects of shrimp, oyster, bullfrog, mussel or prawn culture. Only in the period 2000-2003 total support to aquaculture grew almost 25%. On the other hand, funding from BANCOMEXT source also increased every year, and almost doubled from 2002 to 2003. Information after 2003 is not available, but, as explained earlier in this chapter, Alianza Contigo began in 2003 and since then represents the main source of financing for the aquaculture sector. Alternate sources of financing to aquaculture activities are FOCIR (Capitalization Fund for Rural Investment) and SAGARPA-FIRCO (Trust for shared risk). FOCIR’s Programmes in 2005 included support to productive conversion and to establish production chains. Funds from these sources operate in several cases as complementary support for a single aquaculture project.

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Table 12.3. Aquaculture sector funding from FIRA-FOPESCA and BANCOMEXT

FIRA-FOPESCA BANCOMEXTa Tilapia, carp Shrimp, oyster, Short and Year Total and trout bullfrog, mussel, long term loans aquaculture culture prawn culture MXN million MXN million MXN million USD million 1994 105.04 3.57 101.46 1995 97.94 1.94 95.99 44.9 1996 100.17 1.69 99.02 53.2 1997 97.52 3.55 93.97 42.8 1998 150.42 0.33 150.94 68.3 1999 271.58 3.17 268.41 82.2 2000 498.58 15.07 483.51 93.6 2001 589.53 17.1 572.42 67.9 2002 618.26 18.96 599.3 107.3 2003 619.87 5.23 614.63 193 a. Includes fisheries and aquaculture. Source: CONAPESCA

Sanitary and quality assurance issues Countries have different aquatic (marine, coastal or freshwater) environments and introductions of exotic species, both intentional and unintentional, can become a major threat. The exotic species do not have natural competitors or predators and so can cause significant economic damage to aquaculture, fisheries and the ecosystems. Impacts of introduced pests and pathogens can be dramatic and are usually irreversible and has caused fisheries to collapse, destroyed aquaculture stock, increased production costs, threatened human health and altered biodiversity. States, therefore, have a shared commitment to address threats to their aquaculture, fisheries, biodiversity, economy and human health. Sanitary and safety issues in aquaculture and food have become a priority to the Federal Government in general and CONAPESCA in particular. In 2003, SAGARPA created the General Directorate of Aquaculture, Fisheries and Agrifood Safety (DGIAAP). As part of the National Service of Sanitary, Safety and Food Quality (Servicio Nacional de Sanidad, Inocuidad y Calidad Alimentaria, SENASICA), DGIAAP promotes the constitution of State Committees of Aquaculture Sanitary issues (SCASs), which are auxiliary organisms of producers. Responsibility for sanitary issues in aquaculture is shared between CONAPESCA and SENASICA, and most of the sanitary norms are in accordance with recommendations of the International Aquatic Animal Health Code. SCASs are responsible, with SAGARPA, CONAPESCA and State Governments, for the implementation and follow up of sanitary and safety actions and programmes for the aquaculture industry. Their main function is to detect, prevent and control the dispersion of diseases of high impact in aquaculture, reducing by this way the risk of investment. SCASs also encourage the application of Good Management Practices (GMPs). Table 12.4 shows a list of current SCASs operating in Mexico.

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Table 12.4. State Committees of Aquaculture Sanitary issues (SCAS) operating in Mexico

Shrimp Trout Tilapia and carp Bivalve molluscs

Sonora, Sinaloa, Edo. Mexico, Puebla, Tlaxcala, Jalisco, Baja California Sur, Nayarit, Colima, Chihuahua, Veracruz, Tabasco Sonora, Tamaulipas, Michoacán Baja California, Nayarit Baja California Sur

Source: SENASICA, 2006.

SENASICA has established the Safety Programme of Aquaculture and Fisheries, whose objective is to encourage and endorse application of systems of contamination risk reduction like the Good Practices of Aquaculture Production (Buenas Prácticas de Producción Acuícola, BPPA) and Good Practices of manufacturing in the primary processing of aquaculture products (Buenas practices de manufactura en el procesamiento primario de productos acuícolas, BPMPPPA), in aquaculture farms and processing plants in the country (SENASICA, 2006). The BPPA Programme is currently executed for shrimp, trout and bivalves, on farmers’ voluntary or self-involved scheme. SENASICA schedules every year extension and training courses in different States on issues related to aquaculture safety and sanitary. CONAPESCA coordinates the National Programme of Aquaculture Sanitation and the National Network for diagnostic and disease prevention of aquatic organisms (PRONALSA). The network incorporates 13 different laboratories in the country specialized in aquaculture pathology, including CIAD (Centro de Investigación en Alimentación y Desarrollo), CIBNOR (Centro de Investigaciones Biológicas del Noroeste), CICESE (Centro de Investigación Científica y de Investigación Superior de Ensenada), Centro de Ciencias de Sinaloa,CINVESTAV(Centro de Investigación y Estudios Avanzados del Instituto Politécnico Nacional), and others. The network is coordinated by the Metropolitan Autonomous University (Universidad Autónoma Metropolitana, UAM), with headquarters in Mexico City. The final objective is to build up a System of Epidemiologic Surveillance. Currently the network evaluates diseases on shrimp, bivalves and fish. Alianza Contigo has also a Programme of Safety and Sanitary issues (PSS). Under PSS, a specific subprogramme of Aquaculture Sanitary (SAS) issues has been created. Through SAS, Alianza Contigo assigns funds to SENASICA for sanitary, safety and quality programmes and actions. SAS started operations in 2003 when the first SACs were established. It doesn’t have disease-oriented campaigns, but rather focus campaigns to a species and the whole spectrum of diseases that the organism may have under culture. Currently three campaigns are launched: integral campaign for diseases control in shrimp, in fish and in molluscs. The campaigns correctly are based on biosecurity measures and good practices in production. SENASICA also funds education, training and extension services. Up to date, three manuals of food safety of aquaculture organisms (bivalves, trout and shrimp) have been published (Calvario and Montoya, 2003; Chávez and Higuera, 2003; García and Calvario, 2003, respectively) and one for safety manufacturing practices of aquaculture products (Cárdenas and Noriega, 2003). They are used by SENASICA for training and extension courses to farmers and processors in the country.

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Conclusion

The prospects for the aquaculture sector are very positive, and both industry and government are enthusiastic about future development potential. Mexico has made some good investments in recent years in developing an enabling environment for the sector. This is particularly evident in the establishment of the aquaculture centres, commitment to sanitary and quality assurance issues, extension services, the reduction in the destruction of mangroves, and training for aquaculture operators. Mexico’s aquaculture sector operates in such a way that it can promote itself as being able to provide national and international markets with “clean and green” products. However, there are issues of coordination between government agencies with overlapping regulatory responsibilities for key aspects of aquaculture operations, particularly environmental management, land use approval and health and sanitation policy. Action is clearly needed to reduce red-tape and improve policy coherence in order to facilitate the further development of this emerging sector. In particular, action is required to develop a coherent, transparent, risk-based set of environmental parameters for aquaculture operations in order to reduce the costs and uncertainty associated with environmental compliance. Concerns also remain about the effect of public works such as canal construction and lagoon dredging on the shrimp larvae and juveniles, and on sedimentation in the waterways.

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Chapter 13. Fisheries policy and rural development – 295

Chapter 13.

Fisheries policy and rural development

According to OECD´s classification, rural conditions are found in communities or locations with population density lower than 150 habitants per square kilometre, and which are located more than an hour distance to the closest urban area. In Mexico, 34% of population lives in communities of less than 100 habitants/km2, and of this percentage, 91% live more than an hour distance from urban areas of at least 100 000 habitants. Ten percent of total population in Mexico lives more than four hours from the closest urban area (World Bank, 2004). In 2004, 61% of the Mexican population in extreme poverty lived in rural communities. These and many other statistics of population and social development show that rural development has to be a central public policy for all government programmes, both at federal and state levels. For the current federal government, rural development means improving access to both services and wealth generation opportunities as an efficient way to tackle poverty. Rural necessities have a range of aspects and degrees of provision, and may involve provision of access to markets, services, financing, capacity development, as well as access to technology through education and training. On December 2001 the Law for Sustainable Rural Development (Ley de Desarrollo Rural Sustentable, LDRS) was published in the Official Gazette, and pursues rural development on two criteria: a) inter-institutional coordination and b) federalization and decentralisation. To fulfil the first criteria, an Inter-Secretariat Commission for Sustainable Rural Development was established, incorporating the Ministers of nine Federal Secretariats, included SAGARPA. The linkages between fisheries policies and rural development strategies in Mexico are complex with historical, political and social influences that are still influencing policy development today. The linkages are manifest in several ways. First, there is a high incidence of rural poverty in the coastal states of Mexico. Based on the CONAPO marginality index, coastal states account for 7 of the 10 most marginal states in Mexico, with the coastal states of Chiapas, Guerrero, Oaxaca and Veracruz being the most marginal.1 Second, fisheries and aquaculture play a prominent role in the economies of these states. While the contribution of fisheries to the GDP of these states is generally relatively low, it is a regionally important sector in terms of employment and food production. Figure 13.1 shows the number of fishers in each state, ordered according to the degree of marginality (from poor to rich). It can be seen that there is a concentration of fishers in the poorer states on the left half of the figure.2 Third, fisheries management policies have played a historical role in wealth redistribution through the system of reserved species that existed up until the early 1990s. This system provided fishing cooperatives with exclusive rights of access to certain species (most notably, shrimp). While this reservation was lifted in 1992, the effects of the former policy have lingered through

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the persistence of excess capacity and resource use conflicts in the shrimp and other fisheries. Fourth, there is a large number of ejidos in the coastal strip of Mexico and thMese influence the rate of resource use and extent of resource conflict in coastal fisheries. The area covered by individual ejidos ranges from large parcels of land and coast to relatively small and fragmented areas. In Baja California North, for example, the southern half of the state and much of the southern coast is covered by a relatively small number of ejidos. In contrast, there are 207 relatively small ejidos scattered along the coast of Sinaloa. The historical links to local fish resources that are often claimed by coastal ejido communities tends to complicate fisheries management. Finally, the fishing sector in Mexico has often been regarded as a ‘last-resort’ activity, used by politicians as a means of reducing unemployment, reducing pressure on the agricultural sector, and keeping social unrest under control. These linkages create an expectation that fisheries policies have a role to play in alleviating poverty in rural areas. This is particularly evident in the littoral regions of coastal states, but it is also increasingly the case in inland areas where aquaculture is regarded as a potentially important alternative activity for the rural poor. This chapter reviews the effects of fisheries and aquaculture policy on rural development. Two key areas are addressed: the role of fisheries management policies and the distributional impact of fisheries support programmes.

Figure 13.1. Number of fishers by state, ordered by degree of marginality, 2003

45 000

40 000

35 000

30 000

25 000

20 000 Number of fishers 15 000

10 000

5000

l í t r

i s z s s s o a n a o s a a a a n o a e o n o o o a o a o

l l s r l i a t u r r r i a u o c c e c g c á a o o a u ó r h á g

l b l l i o a a t n r t a m e a o s S u t s c p a c c i n p h r e e t r x i c e R l c a e y a i n a u n l l h r x o a e a a j r e a a o L d é é x a i t a o a d u c n e f r o a r i i i a u i a e a b o a o i r p u e P a l h l u a J o P N u l C e M n n a S o u a h n e S h H F O c a r a M i v s m C Y u T c a i T a D c C G V i a t m o h e a C o f u u s Q t i n a Z u i l M i C C L a a r

G T j a t u N

n a s

C i g Q

A D

S j

Source: CONAPESCA (2006). States ordered from poor to rich by the CONAPO marginality index.

Rural poverty has fallen by a half between 1998 and 2004, but this apparent success must be qualified in several respects. First, most of this fall represents a recovery from the dramatic increase in poverty following the 1995 currency crisis; the 1992-2002 decade

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has been called a “lost decade” in terms of rural poverty-reduction. Second, rural areas still account for a disproportional share of the extreme poor and, more generally, large gaps remain between rural and urban localities, north and south, and indigenous and non- indigenous communities within rural areas. Third, the reduction in poverty may reflect progress of households close to the poverty line, rather than at the lower end of the income distribution. Fourth, most of those who have escaped rural poverty in this period have done so through rural non-agricultural activities and migration, rather than through participation in the more traditional agriculture activity. At the outset, it is important to recognise that fisheries policy is not the appropriate instrument to address widespread poverty concerns. The solutions lie in a much broader array of policy mechanisms that are much better suited to this purpose and go well beyond the realm of fishery policy. Overall economic development, the social welfare net and the creation of employment alternatives in coastal regions will all have a much more prominent role in alleviating rural poverty. Considering a sector specific response would only be appropriate if society-wide income support systems are inadequate and the prevalence of poverty is directly linked to fishing. Nevertheless, there remains the expectation that fisheries policies have a role to play in the policy mix, particularly in regions that are relatively well-endowed with fish resources and suitable aquaculture sites.

Impact of fisheries management policies

In Mexico today, the main artisanal marine fisheries are giant squid, shark and shrimp, with the latter two being the only ones with management plans. Fishing is the main source of income for many of the artisanal fishers, but only the low value species are used for their own consumption; the resources they target are generally of high commercial value and are sold. The artisanal fleet consists mostly of fibreglass boats (up to 36 feet long) with an outboard engine and are popularly known as pangas. Around 54% of the fleet is located on Pacific coast (half of them in the Gulf of California) and 46% in Gulf of Mexico (particularly in Veracruz, Tabasco, Tamaulipas, Campeche and Yucatan). The linkages between fisheries policies and rural development have deep historical roots. The agrarian reforms of the early 20th centuryinMexicosawthecreationof cooperatives and ejidos (also called the social sector). Prior to 1992, these cooperatives/ejidos had exclusive rights to exploit and market the most commercially valuable fisheries, including shrimp, abalone, lobster, oysters, squid, mullet, octopus and totoaba. The system of cooperatives was intended to provide development opportunities for these fisheries and to effect a redistribution of wealth to the poorer fishers. The cooperatives sought to take advantage of their exclusive rights by expanding capacity, production and exports, and this was often underpinned by subsidies from successive administrations in repeated efforts to maintain employment in the sector. However, by the early 1990s, many parts of the sector were in economic crisis due to uncontrolled expansion, overcapacity and heavy competition for stocks. Many cooperatives were on the verge of bankruptcy, the state-controlled fisheries bank, BanPesca, which had been providing soft loans, was closed down, and catches were declining. During the general structural reforms of 1992, the cooperatives’ exclusive right of access were removed and the private sector invested heavily in the sector, purchasing and using the boats and equipment of debt-ridden cooperatives. By 1993-94, around 90% of

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the offshore fleet in the North Pacific was already privatised, and the trend continued throughout the country. However, the change in access and ownership arrangements was not accompanied by measures to effectively limit further expansion in the fleet, particularly in the inshore fleet. The result was the continued expansion of the small scale fleet so that the numbers of small-scale vessels, which had already more than doubled between 1980 and 1990, increased by a further 40% between 1990 to 2000.3 There was both horizontal and vertical expansion in this sector. Horizontal expansion is when capacity is being increased by more fishers using the same technology, while vertical expansion is based on new and improved technology. Mexico’s artisanal fleet is largely uncontrolled, and may be even uncontrollable, and most of the artisanal fisheries remain essentially open access fishery. CONAPESCA is focussing enforcement efforts on a few key fisheries such as shrimp, lobster, giant squid. CONAPSECA’s ability to enforce regulations in the artisanal sector is severely constrained by the sheer scale of the problem and a lack of sufficient resources. It is also influenced by a concern that the enforcement of regulations would put up to 60 000 people out of the industry, with few alternative employment opportunities (personal communication, CONAPESCA, February 2006). Illegal fishing, combined with poor enforcement and high export prices, has exacerbated the level of over-exploitation in the small-scale fisheries. The role of the sector as an employer of last resort, appears to be embedded in the government approach to the sector. The growth in the artisanal fleet, coupled with poorly defined access rights, has also given rise to a range of resource use conflicts, particularly in the shrimp sector. Cooperatives remained in the inshore shrimp fishery catching mainly smaller shrimp for the domestic market, while the private-owned vessels caught shrimp both offshore and inshore for export. This has resulted in conflicts over resource use between these two groups of fishers, exacerbated by the fact that the commercial offshore shrimp fleet is more heavily regulated than the artisanal fleet (although there still remain significant overcapacity problems in the offshore shrimp fleet). The inshore fishers also had conflicts with shrimp farms, which needed wild larvae from the estuaries, where many small scale fisheries take place. The Mexican situation can be characterised using two classic interpretations of the relationship between poverty and fisheries (Hersoug et al., 2004). The first argues that “they are poor because they are fishers.” Here, the open access nature of local fisheries leads to more and more people entering the fisheries, resulting in over-fished resources, an elimination of resource rent, and ultimately in the impoverishment of the fishers and their communities. In addition, the low alternative cost of labour in fisheries resulting from the lack of alternative opportunities means that fishers become “trapped” in the sector. These two causes, one endogenous to the fishery (open access) and the other exogenous (lack of alternatives), combine to create a situation of continued poverty. The second interpretation argues that “they are fishers because they are poor”. In this case, fishing is regarded as an employer of last resort, where those falling out of the agricultural system and from urban migration can manage to eke out a living. Common property resources then become extremely valuable to poor people and attempts to close the participation in the fisheries may result in increased poverty. The two interpretations are presented in Figure 13.2.

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Figure 13.2. The two pillars of poverty on fisheries

‘Last resort’ Open access Biological and perception of nature of economic fisheriesasa fisheries overexploitation safety valve (endogenous)

Low opportunity “They are costs / Low income “They are poor fishers alternatives because they because they (exogenous) are fishers” are poor”

FISHERIES = POVERTY

Source: Hersoug et al. (2004).

Both these scenarios help explain the current situation in the Mexico’s artisanal fishing sector. The scenarios also point to a difficult policy dilemma for the government in relation to fisheries management. If fishing is, in fact, essential as an employer of last resort, then the classic approach to fisheries sector development of closing the commons and limiting access will result in excessive hardship to those least able to respond. On the other hand, unlimited access will inevitably cause severe damage to the stocks and will ultimately be self-defeating. The solution lies in the institutional framework governing the artisanal sector. It is necessary to find a more appropriate distribution of rights and benefits that can strengthen the artisanal fishers’ access to common pool resources, while at the same time limiting the collective pressure on the stocks. The current situation of an open access artisanal fishery is both poor fishery policy as well as poor social policy. While the overall solution to rural poverty in coastal regions obviously lies in a broader approach involving economic growth, economic diversification, social welfare nets, education, access to rural finance, etc, fisheries management policy can usefully address some aspects of the problem. Bringing the artisanal fleet under control is an obvious first step. As was noted in Chapter 11, an accurate assessment of the size of the fleet is required together with the use of improved monitoring techniques (such as new generation VMS units for small scale vessels). The development of community-based management frameworks can provide a basis for improving the management in many artisanal fisheries. Under certain conditions, empowering artisanal fishers can significantly change the incentives that they face with respect to exploitation and conservation of local resources. At a broad level, the basic ingredients of such frameworks entail devolving responsibility to an appropriate level of organisation to ensure it is representative, inclusive and achieves legitimacy among fishers. This requires authorities to help local fishers define a management level that is representative, responsive, and minimises the risk of free-riders and illegal fishers. Transparency, accountability, and auditing by central government will help reduce the scope for local corruption, as will a wide involvement of stakeholders. The cooperatives may provide a useful organising mechanism within such a framework.

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Such arrangements would be most easily implemented in sedentary fisheries such as abalone, oysters, lobster, sea urchin, etc., as these species are well-suited to area-based management and often have well-defined communities exploiting the resources. Several community based arrangements are already used in various parts of Mexico (see Chapter 11). The use of such arrangements for shrimp and fish species that are locally migratory or shared between several communities would require careful attention to be paid to the relevant scale of “community” for management. These two aspects of scale (species and community) will define the structure for a particular community-based management arrangement.

Aquaculture policy and rural development

A somewhat different situation can be found in the linkages between aquaculture policy and rural development. The 1992 reforms had an impact on the aquaculture sector as the reforms opened up the possibility of fully privatising ejido land. However, there was considerable confusion and conflict over who should have the rights to the communal coastal lands and maritime areas that adjoined the ejido lands. This was complicated by poorly defined property rights, particularly over lands within and next to the federal maritime zone4, and by shifting coastlines which make maps outdated in some parts of the country. Indeed, the land tenure system has slowed the expansion of shrimp aquaculture with many cooperatives and ejidos preferring to maintain their rights and either develop their own operations or enter into joint ventures with private operators.5 However, the difficulties of joint work with cooperatives/ejido sector with respect to tenure, profit sharing and so on have meant that development has only just started to increase in recent years following years of frustrated developments. Linking private and cooperative/ejido producers through Partnership Associations helped the process. Despite the difficulties, the cooperative sector has been able to participate in aquaculture development because it had rights to some of the prime locations in the bays, lagoons, and estuaries that adjoined their lands. A number of models have been used in the shrimp aquaculture sector (DeWalt et al., 2002): • A private company develops the infrastructure and operates the farm, with the cooperative sharing in the profits according to the number of shares they received for their land. • A private company builds the infrastructure for a large farm and operates its own farm on part of the land, while the other part is given to the cooperative to build and operate its own farm. • The ejido sells its land rights and creates companies to run aspects of the farm’s operations. • A private company rents or lease ejido land for a specified period of time.

The extent to which these developments have assisted in meeting rural development objectives and reducing rural poverty is unclear. There is limited hard data on impacts of the reforms on aquaculture development, relying mostly on anecdotal evidence. The tentative conclusion is mixed. Currently, around 80% of shrimp farms are semi-intensive projects with a low level of technology and operated mainly by peasants, who generate 48% of national production. There are concerns over access to suitable sites despite the abundance of such sites in Mexico. There are also concerns that the proliferation of small

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scale aquaculture operations may reduce economies of scale and create difficulties for operators in accessing markets and the value chain. There is a risk that these issues may hamper the ability of aquaculture to play a stronger role in alleviating rural poverty.

Impact of fisheries support programmes

Financial support is provided to the fisheries and aquaculture sector through the Alianza Contigo, National Programme for Rural Aquaculture (Programa Nacional Acuacultura Rural, PRONAR), FIRA-FOPESCA, and the Public Works Programme (Programa Normal de Inversion en Materia de Obra Publica). The evolution and extent of fisheries support programmes was described in Chapters 10 and 12. The primary aim of this set of programmes is primarily industry development through the provision of grants and soft loans in support of infrastructure development, gear purchase, vessel modernisation, marketing studies, promotion, etc. However, two of the programmes, Alianza Contigo and PRONAR, have explicit redistribution objectives in their legislation in which priority for funding is given to poorer communities. A third programme, the Public Works Programme, has redistribution as a secondary consideration in its planning but it is not an explicit objective of the programme. In addition to these sector specific programmes, there are several programmes that are more generally applicable. These include for example the sub programme for the strengthening of enterprises and rural organisations (PROFEMOR), subprogramme for the development of capacities in rural areas (PRODESCA) and the subprogramme of support to projects of rural investment (PAPIR).

Alianza Contigo Alianza Contigo is the major funding programme for the sector and is financed by the federal government with matching grants from state governments and contributions from private investors. Expenditure under the programme totalled MXN 818 million in 2005. The programme is formally intended to benefit low income communities but does not include explicit targeting criteria to help achieve this. The distribution of expenditures under Alianza Contigo is broadly regressive. This can be seen in Figures 13.3 and 13.4 which depict the total expenditure and average annual expenditure per fisher under Alianza Contigo for 2004 and 2005 across the states and ordered by degree of state marginality. Taking the average between the two years helps to smooth out fluctuations in funding flows. (Note that the data for Aguascalientes, an inland state with 37 registered fishers, has been truncated to improve the presentation of the data.) The largest payments per registered fisher occur in the richer states while per capita payments to the more marginal states are relatively lower. The regressive pattern of expenditure is even more evident if just the 17 coastal states are included (Figure 13.5). This result is, perhaps, unsurprising. Alianza funding seems to be directed mostly towards commercial fisheries, and towards production projects and action plans. Some of the poorer fishers and aquaculture operators may not be able to take advantage of these programmes as they tend to lack the resources to provide matching funds. In addition, around 26% of the expenditure under Alianza in 2005 was to fund a decommissioning scheme in the shrimp fishery, with just four states receiving 80% of the available funding (Sonora, Campeche, Tamaulipas and Sinaloa). The criteria under which the decisions for the recipients of this expenditure were made was the degree of excess capacity in the

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fisheries of the state rather than the extent of rural poverty (although the two are often linked). It is worth noting a caveat about the poverty index underlying the analysis. The data on the marginality of states refers to the state as a whole and does not necessarily mean that there is an even distribution of poverty across rural communities or occupations within a state. There may, indeed, be high variations in poverty at the local level, for example between fishing communities and agricultural communities. Data are not available on poverty indicators for fishing dependent communities within the coastal states. Collection of such data would be a useful addition to the database for the fisheries sector.

Figure 13.3. Total Alianza Contigo expenditure by state, ordered by degree of marginality, 2004 and 2005

300

250

200

150 MXN million

100

t s sí la ri o s o a a s a a uz lgo o b r lo r u ur e il p r t ya ta lima h eón eral a atán tecas xcala re éxic a aS hu d axaca Po uc a inaloa a o ono u i lient liforniaoL O Hida Pue Na S l M M Co S Jaliscoh n oa a Chi Guerrero Verac is Tabasco Y DurangoT hi C ev u Campeche Michoacán Zac Queré C u ito Fe Guanajuato Tamaulipas N an L Quintana Roo S Aguasca Baja C Distr Baja Califor

Source: CONAPESCA (2006).

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Figure 13.4. Distribution of Alianza Contigo expenditure per fisher by state, ordered by degree of marginality, 2004-05

10 000

23 134 9 000

8 000

7 000

6 000

5 000

MXN per fisher 4 000

3 000

2 000

1 000

t í r

i s z s s s a s o a n n o o o o a o a a n o a o a a a e o

s l l i r l t r u r r

a u o c c e c c a o a g á o u ó á g h

l i l o b l t n a a r t a m o e a

s S u c s p t c i a c p h e n r t x i r e R c l a e y a i c n a u n l

l h r x e a a o a j r e a a o L

é é x i o a c t a n a d u e f r o a r i i i a u a e a i b i o a o p r u P l a h l a u o J P u l C N n e M a o n S u a h n e S h H a O c r a M i v m s Y C u T c a i a D T

C c V G i a m t o h e a

f u u s

Q i a n Z u

l M i C C

L a a

G T j a u N

n a

C g Q

Figure 13.5. Distribution of Alianza Contigo expenditure per fisher by coastal state, ordered by degree of marginality, 2004-05

7 000

6 000

5 000

4 000

3 000 MXN per fisher

2 000

1 000

0 Jalisco Nayarit Colima Sonora Sinaloa Oaxaca Yucatán Chiapas Tabasco Veracruz Guerrero Michoacán Campeche Tamaulipas Quintana Roo Baja California Baja California Sur

States ordered from poor to rich by the CONAPO marginality index. Average expenditures over 2004 and 2005 used to smooth out annual fluctuations in expenditure patterns. Source: CONAPESCA (2006).

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Programa Nacional de Acuacultura Rural As discussed in the previous chapter, the Programa Nacional de Acuacultura Rural (PRONAR) is a fairly modest programme that supports commercial projects in the sector focusing on species diversification, systems intensification, integration of chains and increasing value-added. The programme, which began in 2002, explicitly targets communities classified by the National Council of Population having an “average”, “high” or “very high” degree of social marginalization. It also targets ejidatarios, cooperatives, indigenous fishers and women’s groups, as well as small scale fishers. The programme is intended to assist these groups become established in aquaculture, taking pressure off agricultural activities and wild capture fisheries. The federal and state governments provided funding of just over MXN 100 million in 2004 to 22 states, with the federal government contributing 77% of the total. In 2005, the federal government provided MXN 77.8 million in 20 states. There is a fairly progressive distribution of payments under PRONAR although there is still some distinct variation across states (Figure 13.6). Some of the less marginal coastal states who are major fishing states receive a high proportion of payments. The situation is more diffuse when the population of the states is taken into account. Figure 13.7 shows that the payments per person (total population) are more evenly spread out across the states. This indicates that the redistributive objective of the PRONAR payments is not being achieved as much as it could be.

Figure 13.6. Distribution of average annual PRONAR expenditure by state ordered by degree of marginality, 2004 and 2005

MXN million 10

í t r s o a z o a e o n n s o i a o o a s o o a s a o a s a a n s l r l l i r t r r u i a c u g h c á á a o g o o c a c u e ó r l o b t a a l a l i t n e c a m o s S u p a t c s c t n i p h r e r c a e a u y a c e R x l i i n r x e l n l h a o e a a j é a r a o L i a d u c t a n x é o a e f i i r r a u o a i i a e a r P p b o a o u i h u a a l l P N u l C J n o u e a h n S e n M a S h o O H c r a a C s m Y M i v i T c a u D T a G V i a t m o c C a h C e u u f s Z Q n a i u i C l L C M a G T a u a j N u n a Q C g a B a A S j a

States ordered from poor to rich by the CONAPO marginality index. Average expenditures over 2004 and 2005 used to smooth out annual fluctuations in expenditure patterns. Source: CONAPESCA (2006).

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Figure 13.7. Distribution of average annual PRONAR expenditure per person in each state ordered by degree of state marginality, 2004 and 2005

4 MXN per person

í t r s o a z o a e o n n s o i a o o a s o o a s a o a s a a n s l t r l r u l i a r c u g h c á á a o r g o o c a c u e i ó r l o b t a a l a l i m t n p e a t c s c c a n i p o s h S u r e r c a e a u y a t c e R x l i i n a r x o e a a e j a r l n l a h o L i a d u c t a n é x é o a e f e a r i p b o a i r r o a u o a u i i a i h P u a a J l l o u e P a h n N S e u l n M C a S h n o O H m c M i r a a v C is T c Y a u D T a G V a i a t m h o c C e u u f C Z Q n a i s u L C M i C l a G T ja u a u N n a Q C g a B A S ja a B

States ordered from poor to rich by the CONAPO marginality index. Average expenditures over 2004 and 2005 used to smooth out annual fluctuations in expenditure patterns. Source: CONAPESCA (2006).

FIRA-FOPESCA A similar exercise can be undertaken for expenditures under FIRA-FOPESCA, which provides soft loans and guarantees for fishers and aquaculture operators. Although this programme does not have a redistributive objective, it is useful to examine the distributive effects of the payments under the scheme in the context of rural development. Given that 93% of payments under FIRA-FOPESCA go to the coastal states, it is worth examining these in isolation from the inland states. The pattern of expenditures under FIRA-FOPESCA for this group of states is highly regressive with most of the payments going to the richer states (Figure 13.8). This may be due to the financially insecure basis from which fishers in the poorer states have to operate, with little capital and few prospects for expanding fishing operations beyond artisanal and subsistence levels. The bulk of the FIRA-FOPESCA funding goes to just four states — Sinaloa, Sonora, Colima and Yucatan accounted for 80% of the total funding in 2005 — each of which have well- established commercial fishing interests and a willingness and ability to avail themselves of the funding opportunities.

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Figure 13.8. Distribution of average annual expenditures under FIRA-FOPESCA per fisher by coastal state ordered by degree of marginality, 1994- 2005

14 000

12 000

10 000

8 000

6 000 MXN per fisher

4 000

2 000

s o a z e o n n it a o a s a o r a a r c u h c á á r o a r c u i p e a r c s c t a l m o s S n r c a y a Ro li ip n li r ia r x e a a l a o e a ra p b o c a in a u o a i if u N Co a J n l u O e m a h S n S r Ch V T c Y a G i t m fo Ca Ca M in a li u T a ja C a Q B ja a B

States ordered from poor to rich by the CONAPO marginality index. Average expenditures for the period 1994-2005 are used to smooth out annual fluctuations in expenditure patterns. Source: CONAPESCA (2006).

Conclusion

In summary, the current fisheries management regime for the artisanal sector in Mexico has not helped the government meet rural development objectives in the coastal regions. In the medium to long-term, the open access nature of this sector will reduce both the environmental and social sustainability of the communities that depend on the fisheries resources. This is both poor fishery policy and poor social policy. While the broader solution to rural poverty lies elsewhere in the government’s policy kit, changes to the management of the artisanal sector can ensure that fisheries policies can work with, rather than against, poverty alleviation objectives. Similarly, some reforms are required to the aquaculture policy to ensure that this sector can also play a stronger supporting role within a broad policy framework. The set of fisheries support programmes is not really intended to be a major vehicle for income support in rural communities. The programmes are fairly modest and are dwarfed by the agriculture support programmes in terms of both resources and targeted population. However, the fisheries programmes still have a role to play in rural development and two of the programmes have explicit rural development objectives to this end. The broad conclusion from the analysis in this section is that the distribution of the initial transfers under the Alianza Contigo and FIRA-FOPESCA programmes are highly regressive while the distribution under the PRONAR is less regressive. Policy

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makers should consider the distributional implications of these programmes in future decisions about funding allocations.

NOTES

1. See Part II for a description of the CONAPO marginality index. 2. The data refer to the state as a whole and not to specific regions within a state (such as coastal regions). Regional disparities within a state can be significant and it is possible that rural poverty is concentrated in agricultural communities in a particular state but is not evident in fishing dependant communities. Such disparities can help to explain migration of workers both between sectors within a state and between states. However, no work has been done on the incidence of rural poverty in fishing regions and policy development would benefit from such analysis. 3. Since then, the government has not collected data on the number of vessels in this sector, meaning that there is no accurate assessment of the scale of the problem. See Chapter 11 for further discussion. 4. All coastal lands within 20 m of the highest tidal influence are part of the federal maritime zone. 5. See Part II for a more detailed discussion of the need to reform the land tenure system.

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Chapter 14. Conclusions and recommendations – 309

Chapter 14.

Conclusions and recommendations

This study provides an assessment of fisheries policy in Mexico since 1990 against the objectives set for the sector by the government of Mexico. These objectives have shifted significantly over the period from 1990 to the present as the governments and their policy priorities have changed. Meanwhile, the fundamental concern for policy development is that the fisheries sector be placed on a sustainable basis with respect to resource utilisation, generation of resource rent, economic profitability, and sustainable livelihoods for fishing communities. The reforms that have been instituted over the period have sought to address parts of these concerns, but from different perspectives and with different priorities underlying policy actions. The conclusions and recommendations presented in this chapter seek to provide some guidance to policy makers on the effectiveness of the current fisheries policy framework and the priorities for future policy developments. As a general observation, it is clear that the Mexican authorities have “picked the low fruit” on the tree of fisheries policy reform and the time has come to move on to the more challenging “high fruit.” The high value tuna and commercial shrimp fisheries are doing well (although further policy refinements are required) and the aquaculture sector is flourishing. The nature of these fisheries has made their successful management relatively more tractable. The more difficult challenges (the high fruit) lie ahead, particularly with respect to bringing the artisanal sector under control, reducing effort in a number of fisheries, and strengthening the institutional and governance framework for the sector.

Conclusions

Directions of fisheries policy While policy makers recognised that reform of Mexico’s fishery policy was necessary in the early 1990s, the multiple changes in policy direction that the sector has experienced since 1990 have not been conducive to the development of a stable regulatory environment for the sector. The policies in place for the sector in the early 1990s did not provide a regulatory environment that encouraged a sustainable fishery sector and hampered the longer term economic prospects of the sector. The overarching objective at that time was to reach maximum sustainable yield for fisheries and government policies encouraged export-oriented growth in the sector. This had a number of consequences that set the scene for subsequent changes in policy direction: • Excess fishing effort which had been assisted by government subsidies for fishers and minimum controls on fishing effort.

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• Uncontrolled expansion in the small-scale and artisanal sector as rural policies and subsidies attracted people to coastal regions with the numbers of fishers increasing by 75% in the decade prior to 1992. • Declining catch rates in many fisheries and resource stocks under pressure due to the de facto open access regimes in place and the limited incentives to conserve the resource. • Poor profitability across the sector as a result of inefficient economic operating conditions, exacerbated by the strong role played by the cooperatives which effectively stifled efficiency and masked price signals. • Considerable uncertainty regarding access rights for fishers in the sector, compounded by the dominant role of the cooperatives. The shift towards an environmental focus in the early 1990s sought to address these shortcomings by reshaping the institutional framework and directing the sector towards a more sustainable footing. The major change was the incorporation of fisheries into the significantly larger Secretariat of Environment, Natural Resources and Fisheries (SEMANARP), prior to which it had been a separate Secretariat. Sustainability of fisheries and associated marine resources then became a priority of the government, with the precautionary principle being introduced as a guideline. The systematic collection and analysis of biological data was institutionalised together with the use of stock assessment techniques, leading to a sounder scientific basis for decision making. The role of the Mexican Official Standards (NOMs) in establishing management regimes for specific fisheries was established and, towards the end of the 1990s, the National Fisheries Charter became the major instrument for defining and promulgating management measures. Greater attention was paid to the sustainability of fisheries resources. However, this was not supported with changes to management measures or support programmes to effectively control effort. In fact, only a few sedentary stocks were controlled through quotas; most fish stocks were managed with closed seasons, permits and certain restrictions on gear. The policy reversal which stripped the cooperatives of their exclusive access rights opened up many fisheries to private sector involvement and had the potential to improve the economic efficiency in the sector. However, it also exacerbated the problem of overcapitalisation and excess effort as private investment in the sector increased rapidly, supported by increasing subsidies under FIRA-FOPESCA and soft loans from BANCOMEXT. In addition, the expansion of the artisanal fishing sector continued without effective controls. The lack of a holistic approach to implementing the change in direction in fisheries policy resulted in a high degree of policy incoherence and significantly compromised the gains made from increasing the management focus on stock status and improved scientific assessments. The open access nature of the fisheries was not addressed. The change of government in 2000 brought about yet another evolution in the policy framework for the sector. There was a shift back towards industry development and promotion, with significant emphasis being placed on aquaculture sector development and high value fisheries such as tuna and shrimp. This was exemplified by the incorporation of fisheries and aquaculture into the industry-oriented Secretariat of Agriculture, Livestock, Rural Development, Fisheries and Food (SAGARPA). The broad objectives under the Sectoral Plan for the fisheries sector include fisheries sustainability and sectoral development objectives as it has continued to strengthen the role of the

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NOMs and the National Fisheries Charter in developing sustainable management measures, improve the legal certainty surrounding fishing rights, and promote development of aquaculture. Finding the policy balance between these often competing policy priorities is a challenging task and some progress has been made towards achieving such a balance in Mexico as a result of the reforms to fisheries policies that have taken place. The policy framework that is in place now is clearly more appropriate for helping to achieve sustainable fisheries and performs better in many areas than the previous regime. However, the reform process is not complete and there remains significant scope for further improvements and policy developments which build on the current policy foundations. Such policy improvements are possible and necessary if the fisheries sector is to make a strong contribution to the economic and environmental health of the country.

Achievements of fisheries policy changes

The progress that Mexico has made in changing its fisheries policies is evident in a number of areas, though so too are a range of remaining problems. The achievements of the policy changes, and areas where problems persist, can be summarised against the objectives contained in the sectoral plan.

Use fisheries and aquaculture resources in a sustainable way • Management policies have had mixed results with respect to the status of fisheries resources. Of the 54 stocks for which stock assessments were available in 2004, 11 stocks are assessed as being overexploited while 34 stocks are fully exploited. The change in stock status for the assessed stocks in recent years has been marginal. Of the stocks surveyed in this report, two overexploited stocks recovered to sustainable levels (blue shrimp in Sonora, lobster in Yucatan) while four stocks deteriorated to being overexploited (brown shrimp in Sinaloa-Nayarit, lobster stocks in the northern and southern areas of the Baja California Peninsula, red sea urchin in the Pacific, Queen Conch on the Banco Chinchorro). Given that the recovery of fish stocks is generally a long term process, it is not unexpected that there is little change over the four year period examined. However, further efforts are clearly required to reduce the number of overexploited stocks and reduce fishing pressure on the large number of stocks that are currently fully exploited.

• There has been marked success in reducing bycatch in some fisheries. This has been particularly evident in the Pacific tuna fisheries where there has been a 99% decline in the number of dolphins caught per set between 1986 and 2003 through the use of selective fishing practices and technologies. The rapid and proactive introduction of turtle-excluder devices in the shrimp fisheries ensured that Mexico was not drawn into lengthy trade disputes as was the case with the dolphin-tuna issue and was able to maintain production and exports of this high value species. In other fisheries, bycatch reduction measures are gradually being introduced, although more remains to be done.

• The negative environmental impacts of aquaculture have been reduced. Mangrove destruction for the construction of fish farms has been largely halted. Mexico’s aquaculture sector operates in a way that allows the sector to promote itself

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as being able to provide national and international markets with “clean and green” products. This has been helped by the establishment of the network of Aquaculture Centres to help improve the aquatic health of fish farms as well as train operators in appropriate sanitary and aquatic health practices. However, concerns remain about the effect of public works such as canal construction and lagoon dredging on the shrimp larvae and juveniles, and on sedimentation in the waterways. There are also issues of coordination between government agencies with overlapping regulatory responsibilities for key aspects of aquaculture operations, particularly environmental management, land use approval and health and sanitation policy. Action is clearly needed to reduce red-tape and improve policy coherence in order to facilitate the further development of this emerging sector. In particular, action is required to develop a coherent, transparent, risk-based set of environmental parameters for aquaculture operations in order to reduce the costs and uncertainty associated with environmental compliance.

• The status of inland fisheries remains a concern. The constant increase in fishing effort in river basins, coastal lagoons and protected areas is a direct consequence of the growth in the working age population who have few employment alternatives in communities bordering inland water zones. The river fishers tend to concentrate on the more profitable fisheries, such as shrimp, lobster, and oyster, which permanently increases the fishing effort brought to bear on those resources. Addressing the inland fisheries issues should be a priority but will require the involvement of other policy areas, particularly with respect to rural development.

• The transparency of stock assessments, resource status, and management measures has continued to improve. The National Fisheries Charter is now an established feature of the management landscape and serves a crucial role in improving the access of various stakeholders to information of fish stocks in Mexico. The coverage and detail of the Charter is extensive, providing comprehensive data on 96% of the species captured in marine waters. The effectiveness of the Charter could be further improved by more closely integrating it with management plans for individual fisheries.

Increase the economic and social profitability of fisheries and aquaculture • There is limited information on the economic profitability of commercial fisheries. Anecdotal evidence indicates that certain segments of the fisheries sector generate intramarginal profits, most notably the tuna fleet and the commercial shrimp fleet. However, the fact that too much effort remains in many fisheries suggests that any rent generated in the sector will be quickly dissipated as vessels increasingly compete for available resources. Further anecdotal evidence suggests that this is indeed the case for many of the sedentary and small scale fisheries where excess effort combined with illegal fishing have reduced profitability. The overwhelming focus on technical measures and input controls, coupled with a lack of clearly defined access rights, exacerbates this problem. In areas where there have been innovative management regimes in place, particularly local co-management initiatives for area-based fisheries, there is evidence that resource rents and profitability is increasing and resource use conflicts declining. No surveys of costs and earnings are undertaken making it difficult to draw broad empirical conclusions about the success of policy reforms in achieving this objective. While from a

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pragmatic perspective, such surveys may not be perceived as the highest priority for authorities at this stage, they would nevertheless provide important information about the economic effectiveness of different management regimes. Future work on this area is required.

• Subsidies have increased in the sector as part of a general push to modernise engines and gear, improve infrastructure and reduce costs of fishing operations. While these have improved short-term profitability in some fisheries and helped to support some poorer fishing communities, many of the subsidy programmes will adversely affect the long-term resource sustainability and economic profitability of the sector, particularly those that are directed towards modernising vessels, increasing engine power and reducing operating costs. Many of these subsidies effectively mask the price signals for inputs, distorting the operating decisions of fishers and generating increased fishing pressure in the predominantly input- controlled fisheries. They also create a culture of subsidy dependence which reduces economic flexibility and social resilience. Some reduction and redirection of support, both in terms of objectives and recipients, is required.

• The tendency to use artisanal fisheries as a social safety net will exacerbate existing problems of resource conflict, stock degradation and rural poverty in the coastal regions. This is especially evident in the shrimp fishery where conflicts over access between different fleet segments continue unabated. To some extent, this is outside the immediate purview of fisheries policy as it is generally more appropriate to use social policy tools to address rural poverty issues. However, there is no doubt that the lack of control over expansion of the artisanal fleet is not conducive to achieving social or rural development objectives, nor the sustainability of the resource. A more holistic approach needs to be undertaken, ensuring that the fisheries and rural development policies are mutually supportive.

• Rural aquaculture is being promoted as a means of getting artisanal fishers out of fishing and into the aquaculture sector. It has had a marginal impact in some areas. The recent FIFOPESCA initiative in the Gulf of Mexico is a concrete example of this strategy and provides a useful guide for the future.

Increase legal certainty in fishing and aquaculture activities • Reforms to the system of permits have helped to improve the legal certainty for commercial fishers. The decision to restrict the number of permits to one per vessel will assist management authorities in gaining a slightly greater degree of control over fleet expansion. The four year time limit for permits provides some degree of certainty for fishers. However, given that the permits are almost always automatically renewed, it is not clear that the length of validity of permits is a major issue for fishers. The decision taken to no longer issue 20-year concessions for commercial fishing was sensible as there was a lack of appropriate management policy instruments encouraging economic efficiency and managerial and technological innovation, leading to an excess of latent capacity and poorly performing companies. Nevertheless, the current permit system could be improved to strengthen and better define access rights (including introducing transferability and improving divisibility and security of title), as well as incorporate effective mechanisms for revoking permits.

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• Maintenance of long term concessions for aquaculture and tuna ranching provides long term certainty for investors and facilitates access to credit for operators. These 20-year concessions are renewable for a similar period and are also transferable, allowing for the entry of new participants in the sector and improving economic efficiency in the sector. This is a positive step and should be maintained.

• The performance of fisheries enforcement is beginning to improve following a period in which there was an enforcement vacuum due to shifts in administration policies and structures. The introduction of vessel monitoring systems (VMS) in the Pacific fleet and the use of observers in the entire tuna fleet and in a portion of the Pacific swordfish fleet are important positive steps forward. Plans to extend the use of VMS to small scale and artisanal vessels and observer coverage to parts of the shrimp fishery will reinforce these improvements. However, enforcement efforts are still hampered by a lack of resources and a poor institutional structure. This is exemplified by a split in enforcement functions between government agencies (CONAPESCA, PROFEPA and the Navy) and the fact that CONAPESCA has no legal power to enforce its own regulations without referring them to the National Prosecutor. There is also an acknowledgement within CONAPESCA that enforcement of regulations within the artisanal fisheries and many of the small scale fleets is virtually impossible with current levels of resources and without having a significant impact on the livelihoods of the poorer fishers. Innovative ways of enforcing regulations are therefore required for these fleets. Overall, a more cohesive organisational enforcement framework should be implemented as a priority.

• There remain problems with illegal fishing and inadequate monitoring and reporting of catches which undermines the advances made in the permit system and stock assessments. While illegal fishing is not a problem for the tuna fishery, it remains a major concern for many inshore fisheries (for example, shrimp) and sedentary fisheries (such as abalone and Queen Conch). An additional concern is the ability of the Mexican judicial system to adequately prosecute fisheries offences, although this largely lays outside the remit of fisheries policies. Further efforts to police illegal fishing are required, including the development of co-management schemes where appropriate to help strengthen fishing community commitment to sustainable fisheries.

• Elimination of the 1992 reserved species regulations for cooperative societies in commercial fishing opened up the possibility of private investment participation in the extraction and cultivation of the species that command highest commercial prices, such as shrimp, etc. However, it did not resolve the ongoing conflicts between the small scale and large scale fishers in the shrimp fleets.

Promote support programmes and services to fishing and aquaculture activities • Government financial transfers to the marine capture industry account for two-thirds of total transfers to the fisheries and aquaculture sector. Support to the marine capture sector as a proportion of the value of landings increased from 14% 1996 in 1996 to 19% in 2004 and is marginally below the OECD average. Most of the transfers in this sector (72%) are directed towards direct payments and cost-reducing transfers, primarily payments for diesel subsidies, direct grants and a decommissioning scheme for the shrimp fleet. There are some concerns that such

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transfers, in the absence of effective constraints on effort and capacity, will adversely affect the long term sustainability and profitability of the sector. While decommissioning schemes are widely regarded as central to capacity reduction efforts, it is essential to ensure that they are carefully designed so as to avoid providing perverse incentives to fishers which hamper capacity reduction efforts. Cost recovery for a range of fisheries services provided to the commercial sector would be appropriate.

• Spending on the aquaculture sector has increased in recent years through the Alianza Contigo programme and the Programa Normal, reflecting increasing government focus on the development potential of the sector. The expenditure has lead to, amongst other things, the establishment of the network of aquaculture centres, shrimp handling facilities, and improved understanding of aquatic health management by aquaculture operators. These achievements have helped the aquaculture industry to grow at a rapid rate. However, it would be appropriate for the government to institute some degree of cost recovery for these expenditures, particularly those related to the establishment, maintenance and operation of the infrastructure facilities.

• The ability and willingness of the sector to gain access to financial markets has increased and companies are beginning to make increased use of the loans and guarantees provided by BANCOMEXT to facilitate export-led developments, and the soft loans and credit guarantees available through FIRA-FOPESCA. However, equity may be an issue as the programmes tend to target larger commercial operators in the fisheries and aquaculture sectors and poorer applicants often cannot provide the required matching funds to take advantage of the programmes. These types of programmes will only partially address this deficiency and further attention needs to be paid to the use of more innovative financial mechanisms as well as to broader financial sector policies.

• The development and implementation of mechanisms for consultation and stakeholder involvement has been a positive step. Extensive consultative mechanisms are in place for dialogue between Federal, state and municipal governments in setting NOMs, allocating funds under the various support programmes, and implementing management arrangements. Stakeholders also have a number of forums in which they have potential to influence policy development. However, like most such frameworks, the results of consultation efforts will only be as good as the faith that all parties bring to the discussions. Consultation without some assurance that views will be taken into account will prove to be hollow. There is some concern that the role of scientific advice in informing the consultation mechanisms and management settings is weak and that many of the management decisions are based on considerations other than science-based analysis.

• The decentralisation of decision making power and management responsibility has been initiated and continues at a very cautious rate. The relocation of CONAPESCA from Mexico City to Mazatlan can be viewed as the first step in the process, accompanied by the establishment of the regional offices of INP. A regionalisation process for fisheries has the potential to improve transparency, increase stakeholder involvement, enhance enforcement efforts and better target funding for research and support. At the same time, regionalisation needs to be

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carefully designed and well-resourced within an overall institutional framework that works to support a well-articulated vision for the industry and to avoid political interference in management. This will require a robust and resilient institutional structure.

Summary • In summary, Mexico has made progress in the course of its reforms to the fisheries sector. The changes that have been implemented help to move the sector towards a more sustainable and profitable future. However, it is clear that more needs to be done to embed and build on these policy changes. In many ways, the future path for policy development in the sector will be more challenging as there will be difficult policy tradeoffs to be resolved. This will present policy makers with a more politically difficult task than the reforms undertaken during the previous decade as the next stage of policy reform will need to address issues in which entrenched interests have strong incentives to resist change.

Recommendations

Priorities for the sector There are two top-line priorities for the Mexican government with respect to fisheries policy. First, the Mexican government should develop a higher-level, long-term vision for the future of the fisheries and aquaculture sector in order to provide an opportunity for ensuring that the vision and strategies can transcend political administrations and reduce long-term uncertainty in the sector. Recommendations for further adjustments in Mexico’s fisheries policies need to be framed by a vision of Mexico’s fisheries sector in the future. The objectives articulated in the new Fisheries Law provide a sound basis for the future as they include an array of resource sustainability, economic and social concerns, building on the advances made in recent years. However, achieving a balance between industry development, resource sustainability and coastal poverty alleviation is a difficult task. Searching for such a balance requires a clearly articulated vision for the future of the fisheries and aquaculture sector, and such a vision appears to be lacking at the moment. The second priority should be the maintenance of a stable regulatory environment for the sector. The changes in policy direction experienced since 1990 have not been conducive to maximising the potential for the fisheries sector to generate long-term net economic benefits for the country. The need for a stable policy framework is particularly acute for the fisheries sector where management policies should be geared to enable long term, sustainable utilisation of available resources. Multiple changes in policy direction over the last 15 years have compromised the resource and economic sustainability of the sector over the longer term. Under the Mexican political system, such shifts are, to some extent, unavoidable where new plans are put in place with each change in administration. However, they should reflect minor course corrections rather than wholesale shifts in policy priorities. From the various policy statements and objectives produced in recent years, coupled with the objectives under the FAO Code of Conduct for Responsible Fisheries and the

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OECD’s guiding principles, it is clear that the articulation of such a vision can be readily developed and would centre around the following goals: • Contribute to overall economic growth. • Ensure sustainable resource use. • Increase the economic resource rent from fisheries and aquaculture. • Ensure resilient fishing communities, without dependency on government subsidies. • Reflect the societal benefits and costs of impacts on the environment in the decisions of its agents. • Be responsive to market signals in both input and output markets.

Actions for further reform The existing array of policies can be enhanced to consolidate and strengthen the achievements of the reforms undertaken to date, and to ensure that government policies can effectively realise the long term vision for the sector. In considering the necessary actions for further reform, it is important to recall that fisheries are a dynamic system with many integrated components. Changing one component of the system will have

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consequences for other parts of the system: some consequences will be anticipated and well-understood, while others will be unexpected. It is important to take a holistic view of fisheries policy reform and understand that reforming one aspect in isolation may not necessarily lead to improved overall fisheries outcomes. A good example is the use of decommissioning schemes in a fishery, the use of which will be ineffective if they are not accompanied by measures to effectively restrict future effort expansion in that particular fishery. Policy makers should therefore take a holistic and integrated approach to reform to ensure that the benefits of policy changes are maximised while minimising the costs. An agenda for further policy reform should cover the following key areas: • Recovery plans for overexploited stocks. • Controlling and reducing fishing effort. • Development of management plans. • Use of economic management instruments. • Institutional structure, including decentralisation, stakeholder consultation and scientific support. • Improving coordination of approval and management requirements for aquaculture. Immediate efforts should be undertaken to put in place recovery plans for overexploited stocks. There is nothing to be gained in delaying action on this important resource sustainability issue. Declining catches and catch rates will merely encourage a shift of effort to other fisheries and increase pressure on other stocks. • To achieve stock recovery, the government should develop and implement integrated management plans for overexploited fisheries with specific, measurable goals for stock recovery based on scientifically-derived reference points. Stronger enforcement of existing regulations for remaining fishers should be an integral part of stock recovery plans. • Such management plans should also incorporate measures to permanently reduce effort and fishers in these fisheries as any gains from temporary effort reductions will quickly be dissipated if the underlying causes of the excess effort are not addressed. So, while immediate effort reduction measures should be undertaken (including, where appropriate, extended closed seasons, fishing moratoriums and suspension of licences), further management reforms for affected fisheries are required, such as strengthening access rights and introducing time-limited vessel decommissioning and licence buyback schemes and introduce quotas when technically feasible (see below for further discussion of decommissioning schemes). • The fact that 5 of the 11 overexploited stocks are sedentary species should make the development and enforcement of stock recovery plans and enforcement of regulations more feasible. Indeed, some of these fisheries have already had been subject to recovery plans and this experience, though unsuccessful to date, will facilitate the development of further recovery plans. In particular, the concept of recovery plans is now embedded in the mindset of some fishers and this can be used to advance stock recovery efforts. • The development of stock recovery plans for shrimp, grouper and other fishes is more challenging as they are subject to greater conflicts between users. The pacific shrimp fishery, in particular, has a large artisanal component that increasingly

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competes directly with industrial fishers. While the fishery has a management plan in place, it has not proved to be particularly effective in reducing conflict and easing fishing pressure. The use of more innovative management measures is required to address fundamental resource conflicts in this fishery. Consideration should be given to the use of transferable effort quotas and co-management arrangements, coupled with significant control on further expansion of the artisanal fleet (see below for further discussion). In addition to stock recovery, it is clear that further measures are required to control fishing effort in many fisheries. • The use of decommissioning schemes, recently trialled in the shrimp fishery, should be extended. Care needs to be taken in the design and implementation of these schemes as they can quickly become embedded in the expectations of fishers, resulting in perverse incentives to stay in the industry to wait for a government payout to leave and thereby reducing industry flexibility. The schemes should be credibly announced as being “one-off” schemes for each fishery and the availability of decommissioning payments should be strictly time-limited. Cost effectiveness can be improved by using auctions, rather than fixed payments per vessel, to identify vessels to be scrapped. As is currently done, the permit attached to a vessel should be retired as part of the decommissioning package. It is very important that decommissioning schemes are introduced together with other measures that will effectively prevent capacity and effort increasing in a fishery. • There appear to be few rules on the replacement of vessels, increasing the scope for technological creep as older vessels are replaced with more modern vessels with greater catching power. While fleet modernisation has been seen as a desirable process in the past, it is appropriate to consider introducing restrictions on the allowable increases in engine and catching power of new vessels, including elimination of subsidies for vessel and engine purchase and modernisation. • The use of observers should be extended within the high value fisheries, with the costs being at least partly recovered from the industry. The innovative financing schemes used to run observer programmes in the tuna, swordfish and shrimp fisheries provide a good model and should help ensure the cost-effectiveness of such programmes. The use of observers should only be instituted where the societal benefits, including the collection of scientific information and improved compliance with management measures, outweigh the cost of the schemes. • Better targeting of financial support should be a priority. The majority of Mexico’s financial transfers are directed towards direct payments and cost-reducing transfers and this should be reduced. Authorities should also re-examine the regional and fleet destinations for expenditures. In particular, it is not clear why commercial fisheries require financial support, particularly if they are generating resource rents and making profits. If particular fleets are not generating rents or profits, then the problem is the more fundamental one of inadequate management, and the provision of subsidies will merely delay and exacerbate the underlying problem. The growth in the number and power of the artisanal fleet is a major concern, especially in the shrimp fishery, but also in many fisheries in the poorer coastal regions and inland waters. This is a classic case of too many fishers chasing too few fish, coupled with a large amount of illegal fishing. The current situation of keeping these fisheries as de-facto open access fisheries will only serve to augment rural poverty in these dependent

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populations and will lead to long-term resource depletion. It also needs to be acknowledged that fisheries policy is not the appropriate instrument to address widespread poverty concerns; social policy is much better suited to this purpose. It is closely linked to overall economic development of the country, and to the development of economic alternatives in coastal regions. This is essentially a matter of people and community management, an issue that also goes beyond fisheries policy. Considering a sector specific response would only be appropriate if society-wide income support systems are inadequate and the prevalence of poverty is directly linked to fishing. Nevertheless, there are a number of steps that the government can take to begin addressing the issue: • At the moment, there is no clear published data on the artisanal fleet and this would be a necessary first step in determining the magnitude of the task confronting the government. • It is necessary to improve the surveillance and enforcement capability of CONAPESCA, including an adequate resource base. This should also include an institutional structure which ensures CONAPESCA has a unified control structure for fisheries enforcement. • Extend the process of installing VMS on small scale and artisanal vessels with cheaper, new generation VMS units. This will assist in monitoring this segment of the fleet, and will help support future efforts to control the location and intensity of effort. • The use of decommissioning schemes for the artisanal sector is unlikely to be successful without some means of restricting those who leave the sector from re- entering. The cost of pangas is so low that such re-entry is quite feasible. Indeed, it is possible that any payments from decommissioning will be reinvested in the fishery. • A useful step would be to examine the feasibility of local governance mechanisms in particular fisheries as discussed below with respect to community based management. Asystemoffisheries management plans should be instituted. While a few fisheries have management plans in place, these have generally been ad hoc,fragmentedand effective in only some cases. Comprehensive management plans could build on the current system of NOMs and the National Fisheries Charter, and would provide a mechanism for long-term planning for individual fisheries. Their development and implementation could be undertaken within the consultative framework that is already established and functioning for a number of fisheries. They would, however, require some legal status in order to be meaningfully enforced. The major benefit to such an initiative would be to unify the sources of management advice, provide a holistic approach for managers, and improve the transparency and certainty for fishers. Market-based instruments should be introduced for those fisheries where the necessary biological, economic, legal and social conditions combine to increase the probability of a good management outcome. The heavy reliance on the use of limited entry (through permits) and technical measures to control effort is unlikely to be effective in the longer term. Indeed, they have resulted in technological creep and input stuffing, and have increased fishing pressure. Altering the economic incentives faced by fishers, and harnessing the power of the market to efficiently allocate resources, will improve the

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economic viability and adjustment capabilities of the sector. It should be recognised that there is a wide range of market-based instruments and that individual transferable quotas are not the only available economic instrument for managing fisheries. A range of innovative management mechanisms have been successfully used in other OECD countries and the conditions are ripe for their selective use in Mexico’s fisheries. Some stakeholders may consider it premature to consider the introduction of market based management into the Mexican fisheries sector, particularly given some of the challenges currently presented by the issues of judicial enforcement, overfishing, and excess capacity. However, experience has shown that there are significant benefits in combining capacity reduction programmes with market based management measures as they tend to be mutually reinforcing if properly designed. • A necessary condition for the use of market-based instruments is a strong system of clearly-defined access rights that are exclusive, transferable, and legally enforceable. Such a system is currently lacking in Mexico where, at the moment, access rights are poorly enforced. Improvements in this area may need to be part of an economy-wide reform process to improve the legal regime surrounding productive assets in general. One of the challenges facing the Mexican fishing industry in this regard is the very large artisanal fleet in the poorer regions where the application of property rights concepts may be difficult to enforce. Variants of market-based instruments, such as community based management approaches, may be useful in such circumstances. • Although the present management system under the IATTC does not provide for such a measure, the tuna fishery could potentially benefit from the use of individual transferable quotas. It is a single species fishery with well-defined stocks, a small fleet, and a sound resource base. Introducing transferability into the existing system, perhaps with limits on quota concentration to allay fears about consolidation, would improve the efficiency of the fleet, enhance short and long term adjustment and improve resource rent generation. • The use of individual transferable effort quotas (based, for example, on vessels or gear units) could be considered in fisheries where the species characteristics mitigate against the use of output based quotas (for example, the commercial shrimp fishery and some single and multi-species fisheries). These are used extensively elsewhere in the OECD with a great deal of success. • Other forms of market based mechanisms such as community-based management could be introduced in other fisheries, particularly for sedentary species such as abalone, oysters, mussels, lobster which are well-suited to area-based management. Such management arrangements already exist informally for a number of fisheries and the concept could be formalised and extended. • Experience with market-based instruments in other OECD countries indicates that the introduction of such management changes requires the active support of industry to be successful. Indeed, in many cases, industry has been one of the major proponents of reform, working in concert with government to establish a more sustainable and profitable industry. This highlights the need for institutional arrangements to allow for extensive stakeholder consultation with the expectation of a high degree of government responsiveness to issues raised during consultations. The actual process of policy change depends critically on the institutional structure governing Mexico’s fisheries sector. The structure within which policy decisions are

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discussed, designed, developed and implemented is important for the eventual acceptance and success of the reforms. For this reason, the Mexican government should undertake further development of the institutional structure for the sector to ensure that it works for the reforms rather than against them. One of the central concerns expressed by industry and others in the course of preparing this report is the incorporation of CONAPESCA into first SEMARNAP and now SAGARPA at the level of an Under-Secretariat. This largely reflects a concern about a perceived lack of influence on fisheries matters within the Federal government as a result of having to compete to be heard within a large department covering many (mostly agricultural) sectors. These concerns were exacerbated by the transfer of CONAPESCA from Mexico City to Mazatlan in 2001. There are, of course, costs and benefits associated with this institutional arrangement and it is incumbent on the government to determine which arrangement best meets their objectives. The location of CONAPESCA in Mazatlan suits the objective of bringing decision making closer to some of the stakeholder communities. Its location within a major fishing region of Mexico is appropriate, although care needs to be taken to ensure that its decision making processes and consultation is seen as inclusive across the other fishing regions. • An institutional development that is worth examining is the establishment of CONAPESCA as a functionally independent agency within SAGARPA,withan independent budget line and devolved decision making powers on fisheries issues with a direct line of reporting to the Secretary for Agriculture. In addition, the institutional structure needs to be reorganised to provide CONAPESCA with the necessary powers and functions to effectively undertake fisheries enforcement as a unified control structure. This also requires adequate resources to be made available. The use of cost recovery in some fisheries could assist the resourcing issue. • The decentralisation of institutional arrangements should continue. At the moment, this process is somewhat haphazard with no clear guidance as to the government’s intention. A clear plan and appropriate commitment to funding is required with the aims of increasing transparency, accountability, and stakeholder participation and empowerment. Some of the ingredients to further decentralisation are already in place: − Mexico can be naturally divided into the four coastal regions (Regions I – IV) and the inland waters, each with distinctive regional ecological characteristics and policy issues. − Regional consultative mechanisms are in place for some fisheries. − The National Fisheries Institute (INP) has a strong regional network through the Centros Regionales de Investigacion Pesquera. − State fisheries offices exist, although these are mostly in name only as they consist of a single under-delegate located in the SAGARPA state offices and report to SAGARPA state delegates. This institutional framework is largely inefficient as the fisheries component drowns within a bureaucracy which is not conducive to sound fisheries management.

This basis could be further developed to provide an appropriate level of regional management that is representative, transparent, responsible and responsive, allowing for fishers to be empowered within the decision making system. Concerns over corruption or biased decision making can be addressed by ensuring a wide stakeholder involvement

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(including environmental NGOs and community groups as well as fishers’ representatives), transparency of analysis and advice, and accountability mechanisms for advice given and decisions taken. The major risk to be wary of is the creation of an unwieldy hierarchical structure that is essentially a top-down, command and control structure. This will very quickly lose legitimacy amongst fishers and other stakeholders. The benefits of decentralised decision making lie in improved stakeholder input to scientific analysis and regulatory design, increased acceptance of regulations, and potentially lower enforcement costs. The major cost involves an up-front investment in institutional capacity building. • A major element of a more decentralised institutional structure is an increased reliance on community based management to assist in the better management of inshore, artisanal and inland fisheries (discussed above). It could also provide the basis for enabling authorities to better manage conflicts between stakeholders, especially for the shrimp fishery. • There is clearly a need to increase the resources and expertise availability to the National Fisheries Institute (INP). Sound scientific advice, including socio-economic analysis, underpins successful fisheries management and the INP faces a funding and expertise shortfall that needs to be addressed. Given that there is considerable benefit to the industry from the provision of INP’s scientific advice, some of the costs of the INP should be cost recovered from the commercial fishing industry. • At this stage, it is important to note that fisheries policy changes do not come free of charge. It is clear that some investment in institutional capacity building is required. This will involve short-term costs, but can be expected to generate long-term benefits. Reforms that are directed towards more profitable commercial fisheries should be accompanied by cost recovery to ease the financial burden on the government. There is a need to improve agency coordination for the approval and supervision of aquaculture projects. At present, there are too many overlapping and contradictory regulations governing aquaculture developments. A “one-stop shop” would be a useful innovation to streamline the approvals process. Further work is also required to develop a coherent, transparent, risk-based set of environmental parameters for aquaculture operations in order to reduce the costs and uncertainty associated with environmental compliance at the moment. In addition, it would be appropriate for the government to institute some degree of cost recovery for government transfers to the aquaculture sector, particularly those related to the establishment, maintenance and operation of infrastructure facilities.

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