Mexico: NAFTA corn liberalization fails farmers, environment

by Chakravarthi Raghavan

Geneva, 25 Oct 2000 -- The liberalisation of the corn market (and the corn sector of agriculture) in Mexico, in terms of the North American Free Trade Agreement (NAFTA) has failed to deliver the promised gains in human welfare or environmental and social benefits, a new report commissioned by the UK-based Oxfam and the Swiss-based World Wide Fund for Nature (WWF) International.

The study, “The Environmental and Social Impacts of Economic Liberalization on Corn Production in Mexico” by Dr. Alejandro Nadal of El Colegio de Mexico, says that the current liberalisation patterns and inadequate state support threaten the ability of Mexican farmers to continue to grow corn and the ability of consumers to afford it.

While the study focuses on the effects of NAFTA on Mexican corn sector, some of its analysis and conclusions have a relevance to the entire ‘neo-liberal, economic liberalization’ arguments and policies visavis trade liberalization and agriculture in the developing world, particularly in countries with large rural subsistence agriculture.

The same arguments of ‘efficiency’ and ‘welfare’ benefits of trade liberalization, are being used in the major developing countries of the South—including China, India and Indonesia, most of the subs-Saharan African countries—by their own trade establishments and the WTO, World Bank and IMF, to force WTO-led agricultural liberalization policies on these countries and their rural economies.

“This study shows clearly the danger of moving ahead with liberalization without first assessing in detail the complex linkages between sustainability, poverty reduction and market liberalization,” says Penny Fowler of Oxfam.

“The human and environmental stakes are just too high for governments to move ahead without understanding fully the impacts of liberalization and without putting in place measures to prevent devastating social and environmental changes that could have been foreseen, if more detailed analysis had been conducted,” she adds.

Mirella Perrin of the WWF’s Trade and Investment Unit, in commenting on the Nadal study and its conclusions says: “Current liberalization patterns threaten the ability of Mexican farmers to continue to grow corn, and the ability of consumers to afford it.

“In this case,” adds Perrin, “the traditional approach to liberalization - with its focus on market-based efficiency - seriously undervalued the social and environmental benefits offered by diversified small-scale and non-intensive practices.”

In spite of a sharp drop in corn prices and the increase in imports, says the Nadal study, Mexico’s production of corn has remained stable.

And while, the cultivated area devoted to corn has expanded in Mexico, yields have dropped.

“The increased overall consumption of maize (domestic production plus imports) is explained by its increased use as cattle feed and in industrial processing,” the study finds.

The study shows that there has been little incentive and opportunity for farmers to reallocate productive resources to other crops.

And, due to market imperfections and segmentation, the expected benefits in terms of lower consumer prices for maize products have failed to materialize, and the prices of ‘tortilla’ (thin flat unleavened bread made of corn and eaten hot) has actually risen.

While modernization or crop substitution may be an option for a small group of competitive producers, says the Nadal study, a number of less profitable growers are being forced to migrate to urban areas or other countries.

A main finding of the study is that migration and the weakening of social institutions are contributing to the genetic erosion as traditional knowledge on corn seeds is lost.

The restructuring of the corn sector as a result of NAFTA is contributing to an accelerating soil erosion trend, both through specialization and monoculture, coupled with increased use of fertilizers—as is the case with the more competitive producers, the more intensive use of soils, including by extending the cultivation of marginal lands by traditional producers.

The NAFTA Agreement (amongst Canada, Mexico and the United States), in its Chapter VII covering the agricultural sectors of the three countries, required Mexico’s opening up of its corn sector to imports, in exchange for guaranteed access to the Canadian and the US markets for horticultural products and other labour-intensive crops.

NAFTA negotiators viewed the Mexican corn sector as inefficient in comparison with yields in the US corn belt, but Mexico’s horticultural and other crops involving labour-intensive production were seen as providing comparative advantage for Mexico.

Zea Mays—Corn in US English, maize in UK English, el maize (in Spanish) -- has been cultivated in Mexico for 5000 years, and is one of the three most important staple food crops in the world. Rice and Wheat are the other two.

Yet, points out the Mexican academic in his study, no where is corn more deeply entwined with the social and economic fabric of a nation, or is more genetically diverse than in Mexico. Forty-one racial complexes and thousands of corn varieties are recognized in Mexico— and form a rich reservoir of genes for coping with drought and other adverse environmental conditions. Mexican corn producers rely heavily on these adaptations for their survival, and Mexico as the repository of this genetic diversity can also play a crucial role in meeting the challenge of the world demand in the 21st century.

At the time of the final NAFTA treaty negotiations, and from the viewpoint of Mexico, corn was by far the most important crop included in NAFTA: it accounted for 60% of land under cultivation and a similar proportion of agricultural output by value.

In terms of employment generation, corn is the single most important commodity in the economy, providing the main source of livelihood for over three million producers who account for 8% of Mexico’s population and 40% of the people working in the agricultural sector.

Says the study: “Corn producers have a direct and significant impact on Mexico’s natural resource base, especially in terms of soil conservation, aquifer use and chemical inputs. It is clear, therefore, that the inclusion of corn in NAFTA, implied fundamental restructuring of the agricultural sector in Mexico, with wide-ranging social, economic and environmental consequences.”

The NAFTA negotiators viewed the Mexican corn sector as inefficient in comparison with yields in the US corn belt. But their narrow economic concept of efficiency failed to take account of two other important facts:

Firstly, there are deep structural differences between corn producers in Mexico and those in the US, making it difficult to compare corn production in the two countries. There are enormous disparities in labour/out coefficients. US corn is produced at roughly 40% of the cost of production in Mexico, and average yields vary from 1.8 tons per hectare in Mexico to 8 tons per hectare in the US.

However, the difference in productivity may be significantly less when considering the ‘external’ social and environmental costs of capital intensive agricultural practices in the United States. There is also a greater heterogeneity in Mexico’s corn sector and poor producers with low yields can coexist with more competitive farmers producing yields comparable to those found in the US.

Secondly, about 60% of the 1.8 million Mexican producers are estimated to use locally adapted corn varieties, covering about 80% of the total area under corn cultivation.

“These producers are effectively custodians of genetic diversity, with careful selection of the varieties best suited to local growing conditions as the most important tool in their struggle to survive and remain productive.”

“However,” says the study “NAFTA negotiators failed to recognize the important role played by this part of Mexico’s corn sector in maintaining the country’s genetic diversity, but saw the “inefficient” producers merely as a drain on the economy.

“As a result it was considered desirable for this group of producers to move from corn production to cultivation of other crops or to non-agricultural sectors of the economy”.

Given the strategic importance of corn production in Mexico, NAFTA originally established a long transition period for this sector -- 15 years for the final alignment of domestic corn prices with international, principally prices in the United States.

At the beginning of the transition period, the existing tariff and import permit system was transformed into a tariff-rate quota (TRQ) regime that would gradually be phased out. During the 15-year transition period, the tariff free quota, initially set at 2.5 million tons a year, was to be expanded at a constant rate of 3% per annum, while the applicable ad valorem tariff for imports exceeding the quotas would be reduced from 206% in 1994 to zero by 2008.

Mexican corn producers, Nadal points out, received assurances that the adjustment-assistance policies would be implemented during the 15-year transition period—ranging from direct income support mechanisms to credit, infrastructure investments, and agricultural research and development. The price support mechanisms that had existed for 40 years were to be replaced gradually by these ‘non-trade distorting measures’.

The study points out that the planned 15-year transition was actually compressed to roughly 30 months. Between January 1994 and August 1996, domestic corn prices fell by 48%, thereby converging with the international market some 12 years ahead of the period set by NAFTA, thus forcing Mexican corn producers into a rapid adjustment.

This was the result of the Mexican government not implementing the tariff rate quota as planned, but instead exempting all corn imports from tariff payments after 1994, on the ground of a need to lower prices and reduce inflationary pressures.

“This abrupt and premature termination of the adjustment process took place against a background of declining state support for agriculture. The policy instruments supposed to assist transition rapidly lost much of their effectiveness. As a result of inflation, PROCAMPO, the mechanism for direct income support, lost 40% of its value in real terms. In addition, credit provision declined to extremely low levels and public investment in infrastructure was severely curtailed. Finally, the price regulation agency, CONASUPO, which was to have been gradually phased out, was completely dismantled in late 1998.

During NAFTA negotiations there was no in-depth analysis of how NAFTA would affect Mexican corn sector. Some rough estimates and general models were developed and use - despite their fundamental flaw due to lack of precision and rigor, unsound assumptions and a theoretical bias favouring liberalization, says the study. The predictions developed by these models, a post hoc rationalization exercise, turned out to be erroneous.

“The decision to liberalise the corn sector under NAFTA was based more on ideology than careful analysis of factors,” says Nadal.

Between 1994 and 1998, imports of cheap corn did lead to price reductions, and at a much faster rate than anticipated, but the predicted drop in domestic corn output did not take place: production was running at historically high levels; the area under corn cultivation increased, implying a drop in average yield per hectare and suggesting that more marginal land was being cultivated under increasingly stressful conditions.

A fundamental flaw in the pre-NAFTA studies was that only one variable, market price, would determine changes in behaviour of Mexican corn producers - neglecting the many other factors, such as market prices for alternate crops, wage costs, and interest rates.

The NAFTA-led liberalization has also had environmental and social costs in terms of three categories of producers: competitive, intermediate and subsistence.

The competitive producers—with access to good soils, irrigation, input-intensive technologies and well established marketing channels— enjoy profit margins enabling them to withstand pressure of price reductions and the challenge of competition from NAFTA-related corn imports. Most of them own larger-then-average land plots and have flexibility to shift to other basic crops, horticulture or non-traditional commercial produce.

As corn prices dropped, so did prices for substitute crops. Crops such as barley, rice, sorghum and wheat fetched lower prices than corn, making corn relatively more profitable. This led competitive producers to continue corn production, with the CONASUPO, the state purchasing agency, concentrating its reduced purchasing power to regions where competitive producers were dominant.

It is clear that contrary to NAFTA predictions, labour-intensive horticultural crops cannot provide ‘economic space’ for reallocating labour and land from the corn sector. For most horticultural crops, technological improvements, have brought in significant output growth, without need for additional labour or land. Also, Mexico has probably maximised its penetration of North American markets in the face of strong competition from California, Florida and Central/South America.

Transgenic corn seeds, already in the market in Mexico, are also probably being used by the more productive farmers in the north west. While the environmental impact are still being debated, there is reason to believe that use of the Genetically Modified (GMed) seeds may pose serious threats to some wild relatives of corn, which are very important as repositories for domestic varieties.

The Intermediate producers, enjoying moderate profits before NAFTA, operate under less favourable rain-fed conditions and may or may not be able to shift to other crops, and can withstand foreign competition only through exceptional efforts. For now, they have remained strong market participants. The relative prices of agricultural products have affected them in the same as the competitive producers. But they have encountered more difficulties because of their narrow profit margins, and maintained production out of desperation, to satisfy household needs and sell a modest surplus.

Economic pressures have forced them to cut direct monetary costs, through reduction of hired labour, leading in turn to fewer employment opportunities and strong migration pressures on poorer substance producers. But cutting the work force may have detrimental effects on corn yields, since key labour-intensive operations have had to be scaled back.

The subsistence farmers account for 40% of all Mexican corn producers and operate under difficult conditions of soil, irregular rainfall and small holdings. Their response to NAFTA-induced price reductions has been to maintain and expand area under corn cultivation. But as a result of inflation, rural wages have fallen considerably since 1994, and employed has lagged behind GDP growth. Corn production has thus become crucial for the survival strategies of the poor: it is cheaper to grow corn for household consumption than buy it at local markets.

Much of the literature justifying inclusion of corn in NAFTA was on the assumption that subsistence producers would not be affected by price reductions since they did not sell any produce. But this failed to recognize that the subsistence farmer has to get sufficient income to cover basic household needs - either through off-farm activities or petty corn sales between harvests.

The stressful conditions of subsistence growers are having critical effects on the social and environmental fabric of Mexico, says the Nadal study. Migration has become one of the most important issues.

The study argues that the process of genetic erosion mediated through the disappearance of the institutional and social base is one of the major threats to Mexico’s corn growers and their capacity to improve livelihoods.

In this last respect, the inclusion of corn in NAFTA “is a clear example of how trade liberalization planned with a short-term view can have long-term negative impacts,” says the study.

Global demand for corn is projected to rise rapidly in coming decades, with the bulk of new demand arising in tropical countries. Exploiting the potential of Mexico’s genetic resources may play a decisive role in satisfying this demand.

There is ample justification for continued support to Mexico’s corn producers in order to ensure the development and in situ conservation of local varieties, the study argues.

The study gives a set of policy recommendations in three critical areas:

        Macroeconomic and social sector policies to support Mexican agriculture in general and corn production in particular - including public investment in health, housing, education and communication, and a return to the original 15-year transition for corn prices under NAFTA;

        sustainable identification of agricultural production through promotion of two crop cycles a year and sustainable measures to increase crop yields - such as through measures to counter soil erosion, controlled use of external inputs and conservation practices;

        targeted subsidies to strengthen capacity of producers to develop and conserve their genetic resources - using both direct support and technical assistance measures.

In situ or dynamic conservation is seen as a top level priority, depending critically on the welfare of subsistence corn producers.

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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