TRADE POLICY AND SOME ASPECTS OF THE DISTRIBUTION OF INCOME IN AGRICULTURE: MEXICO

When agriculture output has a large participation in the exports of a country, and if there are no domestic insulation policies, the overvaluation of the exchange rate lowers the price that farmers receive for their products. When the overvaluation of the exchange rate is coupled with an industrial import-substitution policy, then the relatively lower prices of agricultural products which result direct the use of resources toward more productive activities, that is, out of the agricultural sector. In this thesis the effects that the overvaluation of the exchange rate have on resource use and factor returns in the agricultural sector are analyzed. The factors of production are land, capital and labor. The analysis is for Mexico and it considers the differential impacts on three types of farms: large private farms, small private farms, and ejidal production units. To perform the economic analysis a static partial equilibrium model is used. The effects of a change in the product price on the uses and returns of the factors of production are assessed, using the elasticities of the equilibrium factor prices and quantities with respect to the price of the agricultural product. For each type of farm a Cobb-Douglas production function is estimated. The hypothesis of unity elasticity of substitution is tested. The elasticity of labor supply is estimated using a supply and demand simultaneous equations model. The supply elasticities of land and capital are judgment values; therefore a sensitivity analysis is performed. The maintained hypothesis is that the overvaluation of the exchange rate had a rather sizeable effect on the distribution of income in Mexico. A review of economic studies on Mexico gives evidence of the degree of overvaluation of the exchange rate, and the money transfers between the agricultural sector and the rest of the economy. Some evidence of the linkage among domestic and international prices is also provided. In the case of Mexico, the empirical results of this thesis indicate that the positive effects of some domestic agricultural policies were offset, or at least counterbalanced, by the negative effects of the implicit tax imposed on the agricultural sector due to the overvaluation of the exchange rate. The analysis of agricultural policy in the context of general economic policy helps to explain why the incomes of the individuals engaged in agricultural activities lag behind the rest of the economy. The effects of the overvaluation of the exchange rate within the agricultural sector were also of a discriminatory nature. Large farms are the most affected, but they are able to pass on part of the impact by adjusting their use of capital and labor. Given the structures of the labor markets, labor is dammed up in the agricultural sector of Mexico. Therefore, hired and family labor bear the burden of the adjustment to the discriminating trade policies. It is in this sense that a general economic policy, the overvaluation of the exchange rate, had a negative impact on the income level and on the distribution of income within the agricultural sector. The analysis views exchange rate policy as an instrument of the industrial import-substitution policy. It is entirely possible that the so-called energy policy (oil exports) will cause a rise in the value of the exchange rate in the future. If that occurs, the results of the present analysis should shed some light on the possible impacts of the energy policy on the agricultural sector, the different groups within that sector, and the use and returns to the resources in this sector