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Agricultural policy reform in Mexico: A computable general equilibrium analysis

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Rebecca L. Harris

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Over the past decade, Mexico has liberalized its agricultural sector, moving from a system of price supports, producer subsidies and consumer subsidies to a less distorting scheme in which market forces play a greater role. Coinciding with these reforms, the government implemented the PROCAMPO system of direct payments to farmers.

This dissertation uses a computable general equilibrium (CGE) model to analyze the regional, household, and economy-wide effects of switching from the old system of price supports and subsidies to the new system of reduced price intervention and PROCAMPO payments. A CGE model of Mexico is constructed with four rural regions and one urban region and a high disaggregation of the agricultural and food sectors. It also includes 15 households, defined according to region and income level to permit a rich analysis of distribution effects.

This dissertation provides a new social accounting matrix (SAM) of Mexico for 1996, disaggregated according to the model's specifications. The SAM's construction employs recently developed entropy techniques to reconcile disparate data to ensure that the SAM is balanced and consistent. The CGE model incorporates mixed-complementarity specifications so that the system of equations includes both strict equalities — as is typical in a CGE model — and inequalities. This relatively new approach enhances the model by permitting threshold effects in the migration decision and in the operation of the price floor and import quota.

The initial experiment consists of removing the PROCAMPO payments from the base year (1996) and adding back the subsidy and support scheme as it existed in 1993, the year before PROCAMPO began. Then the two policies are tested under two different external shocks — an exchange rate depreciation, and a negative productivity shock to one region's agricultural sectors — to see how each policy regime reacts.

The simulations demonstrate that in a unperturbed situation, lump sum payments are preferred to the system of subsidies and price supports. In the event of a negative external shock, the simulations suggest that the old system performs better in terms of output and rural production. However, urban households suffer, and their size in the total population may make this an unattractive policy.


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George Washington University

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