mexico agriculture and rural development...
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Report No. 51902-MX
MEXICO
Agriculture and Rural Development
Public Expenditure Review
December 2009
Agriculture and Rural Development Unit
Sustainable Development Department
Latin America and the Caribbean Region
The World Bank
Document of the World Bank
© The World Bank
Agriculture and Rural Development Unit
Latin America and the Caribbean Region
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Cover design: Michelle Friedman, World Bank
Photos: The World Bank Photo Collection
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Document of the World Bank Report No. 51902-MX
i
Contents
Report Information ..................................................................................................... iii Preface ..........................................................................................................................v EXECUTIVE SUMMARY ....................................................................................... vii
1. Introduction ............................................................................................................1 Purpose of the Study .....................................................................................................1
Overview of The Mexican ARD Policy Context .........................................................3 Performance of the ARD Sector and of Rural Poverty ................................................7
2. Diagnostics of the Federal Rural Budget ...........................................................11 Mexico‘s Rural Development Budget: The Programa Especial Concurrente (PEC) .11 Classification of ARD Programs ................................................................................14
The PEC Structure ......................................................................................................18 Changes in the 2008 PEC ...........................................................................................24
Other Fiscal Costs Outside PEC .................................................................................26 Relative Size of ARD expenditures ............................................................................29
3. Efficiency Assessment ..........................................................................................32 Comparison with Latin American Countries ..............................................................32 Comparison with OECD Countries ............................................................................36
APE and Agricultural performance at the State Level ...............................................40 APE and the Performance of Different Crops Over Time .........................................46
4. Equity Assessment ...............................................................................................52 State and Municipal Level Equity Assessment ..........................................................52 Producer and Household Level Equity Assessment ...................................................59
5. M&E and Institutional Aspects of ARD Programs ..........................................66 Monitoring and Evaluation .........................................................................................66 Institutional Issues ......................................................................................................69
6. Options for Moving Forward ..............................................................................73 Key Features of the ARD Program in Mexico ...........................................................73 Policy Options for Reform .........................................................................................75 1) Improving the ARD Planning System ...................................................................75
2) Rationalizing the Overall System for Farmer Support ...........................................77 3) Improving the Support System for Small Producers through gradual
decentralization ..........................................................................................................84 4) Improving the M&E and Institutional Aspects of ARD Programs ........................86 5) Increasing the Positive Environmental Externalities of ARD Programs and
Supporting the National Climate Change Strategy ....................................................88
Appendix to Chapter 6: Technical Notes ...................................................................94
Technical Note 1: New Zealand‘s Successful Agriculture Policy Reform
Experience ..................................................................................................................94 Technical Note 2: INDAP: Technology Transfer Targeting Small Farmers in Chile ....
………………………………………………………………………………………96 Technical Note 3: Payments for Environmental Services in Natural Resource
Sectors ........................................................................................................................98
7. References ...........................................................................................................102
ii
List of Boxes
Box 2-1: Dimensions in the Decentralization of Rural Development Programs in
Mexico .......................................................................................................................... 17 Box 2-2: Efficiency gains from switching from private to public goods ..................... 20 Box 2-3: The role of agricultural subsidies in Mexico‘s water crisis .......................... 27 Box 6-1: OECD Analysis on Inter-Institutional Horizontal Co-ordination ................. 76
Box 6-2: Challenges Facing the Rural Finance Sector in Mexico ............................... 79 Box 6-3: Proposal by Winters and Davis (2007) on PROCAMPO Reform ................ 80 Box 6-4: Proposal by Sumner and Balagtas (2007) on Ingreso Objetivo Reform ....... 82 Box 6-5: Applying a Territorial Approach to Rural Development in a Decentralization
Option ........................................................................................................................... 86 Box 6-6: Rural Proofing in the UK and Canada .......................................................... 87
iii
Report Information
CURRENCY EQUIVALENTS
(Exchange rate effective as of 12/1/2009)
Currency Unit: Mexican Peso (MxP)
US$ 1= MxP 12.88
FISCAL YEAR
January 1 – December 31
Abbreviations and Acronyms
AOI Agricultural Orientation Index
APE Agricultural Public Expenditure
ARD Agriculture and Rural Development
ASERCA Apoyos y Servicios a la Comercialización Agraria
CABSA Program to Develop Environmental Services Markets for Carbon
Capture and Biodiversity and to Establish and Improve Agroforestry
Systems
CC Concentration Coefficient
CIDRS Comisión Intersectorial para el Desarrollo Sustentable
CLCs Cuenta por Liquidar Certificada
CONAFOR Comisión Nacional Forestal
CONAGUA Comisión Nacional de Agua
CONAPO Consejo Nacional de Población
CONEVAL Consejo Nacional de Evaluación
ENIGH Encuesta Nacional de Ingresos y Gastos de los Hogares
ENNVIH Encuesta Nacional sobre los Niveles de Vida de los Hogares
EU European Union
FAIS Fondo de Aportaciones para Infraestructura Social
FAO Food and Agriculture Organization
FAPPA Fondo para el Apoyo a Proyectos Productivos
FIRA Fideicomisos Instituidos en Relación con la Agricultura
FIRCO Fideicomiso de Riesgo Compartido
FISM Fondo para la Infraestructura Social Municipal
FONAES Fondo Nacional de Apoyos para las Empresas Sociales
GATT General Agreement on Tariffs and Trade
GDP Gross Domestic Product
GOM Government of Mexico
GSSE General Service Support Estimate
IDB Inter-American Development Bank
INEGI Instituto Nacional de Estadística y Geografía
LAC Latin America and Caribbean
LDRS Ley de Desarrollo Rural Sustentable
M&E Monitoring and Evaluation
iv
MPS Market Price Support
NAFTA North American Free Trade Agreement
NRM Natural Resources Management
OECD Organization for Economic Co-operation and Development
PDR Programa de Desarrollo Rural
PEC Programa Especial Concurrente para el Desarrollo Rural
Sustentable
PER Public Expenditure Review
PES Payment for Environmental Services
PROCAMPO Programa de Apoyos Directos al Campo
PROGAN Programa de Estímulos a la Productividad Ganadera
PRONASOL Programa Nacional de Solidaridad
PSAB Pago por Servicios Ambientales del Bosque
PSAH Pago por Servicios Hidrológicos Ambientales
PSE Producer Support Estimate
RDE Rural Development Expenditure
SAGARPA Secretaria de Agricultura, Ganadería, Desarrollo Rural, Pesca y
Alimentación
SCT Secretaria de Comunicación y Transportes
SECON Secretaria de Economía
SEDESOL Secretaria de Desarrollo Social
SEMARNAT Secretaria de Medio Ambiente y Recursos Naturales
SFP Secretaria de Función Publica
SHCP Secretaria de Hacienda y Crédito Publico
SMA Salarios Mínimos Agropecuarios
SRA Secretaria de Reforma Agraria
TFP Total Factor Productivity
TSE Total Support Estimate
USA United States of America
v
Preface
At the request of the Secretaria de Hacienda y Credito Publico (SHCP), the World Bank
has produced this ARD PER that analyzes Mexico‘s Rural Development federal budget,
known as the Programa Especial Concurrente (PEC). The analysis focuses on the
categorization of PEC, efficiency aspects using international comparison as well as state
level comparisons, and equity aspects at the state and household levels.
The core team for this report comprised John Nash (Lead Economist, LCSSD), Jose
Maria Caballero (FAO consultant), Christian Borja-Vega (Consultant), Jozef Draaisma
(Senior Country Economist) and Yurie Tanimichi Hoberg (Task Team Leader). Dianelva
Montas and Erika Salamanca (LCSAR) handled logistics in Washington DC, Alejandra
Gonzales and Rosa Maria Hernandez-Fernandez handled mission logistics in Mexico
City, Maria Claudia Pachon and Diana Cubas edited the Spanish translation and Michelle
Friedman assisted finalization and publication of the report.
The team benefitted from the detailed comments by Steven Webb (peer reviewer), Dina
Umali-Deininger (peer reviewer), Mona Sur (peer reviewer), Evelyne Rodriguez
(external peer reviewer), Ethel Sennhauser (Sector Manager, LCSAR), David Rosenblatt
(Sector Leader/Lead Economist, LCSPR), Gustavo Saltiel (Sector Leader), John Scott
(Professor, CIDE), Stefano Pagiola (Senior Environmental Economist, ENV) and Susana
Sanchez (Senior Financial Economist, AFTSN). Technical background papers for the
report were prepared by Luis Gomez Oliver (Consultant), John Scott
(Consultant/Professor, CIDE), and Alberto Valdes (Consultant). In addition, Stefano
Pagiola (Senior Environmental Economist, ENV), Ricardo Hernandez (Senior
Environmental Specialist, LCSEN), Robert Davis (Senior Forestry Specialist, LCSAR),
Gerardo Segura (Senior Rural Development Specialist, LCSAR), and Harideep Singh
(Senior Rural Development Specialist, LCSAR) also provided technical input into the
report. The team worked under the overall guidance of Mr. Carlos Treviño
(Subsecretario de Egresos, SHCP) and received technical guidance from SAGARPA
through Mr. José Luis López Díaz Barriga (Official Mayor).
vi
vii
MEXICO Agriculture and Rural Development Public Expenditure Review
EXECUTIVE SUMMARY
===============================================================
1. Mexico‘s large ARD program represents a very significant fiscal effort by the
Government of Mexico (GOM) on behalf of the rural population. Average public
expenditure per capita is now similar in the urban and rural sectors, unlike that in
many Latin American countries, where there is still an ―urban bias‖ in the
allocation of public expenditure. The present day Agriculture and Rural
Development (ARD) program represents the outcome of the far-reaching reform
efforts which began in the late 1980s to modernize the sector and introduce a
more efficient, equitable and less distortionary policy environment.
2. Mexico‘s ARD policy reforms included many novel features signaling a clear
departure from past policies. They resulted in some international best practices
such as the success of the Oportunidades program in rural poverty reduction, the
decoupled design1 of PROCAMPO, and the strong global leadership of the GOM
in mainstreaming climate change in ARD issues. This report offers options and
alternatives for the GOM to move forward on further improving its ARD public
expenditure program.
3. There are four reasons why the study is timely. First, 2008 marked the end of the
North American Free Trade Agreement (NAFTA) transition period and signaled
the full integration of the North America markets. Trade liberalization and
NAFTA were powerful influences on recent Mexican Agriculture and Rural
Development (ARD) policies, since NAFTA was conceived and negotiated in an
environment in which there was some fear that reduction of trade barriers would
create pressure on local producers, and in particular would cause a collapse in
domestic production of corn, a product deeply engrained in Mexican culture.
Thus, the end of the transition is an appropriate time to reflect on these policies.
Second, the current global food price crisis and the long-term prospect of high
prices for agricultural goods provides heightened social and political attention to
reassessing the main tenets of Mexican ARD policy and revisiting the main
programs.2 Third, the growing concern of the GOM for the sustainable use of
natural resources, in particular water resources, and for the impacts of climate
change calls for analysis of the budgetary implications of measures to improve
1 Decoupled payments are defined as those whose amount is not dependent on current production, input use
or prices, and thus is expected to have minimal impact on production decisions. 2 While commodity prices have fallen since their peaks early in 2008, they remain high relative to levels of
recent years, and in general this seems to be the most probable scenario for the future. Recent events are a
reminder that global commodity markets are -- and are likely to remain – volatile, underscoring the
importance of policies that help producers to increase their competitiveness under a variety of conditions
and allow them flexibility to respond to changing circumstances.
viii
natural resources use and adjustment to climate change. This is particularly
important since recent forecasts show that Mexico will be disproportionately
affected by climate change, in particular by hurricanes, changes in temperature
and precipitation, and increased frequency and severity of floods and droughts.3
GOM adopted a National Climate Change Strategy in 2007 in recognition of this
important issue. A detailed analysis of ARD expenditures should help the GOM
and other interested parties in all three of these areas. Finally, the recent global
financial crisis highlights the importance of efficiency in public expenditure
programs as the role of the government is expanding in attempting to stave off a
recession.
Key Findings of the Report
1. Overall Strategy
4. Total rural expenditure (including universal social services) is estimated to
be MxP 382 billion, or a quarter of total public spending and 4 percent of
national GDP. This represents a very significant fiscal effort on behalf of the
rural population. Given the current share of the rural sector in the national
population (24 percent), average public expenditure per capita is now similar in
the urban and rural sectors. There is, hence, no ―urban bias‖ in the allocation of
public expenditures and subsidies.
5. The current structure of ARD expenditures in Mexico is largely the result of
past decisions to subsidize particular farming sectors, regions, crops, and
other aspects of farming. Most subsidies were introduced independently of
others because of circumstances at the time; and once introduced, the subsidies
have proved difficult to phase out. The resulting system is complex and poorly
oriented toward a clear long-term strategy or apparent socioeconomic rationale.
6. The Programa Especial Concurrente has not worked as a coordinating
mechanism of ARD programs as intended. The Sustainable Rural Development
Law of 2001 established a coordinating framework for ARD public expenditures
through the Comisión Intersectorial para el Desarrollo Sustentable (CIDRS),
headed by SAGARPA. CIDRS was expected to serve as a forum to coordinate
GOM‘s ARD activities. But a strategy has not been developed, and CIDRS has
not oriented or coordinated federal resource allocations to ARD programs. The
3 Third National Communication to the UNFCCC (November 2006). Increases in temperature: by 2020
projected temperature is expected to increase 0–2.5ºC in the winter (December–February) and 0.9–2.2ºC in
the summer (June–August). Reduction in precipitation: Rainfall is expected to decrease by up to 15 percent
in the central part of Mexico and by less than 5 percent near the Gulf of Mexico, mainly between January
and May; by 2020 projected precipitation fluctuations will be in the range of –7 to +12 percent (December–
February) and –8 to +12 percent (June–August). Increased frequency and intensity of extreme weather
events: the number of severe storms and the intensity of severe drought are also expected to increase; sea
water temperature is expected to increase 1–2ºC, leading to stronger and more intense tropical hurricanes
in the Caribbean Sea, the Gulf of Mexico, and the Pacific Ocean near Mexico, with a 6 percent expected
increase in wind intensity and a 16 percent expected increase in precipitation within 100 kilometers from
the center of a hurricane; cold fronts may become less frequent.
ix
main instrument for CIDRS to coordinate ARD public expenses and activities is
the Programa Especial Concurrente (PEC). But PEC has never functioned as a
planning tool; rather it operates as an annual budget exercise for tabulating the
budget lines of all rural development programs together. PEC appears as an annex
of the annual federal budget.
7. Some current ARD programs are incompatible with the far-reaching and
ambitious climate change goals in Mexico’s 2007 National Climate Change
Strategy.4
Mexico is the only developing country to have submitted three
National Communications to the United Nations Framework Convention on
Climate Change (UNFCC), demonstrating a strong commitment and leadership
role in the international climate change agenda. However, certain major ARD
programs counteract these goals—for example, the electricity subsidy for farmers
to pump groundwater (tarifa 9), which has led to the overexploitation of many
aquifers in water-scarce regions, and the Ingreso Objetivo program, which
encourages farmers to produce low-value crops and even water-intensive crops
(fodder) using scarce water resources.
2. Rural vs. Agricultural vs. Social Objectives in the Budget
Productive public goods programs (such as infrastructure, research and
development, and the like) are underfunded. Two-thirds of productive
programs are private goods programs (subsidies to individuals and families,
cash transfers, and so on), and less than one third of spending in public goods
goes to productive programs.
While nearly all social programs are targeted to the poor (including small
farmers and vulnerable groups), very few agriculture programs are. More
than 95 percent of social program expenditures are targeted to the poor, but
only 8 percent of agricultural programs are.
In contrast to the importance of the rural non-farm sector, PEC reflects
an agro-centered view of rural development. Some 70 percent of spending
in productive programs is specifically for agricultural activities. Productive
programs not targeted to agriculture receive only part of the remaining 30
percent, since most of these programs support agricultural activities as well.
Agricultural programs are skewed toward private goods, while
nonagricultural rural programs emphasize public goods. More than 80
percent of agricultural programs support private goods, while less than 25
percent of nonagricultural programs do.
Certain programs, such as tarifa 9, have high environmental costs that
generate huge negative externalities. These externalities are expected to
4 The National Climate Change Strategy was formulated in 2007 and identifies opportunities to reduce
emissions on a voluntary basis as well as measures for national and local capacity for response and
adaptation. The strategy proposes concrete adaptation and mitigation measure for all sectors, including
agriculture, covering all the main aspects of climate change policy. Climate change strategies and action
plans have also been developed at the subnational level for Mexico City and the states of Veracruz and
Nuevo Leon (World Bank 2008b).
x
become more serious as natural resources are increasingly exposed to climate
change.
3. Efficiency Assessment
The allocation of agricultural spending by states is correlated to the size
of their agricultural sectors; when normalized by the size of the sector, it
is not related to the growth of their agricultural sectors. That growth per
peso spent differs substantially across states suggests that reorienting
agricultural public expenditure to states where it has the highest impact would
increase the growth of the sector countrywide for a given level of public
spending.
Reallocating spending from private to public goods would allow for
further increase in efficiency in agricultural spending. Regression results
show that a 10 percent increase in agricultural public expenditure on private
goods as a percentage of the value of agricultural production is associated
with a 2.6 percent reduction in agricultural GDP growth. On the other hand,
spending on public agricultural goods shows a positive, although not
statistically significant, impact on agricultural GDP growth.5
4. Equity Assessment
ARD spending (which comprises agricultural spending and rural
development spending) is inequitable. Simulations show that the
distribution of ARD expenditures is flat for the poorest 70 percent of rural
households, which receive less than MxP 500 per capita per month in ARD
subsidies. However, the richest 10 percent receive on average more than MxP
3,000 per capita per month.
Taken alone, rural development spending is progressively distributed, with the poorest 20 percent of rural households receiving 33 percent of
benefits.
In contrast, agricultural spending is extremely regressive, with more than
half of spending concentrated in the richest decile.
Agricultural spending is so regressive that it cancels out about half the
redistributive impact of rural development spending. Rural development
programs decrease the Gini coefficient (reduce inequality) by about 14.2
percent, while agricultural spending increases the Gini coefficient (raises
inequality) by about 6.7 percent.
5 Using a 1985–2001 dataset on rural expenditure for LAC, Lopez and Galinato (2007) also show that
reducing the share of subsidies to private goods (or, equivalently, increasing the share of public goods) in
the government‘s budget has, ceteris paribus, a large and significant positive impact on rural per capita
income.
xi
5. M&E and Institutional Aspects of ARD Programs
M&E of ARD programs has greatly improved recently, but important
challenges remain. These include carrying out evaluations not only of single
programs but also of the entire PEC, developing and integrating databases of
ARD program beneficiaries, conducting deeper program evaluations at longer
intervals instead of the current annual cycle, and systematically using
evaluation results for managerial and budgetary decision-making.
Implementation matters—and it is particularly complex in production-
oriented programs. How programs are implemented is almost as important
as how they are designed. Key aspects to take into consideration for
implementation include the three-year, no reelection electoral system of
municipal authorities, which hinders their involvement in medium- to long-
term endeavors like ARD; the year-based budgetary system in Mexico, which
does not favor the continuity of programs and views required by ARD and
does not offer security to beneficiaries regarding program stability;
administrative and budgetary norms that make it difficult to disburse program
funds and limit disbursement to several months of the year, thus placing big
pressure on those executing the program;6 the scarcity of recurrent funds for
program operation; and the poor economic compensation and weak morale for
bottom-level program operators, which is inconsistent with the importance of
their function.
Options for Moving Forward
8. To make well informed decisions, the GOM will need to weigh the tradeoffs of
policy options based on considerations such as cost, sequential importance,
technical difficulty, risks, and impact. While some options promise greater
benefits in the longer run, others could be targeted for quick action. Policy options
are reviewed in the following five areas:
1) Improving the ARD planning system.
2) Rationalizing the overall farmer support system.
3) Improving the support system for small producers through gradual
decentralization.
4) Improving the M&E and institutional aspects of ARD programs.
5) Increasing the positive environmental externalities of ARD programs and
supporting the national climate change strategy.
1) Improving the ARD Planning System
6 Many agricultural public expenditure programs are very sensitive to the timeliness with which resources
reach farmers, especially in areas where the rainy season is short. Operational and budgetary norms often
stand in the way of timelines, resulting in the late arrival of subsidies.
xii
9. A more effective planning system for ARD spending could be put in place.
The guidelines for allocating budgetary resources and the authority and planning
capacity of the CIDRS would have to be strengthened for PEC to be effective. A
recent OECD review of rural development issues in Mexico (OECD 2007c)
highlights the challenge faced by Mexico where SAGARPA, a sectoral ministry
without sufficient authority over peer sectoral ministries is mandated to plan the
ARD expenditures as chair of CIDRS. The OECD proposal to move CIDRS from
SAGARPA to the President‘s office would better reflect the multisectoral
character of rural development, and strengthen the Commission‘s planning
capacity. Another option is to place CIDRS under SHCP because SHCP is primus
inter pares as a ministry, has a multisectoral mandate and view, and is responsible
for looking into the effectiveness and quality of public expenditure and preparing
the federal budget. In addition to strengthening CIDRS, a strong nucleus of
agricultural policy analysts, staffed with experts of recognized academic
excellence could be formed to operate autonomously under the SAGARPA.
10. The planning system for ARD spending should be based on a comprehensive
national ARD strategy. Without a comprehensive ARD strategy and planning
system for ARD expenditures it is difficult to achieve coherence among ARD
programs and their objectives. A comprehensive ARD strategy with consistent,
explicit, and selective objectives as well as quantifiable results and performance
indicators would be an important step toward better ARD policy. The strategy
could serve as a framework for individual programs, which would be assessed by
their contribution to its objectives. The strategy would also serve as a framework
for the M&E of individual programs. Along with the strategy, an ARD budgetary
planning system would be required to ensure consistency between the strategy
and budgetary allocations. PEC has led to substantial progress in this direction.
But so far PEC provides only the framework—not the content—of such a system.
2) Rationalizing the Overall System for Farmer Support
11. Federal public expenditures in productive programs should be reoriented in
three ways.
Gradually discontinuing market price support (MPS) to inputs and outputs, as
well as compensatory cash transfers.
Substantially increasing allocation to public goods such as irrigation
improvement and management; drainage and transport infrastructure; other
rural infrastructure (such as that provided by FAIS); research, extension, and
training; sanitary and phyto-sanitary services; market intelligence (including
collecting weather information through weather stations and agricultural
statistics); emergency programs; and other public goods.
Increasing support to small producers.
xiii
12. Non-targeted production-oriented programs benefiting mostly commercial
farmers should be separated from productive and natural resource
management (NRM) programs targeting small producers, vulnerable groups,
and the poor which should be decentralized to the states. Resources for non-
targeted production-oriented programs could be maintained at the federal level,
but funds now spent by different ministries for targeted programs could be
pooled. The pooled funds could be distributed to state governments as block
grants according to an objective formula to allow state governments to create their
own programs that promote small producers. In addition, given the current
imbalance in favor of non-targeted programs, some resources could be moved
from non-targeted programs to the pooled fund. These decentralized funds could
also support programs that assist small producers in adapting to climate change
and increasing positive externalities in NRM programs.
13. Federal non-targeted programs that support on-farm and value chain
investments should be rationalized. These programs include PROGAN, Apoyos
a la Competitividad de las Ramas Productivas/Adquisición de Activos
Productivos, and the non-targeted programs of Alianza. One option is to merge
these types of program into a new non-targeted support program for on-farm and
agriculture value chains investments. Another is to maintain different programs
but redesign them and perhaps eliminating some to avoid duplications, sharpen
their objectives, and make them more effective and results oriented.
3) Improving the Support System for Small Producers through gradual
decentralization
14. Gradual decentralization to state governments of the mandate and resources
to support small producers would help address challenges. There are several
reasons for this:
Decentralization would facilitate a territorial approach for rural
development, which would help clustering investments.
The number, dispersion, and heterogeneity of small producers favor
responsibilities at the subnational level, where constraints and
opportunities can best be identified.
The subnational level is also more appropriate for attaining synergy
between productive programs and other investments and services (such as
NRM, infrastructure or education) favoring small producers.
Resources could be more rationally used at the subnational level if state
governments apply them according to state-level strategic plans for the
development of the small producers.
15. After the transition period, decentralization would imply transferring to
state governments, in addition to the present FAIS to finance small rural
infrastructure, block grants for the decentralized development of small rural
producers (in productive and NRM activities). This, in turn, implies (i) phasing
out corresponding federal ARD programs and allowing state governments to
xiv
replace them with their own programs, so that they can exert strong ownership of
the rural development agenda for the development of small producers in their
states; (ii) pushing ahead with administrative federalization (federalización
administrativa) to transfer to state governments the assets, staff, and other
operational resources of federal ministries required for state governments to
properly operate the newly decentralized funds; and (iii) strengthening the
implementation capacity of state governments to be able to takeover these
responsibilities. Decentralization of funds to support small producers would
facilitate the use of a territorial approach to rural development.
4) Improving the M&E and Institutional Aspects of ARD Programs
16. Alternatives exist to enhance the M&E system of ARD expenditures. There
have been recent important advances in the M&E of rural programs. There are,
however, still remaining important areas for improvement. These include
carrying out evaluations not only of single programs but also of the entire PEC,
the development and integration of databases of the beneficiaries of ARD
programs, deeper program evaluations at longer intervals instead of the current
annual cycle, and systematic use of evaluation results for managerial and
budgetary decisions based on action agendas agreed upon by the evaluators, the
implementing agency, and a third party. Adherence to these agendas should be
monitored closely. As a logical follow on to the Ley de Desarrollo Rural
Sustentable, Mexico could also start a ―rural proofing‖ system to anticipate and
monitor national policies‘ impact on the rural sector. Canada and the United
Kingdom both found success with rural proofing systems (called ―rural lens‖ in
Canada).
17. Alternatives exist to improve program implementation. Implementation
challenges are complex and varied. Many are institutional limitations that take
time to resolve. Simplifying the number and type of programs would certainly
help respond to the implementation challenge, as would a comprehensive ARD
strategy. To help identify and address these issues, CONEVAL‘s process
evaluations could be widely used to maintain the focus on implementation
challenges. Issues that could be addressed include:
Revising the budgetary and administrative regulations under which ARD
programs are implemented to ensure that they provide sufficient flexibility
and do not unnecessarily impair or slow down implementation.
Paying due attention to the recurrent/operational cost needs of programs,
which are particularly large for production-oriented programs.
Improving dissemination of programs and the accountability of operators vis-
à-vis beneficiaries and using ―client satisfaction‖ criteria to assess
performance.
Improving the economic incentives and morale of program operators and
ensuring that incentives are well aligned with program objectives.
xv
5) Increasing the Positive Environmental Externalities of ARD Programs and
Supporting the National Climate Change Strategy
18. Strategies for supporting agriculture and for dealing with climate change
need to be mutually reinforcing. For the past two decades over 80 percent of
economic losses from weather-related disasters occurred in the agriculture sector.
Agricultural policies and climate change policies thus need to be mutually
reinforcing by incorporating two principles. First, farmers need to respond to
localized changes in climate depending on their individual conditions and
constraints. Policies should expand their options rather than encourage them to
make choices that do not correspond well to individual circumstances. Second,
farmers should not be encouraged to ―maladapt‖ by overusing scarce resources or
increasing production in high-risk areas. Both principles have implications for
agricultural policies that are congruent with the National Climate Change
strategy.
19. Expanding payments for environmental services (PES) programs beyond
forestry could create positive synergies between agricultural production and
the environment. Specific investment programs to reduce emissions that are
identified by the National Climate Change Strategy and that could be scaled up
include programs to increase the use of biomass, e.g. through high-efficiency
wood burning stoves in rural communities and renewable energy sources for rural
areas as supported by the Fideicomiso de Riesgo Compartido (FIRCO), livestock
programs to rehabilitate degraded rangelands, and hydro-metrological hazard risk
management and water resources management. Scaling up these programs could
be accomplished either through national programs or through decentralized
programs. Such scaling up should be accompanied by appropriate monitoring
measures to ensure that the programs are responding to their environmental
objectives. In particular, there is considerable scope to replace distortionary
programs such as Ingreso Objetivo with targeted environmentally-friendly PES
programs, which would reduce distortions and provide income support to small
farmers while also providing valuable national and global externalities.
Summary Matrix of Options
20. In order to make well-informed going forward, the GOM will need to weigh the
trade-offs among the various criteria of policy options such as cost, cost,
sequential importance, technical difficulty, risks, and impact. The following table
summarizes the policy options presented in the study, based on some of these
criteria. The matrix will make clear that while there are options which promise
greater benefits in the longer run, there are also areas that the government could
target for quick action.
xvi
Table: Summary Matrix of Policy Actions
Policy Options Implement
ation
Likely
Impact
Technical
Difficulty/
Risks
Fiscal Cost or
Savings
1. Improving the ARD Planning
(1) Prepare and approve a national
ARD strategy
Short High Medium Low Cost
(2) Reposition CIDRS within the
federal government to strengthen its
coordination capacity, and build an
effective ARD budgetary planning
system
Short
Medium
High
No Cost or Savings
(3) Create a nucleus of high-level
agriculture policy analysts under
SAGARPA umbrella.
Short
Medium
Low
Low Cost
2. Rationalizing the overall system for farmer support
(1) Increase expenditure allocation to
public goods: irrigation improvement
and management, drainage and
transport infrastructure; other rural
infrastructure (such as that provided
by FAIS); research, extension and
training; sanitary and phyto-sanitary
services; market intelligence;
emergency programs; and others
Short, Medium
and Long
High
Medium
High Cost
(2) Modify PROCAMPO Short Medium Medium No cost or saving
(3) Discontinue PROCAMPO Medium High High High Saving
(4) Modify Ingreso Objetivo Short Medium Medium No cost or saving
(5) Discontinue Ingreso Objetivo Medium High High High Saving
(6) Modify input support programs
(tarifa 9, agrodiesel, others)
Short Medium Medium No cost or saving
(7) Discontinue input support
programs with or without temporary
compensatory payments (tarifa 9,
agrodiesel, others)
Short
High
High
High Saving
(8) Rationalize federal non-targeted
programs oriented to support on-farm
and value chain investments (mainly
PROGAN, Apoyos a la
Competitividad de las Ramas
Productivas/Adquisición de Activos
Productivos, and the non-targeted
programs of Alianza).
Short, Medium
High
High
Low Cost/No Cost or
Savings
(9) Reduce the allocation to non-
targeted production oriented programs
to allow for an increase in expenditure
to support small producers (see 3 (1))*
Short, Medium
and Long
High
Low
Medium
Saving
(10) Increase support to the rural non-
farm sector
Short, Medium
and Long
High
High
Medium Cost
(11) Strengthen the rural finance
sector to increase service access
Short,
Medium, and
High
High
Medium Cost
xvii
Long
3. Improving the support system to small producers
(1) Increase expenditure allocations to
support small producers*
Short, Medium
and Long
High
Low
Medium
Cost
(2) Pool resources from targeted
production/NRM oriented programs of
different federal entities, decentralize
those resources to state governments
according to an agreed distribution
formula and decentralization protocol,
and discontinue the corresponding
federal programs
Medium, Long
High
High
No Cost or Saving
(3) Accelerate the decentralization of
ARD federal offices (federalización
administrativa)
Short,
Medium, and
Long
Medium
High
Low Cost
(4) Agree with state governments on a
protocol containing guidelines for
decentralization of funds to support
small producers: (i) national
benchmarks, (ii) fund distribution
formula, (iii) M&E system, (iv)
implementation support system, and
(v) state government responsibilities
Short, Medium
Medium
Medium
No Cost or Saving
4. Improving the M&E and the implementation of programs
(1) Adjust budgetary and
administrative regulations of ARD
programs to ensure flexibility and
timely execution
Short
Medium
High
No Cost or Saving
(2) Increase recurrent cost allocations
for production oriented programs
Short, Medium
and Long
Medium
Medium
Medium Cost
(3) Improve the dissemination of ARD
programs
Short, Medium
and Long
Medium
Low
Low Cost
(4) Improve the accountability of
program operators at all levels and
introduce ―client satisfaction‖ criteria
to assess performance
Short, Medium
and Long
High
Medium
Low Cost
(5) Improve the economic and moral
incentives of medium and bottom level
program operators
Short, Medium
and Long
High
Medium
Medium Cost
(6) Carry out evaluations of the entire
PEC
Short, Medium
and Long Medium Low/Medium Low Cost
(7) Develop and integrate databases of
ARD program beneficiaries
Short, Medium
and Long Medium Medium Low Cost
(8) Carry out in-depth program
evaluations at less frequent intervals
Short, Medium
and Long Medium Low Low Cost
(9) Organize a system to agree on
and monitor action agendas
deriving from evaluation results
Short
Medium
Low
Low Cost
5. Increasing environmental externalities of ARD programs and supporting the national climate change
strategy
(1) Improve SAGARPA norms to
regulate slash and burn agriculture in
light of increasing forest fires
Short Medium Low No Cost or Saving
xviii
(2) Increase research allocation to
research and technology transfer of
reducing emissions from agriculture
such as no-till technology, reducing
GHG gas from livestock, reforestation,
efficient use of inputs
Short, Medium
and Long
High Medium Medium Cost
(3) Revise regulations to incentivize
farmers to sell electricity generated by
biomass to the grid^
Medium Medium High Medium Saving
(4) Improve targeting of geographical
area and payment levels of payment for
environmental services programs, and
scaling up its operations
Short, Medium
and Long High Medium High Cost
(5) Replace distortionary support
programs with payments for
environmental services
Short, Medium
and Long High Medium No Cost or Saving
Implementation term: Short (< 2 years), generally associated with changes in laws or regulations; Medium (3–5
years), requiring some institutional changes; Long (> 5 years).
Effects term: Short (< 2 years); Moderate (3–5 years); Long (> 5 years).
Impact: High, medium, low (relative to other policy options proposed in these notes, not relative to other more
general reform options).
Technical difficulty/risks of undertaking the options suggested: High, moderate, low.
Fiscal cost to government: High (large public investment programs), moderate (some public program expenditure
required), low (little public expenditure). Fiscal saving: high, moderate, low.
Note: * = The suggested proposal is to shift resources from non-targeted production oriented programs to
targeted ones (eventually decentralized to state governments) to support small farmers. Thus, the net effect
should be budget neutral, i.e. the overall expenditure should not increase or decrease.
^ = The suggested proposal is expected to increase investments by farmers to generate biomass energy.
Although, this proposal per se is budget neutral, in the long-run this should result in fiscal cost saving since
as farmers begin to generate biomass energy, they would buy less subsidized electricity from the grid.
1
1. INTRODUCTION
PURPOSE OF THE STUDY
1. This study examines agricultural and rural development (ARD) public
expenditures in Mexico. The study is based on federal public expenditures.7
Included in ARD spending are all the public programs considered as such by the
Secretaria de Hacienda y Crédito Publico (SHCP), i.e. compiled in the Programa
Especial Concurrente para el Desarrollo Rural Sustentable (PEC).8
For
completeness, some policies and programs benefiting the rural sector that do not
result in budgetary expenditures, but in forgone government income, namely tax
exemptions and discounts to farmers on electricity bills (tarifa 9) are also
considered. However, the study does not address trade policies, another important
government intervention that changes relative border and domestic prices.9
2. In recent years, a growing set of evaluations has become available for the
principal ARD programs in Mexico, and a number of broader evaluations of ARD
policies have been produced (OECD 2006a, 2007d, WB 2005a, 2005b, 2006a,
and 2008, Taylor et. al. 2007). The World Bank has also produced a number of
public expenditure reviews (PER) and sub-sector studies in Mexico: Guanajuato
state-level PER [2002], Veracruz state-level PER [2003], Mexico Country PER
[2004a], Infrastructure PER [2005c], Water PER [2007a], Access to Finance for
Farmers and Agricultural Enterprises [2004b], Mexico‘s Competitiveness:
Reaching its Potential [2006b], Policy Note on Sensitive Crops (Maize, Sugar and
Beans) [2007b]). The present assessment builds on this rich set of results. It aims
to provide a comprehensive appraisal of the overall ARD public spending strategy
implemented in Mexico, in terms of both the scope of the programs considered
and criteria of evaluation. Given the wide range and dispersion of ARD spending
in many, largely uncoordinated programs, as reported in the budgetary analysis,
this assessment focuses on the principal strategic programs and groupings of
programs, and their overall impact on ARD.
7 The study team made an effort to collect ARD expenditure data from state governments through a
questionnaire, but the number and quality of questionnaire returns did not allow the compilation of suitable
estimates of public expenditure in ARD from state governments‘ own budgets. Since ARD spending from
state governments‘ own budgets are known to be rather limited, it is unlikely that their omission affects the
main findings of this study. 8 The PEC does not necessarily include the budget of all activities pertaining to rural development, but this
classification will be used for this study since this is what the Government of Mexico has identified as the
federal budget for rural development. 9 For a review of distortions caused by public agricultural policy including trade policies, see World Bank
(2008c). Also, OECD (2006a) provides a general overview of both the trade and public expenditure
policies of Mexico.
2
3. There are at least four reasons why the study is timely. First, year 2008 marked
the end of the North American Free Trade Agreement (NAFTA) transition period
and the full integration of the North American markets. Trade liberalization and
the signing of NAFTA was a powerful influence in shaping recent Mexican ARD
policies, since NAFTA was conceived and negotiated in an environment in which
there was some fear that reduction of trade barriers NAFTA would create pressure
on local producers, and in particular would cause a collapse in domestic
production of corn, a product deeply engrained in Mexican culture. Thus, the end
of the transition period is an appropriate moment to reflect on these policies.
Second, the current global food price crisis and the long term prospect of a high
price scenario for agricultural goods provides heightened social and political
attention to reassessing some of the main tenets of current Mexican ARD policy
and revisit some of the main programs.10
Third, the growing concern of the
Government of Mexico (GOM) for the sustainable use of natural resources, in
particular water resources, and for the impacts of climate change calls for an
analysis of the possible budgetary implications of measures aimed at improving
natural resources use and adjusting to climate change. This is particularly
important since recent forecasts show that Mexico will be disproportionately
affected by climate change, in particular by hurricanes, changes in temperature
and precipitation, and increased frequency and severity of floods and droughts.11
GOM has adopted a National Climate Change Strategy in 2007 in recognition of
the importance of this issue. A detailed analysis/assessment of ARD expenditures
should help the GOM and other interested parties in all three of these areas.
Finally, the recent global financial crisis highlights the importance of efficiency
in public expenditure programs as the role of the government is expanding in
attempting to stave off a recession.
4. The study is structured in six parts as follows: The first part presents the Mexican
ARD context in terms of policy and performance. The second part dissects the
ARD public budget, classifying expenditure programs in various ways so as to
provide an overview of the scope and composition of ARD spending. The third
10
While commodity prices have fallen since their peaks early in 2008, they remain high relative to levels
of recent years, and in general this seems to be the most probable scenario for the future. Recent events are
a reminder that global commodity markets are -- and are likely to remain – volatile, underscoring the
importance of policies that help producers to increase their competitiveness under a variety of conditions
and allow them flexibility to respond to changing circumstances. 11
Third National Communication to the United Nations Framework for Climate Change (November, 2006).
Increases in temperature: by 2020 projected temperature is expected to increase in the winter (December-
February) between 0 and 2.5 C and in the summer (June – August) in the range of 0.9 and 2.2 C11
.
Reduction in precipitation: the rainfall is expected to decrease by up to 15% in the Central part and by
less than 5% in the area of the Gulf of Mexico, mainly between January and May; by 2020 projected
precipitation fluctuations will be in the range of -7 to +12% (December-February) and -8 to +12% (June-
August). Increased frequency and intensity of extreme weather events: the number of severe storms
and the intensity of periods of severe drought is also expected to increase; the sea water temperature is
expected to increase between 1 and 2 C leading to stronger and more intense tropical hurricanes in the
Caribbean Sea, the Gulf of Mexico and the Mexican portion of the Pacific Ocean, with an increase of 6% in
wind intensity and an expected increase in precipitation of 16% within a radius of 100km from the center of
the hurricane; the cold fronts may become less frequent.
3
part analyses efficiency issues by means of international and state-level
comparisons of agriculture public expenditures (APE) and agriculture
performance indicators. The main focus of the assessment is on APE, but these
are evaluated within the broader context of rural development policies,
considering the degree of consistency and complementarity between the two sets
of policies.12
The fourth part investigates equity issues emerging from ARD
expenditures. Equity is evaluated at the level of geographic units (states and
municipalities) and of individuals and households. In addition to assessing the
equity impacts of the main rural programs, an effort is made to evaluate the
overall equity implications of the entire APE and of rural development
expenditure (RDE). The fifth part contains a brief analysis of the Monitoring and
Evaluation (M&E) system of ARD programs and of selected institutional aspects,
and highlights some issues. Finally, the sixth part offers reflections on possible
directions for moving forwards both for the overall evolution of ARD
expenditures and for some of the main programs.
5. The current structure of ARD expenditures in Mexico is largely the result of an
accumulation of past decisions of subsidizing particular farming sectors, regions,
crops or aspects of farming. Each subsidy program was largely decided
independently of others because of circumstances at the time; and once
introduced, subsidies have proved difficult to phase out. The resulting system is
complex and does not seem to respond to any clear long-term strategy or
socioeconomic rationale. Thus, the aim of the study is to assist in the assessment
of the current overall ARD expenditure structure. There is a rich discussion in
Mexico concerning how specific ARD programs could be reformed and
improved. Although the study enters that discussion in the final chapter on policy
options, its main contribution is in the analysis of the global structure of ARD
expenditures and their efficiency and equity, and in providing guiding principles
and specific suggestions for a comprehensive reassessment.
OVERVIEW OF THE MEXICAN ARD POLICY CONTEXT
6. The principal ARD policies currently implemented in Mexico originated in
the context of a broad, market-orientated reform effort to modernize the
agricultural sector in the late eighties and early and mid-nineties. This
included accession to the General Agreement on Tariffs and Trade (GATT) in
August 1986, constitutional reform of the land tenure system designed to liberate
agricultural land markets in 1992, progressive deregulation of state-trading in
agriculture products and inputs throughout the 1990s and the dismantling of the
12
The study distinguishes between three types of public expenditures affecting rural areas: agriculture and
rural development (ARD) expenditures; agriculture public expenditures (APE); and rural development
expenditures (RDE). APE refers to those programs that more directly affect agricultural production. RDE
are expenditures in rural programs that do not affect agricultural production or only in an indirect way.
ARD expenditure is the sum of both. Classification of programs is often difficult because of the gray area
between APE and RDE, particularly when the impact on agriculture is indirect, and because many
programs include expenditures of both types. The classification of the main programs is presented in the
text.
4
government trading company, the Compañía Nacional de Subsistencias
Populares, and the opening up of agricultural commodity markets under NAFTA,
initiated in 1994, with a long transition period, culminating in the full liberation of
maize, beans, sugar and dairy products in 2008.13
7. These reforms aimed to introduce efficient and equitable ARD programs. The ―second agrarian reform‖ (Gordillo et al. 1999), as this ambitious reform
effort has been labeled, was accompanied by extensive changes in ARD policies,
seeking to introduce more efficient and equitable and less distortionary policy
instruments. The long-drawn ―first‖ agrarian reform was accompanied, from the
Cardenas administration in the 1940s until its formal ending by President Salinas
de Gortary in 1992, by two principal forms of agricultural support: input support
(irrigation, fertilizers, stockholding) and market price support (MPS). By design,
these support policies where both distortionary and inequitable, failing to reach
small farmers who were intended to be the principal beneficiaries of the agrarian
reform.
8. The three principal support programs. Farmers were partly compensated for
the gradual reduction of MPS through three principal support programs: (i) the
Programa de Apoyos a la Comercialización (hereafter Apoyos)14
, an output-based
subsidy program introduced in 1991, (ii) the Programa de Apoyos Directos al
Campo (hereafter PROCAMPO), a per hectare direct transfer program decoupled
from production and prices, introduced in 1994, and (iii) Alianza para el Campo
(hereafter Alianza), a family of investment support programs offering matching
grants and support services, introduced in 1996. The expectation was that these
programs would not only play a compensatory role in the face of growing external
competition but, in the case of PROCAMPO and Alianza, would also provide the
necessary support for farmers to modernize production and switch to higher value
crops in the context of the newly liberalized land and product markets.
9. The reform included many novel features signaling a clear departure from
past policies. In the context of previous support policies, the decoupled design of
PROCAMPO made this program revolutionary in terms of efficiency and equity.
By decoupling transfers from production and prices and setting entitlements
according to historical area, the program was not only expected to minimize
distortions in productive decisions, but also to directly transfer resources to
farmers, including subsistence ones, for the first time in Mexico‘s history. Not
13
The end of the transition period was not the traumatic event that had been feared 15 years earlier, for two
reasons. One was that throughout the implementation period, the government had allowed importation at
low or zero tariffs of larger quantities than had been required under the agreement. Over the 15 year period,
imports of corn (mostly yellow) had grown substantially, but somewhat surprisingly, so had domestic corn
production (mostly white). Thus, the formal elimination of the final tariffs did not much change the reality
on the ground. And secondly, the final phase occurred in an environment in which global commodity
prices – particularly corn -- were at historically high levels. This brought high profits for Mexican
producers, while provoking a food price crisis for consumers. 14
The Programa de Apoyos a la Comercialización and PROCAMPO are both managed by Apoyos y
Servicios a la Comercialización Agraria (ASERCA), an agency within SAGARPA. Apoyos includes a
number of sub-programs, the most important of which is Ingreso Objetivo.
5
the whole reform package, however, shared such novelties. In particular, Ingreso
Objetivo, the main sub-program of Apoyos, is a MPS mechanism for basic crops
such as rice, corn, wheat, sorghum and others, and is essentially no different from
the policies of the pre-reform period.
10. The agriculture support programs were accompanied by rural development
and poverty reduction programs. The reform in agricultural support policies
was accompanied by another reform in rural development and anti-poverty
policies. The principal anti-poverty program introduced was the Programa de
Educación, Salud y Alimentación (Progresa, in 1997; renamed Oportunidades in
2001), offering direct cash transfers to poor rural households conditional on
human capital investment (attending basic education and using health services).15
Three other important targeted rural development programs were introduced in
this period: (i) the Fondo de Aportaciones para Infraestructura Social (FAIS, in
1996), a large decentralized fund for basic infrastructural investment replacing the
Programa Nacional de Solidaridad (PRONASOL) of the Salinas administration
(1988-1994), (ii) the Programa de Empleo Temporal (1995), a multi-agency, self-
targeted temporary employment program16
and (iii) the Programa de Desarrollo
Rural (PDR, in 1996), the principal Alianza program targeted to small producers.
11. The Rural Development Law of 2001 created a framework to coordinate
rural development activities and expenditures in Mexico. Reforms were also
accompanied by an important institutional innovation, the passing of an umbrella
law for rural development, the Ley de Desarrollo Rural Sustentable (2001). This
law introduced a new and comprehensive institutional architecture for agriculture
and rural development in Mexico. At the national level, it created a national
council for rural development with governmental and civil society participants,
and an inter-ministerial rural development committee, the Comisión Intersecre-
tarial para el Desarrollo Rural Sustentable (CIDRS), chaired by the Secretaria de
Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación (SAGARPA),
with the participation of various federal government ministries. In addition, mixed
government-civil society committees were created at the state, district and
municipal levels, and also for the main agricultural product chains and the main
ancillary services, although their functions and authority is still irregular and often
limited. The rural development law also mandated the creation of a coordinating
framework for ARD expenditures, the Programa Especial Concurrente para el
Desarrollo Rural Sustentable (PEC). However, beyond offering a budgetary
classification scheme to organize ARD expenditures, PEC has not had much
impact on the allocation of ARD resources. Coordination of the numerous
15
In 2001 the program was extended to urban areas and upper-secondary education and renamed
Oportunidades. 16
Originally, Programa de Empleo Temporal (PET) included the participation of Secretaria de Desarrollo
Social (SEDESOL), Secretaria de Medio Ambiente y Recursos Naturales (SEMARNAT), Secretaria de
Comunicacion y Transportes (SCT), and SAGARPA, but the SAGARPA component has recently been
discontinued.
6
Mexican ARD programs, executed by various ministries and agencies, remains a
challenge.
12. ARD spending has doubled since 2000 showing an increase in the most
distortionary programs. Since 2000, ARD spending has almost doubled in real
terms, reaching a federal ARD budget of MxP 204 billion for 2008 (see Figure 2-
1). This expansion took place in the context of the liberalization of most
agricultural products in 2003 and the liberalization of ―sensitive‖ products in
2008. The expansion of APE was in large part allocated to existing and new
distortionary instruments such as the agricultural diesel subsidy, which was
started in 2001, partly reversing rather than deepening the effect of the market-
oriented reforms.
13. Specifically, the use of the most distortionary instruments fell in the 1990s,
while the use of the least distortionary instruments rose, but this positive
trend was reversed in recent years. Overall, the reforms led to a sharp
reduction in the participation of the most distortionary instruments (MPS, output
and variable input payments) with the combined share of the latter two in APE
declining from 50 to 20 percent between 1990 and 1996 (see Figure 1-1).17
On
the other hand, the share of the least distortionary instruments (public goods and
payments based on historical entitlements) increased from 30 to 70 percent in the
course of the decade. Since 2000, however, these trends have been reversed, with
the more distortionary instruments gradually gaining ground and the least
distortionary losing it.
Figure 1-1: Least and Most Distortionary APE (% Total APE)
Least distortionary APE
0%
10%
20%
30%
40%
50%
60%
70%
80%
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Payments based on non-current A/An/R/I Public goods (GSSE)
17
The sharp fall in payments based on variable inputs in 1997-2000 may be due to inconsistencies in the
OECD data. The fall in 1997 corresponds to a drop in the electricity subsidy for groundwater pumping for
irrigation, while the sharp increase in 2001 corresponds to the introduction of large agricultural diesel
subsidies. The new output-based payments in 2001 correspond to the introduction of Ingreso Objetivo
(ASERCA), with large subsidies for grains and other crops in 2001.
7
Most distortionary APE
0%
10%
20%
30%
40%
50%
60%
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Payment based on variable inputs Payments based on output
Note: ―Non-current A/An/R/I‖ refers to transfers linked to historical area planted/animal
numbers/receipts/income. For further details see OECD (2007a,b)
Source: OECD (2007) as cited in Scott (2008)
14. Some of the current ARD programs are incompatible with Mexico’s far-
reaching and ambitious climate change goals as represented in the National
Climate Change Strategy adopted in 2007.18
Mexico is the only developing
country to have submitted three National Communications to the United Nations
Framework Convention on Climate Change, demonstrating a strong commitment
and leadership role in the international climate change agenda. However, certain
major ARD programs counteract these goals, for example the electricity subsidy
for farmers to pump groundwater (tarifa 9), which has led to overexploitation in
many of the country‘s aquifers in water scarce regions, as well as the Ingreso
Objetivo program, which encourages farmers to produce low value crops using
scarce water resources and even crops that are water intensive, as is the case with
fodder.
PERFORMANCE OF THE ARD SECTOR AND OF RURAL POVERTY
15. Overall, agricultural growth has been weak but has shown signs of
acceleration since 2000. Between 1980 and 2007 agricultural GDP grew 1.6
percent a year on average, lagging behind total GDP growth of 2.7 percent (see
Figure 1-2). This trend is unsurprising, reflecting the expected contraction of the
share of the primary sector in a developing economy. The relative difference
between the two growth rates, however, has narrowed rather than widened in
18
The National Climate Change Strategy was formulated in 2007 and identifies opportunities for emissions
reductions on a voluntary basis, as well as measures for the development of necessary national and local
capacity for response and adaptation. The strategy proposes concrete adaptation and mitigation measure
for all sectors, including agriculture, covering all the main aspects of climate change policy. Climate
change strategies and action plans have also been developed at the sub-national level for Mexico City, the
states of Veracruz and Nuevo Leon (World Bank, 2008b).
8
recent years, after 2000. In 2001 and 2003, the growth rate of agriculture GDP
was actually above that of total GDP (3.5 percent and 3.1 percent vs. -0.2 percent
and 1.3 percent, respectively). This, together with the stability of basic food prices
and Oportunidades transfers, is widely credited for the significant reduction in
rural poverty achieved during the recessionary 2000-2002 years (Székely and
Rascon, 2004) and the overall 2000-2006 period.
Figure 1-2: Average Annual Growth Rates of Total GDP and Agriculture GDP (%, 1980-2007)
1.6%
3.7%
3.2%
2.6%
4.0%
0.8%
2.6%
1.7%
2.0%
3.6%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
1980-1989 1990-1993 1994-1999 2000-2004 2005-2007
GDP Agric. GDP
Source: INEGI as cited in Scott (2008)
16. The rural poverty rate has decreased but the rural share in total poverty
remains unchanged since 1992. The last decade has witnessed a significant and
sustained decline in rural poverty rates. The incidence of extreme poverty
(pobreza alimentaria) declined from 53 to 24 percent between 1996 and 2006
(Figure 1-3). Most of this decline is a recovery from the dramatic increase in
poverty following the 1995 crisis, since the 1992-2002 decade was fully lost in
terms of rural poverty reduction. More recently (2004-2006), the rate of decline
of rural poverty has decelerated. In 2006, more than half of the rural population
was moderately poor (pobreza patrimonial), and a quarter was extremely poor.
Rural areas still account for two thirds of the extreme poor in Mexico, just as they
did in 1992.
Figure 1-3: Rural Poverty Rates and Rural Share in Total Poverty (%, 1992-2006)
9
0
10
20
30
40
50
60
70
80
90
1992 1994 1996 1998 2000 2002 2004 2005 2006
Po
ve
rty r
ate
s (
lin
e)
0%
10%
20%
30%
40%
50%
60%
70%
80%
Ru
ral
sh
are
in
po
ve
rty (
ba
r)
Rural share in total poverty (alimentaria) Extreme Poverty rate (alimentaria )
Poverty rate (patrimonial)
Source: CONEVAL as cited in Scott (2008)
17. To what extent does agriculture offer an opportunity for rural households to
escape poverty? The poverty reduction potential of agriculture is a major theme
of the Bank‘s World Development Report 2008 (World Bank, 2008a). This
potential seems to have been sharply diminished in Mexico over the last decade,
for independent (non-wage) farm incomes have collapsed from 28.7 to 9.1 percent
of rural household income between 1992 and 2004, while total farm income
contracted from close to 40 percent to just 17 percent (Figure 1-4). As shown in
Table 1-1, however, agriculture is proportionally much more important for the
poor, as a source of both independent income and wage labor employment.
Figure 1-4: Sources of Rural Household Income (%)
10
8.6 4.6
0.1 4.22.0 4.11.6
3.7
22.8
36.3
15.5
18.5
9.0
8.228.7
9.1
0
10
20
30
40
50
60
70
80
90
100
1992 2004
Domestic inter-household transfers Oportunidades and Procampo transfers
International transfers Pensions
Non-Farm Wage Labor Indep. Non-Farm Activs.
Agricultural Wage Labor Independent Farming
Farm Income
Non Farm Income
Transfers
Source: Ruiz-Castillo (2005) as cited in Scott (2008). Total does not add up to
100% because smaller or unspecified income sources were excluded.
Table 1-1: Household Deciles Ordered by Per Capita Income (2006)
Agricultural activities by household (hh) deciles ordered by income per capita (2006)
hh with agricultural workers hh with independent farming income
hh
Deciles Households % Decile Households % Decile
Annual income
million MP MP/hh
1 3,222,510 60% 705,977 26.6% 2,705 3,831
2 1,492,371 32% 249,587 9.4% 1,830 7,331
3 946,424 24% 190,263 7.2% 1,253 6,586
4 625,353 15% 119,835 4.5% 1,038 8,664
5 578,002 13% 103,074 3.9% 1,853 17,977
6 340,805 9% 86,394 3.3% 982 11,362
7 390,019 9% 68,100 2.6% 977 14,349
8 233,630 7% 63,465 2.4% 917 14,456
9 144,672 5% 30,022 1.1% 878 29,249
10 152,976 4% 39,521 1.5% 3,521 89,093
Total 8,126,762 18% 1,656,238 6.2% 15,954 9,633
Source: Scott (2008) based on data in ENIGH (2006)
11
2. DIAGNOSTICS OF THE FEDERAL RURAL
BUDGET
MEXICO’S RURAL DEVELOPMENT BUDGET: THE PROGRAMA ESPECIAL CONCURRENTE
(PEC)
18. PEC has not worked as a coordinating mechanism of ARD programs as
intended. The Sustainable Rural Development Law of 2001 established a
coordinating framework for ARD public expenditures through the Comisión
Intersectorial para el Desarrollo Sustentable (CIDRS), headed by SAGARPA.
The expectation was that CIDRS would develop a rural development strategy and
serve as a forum to coordinate GOM‘s ARD activities. A strategy, however, has
not been developed, and CIDRS has not yet actually managed to orient and
coordinate the allocation of federal resource to ARD programs. Thus, the PEC,
annually prepared by CIDRS, has, to date, not functioned as a planning tool; it
operates as an annual budget exercise where the budget lines of all rural
development programs are tabulated together. PEC appears as an Annex of the
annual federal budget.19
19. The PEC budget has been steadily increasing since its first compilation in
2001, almost doubling between 2001 and 2008. The only year in which it
declined was 2004. During 2001-2008, it has averaged an annual growth rate of
9.2 percent in constant prices (Figure 2-1).
Figure 2-1: PEC Budget 2001-2008 (2007 Constant MxP)
19
The federal budget has, since 1996, explicitly classified the rural development budget even before the
formulation of the PEC in 2001. Before 2001, the rural development budget was compiled under the
category ―gasto en desarrollo rural (rural development costs)‖in the budget decree. Since many
expenditure programs operate in rural and urban areas, a difficult task of SHCP when constructing PEC is
to estimate what part of these programs is spent in rural and urban areas. The criteria used for the
apportioning, which in some cases have been challenged by experts, should be made transparent and
disclosed jointly with PEC figures.
12
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
Mx
P m
illi
on
in
20
07
va
lue
2001 2002 2003 2004 2005 2006 2007 2008
Year
Source: Centro de Estudios para el Desarrollo Rural Sustentable y la Soberanía Alimentaria as cited in
Oliver and Santillanes (2008).
20. PEC reflects GOM’s strong commitment to rural development. PEC
amounted to 12 percent of the federal budget in 2006 and included more than 60
programs with 85 subprograms and 94 components to be implemented by 13
different secretarías plus sub-national governments. The actual executed 2007
PEC budget was MxP 177 billion (Table 2-1). The largest programs in PEC are
PROCAMPO (executed by SAGARPA), Alianza para el Campo (SAGARPA),
Apoyos a la Comercializacion (SAGARPA) and Oportunidades (SEDESOL).
Approximately one third of the total PEC budget is executed by SAGARPA.
Table 2-1: Mexico’s Rural Development Budget (PEC) 2006-2008
13
Allocation MxP million
Percent (%) Current prices Constant prices (2007)
2006 (a) 2007(b) 2008 (c) 2006 2007 2008 2006 2007 2008
Total PEC 152,934.31
152,934.31
176,794.3 204,000.0 160,944.6 176,794.3 198,598.4 100.00 100.00 100
Total by Ministries 125,882.21 144,637.2 171,900.3 134,187.2 146,262.0 167,348.6 82.31 82.57 84.26
Ramo 04.
Gobernación 298.5 300.00 400.0 310.1 300.0 389.4 0.20 0.17 0.20
Ramo 05. SRE 109.2
71.40 69.7 76.0 71.4 67.9 0.07 0.04 0.03
Ramo 06. SHCP 6,180.60
8,291.90 10,795.3 6,781.2 8,291.9 10,509.5 4.04
4.73 5.29
Ramo 08. SAGARPA 48,899.41
58,384.71 65,341.4 53,055.4 58,536.9 63,611.3 31.97 33.33 32.03
Ramo 09. SCT
2,634.0
2,857.80 7,545.7 2,602.3 2,857.8 7,345.9 1.72
1.63 3.70
Ramo 10. Economía 654.5
838.50 918.2 923.3 838.5 893.9 0.43 0.48 0.45
Ramo 11. SEP
24,594.9
23,161.75 24,694.9 25,695.1 23,686.8 24,041.0 16.08
13.22 12.11
Ramo 12. Salud 9,790.80
15,056.45 12,643.8 12,745.9 15,940.5 12,309.0 6.40
8.60 6.20
Ramo 14. STyPS 74.10
66.95 111.0 78.9 67.0 108.1 0.05 0.04 0.05
Ramo 15. Reforma
Agraria
4,342.0
4,772.30 5,435.4 4,618.4 4,779.8 5,291.5 2.84 2.72 2.66
Ramo 16.
SEMARNAT
10,930.4
16,525.10 17,519.2 9,379.0 14,289.8 17,055.3 7.15
9.43 8.59
Ramo 20. SEDESOL 17,372.30
14,233.85 26,290.7 17,892.2 16,525.1 25,594.6 11.36 8.13 12.89
Ramo 21. Turismo 1.5
76.50 135.0 1.7 76.5 131.4 0.00 0.04 0.07
Total by other
categories
27,052.10
30,532.50 32,099.7 26,757.4 30,532.3 31,249.7 17.69 17.43 15.74
Ramo 19.
Aportaciones a
Seguridad Social
5,151.90
5,512.90 6,300.0 5,070.0 5,512.7 6,133.2 3.37 3.15 3.09
Ramo 31. Tribunales
Agrarios
584.2
250.00 790.2 601.2 694.0 769.3 0.38 0.14 0.39
Ramo 33.
Aportaciones
Federales a Estados y
Municipios
21,316.0
694.00 24,758.5 21,086.2 24,075.6 24,102.9 13.94 0.40 12.14
Ramo 23. Previsiones
Salariales y Económic. 24,075.60 250.0 250.0 243.4 13.74 0.12
Source: Oliver and Santillanes (2008).
a. 2006: Executed Budget, data from Public Accounts, SHCP
b.2007: Budget incorporated in the Proceso Integral de Programación y Presupuesto (PIPP), SHCP.
c. 2008: Programmed budget as presented in the Presupuesto de Egresos de la Federación 2008.
21. Difficulty in coordinating the PEC budget is due to several factors. First of
all, there is the magnitude and sheer number of programs and agencies involved,
each with their own objectives, beneficiaries and rules.20
Secondly, it is difficult
for SAGARPA, a line ministry that chairs the CIDRS, to dictate to other line
ministries which ARD programs they should or should not have, and how they
should implement them. The situation would be different if CIDRS and the
annual PEC formulating exercise were under the mandate of Presidencia or the
SHCP. A third reason is the absence of a comprehensive national ARD strategy
with measurable objectives and outcomes and a clear indication of how different
programs would serve to achieve them. Partly because of this, many programs
that were initiated as temporary interventions responding to transitory situations
became permanent over time. Also, due to the absence of a national ARD
20
PEC programs are implemented by 13 out of the 18 federal ministries, as well as state governments for
decentralized programs, other entities of the federal government and the legislative branch of government.
In recent years PEC has included close to 100 different programs, although the consolidation of the 2008
PEC resulted in a reduction to 73 programs, 85 sub-programs and 94 components.
14
strategy, the majority of programs are formulated to serve objectives and criteria
of the originating agency, or even of specific offices within those agencies. As a
result, the PEC budget encompasses numerous programs, sub-programs and
components with duplicating, or at times even contradicting activities, as well as
with noticeable gaps. The introduction of PEC as an accounting instrument was a
valuable step forward in bringing transparency to ARD budgetary allocations, and
is a first step towards coordination and consistency in ARD expenditures. PEC,
however, is not yet fulfilling its role as the mechanism to promote the efficient
allocation and use of public resources to promote ARD.
CLASSIFICATION OF ARD PROGRAMS
22. This section classifies the PEC budget (2006) into various categories: public-
private, social-productive, targeted to the poor-untargeted, etc., in order to better
understand the structure of Mexican ARD expenditures.21
The classification
exercise is complex and leaves room for subjective judgment, partly because the
categories themselves are not always clear-cut, and partly because many programs
have sub-programs and components falling under different categories.22
Programs have been disaggregated to the lowest level possible to enable proper
classification. Whenever available, data from SHCP accounts of the executed
budget were used. When these data were only available at the aggregate level,
additional information was used to allow for disaggregation.23
23. Public goods programs. Included here are programs typically provided by
governments in market economies, generally because they supply goods or
services whose consumption is neither excludable nor rivalrous.24
These
programs usually include investments like rural infrastructure (excluding on-farm
structures), and general social or productive services such as rural education and
health, telecommunications, information, training and research systems,
technology transfer to small producers, sanitary systems, natural resource
conservation and environmental programs, emergency programs, and operational
budgets of institutions. Table 2-2 presents the breakdown of these programs in
PEC.
21
The classification was conducted for 2006 since this was the latest year for which a completed executed
budget was available at the level of disaggregation necessary for the analysis. 22
Because of this, some programs appear under more than one category. The amounts appearing in the
different categories correspond to that spent in the sub-programs or components falling under the category.
This is the case, for instance, of Fondo para la Infraestructura Social Municipal (FISM), part of which is
classified as ―social‖ and part as ―indirectly productive‖, and of Alianza, partly classified as a ―public
goods‖ and partly as a ―private goods‖ program. 23
Additional sources include implementing agency data and external evaluation reports. 24
―Excludable‖ means that persons can be prevented from consuming the good or service, and therefore it is
feasible to charge for its consumption. ―Rivalrous‖ means that consumption of a good or service by one
person reduces the availability for another person to consume. Economic principles dictate that it is most
efficient for the public sector to provide goods and services that are neither excludable nor rivalrous;
therefore they are called ―public goods‖. Also include here are ―quasi-public goods‖ falling between public
and private goods, for which beneficiaries are only partially excludable from the consumption of the good
or service, and the cost of providing the good or service is less than proportional to the number of
consumers, hence are not fully rivalrous, e.g. education often has the characteristics of a quasi-public good.
15
Table2-2: Major Public Goods Programs (categorized into social, productive, and indirectly productive) 2006
MxP
Million
Percent
(%)
PUBLIC GOODS PROGRAMS 79,120.68 100.00
A. Social Programs 40,186.94 50.79
1. Fondo para la Infraestructura Social Municipal (FISM) dentro del Ramo 33. Aportaciones
a estados y municipios 8,681.40 10.97
2. SPSS (Sistema de Protección Social en Salud) 8,653.10 10.94
3. Aportaciones federales dentro del Ramo 33. Aportaciones a estados y municipios 7,939.40 10.03
4. Programa IMSS-Oportunidades (sin Salud Indígena y Progresa) 5,151.90 6.51
5. Comisión Nacional de Desarrollo de los Pueblos Indígenas (CONADEPI) 4,790.70 6.05
6. Enciclomedia 1,801.60 2.28
7. Programas Alimentarios de DICONSA y LICONSA 1,593.00 2.01
8. Forestal (incluye Proárbol) 761.94 0.96
9. Áreas naturales protegidas 465.50 0.59
10. Programa de Atención a Jornaleros Agrícolas 137.90 0.17
11. Otros 210.50 0.27
B. Productive Programs 24,043.74 30.39
1 Programa de desarrollo de capacidades (SEP) 4,975.50 6.29
2. Fondo para la Infraestructura Social Municipal (FISM) dentro del Ramo 33. Aportaciones
a estados y municipios 4,695.20 5.93
3. Infraestructura hidroagrícola 3,297.10 4.17
4. Actividades recurrentes de apoyo productivo con presupuesto regular de SAGARPA* 2,943.10 3.72
5. Caminos rurales 1,823.20 2.30
6. Alianza para el Campo** 1,529.14 1.93
7. Forestal (incluye Proárbol) 913.50 1.15
8. Programa Normal de Sanidades 801.40 1.01
9. Sistema Financiero Rural 677.80 0.86
10. Microrregiones (incluye FONAES) 638.00 0.81
11. Otros 1,749.80 2.21
C. Programas de Fomento Productivo Indirecto (Indirectly Productive) 14,890.00 18.82
1. Gasto operativo (netamente administrativo) de la SAGARPA 4,485.80 5.67
2. Educación agropecuaria (SEP) 3,843.30 4.86
3. Instituciones de Educación Agropecuaria dependientes de SAGARPA 1,910.70 2.41
4. Conflictos y Conciliación Agraria 824.40 1.04
5. Gasto operativo de los Tribunales Agrarios 584.20 0.74
6. Procuraduría Agraria 583.70 0.74
7. Gasto operativo de la SRA 545.20 0.69
8. Programa de Certificación de Derechos Ejidales y Titulación de Solares (PROCEDE) 487.90 0.62
9. INEGI 363.50 0.46
10. Registro Agrario Nacional (RAN) 361.70 0.46
11. Otros 899.60 1.14
Source: Oliver and Santillanes (2008)
24. Private goods programs. Included here are programs that are usually provided
(or could be provided) by the private sector in market economies (mostly because
they supply goods or services whose consumption is excludable and rivalrous),
and also government programs that provide measurable subsidies to individuals or
16
families usually under some targeting criteria.25
Included in this category are,
inter alia, subsidies to on-farm productive infrastructure and equipment, subsidies
to rural credit and agricultural insurance, input support, marketing support, and
compensatory cash transfers. It should not be assumed that government funding
of private goods is necessarily undesirable. There are private goods that are
productivity enhancing and may make sense for government to invest in them for
policy purposes, even if they consist of measurable subsidies to individuals or
families. This is for instance the case with Oportunidades, which enhances
human capital, and with many Alianza subsidies, which enhance the productive
potential of farms. Table 2-3 presents the breakdown of these programs.
Table 2-3: Major Private Goods Programs (categorized into public, private, and indirect private programs) 2006
MxP Million Percent (%)
PRIVATE GOODS PROGRAMS 73,812.70 100.00
A. Social Programs 29,726.00 40.27
1. Oportunidades (Educación – SEP) 13,941.50 46.90
2. Oportunidades (SEDESOL) 11,793.90 39.68
3. Programa de Vivienda Rural 2,207.50 7.43
4. Oportunidades (Salud – SSA) 1,108.60 3.73
5. Fondo para pago de adeudos a braceros rurales del 42 al 64 298.50 1.00
6. Adultos Mayores en Zonas Rurales 297.90 1.00
7. Apoyo para la repatriación de cadáveres a México 39.40 0.13
8. Asistencia jurídica urgente a mexicanos en EE.UU. y defensa de condenados a muerte 17.00 0.06
9. Migrantes en situación de probada indigencia 8.10 0.03
10. Otros 13.60 0.05
B. Productive Programs 43,825.90 59.37
1. PROCAMPO 15,024.50 34.28
2. Ingreso Objetivo (maíz, frijol, sorgo, algodón, arroz, trigo, soya…)/Apoyos directos al
productor por excedentes de comercialización 6,961.23 15.88
3. Alianza para el Campo 4,900.10 11.18
4. Programas Hidráulicos 3,807.40 8.69
5. Fondo de Compensación a Costos Energéticos Agrícolas 2,684.20 6.12
6. Fondo de Apoyo a la Competitividad de las Ramas Productivas 2,258.30 5.15
7. Programa Ganadero (PROGAN) 2,070.00 4.72
8. Programa de Empleo Temporal (SCT)* 791.90 1.81
9. FOMAGRO (FIRCO) 746.70 1.70
10. Forestal (incluye Proárbol) 635.16 1.45
11. AGROASEMEX (Fondos de Aseguramiento y de Microseguros) 520.00 1.19
12. Otros 3,426.41 7.82
C. Indirect Productive Programs 260.80 0.35
45. Obligaciones Jurídicas Ineludibles 260.80 0.35
Source: Oliver and Santillanes (2008).
25. Productive programs: These programs are targeted at directly improving the
productive capacity of agriculture or other rural economic activities. They
25
By including measurable subsidies to private individuals of families, this category includes cash transfer
programs such as PROCAMPO and Oportunidades, and to ―merit goods‖ programs (Musgrave, 1959) like
Vivienda Rural.
17
include, inter alia, productive infrastructure, agricultural research and technology
transfer, sanitary systems, subsidies to rural credit and agricultural insurance,
improvements of productive resources, production subsides, marketing supports,
and marketing information. A different category labeled indirect productive
programs expenses captures those aimed at improving productive capacity but
with less direct impact on production as well as ministerial expenses to operate
the relevant programs. This category includes programs such as tertiary level
agricultural education, agricultural institutional programs, and land registry
programs, as well as ministerial operational budgets.
26. Social programs: These programs consist of expenditures aimed at improving the
general living conditions of the rural population and are not directly oriented at
expanding their productive capacity. Included here are, inter alia, the
improvement of social infrastructure, cash transfers not tied to current or
historical productive use, education, health and social welfare programs, and
consumption support programs. Naturally, social programs have an indirect
productive impact, but their primary aim is to improve the wellbeing of the
beneficiaries not their productive capacity.
27. Targeted and untargeted programs: Programs can further be categorized into
those that are targeted to the poor, small producers and vulnerable groups and
those that are not. Included in targeted programs are those oriented to the
indigenous populations, peasant women and casual workers, as well as other
programs aimed at improving the conditions of small producers or the rural poor
in which targeting is mandated in the operation rules, even if in practice a good
part of the expenditures does not actually reach the poor. Non-targeted
programs are those benefiting the rural population at large, not specifically aimed
at small producers, vulnerable groups or the poor.
28. Program decentralization: Another potential distinction is between centralized
and decentralized programs. This distinction, however, is difficult to establish in
practice because decentralization has several dimensions and the situation of
programs differs according to these dimensions (see Box 2-1). The design,
normative aspects and most or all funding of programs included in PEC come for
the federal level although there already is some level of decentralization in the so-
called ―decentralized‖ subprograms of Alianza.
Box 2-1: Dimensions in the Decentralization of Rural Development Programs in Mexico
The many rural sector programs that exist in Mexico operate under different institutional arrangements.
Some devolve decision-making power to sub-national governments to various extents, while others keep
most or all aspects under the control of central authorities. A simple centralization/ decentralization
dichotomy is insufficient to describe how rural programs work, for program processes move along several
dimensions, some under the control of central authorities, others under sub-national governments.
a) Funding source. Funding of rural programs may come from one, two or all three levels of government.
For most programs the federal level provides all or most of the resources. The programs, for instance, of
SRA (PROMUSAG and FAPPA) and SECON (FONAES) do not have as a rule, state or municipal
counterpart funding. When two government levels contribute, they are usually the federal and state
governments. This is the case with the Agriculture and Livestock sub-programs of Alianza or the
18
PRODEFOR program of CONAFOR. A combination of federal and municipal funding, like in FIRCO‘s
Microcuencas program, does exist but is uncommon. In hardly any program do all three levels of
government contribute funds, with the exception of Alianza‘s Rural Development Program (PDR). Only in
the case of states‘ own programs, like the fertilizer program of the Secretaría de Desarrollo Rural in
Guerrero or the Núcleos de Desarrollo Comunitario program of the Secretaría de Desarrollo Humano in
Jalisco, does funding come exclusively from state sources. Rural Development programs financed entirely
by municipalities are rare.
b) Regulatory authority. Program operational rules serve to establish objectives and set forth key
implementation asepects, ranging from the eligibility criteria to the amount and type of benefits. Except for
states‘ own programs, these rules are issued by the federal government. All rural development programs
from federal ministries operate under centralized rules. When states and municipalities are involved in
program funding, additional criteria may be agreed between the government levels involved, formalized as
convenios and anexos técnicos, which usually include budgetary and programmatic provisions. Alianza´s
decentralized sub-programs are an example of this.
c) Allocation of funds to States. Most rural development programs operate on a demand basis, i.e.
producers apply for and compete for funding. In the case of centralized programs, competition may be at
the national level, in which case no allocation or indicative disbursement figure is given to the states. This
is for instance the case with CONAFOR‘s PRODEPLAN. In other cases, like in SEDESOL‘s
Oportunidaes Productivas and in FONAES, annual expenditure ceilings are established for each state, and
proposals compete at the state-level within those ceilings. Funds, however, are kept at the federal level. In
the case of decentralized programs, not only funds are allocated to the states, they are actually transferred to
fideicomisos located in the states where they are mixed with local funds.
d) Spending authority. Even when funds come from federal sources, prioritization and selection of
proposals may involve sub-national governments. The most centralized scenario is when the selection
process is carried out centrally by federal ministries. This can be done with the prior advice of a state-level
joint committee, like in the SRA‘s programs, or without it, like in the Integración Productiva, Agencias de
Desarrollo Local and Fondo de Financiamiento Social programs of SEDESOL‘s Oportunidades
Productivas. In other cases, like in FONAES, proposals under a certain amount are approved by the state
offices of the corresponding ministry. In more decentralized scenarios, joint state-federal committees may
conduct preliminary selection of proposals with the final decision being left to the federal level. A more
decentralized process is when, like in Alianza‘s decentralized programs or in CONAFOR‘s PRODEFOR
program, state-level joint committees or even municipal-level committees make the final decision. Total
decentralization of spending occurs when the use of resources is decided by sub-national authorities alone,
but this only happens with state‘s own programs.
e) Operational tasks. Rural development programs entail a number of operational tasks, such as promotion
and dissemination, reception and processing of applications, technical formulation of proposals, and
supervision of activities. Different government levels may take part in these tasks, which are usually
supported by private providers of services.
Source: World Bank 2006a
THE PEC STRUCTURE
29. ARD expenditures are equally divided between public and private goods.26
In 2006, 52 percent of PEC (MxP 79 billion) went to public goods programs and
26
Lopez and Galinato (2007) analyze the rural public expenditure of LAC countries for 1985-2001using a
FAO database which shows that 66 percent of Mexico‘s rural public expenditure is private, which is the
fourth highest in the region after Brazil (87 percent), Dominican Republic (80 percent), and Guatemala (69
percent). Contrarily, Honduras (9 percent) and Uruguay (19 percent) have the lowest shares. The
definition of rural expenditure used in this FAO study does not coincide with that of the PEC since
universal social services such as education and health are also included in the FAO‘s definition of rural
expenditure.
19
the remaining 48 percent (MxP 73.8 billion) to private goods programs (Table 2-
4). The implementation of public programs was led by SAGARPA (17 percent),
followed by the Ministry of Education (14 percent), and the Ministry of Health
(11 percent, spent mainly in seguro popular). In addition, budget transfers from
the federal government to states and municipalities, used mainly for rural
infrastructure, amounted to 27 percent of public goods programs. Expenditure in
private goods concentrated in three ministries: SAGARPA (48 percent, mainly for
PROCAMPO, Apoyos, Alianza and PROGAN), SEDESOL (20 percent, for
Oportunidades and the rural housing program), and the Ministry of Education (19
percent, also for Oportunidades).
Table 2-4: ARD Public and Private Goods Programs by Government Agency (2006)
Allocation Total Public Goods Private Goods
MxP Million Percent (%) MxP Million Percent (%) MxP
Million Percent (%)
Total 152,933.38 100.00 79,120.68 100.00 73,812.70 100.00
04. Gobernación 298.50 0.20 0.00 0.00 298.50 0.40
05. Relaciones Exteriores 109.20 0.07 31.10 0.04 78.10 0.11
06. Hacienda y Crédito
Público 6,180.50 4.04 5,331.90 6.74 848.60 1.15
08. SAGARPA 48,898.69 31.97 13,538.94 17.11 35,359.75 47.90
09. SCT 2,634.00 1.72 1,842.10 2.33 791.90 1.07
10. Economía 654.39 0.43 39.10 0.05 615.29 0.83
11. Educación Pública 24,594.90 16.08 10,653.40 13.46 13,941.50 18.89
12. Salud 9,790.80 6.40 8,682.20 10.97 1,108.60 1.50
14. Trabajo y Previsión
Social 74.10 0.05 74.10 0.09 0.00 0.00
15. Reforma Agraria 4,342.00 2.84 3,034.50 3.84 1,307.50 1.77
16. SEMARNAT 10,930.40 7.15 6,385.94 8.07 4,544.46 6.16
19. Aportaciones a
Seguridad 5,151.90 3.37 5,151.90 6.51 0.00 0.00
20. Desarrollo Social 17,372.30 11.36 2,455.30 3.10 14,917.00 20.21
21. Turismo 1.50 0.00 0.00 0.00 1.50 0.00
31. Tribunales Agrarios 584.20 0.38 584.20 0.74 0.00 0.00
33. Aportaciones
Federales a Estados y
Municipios 21,316.00 13.94 21,316.00 26.94 0.00 0.00
Source: Oliver and Santillanes (2008) using data from SHCP
30. ARD expenditures are equally distributed between social and productive
programs. Thus, 46 percent of PEC (MxP 70 billion) went to social programs,
44 percent (MxP 68 billion) to productive programs, and 10 percent (MxP 15
billion) to indirectly productive programs 27
(see Table 2-5). Social programs
were mainly implemented by SEDESOL (Oportunidades, rural housing, and food
27
It should be noted that the even distribution of ARD expenditures between productive and social
programs is influenced by the classification of PROCAMPO as a productive program. PROCAMPO could
arguably be classified as a social program since its objective is to support farmers‘ incomes rather than to
boost production, and there is no conditionality on the use of the entitlement. If PROCAMPO were
classified as a social program, social programs would account for 55.5 percent of ARD expenditures,
productive programs for 34.6 percent and indirectly productive programs for 9.9 percent.
20
programs), the Ministry of Education (Oportunidades and Enciclomedia), and the
Ministry of Health (social protection system and Oportunidades). These three
ministries accounted for nearly half (49 percent) of spending in rural social
programs. Almost three quarters of the expenditure in productive programs was
executed by SAGARPA (in particular PROCAMPO, Alianza, Apoyos, and
PROGAN), followed by SEMARNAT, mainly for irrigation infrastructure, and
the Ministry of Education for programs in agriculture technical training and plant
breeding training. Indirect productive programs comprised mainly tertiary
level agricultural education, and regular recurrent costs of agencies implementing
PEC programs. These costs come mainly from three ministries, SAGARPA, the
Ministry of Education and the Ministry of Land Reform, which were jointly
responsible for 91 percent of this spending category.
31. Production-oriented public goods programs are underfunded despite their
importance for ARD. Table shows that less than one third of spending in public
goods programs goes to directly production-oriented programs. The largest
spending in production-oriented programs of a public goods type was for
productive infrastructure (10.1 percent of public goods), training programs by the
Ministry of Education (6.3 percent), the productive part of FAIS, irrigation
infrastructure, and the public goods sub-programs of Alianza (5.7 percent). The
low level of spending by SAGARPA is noticeable given its mandate for the
development of the rural productive sector. SAGARPA allocates only 9.1 percent
of its total budget to production-oriented programs of a public goods type.
Considering the documented importance for production activities of the provision
of public goods28
, the fact that only 16 percent of PEC is for production-oriented
public goods programs signals overfunding of private goods, some of which could
potentially be reallocated to the funding of public goods (see Box 2-2).
Table 2-5: Cross-classification of Public/Private and Social/Productive ARD Programs, 2006
Total Cost Social Productive Indirect Productive
MxP
Million
Percent
(%)
MxP
Million
Percent
(%)
MxP
Million
Percent
(%)
MxP
Million Percent (%)
Total Cost 152,933.38 100.00 69,912.94 100.00 67,869.64 100.00 15,150.80 100.00
Public 79,120.68 51.74 40,186.94 57.48 24,043.74 35.43 14,890.00 98.28
Private 73,812.70 48.26 29,726.00 42.52 43,825.90 64.57 260.80 1.72
Source: Oliver and Santillanes (2008) using data from SHCP
Box 2-2: Efficiency gains from switching from private to public goods
Recent econometric work finds that in many countries in the LAC region it is crucial to shift rural public
expenditures from large subsidies going to specific groups of producers and towards the increased
provision of public goods1. As an illustration of the importance of the mix of spending between private and
public good, R. Lopez used the FAO LAC Regional Office database from several countries (1985-2001) to
classify expenditures. Public goods included technology generation and transfer, soil conservation, sanitary
and phytosanitary protection, communications and information services, rural infrastructure, and social
services (education and health). Private goods included commodity-specific or focalized items, marketing
assistance and promotion, subsidized credit, and irrigation.
28
For the importance the investment public goods see Lopez and Galinato (2007), World Bank (2005a),
World Bank (2008).
21
The key message from the analysis is that while government expenditures do have a positive effect on
agricultural per capita income, the composition of those expenditures is important. The long-run effects on
per capita agricultural GDP of increasing the share of expenditures going to subsidies were large and
negative (and highly statistically significant.) A reallocation of 10% points of public expenditures from
subsidies to public goods would increase per capita agricultural income by about 2.3 % without increasing
total expenditures. On the poverty side, the analysis found no statistically significant direct effect of the
mix of expenditures on poverty, in part due to the poor state of rural poverty data. The main impact of the
mix of public expenditures on poverty is indirect, through the effect on per capita agricultural income.
Overall, the findings from the cross-country analysis of Lopez for Latin America are consistent with other
analyses for India and China, where spending on rural roads and agricultural research has been found to
have large poverty alleviation effects.
The allocation criteria for expenditures are not complex in theory – public goods should be a priority, and
coverage, targeting and the cost-effectiveness of transfers should enter any project evaluation. But
designing public spending is complicated in practice, because the policy maker would also need to have
empirical measures of the relevant ―elasticities‖ reflecting how agricultural growth and poverty reduction
responds to expenditures on various program categories. And from the national development perspective
one should have information on how national welfare responds to agricultural development. Policy design
is further complicated by the heterogeneity of farming conditions with respect to initial product mixes and
levels of productivity, access to infrastructure, soil fertility, and access to markets. This heterogeneity stems
in part from the natural resource base and geography, but also in part from the approach governments have
taken in the past to expenditures on public goods. Past investments in infrastructure and institutions, such
as telecommunications and transport, and the support network of finance, research and extension, will
determine the ability of small farmers to take advantage of opportunities in both domestic and international
markets. Finally, although the role of governments as the provider of public goods is well established, the
performance of governments is often disheartening. 1 The work by Ramon Lopez of the University of Maryland was pioneering in this area and first developed for the WB
regional report ―Beyond the City, The Rural Contribution to Development‖ in 2005, and later published as Lopez and
Galinato (2007).
Source: Valdes (2008b)
32. While the majority of social programs are targeted to the poor (including
small farmers and vulnerable groups), the majority of agriculture programs
are not targeted. Although the definition of poor differs significantly by each
program and has changed over time within programs, 96 percent of the
expenditure in social programs in PEC is targeted to the poor (Table 2-6), while
only 7.9 percent of the expenditure in agricultural programs is targeted (Table 2-
7). Because of leakages, part of the expenditure in some targeted programs may
not reach the poor. Oportunidades, which is the largest targeted program, is
particularly well targeted. Expenditures in other programs, particularly in those
involving infrastructure and area- or community-based targeting, are less well
targeted. On the other hand, part of the expenditure in non-targeted programs
favors the poor. This is, for instance, the case with PROCAMPO payments to
which small and very small farmers are eligible.
Table 2-6: Targeting of Social Programs
MxP
Million
Percent
(%)
SOCIAL PROGRAMS 69,912.94 100.00
A. Programs targeted at poor 66,865.00 95.64
21. Oportunidades (Educación – SEP) 13,941.50 19.94
22
2. Oportunidades (SEDESOL) 11,793.90 16.87
3. Fondo para la Infraestructura Social Municipal dentro del Ramo
33. Aportaciones a estados y municipios 8,681.40 12.42
4. SPSS (Sistema de Protección Social en Salud) 8,653.10 12.38
5. Aportaciones federales dentro del Ramo 33. Aportaciones a
estados y municipios 7,939.40 11.36
6. Programa IMSS-Oportunidades (sin Salud Indíg. y Progresa) 5,151.90 7.37
7. Comisión Nacional de Desarrollo de los Pueblos Indígenas
(CONADEPI) 4,790.70 6.85
8. Programa de Vivienda Rural 2,207.50 3.16
9. Programas Alimentarios 1,593.00 2.28
10. Oportunidades 1,108.60 1.59
11. Otros 1,004.00 1.44
B. Programs not targeted at poor 3,047.94 4.36
1. Enciclomedia 1,801.60 2.58
2. Forestal (incluye Proárbol) 761.94 1.09
3. Áreas naturales protegidas 465.50 0.67
4. Telefonía Rural 18.90 0.03
Source: Oliver and Santillanes (2008) using data from SHCP
Table 2-7: Targeting of Agriculture Programs
MxP
Million
Percent
(%)
AGRICULTURAL PROGRAMS 47,559.97 100.00
A. Programs targeted at poor 3,760.34 7.91
1. Alianza para el Campo (componente de desarollo rural) 2,083.55 4.38
2. FOMAGRO (FIRCO) 746.70 1.57
3. PIASRE 462.90 0.97
4. Fondo de Tierras 248.50 0.52
5. Fondo Nacional de Apoyos para Empresas en Solidaridad (FONAES) 173.59 0.36
6. Microcuencas (FIRCO) 45.10 0.09
B. Programs not targeted at poor 43,799.63 92.09
8. PROCAMPO 15,024.50 31.59
1. Apoyos directos al productor por excedentes de comercialización (Ingreso Objetivo y otros) 6,961.23 14.64
2. Programas Hidráulicos 3,807.40 8.01
3. Infraestructura hidroagrícola 3,297.10 6.93
4. Alianza para el Campo 2,976.98 6.26
5. Actividades recurrentes de apoyo productivo dentro del presupuesto regular de SAGARPA 2,863.70 6.02
6. Fondo de Compensación a Costos Energéticos Agrícolas 2,684.20 5.64
7. Fondo de Apoyo a la Competitividad de las Ramas Productivas 2,258.30 4.75
8. Programa Ganadero (PROGAN) 2,070.00 4.35
9.- Programa Normal de Sanidades 801.40 1.69
10. AGROASEMEX (Fondos de Aseguramiento y de Microseguros) 520.00 1.09
11. Programa de atención a Contingencias Climatológicas FAPRACC 337.82 0.71
12. Fondo de Apoyo a las Organizaciones Sociales, Agropecuarias y Pesqueras (PROSAP) 197.00 0.41
Source: Oliver and Santillanes (2008) using data from SHCP
33. In contrast to the importance of the non-farm sector in the rural economy,
PEC reflects an agro-centered view of rural development. Some 70 percent of
spending in production-oriented programs of a public goods type is for
23
agricultural activities and 30 percent for programs open to other rural productive
activities (Table 2-10). The main programs in the latter category as shown in
Table 2-9 are the skills development program of the Ministry of Education, which
supports the enhancement of different rural technical skills (25 percent of non-
agricultural programs), a part of FAIS, which supports productive infrastructure
(23 percent), rural roads (9 percent), and forestry and other environmental
programs (7 percent). The weight of the agriculture programs is probably
underestimated since a good part of the resources of many not agriculture-specific
programs is probably, in fact, used to support agricultural activities.
Table 2-8: Main Agricultural Programs (2006)
MxP
Million
Percent
(%)
AGRICULTURAL PROGRAMS 47,559.97 100.00
A. Public Goods 8,736.69 18.37
1. Infraestructura hidroagrícola (Comisión Nacional del Agua – SEMARNAT) 3,297.10 10.13
2. Actividades recurrentes de apoyo productivo dentro del presupuesto regular de SAGARPA
(organismos sanitarios, y de investigación, información y capacitación) 2,853.80 8.77
3. Alianza para el Campo 1,079.39 3.32
4. Programa Normal de Sanidades 801.40 2.46
5. Programa Integral de Agricultura Sostenible y Reconversión Productiva (PIASRE) 462.90 1.42
6. Fondo de Apoyo a las Organizaciones Sociales, Agropecuarias y Pesqueras (PROSAP) 197.00 0.61
7. Microcuencas (FIRCO) 45.10 0.14
B. Private Goods 38,823.28 81.63
1. PROCAMPO 15,024.50 38.70
2. Ingreso Objetivo (maíz, frijol, sorgo, algodón, arroz, trigo, soya…)/Apoyos directos al
productor por excedentes de comercialización 6,961.23 17.93
3. Alianza para el Campo 3,981.14 10.25
4. Programas Hidráulicos 3,807.40 9.81
5. Fondo de Compensación a Costos Energéticos Agrícolas 2,684.20 6.91
6. Fondo de Apoyo a la Competitividad de las Ramas Productivas 2,258.30 5.82
7. Programa Ganadero (PROGAN) 2,070.00 5.33
8. FOMAGRO (FIRCO) 746.70 1.92
9. AGROASEMEX (Fondos de Aseguramiento y de Microseguros) 520.00 1.34
10. Programa de atención a Contingencias Climatológicas FAPRACC 337.82 0.87
11. Fondo de Tierras 248.50 0.64
12. Fondo Nacional de Apoyos para Empresas en Solidaridad (FONAES) 173.59 0.45
13.Actividades recurrentes de apoyo productivo dentro del presupuesto regular de SAGARPA 9.90 0.03
Source: Oliver and Santillanes (2008) using data from SHCP
Table 2-9: Main Non-Agricultural (Productive) Specific Programs (2006)
MxP
Million
Percent
(%)
NON_AGRICULTURAL SPECIFIC PROGRAMS 20,309.67 100.00
A. Public Goods 15,307.05 75.37
1. Programa de desarrollo de capacidades (SEP) 4,975.50 24.50
2. Fondo para la Infraestructura Social Municipal dentro del Ramo 33. Aportaciones a
estados y municipios 4,695.20 23.12
3. Caminos rurales 1,823.20 8.98
4. Forestal (incluye Proárbol) 913.50 4.50
5. Sistema Financiero Rural dentro de las acciones de SAGARPA 677.80 3.34
24
6. Microrregiones (incluye FONAES) 638.00 3.14
7. Alianza para el Campo (apoyo a acuacultura y pesca) 449.75 2.21
8. Otros de Medio Ambiente 448.10 2.21
9. Fomento y Organización Agraria 143.50 0.71
10. Financiera Rural 127.70 0.63
11. Otros 414.80 2.04
B. Private Goods 5,002.62 24.63
1. Alianza para el Campo (acuacultura y pesca) 918.96 4.52
2. Programa de Empleo Temporal (componente operado por la SCT) 791.90 3.90
3. Forestal (incluye Proárbol) 635.16 3.13
4. Programa de la Mujer en el Sector Agrario (PROMUSAG) 482.40 2.38
5. Programa de Opciones Productivas 400.60 1.97
6.- Dar Continuidad a los Apoyos al Sector Pesquero 314.20 1.55
7. Fondo Nacional de Apoyos para Empresas en Solidaridad (FONAES) 311.40 1.53
8. Fondo de Apoyo para Proyectos Productivos (FAPPA) 291.40 1.43
9. Financiera Rural 202.30 1.00
10. Programa de Empleo Temporal (componente operado por la SEDESOL) 196.40 0.97
11. Otros 457.90 2.25
Source: Oliver and Santillanes (2008) using data from SHCP
34. Agricultural programs are skewed towards private goods and non-
agricultural programs towards public goods. More than 80 percent of the
agricultural programs are private, while more than 75 percent of those non-
specifically oriented to agriculture are public (Table 2-10). Echoing the argument
with productive goods in general, the low level of public spending for agricultural
activities is noticeable given the evidence of its superior growth impact. As
indicated above, non- agriculture specific programs focus on the provision of
public goods such as skills training and rural infrastructure. Non-agriculture
specific programs other than the ones mentioned above have tended to be
somewhat ad-hoc pilot-type experiences reflecting the difficulty in designing non-
agricultural rural productive programs in the absence of a multi-sectorial national
rural development strategy.
Table 2-10: Productive programs cross-referenced with public/private and agriculture/non-agriculture (2006)
Total Cost Agricultural
Not specifically
agricultural
MxP
Million Percent (%) MxP Million
Percent
(%) MxP Million
Percent
(%)
Total 67,869.64 100.00 47,559.97 100.00 20,309.67 100.00
Public 24,043.74 35.43 8,736.69 18.37 15,307.05 75.37
Private 43,825.59 64.57 38,823.28 81.63 5,002.62 24.63
Source: Oliver and Santillanes (2008)
CHANGES IN THE 2008 PEC
35. An effort was made in 2007 to consolidate the 2008 PEC budget. In 2007, a
new, more compact functional classification scheme was introduced,
consolidating the wide multiplicity of PEC programs into nine broad groups and
25
16 programs (see Table 2-11). Some simplification in the operational rules of
programs was also introduced in the 2008 budget. However, this reform did not
involve an actual integration or coordination of the original programs, which in
the 2008 PEC numbered 73, many of them containing multiple subprograms. The
principal group within the broader classification, Competitiveness, represents
almost 40 percent of PEC and includes productive programs as traditionally
defined (Alianza), the ASERCA compensatory programs, input subsidies, and
even targeted education spending (including Oportunidades).
Table 2-11: 2008 PEC Budget
PEC 2008
Total budget (million MxP) 204,000
Groups (Programs)
Competitiveness 39.4% Educación 13.3% Apoyos Directos al Campo 8.2% Adquisición de activos productivos 8.0% Atención a problemas estructurales 5.8% Soporte 1.8% Inducción y Desarrollo del Financiamiento al Medio Rural 1.6% Atención a Contingencias Climatológicas 0.4% Apoyo a la participación de actores para el desarrollo rural 0.4%
Infrastructure (Infraestructura en el medio rural) 20.6%
Social (Atención a la pobreza en el medio rural) 16.3%
Health (Atención a las condiciones de salud en el medio rural) 9.3%
Environmental (Uso sustentable de recursos naturales para la prod. Primaria) 6.5%
Administrative (Gasto administrativo) 4.9%
Financial (Financiamiento y aseguramiento al medio rural) 1.6%
Labor (Mejoramiento de condiciones laborales en el medio rural) 0.8%
Land Reform (Atención de aspectos agrarios) 0.6%
Source: Scott (2008)
36. The new structure of PEC reveals little spending in some critical areas like
finance, labor and land related programs. Together, the first two categories
(finance and labor) absorb just 2.4 percent of PEC, equivalent to half of
administrative spending. Only MxP 1.7 billion is allocated to rural employment
programs, which is less than 1 percent of the 2008 PEC. Land related programs
(known as programas agrarios in Mexico), which include, inter alia, access to
land, regularization of land rights, legal and other forms of support related to land
rights for ejidatarios and small farmers in general, and resolution of land
conflicts, absorb only 0.6 percent of PEC, in contrast to the importance of land
issues in Mexico. Social security/protection could probably be better identified as
a separate category but is included in the health and poverty programs. Until very
recently, it was practically non-existent in rural areas. This has changed
dramatically since the introduction and rapid growth of the Seguro Popular since
2004, and a minimum non-contributive universal rural pension started in 2007
(Adultos Mayores de 70 años y Más en Zonas Rurales). In 2008, following a
26
large increase in the approved budget for the latter program (MxP 9.9 billion vs.
the originally proposed MxP 6.4 billion), these two programs account for
approximately 10 percent of PEC.
OTHER FISCAL COSTS OUTSIDE PEC
37. Although PEC captures the majority of public expenditure for rural
development except for universal social services (such as education and
health), there are policy measures implying fiscal costs that are not budget-
based and hence fall outside PEC but do contribute to the rural agenda. They
include tax exemptions, the Tarifa 9, which subsidies electricity tariffs to pump
groundwater, water tariff subsidies, agricultural credit subsidies, and subsidies to
crop insurance. The amounts of these implicit agricultural subsidies are
significant. Because of difficulties in quantifying the magnitude of each program,
only agricultural tax exemptions and Tarifa 9 are examined here.
38. The agricultural sector benefits from several tax exemptions totaling MxP
24.5 billion, which is approximately 5 percent of total tax exemptions and 8
percent of total income tax exemptions. There are 6 different exemption/incentive
categories for agriculture. The largest is the reduction in income tax, which totals
MxP 11.2 billion (Table 2-12). Other exemptions include deductions for
temporary farm worker subsistence (MxP 6.0 billion), for land dedicated to
agriculture (MxP 54 million), of income tax for individuals with up to 20 times
the agriculture minimum wage (salarios mínimos agropecuarios [SMA], MxP 4.8
billion), and for associations up to 40 times the agriculture minimum wage (MxP
2.4 billion).
Table 2-12: Tax exemptions and preferential treatment of the agricultural sector (2006)
MxP million % of National
GDP
Tax Exemption Total 24,547.6 0.27
1. 44.83% reduction in Income Tax (ISR)
11,203.8 0.12
2. Exoneration of 20 minimum agricultural wages (SMA) for
each associate or member (cap of 200 times the general
minimum wage of Mexico‘s Distrito Federal)
4,801.6 0.05
3. Deduction of 19% of revenue of self employed farmers to
cover casual work employment, animal feeding and incidental
expenses (no documentation required)
5,997.5 0.07
4.Exoneration of personal income tax (ISR) up to 40 minimum
agricultural wages (SMA)
2,382.8 0.03
5. Deduction of investments under the ―intermediate regime‖
107.9 0.00
6. Deduction for lands devoted to agricultural activities
(anticipated) 54.0 0.00
Source: Oliver and Santillanes (2008) using data from Presupuesto de Gastos Fiscales 2006
39. Agriculture uses 76 percent of available water resources in the country but
contributes only 1.9 percent of the water use fees and bulk water tariffs
27
collected by the Comisión Nacional de Agua (CONAGUA). Despite the water
scarcity situation in many parts of the country, farmers pay only a portion of the
costs involved in delivering irrigation water. In addition, water charges, although
theoretically based on the volume of water used, are normally calculated per
hectare because of the lack of water measuring devices. The current water tariff
structure does not fully cover the operation and maintenance costs and
depreciation costs of irrigation infrastructure. Also, farmers pay a small fee when
their water use exceeds their concession (MxP 0.1 per cubic meter for excess
water use). This does not take into account the opportunity cost of water, which
would set the price at the marginal cost. Low water pricing and lack of
measurement encourage excessive water use and wasting, a situation that is far
from being unique to Mexico. In fact, in many countries, irrigation water costs
are highly subsidized, with farmers paying part only of the operation and
maintenance costs.29
Cost recovery for operation and maintenance of irrigation
systems is generally better in Mexico than in other developing countries.
40. The electricity subsidy is costly and promotes an unsustainable use of scarce
groundwater resources. The so-called Tarifa 9 is a subsidy on the tariff for
electricity use in agriculture, and is mainly used for pumping groundwater from
wells. The actual cost of generating and transmitting water in Mexico is
estimated to be MxP 1.44/kWh but farmers pay on average MxP 0.33/kWh, i.e.
only 23 percent of the actual cost.30
The subsidy implies that farmers pay on
average 29 percent of the electricity they consume, whereas industrial users pay
94 percent and urban domestic users 43 percent. The total cost of the electricity
subsidy for farmers was estimated to be MxP 8.0 billion in 2006.31
Underpricing
of water together with Tarifa 9 have strong environmental impacts, promoting the
overuse of Mexico‘s scarce water resources. The effects of Tarifa 9 are
particularly detrimental on groundwater resources, which also have serious
consequences for climate change adaptation strategies (see Box 2-3), also the
findings of World Bank (2008d) shows that it has very little positive impact on
poverty reduction since the majority of Tarifa 9 beneficiaries are well-off farmers
and poor farmers typically do not pump groundwater, instead they use water
wheels (norias) or surface water.32
Box 2-3: The role of agricultural subsidies in Mexico’s water crisis
Mexico now faces a ―water crisis‖ that includes the overexploitation of 102 of its 653 aquifers, accounting
for more than half of groundwater extraction in the country. The National Water Commission
(CONAGUA) estimates groundwater over-extraction at almost 40 percent of total groundwater use. The
value of the over-extracted groundwater in agricultural production alone is estimated at more than US$1.2
billion or 0.2 percent of GDP. The depletion of many aquifers leads to non-price and unregulated
rationing, distorting growth in Mexico‘s most dynamic economic regions.
29
World Bank (2007) 30
Muñoz Piña, Avila Forcada, et. al (2006). 31
Primer Informe de Gobierno del Presidente Calderon as cited in Gomez and Santillanes (2008). 32
Of the 105,000 recipients of the subsidy, 68,000 receive an annual subsidy of less than MxP 30,000,
while 33 users receive a subsidy of over MxP 500,000. This amounts to a Gini coefficient of 0.91 for the
distribution of the subsidy (World Bank, 2007a).
28
The map below shows the locations of the 188 most important aquifers and their levels of exploitation.
Most of the extremely overexploited aquifers are in the central-northern regions of Mexico where water
scarcity is an issue and where the most active water-using economic sectors operate. The geographical
distribution of this resource implies scarcity where the economic activity is taking place.
The 188 Most Important Aquifers and their Levels of Exploitation
Source: INE (2006) using data from CNA, Water Statistics in Mexico, 2005 edition
Some apparent contradictions between the Constitution and national water laws and regulations further
complicate this sort of rationing, particularly in relation to disenfranchised populations. Although some
irrigation is shifting to water-saving technologies, the shift is limited, and the crop mix remains largely the
same because (i) water and electricity prices still give the false signal that water is abundant, and (ii)
irrigation infrastructure is insufficient to allow farmers to shift to specialty crops. Moreover, agricultural
producers benefit from low electricity tariffs for pumping (tarifa 9). Consequently, farmers have little
incentive to change current practices, which result in over-pumping of aquifers, lowering of the
groundwater tables, and in many cases the intrusion of salt water. In addition, the financial cost to society
of the approximately US$700 million per year electricity subsidy may represent only a fraction of the full
economic cost, since environmental degradation is not valued properly.
One such example of environmental degradation caused by the inappropriate use of groundwater is the
deterioration of semi-aquatic ecosystem wetlands. These ecosystems are considered among the world‘s
most important because they provide a unique habitat to a large number of species of flora and fauna. They
also support the migration cycles of aquatic birds, 12 species of which winter in Mexico‘s wetlands. For
this reason Mexico has supported the preservation of these habitats by incorporating 51 wetlands in the
Ramsar Convention. However, many of these sites are threatened by the lack of fresh water provided by
groundwater. Such is the case of the Xochimilco wetlands, as well as the Lerma and Aguascalientes
springs and many of central Mexico‘s major lakes (Chapala, Cuitzeo, and Pátzcuaro).
Source: Muñoz Piña, C., Avila Forcada, S. et. al., (2006) and Asad and Dinar (2006)
29
RELATIVE SIZE OF ARD EXPENDITURES
41. The fiscal costs outside PEC quantified above amount to MxP 32.6 billion,
equivalent to 21.3 percent of PEC.33
Including these costs, total fiscal expenses
for ARD increase to MxP 185.5 billion (Table 2-13). Both tax exemptions and
the electricity subsidy can be classified as production-oriented, private goods type
subsidies, thus changing somewhat the balance among expenditure categories. By
including these fiscal expenses, the share of public goods fall from 51.7 to 42.6
percent of total ARD expenditures, while production-oriented expenses increase
from 44.4 to 54.1 percent (Table 2-5 and Table 2-13).
Table 2-13: Total Fiscal Expenses for ARD Including PEC and other Fiscal Costs in 2006
Total Cost Social Productive
Indirectly
Productive
MxP
Million
Percent
(%)
MxP
Million
Percent
(%)
MxP
Million
Percent
(%)
MxP
Million Percent (%)
Total 185,480.98 100.00 69,912.94 100.00 100,417.24 100.00 15,150.80 100.00
Public 79,120.68 42.65 40,186.94 57.48 24,043.74 23.94 14,890.00 98.28
Private 106,360.30 57.35 29,726.00 42.52 76,373.50 76.06 260.80 1.72
Source: Oliver and Santillanes (2008) using data from SHCP
42. Total rural expenditure (including universal social services) is estimated to
be MxP 382 billion, which represents a quarter of total public spending and 4
percent of national GDP. The estimate of ARD fiscal expenses in Table 2-13
does not include rural public spending on universal social services (general
education and health services, social security, and other general subsidies such as
the residential electricity subsidy). The rural share of these public expenditures
was estimated at 27.5 percent in World Bank (2004a). Adding these to the former
estimate of ARD expenditures implies that total rural spending is approximately
MxP 382 billion, representing a quarter of total public spending and 4 percent of
national GDP (Table 2-14).
43. This represents a very significant fiscal effort on behalf of the rural
population. Given the current share of the rural sector in the national population
(24 percent), it implies that average public expenditure per capita is now similar
in the urban and rural sectors, without an ―urban bias‖ in the allocation of public
expenditures and subsidies. In fact, when taking into account the contribution to
the fiscal revenue, there may even be a ―rural bias‖ in the expenditure. However,
there is evidence that the quality of public services is significantly lower in rural
areas.34
44. The magnitude of these expenditures is evident if measured in relation to the
weight of the ARD sector in the national economy. Agricultural GDP was 3.5
33
Since only two fiscal expenses were quantified (tax exemptions and tarifa 9), the actual total fiscal
expenses are expected to be higher. 34
See for instance World Bank (2004c) Chapter 3.A, and OECD (2007d) pages 132-33.
30
percent of GDP in 2006, but rural GDP is considerably larger. Using ENIGH
data, the share of the rural sector in national GDP is estimated to be 11 percent .35
From the above, the total APE for 2006 (agricultural programs within the PEC
plus the agricultural tax exemption and tarifa 9) as estimated in this study (MxP
80,108 million), represents 43 percent of Agricultural GDP, while total ARD
expenditures (MxP 185,481 million, consisting of the entire PEC plus
agricultural tax exemptions and tarifa 9) and total rural expenditures (including
also universal social services, social security and residential electricity subsidies,
MxP 381,636 million) represent, respectively, 18 percent and 38 percent of rural
GDP (Table 2-14).
Table 2-14: Agricultural and Rural GDP and Public Expenditure
National Agriculture Rural (pop. 0-2,500)
Share
(%) Share (%)
Share
(%)
(1) Population (2006, million) 104 100.0%
6.0
(workers)
14%
(workers) 24.5 23.6%
(2) GDP (2006, MxP million) 9,175,564 100.0% 318,158 3.5% 1,007,807a 11.0%
(3) Public RURAL expenditure
(PEC+foregone ag. tax+tarifa
9 , MxP million) 185,481 100.0% 80,108 43.2% 185,481 100.0%
(4) Public expenditure ((3) +
other universal servicesb, MxP
million) 996,037 100.0% - - 381,636c 38.3%
(5) Expenditure/GDP [(3)/(2)] - 2.0% - 25.2% - 18.4%
(6) Expenditure (incl. universal
social services)/GDP [(4)/(2)] - 10.9% - - - 37.9%
Source: Rural population from CONAPO‘s population projection, Agriculture labor population from
ENOE (Encuesta Nacional de Ocupación y Empleo)
Note:
(a) Rural GDP estimated using ENIGH data on share of agricultural and non-agricultural income
(approximately 25/75) in rural households
(b) ―Other universal services‖ include universal social services (general health and educational services),
social security, and residential electric subsidy
(c) Rural share of universal social services estimated using 2006 spending figure and a share of 24.2% for
the rural sector (World Bank, 2004a)
35
To obtain an estimate of rural GDP, the relative share of agricultural/non-agricultural income in the rural
sector as observed in ENIGH (approx. 25/75) is used to estimate non-agricultural rural GDP.
31
32
3. EFFICIENCY ASSESSMENT
45. This section assess the relationship between Agricultural Public Expenditure
(APE) and agricultural production and productivity from three complementary
perspectives: (i) a comparative analysis of APE and agricultural GDP growth
rates using international data, (ii) an analysis of the correlation between APE and
production and productivity growth at the state level, and (iii) an analysis of the
evolution of agricultural support resources with growth rates for production,
cultivated land, and yields of different crops. The assessment is limited to
agriculture programs, i.e. to APE, and excludes non-agricultural rural
development programs, since there is no uniform international/state level dataset
that can be used to compare the budgets and performance of rural development
programs.
46. Two sets of data are used for the international comparisons, from the Food and
Agriculture Organization (FAO) and the Organization for Economic Co-operation
and Development (OECD). The FAO data is the GPAGRURAL database
produced by the FAO Regional Office for LAC.36
Although excellent for the
period covered (1987-2001), unfortunately it has not been updated since 2001.
The OECD data on APE is available as an annual exercise for its member
countries. The OECD monitoring effort is both more recent and allows more
detail in the breakdown of agriculture-related expenditures and supports. It also
allows for a comparison with developed countries.
COMPARISON WITH LATIN AMERICAN COUNTRIES
47. Mexico stands out in LAC as the one country spending more that the rest in
agriculture measured by a variety of indicators. Relative to total government
spending, Mexico spent 6 percent on agriculture in the 5-year average of 1997-
2001 (LAC average was 3.4 percent; Table3-1). This was the highest amount in
LAC. Relative to the size of the sector, Mexico also had the highest percentage,
23 percent against a LAC average of 11 percent (Figure 3-1). APE share in public
expenditure relative to the sector‘s share of GDP, captured in the Agricultural
Orientation Index (AOI), was again the highest: 1.6 compared to a LAC average
of 0.5, with Mexico clearly showing a bias in favor of agricultural spending
(Table 3-2).
36
FAO (2005b)
33
Table 3-1: APE in LAC (1987-2001): 5 year average, % of total public spending
YEARS 1987-1991 1992-1996 1997-2001
Argentina 2 1.4 1
Bolivia 3.1 0.6 2.4
Brazil 5 3.5 3.6
Chile 2.2 2.4 2.6
Colombia n.a. 1 0.4
Costa Rica 22.4 10.1 4.3
Cuba n.a. n.a. n.a.
Ecuador 4.3 4.1 5.1
El Salvador 1.6 0.4 2.1
Guatemala 4.4 2.7 2.9
Honduras 2.3 1.6 2.8
Jamaica 2.9 1.2 0.7
Mexico 9 9.1 6
Nicaragua 5.5 12 9.3
Panama 4.3 2.9 4
Paraguay 5.1 4.3 4.3
Peru 2.1 3.2 2.6
Dominican Rep. 18.9 11 8.3
Uruguay 2 1.7 1.9
Venezuela 3.2 1.4 0.8
LAC 5.6 3.9 3.4
Source: FAO (2005b)37
as cited in Valdes (2008a).
Note: n.a. = non available
37
In the FAO study the source of public expenditures figures is the IMF Government Financial Statistics.
34
Figure 3-1: APE relative to Agricultural GDP (%, 1992-2001)
14.7
10.6
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Méx
ico
Panam
á
Brasi
l
Rep
. Dom
.
Nic
arag
uaLA
C
Uru
guay
Ecuad
or
Chi
le
Cos
ta R
ica
Bolivi
a
Perú
Jam
aica
Hon
duras
Venez
uela
Paragu
ay
Argent
ina
El Sal
vado
r
Gua
tem
ala
Col
ombia
%AGDP
1992-1996
1997-2001
Source: FAO (2005b) as cited in Valdes (2008a)
Table 3-2: Agriculture Orientation Index (AOI): Agriculture expenditure share relative to
agriculture’s share of GDP
YEARS 1985-1990 1995-2001
Mexico 7.1 1.6
Venezuela 1.7 1.2
Dominican Rep. 1.1 0.7
Brazil 1.5 0.7
LAC 111.2.2.2 0.55.5
Nicaragua n.a. 0.5
Panama 1.6 0.5
Costa Rica 3.5 0.5
Ecuador 1.4 0.5
Chile 0.2 0.3
Peru 0.2 0.3
Uruguay 0.5 0.3
Argentina 0.7 0.2
Paraguay 0.2 0.2
Honduras 0.2 0.2
El Salvador 0.2 0.2
Bolivia 0.2 0.1
Guatemala 0.1 0.1
35
Jamaica 0.4 0.1
Colombia n.a. n.a.
Cuba n.a. n.a. Source: Valdes (2008a). Based FAO (2005b). GDP and Agriculture GDP from the World Development
Indicators, and from Government Finance Statistic Database (IMF).
48. Comparatively, the impact of Mexico APE on agricultural growth seems
small. Figure 3-2 shows annual growth rates of agriculture jointly with the ratio
of public agricultural spending relative to agricultural GDP. In 1997- 2001,
Mexico spent on agriculture an amount equivalent to 23 percent of agricultural
GDP while attaining a sectoral growth rate of less than 2 percent. In this figure,
well performing countries are located to the left and above the fitted line. Mexico
is the country furthest away below the line.
Figure 3-2: Agricultural growth rate in LAC in relation to APE (as a percentage of agricultural
GDP), Average (1997-2001)
Panama
Colombia
Venezuela
Argentina
El Salvador
Honduras
Bolivia
Guatemala
Chile
Peru
Paraguay
LACMexico
Brazil
Costa Rica Ecuador
Dominican Rep.
Nicaragua
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
0.0 5.0 10.0 15.0 20.0 25.0
% of AGDP
AGDP Growth Rates
(%)
Source: Valdes (2008a) using FAO (2005b). Agricultural GDP growth rates are based on World
Development Indicators Database.
49. Similarly, the impact of APE on Total Factor Productivity (TFP) is also low. Figure 3-3 compares growth rates in agricultural GDP and TFP over 1981-2001
with average APE/AGDP expenditure rates for 1985-2001, ordering countries by
the latter. The figure suggests, if anything, a negative correlation between the
countries‘ APE and the growth of AGDP and TFP. With the exception of Costa
Rica, the six highest spenders (above 15% of agricultural GDP), show the lowest
agricultural GDP growth rates over the period. On the other hand, the high growth
36
economies in both GDP and TFP are concentrated in the lower and middle end of
the APE distribution.
Figure 3-3: Average yearly agricultural GDP and TFP growth rates and distribution of APE/AGDP
(%, 1981/5-2001)
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Mexic
o
Nica
ragu
a
Uru
guay
Dom
inica
n Republic
Cost
a Rica
Pan
ama
Bra
zil
Chile
Venezu
ela
Jam
aica
Guat
emal
a
Hondura
s
Peru
Ecu
ador
Boliv
ia
Arg
entina
Par
aguay
Colo
mbia
GD
P, T
FP g
row
th
0%
5%
10%
15%
20%
25%
30%
35%
40%
AP
E/G
DP
(%
)
GDP 1981-2001 TFP 1981-2001 APE/GDP 1985-2001
Source: APE and Agricultural GDP from FAO (2005b); Agricultural TFP growth rates from
Avila and Evenson (2004).
COMPARISON WITH OECD COUNTRIES
50. Total government support to the agricultural sector has followed cyclical
trends. The total transfers to the sector, measured by OECD‘s Total Support
Estimate (TSE) is defined as the sum of transfers to producers from taxpayers and
consumers, net of budget revenues (the import receipts associated with MPS
programs). The TSE of Mexico has followed a broadly cyclical pattern: it
declined in the second half of the 80s (following the 1983 crisis and 1986 trade
liberalization through GATT), increased significantly between 1989 and 1994
(reaching its highest historical level in real terms in 1993), collapsed in 1995
following the ―tequila crisis‖, expanded between 1996 and 2002, fell in 2002-
2004, and started to grow again after 2004. Also, the use of the most distortionary
producer support instruments declined in the 1990s but resurfaced again since
2000.
51. Mexican support to the sector is slightly lower than the OECD average and
similar to USA levels. Figure 3-4 shows average TSE for the period of 2003-05
for OCED members and selected MICs, as percentage of national GDP. Mexico‘s
TSE is 0.90 percent of national GDP, compared to an OECD average of 1.2
37
percent and a USA average of 0.86. However, the level is significantly higher
compared to countries such as Brazil, Chile, and New Zealand. The allocation of
Producer Support Estimate (PSE) and GSSE in Figure 3-5 shows that compared to
OECD average, Mexico has a higher allocation for budget support to farmers
(Mexico 59 percent and OECD average 38 percent in 2006), but a lower
allocation for MPS (Mexico 30 percent and OECD average 40 percent in 2006)
and GSSE (Mexico 11 percent and OECD average 23 percent in 2006). Mexican
PSE levels are slightly lower than OECD average levels, similar to USA levels
and much higher than Brazil, Chile, and New Zealand (see Figure 3-6).
Figure 3-4: Total Support Estimate (TSE) for Select Countries (as % of national GDP; 2003-05 average)
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
Australia
New Zealand
Chile
Brazil
Canada
United States
Mexico
OECD
European Union
Japan
Russian Federation
China
Turkey
Source: OECD, PSE/CSE Database, 2007 and OECD Factbook 2008: Economic, Environmental and Social Statistics
Note: EU15 for 2003 and EU25 for 2004-2005. Chile Estimates based on Agricultural Policy Note, OECD. 2008
Figure 3-5: Mexico and OECD’s PSE and GSSE (%, 1990/97-2006)
38
Mexico (1997-2006)
GSSE
MPS
Budget
Support to
Farmers
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
PSE
GSSE
OECD (1990-2007)
GSSE
MPS
Budget
Support to
Farmers
0%
20%
40%
60%
80%
100%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
p
GSSE
PSE
Source: OECD, PSE/CSE Database 2007
Figure 3-6: Producer Support Estimate (PSE) (% of agricultural GDP; 2003-05 average)
39
0
10
20
30
40
50
60
New
Zea
land
Austra
lia
Brazil
Chi
le
Mex
ico
Uni
ted
State
s
Rus
sian
Fed
erat
ion
Can
ada
Turke
y
OEC
DEU
1
Japa
n
Source: OECD, PSE/CSE Database, 2007 and OECD Factbook 2008: Economic, Environmental and Social
Statistics. Chile Estimates are based on Agricultural Policy Note, OECD. 2008
Note: 1/EU15 for 2003 and EU25 for 2004-2005
52. Expenditure in public goods, earlier identified as being underfunded in
Mexico, is higher for marketing and promotion activities and lower for
infrastructure and research and development compared to some OECD and
MIC countries.38
For all the countries included in Table 3-3, infrastructure and
research and development are two categories of common significance. In the case
of Mexico, however, spending on marketing and promotion is the highest
category (although far less than in the United States), and spending on
infrastructure and research and development is relatively low, particularly
compared to New Zealand and also to Brazil and Chile. Knutson (2007) also
points out that Mexico would need to spend an additional MxP 1.1 billion a year
in Sanitary and phyto-sanitary inspection systems if it were to match the US
system.39
38
Brazil and Chile is included as part of OECD‘s regular monitoring and evaluation effort of agricultural
policies for a few non-member countries. 39
As a benchmark, Knutson (2007) indicates that in the US, US$0.01 is spent on sanitary and phyto-
sanitary system per dollar of crops and livestock sales. Applying this benchmark figure to the Mexican sale
of crops and livestocks in 2006 (MxP 303 billion or US$25.3 billion), the cost to the Mexican government
of a US equivalent SPS system would be MxP 2.8 billion. This compares with the 2006 Mexican sanitary
and phyto-sanitary budget of approximately MxP 1.7 billion.
40
Table 3-3: Composition of General Service Support Estimate in Selected Countries (%, Average 2004-2005)
Source: Valdes (2008a) estimates based on OECD PSE/CSE database, 2005/2007.
Note: Brazil is only for 2004. Chilean agricultural schools are almost without exception privately run by
not-for-profit organizations, the budgets of which are not counted here.
APE AND AGRICULTURAL PERFORMANCE AT THE STATE LEVEL
53. The allocation of APE by states is correlated to the size of their agricultural
sectors. Figure 3-7 shows that the distribution of APE and agricultural GDP are closely
correlated, in fact, the correlation coefficient is 0.70, although some states (Tamaulipas,
Zacatecas, Tlaxcala, Sinaloa, etc.) receive disproportionately higher shares in relation to
their contribution to agricultural GDP, while others (Morelos, Baja California Sur,
Aguascalientes etc.) receive disproportionately lower shares. Figure 3-8 shows a map
highlighting the APE received by states relative to their agricultural GDP. It shows that
the states receiving higher proportions of APE are those in the northern and southern
parts of the country, whereas the majority of the central states receive less.
ITEMS Mexico Brazil Chile United
States
European
Union
New
Zealand Switzerland
Research and
Development 16.2 30.7 23.0 5.9 16.4 40.3 18.1
Agricultural
Schools 21.5 13.7 1.1 0.0 7.8 8.6 3.7
Inspection Services 16.5 3.7 9.3 2.6 6.0 32.3 2.4
Infrastructure 13.8 44.5 55.2 14.0 42.4 18.4 18.1
Marketing and
Promotion 31.2 0.4 11.0 70.5 19.5 0.0 11.2
Public Stockholding 0.0 6.9 0.0 0.4 7.3 0.0 8.6
Miscellaneous 0.7 0.0 0.8 6.6 0.6 0.2 37.9
Total % 100.0 100.0 100.0 100.0 100.0 100.0 100.0
41
Figure 3-7: State Shares in National Agricultural GDP and APE (2005-2006) (%; States ordered
from left to right by descending level of state APE received in 2006)
0%
2%
4%
6%
8%
10%
12%
14%
Sinal
oa
Tamau
lipas
Chihuahua
Jalis
co
Sonora
Veracr
uz
Zaca
teca
s
Chiapas
Guanaj
uato
Mich
oacán
Durango
Oaxac
a
Puebla
Méxic
o
San Lu
is Poto
sí
Guerrero
Baja C
alifo
rnia
Hidal
go
Coahuila
Tabas
co
Nuevo Le
ón
Nayar
it
Campech
e
Yucatá
n
Tlaxc
ala
Queréta
ro
More
los
Colima
Aguas
calie
ntes
Baja C
alifo
rnia
Sur
Quinta
na Roo
Distrit
o Federa
l
APE AGDP
Source: Scott (2008)
Figure 3-8: Map of Mexico Indicating the Share APE/Agricultural GDP (2006)
Note: Dark blue states = APE is more than 16 % of agricultural GDP (12 states)
Medium blue states = APE is between 15 % and 11.1 % of agricultural GDP (11 states)
Light blue states = APE is less than 11 % of agricultural GDP (9 states)
42
54. States receiving larger amounts of APE generally contribute proportionally
more to national agricultural growth. This is shown in Figure 3-9 where the
contribution of states to the growth of national agricultural GDP in the period
1994-2006 is plotted.40
States on the left hand side of the figure, which receive
more APE than those on the right hand side, tend to have higher contributions to
national agriculture GDP growth rate. Regression results show that a 10 percent
increase of APE spent in a state is associated with a 0.2 percent higher state
contribution to national agricultural growth.41
Figure 3-9: Average Contribution of the States to the Growth Rates of National Agriculture (Million
MxP 1993 prices) [States ordered from left to right by descending level of state APE received in 2006]
-50.00
0.00
50.00
100.00
150.00
200.00
Sin
alo
a
Tam
aulip
as
Jalis
co
Chih
uahua
Zacate
cas
Sonora
Guanaju
ato
Chia
pas
Vera
cru
z
Mic
hoacán
Dura
ngo
Puebla
Oaxaca
Méxic
o
San L
uis
Poto
sí
Hid
alg
o
Guerr
ero
Baja
Calif
orn
ia
Coahuila
Nuevo L
eón
Nayarit
Tabasco
Cam
peche
Tla
xcala
Yucatá
n
Queré
taro
More
los
Aguascalie
nte
s
Colim
a
Quin
tana R
oo
Baja
Calif
orn
ia S
ur
Dis
trito F
edera
l
mil
lio
n M
XP
(1993 p
rices)
Source: Authors‘ calculations based on National Account figures
55. Examining APE efficiency using state level data: Efficiency of APE can be
examined by looking upon APE as an investment which improves productive
technology. Thus, a higher level of normalized APE (APE/ Agricultural GDP) in
year t would be associated with a higher growth rate of Agricultural GDP in years
t+1, t+2, etc. Looking at it this way, in order to maximize agricultural growth,
APE should be distributed among the states so as to equalize the marginal effect
of APE on growth rates. If we find that rates of growth are low in states where
normalized APE (APE/AgGDP) is high, this suggests that there are potential
gains from reallocating APE from these states to states where the converse is true.
40
This contribution is calculated by multiplying the average annual agricultural GDP of the state in 1994-
2006 by the state‘s average annual agricultural growth rate in that period. 41
The correlation is less than perfect with a correlation coefficient of 0.55. The correlation is significant at
the 1% level (p value = 0.001).
43
56. The allocation of public expenditure to the states is not related to the growth
of their agriculture. The relation between the level of normalized APE received
and the rate of growth of agriculture is shown in Figure 3-10, which exhibits no
correlation between the two variables.42
Under the assumption that the share of
allocations to the states has remained reasonably stable over the period, the
conclusion that follows is that the federal government has tended to allocate more
public expenditure to states with large agricultural sectors but not to those
growing faster. The association between APE and the contribution to national
agricultural growth is explained, therefore, by the effect of size in the allocation
of APE as shown previously in Figure 3-9, not by the fine-tuning of allocations
according to the growth potential of the states, as observed by historical growth
rates.
Figure 3-10: Average Annual Growth Rate of State Agricultural GDP (%, 1994-2006) [States
ordered from left to right by descending level of normalized state APE received in 2006]
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Sin
alo
a
Tam
aulip
as
Jalis
co
Chih
uahua
Zacate
cas
Sonora
Guanaju
ato
Chia
pas
Vera
cru
z
Mic
hoacán
Dura
ngo
Puebla
Oaxaca
Méxic
o
San L
uis
Poto
sí
Hid
alg
o
Guerr
ero
Baja
Calif
orn
ia
Coahuila
Nuevo L
eón
Nayarit
Tabasco
Cam
peche
Tla
xcala
Yucatá
n
Queré
taro
More
los
Aguascalie
nte
s
Colim
a
Quin
tana R
oo
Baja
Calif
orn
ia S
ur
Dis
trito F
edera
l
Sta
te a
gri
cu
ltu
ral
gro
wth
rate
(avera
ge o
f 1994-2
006,
%)
Source: Authors‘ calculations based on National Account figures
57. There is scope for raising the efficiency by re-orienting APE to states which
exhibit higher impact of spending. Given that the growth rate in agriculture
tends to be higher in states with smaller agricultural sectors, the marginal benefit
of APE is higher in those states compared to states with large agricultural sectors,
whose growth rates are lower. As a result, small agricultural states have a much
higher investment efficiency (or ―bang for buck‖)43
of APE than large agricultural
states, which receive a disproportionately higher share of APE. For example,
42
Correlation coefficient is -0.22, which shows little correlation between the two variables (normalized
state APE and state agricultural growth rate). Thus, correlation is statistically insignificant (p value = 0.21). 43
This is calculated by multiplying the average agricultural GDP of the state in 1994-2006 by the state‘s
agricultural growth rate in that period, divided by APE in 2006 of that state.
44
Morelos, which received one of the least APE as a share of its agricultural GDP,
shows MxP 21 of agricultural GDP for every peso of APE that was allocated to
the state, whereas Tamaulipas which received the second most APE as a share of
its agricultural GDP shows only MxP 0.4 of agricultural GDP for every peso of
APE allocated to the state (see Figure 3-11). This would suggest the existence of
potential efficiency gain in re-allocating APE in favor of those states which
exhibit a higher growth per peso of spending.
Figure 3-11: Investment efficiency of APE (“Bang for Buck”) [states ordered from left to right by
descending level of APE/agricultural GDP]
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
Sin
alo
a
Tam
aulip
as
Jalis
co
Chih
uahua
Zacate
cas
Sonora
Guanaju
ato
Chia
pas
Vera
cru
z
Mic
hoacán
Dura
ngo
Puebla
Oaxaca
Méxic
o
San L
uis
Poto
sí
Hid
alg
o
Guerr
ero
Baja
Calif
orn
ia
Coahuila
Nuevo L
eón
Nayarit
Tabasco
Cam
peche
Tla
xcala
Yucatá
n
Queré
taro
More
los
Aguascalie
nte
s
Colim
a
Quin
tana R
oo
Baja
Calif
orn
ia S
ur
Dis
trito F
edera
lMxP
of
AP
E p
er
Ag
. G
DP
sp
en
t
Source: Authors‘ calculations based on National Account figures
58. Labor and land productivity also appear to be uncorrelated with APE (see
Figure 3-12). The four states with the highest APE/AGDP rates (Tamaulipas,
Tlaxcala, Zacatecas and Campeche) present the lowest land productivities among
all states except Yucatan. On the other hand, productivity growth is roughly U-
shaped: it is positive for some of the states with largest shares of APE, negative
for most states in the middle and again positive for the states with the smallest
APE shares.
45
Figure 3-12: Average Value of Production per Worker and Hectare (thousand MxP 2004, 2000-2004,
and Percentage Change in Labor and Land Productivity (%, 2000-2004):
[states ordered from left to right by descending level of APE/agricultural GDP]
0
20
40
60
80
100
120
140
Tamau
lipas
Tlaxc
ala
Zaca
teca
s
Campech
e
Sinal
oa
Quinta
na Roo
Chiapas
Sonora
Chihuahua
Baja C
alifo
rnia
Tabas
co
Guanaj
uato
Hidal
go
Colima
Oaxac
a
Nayar
it
Guerrero
Méxic
o
Puebla
San Lu
is Poto
sí
Yucatá
n
Durango
Queréta
ro
Veracr
uz
Jalis
co
Coahuila
Nuevo Le
ón
Mich
oacán
Aguas
calie
ntes
Baja C
alifo
rnia
Sur
Distrit
o Federa
l
More
los
Val
ue
of
pro
du
ctio
n/w
ork
er
0
5
10
15
20
25
30
35
40
45
Val
ue
of
pro
du
ctio
n/h
ect
are
Value of production/hectare Value of production/worker
Percentage change in labor and land productivity: 2000-2004
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Tamau
lipas
Tlaxc
ala
Zaca
teca
s
Campech
e
Sinal
oa
Quinta
na Roo
Chiapas
Sonora
Chihuahua
Baja C
alifo
rnia
Tabas
co
Guanaj
uato
Hidal
go
Colima
Oaxac
a
Nayar
it
Guerrero
Méxic
o
Puebla
San Lu
is Poto
sí
Yucatá
n
Durango
Queréta
ro
Veracr
uz
Jalis
co
Coahuila
Nuevo Le
ón
Mich
oacán
Aguas
calie
ntes
Baja C
alifo
rnia
Sur
Distrit
o Federa
l
More
los
VP
/wo
rke
r(h
ctr)
Change in VP/hctr Change in VP/worker
Source: Scott (2008)
46
59. There is a negative correlation between spending in private agricultural
goods and state level agricultural GDP growth. Regression results in Table 3-4
show that, controlling for the levels of mechanization, fertilization and
expenditures in public goods, a 10 percent increase in APE on private goods as a
percentage of the value of agricultural production is associated with a 2.6 percent
reduction in Agricultural GDP growth.44
This result may seem counterintuitive,
but can be explained by several factors. First, and most importantly, APE and
infrastructural investments have been concentrated historically in the largest and
most developed agricultural states, where additional growth potential may thus be
lower. Secondly, the size and concentration of federal APE may have a crowding
out effect on private and state government investments in the largest beneficiary
states. Finally, the results are consistent with a low productive impact of APE
programs at the farm level. On the other hand, spending on public agricultural
goods shows a positive but not statistically significant impact on agricultural GDP
growth.45
Table 3-4: Effect of APE on Log Average Annual Agricultural GDP growth: 2000-2006
APE Private Goods (% value agr
prod) -0.261
[0.014]*
APE Public Goods 1.113
[0.316]
Mechanization (% of cultivated
land) 0.052
[0.006]**
Fertilization (% of cultivated land) -0.042
[0.031]*
R-squared 0.712
Robust p values in brackets
* significant at 5%; ** significant at 1%
APE AND THE PERFORMANCE OF DIFFERENT CROPS OVER TIME
60. MPS and output-based ASERCA payments have targeted mostly traditional
crops, and not fruits and vegetables. Figure 3-13 to Figure 3-15 compare the
evolution of agricultural support resources with growth rates for production,
cultivated land, and land productivity of grains, vegetables and fruits over the
period 1980-2004. Both MPS and output-linked ASERCA payments have
targeted mostly traditional crops, particularly maize and other grains, as well as
raw sugar and some animal products like milk and poultry meat (Figure 3-13).
44
This result is in accordance with results by Lopez and Galianato (2007) showing that, ceteris paribus,
reducing the share of subsidies to private goods (or, equivalently, increasing the share of public goods) in
the government‘s budget has a large and significant positive impact on rural per capita income. 45
Lopez and Galinato (2007) also show using a 1985-2001 dataset on rural expenditure for LAC that
reducing the share of subsidies to private goods (or, equivalently, increasing the share of public goods) in
the government‘s budget has, ceteris paribus, a large and significant positive impact on rural per capita
income.
47
Fruits and vegetables, on the other hand, have not received significant support,
but have benefited from the liberalization of agricultural markets.
Figure 3-13: Support Based on Specific Commodity Production: MPS and ASERCA (grains) (MxP
Million, 1980 - 2004)
-20,000
-10,000
0
10,000
20,000
30,000
40,000
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Grains MPS Grains ASERCA
-60,000
-50,000
-40,000
-30,000
-20,000
-10,000
0
10,000
20,000
30,000
40,000
50,000
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
Diary Meat Sugar Other
Source: OECD (2007) as cited in Scott (2008).
48
61. Corresponding to the surge in the support for grains, the production of
grains expanded after 2000 while the growth of vegetables and fruits
declined. As one would expect, after the liberalization reforms a significant
increase is observed in the production of fruits and vegetables, but not of grains.
This growth was associated with an expansion in cultivated land in the case of
vegetables, and an increase in the productivity of land in the case of fruits. By
contrast, after 2000, the growth of vegetable production slows down, and in the
case of fruits declines, while grains grow at an average 7.5 percent annually,
entirely through growing land productivity (Figure 3-14 and Figure 3-15). Note
that the 1988-1994 and 2000-2004 periods present similar trends in the relative
behavior of grain vs. fruits and vegetable production and cultivated land, in favor
of the former. This coincides with the surge of MPS and output-based support for
grains, as well as the expansion of variable input-based support, which is also
mostly linked to the latter.
62. The data reviewed thus suggests a conflict between the market liberalization
process initiated in the early 1990s and culminating in 2008, and agricultural
support policies. Far from being resolved, this conflict has been revived in the
present decade, with the gradual shift back towards more distortionary support
policies. Subsidies have been biased towards traditional crops (grains) rather than
supporting comparative advantage crops like fruits and vegetables. Especially in
light of favorable conditions brought about by the current high commodity prices
for precisely these traditional crops, subsidizing these crops does not make sense
from an efficiency point of view. The findings of an analysis of Mexico‘s
agricultural policies including trade policies in World Bank (2008c) quantify this
anti-export bias. The study shows that producers of several import competing
crops such as certain grains and dairy benefit from huge income transfers (with a
positive nominal rate of assistance of 19.5 percent for the period 2000-04), while
producers of exportables such as fruits and vegetables are taxed (with a negative
nominal rate of assistance of 12.5 percent).46
46
The Nominal Rate of Assistance (NRA) is defined as the percentage by which government policies raise
gross returns to producers above what they would be without government‘s intervention (or lower them if
the NRA is less than zero). This concept is similar to the OECD‘s Total Support Estimate (TSE) but there
are several methodological differences between the two (World Bank, (2008c)). The overall NRA for
importables is positive over the period 2000-04 indicating government support to these crops, but with a
large degree of variation in the level of assistance to specific products. Some major importables showed
almost zero or even negative NRAs (barley, maize, sorghum, soybeans, beans and eggs), while products
such as wheat, rice, milk, sugarcane and chicken meat showed high NRAs (40-80 percent). On the other
hand, NRAs for exportables are negative over the same period except for beef, indicating that exportables
have generally been taxed. The tax was especially high on coffee and tomatoes, exceeding 40 percent in
some years.
49
Figure 3-14: Index of Production, Cultivated Land, and Land Productivity in Grains, Vegetables and
Fruits (Base year is 1980= 1, 1980-2004)
Production
0.0
0.5
1.0
1.5
2.0
2.51
98
1
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Grains Vegetables Fruits
Cultivated Land
0.0
0.5
1.0
1.5
2.0
2.5
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Grains Vegetables Fruits
50
Productivity (Ton/ha)
0.0
0.5
1.0
1.5
2.0
2.5
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Grains Vegetables Fruits
Source: SIAP, SAGARPA as cited in Scott (2008)
Figure 3-15: Average Annual Growth Rates in Production, Cultivated Land, and Land Productivity
in Grains, Vegetables and Fruits (%, 1980-2004)
4.08%
2.26%
7.55%
0.16%
7.50%
2.19%
-0.50%
10.56%
-1.22%-2%
0%
2%
4%
6%
8%
10%
12%
1988-1994 1994-2000 2000-2004
Production
Grains Vegetables Fruits
51
0.84%
-0.15%
-0.95%
-2.35%
6.12%
-2.36%
-4.55%
3.11%
-2.44%
-6%
-4%
-2%
0%
2%
4%
6%
8%
1988-1994 1994-2000 2000-2004
Cultivated land
Grains Vegetables Fruits
3.24%
2.41%
8.50%
2.51%
1.38%
4.55%
4.05%
7.45%
1.22%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
1988-1994 1994-2000 2000-2004
Land Productivity
Grains Vegetables Fruits Source: SIAP, SAGARPA as cited in Scott (2008).
52
4. EQUITY ASSESSMENT
63. The equity of ARD expenditures is evaluated at the level of geographic units as
well as that of individual producers and households. The geographic analysis is at
the state level and also at the municipal level for programs for which there is
information. The distribution of APE is analyzed ordering states by their extreme
rural poverty rates (pobreza alimentaria), using the official CONEVAL measures
for 2005.47
STATE AND MUNICIPAL LEVEL EQUITY ASSESSMENT
64. The distribution by states of APE is highly correlated with Agricultural GDP
but not with extreme poverty. Figure 4-1 shows the cumulative distribution of
ARD expenditures and the cumulative state shares of extreme poverty,
Agricultural GDP and Oportunidades payments. There is a high degree of
correlation between the distribution of APE and Agricultural GDP, but not
between APE and extreme poverty. This is in contrast to the distribution of
Oportunidades, which shows a high correlation with the distribution of extreme
rural poverty. For example, the poorest six states are home to about 55 percent of
the extreme poor, and receive about 48 percent of total benefits from
Oportunidades but only 7 percent of total APE.
47
This measure is highly correlated with the multivariate Consejo Nacional de Poblacion (CONAPO)
marginality index, and is used here in preference over the latter because it represents the current official
poverty measure at the state level. Given the correlation, the results are not sensitive to the choice of
measure.
53
Figure 4-1: Extreme Poverty, Agricultural GDP and ARD Expenditures (%, 2005-6)
[States ordered from left to right by rural poverty rate]
0
10
20
30
40
50
60
Chiapas
Oaxaca
Puebla
Tabas
co
Campech
e
Guanaj
uato
Quinta
na Roo
Méxic
o
Zaca
teca
s
Sinalo
a
Chihuah
ua
Sonora
Coahuila
Nuevo Le
ón
Colima
Distrit
o Federa
l
Po
vert
y ra
te
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Cu
mm
ula
tive
sh
are
s
Rural poverty rate Cummulative poverty sharesCummulative Agric. GDP shares Cummulative APE sharesCummulative Oportunidades shares
Source: Scott (2008), CONEVAL for rural poverty rates, INEGI for Agricultural GDP, and Oliver and
Santillanes for APE and Oportunidades expenditure
65. The distribution of APE per rural capita for the principal programs is
concentrated in the upper half of the poverty-ordered state distribution, with
the highest benefits allocated to the large agricultural states of Tamaulipas,
Sinaloa, Chihuahua, and Sonora. These four states are among the principal per
capita beneficiaries of PROCAMPO reflecting their agricultural land assets. But
their disproportionate participation in APE is explained by the extreme
concentration of Apoyos, diesel and the electricity subsidies (tarifa 9). At the
other extreme, the poorest states receive support mostly from PROCAMPO and
Alianza, obtaining barely a tenth of the per capita support benefiting the former
states (see Figure 4-2).
54
Figure 4-2: Principal APE Programs (MxP, 2006) [states ordered from left to right by extreme
poverty rate]
0
1,000
2,000
3,000
4,000
5,000
6,000
Chiapas
Guerrero
Oaxaca
San Lu
is Poto
sí
Puebla
Veracr
uz
Tabas
co
Mich
oacán
Campech
e
Durango
Guanaj
uato
Hidal
go
Quinta
na Roo
Yucatá
n
Méxic
o
Nayar
it
Zaca
teca
s
Tamau
lipas
Sinalo
a
Queréta
ro
Chihuah
ua
Jalis
co
Sonora
Tlaxc
ala
Coahuila
Aguas
calie
ntes
Nuevo Le
ón
More
los
Colima
Baja C
alifo
rnia
Sur
Baja C
alifo
rnia
An
ual
sp
en
din
g p
er
rura
l cap
ita
(MxP
)
PROCAMPO (tradicional) PROGAN Apoyos a la comercialización Diesel Alianza para el Campo
Source: Oliver and Santillanes (2008) as cited in Scott (2008)
66. State-wise, Alianza is better distributed than PROCAMPO, which in turn is
better distributed than Apoyos. Considering individual programs, Alianza is the
most progressively distributed at the state level, with 28 percent of transfers going
to the poorest five states, followed by PROCAMPO, with 22 percent. The
distribution of Apoyos is highly regressive, with the three poorest states receiving
just 7 percent (see Figure 4-3).
55
Figure 4-3: Distribution of the Three Main Agricultural Programs (%; 2002, 2006).
[States ordered from left to right by extreme poverty rate]
Procampo
0%
2%
4%
6%
8%
10%
12%
Chiapas
Guerrero
Oaxaca
San Lu
is Poto
sí
Puebla
Veracr
uz
Tabasco
Mich
oacán
Campech
e
Durango
Guanajuato
Hidalg
o
Quinta
na Roo
Yucatá
n
Méxic
o
Nayarit
Zaca
teca
s
Tamaulip
as
Sinalo
a
Queréta
ro
Chihuahua
Jalis
co
Sonora
Tlaxc
ala
Coahuila
Aguasc
aliente
s
Nuevo Le
ón
More
los
Colima
Baja C
aliforn
ia Su
r
Baja C
aliforn
ia
Dis
trib
uti
on
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Cu
mm
ula
tive
dis
trib
uti
on
Distr. 2002 Distr. 2006 Cummul. Distr. 2002 Cummul. Distr. 2006 Cummulative rural poverty shares 2006
Apoyos
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Chiapas
Guerrero
Oaxaca
San Lu
is Poto
sí
Puebla
Veracr
uz
Tabasco
Mich
oacán
Campech
e
Durango
Guanajuato
Hidalg
o
Quinta
na Roo
Yucatá
n
Méxic
o
Nayarit
Zaca
teca
s
Tamaulip
as
Sinalo
a
Queréta
ro
Chihuahua
Jalis
co
Sonora
Tlaxc
ala
Coahuila
Aguasc
aliente
s
Nuevo Le
ón
More
los
Colima
Baja C
aliforn
ia Su
r
Baja C
aliforn
ia
Dis
trib
uti
on
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Cu
mm
ula
tive
dis
trib
uti
on
Distr. 2002 Distr. 2006 Cummul. Distr. 2002 Cummul. Distr. 2006 Cummulative rural poverty shares 2006
56
Alianza
0%
1%
2%
3%
4%
5%
6%
7%
8%
Chiapas
Guerrero
Oaxaca
San Lu
is Poto
sí
Puebla
Veracr
uz
Tabasco
Mich
oacán
Campech
e
Durango
Guanajuato
Hidalg
o
Quinta
na Roo
Yucatá
n
Méxic
o
Nayarit
Zaca
teca
s
Tamaulip
as
Sinalo
a
Queréta
ro
Chihuahua
Jalis
co
Sonora
Tlaxc
ala
Coahuila
Aguasc
aliente
s
Nuevo Le
ón
More
los
Colima
Baja C
aliforn
ia Su
r
Baja C
aliforn
ia
Dis
trib
uti
on
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Cu
mm
ula
tive
dis
trib
uti
on
Distr. 2002 Distr. 2006 Cummul. Distr. 2002 Cummul. Distr. 2006 Cummulative rural poverty shares 2006
Source: Scott (2008), calculated based on Oliver and Santillanes (2008) and World Bank (2004a)
67. State-wise expenditures on both public and private goods are regressively
distributed. Interestingly, expenditures in public goods are more regressively
distributed than those in private goods, with per capita benefits rising in the upper
half of the state distribution (Figure 4-4). Expenditures in private goods are
concentrated in the large agricultural states, Tamaulipas, Sinaloa, Chihuahua, and
Sonora, reflecting the concentration of Apoyos, diesel and the electricity subsidies
(tarifa 9).
57
Figure 4-4: Per Capita Expenditure in Public and Private Goods in APE (MxP, 2006) [States ordered
from left to right by extreme poverty rate]
0
1,000
2,000
3,000
4,000
5,000
6,000
Ch
iap
as
Gu
erre
ro
Oax
aca
San
Lu
is P
oto
sí
Pu
ebla
Ver
acru
z
Tab
asco
Mic
ho
acán
Cam
pec
he
Du
ran
go
Gu
anaj
uat
o
Hid
algo
Qu
inta
na
Ro
o
Yuca
tán
Méx
ico
Nay
arit
Zaca
teca
s
Tam
aulip
as
Sin
alo
a
Qu
erét
aro
Ch
ihu
ahu
a
Jalis
co
Son
ora
Tlax
cala
Co
ahu
ila
Agu
asca
lien
tes
Nu
evo
Leó
n
Mo
relo
s
Co
lima
Baj
a C
alif
orn
ia S
ur
Baj
a C
alif
orn
ia
Pri
vate
(M
xP,b
ars)
0
50
100
150
200
250
300
350
Pu
blic
(M
xP,l
ine
)
Private goods Public goods
Source: Scott (2008). Based on data by Oliver and Santillanes (2008)
68. Results at the municipal level for PROCAMPO and Ingreso Objetivo confirm
the regressive geographical distribution of APE. It is possible to analyze the
distribution at the municipal level using administrative data for two main
programs, PROCAMPO and Ingreso Objetivo, ordering municipalities by their
extreme rural poverty rates. Both programs are regressively distributed, but
Ingreso Objetivo extremely so, with high per capita payments for a small fraction
of municipalities, and no payments for most of the rest. In comparison,
PROCAMPO benefits are densely distributed throughout. Figure 4-5 shows that
the poorest 70 percent of municipalities receive 40 percent of PROCAMPO
transfers, but less than 6 percent of Ingreso Objetivo, and in the latter case these
resources are concentrated in a few municipalities so that the great majority of the
poorest half of municipalities (and all those in the poorest third) receive no
transfers from Ingreso Objetivo.
58
Figure 4-5: Average per Rural Capita of PROCAMPO and Ingreso Objetivo Transfers by
Municipalities (MxP, 2005-6) [ordered from left to right by extreme rural poverty rate]
Procampo
0
2000
4000
6000
8000
10000
12000
14000
16000
Municipalities
Pe
r ru
ral c
apit
a e
xpe
nd
itu
re (
MxP
)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Cu
mm
ula
tive
dis
trib
uti
on
Procampo Pesos/cap Procampo Cumm.distr. Procampo Cummulative rural poverty distr.
Ingreso Objetivo
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Municipalities
Pe
r ru
ral c
apit
a e
xpe
nd
itu
re (
MxP
)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Cu
mm
ula
tive
dis
trib
uti
on
Pesos/cap Cumm.distr. Cummulative rural poverty distr.
Source: ASERCA administrative data bases; CONEVAL municipal poverty measures.
59
PRODUCER AND HOUSEHOLD LEVEL EQUITY ASSESSMENT
69. The availability of household and producer data bases reporting both agricultural
support programs and a relevant measure of household/producer wellbeing or
wealth to allow distributive analysis is limited. Three kinds of data sources are
used, which are complementary but not strictly comparable: (i) general household
surveys including ARD transfers (ENIGH 2004, 2006; ENNVIH 2002), (ii)
evaluation surveys for specific programs (Alianza, Oportunidades), and (iii)
administrative data of the programs (PROCAMPO, Ingreso Objetivo).48
The
distribution of benefits is analyzed using two types of ordering corresponding to
the different data sources. In the case of administrative data, producers are
ordered by land holdings, which is the only measure of wealth/welfare reported in
these data. In the case of the national household surveys, benefits received are
analyzed by population deciles ordered by (current) income per capita.
Household and producer data allow coverage of the principal ARD programs,
including the principal agricultural support programs, and rural social programs
like Oportunidades and the Programa de Empleo Temporal, as well as a number
of other smaller rural development programs. Using the distribution of irrigated
land as a proxy for the distribution of hydrological, hydro-agricultural and tarifa 9
electricity subsidies, the agricultural support programs covered in this incidence
analysis represent 75 percent of APE.
70. There is a high degree of regressivity for the major agricultural programs. To compare the principal APE programs, Figure 4-6 presents concentration
curves derived from the administrative data for PROCAMPO, Ingreso Objetivo,
and Alianza PDR.49
For comparative purposes, the distribution of rainfed and
irrigated land is also shown. There is an extreme concentration of benefits for all
programs. The poorest producer decile (in terms of land) receives a tenth of a
percentage point of Ingreso Objetivo and similarly insignificant fractions of the
other programs. At the other end of the distribution, the richest producer decile
receives the following shares of transfers: (i) 45 percent of PROCAMPO,(ii) 55
percent of the Alianza PDR,50
, (iii) 60 percent of energy and hydrological
subsidies (proxied by irrigated land), and (iv) 80 percent of Ingreso Objetivo.
48
General household surveys have the important advantage of being nationally representative and including
high-quality data on income and other measures of household well-being, but their sample size is not
designed to capture specific transfer programs accurately, especially when these have limited coverage or
concentrate a large share of their benefits in a relatively small proportion of producers. The other two
sources are of course designed to capture the program beneficiaries and transfers accurately, but are not
nationally representative and generally contain limited or no income household data. The analysis obtained
from the three sources must therefore be interpreted carefully, and in a complementary way. 49
The curve for Alianza PDR is derived from Word Bank 2006a. 50
The PDR is aimed at low-income groups through explicit targeting criteria. However, the Alianza
evaluation data reveals a failure to comply with these criteria. The program‘s rules require that at least 70%
of its resources be allocated 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 – less than 2% in Very High marginality localities.
60
Figure 4-6: Concentration Curves of Major Agricultural Programs and Land (%)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Procampo Ingreso Objetivo Alianza-Desarrollo Rural
Irrigated Land Rainfed Land
Source: Scott (2008) using ASERCA administrative data, FAO (2005) and World Bank (2006).
71. PROCAMPO stands in contrast to Oportunidades. In Figure 4-7 the
distribution of PROCAMPO and Oportunidades resources is compared using
ENIGH data.51
The contrast between Oportunidades and PROCAMPO is evident
from their concentration curves in the income space. Although both programs are
more progressive than the income distribution, Oportunidades is highly
progressive (pro-poor) while PROCAMPO is regressive.
51
The distribution of PROCAMPO benefits differs substantially according to whether ENIGH data or the
administrative program data of ASERCA are used, the latter resulting in a substantially more regressive
distribution than the former. This is because, as most household surveys, ENIGH does not capture well
household incomes at the top of the distribution. In view of this, we report in some sections two sets of
results for PROCAMPO, one using ENIGH data and the other using ASERCA data.
61
Figure 4-7: Comparison of PROCAMPO and Oportunidades Transfers by Rural Population Deciles
(%, 2006) [ordered from left to right by pre-transfer income per capita]
Rural distribution
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%
Oportunidades Procampo Income
Source: Scott (2008), calculations are based on data by ENIGH 2006
72. ARD expenditures are an inefficient redistributive instrument while APE is
not only inefficient but actually contributes to increasing income inequality.
To assess the global impact of ARD expenditures on rural income inequality, the
APE programs are contrasted with nine social and rural development programs
reported in ENIGH 2006 and in a special ―Social Module‖ commissioned by
SEDESOL with ENIGH 2004. Concentration Coefficients (CC) are used to
measure equity.52
As shown in Figure 4-8, the CC of ARD expenditures is
regressive in absolute terms (CC = 0.24), but still progressive relative to the
distribution of pre-transfer income (CC = 0.35). APE is more regressive (CC =
0.58) than the distribution of pre-transfer income (CC = 0.35), thus actually
contributing to increasing income inequality. By contrast, rural development
expenditure (RDE) is progressive (pro-poor) in absolute terms (CC = -0.2.6), with
the notable exception of the two productive SEDESOL programs: Opciones
Productivas (CC = 0.12) and Crédito a la Palabra (CC = 0.45).
52
The Concentration Coefficient (CC) is a generalized form of the Gini coefficient that shows the
concentration of a particular income source x (in this case payment from ARD programs) when recipients
are ranked by an index y (in this case pre-transfer income). The CC ranges from -1 when all transfers are
received by the poorest households, through 0 when all households receive the same amount of transfer
income, to +1 when all transfers are received by the richest households.
62
Figure 4-8: Concentration Coefficients of ARD Expenditures, Income and Land (2006)
0.809
0.657
0.584
0.524
0.503
0.502
0.454
0.349
0.238
0.121
0.117
-0.073
-0.137
-0.142
-0.232
-0.265
-0.309
-0.315
-0.312
-0.315
-45% -25% -5% 15% 35% 55% 75%
Ingreso Objetivo
Irrigated land
Total APE
Total land
Rainfed land
Procampo (ASERCA)
Credito a la Palabra
Pre-transfer income
Total ARD
Opciones Productivas
Procampo (ENIGH)
Vivienda Rural
Seguro Popular
Despensa DIF
Desayunos DIF
Total RD
PET
IMSS-Oportunidades
Piso Firme
Oportunidades
Source: Scott (2008) using ENIGH 2006, ENIGH 2004 (Social Module), ASERCA Beneficiary data bases.
Note:Data for 2004 is used for the following programs: Piso Firme, Programa de Empleo Temporal (PET),
Deasyunos and Despensas DIF, Vivienda Rural, Opciones Productivas, and Crédito a la Palabra.
73. There is a sharp contrast between the distribution of APE and RDE. Under
certain assumptions,53
the distribution and income incidence of total ARD
expenditures in 2006 was estimated. A very different story emerges for APE and
RDE. More than half of APE is concentrated in the richest household/producer
decile, whereas RDE is progressively distributed, with the extreme rural poor (the
poorest 20 percent of rural households) obtaining 33 percent of transfers (Figure
4-9). APE is regressive even relative to the distribution of pre-transfer income, so
its incidence actually increases income inequality.
53
The assumptions used are as follows:
(i) The RDE transfers whose distribution could not be estimated directly (40 percent) are distributed on
average as those that were estimated (60 percent). This probably overestimates the progressivity of RDE,
given the weight of Oportunidades in the estimates.
(ii) The APE programs whose distribution could not be estimated (37 percent) are assumed to be distributed
as total (rain-fed & irrigated) cultivated land, as reported in the ASERCA data bases (except for the energy
and hydro-agricultural expenditures which are assumed to be proxied by the distribution of irrigated land).
This is probably a lower bound for the repressiveness of APE.
(iii) Given the important degree of underreporting of household income in ENIGH when compared to the
National Accounts, to obtain a realistic estimate of the incidence of ARD expenditures, HH income was
adjusted by the relevant factor (1.87) to make it consistent with the National Accounts. Since it is
reasonable to assume that underreporting in Mexico is more significant at the top than at the lower end of
the income distribution, both adjusted and unadjusted estimates are estimated.
63
74. Results show a flat ARD distribution for the poorest 70 percent and a sharp
increase for the richest 10 percent, mainly through APE. The top 10 percent
receive more than half of total APE, but less than 2 percent of total RDE (Figure
4-9). Total APE transfers represent 20.7 percent of the adjusted average income
of the richest decile (almost 40 percent unadjusted), but just 7.6 percent of the
poorest (14 percent unadjusted) (Figure 4-10). On the other hand, total RDE adds
53 percent (almost 100 percent unadjusted) to the poorest deciles pre-transfer
income, but barely adds to the income of the top decile. To summarize, the
distribution of public ARD expenditures is flat for the poorest 70 percent, at less
than MxP 500 per capita per month, but increases sharply at the tenth decile,
where rural households obtain on average more than MxP 3,000 monthly per
capita (Figure 4-11).
Figure 4-9: Estimated Distribution of APE and RDE (%, 2006) [rural household deciles ordered
from left to right by pre-transfer per capita income]
1.6% 1.6% 2.5% 3.4% 4.0%5.2%
6.9%9.2%
13.4%
52.3%
17.2%15.8%
13.2%12.0% 12.1%
9.4%7.1% 6.6%
4.8%
1.8%
0%
10%
20%
30%
40%
50%
60%
1 2 3 4 5 6 7 8 9 10
household decilesAPE RD expenditure
Source: Scott (2008) , using ENIGH 2006
64
Figure 4-10: Estimated Incidence of APE and RDE in Rural Household Income (Transfer as % of Pre-transfer
income, 2006) [rural household deciles ordered from left to right by pre-transfer per capita income]
7.6%5.1% 6.0%
7.1% 7.4% 8.1% 9.0%10.2%
12.6%
20.7%
52.9%
30.9%
20.5%
16.3%15.2%
9.8%
6.3%4.9%
3.1%0.5%
0%
10%
20%
30%
40%
50%
60%
1 2 3 4 5 6 7 8 9 10household deciles
APE RD expenditure
Source: Scott (2008) , using ENIGH 2006
Figure 4-11: Estimated Average Monthly Transfer per Capita to Rural Households from APE and RDE
(MxP, 2006) [rural household deciles ordered from left to right by pre-transfer per capita income]
49 55 84 126 159 210 282 417719
3,005
339 336 287 291 328 255 199201
175
78
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1 2 3 4 5 6 7 8 9 10
household deciles
MxP
APE RD expenditure
Source: Scott (2008) , using ENIGH 2006
75. APE cancels out approximately half of the redistributive impact of RDE. The
accounting effect of APE on the rural Gini coefficient is to increase it by 6.7
65
percent (11.5 with unadjusted income), while RDE decreases it by 14 percent
(24.8 percent unadjusted), with a net reduction of 6.5 percent associated with total
ARD expenditures (see Table 4-1). In other words, the regressive nature of the
APE is so great that it cancels out approximately half of the redistributive impact
of RDE on relative inequality, measured through the Gini coefficient.
Table 4-1: Redistributive Effects of APE and ARD Expenditures
HH Deciles
Distribution Transfer Incidence
Transfers Pre-
transfer
income
Post-transfer income
APE RDE + APE + RDE + APE
& RDE APE RDE Total
Income:
Unadjusted
(Million MxP)
108,572 76,925 467,957
1 1.6% 17.2% 2.9% 2.7% 4.9% 4.4% 14.2% 99.0% 113.2%
2 1.6% 15.8% 4.4% 3.9% 6.0% 5.3% 9.5% 57.9% 67.4%
3 2.5% 13.2% 5.5% 5.0% 6.6% 5.9% 11.2% 38.3% 49.5%
4 3.4% 12.0% 6.5% 6.0% 7.3% 6.7% 13.2% 30.4% 43.7%
5 4.0% 12.1% 7.1% 6.6% 7.8% 7.2% 13.8% 28.4% 42.2%
6 5.2% 9.4% 8.5% 8.0% 8.7% 8.2% 15.1% 18.4% 33.5%
7 6.9% 7.1% 10.0% 9.5% 9.6% 9.2% 16.8% 11.8% 28.6%
8 9.2% 6.6% 11.6% 11.2% 10.9% 10.6% 19.1% 9.2% 28.3%
9 13.4% 4.8% 13.7% 13.8% 12.5% 12.7% 23.6% 5.8% 29.3%
10 52.3% 1.8% 29.7% 33.5% 25.8% 29.7% 38.7% 1.0% 39.7%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 23.2% 16.4% 39.6%
Gini 0.5839 -0.2652 0.3486 0.3887 0.2620 0.3118
Change in Gini 11.5% -24.8% -10.6%
Income:
Adjusted
(Million MP)
875,291
1 2.9% 2.7% 4.0% 3.8% 7.6% 52.9% 60.5%
2 4.4% 4.1% 5.3% 5.0% 5.1% 30.9% 36.0%
3 5.5% 5.2% 6.1% 5.8% 6.0% 20.5% 26.5%
4 6.5% 6.2% 7.0% 6.6% 7.1% 16.3% 23.3%
5 7.1% 6.8% 7.5% 7.2% 7.4% 15.2% 22.6%
6 8.5% 8.2% 8.6% 8.3% 8.1% 9.8% 17.9%
7 10.0% 9.7% 9.8% 9.5% 9.0% 6.3% 15.3%
8 11.6% 11.4% 11.2% 11.0% 10.2% 4.9% 15.1%
9 13.7% 13.7% 13.0% 13.1% 12.6% 3.1% 15.7%
10 29.7% 31.9% 27.5% 29.7% 20.7% 0.5% 21.2%
Total 12.4% 8.8% 21.2%
Gini 0.3486 0.3721 0.2990 0.3259
Change in Gini 6.7% -14.2% -6.5%
Source: Scott (2008)
Note: RDE = Rural Development Expenditure
66
5. M&E AND INSTITUTIONAL ASPECTS OF ARD
PROGRAMS
MONITORING AND EVALUATION
76. The Monitoring and Evaluation (M&E) system in Mexico has been
undergoing major changes in the legal and institutional framework since the
late 1990s. In the 1970s and 1980s, evaluations were implemented, if at all, by
internal departments within the programs themselves, with limited transparency or
accountability. In 1997, the Progresa/Oportunidades program began its highly
acclaimed M&E system using multi-annual panel data sets and rigorous
experimental or quasi-experimental methods.54
In 2000, annual evaluations
became mandatory for all targeted programs in the 2000 Federal Budget Law.
Similarly, tax/expenditure incidence analysis was made mandatory for all public
spending in 2001 by the 2001 Federal Budget and Tax laws. Evaluations are
required to be submitted to Congress to feed into the annual federal budgetary
process. In 2005, the Consejo Nacional de Evaluación (CONEVAL) was created
by the Ley General de Desarrollo Social, with the dual mandate of generating
official poverty measures and coordinating the evaluations of all social
development programs, including all targeted rural social development
programs.55
In 2006, results based budgeting and a performance evaluation
system were made mandatory for all federal spending programs by the Ley
Federal de Presupuesto y Responsabilidad Hacendaria. The Logical Framework
was the methodology adopted to generate the relevant performance indicators. In
2007, General Guidelines for the Evaluation of Federal Programs (Lineamientos
generales para la evaluación de los Programas Federales de la Adminisración
Pública General) were issued by CONEVAL, and in May 2008, the results based
budgeting and the performance evaluation system were expanded to local (state
and municipal) government programs through a constitutional reform.
54
The credibility of the program‘s positive and internationally recognized results can arguably be credited
as a major factor in explaining the political survival of the program to two changes in administration, a
change in political party, and even a political regime change (from effectively one-party rule to alternating
parties). 55
CONEVAL is a decentralized federal public agency attached to SEDESOL. Its functions include
establishing M&E methodologies and performance indicators, disseminating evaluation results, identifying
priority intervention areas, setting up criteria for poverty measurement, and giving suggestions to
Government with respect to M&E of social programs and poverty measurement. CONEVAL is chaired by
SEDESOL and consists of six experts of well-established reputation and a technical secretary. Evaluation
work is jointly coordinated by CONEVAL, SHCP and SFP, which integrated the ―Evaluation System‖.
67
77. To organize the evaluation work, Annual Evaluation Programs are
established each year indicating which programs will be evaluated and what
type of evaluation will be carried out.56
Programs have already been compiled
for 2007 and 2008. The Annual Evaluation Programs reports 130 and 202
evaluations to be submitted to Congress in 2007 and 2008 respectively. However,
the majority were basic ―consistency and results‖ evaluations, which often suffer
from insufficient depth, and only 3 (6) were impact evaluations in 2007 (2008).
78. The rapid development of the institutional M&E framework since the late
1990s, and especially since 2006, is remarkable but the actual implementation
of this ambitious framework is facing practical challenges, especially in ARD
programs. Annual evaluations have been limited and heterogeneous in quality,
depth, objectivity and comparability. This is especially true for programs in rural
areas where the beneficiaries are dispersed. These limitations stem from issues on
the supply side, i.e. the thin pool of qualified expert consultants who are able to
conduct quality evaluations, as well as the demand side, i.e. the limited resources
available to CONEVAL, SHCP, Secretaria de Funcion Publica (SFP), and
Congress to regulate and process the rapidly growing number of evaluations.
Also, although the Logical Framework methodology adopted is in principle a
simple and easily replicable method to achieve consistency between instruments
and objectives across programs, the consistent and informative application of this
method may be difficult to achieve in practice. The Logical Framework method
should be used as a minimum common denominator for the M&E system, to be
complemented with more substantive evaluation methods.
79. The evaluation of agricultural programs is particularly tricky for several
reasons. First, they are usually demand-led, and hence the actual beneficiaries
are not known beforehand. Second, they pose complex measuring challenges (of
farm related inputs, outputs, prices and assets), which require carrying out farm
management type surveys. Third, results vary among farms according to agro-
ecological conditions and factors such as weather and water availability, which
makes it difficult to select control groups and compare results. Finally,
beneficiaries are dispersed and costly to reach. Because of these challenges,
specific methodologies, beyond general evaluation principles and methods, are
not readily available to assess the impact of these programs. This is an area where
methodological research and trial and error experimentation is highly needed.
80. Limited availability of experienced talent in M&E hinders the
implementation and oversight of good M&E. There is a shortage of well-
trained M&E experts in universities and consulting firms in Mexico to carry out
the evaluations, as well as on the side of the contracting institutions (ministries
and agencies) to act as counterparts in the evaluations and monitor quality.
56
Various types of program evaluations are considered in the Lineamientos: consistency and results,
indicators, processes, impact, and ad hoc aspects. In addition, there are also strategic evaluations related to
the policy, institutional or strategic aspects of programs or sets of programs, and new programs must
undergo a design evaluation in the first year.
68
81. ARD programs are monitored and evaluated only at the program level and
not at the level of PEC to track progress in rural development. Beyond
offering a minimum of consistency between evaluations, the new M&E
framework tracks results at the program level, and fails to provide a broader
perspective considering the links, complementarities and synergies among
programs. There is no autonomous and technical evaluation institution for ARD
programs looking at the entire ARD portfolio comparable to the role of
CONEVAL for social development, though even the latter has yet to institute an
evaluation methodology capable of converting the growing tide of individual
evaluations into a comprehensive evaluation of social spending.
82. Currently, there is no unified information system and data base for different
ARD programs, or even different agricultural support programs to
coordinate the distribution of resources at the beneficiary level. On the
contrary, each program (even within SAGARPA) has their own database of
beneficiaries and it is often not possible to link them. This makes it difficult to
analyze aggregate impacts, identify overlaps, or track the total resources received
by individual producers from different programs to allow for the establishment of
a ceiling on total APE transfers received, or identifying horizontal and vertical
inequities in these transfers. More ambitiously, a unified system would allow for
the targeting of complementary support packages as a function of the specific
socioeconomic characteristics and productive potential of producers. At present,
only a handful of programs, notably Oportunidades, have adequate beneficiary
data bases. An ambitious project to construct a unified data base of the principal
social programs was initiated by SEDESOL in the previous administration.57
An
IDB technical assistance project has been launched recently with the ASERCA
unit of SAGARPA to build a system of this kind for the agricultural support
programs as well as to design an improved Logical Framework for
PROCAMPO.58
83. Annual evaluations are costly to implement and unnecessary in most cases.
Currently, external evaluations of targeted programs are carried out annually.
This is expensive and in most cases unnecessary because of few program changes
from one year to the next. As a consequence, quality suffers, ―evaluation fatigue‖
sets in, and there is a tendency of program managers not to take evaluation results
sufficiently into account in their decision-making. It would be preferable to have
less evaluations of better quality and more relevance. Also, rather than covering
all program aspects, evaluations could cover in depth specific aspects in separate
years. The new CONEVAL evaluation framework seems to allow making these
adjustments.
57
This has been hampered by the failure to build a functional identification number system for the Mexican
population. The Clave Única de Registro Poblacional was created for this purpose, but currently contains
multiple registers. 58
The ―Improving systems and operational procedures of PROCAMPO‖ program was approved in March
2008. It is a technical assistance project with US$100,000 financed by the IDB and US$25,000 financed as
counterpart from SAGARPA.
69
84. The weakest and most critical link in the improved M&E framework is the
insufficient feedback of the evaluation results into managerial and budgetary
decision-making. Even the most sophisticated and functional M&E system
becomes irrelevant for policy making if there are no effective mechanisms to
translate its results into actual managerial and budgetary decisions, from policy
reforms to changes in the behavior of final service providers in response to
accountability and incentive mechanisms. To date, there is little evidence that the
annual evaluations of ARD programs or the overall distributive analysis of public
spending/taxes have been used in budgetary decisions by the executive or
legislative branches of government, thus creating a space for political
interferences in the determination of the public spending program. A possible way
to provide feedback is for evaluation exercises to be followed by the setting up of
an action plan for program managers to address the issues identified in the
evaluations. The plan would be agreed between evaluators, program managers
and representatives of the evaluation system. Compliance with the actions agreed
upon in the plan would need to be monitored.
INSTITUTIONAL ISSUES
85. In this section some selected institutional issues are examined. They succinctly
cover two broad topics: (i) the political economy circumstances in which ARD
policy-making is conducted, and (ii) the challenges found in the implementation
of ARD programs.59
86. A crucial political-economy issue is the pressure of rent-seekers and interest
groups to influence programs and their design. This pressure has been behind
the creation or extension of some programs in Mexico as well as in other
countries, including high income countries, and resisting it may be difficult. One
reason is that ARD policies are regarded by some sectors as an arena of resource
dispensation rather than as economic instruments to improve distribution and
growth.60
Congruent with this is a view of ARD programs as a cost of
maintaining social tranquility in the countryside, to be adjusted according to
social negotiation or voting pressure. However, the political and public
administration system has increasingly employed a much more technical or
rational view in the last decades, and hence views of the above type are rapidly
receding. The present moment seems particularly appropriate for accelerating this
transition. The formulation of a national ARD strategy and the creation of an
ARD expenditure planning system advocated in Chapter 6 could be the triggers of
a stronger position vis-à-vis this type of pressures. The strengthening of
CONEVAL‘s M&E function would also favor this.
59
More detailed analysis and factual information is contained in World Bank 2005b on the first topic and
World Bank 2006a on the second topic. 60
This trend is not unique to Mexico. It is often observed in other countries as well, developing and
developed alike, where agricultural programs are often exempt from the usual scrutiny and evaluation
accorded to publicly funded programs.
70
87. A related issue is the often-strained relationship between the executive and
legislative branches of government in the formulation of ARD policies and
budgetary allocations. More interaction between the Executive and the (strong)
rural lobby in Congress, particularly, but not only, during the budget formulation
process would improve the chances for a more rational ARD policy framework.
88. Another political economy issue is the relation between the federal and state
governments in ARD policies. With a few exceptions (mainly Alianza and
FAIS-FISM (Fondo para la Infraestructura Social Municipal), ARD programs
and expenses are fully centralized. Program design, funding and operational rules
are usually handled at the federal level.61
Under these circumstances, since state
governments do not have control of the rural agenda in their states, they do not
internalize the political and economic costs and benefits of ARD actions,
successes and failures. There is an ambiguous state of affairs in which neither the
federal government nor state governments feel truly accountable for ARD
outcomes. State governments are not necessarily unhappy with this, because, if
need be, it allows them to blame the federal level for program shortcomings and
avoid hard, possibly unpopular, decisions in the allocation of scarce funds. This
pushes the situation towards low-level policy equilibrium, particularly since state
governments would have clear advantages in designing and carrying out many
ARD actions. Certain courses of action to counter this trend are proposed in
Chapter 6.
89. Implementation matters, and is particularly complex in production-oriented
programs. How are programs implemented is almost as important as how they
are designed. Implementation challenges may jeopardize, even reverse, the
achievement of objectives.62
These challenges are particularly acute in
production-oriented programs compared to infrastructure or cash transfer
programs. The reasons are that for good implementation production-oriented
programs require a medium- to long-term perspective, a particular type of synergy
between ground level program operators and the responsible agency, high quality
participation of beneficiaries, and a large recurrent budget. The bottom line is
that these programs deal essentially with private goods, and public-private
convergence is hence of the essence.63
The above conditions are difficult to meet,
and appropriate implementation is therefore a challenge. Several aspects of the
operational challenges are highlighted below.
90. Macro type political and administrative circumstances may place constraints
on implementation. One such circumstance is the 3-year, no reelection electoral
system of municipal authorities, which hinders their involvement in medium- to
long-term endeavors like ARD. Another circumstance is the annually based
61
See World Bank (2006a) for an analysis of the decentralization of rural programs in Mexico. 62
For an analysis of implementation challenges of rural development programs in Mexico see World Bank,
2005b, Rural Poverty Study, Chapter 6. For the case of the rural development program of Alianza, see
World Bank, 2006a, Rural Decentralization Study, Chapter 3. 63
An illuminating analysis of this matter, based on the case of public programs in the State of Ceará, in
Brazil, is that of Judith Tendler (1997).
71
budgetary system existing in Mexico, which does not favor the continuity of
programs and views required by ARD, and does not help giving security to
beneficiaries regarding the stability of program benefits.
91. Execution of the budget is limited to a short time window and relies on
deferred payment modalities. Overall the execution rate of the PEC is quite
high. The execution rate for the latest year available, 2007, shows an execution
rate of 97 percent for the entire PEC program (Table 5-1). However, the
existence of administrative and budgetary norms make it, in practice, difficult to
disburse program funds and typically limit the disbursement period to several
months in the year, thus placing big pressure on those executing the program64
.
An examination of the quarterly execution rates of the PEC budget, at glance,
present a smoothed disbursement pattern over the quarters (Table 5-2).
Table 5-1: 2007 PEC Budget by Ministry
Budget Branch (ramo) PEC 2007 (millions of pesos)
Approved Modified Executed % Executed
TOTAL 176,794.4 170,122.6 165,354.4 97%
SEGOB 300.0 300.0 300.0 100%
SRE 71.4 82.8 82.8 100%
SHCP 8,291.9 8,100.2 7,534.5 93%
SAGARPA 58,536.9 57,677.4 56,519.4 98%
SCT 2,857.8 2,857.7 1,707.5 60%
SE 838.5 837.3 837.2 100%
SEP 23,686.8 24,592.0 23,220.0 94%
SSA 15,940.5 10,752.0 10,752.0 100%
STPS 66.9 66.6 66.6 100%
SER 4,779.8 4,701.4 4,701.4 100%
SEMARNAT 14,289.8 13,026.1 12,551.1 96%
AP-SS 5,512.9 5,512.9 5,512.9 100%
SEDESOL 16,525.1 16,524.5 16,517.3 100%
SECTUR 76.5 76.5 76.5 100%
PSE 250.0 250.0 250.0 100%
TSA 694.0 689.6 649.6 94%
AP-FED 24,075.6 24,075.6 24,075.6 100%
Source: SHCP
Table 5-2: 2007 PEC Quarterly Execution Rate (Million MxP)
Quarter Allocated Executed (cumulative, incl. CLCs) % Execution (cumulative)
1Q 42,530.70 29,196.80 17.2%
2Q 42,530.70 85,341.60 50.2%
3Q 42,530.70 126,309.20 74.2%
4Q 42,530.70 165,354.40 97.2%
Total 170,122.80 165,354.40 97.2%
Source: Centro de Estudios para el Desarrollo Rural Sustentable y la Soberanía Alimentaria
64
Many APE programs are very sensitive to the timeliness with which the resources reach farmers,
especially in areas where the rainy season is short. Operational and budgetary norms often stand in the way
of timelines, and result in the late arrival of subsidies.
72
92. Recurrent funds for program operation are scarce. Vigilance from SHCP that
program money is well spent, as much as possible going to final beneficiaries, is
to be praised, but it must be understood that shortage of operational funds may
jeopardize programs. It is important for budgeting authorities to realize that
production-oriented programs are particularly costly in recurrent costs if high
quality implementation is sought. Also, the level of operating cost is expected to
differ depending on project design, e.g. PROCAMPO requires very little
operational funds once the beneficiary roster has been compiled, while others, like
Alianza‘s PDR requires much more funding for effective implementation.
93. Organizational systems and cultures often lead to poor implementation. Due
to the segmentation of government agencies, rural programs often have different
breakdowns of geographical regions, different definitions, norms and procedures
for similar things, different timing and disbursement methods, and create their
own separate counterpart organizations. This makes program coordination
extremely difficult. Another key issue is how to overcome the culture of short-
term achievement often present in ARD program activities characterized by
focusing on quick results with insufficient strategic focus. The pressure to
disburse program funds is part of this. Pursuing quick results hinders inter-
agency and agency-client cooperation and beneficiary selection, and leads to low
expenditure quality.
94. There is insufficient client orientation and empowerment of beneficiaries.
Three main issues may be highlighted here: (1) poor program dissemination,
which is essential in demand-driven programs; (2) weak direct accountability of
program operators to clients/beneficiaries and weak ―client satisfaction‖ incentive
criteria; and (3) in some cases, an opportunistic and rent-seeking behavior of
program operators and service providers.
95. There are few incentives for program operators to perform well. Program
operators dealing with field activities and the interface with clients are generally
poorly paid and their knowledge and experience little valued. This refers not only
to the staff of the implementing agencies, but also to contracted private technical
service providers. The poor economic compensation and weak incentives to boost
morale for bottom level program operators is generally inconsistent with the
importance of their function. Some of the issues are: no link of payments to
performance and client satisfaction; little valuation of the operators‘ function,
with scarce consultation with them on program matters; insufficient training and
dissemination of best practices; no systematic performance evaluations; and an
insufficient networking system and a client-orientation culture.
73
6. OPTIONS FOR MOVING FORWARD
96. Mexico‘s large ARD program represents a very significant fiscal effort by the
GOM on behalf of the rural population. Average public expenditure per capita is
now similar in the urban and rural sectors, unlike that in many Latin American
countries, where there is still an ―urban bias‖ in the allocation of public
expenditure. The present ARD program represents the outcome of the far-
reaching reform efforts which began in the late 1980s to modernize the sector and
introduce a more efficient, equitable and less distortionary policy environment.
97. Mexico‘s ARD policy reforms included many novel features signaling a clear
departure from past policies. They resulted in some international best practices
such as the success of the Oportunidades program in rural poverty reduction, the
decoupled design of PROCAMPO, and the strong global leadership of the GOM
in mainstreaming climate change in ARD issues. This chapter offers options and
alternatives for the GOM to move forward on further improving its ARD public
expenditure program.
98. The basic diagnostics in previous sections identify several challenges in the
current structure of ARD expenditure:
Low cost-effectiveness—a high level of spending in rural areas, with low
impact on growth, climate change adaptation, and poverty reduction.
Imprecise ARD strategic objectives and rationale.
Distortion in some important programs—causing the prices paid or received
by private parties to differ from their values to society, discouraging producers
and consumers from making economically efficient decisions and in some
cases resulting in negative environmental externalities.
Poor coordination among the many expenditure programs.
Regressive overall spending, especially in agricultural support programs.
Limited built-in monitoring and evaluation.
Implementation constraints.
KEY FEATURES OF THE ARD PROGRAM IN MEXICO
99. Resources for ARD in Mexico are large. The amount of resources spent by
Mexico in ARD is large, bigger than in other countries in Latin American and
bigger also than in many OECD countries, in relation to the sizes of the
agricultural sector, the rural population, and the public expenditure bill (see
chapter 2). Yet the results have been less than expected (see chapter 3). So the
74
challenge for Mexico is not the size of ARD expenditures but their allocation and
quality—the thrust of Mexico‘s expenditure reform.
100. Some ARD programs have contradictory goals. There seems to be little
coherence among the objectives of some support programs to farmers.
SAGARPA and CONAGUA programs improve efficiency in irrigation water use,
but tarifa 9 militates in the opposite direction. Similarly, Alianza, Apoyos a la
Competitividad de las Ramas Productivas, and PROCAMPO Capitaliza aim
mostly at production intensification, competitiveness, and employment
generation. This aim is contradicted by Ingreso Objetivo, which mostly supports
crops that generate little employment and have no comparative advantage.
Similarly, input support programs, like the electricity and diesel subsidies
promote production patterns based on comparative advantage. Mexico should
address these inconsistencies in policy messages and incentives.
101. Public goods are undersupplied. The importance of public goods to promote
agricultural development is well established (see Box 2-2). Public goods ought to
be the main thrust of a competitively oriented APE program. Yet, considering all
fiscal costs examined in this study (budgetary and nonbudgetary), public goods
are only 24 percent of the cost of supports directly related to agricultural
development—and 43 percent of those related to total ARD. Rebalancing ARD
expenditures in favor of public goods would be one of the crucial aspects of
agricultural policy reform.
102. Some ARD programs have the perverse effect of encouraging activities that
generate negative externalities. Ideally, the programs should generate positive
externalities. The most obvious challenge is the incentive to deplete aquifers
created by the tarifa 9 subsidy to groundwater pumping. Others include incentives
to overuse agrichemicals, resulting in contamination of waterflows, and to
cultivate marginal lands, resulting in erosion and increased flood risk
downstream. Programs like tarifa 9 that encourage overuse of water also result in
maladaptation to future conditions, which are likely to be drier since Mexico is
expected to experience a decline in water runoffs of 10–20 percent nationally and
up to 40 percent along the Gulf Coast wetlands.65
Some policies, particularly
subsidies to grain production, are also known to contribute to deforestation.66
103. Redirecting agricultural expenditures to encourage activities that generate
positive externalities would produce substantial environmental gains. Several
windows of the ProÁrbol Program administered by CONAFOR already seek to
do this; opportunities should be sought to recast other programs along similar
lines. Such measures could also generate additional financing—for example, from
local water users and from national and global buyers of carbon emission
reductions.
65
The decline is in the difference between precipitation and evapotranspiration (World Bank 2008b). 66
Klepeis and Vance (2003), in a study of Southeastern Mexico, suggest that PROCAMPO‘s requirement
to keep land in production is linked to deforestation and deterioration of soil fertility.
75
POLICY OPTIONS FOR REFORM
104. This section discusses some options and suggestions to reform ARD expenditures
in the light of the analysis of previous chapters. ARD expenditure as a whole is
examined, and options for a new overall structure are presented. The present
moment is particularly appropriate for these changes because of the opportunities
created by the medium- to long-term scenario of high agricultural prices. The
buoyant state of markets should make the transition smooth and the changes more
palatable to those who would see their subsidies diminished.
105. To make well informed decisions, the GOM will need to weigh the tradeoffs of
policy options based on considerations such as cost, sequential importance,
technical difficulty, risks, and impact. While some options promise greater
benefits in the longer run, others could be targeted for quick action. The chapter
summarizes policy options in five areas:
6) Improving the ARD planning system.
7) Rationalizing the overall farmer support system.
8) Improving the support system for small producers through gradual
decentralization.
9) Improving the M&E and institutional aspects of ARD programs.
10) Increasing the positive environmental externalities of ARD programs and
supporting the national climate change strategy.
1) Improving the ARD Planning System
106. A more effective planning system for ARD spending could be put in place.
The guidelines for allocating budgetary resources and the authority and planning
capacity of the Comisión Interministerial para el Desrrollo Rural Sustentable
(CIDRS) would have to be strengthened for PEC to be effective . A recent OECD
review of rural development issues in Mexico (OECD 2007c) highlights the
challenge faced by Mexico where SAGARPA, a sectoral ministry without
sufficient authority over peer sectoral ministries is mandated to plan the ARD
expenditures as chair of CIDRS. Box 6-1 summarizes the OECD analysis on
coordination of rural policies of its member countries (OECD 2006a). The OECD
proposal to move CIDRS from SAGARPA to the President‘s office would better
reflect the multisectoral character of rural development, and strengthen the
Commission‘s planning capacity. Another option is to place CIDRS under SHCP
because SHCP is primus inter pares as a ministry, has a multisectoral mandate
and view, and is responsible for looking into the effectiveness and quality of
public expenditure and preparing the federal budget. In addition to strengthening
CIDRS, a strong nucleus of agricultural policy analysts, staffed with experts of
76
recognized academic excellence could be formed to operate autonomously under
the SAGARPA.
Box 6-1: OECD Analysis on Inter-Institutional Horizontal Co-ordination
OECD sees interinstitutional coordination as an aspect of meta-governance—or ―the governance of
government and governance.‖ In this framework horizontal coordination attempts to overcome sectoral
approaches in favor of an integrated policy approach to rural development. Coordination is needed to
―encourage the various institutional and managerial systems which formulate and implement rural policy to
work together.‖ To ensure consistency—that is, ―that individual policies are not contradictory and that they
converge in a coherent strategy‖—several horizontal co-ordination options are considered following OECD
member-country experience:
―a special unit reporting directly to a head of government or parliament [France];
an integrated ministry to address several issues of importance to rural regions [UK, Germany, Japan];
‗policy proofing‘ [UK, Canada]; and
inter-ministerial co-ordination via working groups and formal contracts [Mexico, Italy]‖
In Mexico OECD highlights the innovations from the LDRS and CIDRS, but acknowledges that
―SAGARPA has been much on its own leading the promotion and implementation of the LDRS [and that]
the fact that the CIDRS is chaired by one sector limits the multi-sectoral objective of the law.‖ In this last
respect, ―experience from OECD countries indicates that a horizontal commission which is chaired by one
sector (in this case, agriculture) may be limited in pursuing multi-sectoral objectives and hinders the full
involvement of other ministries in a national rural strategy‖. The alternatives proposed to strengthen the
CIDRS are:
―Assigning a meta-ministerial leadership to the CIDRS (…), which could be filled by the Chief of the
Executive‖.
―Rotated leadership of CIDRS (…) among different ministries. In this way the works of the
commission are not seen as monopolized by one institution‖
―The creation of an ad hoc independent institution in charge of rural policy with multi-sectoral
perspective, with budget and normative arrangements to enforce collaboration from the different
ministries‖.
―Strengthening the legal attributions of CIDRS (…), with stronger budgetary allowances rather than
the formality of presenting a ‗rural budget‘ to congress‖.
Source: OECD, 2006a, pp. 110–114, and OECD 2007c, pp. 118–122
107. The planning system for ARD spending should be based on a comprehensive
national ARD strategy. Without a comprehensive ARD strategy and planning
system for ARD expenditures it is difficult to achieve coherence among ARD
programs and their objectives. A comprehensive ARD strategy with consistent,
explicit, and selective objectives as well as quantifiable results and performance
indicators would be an important step toward better ARD policy. The strategy
could serve as a framework for individual programs, to be assessed by their
contribution to its objectives. M&E of individual programs could also be carried
out. Along with the strategy, an ARD budgetary planning system would be
required to ensure consistency between the strategy and budgetary allocations. As
seen, PEC has led to substantial progress in this direction, but so far it provides
only the framework—not the content—of such a system.
77
2) Rationalizing the Overall System for Farmer Support
108. The federal public expenditure system in productive programs should be
reoriented in three ways.
Gradually discontinuing MPS to inputs67
and outputs, as well as compensatory
cash transfers (see Technical Note 1 in the Appendix of this chapter which
describes New Zealand‘s successful agriculture policy reform experience in
the Appendix to this chapter).
Substantially increasing allocation to irrigation improvement and
management; drainage and transport infrastructure; other rural infrastructure
(such as that provided by FAIS); research, extension, and training; sanitary
and phyto-sanitary services; market intelligence (including collecting weather
information through weather stations and agricultural statistics); emergency
programs; and other public goods.68
Increasing support to small producers.
109. Non-targeted production-oriented programs benefiting mostly commercial
farmers should be separated from productive and natural resource
management (NRM) programs targeting small producers, vulnerable groups,
and the poor which should be decentralized to the states. Resources for non-
targeted production-oriented programs could be maintained at the federal level,
but funds now spent by different ministries for targeted programs could be
pooled. The pooled funds could be distributed to state governments as block
grants according to an objective formula to allow state governments to create their
own programs that promote small producers. In addition, given the current
imbalance in favor of non-targeted programs, some resources could be moved
from non-targeted programs to the pooled fund. These decentralized funds could
also support programs that assist small producers in adapting to climate change
and increasing positive externalities in NRM.
110. Federal non-targeted programs that support on-farm and value chain
investments should be rationalized. These programs include PROGAN, Apoyos a
la Competitividad de las Ramas Productivas/Adquisición de Activos Productivos,
and the non-targeted programs of Alianza. One option is to merge these types of
67
Given the likely difficulty of immediately discontinuing tarifa 9, a major input subsidy program that
subsidizes electricity for farmers to pump groundwater, Asad and Dinar (2006) present some options for
reforming the program: (i) decoupling, so that each farmer receives the average subsidy; (ii) allocating the
subsidy based on historical consumption; (iii) assigning subsidies only to water concession holders,
thereby stimulating a more efficient and legal use of water and electricity; and (iv) a combination of one of
the preceding options with a payment per hectare approach to further target the subsidy. Each of these
options has political economy consequences that would need to be considered in the context of the policy
dialogue, but none of the options would be as politically charged as eliminating the subsidy altogether. 68
Certain functions within these activities should be carried out by the private sector due to the private
goods nature of the activity, e.g. implementing appropriate management practices, financing of the
certification process, developing traceable systems etc.
78
program into a new single non-targeted support program for on-farm and
agriculture value chains investments. Another is to maintain different programs
but redesign them and perhaps eliminating some to avoid duplications, sharpen
their objectives, and make them more effective and results oriented.
111. Non-targeted programs, which benefit mostly commercial farmers, are better
administered at the federal level. This is because these producers tend to be
more specialized, better linked to the value chains, and less in need of a close
rapport with agency staff. A commodity or value chain approach rather than a
territorial one could be used for these programs, so it makes sense to decentralize
the mandate and resources for supporting small producers while managing non-
targeted programs at the central level.
112. The logic of deficiency payments needs to be reassessed. Deficiency payments
protect farmers‘ incomes from market events by providing a subsidy equal to the
difference between the market price and a reference price calculated to ensure a
―fair‖ income to farmers. Isolating farmers from price movements (particularly
price falls) interferes with market adjustment. Depending on the crop supported,
deficiency payments can encourage overuse of water resources, as in Mexico,
where water-intensive basic grain production is supported. Deficiency payments
may be justified on a strictly temporary basis under emergency conditions but not
as a permanent support system. One such deficiency payment program is
Mexico‘s Ingreso Objetivo which covers 10 basic crops (mainly grains) in certain
states and is used as a permanent system of income support to beneficiary
farmers.69
The program is expensive and inequitable and distorts production
decisions. More efficient market-based instruments based on price risk
management tools, insurance, and other public goods could also protect farm
incomes while promoting competitiveness, employment, and growth in a less
distortionary manner than deficiency payments.
113. The logic of decoupled compensatory transfers also needs to be reassessed. Lump-sum compensatory transfers have been much celebrated because, being
decoupled from production and prices, they are a non-distortionary payment to
farmers. They have been widely used in the European Union, United States, and
other countries to cushion the transition to market liberalization and the lifting of
price supports. Originally designed for a transition period of 15 years (1994–
2008), Mexico‘s PROCAMPO is this type of a large compensatory transfer
program. Having reached the end of the transition period and having cushioned
the NAFTA impact, the economic logic of this program should be analyzed, given
how expensive and inequitable it is. The GOM can reassess whether to keep
paying farmers more or less indefinitely because they planted corn (or other
eligible crop) 18–20 years ago, especially with the recent high agricultural prices.
69
This program is akin to the U.S. Marketing Assistance Loan program, a major countercyclical program
that allows farmers of designated crops to receive a loan from the government using production as
collateral. The program effectively guarantees a minimum price for the crops since producers can forfeit
the crop to the government when the loan matures and keep the loan principal as payment, if market prices
are lower than the guaranteed price.
79
114. The role of compensatory transfer programs on easing rural liquidity
constraints should be clarified. Rural credit in Mexico is very limited, seriously
constraining investment capacity in rural areas.70
Because of this, public subsidies
can help ease liquidity restrictions for rural producers. But it would be better to
tackle the underlying challenge of increasing rural finance (Box 6-2)—for
example, by adjusting the regulatory framework to better reflect the
circumstances of rural financial markets,71
by picking up part of the risk of rural
credit operations, by subsidizing some fixed costs of providing financial services
to small dispersed producers, by supporting microfinance institutions with
training and technology, or by expanding the capacity and improving the focus of
government rural financial institutions such as Fideicomisos Instituidos en
Relación con la Agricultura (FIRA), Fondo de Capitalización e Inversión del
Sector Rural and Financiera Rural. Furthermore, promoting price risk
management tools and insurance can increase farmers‘ access to credit because
financial institutions regard these tools as guarantees in approving credit.
Box 6-2: Challenges Facing the Rural Finance Sector in Mexico
Rural finance in Mexico is characterized by inadequate outreach and limited access to finance. Nearly 70 percent of municipalities do not have a single bank branch, and close to 80 percent of the rural population does not have access to financial services Financial services in rural areas are provided mostly by numerous small, often weak institutions. There are three main challenges facing the sector at the retail level:
Consolidating local institutions and enhancing depositor confidence by ensuring that institutions are
regulated and supervised and by establishing a deposit protection fund offering a reasonable level of
security to savers.
Deepening penetration and outreach of the sector by strengthening the branch network of existing
institutions and by deploying innovative non-infrastructure-based approaches such as
correspondent/agent banking and mobile banking.
Adapting lending processes to the characteristics of low-income rural clients to mitigate self-selection
out of the formal banking system by potential clients and introducing financial products that respond to
needs of the local population (small savings, medium- to long-term maturity loans, national and
international remittances, among others). There are several new types of agencies (―para-financieras,‖
SOFOLES, SOFOMES) that are becoming important sources of rural finance using different means. It
would be useful to evaluate their effectiveness.
The national and policy levels also face a range of issues, notably more schemes supported by multiple institutions, which permits arbitrage among recipient banks/institutions and unhealthy competition among public institutions (in lending and in channeling subsidies), and a relatively large subsidy in interest rate and transaction costs. The main challenges at the policy level are initiating action to consolidate and integrate the various schemes and programs under one or two agencies, carrying out a stringent evaluation of the different forms of subsidy and their outcomes to improve efficiency of public funds, and reviewing
70
Rural finance is an extremely important policy issue in Mexico, but it is not addressed in this study partly
because of its technical nature and partly because, although there are some rural finance programs in PEC,
this being mainly a private area, most associated issues are not visible in a public expenditure analysis. 71
Some examples of proposed adjustment to the regulatory framework include amending legislation of the
minimum deposit requirement for niche financial companies such as housing mortgage companies and
consumer lending companies to enable them to accept deposits, which is a more demanded service in rural
areas than credit; reforming the structure of Financiera Rural to separate its role as a second-tier bank and
first-tier bank to alleviate unfair competition in the first-tier banking market; and defining norms to
standardize the operations of auxiliary financial service firms in areas such as credit registration forms,
credit reporting to government, and accounting reporting forms (Buchenau and del Angel 2007).
80
the roles of the nodal agencies in the changing sector institutional capacity (for example, FIRA‘s ability to continue it subsidy program is expected to diminish significantly over the next five to six years).
115. Rural non-farm development has large potential for complementing
agriculture policies in fostering rural development. As shown in chapter 2,
rural nonfarm activities are extremely important for income generation and
employment in rural areas, but they receive only a small part of ARD
expenditures. Reaching this sector with promotional activities is a big challenge,
but so is the potential payoff. Difficulties arise from the multi-sector character of
rural nonfarm activities and the absence of organizations whose members are
engaged in rural nonfarm economic activities,72
which gives the sector little
visibility and common voice. The government‘s sectoral organization in economic
development also makes it difficult to formulate policies that support the sector.
This is particularly true because some important measures – including safety nets
in the short term and increasing human capital in the longer term – are the
responsibilities of different governmental agencies.
116. The suggestions described above for rationalizing the overall system for farmer
support imply, at the individual program level, the gradual discontinuation of
PROCAMPO and Ingreso Objetivo as well as the transformation of Alianza. The
rationale for these options and discussion of alternatives follows.
117. PROCAMPO. The future of PROCAMPO has elicited many ideas. So far,
notwithstanding the end of the NAFTA transition period, the program has been
maintained without major modifications. But there are airs of change, and
proposals are being voiced. Some attempt to make the program less regressive by
capping payments (making payment per hectare a decreasing function of size or
limiting eligibility to farmers under a certain size, say 5, 10, or 20 hectares).
Another proposal is to open the program to all farmers and link it to present farm
size rather than to the historical acreage of eligible crops. Thus, all farmers, by
virtue of being such, would receive a subsidy linked somehow, more or less
regressively, to farm size, with or without a limit on that size or a cap on
payments. Bolder proposals are to discontinue PROCAMPO and use its resources
for something else to benefit farmers or the rural population (such as expanding
Oportunidades, carrying out new environmental programs, or improving rural
education). The most detailed proposal divides PROCAMPO into two parts: an
unconditional cash transfer and a conditional cash transfer (see Box 6-3; Winters
and Davis 2007).
Box 6-3: Proposal by Winters and Davis (2007) on PROCAMPO Reform
The proposal by Winters and Davis (2007) divides PROCAMPO into an unconditional cash transfer and a
conditional cash transfer. The unconditional transfer would be paid to all farmers, regardless of crop, of up
to 5 hectares,1
as a fixed, lump-sum. Eligible land is defined as ―the average total land [under] production
72
This includes small traders, artisans, small entrepreneurs in different industries (dressmaking,
shoemaking, construction materials, and the like), providers of personal and technical services (hairdressers,
mechanics, electricians, and the like), and others.
81
over the previous three agricultural seasons.‖2 Conditional transfers would be paid to all farmers,
irrespective of crop, of up to 10 hectares, proportional to the amount of land, and subject to certain
conditions on ―capacity building and/or the adoption of certain agricultural practices of resource
management.‖3 Participation in the conditional transfer would be optional. Farmers of less than 5 hectares
could receive both transfers. Conditionality would be ―region specific and determined by regional
SAGARPA offices.‖ The total payment to a household from the two transfers could be capped. For
households also participating in Oportunidades the payment from the PROCAMPO transfers plus the
payment from Oportunidades could be capped.
Observations. This proposal improves on PROCAMPO but has some shortcomings. With regard to the
unconditional transfer, what is the sense of making an unconditional lump-sum transfer to small farmers
when Oportunidades already exists? Oportunidades is well targeted and covers the entire rural area, so a
farming household that is not a beneficiary is not likely to qualify as poor.4 Why should it then receive an
unconditional cash transfer from government? What makes this household more deserving than other
nonpoor households? If the household already participates in Oportunidades, why should it receive a
separate payment from PROCAMPO that other Oportunidades beneficiaries do not receive? There is little
economic sense in this.
The conditional transfer raises two questions. First, exactly what conditionality would be applied and how
would it be monitored? The implementational difficulties of production-oriented programs suggests many
monitoring challenges. Second, is a size-related transfer conditional on certain recipient behavior better
than alternative ways to promote farm competitiveness for the size range of farms considered. Among the
alternative forms is support (through co-financing) of on-farm investments like those carried out by
Alianza. Much duplication and overlapping would be likely between this transfer and the Alianza PDR
program, which is targeted to the same type of farmers.
1 The authors indicate that the cutoffs of 5 and 10 hectares chosen for small and medium-size farmers are only
suggested definitions and that careful consideration should be given to other cutoffs. The authors also mention that the
beneficiaries of the first component could be selected by their poverty status, using a method similar to that of
Oportunidades. 2 No mention is made of livestock farms, and no difference is stated between rainfed and irrigated land. 3 The authors also say: ―The transfer could be conditional on adopting certain agricultural practices or attending public
lectures on productive activities and natural resource management and from these lectures presenting a management
plan for improving on-farm production practices.‖ 4 Oportunidades, like any other targeted program, suffers from exclusion errors. But Oportunidades is acknowledged to
be well targeted and well implemented, and hence this error should not be large. In any case, it would make little sense
to keep PROCAMPO as a default payment system for those missed by Oportunidades.
Source: Winters and Davis (2007).
118. Considerations for modifying or discontinuing PROCAMPO in its present
form. Although the rationale for discontinuing PROCAMPO may be clear
economically, especially given the existence of other programs that cater to small
farmers, modifications to the program may be more feasible for the short term. In
designing a new PROCAMPO, important considerations include:
Ensuring that a modified PROCAMPO does not cause major negative
environmental externalities, or, better yet, that it promotes
environmentally friendly activities.
82
Enhancing, or at least maintaining, the level of decoupling between
production and the subsidies to avoid distorting production decisions.73
Improving equity—for example, by capping payments or reducing
payment per hectare as the number of hectares increases.
Building in incentives to induce farmers to switch to high value crops, and
Announcing a final date to discontinue the program and possibly a
timetable for reducing payments until full discontinuation.
119. Possible alternative uses of PROCAMPO funds. Funds from the existing
PROCAMPO could be allocated to a completely new program with different
eligibility or operating rules or could be combined with an existing program that
would keep PROCAMPO‘s identity. Worthwhile alternatives include an
augmented Oportunidades program ("CAMPOrtunidades"), new environmental
programs, and improved rural education programs. Another option is to expand
the noncontributory rural pension scheme, which pays individuals age 70 and
older who live in locations of up to 20,000 inhabitants MxP 500 a month. Given
this coverage and benefit amount and 2005 Conteo Nacional de Población
population data, the program would cost about MxP 10.2 billion. Expanding to
cover the population age 65 and older would increase the cost to MxP 15.2
billion, and to cover the population age 60 and older (as in Brazil) would cost
MxP 21.7 billion. Since the 2007 programmed cost of PROCAMPO was MxP
14.9 billion, the funds from the discontinued PROCAMPO would more than
allow the pension program to cover rural residents age 60 and older.
120. Ingreso Objetivo. Ingreso Objetivo has much smaller coverage than PROCAMPO
and is generally regarded as a distortionary program. Most experts have proposed
discontinuing rather than modifying it (Box 6-4; Sumner and Balagtas 2007).
Another option being discussed by GOM is to use price bands rather than a single
reference price, but details of this proposal are still being developed.
Box 6-4: Proposal by Sumner and Balagtas (2007) on Ingreso Objetivo Reform
Sumner and Balagtas (2007) make two recommendations for Ingreso Objetivo reform. The preferred one is
to discontinue the program for five reasons:
The subsidy is inequitable, concentrating on better-off farmers and states.
Expected high cereal prices in the coming years mean that payments will be very small or nil, making
this a unique opportunity to eliminate the program.
It would be better to use countervailing duties to compensate producers for the reduction in U.S. export
prices due to U.S. domestic support policies.
Resources used in the incremental production of program crops due to the subsidy would be allocated
to other uses, increasing efficiency.
Eliminating the program would reduce production from participants, thus raising domestic prices and
favoring nonparticipants.
73
PROCAMPO is currently partially decoupled because subsidy payments are based on historic production
patterns. But a condition of receiving payment is that the land in question is still in active productive use
(including forestry or certain ecological use). Thus, for example, land that is fallow would not be
considered as under eligible use. This has raised concerns over its effect on deforestation and soil
degradation.
83
They also recommend improvements to the program if political economy reasons prevent discontinuation.
The first is to reduce target prices so that ―they reflect the ‗safety net‘ feature of the program,‖ setting target
prices ―so that payments are made only when market prices are truly low by historical standards
recognizing the long-run trend toward lower commodity prices in inflation adjusted terms.‖ Another is to
decouple payments, converting them into direct transfers to ―all producers with a history of marketing the
program crop, with no requirement that they maintain production in that or another crop.‖
Observations. Reducing target prices seems a reasonable second-best option, but a program of decoupled
direct transfers to farmers with a historical record of producing the program crops already exists:
PROCAMPO. If amended this way, Ingreso Objetivo would duplicate PROCAMPO while being more
poorly targeted. Another option is to pay the price subsidy not on the full amount produced but on a
smaller, intra-marginal amount, so that the Ingreso Objetivo payment does not affect producers‘ decisions.
This would improve the allocative distortions from the subsidy but not its distributional bias. Related to
this, Rosenzweig (2008) proposes to discount PROCAMPO transfers from the Ingreso Objetivo subsidy.
Source: Sumner and Balagtas (2007)
121. Alianza. Alianza para el Campo, Mexico‘s flagship agriculture investment
support program, is the largest demand-led program for co-financing private on-
farm investments. But Alianza is more than that: it is a financing umbrella for a
wide variety of SAGARPA activities, from fisheries to sanitary and phyto-
sanitary services, farmer organization, support to rural development councils,
training, research, information systems, and a host of other expenses. Many
actions financed under Alianza are regular SAGARPA activities—that is, part the
regular work of any ministry of agriculture. It is unclear why these activities are
financed under a specific, annually renewed program, subject to yearly-approved
operation rules.
122. Reorienting Alianza. Three measures are proposed to realign the program:
Separating all the subprograms, components, and activities that naturally
belongs within the regular program of work of SAGARPA and budgeting them
under SAGARPA‘s regular expenses.
Merging funds from Alianza PDR with those of other production-oriented
targeted programs to be decentralized.
Either (i) merging untargeted investment support Alianza subprograms with
other untargeted investment support programs, such as PROGAN and Apoyo a las
Cadenas Productivas, to create one single large program to co-finance on-farm
and value chain investments, or (ii) maintaining different production-oriented
untargeted programs and redefining them to structure a comprehensive system
that provides general investment support to on-farm and agriculture value chain
investments. The policy instruments available for commercial agricultural growth,
including Alianza, must be rationalized and made more effective. Rosenzweig
(2008) points out the weak focus on productive activities in the current APE and
emphasizes the need for new instruments for a more effective agricultural policy.
84
Restructuring the investment support system for commercial agriculture would be
a major part of this effort.74
3) Improving the Support System for Small Producers through
gradual decentralization
123. Small producers face big and distinct challenges. Small producers‘ restrictions
and potentials differ from those of medium-size and large commercial farmers.
Small producers needs require adequate consideration in ARD expenses to make
them more competitive, especially given the highly regressive nature of the
agricultural support programs (see chapter 4). Several programs from various
ministries are already oriented toward small farmers (Alianza PDR, for example).
But challenges remain: the numerous programs overlap and lack a clear-cut
rationale, investments are so dispersed that effectiveness is reduced, and technical
assistance, training, and business focus are insufficient. Technical Note 2 in the
Appendix of this chapter summarizes Chile‘s technical assistance program, which
is clearly targeted toward small farmers.
124. Gradual decentralization to state governments of the mandate and resources
to support small producers would help address challenges.75
There are several
reasons for this:
Decentralization would facilitate a territorial approach for rural development,
which would help clustering investments (see below).
The number, dispersion, and heterogeneity of small producers favor
responsibilities at the sub-national level, where constraints and opportunities
can best be identified.
The sub-national level is also more appropriate for attaining synergy between
productive programs and other investments and services (such as NRM,
infrastructure or education) favoring small producers.
Resources could be more rationally used at the sub-national level if state
governments apply them according to state-level strategic plans for the
development of the small producers (see below).
125. In principle, such decentralized funds should be targeted mainly at states
where it can be most efficiently used by small producers, i.e., where it can get
the biggest ―bang for buck‖ in terms of growth and poverty reduction. In practice,
74
Rowenzweig (2008) offers the following as guidelines for such a restructuring: (i) employment
generation should be a critical aim of the support system because it is a major way for the growth of the
commercial sector to trickle down (crops and farming systems that are labor intensive should thus be
supported); (ii) instead of rigid operational rules of present programs, flexibility is needed to operate
severeal support instruments, from competitive funds to liquid guarantees, co-financing of relevant
investments, kickoff grants, support to strategic alliances between producers and other market agents, tax
concessions, and others (the use of these instruments should be selective rather than universal); and (iii) the
support system should embrace not only farmers but other agents in the value chains who create synergies. 75
There is a detailed analysis of a proposal to decentralize rural programs to state governments in World
Bank (2006a) and World Bank (2007c).
85
political realities will mean that there are some tradeoffs necessary, but at the
least, the programs should be designed to allow monitoring of results over time,
so that future allocations can take past performance into account.
126. Because decentralization takes time to implement, a starting point could be a
discussion between the federal government and state governments to clarify
the following aspects:
Federal programs, subprograms, and components that could be
decentralized—that is, programs that are production-oriented and targeted to
small producers.
The formula for distributing funds to the states.
Other resources that should be transferred, such as staff, vehicles, operation
funds, equipment, buildings, and so on.
Eventual institutional support to some state governments from the federal
level to enable them to effectively carry out their new responsibilities.
The broad guidelines and the M&E system to be established by the federal
government for the use of funds.
Responsibilities for the federal government and state governments. Federal
government responsibilities would include setting minimum standards and
benchmarks for use of funds by state governments, conditioning fund transfer
on preparation of strategies and programs, setting up M&E systems for these
strategies and programs, enhancing state government implementation
capacity, and auditing use of block grants, independent of the audits by state
legislative bodies. State responsibilities would include creating and approving
a state strategy for developing the small producer sector and a logical
framework with clear objectives and measurable outcomes that could be
evaluated as well as any necessary counterpart funding from their own
resources.
127. After the transition period, decentralization would imply transferring to
state governments, in addition to the present FAIS to finance small rural
infrastructure, block grants for the decentralized development of small rural
producers (in productive and NRM activities).76
This, in turn, implies (i)
76
The idea is to decentralize to state governments the budgetary funds of programs oriented toward
improving the productive and competitive capacity of small producers. These funds are currently budgeted
under federal production-oriented targeted programs of various ministries, such as SEDESOL (. Opciones
Productivas), SECON (FONAES), SAGARPA (Alianza PRD), and SRA (FAPPA). Funds would be
distributed to the states as block grants, where the resources from different programs would be merged,
determined by an objective formula based on demand considerations, which should not be regressive.
Future programs that assist farmers in adapting to climate change and managing natural resources to
increase positive externalities would also be good candidates for funding under such block grants, since
such they would need to be carefully tailored to local agro-climatic and production conditions.
86
phasing out corresponding federal ARD programs and allowing state governments
to replace them with their own programs, so that they can exert strong ownership
of the rural development agenda for the development of small producers in their
states; (ii) pushing ahead with administrative federalization (federalización
administrativa) to transfer to state governments the assets, staff, and other
operational resources of federal ministries required for state governments to
properly operate the newly decentralized funds; and (iii) strengthening the
implementation capacity of state governments to be able to takeover these
responsibilities.77
Decentralization of funds to support small producers would
facilitate the use of a territorial approach to rural development (Box 6-5).
Box 6-5: Applying a Territorial Approach to Rural Development in a Decentralization Option
Within the states the regional level is key to implement rural development activities with a territorial
approach. The collection of municipalities (regions) in which Mexican state governments divide their states
for planning purposes seem appropriate for a territorial approach to rural development—that is, for
clustering investment and implementing strategic territorial programs. Strong regional economic
coordination institutions are very important to that effect. Some states, for instance Michoacán, have
already created regional development councils. If strengthened with technical capabilities and provided
funds to co-finance productive programs for small producers, these councils could become the focal point
for rural economic development in their territories.
In most states, however, the coordination entities for rural development at the regional level are the
Comités Distritales de Desarrollo Rural Sustentable (CDDRS). These councils could be appropriate meso-
level entities for economic coordination of ARD activities in their regions but their institutional capacity
and participatory nature should be strengthened.
Regional councils (whether CDDRS or others designed by state governments) could combine participatory
principles with sound technical and market criteria to design long-term development strategies for small
producers in their territories. These strategies would be based on the potential of territorial assets and the
identification of development axes. Investment clustering could be achieved through programs decided in a
participatory manner, capable of attracting the interest of a sufficient number of producers in order to reach
a critical mass of output, and through the use of a value chain approach. Regional councils could also
design large projects capable of triggering rural regional development.
To fulfill these functions, regional councils would need to be staffed by core groups of well selected and
motivated technical staff, to be paid using the funds decentralized to the states. In addition, they should
receive a share of the decentralized resources to co-finance the financial investments in their regional
programs. Thus, regional councils would be the main operational vehicle of the rural development
strategies and policies of the states.
Source: World Bank (2006a).
4) Improving the M&E and Institutional Aspects of ARD
Programs
128. Alternatives exist to enhance the M&E system of ARD expenditures. Chapter
5 presented the recent important advances and areas for improvement in the M&E
of social programs: evaluations not only of single programs but also of the entire
PEC, development and integration of databases of the beneficiaries of ARD
77
See Wolrd Bank (2006a) for further discussion on options for decentralization in Mexico.
87
programs, deeper program evaluations at longer intervals instead of the current
annual cycle, and systematic use of evaluation results for managerial and
budgetary decisions based on action agendas agreed upon by the evaluators, the
implementing agency, and a third party. Adherence to these agendas should be
monitored closely. As a logical follow on to the Ley de Desarrollo Rural
Sustentable, Mexico could also start a ―rural proofing‖ system to anticipate and
monitor national policies‘ impact on the rural sector. Canada and the United
Kingdom both found success with rural proofing systems (called ―rural lens‖ in
Canada; Box 6-6).
Box 6-6: Rural Proofing in the UK and Canada
The U.K. Government‘s Rural White Paper of 2000 obliges all domestic public entities to put a rural-
proofing mechanism in place through to systematically check policy design and implementation for impact
on rural areas, and to mitigate impacts where appropriate. Much like the ―rural lens‖ approach in Canada,
the process has helped interdepartmental coordination. Interest in rural proofing has spread from central
governments, becoming a tool for local authorities to analyze and improve. The British Commission for
Rural Communities, which acts as supervisory body to verify that rural proofing has been undertaken,
produces an annual report. The Treasury guidelines on SR04 highlight the need for rural proofing, but the
responsibility was on departments to translate it into their delivery plans for 2005–08.
In 1996, Canada produced the ―Thinking Rural‖ report, detailing new and explicit guidelines for rural
policy. The Federal Government created a Rural Secretariat within the Ministry of Agriculture and Agri-
Food to administer Canada‘s rural policymaking and to coordinate federal agency activity affecting rural
areas through an interdepartmental working group on rural issues. Subsequently, a Secretary of State for
Rural Affairs was established at the Cabinet level. All new policies were subject to a rural policy impact
assessment. In 1998 a rural lens checklist was introduced to determine whether a policy or program
addresses priorities for rural areas. The checklist covers the priority rural areas and the consideration,
delivery, communications, and M&E or rural impacts. The Rural Secretariat administers the Canadian
Rural Lens with staff from other departments, scrutinizing new policy initiatives. Rural lens staff can
advise the Minister to support (or not to support) new policy proposals. Although the Minister has only one
voice at the Cabinet table, opportunities to involve regional development agencies and their ministers are
sought. This gives departments an incentive to take the rural lens comments into account. If the rural lens
staff think that the rural perspective has not been properly addressed, they can influence the policy proposal
accordingly. The objective is not to advocate for putting rural considerations first, but to ensure that
decisions are fully informed of the implications for rural communities.
Source: OECD (2006), The New Rural Paradigm
UK The Countryside Agency (2004), Rural Proofing in 2003/04
129. Alternatives exist to improve program implementation. Implementation
challenges are complex and varied. Many are institutional limitations that take
time to resolve. Simplifying the number and type of programs would certainly
help respond to the implementation challenge, as would the approval of a
comprehensive ARD strategy. To help identify and address these issues,
CONEVAL has the process evaluations instrument, which could be widely used
to maintain the focus on implementation challenges. Issues that could be
addressed include:
88
Revising the budgetary and administrative regulations under which ARD
programs are implemented to ensure that they provide sufficient flexibility
and do not unnecessarily impair or slow down implementation.
Paying due attention to the recurrent/operational cost needs of programs,
which are particularly large for production-oriented programs.
Improving dissemination of programs and the accountability of operators vis-
à-vis beneficiaries and using ―client satisfaction‖ criteria to assess
performance.
Improving the economic incentives and morale of program operators and
ensuring that incentives are well aligned with program objectives.
5) Increasing the Positive Environmental Externalities of ARD
Programs and Supporting the National Climate Change
Strategy
130. Strategies for supporting agriculture and for dealing with climate change
need to be mutually reinforcing. For the past two decades over 80 percent of
economic losses from weather-related disasters occurred in the agriculture
sector.78
Agricultural policies and climate change policies thus need to be
mutually reinforcing by incorporating two principles. First, farmers need to
respond to localized changes in climate depending on their individual conditions
and constraints. Policies should expand their options rather than encourage them
to make choices that do not correspond well to individual circumstances. Second,
farmers should not be encouraged to ―maladapt‖ by overusing scarce resources or
increasing production in high-risk areas. Both principles have implications for
agricultural policies that are congruent with the National Climate Change
strategy.
131. Expanding payments for environmental services (PES) programs beyond
forestry79
could create positive synergies between agricultural production
and the environment. Specific investment programs to reduce emissions that are
identified by the National Climate Change Strategy and that could be scaled up
include programs to increase the use of biomass (for example, through high-
efficiency wood burning stoves in rural communities and renewable energy
sources for rural areas as supported by Fideicomiso de Riesgo Compartido, or
FIRCO), livestock programs to rehabilitate degraded rangelands, and
78
Saldaña-Zorrilla (2007). 79
These include Pago por Servicios Hidrologicos Ambientales (PSAH), Programa Nacional de
Reforestacion (PRONARE), Programa de Conservación y Restauración de Ecosistemas Forestales
(PROCOREF) and Programa de Plantaciones Forestales Comerciales (PRODEPLAN) and would support
reforestation, more efficient forest management practices, and recovery of degraded forest lands. Forestry
programs, which have seen exponential growth in public expenditure allocation since 2000, could be
further scaled up, taking into careful consideration the current and future projection of ecological suitability
of the land in terms of soil characteristics and slope, as well as the financial viability of the productive
operation, to ensure that the right species of forests are being promoted in areas where they make sense
ecologically and financially.
89
hydrometrological hazard risk management and water resources management.80
Scaling up these programs could be accomplished either through national
programs or through decentralized programs. Such scaling up should be
accompanied by appropriate monitoring measures to ensure that the programs are
responding to their objectives. In particular, there is considerable scope to replace
distortionary programs such as Ingreso Objetivo with targeted environmentally-
friendly payments for environmental services programs, which would reduce
distortions and provide income support to small farmers while also providing
valuable national and global externalities.
132. The discussion below on Mexico‘s umbrella forestry program, ProÁrbol,
highlights some challenges faced in PES programs and offers suggestions for
reorientation.
133. ProÁrbol. The ProÁrbol program is an umbrella framework under CONAFOR
that supports Mexico‘s forestry sector. Its far-reaching goals are aimed at
conducting forestry planning, improving production and productivity, promoting
conservation and forest restoration, and increasing sectoral competitiveness. In
terms of conservation efforts, it houses programs for reforestation, soil
restoration, forest fire prevention, sustainable forest management, and payment
for environmental services (Pago por Servicios Ambientales del Bosque,
PSAB).81
Previous and current administrations have allocated a significant
amount of budget to the sector since 2000, and the ProÁrbol budget has been
growing exponentially since,82
despite initial implementation and administrative
challenges.83
The program‘s performance still leaves much to be desired in terms
of meeting its goals (productivity, production level, conservation, and
competitiveness).
80
This may include improved water resources management programs that emphasize preserving
environmental services such as the Alianza para el Pueblo program, which supports efficient use of water
for irrigation, modernizing and rehabilitating irrigation districts, strengthening climate data collection,
processing, using and disseminating water, and recognizing ancestral practices and lessons learned by
communities affected by climate variability. 81
PSAB now receives over MxP 100 million a year in funding. Some 1.4 million hectares were under
conservation contracts in early 2008; 2008 contracts should bring this total to over 2 million hectares.
PSAH (and, subsequently, the water window of PSAB) pays landowners to conserve existing forests.
Payments are made ex post, once the conservation has been verified. Eligibility is based on both spatial
criteria (there is a map of eligible areas, based primarily on indicators of importance for water services) and
various prioritization criteria (each application receives from 0 to 5 points if they meet the stated criteria,
and the applications with most points are accepted); the actual criteria have evolved over time in response
to both technical and political considerations. Conservation contracts are for five years, and are renewable
providing applicants have sufficient points. Payments are uniform countrywide. They are stated in
multiples of the minimum wage, and amount to about US$40 per hectare per year for cloud forests and
US$30 per hectare per year for other forests. 82
Budget for the forestry sector in Mexico grew by 2,094 percent between 2001 and 2008 (Merino,
Rodriguez et. al., 2008). 83
For example, to streamline the work, the program initially conducted all transactions by bank transfers,
rather than by checks, which caused some delays and discontent among beneficiaries. Also, some
administrative guidelines—such as the verification procedures for plantations subsidies— were delayed.
90
134. The status quo of the PSAB (ProÁrbol). Mexico undertook careful preparation
for the PSAB program. But these good intentions were overwhelmed by intense
implementation pressures. For example, criteria for payments for hydrological
environmental services were changed to spread payments more broadly,
irrespective of relative importance for water services, when it became clear that
focusing payments on areas where aquifers are most overexploited would
concentrate payments in only a few states. The program has also been used as a
vehicle to address unrelated activities, such as a commitment that Mexico made at
the Bishkek Mountain Summit to increase spending on conservation in mountain
areas; these were added to the eligibility criteria. The result was very poor
targeting, at least initially (Muñoz et. al. 2008). From 2003 to 2005 as much as 90
percent of forest area under contract was in areas with aquifers in equilibrium or
underexploited aquifers, and as much as 72 percent was in areas of low or very
low risk of deforestation. More recent assessments are not available, but
efficiency is thought to have increased (for example, location in an area of high
deforestation risk is now a priority criterion). A politically-driven requirement for
uniform payments also means that payments are often ill-suited to local
conditions—paying much more than opportunity costs in some areas (resulting in
much higher demand for participation than funding allows) and much less than
opportunity costs in other areas (resulting in limited participation in areas that
could provide very high levels of environmental services).
135. Reorientation of PSAB (ProÁrbol). PSAB shows that programs aimed at
improving environmental conditions are feasible and can attract considerable
interest from land users. But it also shows that such programs are as vulnerable as
other public programs to pressures that divert them from their stated objectives.
Considerable efforts are needed to ensure that these programs reach their
objectives efficiently.84
Even so, even an imperfect program aimed at improving
environmental conditions may well be better than one that generates negative
externalities. Technical Note 3 in the Appendix of this chapter presents some
international perspectives on programs for payments for environmental services.
136. Table 6-1 summarizes possible actions for each of the five policy themes
discussed above, identifying tradeoffs among the various criteria of policy options
such as cost, sequential importance, technical difficulty, risks, and impact. The
matrix highlights that while some options promise greater benefits in the longer
run, others could be targeted for quick action. Actions that are likely to have the
highest impact, and yet could be tackled in the short term include those to
improve the overall national ARD planning system, M&E system and some
changes in institutional or operational aspects. Other actions could be taken on as
84
The World Bank, with GEF co-financing, is supporting a project to increase the efficiency of Mexico's
PSAB program. The Mexico Environmental Services Project has three components: developing new
financing sources based on payments by local service users (primarily water users, but also biodiversity
users such as the tourism industry, and carbon buyers), increasing the efficiency of the current payment
program (primarily by moving away from the current countrywide one-size-fits-all approach to a
differentiated approach tailored to the conditions of particular areas), and one to support participation by
poorer ejidos.
91
a mid to long term goal, such as decentralization of small farmer programs to state
governments. However, even for this longer term action, concrete immediate
steps are also identified, such as identifying the responsibilities of each level of
government and national benchmarks, that would facilitate the transition to the
longer term goal but could be implemented in the short term.
Table 6-1: Summary Matrix of Policy Actions
Policy Options
Implemen-
tation
Likely
Impact
Technical
Difficulty/
Risks
Fiscal Cost
or Savings
1. Improving the ARD Planning System
(1) Prepare and approve a national
ARD strategy Short High Medium Low Cost
(2) Reposition CIDRS within the
federal government to strengthen its
coordination capacity, and build an
effective ARD budgetary planning
system
Short Medium High No Cost or
Savings
(3) Create a nucleus of high-level
agriculture policy analysts under
SAGARPA umbrella.
Short Medium Low Low Cost
2. Rationalizing the Overall System for Farmer Support
(1) Increase expenditure allocation to
public goods: irrigation improvement
and management, drainage and
transport infrastructure; other rural
infrastructure (such as that provided
by FAIS); research, extension and
training; sanitary and phyto-sanitary
services; market intelligence;
emergency programs; and others
Short, Medium
and Long High Medium High Cost
(2) Modify PROCAMPO Short Medium Medium
No Cost or
Savings
(3) Discontinue PROCAMPO Medium High High High Savings
(4) Modify Ingreso Objetivo Short Medium Medium
No Cost or
Savings
(5) Discontinue Ingreso Objetivo Medium High High High Savings
(6) Modify input support programs
(tarifa 9, agro-diesel, others) Short Medium Medium
No Cost or
Savings
(7) Discontinue input support
programs with or without temporary
compensatory payments (tarifa 9,
agro-diesel, others)
Short High High High Savings
(8) Rationalize federal non-targeted
programs oriented to support on-farm
and value chain investments (mainly
PROGAN, Apoyos a la
Competitividad de las Ramas
Productivas/Adquisición de Activos
Productivos, and the non-targeted
programs of Alianza).
Short, Medium High High No Cost or
Savings
(9) Reduce the allocation to non- Short, Medium High Low Medium
92
Policy Options
Implemen-
tation
Likely
Impact
Technical
Difficulty/
Risks
Fiscal Cost
or Savings targeted production-oriented programs
to increase support for small producers
(see 3 (1))*
and Long Savings
(10) Increase support to the rural
nonfarm sector
Short, Medium
and Long High High
Medium Cost
(11) Strengthen the rural finance
sector to increase service access
Short,
Medium, and
Long
High High Medium Cost
3. Improving the Support System for Small Producers through gradual decentralization
(1) Increase expenditure allocations to
support small producers*
Short, Medium
and Long High Low
Medium
Cost
(2) Pool resources from targeted
production/NRM-oriented programs of
different federal entities, decentralize
those resources to state governments
according to an agreed distribution
formula and decentralization protocol,
and discontinue the corresponding
federal programs
Medium, Long High High No Cost or
Savings
(3) Accelerate the decentralization of
ARD federal offices (federalización
administrativa)
Short,
Medium, and
Long
Medium High Low Cost
(4) Agree with state governments on a
protocol containing guidelines for
decentralization of funds to support
small producers: (i) national
benchmarks, (ii) fund distribution
formula, (iii) M&E system, (iv)
implementation support system, and
(v) state government responsibilities
Short Medium Medium No Cost or
Savings
4. Improving the M&E and Institutional Aspects of ARD Programs
(1) Adjust budgetary and
administrative regulations of ARD
programs to ensure flexibility and
timely execution
Short
Medium
High
No Cost or
Savings
(2) Increase recurrent cost allocations
for production oriented programs
Short, Medium
and Long
Medium
Medium
Medium Cost
(3) Improve the dissemination of ARD
programs
Short, Medium
and Long
Medium
Low
Low Cost
(4) Improve the accountability of
program operators at all levels and
introduce ―client satisfaction‖ criteria
to assess performance
Short, Medium
and Long
High
Medium
Low Cost
(5) Improve the economic and moral
incentives of medium and bottom level
program operators
Short, Medium
and Long
High
Medium
Medium Cost
(6) Carry out evaluations of the entire
PEC
Short, Medium
and Long Medium Low/Medium Low Cost
(7) Develop and integrate databases of Short, Medium Medium Medium Low Cost
93
Policy Options
Implemen-
tation
Likely
Impact
Technical
Difficulty/
Risks
Fiscal Cost
or Savings ARD program beneficiaries and Long
(8) Carry out in-depth program
evaluations at less frequent intervals
Short, Medium
and Long Medium Low Low Cost
(9) Organize a system to agree on and
monitor action agendas deriving from
evaluation results
Short
Medium
Low
Low Cost
5. Increasing the Positive Environmental Externalities of ARD programs and Supporting the National
Climate Change Strategy
(1) Improve SAGARPA norms to
regulate slash and burn agriculture in
light of increasing forest fires
Short Medium Low No Cost or
Savings
(2) Increase research allocation to
research and technology transfer of
reducing emissions from agriculture
such as no-till technology, reducing
GHG gas from livestock, reforestation,
efficient use of inputs
Short, Medium
and Long High Medium Medium Cost
(3) Revise regulations to incentivize
farmers to sell electricity generated by
biomass to the grid**
Medium Medium High Medium
Savings
(4) Improve targeting of geographical
area and payment levels of payment
for environmental services programs,
and scaling up its operations
Short, Medium
and Long High Medium High Cost
(5) Replace distortionary support
programs with payments for
environmental services
Short, Medium
and Long High Medium
No Cost or
Savings
Implementation term: Short (less than 2 years), generally associated with changes in laws or regulations;
Medium (3–5 years), requiring some institutional changes; Long (more than 5 years).
Effects term: Short (less than 2 years); Moderate (3–5 years); Long (more than 5 years).
Impact: High, medium, low (relative to other policy options proposed in these notes, not relative to other
more general reform options).
Technical difficulty/risks of undertaking the options suggested: High, medium, low.
Fiscal cost to government: High (large public investment programs), medium (some public program
expenditure required), low (little public expenditure). Fiscal saving: high, medium, low.
* The suggested proposal is to shift resources from non-targeted production oriented programs to targeted
ones (eventually decentralized to state governments) to support small farmers. Thus, the net effect should
be budget neutral—that is the overall expenditure should not increase or decrease.
** The suggested proposal is expected to increase investments by farmers to generate biomass energy.
Although, this proposal per se is budget neutral, in the long-run this should result in fiscal cost saving since
as farmers begin to generate biomass energy, they would buy less subsidized electricity from the grid.
94
APPENDIX TO CHAPTER 6: TECHNICAL NOTES
Technical Note 1: New Zealand’s Successful Agriculture Policy
Reform Experience
New Zealand historically pursued a policy of agricultural protection (1960-1980), but
after structural macroeconomic adjustment and trade openness the agricultural sector
experienced a gradual liberalization from subsidies and price controls. In the period from
the 1960s until 1980 New Zealand had strong price controls and subsidies to farmers in
order to keep production levels constant while encouraging exports (Johnson, R.W.N.,
2000). By 1983, for instance, New Zealand‘s producer support estimate (PSE) was 35%
of producers‘ income and the effective rate of assistance surged to 123% of total rural
household income (OECD, 2008). After 1983, New Zealand Government began to reduce
export and farm subsidies in the agricultural sector. During the 1990s further deregulation
reforms enabled the agriculture sector to benefit from greater synergies, better use of
resources, and a competitive industry structure that allowed better adjustment to markets.
These reforms led to an improvement of TFP growth to average 2.5% a year compared to
a 1.5% growth in the pre-reform period.
Source: MAF, 2006
Policy Impacts of Reforms
Sector Growth
From the period between the mid-1960s until the mid-1980s the share of agriculture
production to GDP fell steadily from 14% to 5.7%, given heavy regulation, price
distortions, low incentives to production and unfavorable exchange rates. A decade after
deregulation in the agriculture labor productivity has doubled. Despite less land devoted
to livestock and arable farming—from 14 million hectares in the 1980s to 12 million
hectares in 2000s—, productivity increased 85% in a 20 year period.
95
Source: MAF, 2006
The competitive market structure generated after the reforms led to smooth adjustments
to external shocks and, as a result, resources were more efficiently allocated to high
productivity sectors. For example, among pastoral industries the reformed caused
resources to divert into dairy farming, a highly productive sub-sector. Consequently, total
stock units in the dairy sector increased by 65% while beef and sheep sectors declined by
2 and 43%, respectively. A consequence of reforms was to allocate more resources into
innovation, research and other important services that foster agricultural production
efficiency. The high value of agriculture production has allowed New Zealand to have
one of the highest propensities to invest ratios, and one of the highest percentages of
GSSE in relation to TSE for the development in Agriculture among OECD countries
(OECD, 2008).
New Zealand’s GSSE on Agriculture 1986-2008
Source: OECD, 2008
References: Johnson, R.W. 2001. ―New Zealand’s Agricultural Reforms and their International Implications”. IEA,
U.K.
Anderson, K., Martin, W., and Valenzuela, E. 2006. “The Relative Importance of Global Agricultural
Subsidies and Market Access”. World Trade Review. Vol. 5 No. 3.
0
10
20
30
40
50
60
70
80
90
1986 1988 1990 1992 1994 1 996 1998 2000 2002 2004 2006
GSSE as % of TSE
Mexico New Zealand United States European Union OECD - Total
0
10
20
30
40
50
60
70
80
90
1986 1988 1990 1992 1994 1 996 1998 2000 2002 2004 2006
GSSE as % of TSE
Mexico New Zealand United States European Union OECD - Total
96
MAF. Agriculture in New Zealand: Past, Present and Future. ABARE and New Zealand Ministry of
Agriculture and Forestry 2008
OECD. 2008. Case Study: Domestic Reform, Trade, Innovation and Growth in New Zealand‘s Agricultural
Sector. TPWP No. 74. Paris.
Technical Note 2: INDAP: Technology Transfer Targeting
Small Farmers in Chile
Chile‘s Institute for Agricultural Development (INDAP) began in 1962 as an agency of
the Ministry of Agriculture, oriented exclusively at enhancing the productivity of small,
family farms through lending and technical assistance. INDAP‘s definition of small farm
families, which has remained unchanged over the decades, is simple: families with 12 or
fewer hectares (irrigated equivalent), with a net worth less of than US$100,000, and with
income deriving principally from agriculture. Other than INDAP, there is no government-
supported extension service; commercial operations are left to contract such services with
private agents and remain unsubsidized. INDAP is also the only significant source of
formal long-term credit for the low-income, small-farm sector.
Chile was one of the first countries to introduce public funding and private delivery of
agricultural technical assistance. INDAP has evolved over time while maintaining a
degree of continuity as it adjusts to changing conditions. The basic principle of
underwriting private extension services for only small farms has been maintained for
three decades, although the structures of INDAP‘s operation have adapted to experience
and new realities. The overall approach has proven itself operationally as a manner of
delivering extension, although its success in graduating farmers is less clear. It has also
maintained political support and funding, which have increased in real terms. Questions
remain about program coverage and success in aiding viable farmers to reach commercial
competitiveness.
Impact of INDAP’s small farmer assistance programs
The growth in clients of INDAP‘s technical assistance programs and subsidies and
expenditures has been well documented. A third of INDAP‘s transfers are now credit
subsidies, and two-thirds are subsidies for on-farm investment, technical assistance, and
managerial training (either directly to individual farmers or to farm groups and
municipality-run programs in poor areas). According to the OECD, INDAP‘s credit and
technical assistance programs reached in some form (perhaps minimally) approximately
116,000 people in 2006, or 42 percent of small farms (as counted in the 1997 agricultural
census). The share receiving significant technical assistance is approximately half.
The role of INDAP‘s technical assistance in moving farmers into a sustainable, higher-
income trajectory—their insertion into commercial structures—is less well known, and
there are simply no good measures of how many former clients have left the program and
succeeded on their own. Unlike the USDA extension service, which is meant to be a
permanent support for information dissemination to agriculture as an industry and not
specifically oriented to small farmers, INDAP is meant to focus on a specific subgroup of
poorer farmers who could, with assistance, reach viable scales.
97
The two most recent evaluations conducted in the mid-1990s show that INDAP
contributes to more intense agricultural input use, including family labor, which increases
gross and net farm income. Lopez (2000), however, finds that INDAP programs do not
raise family incomes due to an off-setting reduction in off-farm income and that more
intense input use does not raise total factor productivity. The key determinant in total
household income appears to be internal household characteristics rather than external
factors, including geographic location. Berdegue and others (1998) find that INDAP
programs increase household income, but the effect could have been due to selection bias.
They also note that INDAP has less of an effect in some geographic areas. But these
studies should be complemented by an examination of what happens to these families
over time, an analysis that INDAP has neglected.
INDAP‘s basic mission—to graduate viable farmers into commercial agriculture—has
not been explicitly used in evaluating the program. It is unclear whether INDAP is
treating new cohorts of farmers over time or aiding the same group of beneficiaries
repeatedly. The number of small farmers is declining, but INDAP has been growing.
During the early 1990s INDAP‘s budget increased 11 percent a year in real terms, and
4.4 percent in the late 1990s. By the early 2000s government funding still covered about
85 percent of INDAP costs. Some Chilean experts speculate that the agency attends to
more or less the same group of beneficiaries over time, implying that the fiscal outlays
per client could amount up to US$3,000 or more per year—or about US$50,000 over the
last 15 years. These would be large sums relative to the incomes of the Chilean rural poor.
Panel data following INDAP clients would be useful for finding the proportion of farmers
that reach commercial viability and the factors contributing to their success.. When
applying the lessons from Chile‘s INDAP to other countries, this deficiency should be
remedied.
A summary of best practices for technical assistance from INDAP’s experience
Define the target audience within the small farm sector, identifying the subset of
farmers that could eventually generate sustainable income without government
subsidies. Do not pretend to cover all small farmers at the same time.
Set up a monitoring system to assess a program‘s ability to graduate clients to
sustainability after five to seven years. Periodic quantitative evaluations are needed
(recognizing selection effects between clients and the control group) that go beyond
detecting impacts on production and input use to assessing the impact on household
incomes from all sources.
For farm families that cannot reach a viable scale in production, focus aid on
transition to other income activities and on social safety nets and noncontributory
pensions.
To reduce the costs and inefficiencies associated with government programs, do not
subsidize extension service for commercial farms. There is a rationale to support basic
and adaptive research for agriculture as a whole.
Government support for—and supervision of—private delivery of extension services
can provide technical assistance more efficiently than embedding extension delivery
in a government bureaucracy.
98
Do not rely on a voucher system that asks individual small farmers to make contracts
with extension providers because it may not generate the scale of demand that could
sustain a private market for extension services.
Use centralized coordination of extension services for standardized commodities, not
for products that require closer vertical coordination along the marketing chain.
Recognize that an extension delivery system cannot ―get it right‖ from the beginning,
but must adjust to mistakes and changing conditions. Information and monitoring, and
flexibility, are key to adjustment.
References
Diaz, Juan. 2007. ―Family Farm Agriculture: Factors Limiting its Competitiveness and Policy
Suggestions,‖ note prepared for the OECD Review of Agricultural Policies: Chile.
Berdegue, Julio, and RIMISP (Red Internacional de Metodologías de Investigación en Sistemas de
Producción), STOAS, Grupo de Investigaciones Agrarias (GIA) and EMG Consultores. 1998.
―Evaluación de Instrumentos de Fomento Productivo: El Programa de Transferencia Tecnológica
de INDAP.‖ Santiago, Chile.
Lopez, Ramon. 2000. Determinants of Rural Poverty in Chile: Evaluating the Role of Public
Extension/Credit Programs and Other Factors,‖ Chapter 9 of R. Lopez and A. Valdes, eds., Rural
Poverty in Latin America, St. Martin‘s Press.
Sotomayor, Octavio. 1994. ―Políticas de modernización y reconversión de la pequeña agricultura
tradicional Chilena,‖ ODEPA and IICA, Santiago.
Source: Valdes and Foster (2008).
Technical Note 3: Payments for Environmental Services in
Natural Resource Sectors
Managing natural assets well is difficult because the value of many—if not most—of
their environmental services cannot be internalized by private actors; they are
externalities and public goods. Individuals in society generally value natural assets, but
the incentives guiding private action rarely reflect their value to society as a whole. The
key to better managing natural assets is to design institutions that can measure the social
benefits and costs of environmental services and translate that information into
appropriate incentives for individual decisionmakers, such as farmers. The classic policy
proposals for better management focused on reducing negative externalities:
environmental taxes on emissions, mandated best practices, property rights allocation,
and support for institutions for common property management.
In agriculture and forestry environmental taxes are rarely used due to the high cost of
monitoring emissions. Emissions permits outside agriculture tend to be pollutant specific.
Better known in the natural resource sector are best management practices to reduce
environmental damage. Such practices are now more common—for example, when
managing native forests—and are often pushed by tourism-linked considerations and by
consumer preferences in wealthier countries valuing not only the product but the
environmental friendliness of production. In fact, there is growing emphasis on private,
third-party certification and voluntary implementation of standards, as with organic
produce in fresh fruits and vegetables for exports. This is due in part to the normal
99
slowness of governments as many developing countries to adjust the design and
enforcement of best practices.
Recent policies have emphasized both market-oriented and government-supported
subsidies of environmental goods and services. These policies, such as incentives for
better land management, focus on Payments for Environment Services (PES) provided by
those who benefit from such services, including local, regional, and global beneficiaries.
PES programs can be found increasingly in both developed and developing countries,
ranging from contracts between farmers and local industries whose profits are sensitive to
water availability, to contracts between one country‘s industry and groups in distant
countries seeking carbon sequestration. According to the FAO, there are four main PES
markets: climate change mitigation, watershed services, biodiversity conservation, and
landscape aesthetics. In developing countries markets for reducing carbon emission and
conserving biodiversity are potential sources of new revenue for agriculture. The ultimate
beneficiaries of environmental services are usually dispersed, so intermediaries such as
governments and international public and private concerned entities are required. To date,
PES programs have been pushed by governments and are geographically focused. They
are usually direct payments in exchange for better land management, such as soil and
water conservation measures, and tree plantations for carbon sequestration. Beneficiaries
can pay via a surcharge to water bills or with fees for park visitors. There are two key
steps for designing efficient PES programs. First is targeting farmers or other managers
of natural assets whose adoption of better management practices can yield the highest
environmental benefits for the lowest costs. Second is the structure of compensation,
which not only induces better management but also is ―self-enforcing‖ by reducing
monitoring costs and assuring compliance.
Perhaps the most studied case of PES in Latin America is the Costa Rican National
Forestry Financing Fund, which began in 1997 and has led to similar efforts in other
countries. The fund officially recognizes that forest owners provide a bundle of
environmental services, including watershed protection, biodiversity conservation, scenic
beauty, and carbon fixation and sequestration. The PES system arose when the
government was searching for sustainable funding for both forest conservation and aid to
the forestry sector. A 2002 evaluation of the program found that the Costa Rica PES had
contracted more than 280,000 hectares of private forests, with more than 800,000
hectares pending, spending US$57 million between 1997 and 2002. Forest conservation
contracts paid over US$210 per hectare, and reforestation contracts US$538 per hectare.
Funding came primarily from fuel taxes, complemented by international donors.
One special consideration is the potential role of PES in alleviating poverty. Associated
with poverty are low levels of education, ill-defined property rights over natural assets,
and a lack of capital that could support households during long-term investments in
natural assets (such as planting trees). Poverty often leads to environmental degradation.
Being able to target poor farmers for PES would bring both environmental benefits and
poverty reduction. Yet while targeting the poor on paper might be logical, implementing
a PES plan would be constrained by the very structural characteristics that link poverty to
100
environmental degradation in the first place: ill-defined property rights that make
contracting and long-term projects uncertain for both buyer and seller of the service;
small farm holdings that increase the transaction costs per unit of compensation and
reduce the viability of better management (such as crop rotation) and thus increase the
required compensation to entice farmers to better management practices; and lack of
credit as a short-term backup makes farmers more risk averse to adopting a new system
of management. Nevertheless, the World Bank, while recognizing that PES is not in itself
an antipoverty strategy, has suggested some pro-poor considerations in PES design:
devise specific mechanisms to counter high transaction costs and understand the social
context in which a PES would be applied to avoid adverse impacts on the poor and design
appropriate remedial measures. Making PES programs pro-poor, however, might increase
their costs, so funding must be found beyond the beneficiaries of environment services.
Donors who are more directly concerned about poverty could finance these additional
costs.
Both the World Bank and the FAO have programs to help policymakers and interested
parties design PES strategies. The World Bank has supported PES projects in many
countries, particularly in Latin America. Past World Bank–supported PES projects have
been implemented in Colombia, Costa Rica, and Nicaragua; projects are currently under
way in Costa Rica, Mexico, and Panama; and projects are in preparation in Brazil,
Colombia, and Ecuador. FAO implements a program called Payment for Environmental
Services for Agricultural Landscapes (PESAL), under its Agricultural Development
Economic Division (ESA). The ESA provides web links and tools for designing and
implementing PES with information on ecosystem services markets, recommendations on
setting up PES schemes, and links other international organizations in this field.
Source: Valdes (2008b).
101
102
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