Introduction

Agriculture contributes less than 8 percent of Mexico's GDP. Nevertheless, when in June 1990 Presidents Salinas and Bush announced negotiations on a free trade agreement (FTA) between Mexico and the United States, it was clear that agriculture would be a major stumbling block. At stake is much more than the efficiency gains that liberalizing agriculture, particularly maize production, would bring to Mexico, substantial as we find them to be. Maize protection is Mexico's de facto rural employment and antipoverty program, so distributional concerns complicate the liberalization process. Further complications arise because, while high maize prices almost certainly contribute to, rather than alleviate, poverty, rapid liberalization would increase poverty during transition.

This paper focuses on the distributional effects of liberalizing maize in Mexico, the policies that can be put in place to alleviate them, and the incentive problems that would be caused by such policies. Our results, however, are of much wider interest than the FTA negotiations themselves. Agriculture has been a major stumbling block in trade negotiations everywhere, having always been excluded from GATT negotiations until the recent Uruguay round, which almost collapsed because of it. In many cases the reasons are similar to the ones discussed in this paper.

Transitional problems like the ones analyzed in this paper are likely to arise in most major economic reforms. In particular, we focus on the implications for policy design of the absence of well-functioning capital markets, on the welfare costs of reforming only gradually, on the incentive problems created by trade adjustment policies, and on the redistributive aspects of policy reform in the presence of realistic limits on the array of intervention instruments available to the Government.