The Ejido System and Economic Growth of the Mexican States Frederick H. Wallace Gulf University for Science and Technology and Joana Chapa Cantú Universidad Autónoma de Nuevo León Prepared for presentation at the “2015 WORLD BANK CONFERENCE ON LAND AND POVERTY” The World Bank - Washington DC, March 23-27, 2015

Institutions and Growth What is the role of institutions in economic growth? Do good institutions foster growth or does growth foster good institutions? Do poor institutions reduce growth or does slow growth promote poor institutions? 2

Institutions and Growth in Mexico Study a unique communal property institution, the ejido system. What is the impact of the ejido system in economic growth of the Mexican states? Our results suggest the answer is insignificant at best and negative at worst. 3

Annual Per Capita GDP Growth Country – 1940 to % – 1970 to % – 2003 to % Growth has been highly variable across states. Growth in Mexico has slowed since

State Annual Per Capita GDP Growth Highest – 1940 to %State of México – 1970 to %Querétero – 2003 to %Zacatecas Lowest – 1940 to %Baja California – 1970 to %Veracruz – 2003 to %Chiapas 5

Earlier Work on Mexican Growth Esquivel (1999), Chiquiar (2005), Carrion-i- Silvestre y German Soto (2007) Chiquiar looks at convergence of state income in Mexico. – Finds absolute and conditional convergence – Per capita GDP diverges We use data from Chiquiar in our study. 6

Ejido System Two types of land, common and parceled. – Common land used by all. – Parceled land is assigned to an individual or family. Before legal changes in 1992 ejido land could not be sold, rented, or used for collateral. Before 1992 land could not be left idle more than two years. Since 1992 ejido land can be converted to private ownership. Process is costly and time consuming. 7

Ejido Land in States The proportion of state land in the ejido system varies widely across states. In 2007 – Oaxaca (92%), Baja California (83%), and Nayarit (80%) – Nuevo León (32%), Tamaulipas (33%), and Sonora (35%) Percentages have changed over time as presidents have given land grants and some land converted to private ownership. 8

Ejido System and Growth Links-1 Inefficient Land Use-By restricting use to agriculture and related activities, land in the ejido system cannot be used in other activities. – According to the national statistics agency (INEGI) about 38% of the Federal District (México D.F.) is in the ejido system. 9

Ejido System and Growth Links-2 Reduced Labor Mobility-before 1992 an ejiditario who sought employment outside the ejido risked losing rights to the parcel. – Valsecchi (2014) finds that international immigration of ejiditarios increased after the 1992 reforms. – Suggests that the movement of ejiditarios to cities in Mexico likely increased after

Ejido System and Growth Links-3 Suboptimal Investment-since ejido land can not be used as loan collateral, acquisition of productive capital may have been restricted. – Financial institutions cannot take possession in the event of default. – Dependence on federal government for financial support. See Albertus et. al (2013) – Besley (1996) formally treats these issues. 11

Ejido System and Growth Links-4 Model of Drazen and Eckstein (1986) – A competitive market in land causes investors to substitute land for capital in their portfolios. – Alternatively, consider system in which land can be inherited and sale of land prohibited, much like ejidos before Investors have only capital in their portfolios. – Steady state growth rate can be higher in the alternative system because there is more capital. 12

13 Conditional Convergence Estimation Chiquiar model with the addition of a variable, L i t, for the fraction of state i land in the ejido system at time t. t = 1981, 1991, SUR estimation y i T -y i 0 : change in log per capita GDP, state i X i 0 : explanatory variables Coefficient β measures convergence/divergence.

Ejido Data Ejido land is either common or parceled. Sum is total land in the ejido system. The total is the measure we would like to use to calculate the fraction of state land in ejidos. Only estimates of the amount in parcels are available for 1981, 90% of the data gathered in ejido census for 1981 was destroyed in the 1985 earthquake in Mexico City. 14

Explanatory Variables Begin with significant explanatory variables used by Chiquiar. Examples – Shares of agriculture and manufacturing in state GDP – Share of population in rural areas – Average years of schooling Results for various models presented in paper. SUR estimation. 15

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Convergence Results Significant negative coefficient on initial log GDP per capita indicates conditional convergence Insignificant coefficient on initial log GDP per capita suggests neither convergence nor divergence of GDP per capita Consistent with Chiquiar for Final period-results sensitive to start date. 18

Ejido and Growth-1 Ejido system had no effect on economic growth in Coefficient negative, insignificant. – Results are consistent across different model specifications. – Mexico dependent on traditional agriculture so the output loss from having land in ejido system was low. – Government spending expanded in the 1970s with oil discoveries. Government may have provided ejidos with sufficient investment funds. 19

Ejido and Growth-2 Ejido system had significant, negative effect on economic growth in States with higher shares of ejido land grew more slowly. – Results are consistent across different specifications. – Mexico began to attract industry suggesting that the designation of some land as only agricultural may have been a binding constraint. – Until 1992 legal changes, an ejiditario risked losing rights if he/she left the ejido for an extended period. Could not pursue more productive work. 20

Ejido and Growth-3 Ejido system had insignificant effect on economic growth in or – Results are consistent across different model specifications for the three periods. – Reforms may have relaxed some of constraints on land and labor use. – These conclusions appear sensitive to the ejido variable included as will be seen in the restricted estimations. 21

Restricted Estimations-1 Ejido data for 1981 include only parcels and are estimated. Loss of data due to earthquake. SUR estimation of model for and or periods. Parcel measure. Similar results to those of three period model. – Significant negative effect of ejido system – No significant effect in subsequent period. 22

Restricted Estimations-2 Alternative measure, total ejido land as share of state land is available for the two periods. SUR estimation of model using total measure. – Weak evidence of divergence in growth rates, rich states grew faster – Significant positive effect on log GDP per capita Divergence. – Significant negative effect on log GDP per capita Conditional convergence. 23

Restricted Estimations-3 SUR estimation of model using total measure. – No significant effect of total ejido land share on per capita GDP growth – Significant negative effect of total ejido land share on per capita GDP growth – Significant negative effect of total ejido land share on per capita GDP growth

Conclusions-1 Consistent with Chiquiar’s findings, per capita GDP seems to have converged across states during In most specifications per capita GDP neither converged nor diverged , although conclusions change with use of total ejido variable in restricted models. Evidence on convergence is contradictory depending on start date of final period. 25

Conclusions-2 Most specifications indicate that states with more land in the ejido system had slower growth rates Conclusions change with different ejido variable, negative effect in and with total ejido land. No significant effect It seems clear that the ejido system has not contributed positively to economic growth of the Mexican states since