Effects of Land Degradation in a Diversified Economy with Local Staple and Labour Markets: A Village-Town CGE Analysis from Mexico

Abstract

Land degradation has potentially complex effects on diversified economies typical of rural areas in less-developed countries. Market linkages transmit the impacts from the directly affected households to others in the economy. When high transactions costs inhibit trade in food,labour, capital,or other goods,shifts in consumer or input demands influence prices and unleash general-equilibrium effects in local economies. These effects are missed by the extensive research on first-round effects of agricultural policies on household farms including those in imperfect market environments. Economy-wide models including computable general equilibrium (CGE) models are designed to capture the second and higher-round feedback of exogenous shocks to the macro economy. Our research uses an adaptation of CGE techniques presented in Taylor & Adelman (1996) to explore the impacts of land degradation on village economies and on migration for an area in rural Mexico characterised by local markets for staples and labour. Our village-town CGE blends microeconomic household farm models with economy-wide modelling. Results suggest that second round effects,which are not captured by household models can be important.