Agricultural and economic tools

Although the agricultural contribution to the GDP of Mendoza remains below 10%, the sector becomes economically relevant when the multiplicative effects are considered. Since our focus is on the grapevine production, we review the fiscal policies and economic tools employed in different sectors to improve the economic performance of vineyards over the last 25 years.

Prior to the economic crisis of 2001, wine-related associations and institutions had drafted a restructuring plan to improve the strategic opportunities of the industry. This plan included technology adoption, variety improvement and development of new markets (COVIAR/OVA 2018;

Azpiazu and Basualdo 2001). Foreign direct investment assisted in this process since vineyards and wineries had not fully utilized present infrastructure and institutions but were prepared in terms of quality analysis frameworks and procedures. The new focus on targeted markets struggled to effectively increase the market share. Argentinean wine is welcomed in countries with high-purchasing power, but it is relatively more expensive than the competition. In particular, due to higher production costs, lack of proper infrastructure that increases the cost of logistics and relatively higher importation levies. Trade logistics represents 17% of the production and commercialization costs (COVIAR/OVA 2018).

Regarding the price paid to producers, small and medium vineyards have historically faced an uneven situation for bargaining power. Moreover, the increase in export-oriented wineries led to higher mistrust in the free-market so small and medium producers organized themselves into collectives to increase their bargaining power through the shield of cooperatives. Later, contract agreements, for partial or total production, improved the relationship between grapevine producers and wine makers. Jointly, key institutions and provincial governments agreed on the share that wine will be transformed into must to regulate the wine supply and further maintain prices. More recently, the abundance of base wine in stock and good harvest years led to lower market prices of grapevines;

situation that had to be solved with government intervention. In 2016, national government spent USD 11.2 million to improve the market price through reductions in wine stock. Considering external factors in grapevine production, institutions have deployed programs for assessing potential climate risks and minimizing effects of contingencies: for example, through programs like hail storm protection and rural insurance (Gibbons et al. 2016). Institutions seek to help farmers to improve their agronomic management and practices through smarter use of agrochemicals. Uncertainty in the local currency jeopardized the competitive gains of micro-devaluations since input providers adjusted faster to real values in US dollars.

When it comes to production factors, grapevine production in Mendoza remains a labor intensive crop with a variable share of intermediate inputs according to location, grape quality and conduction system. On average, the total production cost is USD 3,824 per hectare, composed of labor (72.1%), machinery (11.4%), agrochemicals (9%) and physical inputs (7.4%) (COVIAR/OVA 2018).

Regarding labor policies, institutions lagged behind in terms of formality and flexibility of the labor force. In addition to the higher employment costs for firms and small vineyards, the deployment of alternative labor standards for seasonal and permanent workers did not affect the level of employment in the sector. On the contrary, these measures led to a lower share of permanent labor with higher benefits. Seasonal workers can count on regulated salary that is constantly updated by institutions.

These measures improve resource allocation and flexibility but also incentivize farm workers to seek short-term employment (Van den Bosch 2008).

Altogether, the review of the agricultural policies shows an active public sector in the regulation of all production factors. However, in the framework of political economy; we will further discuss the general environment of these regulations along with the effectiveness and suitability of the economic measures.

2.2.4 Framework

For those farmers that have a well, groundwater becomes a common-pool resource with low-excludability for pumping it (OECD 2015). The sole existence of underground resources raises concerns about their characteristics: boundaries of the reserve, the hydrogeological uncertainties, irreversibility of mismanagement, and information asymmetries (Booker et al. 2012; NRC 1997;

Theesfeld 2010).

The institutional tripod framework is used. This methodology assess the tripartite institutional performance by decoupling the roles of organizations and stakeholders at different levels. It helps to understand the underlining power structures, decision making stages, and incentives of participants in the political process.

Meinzen-Dick (2007) introduced the framework acknowledging that there is no single solution for all water problems in policy analysis. An objective manner of analysis is to decompose the policy instruments into regulatory, economic, and voluntary. The regulatory instruments frame the command and control of water policies. That is the ownership of rights, standards for pollution and abstraction among others. In most of the cases, water rights are attached to agricultural land and are non-tradable.

OECD (2015) and Theesfeld (2010) agree on the importance of analyzing institutions involved, power structures, and independence of decision makers to comprehend the political process of water policy. Regarding the economic instruments, they reflect the financial incentives that may drive the decision of the stakeholders; this could be directly influenced by groundwater fees related to infrastructure, location, and services (Zilberman et al. 2008).

Furthermore, the joint analysis of physical conditions and institutional settings that consider asymmetric information are critical factors for design and implementation of policies (Dinar 2000).

To achieve a comprehensive governance structure on public institutions, a systematic review of planning and policy instruments is essential (Theesfeld et al. 2010).

Energy policies that subsidize groundwater withdrawals are commonly referred as ill-conceived policies (Bailis 2011). Since the marginal cost of acquiring water for irrigation decreases, it is possible that economic agents continue or start employing water inefficiently.

As expected, diminishing subsidies translate into higher tariff for producers, who initially constrained their energy consumption for agricultural irrigation. Later, the prevailing scenario of water scarcity and the recovery of grapevine prices led to a subsequent increase in groundwater use. What is still unknown is a good estimate of the demand function of groundwater for agriculture in the area of study. Regarding other areas in the northern basin in Mendoza, the price elasticity is -0.57 for producers that only use groundwater and -1.28 for users with access to both types of irrigation systems (Barbazza 2005). This means that a 1% increase in groundwater price will diminish consumption by 0.57% for farmers that rely completely on groundwater; whilst 1% increase in water abstraction will diminish consumption by 1.28% for conjoint users.

Other studies in India analyzed the effect of a 10% reduction in energy subsidies and found a

reduction of the pumped water between 4.4 and 6.7% (Badiani and Jessoe 2011; OECD 2015; Shah et al. 2012). While in case of Mexico, Sun et al. (2016) consider that doubling the cost of pumping would only reduce demand by 6%. However, the total withdraw of the energy subsidy would decrease pumping by 15% in the short run and settle in 19% on the long term (OECD 2015). Often, energy subsidies for irrigation efficiency are interpreted as a double-edged sword in groundwater management (OECD 2015). Acquiring higher efficiency standards on irrigation is more beneficial for farmers but could deteriorate soil quality or aquifer recharge. Some additional measures should foster cultivation of less water demanding crops to avoid negative effects of the measure.

Coady et al. (2015) propose that efficient pricing from energy producers to suppliers should equal the cost of production. Additionally, pigouvian taxation is a tool to correct externalities that are not covered by other political measures. Moreover, Sun et al. (2016) have shown that effectiveness of electricity price-based policies is certainly a reason to consider this instrument for groundwater as a common pool resource.