The Economic Development of the Lsthmic Region of Mexico (In Four Volumes)

Report No. 1080-ME The Economic Development of the lsthmic Region of Mexico (In Four Volumes)

Public Disclosure Authorized Volume 1: The Text March 30, 1976 Latin America and the Caribbean Region

FOR OFFICIAL USE ONLY Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank

This document has a restricted distribu Lioni and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without WVorld Ban-k auLhorization. FOR OFFICIAL USE ONLY

This Report is based on the findings of a mission which visited Mexico in November 1974. The mission was led by Ian Scott and included:

Damianos Hilsaca - Human Resources Thomas Hutcheson - Industrial Economics Ulrich Kllffner - Water Resources Luis Marco (Consultant) - Transport Economics Peter Scherer - Rural Development Rafael Sison - Urban Development Dirk van der Sluijs - Agriculture

The mission wishes to acknowledge the invaluable cooperation it received from the Mexican authorities and particularly from the Comision Coordinadora Para El DesarrolloIntegral del Istmo de Tehuantepec.

This document has a restricted distribution and may be used by recipients only in the performance of their ofMcial duties. Its contents may not otherwise be disclosed without World Bank authorization. THE ECONOMIC DEVELOPMENT OF THE ISTBMTC REGION OF MEXICO

Table of Contents

SUEMART AND COCIUJSIONS .. e....eee,eee.e.eeie.eoeeeee.o.eeoee X - iv

CHAPTER 1. THE CONTEXT

A. Backgroud * aeooeeeeee,e*Oeee*eeeeeoee*oo* 1 B. Regional Development Policy in Mexico Before 1970 ego,., 1 C. The Spatial Stnr.ctume of the Mexican Econorny ...... 2 ID. The Inplications of the Spatial Order . 5 69096.* .0 . 6 E. The Growth Centre Concept *eeg* 0eCseOeaeo eeo.oe*oeeee 12 F. The Isthmic Region *...... X ..e.ag. .@ *..a@ ..... lb4

CHAPTER 2. THE RBGION

A. Geography *e .e..geoe0goooeeeee eeeoeo*oeeg 20 Be Demography ,eee.ge ogo gee eoge"eeeeee 22 C. Economic Structure ...... * .**.*,* e.g.e,,,,,, 25

CHAPTER 3. THE DEVELOPET FRAMEWORK

Ao ItrodIction *ssve^e¢@ @*ow eee6* 40 Be Human Resources *40,eee@0eooooo eee egeeogee ho C Agriculture ...... 4a COIs gag OO4* G o aosegO geOe a 42 D. Forestry .. g....*g..o.e e*eg 0000 **eeeeOoO Ogo 51 E* Fisheries *4e*eeeeoveeeee*Xe* 52 F. Mining and Petroleum .... og,g ggoeeeQegeGegee 54 Go Manufacturing ,...*se....0 0eo.0 57..o.7 H. Comunications * egg, g .... ego e.ge. e 62 Io Services .G, ** * C*gegeg#*ee.o*Qooeeoe.gge 64 J. All Things Considered .,..eg....O.ge.*.,,*ge *,*Q***** 6 7 CHAPTER 4. TOWARDS A DEVELO}FET STRATEGY

A. Orientation .. ge..eo.e..e.*egooeoeoe e g*6*3o *eee 69 B. Quantifying the Objectives ...... ,..*,**,....e0 . e74

C. Urban Development .g.g.e... goggaeoeg .eeeedeo 0 ae a G * O 75 Do Firal Development e...... o,ae-. Iase,gJIeIsoee**sae * 104 E. Transport Development geg eggege 4.e.eee, ....e e.. e 114 CHAPrER 5. THE NEXT STEP

Ao Introdaction **^¢-*XX¢-*eeZ5****@¢@ 135 B. The Institutional Framework 135 C. Implemeritatiorn .. e.. ee geog.ege e egog ea*ege e .gg@e 140 LISr OF FIGURES

Number as Referred IBRD After to in Report Serial Number Title Page No.

1. 15601 Composition by Age and Sex in the Istliuus and France, 1970 (Percentage) 22

2.(a) 15600 Welfare Profiles 34 (b) 15599 Welfare Profiles 34 SUMMARY AND CONCLUSIONS

i By, comparison with most other parts of Mexicoj the Isthmic region -- defined in this Report to include the whole of the States of Chiapas and Tabasco and portions of the States of Veracruz and Oaxaca -- is remarkable for the contrast between its present relative poverty and its considerable potential for future development. However$ the relative poverty of the region as a whole disguises important intra-regional differences between the fertile and mineral rich coastal plains of Veracruz and Tabasco and the mountainous and less well endowed parts of the region located in Chiapas and Oaxaca.

DEVlEOBINT INICATCRs (1970)

Indicator Chiapas Oaxaca Veracruz Tabasco Nation

Development, Index (Rank Order out of 32) 31 32 15 20 - Value Added per Capita (Rank Order out of 32) 28 32 9 23 - Average Monthly Income per Family (Pesos) 716.6 53702 1576.7 1630.4 1782.0 Incoie Distribution (Ginr Coefficient) .628 .688 .583 .570 o589 Urban Population (as % of total) 28 28 47 33 59 Retail Sales Per Capita (Pesos) 391 288 10214 695 1906 Motor Vehicles per 1I000 Population 0010 0007 0,.016 0.011 0.034

Literacy ( ) 57 58 70 76 76

Infant Mortality (per 1000) 59 60 55 53 66 Dwellings with Piped Water Suppl(96) 38 35 51 34 61 ii. By comparison with the rest of Mexico, the Isthmic region is by no means resource-poor. It has considerable agricultural potential particularly on the Gulf Coast plain and to some extent also in the mountains and on the Pacific Coast. It has abundant petroleum and other mineral wealth, most of which like most of its agricultural potential, is ooncentrated on the Gulf Coast and it has an unequalled supply of water for agriculture, industzy and hydropower generation. Although they are, in relative terms, much less importants the region is also endowed with abundant resources for forestry and fisheries. iii. G;iven this, the obvious question is why the region as a whole has not experienced more development and why, in particular., the Gulf Coast has not moved further ahead? Mexico, after all, has numerous examples of major urban agglomerationss such as Monterrey, where industrial growth has been based on the devtlopment of mining activities in a hinterland area and several other instancess ntably the northwestern cities of Ciudad Obregon, Hermosillo and Culiacan, where urban and regional development has been mainly founded on the growth of agriculture. iv. Thus far however, many of the resources of the Isthmic region have not been developed and those resources that have been developed have been developed in such a way that few of the benefits arising have been enjoyed within the region.

Vo With respect to agricultural developments, part of the problem has been that although its soils are fertile and there is abundant water, the latter resource is a mixed blessing because extensive areas of the Gulf Coast are flooded for at least part of the year. Until the coastal plain is drained, much of it cannot therefore be used for crop or livestock production, Another constraint is that although there is much expertise in Mexico concerning agricultural techniques for dry tropical areas, there is relatively little expertise pertaining to the agriculture of the humid tropics. These factors, together with the absence -- relative to other parts of the country - of entrepreneurial initiative and the scarcity of local capital for investment, help explain why agriculture has not, so far, developed on a significant scale.

Vi. The enclave nature of the urban-industrial growth which has been associated with the petroleum sector in the Gulf Coast has roots which go back to the beginnings of Mexico's petroleum industry in the first decade of the 20 century when Minatitlan was growing up as an isolated refinery town owned and operated by a foreign enterprise. Despite the expropriation of the petroleum industry in 1938 and its subsequent development as a state monopoly by Petroleos Mexicanos (PENE),, the industry has preserved its enclave characteristics and Minatitlan is still a refinery town although its near-neighbor, Coatzacoalcos, has begun to develop as a diversified industrial port. vii. Enclave development has not however been confined to Minatitlan and with few exceptions, it characterizes most parts of the region. Given this -- and the evidence can be found in every sector and almost every town and city -- the Isthmic region appears as a classical example of a peripheral area within a "core-periphery" framework where the national core is Mexico City. The pattern of its development -- to the extent that development has occurred -- has thus been such that intra-regional linkages have been few, there has been heavy reliance on imported services, internal income multipliers have remained small because incomes generated in the region have generally been spent elsewhere and because investment decisions -- particularly those of Petroleos Mexicanos -- have usually been made in ignorance of what other investors intended to do. viii, This phenomenon is easy to describe but difficult to circumvent. It is clear however, that if the Isthmic region is to be developed in a way that would make sense in tems of a national development strategy, the dependent, enclave, nature of its economy must be modified. Again,* this is easier said than done, But there are several reasons for believing that given the existence of an appropriate set of policies this could be done and that the region could make an important contribution to Mexico's economic growth and development. ix0 Foremost among these reasons is the fact of its highly favorable physical resource endowment, which, ntwithstanding the many impediments to agricultural and industrial growth, is such that in a national perspective the Isthmic region emerges with strong comparative advantages. Second, there is the fact of its relative proximity to the country's major market area of the Guadalajara-Mexico City-Veracruz axis which, relative to almost all other parts of the periphery gives it greater market potential than almost any other part of the country. Further, there is its highly favorable access to the external markets of the Atlantic (the USA and Europe) through the port of Coatzacoalcos and also (in the longer run) its comparative ease of access to the markets of the Pacific via the "land bridge" of the Isthmus. Finally, although the development of the Isthis has hardly begun, a substantial amount of fixed investment is already in place particularly in the petroleum sector and this constitutes another facet of the framework for its future growth. x. Juxtaposed to these comparative advantages there are numeroas constraints, among which the paucity of its human resources is outstanding. There are, moreovers severe challenges to integrated urban-rural development which, because of the presently capital intensive nature of its industrial growth and the poverty of its rural communities, are probably as great as might be found anywhere in Mexico. There are also imposing difficulties in the way of sectoral development. xi. In the agricultural sector it is obvious that extensive drainage will be needed to make the Gulf Coast plains productives, that new cultivation - iv - techniques will have to be developed for the humid tropics, and that it will also be necessary to provide capital for investment from outside the region. xii. In the industrial sector the main challenge will be to develop a nonenclave environment which will require the creation of a favorable investment climates, the introduction of new incentives for the private sector, and a substantial volume of direct industrial and infrastructural investment by the public sectors, which, particularly as it concerns PE,EX, will have to be carefully planmed 0 xiii. Given these challenges and notwithstanding the advantages of the Isthmus relative to other parts of the periphery it may be asked whether the effort to develop this region is really worthwhile. xiv. This report argues that it is. Firsts because in the long runs, Mexico wil have no alternative than to develop alternative certers for population concentration away from the present "core of Mexico City. And second, because even though the comparative costs and benefits of development in one part of the periphery relative to another part cannot be precisely quantified. the partial measurements that are available point towards selecting the Gulf Coast of the Isthmus as a locus for urban-industrial growth and to harmonize this growth with the development of urban and rural areas elsewhere in the region. CHAPTER 1: THE CCNTEXT

A. BACKGRO(UND 1. Three recent IBRD Reports - "The Economy of Mexico: A Basic Report" "Urban Development in Mexicot",2/ and "Spatial Development in Mexico"3/ - have analyzed some of the structural characteristics of the Mexican economy, These reports and particularly the last, provide a general background to this one, which is among the first studies of regional development to be undertaken by the World Bank in Latin America. 2. Regional development is not of course a new topic in Mexico. It appears however that a new approach to it - in which regional development is seen as a facet: of spatial development within a coherent macro.economic framework - is urgently needed. B. REGIONAL DEVELOPMENT POLICY IN MEXICO BEFORE 1970

3. The main antecedents of Mexico's regional policy refer to the work of the River Basin Commissions as agencies of regional development. Modeled in many ways on the Tennessee Valley Authority, these commissions were set up in the 1940's and 50s to promote the development of a number of major hydraulic regions, the respective territories of which are shown on Map 1* Barkin and King (1970) have argued that the major force underlying the growth of the commissions was the perceived need (for the nation) "to increase agricultural production for both home and foreign markets and to expand supplies of electric power." These were macro-economic as well as regional objectives and although the authors suggest that the commissions were also seen by the authorities as instruments for achieving "the radical aim of industrializing away from th6 central areas of Mexico",, there is very little hard (or even soft) evidence that the latter role was ever clearly articulated for them.

4. The commissions - in varying degrees - have nevertheless been successful in fulfilling their essentially limited objectives. They have undoubtedly played an important role in facilitating the growth of the agricultural and power sectors in their respective regions, and, in aggregate., in the country as a whole. But it is difficult to make the case that they have facilitated the spatial decentraLization of the Mexican economy. First because they were not explicitly set up to do so - and whatever general notions may have been associated with them in this regard, they were given neither the terms of reference nor the instruments which would have been needed to pursue such a goal had it existed, Second, because they obviously did not do so inasmuch as the economy became, in aggregate, even more centralized after 1940 than it was before, and to the extent that ura-n-industrial grovth occurred in hitherto unindustrialized areas, it had little to do with

1/ ME-193, June 27, 1973. 2 Forthcoming, early 1976. Referred to in this text as "Urban Development."

3/ Forthcoming, early 1976. Referred to in this text as "Spatial Development." -2-

the work of the Commissions.J/ It would be both idle and unfair to conclude that the commissions had failed to achieve something they did not set out to do b'.;t It is ob7iously important to see them for what they were and in fact, still are.

5. Dei_x.ntralization was not then, among the functional objectives of the Commissions. Nor can it really be argued - given much evidence to the contrary - that Li the 'forties, 'fifties or 'sixties, decentralization was a major or even a minor goal of government economic policy. The latter was, mainly, if not exclusively, concerned with the pursuit of sustained economic growth anid decentraLization was not an important consideration. Although we can point to a few decentralization instruments introduced in 1940-70, we should bear in mind that they were, almost without exception, very that weak, they were not orchestrated and that in most instances - with such exceptions as the border industries program introduced in the late 'sixties they - were indirectly or directly offset by countervailing measures. ]mndeed, although it is probably correct to argue that Mexico's economic policy at this time was essentially aspatial (i.e., was innocent of any intention to affect the spat'.al structue o te economy), it would be easier to argue that it encouraged concentration and centralization rather than the reverse. The spatlal implications of economic policy in 1940-70 are discussed in "Urban Development" (Chapter 2).

6. Prior to the Echeverria adninistration, Mexico had not therefore addressed the question of regional policy in terms of development in the spatial dimension (i.e., the geographic distribution of population, production and cons ,,r,rtion). But since 1970, there have been several indications that the Government has become increasingly aware of the need to evaluate the implications of the co"..itryls spatial structure. As argued in "Spatial Development", there are a number of good reasons for this concern, particularly when the time horizon involved is a longish one from, say, now, the until end of the century. To understand why this is so, it is necessary to answer three questions. (1) What are the characteristics of the present spatial structure and how might they be expected to evolve in the future in the absence of government intervention? (2) What are the implications arising? (3) What policies would accommodate these implications? Each of these questions is discussed in detail in "Spatial Development" and no useful purpose would be served by repeating the answers here in full. But the next three sections summarize some of the main points and add a few others of particular relevance to this Report.

C. THE SPATIAL STRUCTURE OF THE MEXICAN ECONOMY

7. The basic components of the spatial framework of the Mexican (as any other) economy are, (a) the structure of human settlements as defined by the settlement hierarchy, and (b) the structure of the transport networks which allow movemeint between these settlements and which may also be defined

1/ A prospectively important exception is Las Truchas, based on the SICARTSA complex in the Rio Balsas Basin which has recently been established with the encouragement of the Baloas Commission. -3-

in terms of a hierarchy of transport and communication routes. The aggregate country's spatial framework thus includes every settlement from the hamlet smaLlest to the largest metropolitan area and every rcd, railway and airway. Me Given that urban population size reflects major economic contrasts between different cities and that most of the country's transport concer-n activities flows between these major nodal points, the major features of the spatial framework can be surnarized in terms of the spatial arrangement the largest of cities and the intercity routes which connect them. These features are of what we might term a macro-spatial character and tell us to what degree the spatial distribution of urban population, production and prosperity, is concentrated or dispersed and is balanced or unbalanced.

9. In 1970, there were some 37 citiesl/ with populations of more than 100,000 (Table 1.1). Together, they accounted for nqre than two-thirds of the country's urban population of about 20 million.-/ They' for also accounted even larger shares of the total value of output of the secondary and tertiary sectors, and more than seventy percent of a-l personal incomes. Within this universe, half of the urban population and more than haLf all output of and incomes was accounted for by Mexico City alone, which is (and has long since been) the "primate" city and central "core" of the national space economy. Subsidiary "cores" exist in the second and third largest cities - Guadalajara and Monterrey - which are respectively, only one-sixth and one-seventh the size of Mexico City. 10. The three major cities are located at the apices of an aLmost equilateral triangle in the "lcenter"t of the country.2/ (Map 2) One side of this triangle has become a major axis of urban development which stretches from Guadalajara to Mexico City and contaiXns a broad belt of urban centers including Leon, Queretaro, Irapuato, Morelia and Cuernavaca. This belt extends beyond Mexico City through Puebla and Orizaba to the Gulf Coast port of Veracruz. Around Monterrey, there is ancther loosely cluster articulated of cities which extends northwards to Reynosa, Nuevo Laredo and Matamoros on the U. S. frontier, and west to Saltillo. Most of large the other cities are also in the northern states but are not, in general, interrelated. One group comprises the cities of the north-center and northwest frontier (Ciudad Juarez, Nogales, Mexicali and Tijuana). Another comprises the ci.ties of the northwestern states (Hermosillo, Ciudad Obregon) which, almost uniquely in Mexico, have grown on the basis of strong rural- urban linkages. Finally, there are the relatively isolated interior cities of the north-central states (Chihuahua and Torreon). In the south there as yet, are, few large urban centres, the major exception being Merida which is

1/ More accurately, "urban municipios." 2/ Defined in terms of all those living in settlements of more than 2,500 inhabitants. In 1970, sixty percent of the Mexican population was urbanized" in this sense. 3/ "Center" is, in this case, a power concept rather than a geographical one. -14-

the regionaX "core" of the Yucatan peninsula. Elsewhere, although they have obvious potential for future deveiopment (that potential being the subject of this report), the cities of the Coatzacoalcos Delta (Coatzacoalcos and Minatitlan) and Villahermnosa, have only recently begun to grow, while Oaxaca and Tuxtla Guti6rrez are semi-isolated mountain enclaves.

11 The transport and communications networks which link all these cities are not only a vital key to their historical development (see "Urban Development'", Chapters 1 and 2) but generally reflect the intensity of current interuban relationships (Map Three). The road, rail and air networks and also the telecommunications systems show, in general, a close relationship between urban size on the one harnd and the intensity of interurban traffic flows on the other.

12. Tlese factors are consistent with Mexico Cit-y emerging as the major node in the transport system. It is also important to recognize however that although Mexico City has been described as "the central sun around which the country revolves'i,j there has, since the 19th century, been a second center of economic power - the U.S.A. The railroad system (and because it was constructed as a competing alternative rather than.a complementary system), the road network, thus facilitate north-south rather than east-west movements to and frorm Mexico City and the U.S. border, although the pattern of traffic densi_tyshows that Mexico City is the origin or destination of a major share of all traffic.

13. Our first conclusion abbut the co intry's spatial structure derives directly from its framework. It is that Mexico is a highly centralized country in terms of all of the relevant demographic, economic, and transportation indicators and that Mexico City, both by virtue of its size relative to other cities and by virtue of its relative economic, political and cultural importance occupies a strongly preeminent status. (Table 1.3).

14. A second dimension of the country's spatial structure refers to urban-rural relationships and to continuity or discontinuity in economic and cultural relations between towns and cities on the one hand and the country side on the other.

15. At a national level the process of urbanization has been closely associated with economic growti. This follows from the close relationship between urbanization and the development of the secondary and tertiary sectors, and the fact that the shift out of agriculture has been associated with rising factor productivity. At a sub-national level therefore, it might be expected that the relative degree of urbanization would be associated with variations in economic development, and the data suggest that this is indeed generally the case. On the whole, we find that the more urbanized the subnational area (state), the higher the level of economic development (Table 1.4).

1/ Tucker (1953), 16. We also find however, that many of the country's largest cities are located in relatively poor and undeveloped states, a good example being Puebla, the countriy's fourth largest city, located in a state which, in 1970, ranked among the five least developed in the nation, The city of Puebla thus stands up like an island of prosperity in a sea of poverty. We find, too, that some of the more developed states do not have high indices of urbanization. This is conspicuously true in the nowest, where Sonora and Sinaloa, which, in 1970, ranked among the ten most prosperous states in the country, had relatively low ranks with respect to the degree of urbanization. Nor did these states include any of the country's biggest cities, the largest in either of them being Culiacan, which in 1970, ranked ninth in the urban size hierarchy.

17. We conciude that whereas both urbanization and the growth of large cities have been generaLly associated with relatively advanced economic development at the subnational level, neither can be regarded as a necessary or sufficient condition of subnational development. 'Why? First, because the evidence shows that in some parts of the country - the northwest in particular - economic development has been strongly associated with agricultural developments in such circumstances, neither urbanization nor the development of a large city (in terms of the nationaL urban system), are necessary conditions of economic progress. We should note however that to the extent urban development has ocourred in the northwestern states it has been closely associated with the development of the agricultural sector - a point which is revealed by looking at the industrial and commercial structure of Culiacan, Obregon or Hermosillo.l/ Second, because in relatively poor and/or unurbanized states, the relationship between large cities and the surrounding countryside is often predatory. The roots of dualistic relationships between urban and rural economies obviously have many dimensions, including the allocation of investments, particulLarly public investment, and relative prices which favor urban growth and which among other things, facilitate the expansion of industrial activities in cities far removed from the sources of raw materials and foodstuffs. / Under these conditions, a city can grow almost indefinitely without particular regard to the rural areas around it.

1d. Many, and perhaps most, of Mexico's largest (and also smaller) cities have not therefore been associated with the "spread" of development in their hinterlands, and urbanization has not usually had beneficial effects on the surrounding area. Places which are relatively close to major cities are often as poor as those much further away. At the regional and sub- regional level, development has not, in general, "trickled down" from major urban centers to smaller cities and rural areas. Stand on Avenida Reforma or in the Zona Rosa in Mexico City. Then go to the centre of Toluca about an hour and a half away in the state of Mexico. Then to a small town, say 20 km from Toluca. Then to one of the many villages around. The smaller j/ See "Spatial Development."

2/ The e;xistence of a relatively complete transport network is another obvious condition of this type of urban growth. (See "Spatial Development") - 6 -

the place, the lower the level of absolute and relative welfare as seen from personal observation (and as supported by statistical evidence). This exercise would of course provide the most extreme developmental contrasts that one might find in a distance of less than 100 kms. in the whole of Mexico. But the pattern would be essentially similar if the starting point were any one of the countryts major cities. Going from the urban to the rural sector is rather like falling off a precipice.

19. Taking account both of what we have called its macro-spatial structure and of rural-urban relationships in Mexico, we conclude that the Mexican spatial system is still evolving. There is substantial interdepen- dence between the country's major cities, which are, in varying degrees, specialized in accordance with their comparative advantages. Thus, if we define the 'urban system" in terms of the set of 37 cities with 1970 populations of more than 100,000, we could argue that the system is quite well developed and is approaching maturity, the latter judgment being based on the relative stability of the urban hierarchy in recent years. But if we define the spatial structure in terms of the complete system of settlements, from the largest metropolitan areas -to the smallest villages we cannot say the spatial system is continuous - there are too many interruptions and dis- tortions. Neither, therefore, can we say it is tmature". This is the spatial dimension of Mexico's present state of economic development. Our macro- economic analysis s4gws that Mexico has reached an "tin-between", point of economic progress. JV The spatial order is part and parcel of the general economic order and inasmuch as the Mexican economy has not tqaatured" it is unsurprising that its spatial structure has not done so either.

20. The Mexican experience clearly shows that the processes of concentration and differentiation (which are really two sides of the same coin) has been going on at least since 1940 and, as recently as 1970, showed no signs of stopping or of being reversed. With regard to concentration, the dEmographic and economic indices speak for themselves. And with regard to differentiation,, the data also show very clearly that since 1940, the least developed states (Oaxaca, Chiapas and Guerrero) have fallen increasingly further behind the most developed state - the Federal District. In simple terms, the rich have become relatively richer and the poor poorer -- at the state as at the interpersonal level. If we cast Mexico City as the "core" of the economy and everything else as the "periphery", we can in fact sustain the argument on the basis of incremental "differentiation". We can, moreover, use the same model to interpret spatial contrasts at the subnational level and, in particular, to explain the development of dual economic systems in urban and rural areas. Given this, we can see the relationship between Mexico City and the rest of the national economy as a special case of a general phenomenon.

D. THE IMPI;CATIONS OF THE SPATIAL ORDER

21. In terms of policy implications, the two aspects of spatial development which have been iritroduced can, for certain purposes) be separated. On the one hand, it is possible to focus on the issues which arise from the 1/ See "Basic Report" (Volume IV: The Future"). -7- size-distribution and spatial-distribution of major cities. On the other, it is possible to focus on the fact that development has, so far, been unevenly distributed across the national space. The first focus emphasizes the issue of economic and demographic concentration and centralization and the problems of national core-periphery relationships. The second emphasizes the problem of the uneven geographic distribution of economic welfare and, in particular, the lack of rural-urban integration. These problems are of different conceptual orders: the first refers to the basic spatial framework or geographic layout of the national economy arid deals with specific inter-city and inteF-regional relationships; the second has its roots in intersectoral relationships between urban and rural areas and in the terms of trade and the allocation of resources between agriculture and industry.

(i) The Issue of Centralization

22. It has been argued (see "Spatial Development", Chapter 1), that the degree of concentration in the Mexican economy is a potential source of economic inefficiency. This arises from two considerations. First, concentration per se implies that the absr'lute and relative size of Mexico City, given itTo7ation in a water-short altiplanol is likely to create increasingly severe economic, social and polit problems. From an economic point of view it is already clear that the costs of providing certain public services - notably but not exclusively water - are higher in Mexico City than in other cities. In addition, the size and location of Mexico City already has a large number of direct and indirect consequences (congestion and pollution for example), which point to the likely inefficiency of continued concentration. It is impossible to reach a conclusive judgment about the present trade-off between the economies and diseconomies of agglomeration in Mexico City. But it is a reasonable guess (supposing they could be measured), that even if the present social economieX were to outweigh the social diseconomies, they will not do so forever.1! Mexico City now has 10 million people. By the year 2000 it will probably have at least 20 million. And this number is a very conservative estimate which would allow for a significant reduction in the rate of population increase (now about 5.4 percent a year). There is, worldwide, no precedent for managing an urban agglomeration of this size. Bearing in mind that quite a large proportion of the economically active population may continue to be underemployred2/ the rnon-economic implications of continued agglomeration are likely to be at least as serious as the economic ones. To summarize, even if Mexico City is not already too big, it eventually will be - perhaps sooner than later, There are, coiisequently, sound reasons to believe that economic and demographic concentration in the Valley of Mexico must be regarded as a serious national issue and one about which something should be done.

1/ Frcx the standpoint of the firm the situation is of course likely to differ, 2/ See "Spatial Developmenttt, Chapter 2.. -8-

223. The second reason for believing that the existing spatial structure may - from a national point of view - be inefficient, is that resources for development in the periphery may not, at present, be efficiently exploited and opportunities for efficient growth may thus be foregone; this may be particularly important with respect to the efficient growth of the export sector. (ii) The Probleme of Inequality 24. The equalization of economic opportunities and economic welfare throughout the nation is not a realistic objective for Mexi:o - or any other developing country. 1 / But it is also clear that the existing degree of inequality between the urban economy and the rural economy (with the exceptions we have noted) is unacceptable to the Mexican Government and that it wishes to bring about a marked improvement in the living conditions of the rural, vis-a-vis the urban, population. Commitment to a policy of rural development s imples the adoption of policies which will tend to redress the imbalance between the urban and rural sectors at a national level, and also at a regional and subregional level, depending on the development potential of the rural sector in specific areas. What it does not imaply is the subsidi- zation of rural development in areas which lack comparative advantages. In a nutshell, the problem of urban-rural imbalance must be resolved in such a way that the pursuit of equity does not become a constraint to the achievement of economic efficiency. (iii) The Feasibility of Change 25. Given that the Mexican Government wishes (i) to achieve some measure of spatial decentralization in the economy; (ii) to develop the resources of the "periphery" in an efficient manner and (iii) to reduce the existing imbalance in economic welfare betwfeen the rural and urban sectors, two questions arise. First, what are the constraints to achieving these objectives? Second, are these objectives mutually compatible, or are they contradictory? 26. The constraints arising are generally similar from one objective to another. We have argued in "Spatial Development" (Chapter 2), that the issues of spatial policy will not be easily resolved. We have also argued there that these issues go to "the very heart of the process of developmental transformation itself:" and that policies for spatial change "are extremely difficult to carry out with any prospect for success." The argument continues: "This may be ascribed in part, to the inherent stability of spatial systems and to the fact that spatial policies can operate only at the margins of space forming processes. To bring about changes in spatial systems, consistent policies must be pursued with single minded attention and over very

1/ Circumstances may, to some extent, alter cases. Regional policy in the European Community for example clearly emphasizes "backward" regions. The countries concerned, however, are much more developed than Mexico, and can presumably "afford" to pursue such objectives. - 9 -

long periods of time. Frequent changes in the objectives of such policies tend to cancel each other and to prevent long-range commitments to regional development. The long-run nature of spatial development policy also implies that the objectives selected must be able to count on the continuing support of succeeding government administrations. Objectives shoulLd therefore be few in number, easily communicated, and widely supported."

27. In the Mexican case, we have already seen that these objectives are, on the one hand, of a macro-spatial nature (i.e., they refer to the structural characteristics of the economy as a whole) and on the other, of a micro-spatial nature (i.e., they refer to rural-urban relationships throughout the country).

28. Most of our preceding comments pertain to the macro-spatial questions of centralization on the one hand and the development of the periphery on the other. They are also generally relevant however, to the issue of rural-urban imbalance. The question remains - how can macro-spatial and micro-spatial policies be addressed within a common policy framework? Our answer is that the appropriate policies whic'- might be used to resolve the problems of centralization and periphery development, and the policies which might be used to achieve greater interpersonal equity in the context of rural-urban imbalance, can be linked in what we shall refer to as a "growth centres" strategy. We would emphasize however, that spatial change will not be easy to achieve; that the concepts involved are well understood, but that it is less clear how they should be translated into an operational framework; that the probability of success of any given instrument of spatial policy cannot be calculated with much precision and that worldwide experience suggests that spatial policies will often fail, Neither decentralization, nor the development of the periphery, nor rural-urban integration will, therefore, be easily achieved. But if we look at the implications of not attempting to devise a spatial policy,the picture is no means optimistic - a viewpoint by which seems to be shared by the Mexican authorities.

Eb THE GROWTH CENTRE CONCEPT

29. The growth center concept advanced in "Spatial Development" is explicitly related to the objective of decentralizing economic growth away from the Valley of Mexico on the one hand and of developing underutilized resources for national economic growth in so called "peripheral" areas on the other. It is also seen - at the intra-regional level - as a means of alleviating interpersonal contrasts in economic welfare, particularly those which now exist between the population of urban areas on the one hand and those of rural areas on the other.

30. This growth centers strategy is based on the view that just as tahe process of economic growth will, left to itself, produce a highly uneven spatial pattern, government intervention designed to produce an alternative pattern, must also be discriminatory. A fundamental precept of spatial policy is that if the resources available for development are spread too thinly, the macro-spatial structure is unlikely to change. In the Mexican case this means, ipso facto, that the economy would remain as centralized as ever. The development of the periphery therefore implies discriminatory - 10 -

development, and the careful ranking of areas in terms of their relative potential to achieve rapid and sustained economic growth, without a long-run increase in financial transfers.

31. Development regions and growth centers thus make natural bed- fellows, because the best way to define development regions is in terms of areas which are associated (by proximity) with growth centers. Although the whole of a national space must ultimately be incorporated in any useful attempt to define a spatial strategy, and each part of it must be associated with one or more growth centres, a set of priority development regions need not, and indeed, given a selective approach, cannot, do so. Thus, a map of priority development regions in a given country need identify only those areas which are thought to have unusual potential for accelerated development. They will not necessarily however have the same amount of potential with respect to their prospective contributions to a national decentralization strategy nor will they necessarily address the problem of integration in the same way. With respect to the first point, a critical difference between one growth centre and another is that since they are unlikely to be all of the same size, those which have the largest initial size will make the largest contributions to decentralization - assuming comparable growth rates in all of them. With respect to the second point, the relevance of a particular growth centre to rural-urban integration largely depends on how serious the problem is on the one hand and what the rural environment is like on the other. It is important to recognize therefore that even though a set of growth centres may share a priority status, they are likely to be of unequal importance from a macro-economic viewpoint.

32.. Two kinds of places suggest themselves as growth centres. First, those which already contain major metropolitan cores which are likely to sustain further growth. Second, those which do not contain major metropolitan cores but which do contain resources which, if exploited, could support sustained metropolitan development. In Mexico, there are many more examples of the former type of area than of the latter. Monterrey and Guadalajara, together with the cities of the Bajio Corridor (Queretaro - Celaya - Salamanca - Irapuato) appear to be particularly well endowed as growth centers of the first type. While all of them have certain disadvantages, some of which - water supply problems in particular - they share with Mexico City, they also have obvious potential for further development, taking account of their respective locations, sizes, and economic and demographic structures. Several other cities including Torreon, Chihuahua, San Luis Potosi, Leon, Morelia, Puebla, Veracruz, Tampico and Merida can also be identified as potential growth centers, primarily on account of their historical growth. In some instances, however, notably Torreon and Tampico, the potential for future expansion derives, in part, from the prospects for resource develop-nient in their hinterlands.

33. Torreon and Tampico could therefcre be said to fall (partly) into a second category of growth centers - where the resource endowment is the key parameter of development potential. Two other metropolitan areas, Coatzacoalcos-Minatitlan on the one hand, and Villahermosa on the other, are very clearly in this category, and are, as we have already noted, the focal points of the area with which this study is concerned. It follows from this that many of the considerations which pertain to the development of the "Isthmic Region" in which they are located, do not pertain to most of the other growth centers which have been mentioned above because we are dealing here with a resource based development region whereas the prospects for growth elsewhere depend much less on tapping unutilized resources than on exploiting existing externalities. Map 4 shows all of the growth centers we have mentioned above and links the growth centers to a series of development regions: (a) the Federal Capital Region in the Central Plateau; (b) the Bajio Corridor; (c) the Northeast; (d) the GIuadalajara region and (e) the Southern Gulf Coast Plain. A variant (Map 5) implies more radical changes in the existing spatial order, in which the whole of the Gulf Coast is identified as a development region, and.in which the whole of east region (centered on Monterrey) is thus linked with the Southern Gulf Coast Region.

34. In both "scenarios" therefore, the southern Gulf Coast would be a priority development area and this is the starting point for our analysis of development in the somewhat larger area we call the "Isthmic Region."

F. THE ISTHMIC REGION

(i) Regional Definition

35. This report contains an account of how a growth center policy could be applied to the area associated with Coatzacoalcos/Minatitlan and Villaher- mosa. Our definition of this region is partly based on criteria of administrative and statistical convenience, although the reasons for its tentative delimination vary from one border to another. The northern and southern margins are defined by the Gulf and Pacific coasts. The eastern margins are defined in part by the Guatemala border and in part by the fact that there is very little spatial interaction between Villahermosa and Campeche. The southern part of the western margin is defined by the mountain barriers of the State of Oaxaca while the northern part of the western margin is delimited by the respective spheres of influence of CoatzacoalcosAIinatitlan and Veracruz.27 Faced with the need to relate the growth centers of the Gulf Coast to a larger area we have excluded all places which are essentially beyond the actual or potential sphere of influence of the Gulf Coast or which would, in a logical spatial strategy for the whole country, be linked with some other growth center. We have also however included the more im- penetrable parts of Chiapas and Oaxaca in what we call the Isthmic Region because there are no other centers to which they could, on present evidence, be linked.

36, We should add that we are not persuaded anybody has yet devised, for Mexico, a definitive set of development regions. There have certainly been many efforts at regionalization according to criteria which have been significantly different. Most regionalization schemes have been designed for practical administrative purposes. The most obvious is the set of 32 states,

1// The nofthwestern margin is, however, likely to change over time, depending on the intensity of urban, industrial and commercial growth in these cities. - 12 - most of the boundaries of which were already defined in the 19 century; all other schemes have been imposed on this one. And they vary - both with respect to the number of regions and with respect to bcundary definitions according to the purpose of each scheme. There are, fcr example, 106 re4,ions for minimum wage administration, but only six for the regional organization of the power sector.

.37e Although we have not sought to make our definition of the Isthmic Region consistent with any national scheme of regionalization, we find that our interpretation of its structure (with an explicit major subregional division between its northern and southern parts) is very close to the sum of two of the subregions identified in the most recent and probably most thorough attempt at national regionalization; that of CEPAL/Presidencia (1974) (Map 6). (ii) Development Goals 38. Consistent with our earlier arguments, the principal goals of development in the Isthmic Region would be derived from the national priorities of decentralization and, related to this, sustained national economic growth, and an improvement in the interpersonal distribution of goods and services, particularly as between urban and rural areas. These priorities are not ranked, partly because they are interdependent - at the regional, as at the national level.

39. These general objectives would apply to any development region in any part of the country. But they apply with particular force to the Isthmic Region because of its unusual po'ential on the one hand, and its relative poverty on the other. This region thus offers a rather unique opportunity (in the Mexican context) to combine both objectives within a single regional strategy. This is not, in itself, an argument for treating it as a priority development region but certainly adds to the appeal of doing so given that there may be other reasons for such a decision. We shall discuss these reasons in terms of supply, demand and comparative advantage.

(a) The Supply Side

40. There is remarkable unanimity in Mexico about the resource potential of the Isthmic Region. T1his, it is often said - in Mexico City as well as in the region itself - is the region that has everything. Abundant water; good soils; a variety of non-metallic minerals. And petroleum. We believe this popular image is essentially valid; it is one of the country' s best endowed regions - certainly among those whic have, until now, remained relatively less developed.

41, Insofar as the resource base has been evaluated, the non-metallic minerals, petroleum, forestry and fisheries sectors of the Isthmic Region appear, by comparison with those of other parts of the country, to have good prospects for future growth. There is, however, a less favorable side - 13 - in that its climate, from the point of view of those who live there, is less than ideal. Half a century ago this was a much more serious problem than it is now; insofar as the area wz.s known at all, it was known for its isolation, diseases and tropical discomforts. Roads, railways, modern medicines and air conditioning have changed much of that. But not everything. It is still - for most of the year - hot and humid and by oompari- son with highland Mexico, a less congenial environment in which to live and work. The physical conditions of the Isthmic Region qua human environment are not therefore among its advantages. Neither, however, under present conditions, are they an overwhelming obstacle to its development.

42. Many people in Mexico seem to believe that whereas the natural resource base of the region is very strong, the paucity of its human . resources is a constraint to economic growth. This, at least in terms of the relative strengths of its natural and human resource endowments, seems a fair assessment. There is no doubt that the current demographic characteristics of the region are unfavorable to sustained growth, particularly with regard to the availability of industrial manpower. It is therefore clear that education and training for the region's population and the in- migration of skilled labor from other parts of the country will be necessary if its resource potential is to be developed.

43. The third part of the resource endowment consists of fixed investments in infrastructure and productive capacity in urban and rural areas and in the transport and communications systems which link them. By comparison with other regions, fixed investment of most kinds is relatively meagre, the main exception being public investment in the petroleum and power sectors. Other industrial investment, and fixed investment in agriculture, mining, forestry and fishing is on a generally small scale and is geographically concentrated (as is investment in the petroleum sector). Urban, rural and caiimunications infrastructure is sparse and is also concentrated in a relatively few areas. It is therefore clear that in general, the existing structure (like the human resource base) is a less important advantage for the future development of the region than its - as yet underexploited - natural resources. Thus, most things still remain to be done and most decisions are yet to be made although this can be seen as a plus rather than as a minus inasmuch as it may be possible to conceive of a coordinated program of public investments to provide an adequate framework for regional growth, without having to consider, to any great extent, what needs to be undone in order to construct such a framework. The region is still, in many respects, a virgin land.

.44, The critical question is whether the costs of developing the region would be higher or lower relative to the fruits of development than those which might be incurred in developing resources in other parts of the country with the dual objectives of decentralization and integration: we cannot answer this question in a comprehensive fashion. But we can point to some of the relevant factors. - 14 -

45. With respect to the complementary aspects of the resource base, few other parts of the country have equivalent diversity. This region not only has minerals, but aiso agricultural resources, both of which provide bases for primary industries and a variety of processing and manufacturing activities. There is, consequently, unusual potential for diversified urban- industrial growth.

146. As far as primary production is concerned, the evidence suggests that whereas in most other parts of Mexico, there is little land left to be exploited, in the Isthmic Region, there is still - relatively speaking - a lot. And whereas in almost every other area, the development of "new" land is predicated on the extension of the irrigation system, in the Isthmic Region, it is mainly a matter of drainage; preliminary estimates show that the investment cost per hectare of drained land is about a quarter of that for irrigated land. Against this however, we must set the costs of the applied research in tropical agriculture which must be completed if the region is to be developed, whereas in irrigated areas, the relevant agricultural technology is already relatively well known. As for minerals and petroleum, the costs of exploitation appear to be lower than in say, Baja CaLifornia, which also has interesting potential in both sectors.

47. Relating the costs of industrial development to the availability of resources, the proximity of the existing urban areas of the region to major sources of agricultural and mineral production is closer than that of cities in many other regions. Assuming the resource base were developed, processing and manufacturing industries located in the region would thus have an advantage over most of those located in other regions in terms of the cost of transporting raw materials to industrial plants.

48. However, at least in the short run, there is also the important question of the externalities, scale economies and agglomeration economies which may be expected in large urban-industrial centers. For the time beingg, none of the cities of the Isthmic Region have such advantages. Inter-industry linkages and inter-sector linkages (between the industrial and commercial sectors) are clearly more available elsewhere. The development of industrial complexes will therefore be constrained by the fact that many services are not now available. Likewise, other cities have built-in advantages with respect to the provision of intermediate inputs.

49. Finally, the costs of urban expansion in the region are likely to be lower than in many other areas, particularly the Valley of Mexico, especially if we take account of alternative uses for the areas concerned. With regard to services, water supplies are cheaper in the region than elsewhere in the country and this will become even more emphatically true in the future than it is now as the marginal costs of water supply in other cities rise ever more steeply. The costs of power are also demonstrably lower in this region than in any other part of Mexico. (b) The Demand Side

50. The assessment of the potential demand for the goods and services which are, or which might be, produced in the Isthmic Region,is a more spc.- lative exercise than the assessment of its potential contribution to their output. There are, nevertheless, a number of useful ways of looking at this question - some quantitative, others qualitative - which, in sum, can give us a good idea of the prospects for demand growth.

51. The key question concerns the comparative advantage of the Isthmic Region in relation to the rest of the country. There are, therefore, two issues. First., what is its comparatiJve advantage in terms of competition for domestic markets? Second, what is its comparative advantage in terms of access to external markets?

52. Assuming the country's principal market area will continue to be on the central plateau and in the broad belt of the Guadalajara-Veracruz axis, the Isthmic Region is considerably closer to the main domestic market of Mexico City than the major urban centers of the north and northeast - notably Mionterrey and the frontier cities. Moreover, assuming the eventual emergence of a Gulf Coast axis, linking Monterrey with Tampico and Veracruz, this region should eventually have good access to the major markets of the northeast as well as to those of the cent Put in quantitative terms - those of population and income potentia/- the region would suffer by comparison with any part of the Guadalajara-Veracruz axis. But relative to the rest of the country, its location is undoubtedly advantageous.

53. The potential of the Isthmic Region is however, a much greater advantage with respect to external markets. Here, there are two factors. The first concerns the advantages of the Gulf Coast with respect to the Atlantic. Through Coatzacoalcos, which is a potentially better port than any other in Mexico, the Gulf Coast of the U.S.A. together with the coasts of Europe, the Caribbean, and the Atlantic seaboard of South America are al easily accessible. It is true of course that Tampico and Veracruz share this perspective. But neither are in regions with as much untapped development potential and to a greater extent than in Coatzacoalcos, their growth, as ports, is likely to depend on the movement of traffic originating outside the regions with which they are directly associated. This is not to say the future growth of port-traffic in Coatzacoalcos will not, to some extent, be based on exports of goods produced elsewhere in the country, but rather that the regional export-base is particularly strong. From a macro-economic point of view it makes obvious sense to locate export oriented industries close to the points of exit of their respective products.,

1/ See Appendix Pe - 16 -

54. The external market advantages of t.he region are not limited to those accessible through CoatzacoaeLcos. One of its unique characteristics is that it aLso has privileged access to the Pacific and thus to the western seaboard of North and South America and to Asia. The Isthmus of Tehuantepec provides an easily traversed route between the Gulf and Pacific Coasts and gives the region unrivalled access to both oceans. Once again, there are is many problems to be overcome in exploiting this advantage, but there no doubt that the inter-oceanic link in and of itself, is a key aspect of the regionts development potential. The Isthmus not only offers access to many overseas markets for the products of the region but also for those of other regions which can most economica.LILy develop export markets by using the Isthmic corridor. There is also the possibility of using the Isthmus as a "land bridge" for container traffic between the Atlantic and the Pacific. One suggestion (see Chapter 4), of which much has been made over the last year or so, is to construct a high-speed railway from one coast to another for this purpose. Whilst we consider this idea to be premature, we also believe that the land bridge idea is an important part of the region's geographic structure and one of the keys to its access to international markets, although it is equally importa,nt to stress it is not the be-all and end-all of development in the region.

(c) Conclusions dis- 55. Given the goals - and given the constraints - which we have cussed above, we conclude that this region does have significant development potential and can play a role in a national development strategy encompass- ing decentralization as weil as the pursuit of growth with equity, albeit on a relativeLy modest scale. And the question of scale is very important because it is obvious that in the next 25 years the growth centres of the Isthmic Region will not be able to make anything like the same contribution to national decentraTlzation as Monterrey and the associated region of the Northeast or Guadalajara and the associated Western region. It is therefore necessary to bear in mind in reading this report that the mission does not see this region as a panacea for all of Mexico's problems of spatial development. If this conclusion seems obvious it is nevertheless worth stressing because there is perhaps a tendency in some quarters to regard it as exactly that. And to underline our caution yet further we should add that it would be unrealistic to suppose (even if one accepts the arguments about why-and how regional development should be pursued) that it will be easy to persuade private investors to locate in the region and that it is by no means clear that all parts of the public sector will be eager to do so either, There are moreover formidable constraints in respect of the supply of human resources which needs must be overcome if this region is ever to "take off."

56. On balance however, we believe that the advantages of the region outweigh its disadvantages and that a regional development effort should be attempted. - 17

CHAPTER 2: THE REGION

A. 0GEORAPHY

(i) The Area

57. The Isthmic regionr, as defined in this report, con+tains four major physical zones (Map 7).

(1) the broad, humid lowlands of the Gulf Coast;

(2) the mountain regions of the Center and South (the Sierra Madre and the Chiapas Highlands);

(3) the broad mountain valleys; and

t4) the narrow Pacific lowlands (Gulf of Tehuantepec)O

58. The total area is approximately 13.6 million ha (Table 2.1 )o It includes 205 million ha in Tabasco, 7.4 km ha in Chiapas, about 2 million ha in Oaxaca and 1 .7 million ha in Veracruz. (ii) Climate

59. Climatic conditions in the region vary from hot to very hot, and from sub-humid to humid, and are determined by its location between two oceans.

60. Along the Pacific Coast in the south, there are strong and (in the narrow coastal plain) relatively dry, northern winds, although conditions are more or less calm between June and September. The "corridoru between Arriaga and Juchitan c-long the Pacific has particularly strong winds, whichs, besides being generally unpleasant, gust up to 130 km/hr; trailer traffic is prohibited during certain months. The wind also causes special problems (desiccation, lodging and grain losses) for crop production in this part of the region.l/ In the Norths, along the Giulf Coast, northerm winds ("Nortes") prevail during December and January. These winds are dry in the lowlands, but bring rain in the mountains. Hurricanes, and high-intensity rainstorms occur during September and October. j/ It is therefore surprising that local centers of investigation do not place more emphasis on studies ivolving the establishment of wind breaks, or studies of cultural practices that might mitigate the damaging effects of winds on crop production. - 18 -

61. The principal factor modifying basic temperature and rainfall patterns within the region is elevation, which ranges from sea level to more than 3,000 Mn0 , maximum altitudes being attained in the central zone. 62. Most of the northern subregion (north of the 17th parallel), receives well over 2.,000 mm of rainfall a years, mostly between May and October; FPebruary, March and April are dr7. During this period, total monthly rainfall may be as low as 20 mm. However, both the waterholding capacity of the typical soils of the coastal lowlands and the water tables are generally high, and the lack of moisture rarely retards plant growth.j/ Average annual temperatures in the northerm lowlands are between 25 and 26 C. The coolest month is January (21C - 24c ); temperatures are highest during May, early in,the planting season (Table 2.2).

63. The southern part of the region is characterized by drier conditions than are found in the North, as a reslt of much lower precipitation (1000 mm or less in the Sierra Madre de Chiapas and coastal plains in the Southwest.), and high evapotranspiration because of strong winds and high temperaturets. There is a pronounced dry season9 from December to March or April in the far Southeast (the Tapachula area), where total annual rainfall is between 2500 and 4000 mm (depending on elevation), but where monthly rainfall from December through March is less thLan 20 mm. Average annual temp,eratures are higher in thle narrow Pacific coastal plains than in the broads, northern lowlands, ranging from 25 C to ovear 32 C. 64. Rainfall in the highlands, of Chiapas and Oaxaca varies considerably from about 9000 mm in the southern mountain range (the Sierra Madre de Chiapas) to 4500 mm in the northern mountains (Montafias del Norte de Chiapas).

65. Frosts occur at higher elevations, e.g., in the mountains east of Salina Cruz, around Matias Romero, and in the neighborhood of Tuxtla Gutierrez.

66. No information is available an insolatioa (hours of sunshine), but the few data on percentage cloud cover for several localities in the region suggest that the Pacific subregion receives more solar energy than the Gulf subregion. The period June-October (the main growing season) has the highest percentage of cloud cover throughout the region (Table 2.3). (iii) Water (see also Appendix 0)

67. The major rivers of the Gulf Coast are the Coatzacoalcos, Tonalt and Grijalva-Usumacinta, all of which drain to the Coastal Plains0 Because

j/ In the section on Soils it is pointed out that plant growth in this area is more affected by an excess of water (lack of air) in the root zone than by water deficiency, - 19 - of the proximity of the continental divide to the Pacific Coast, their basins cover much of the region. 68. The Coatzacoalcos basin covers most of the narrowest north- south transect of the region - with a drainage area of about 21,120 km2 . Two major branches, oIne originating in the Sierra Macre de Oaxaca and the other in Western Chiapas, join near Minatitlan, about 20 km from the coast. 69. The Tonala is situated between the Coatzacoalcos and the 2 Grijalva-Usumacinta. Although its basin covers only a small area (6000 km ) its average annual flow of 5,875 million m3 puts it among the country's major rivers. It originates on the northern slopes of the Sierra Madre de Chiapas just north of the Malpaso reservoir. From there, it flows down to the swampy coastal plains of Tabasco on its way to the sea. 70. The Qrijalva-Usumacinta system extends into Guatemala and has the largest flow of any river in Mexico. The area of their Joint basin is 84sO0 km2 and the average yearly volume is 835,000 milion m; * These rivers run roughly parallel from southeast to northwest, draining the mountain zones of Chiapas, north of the continental divide. Entering the coastal area of the Gulf coast, they form an extensive and fertile delta in Tabasco, B. DEMOGRAPH

(i) Population SLze, Comosition and Distribution

71 The regionts 1970 population of 3.1 million was equal to 6.3 percent of the national total. The age pyramidj] narrowed very quickly from the youngest to the oldest age group and therefore differed little from that of Mexico as a whole (Figure 1. ). Its extreme youthfulness was marked by the fact that about half of it was under the age of 15 and few people were aged 65 or over - typical ch_;'acteristics of high fertility, high mortality., low life expectancy and a low level of economic development. 72. The age composition has important economic and social consequences. A high proportion of the total under 15 or over 65 (51.1 percent in 1970), implies a distortion between the size of the working age population and those too young or too old to work, and yields a dependency ratio of less than one to one, Moreover, whereas about half the working age population are women, only 807 percent are actually employed. A relatively small part of the male population must therefore support all those too young, too old, or for some reason unable or unwilling to work,

/ The age composition of any population at any given time reflects the cumulative effects of the pattern of fertility, mortality and life expectancy up to that time. In a region with considerable in or out migration, the age and sex composition will be further affected by the age-sex structure of in or out migration. - 20

73. In 1970, there were 97.5 women per 100 man in the region as a whole. However, there were strong age-group and geographic contrasts. In the Coatzacoalcos Delta, for example, there were 103 women of working age (12 years and over) for each 100 men, while in the 15-24 age group the ratio was even higher (114:100). These variations obviously reflect high rates of female migration to Coatzacoalcos but the pattern for other cities was generally similar. 74. With respect to geographic distribution, we find that in 1970, Chiapas accounted for much the largest share of the total population of the region3 followed by Tabasco, Veracruz and Oazaca (Table 1.5), In terms of overall density however, Oaxaca (6.8 person8/ha,) was the most populous area followed by Chiapas (4.7) Tabasco (3.2) and Veracruz (3,1 )c The average density for the region was f.2 persons/ha.

75. In terms of the census definition,g about 40 percent of the region's population lived in urban areas in 1970, The distribution of the urban population between major towns and cities clearly emphasizes the dominant status of Villahermosa., Coatzacoalcos and Minatitlan - all located on the Gulf Coast plain (Table 1.6), Regarding the latter two as a single cluster their combined population in 1970 was on the order of 200,,000 as compared with 160,000 in Villahermosa. In the south, Tuxtla Gutierrez and Tapachula are the largest settlements of,, respectively, central and southern Chiapas. In Oaxaca, at the southern end of the Isthmic zone,, there are several relatively small towns, the largest being the port of Salina Cruz (24,,000 in 1970), Throughout the region, there are several urban municipios with 1970 populations of about 20,000 including Hui-mangui- llo in the north, Acayacan and Catenaco in the northwest,, Katias Romero in the center and Arriaga, Juchitan and Tehuantepec in the south. In terms of relative population size therefore, the urban hierarchy of the region is dominated by Coatzacoalcos-Minatitlan (the Delta) and Villahermosa$ both on the Gulf Coast, while the other relatively large cities are unevenly di stributed in the '"periphery".

76. There is not, however, a clear relationship between the general distribution of population in the region and the size structure or distribution of its urban settlements. The north is relatively sparsely populated, but contains the largest towns in the region. The south is more densely populated, particularly Oaxaca, but has fewer large urban settlements. This, as we shall see later, is attributable, in part, to the relative resource endowment of the northern and southern subregions, and in part, to the evolution of transport routes to and from and within the region.

(ii) ation Growth

77. The recent rate of population growth in the region has been slightly higher than in Mexico as a whole (i.e., just above 3.4 percent)o

1/ Rural populations are defined as those living in settlements of fewer than 2s,500 people. Figure I COMPOSITION BY AGE AND SEX IN THE ISTHMUS AND FRANCE, 1970 (PERCENTAGE)

r- - ;- France

Females 50-54 M9ales

35-39-

30- 34 - x 400-4425-2°4 - 49 7 A ; 5-5 20-24 3 7 15-19 6 The Southes Region las jf Mexico 10-14 -- r

Under - 5

1520 10 5 0 .205 10 15 Percentage

World Bank-15601 This implies, given net outmigration to other parts of the country (see below), that the recent rate of natural increase has been unusually high. 780 Within the region, however, urban areas in general and the major cities in particulars have, to a large extent., grown on the basis of in-migration. In 1970, more than 30 percent of the population of the Coatzacoalcos Delta had been born elsewhere and in Villahermosa, the numier (20 percent) was also high (Table 1.7).

790 Notwithstanding net outmigration, rural areas in general have apparently experienced relatively faster rates of natural increase than urban areas. The reasons for this are not fully understood but probably include a combination of (i) a tendency for farm families to have large numbers of children to provide "social security" against old age; (ii) low levels of educational attainment in rural as compared with urban areas; (iii) conservative cultural attitudes in rural communities and (iv) the relatively greater availability and knowledge of contraceptive devices in urban than in rural areas. (iii) igraton / 80. Recent patterns of migration within the region not only feature movements from country to town but also in specific geographic directionss the major flows having been from Chiapas and Oaxaca to Tabasco and Veracruz, particularly the Coatzacoalcos Delta (Table 1.8). Although non-monetary factors such as educations social and cutural opportunitiess housing and better welfare services are obviously important, the main causal factors appear to be economic. For examples while the southern subregion has one of the lowest minimum wage levels in the country, the Coatzacoalcos-Minatitlan area has one of the highest and this in itself is an obvious source of attraction.

81. Tables 1.9 to 1.12 show net in and out migration from the Isthmic region in 1960/70. Out-migration is higher than in-migration for the region as a whole and for each state area separately. In 1970, 646,000 of those born in the region were living in other states, while 232s,000 people had moved into the region since 1960 - including 8,,000 foreigners. The ratio of outmigrants to in-migrants was 2-3:1 in Chiapass, 55s:1 in Oaxacas 1.4:1 in Tabasco and almost one to one in Veracruz. The relative loss through migration was much greater in poorer than in better- off states.

82. Migration data show that while out-migration among females is greater than among maless in-migration. is greater among males than among females; mary women migrate from rural to urban areas, the majority of them being classified as "employees", which suggests that they often engage in domestic employment.

2 / See Appendix A. - 22 -

83. The age structure of migrants indicates that almost half of them are between 10 and 29 years of age; the numbers decline very rapidly in older age groups.

84. Data on the destination of migrants leaving the region show that Mexico City is still the main source of attraction and that 55.7 percent of all out-migrants in 1960-70 went to the Federal District. Other major areas of attraction include the State of Mexico, which accounted for 11e4 percent of the total, Puebla (9.2 percent) and Tamaulipas (5.8 percent)* These states thus accounted between them for more than 80 percent of all out-migrants from the region to the rest of the country.

85. Nearly 14 percent of all in-migrants to the region came from Mexico Citys and 3,5 percent were from foreign countries. These were mainly higher level professiornls, technicians, and managers who went to work in the Coatzacoalcos Delta. The bulk of the remaining imnaigrants came from neighboring states - mainly to Veracruz. 86. Although the Coatzacoalcos Delta attracted migrants from every state in the country, most had not travelled far. Two-thirds of those going to the Delta came from the neighboring states of Oaxaca., Chiapas and Tabasco and almost half of all migrants to Villahermosa came from Veracruz, Chiapas and Qaxaca (Table 1.13). C. BCONOMIC STRUCTURE

(i) ProAuction and Duploymert

(a) The General Structure

1 . Production

87. There are severe conceptual and mechanical problems in measuring the value of output in this region (or indeed any other in Mexico), the only available informatton being the state product estimates prepared by the Bank of Mexico. Aggregating the estimates for 1970 for the states of Veracruz, Tabasco, Chiapas and Oaxaca, the aggregate value of their output is estimated at Mex$39 bilion (Table 2.20)o Adjusting (on a per caita basis) the estimates for Veracruz and Qaxaca because only parts of these states are included in our definition of the Isthmic region (see Chapter 1), the total product of the region is estimated at Mex$20.6 billion - equivalent to 4.8 percent of the nation's 1970 GDP,i/

I/ The adjustments assume the per capita product of that part of Veracruz located in the southeast region was three times the average for the state and that per capita product in the Oaxaca portion of the region was 80 percent greater than the average for Oaxaca state. Bearing in dind the fact that nearly 300,000 out of 53)4,000 people living in the Veracruz zone of the Southeast were in the largely urban areas of the Coatzacoalcos Delta and that the Isthmic zone of Oaxaca is relatively more productive than the rest of that state, these assumptions seem reasonable. (See also Appendix B). - 23 -

88. Within the region, there are major contrast.s between different zones (Table 5.2 ). The Veracruz zone has a much higher per capita product than the other three state or sub-state zones; the Tabasco zone ranks nexts while the average for Oaxaca is significantly higher than that for Chiapas.3/ By comparison with the nation as a wholes three out of the four state or sub-state zones rank below the national average output per capita (Mex$8,776). But whereas the state of Veracruz as a whole had an average output per capita which was also below the national average, the value of output in the Veracruz part of the Isthmic Region was higher than in any other entity except the Federal District - although it was not much in excess of the average values for Coahuila or Nuevo Leon which, of course., include poor rural areas as well as large urban centers. This, however, in view of the concentration of heavily capital intensive indastrieo in the Coatzacoalcos Delta (mainly petroleum and chemicals) is hardly surprising 0 2, 1nployment :Labor Force Participation

89. Labor force size is a function of population size and characteristics on the one hand, and of the various factors which determine the proportion of different age-sex groups entering or seeking employment on the other. The size, and age-sex composition of the population are functions of fertility, mortality and migration. Participation rates are determined by the structural composition of the economy (particularly with respect to the relative importance of agricultural and non-agricultural activities), the conditions of the labor market, health, motivation, the urban-rural distribution of the population, and a variety of cultural and sociological factors, among which are those which mainly determine the participation of women.

90. Four features of the present structure of participation stand out: the low overall level; the relatively important role of school-age children; the very low level of female participation in the economy in general and in agriculture in particular; and the marked contrast in participation rates between rural and urban areas. We shall now comment on each of these features. 91. First, the rate of growth of the region's economically active population has been lower than that of the population as a whole and in Table 4l1, which shows comparable data for 1960 and 1970, we see that over a 10-year period, labor force participation fell by almost eight percent in Mexico as a whole and by almost 8.5 percent in the Isthmic region. The pattern for the region is therefore similar to that of the country. The change within age-sex groups is also strikingly similar - over a broad range - to that which has occurred in recent years in many

2/ The value for Oaxaca State - as a whole - is about the same as that for Chiapas. - 24 -

other countries in that there have been no significant changes in the participation of the key age group (males 25-49) within the period, although participation rates of younger men have declined substantially; it is not clear however to what extent the latter phenomenon tt is a product of the discouraged worker" effect and to what extent it reflects some improvement in the extent of full-time education (Table 4.2 )e 92. Second, to the extent it does reflect an increase in school attendance for this age group, the trend is in conflict with the fact that employment of school-age children in the region is common, as shown by the fact that the labor force in the 12-19 age group accounts for more than a sixth of the total labor force. Given that another sixth is drawn from people aged 50 and over, only 65 percent of the total labor force is in what we normally regard as the productive age group (20-49). For women, the figures are more dramatic, 28 percent of the female labor force being in the 12-19 age group. This suggests that a lack of educational facilities forces many people into the labor force at an early age.

93. Third, whereas male participation ratess, particularly in the young and old age groups are similar to those in more developed countries and are slightly higher in each age group than the national average (Table 4.3), those for women are remarkably low. Male participation retes increase progressively., rising to 93.9 percent in the 25-49 age group. But the size of the economically active female population is extremely small when compared to other countries - developed and underdeveloped. Female participation in the regional labor force (8.7 percent) is less than half the national average and one-fourth the average for the United States. Labor force participation among females rises from an extremely low level - of 4.7 percent for those under 14 to 13.3 percent in the 15-19 age group.

/ Against the background of a low participation rate for women in general, the very limited participation of women in agriculture is particularly striking. In 1970, the proportion of women in the agricultural labor force of the USA was 11.2 percent while in Japan the figure was 53.0 percent. By comparison, the figure for Mexico as a whole was 16 percent but that for the Isthmic region was only 4.8 percent. A partial explanation for this phenomenon may lie in the definition of employment used in th-,e censas, as a result of which women who work on farms are normally classified as non-paid family workers. There is also the matter of the replies of womenl to the census question of whether they are engaged in gainful activity. In the rural environment of the region, the social status of women and the division of l½2r between sexes may greatly influence a woman's conception of econorom "ally gainful activity and whether she considers herself economically -tive. It is likely that mary women in the region who were classified as economically inactive in the 1970 census should, rather, have been classified as unpaid family workers; with this adjustment (which we cannot quantify), the real level of female participation in agriculture and in the economy in general would obviously be higher. 25 -

94. A fourth feature of the structure of participation rates is illustrated in Table 4.5 i-wich shows considerable differences between urban and rural areas. In urbdn areas - partly for the reasons we have discussed above, female participation rates are almost twice as high as in rural areas. Urban-rural differences among males are relatively small in the age group 25-49. However, in the 15-29 age group the rate is much lower for young urban workers than for rural workers of the same age. This undoubtedly reflects the relative lack of educational opportunities in rural areas. especially at the secondary level, and the fact that almost all secondary schools are located in urban areas. We can say:, therefore, that migration from rural to urban areas is likely to reduce male participation rates and to increase female participation rates, particularly among young people.

: UneSployment

95. The Mexican census defines the economically active population (EAP) as that part of the total population aged 12 and over which was employed or was actively seeking employment at the time of the census. Thus defined, the overall unemployment rate for the Isthmic Region in 1970 was 2.8 percent, the rate for the miale population was 1.6 percent and the rate for the female population was 10.8 percent (Table 4.6 ). For both sexes unemployment was concentrated among young people, a c.ommon phenomenon in both developed and underdeveloped countries, and was highest for men in the 15-19 age group and for women in the 12-14 age group. Unemployment was very low in the age group 25-49 but was high in the oldest age group (50 years and over). 96. Whereas employment in the 12-19 age group constitutes only a small proportion of total employment., the unemployed members of this group account for one-fourth of all unemployed persons in the region as a whole and for an even larger share in some areas (Table 4.7 ). 97. Despite these figures, it is obvious that unemployment in the region is grossly understated in the census. The first reason for this is that a lack of job opportunities and persistent underemployment or unemployment has induced a "discouraged worker effect". By this we mean that some people have withdrawn from active work seeking because of a consistent failure to find employment or that, in some cases, they do not attempt to look for work because the experience of friends and others suggests a low probability of success. The census does not make it possible to distinguish (within the economically inactive population) between those who are willing to work - 26 - if employment opportunities are offered but are not actively seeking employment and those who do not., in any case, wish to work. If a person is not working and is not looking for work he is automatically classified as economically inactive. Many such people are, however, really unemployed. 98. The first piece of evidence for the discouraged worker effect is comprised in the very low unemployment rates among the male populations, referred to above. The existence of discouraged workers makes the labor force seem smaller than it would be if there were more job opportunities. Moreover., it makes the unemployment rate substantially lower than it Would be if discouraged workers were numbered among the unemployed. We note, however, that in Coatzacoalcos-Minatitlan, unemployment rose from 1 .3 percent in 1960 to almost 5 percent in 1970, while in areas where job opportunities were scarces unemployment was extremely low and in some instances near zero (Table 4.8 . Usually, a low level of unemployment is associated with prosperity and the easy availability of job opportunities. In this case the opposite seems to be true, and we conclude that low levels of unemployment point to a persistent lack of job opportunities whereas fast growing areas (such as Coatzacoalcos) have an "image of opportunity" and therefore attract migrants in disproportion to the number of real opportunities which are available, the consequence being a relatively high level of unemployment.

99. Further support for the argument that labor force size and unemployment are both underenumerated because of the discouraged worker effect, is provided by the generally low labor force participation rates for young people. Participation rates in the age group 12-14 suggest that 88 percent of this group are not economically active. But education data suggest they are not in school either. Table 4.9 shiows that school attendance accounted for only 46.4 percent of the total population in this age group and for 18.0 and 3.6 percent of the male population in the age groups 15-19 and 20-24 respectively. The question arises; what are they doing if they are neither in the labor force nor in school? The answer is almost certainly that many of them are on the fringe of the labor market waiting for job opportunities to develop.

100 * A further reason for the understatement of unemployment is that many of those currently employed are engaged in only part-time, marginal or low productivity activities in the "informal" urban sector. In 1970 for examples, one sixth of the female labor force in the region was employed in activities "not sufficiently specified", a category which certainly includes marginal employment for otherwise redundant labor which contributes little to general welfare. Additional evidence in this regard is afforded by the incidence of marginal employment as revealed by census data on earnings and on the regularity of employment. Using both of these measures, Table 2.31 shows that underemployment in Coatzacoalcos in 1970 accounted for nearly 20 percent of the labor force although the rate was lower elsewhere. This pattern is consistent with the expected relationship between the rate of urban economic growth and the inflow of migrants in response to apparent job opportunities. - 27 -

(b) The Sectoral Structure

1. The Sectoral Structure of Ouput 101. The structure of output varies considerably (Table 5.3 ) from one state or substaue zone of the region to another. The Veracruz zone emerges as more heavily indastrialized (22.6 percent of state output) than Oaxaca (12.3 percent), Chiapas (7.8 percent) or Tabasco (6.5 percent). Given this, the relatively greater importance of the tertiary sector in Veracruz follows quite naturally, while the role of agriculture varies inversely with that of secondary and tertiary sector activity as thus measured.

2@ The Sectoral Structure of B oe 102. The importance of agriculture in the economy of the Isthmic region and the agrarian nature of its society., is also illustrated in Table 4.11- In 1970, almost two thirds (63.5 percent) of the economically active population and 70 percent of all males were engaged in agriculture. This sector accounted for 43 percent of the EAP in the Veracruz zone, and for 73, 64 and 59 percent of the EAP in the Chiapass Oaxaca and Tabasco zones respectively. The importance of agriculture for male employment is illustrated by the fact that in the Chiapas zone for example, more than three quarters of economically active males were engaged in this sector. Services provided the second largest source of employment, accounting for 22.4 percent of all workers in 1970. The industrial sector came third with 14.1 percent of the EAP. 103. The concentration of employment in the traditional sectors is furthLer emphasized by the limited amount of employment in the infrastructure sectors (transportation, communications, utilities, and construction), which together employed less than 4.8 percent of the total labor force in 1970 while the utilities sector employed only 0.3 percent. 104. The greatest structural difference between the Isthmic region and Mexico as a whole lies in the role of agriculture, the proportion of the labor force engaged in agriculture in the region (63.5 percent) being much higher than the national average (38.5 percent) in 1970. Other differences occur with respect to the industrial sector where a much larger proportion (16.7 percent) was engaged in manufacturing industry in Mexico as a whole than in the Isthmic Region (6.2 percent), while a much smaller proportion of the economically active population of the region was employed in services than in the country at large (Table 4.12). 105. The predictable differences between urban and rural populations with regard to the sectoral distribution of the labor force are apparent from the 1970 census. In the rur.l areas of the region, more than three- fourths of all economically active men and 30 percent of all economically active women were engaged in agriculture, whereas in urban areas, the - 28 ° percentages employed in agriculture were much smaller. There was, however, a marked contrast between urban areas of different sizes - the smaller the urban area, the larger, in general, the proportion of the labor force engaged in agriculture. 106. The characteristics of the employment structure which are reflected by the concentration in traditional economic activities is also reflected in the occupational distribution of employment. Professional., scientific and technical personnel of all kinds are few in number, while unskilled occupations predominate (Table 4L1j). 107 Two thirds of all workers are thus faners or artisans and only 8.3 percent are in the professional, technical-managerial, administrative or clerical occupations characteristic of an industrial society. This rate is almost half the national average (15.5 percent) and is well below the comparable ratio in the United States (almost 40 percent)0 Less than four out of every hundred workers are professionals or technicians, the majority being employed inrindustries and public services in Coatzacoalcos and Minatitlan. 108. Table 4.14 shows that the Veracru.z, Tabasco, Oaxaca -p-d Chiapas zones of the region account., respectively., for 17, 24, 9 and 50 percent of the region's employment. Given this, we might expect a rouhly sindlar pattern within occupational classifications. Instead, we note that the Veracruz region has a relative abundance of professional-technicals, managerial, and administrative personnel compared to other zones. This is a direct result of the major role of PEME in that area; the concentration of qualified persons in the Coatzacoalcos-Minatitlan zone is further illustrated by the fact that while less than 7 percent of total employment is concentrated there, 16.9 percent of all skilled labor is in these two muicipios. The same is true for the Villahermosa area with respect to Tabasco. 109. If we look at the distribution of occupations among industries (Table 4.15), we find that the primary sector accounts for 63 percent of total employment in the region, but for less than six percent of professional- technical workers. On the other hand, the petroleum sector employs more than twice as many professional and technical workers and almost four times as many administrative workers as would be consistent with its share of total employment, Services employ one out of twelve employees in the region but almost two thirds of all professional and technical workers.

(ii) Economic Welfare (a) Patterns of Welfare 110. The southern (or Pacific) part of the region is markedly worse- off in terms of economic welfare than the northern (or Gulf) areas despite significant differences between Veracruz on the one hand and Tabasco on the other. - 29 - ill. Looking at Tables 3.1 to 3.8 these contrasts are immediately clear. The populations of the Chiapas and Oaxaca zones of the Isthmic region are less literate9 less well-nourisheds less healthys less well-housed and have lower standards of living (as measured by various other indices of consumption) than the populations of Veracruz and Tabasco. Moreover, we find that Chiapas and Oaxaca - particularly the latter - are in all respects markedly worse off than the nation as a whole, whereas Veracruz and Tabasco are also, in general, worse-off than the nation as a whole, but by much smaller margins. With respect to literacy for example, the national average score in 1970 was 84 percent. All four states had lower scores, But whereas those for Chiapas and Oaxaca were 57 and 58 percent respectively, the scores for Tabasco and Veracruz were 76 and 70 percent. Similarly, with respect to the possession of radios, the northern ptates scored 75 and 67 percent against 55 and 52 percent in the south, the national average being 75 percent. The picture which emerges is thus one of a region with strong internal contrasts between north and south, no part of which, however, is more prosperous than the nation as a whole. Consequently, when the scores for all four states are expressed as averages, the region emerges as an area of relative poverty in a national context.

112. Intra-regional variations in economic welfare of the "north-south" variety are of course highly generalized and within each of these areas there are further important conitrast.s0 Some of them are large, notably those between the urban areas of the Coatzacoalcos Delta and adjacent parts of the Gulf Coast in the state of Veracruz. But Oaxaca and Chiapas have their contrasts too.

1il. These show up in Table3 3.1 to 3.8 where Coatzacoalcos is seen to have a better fed, better shod, better educated and better housed population than most other municipalities in the region, the contrasts with Minatitlan being particularly striking, given its proximity to Coatzacoalcos. Elsewhere, the contrasts with Coatzacoalcos are largely, but not entirelyp a matter of size. Salina Cruz and Tuxtla Gutierrez thus stand out as relatively well off by comparison with smaller urban areas, At the municipal level moreover, the powerful interstate contrasts between the Gulf and Pacific coastal zone, to which attention was drawrn above, are much less apparent than at the state level. There are, for example, several very poor municipios on the Gulf coast while others of comparable size, located in the southern part of the regions are less poor. The worst-off areas of all are in the centre of the interoceanic zone and such municipios as Jesus C-arranza and San Juan Evangelista (Veracruz) which are both located in this area are probably as poor as any in Mexico. By comparison, such municipalities as Arriaga (Chiapas) and Ixtepec and Juchitan (Oaxaca) have relatively high living standards.

114. The broad picture therefore is one of an overall framework of north-south contrasts with sub-regional differences. Consistently, however, urban welfare is superior to r-ural welfare and even relatively well off rural municipalities have poorer conditions than the poorest urban municipios anywhere in the region, although it appears to be true that without exception, rural populations located along main trunk roads are generally better served than those of more remote villagess particularly in mountain areas. - 30 -

115. It is estimated that about 35 percent of the rural population is supplied by water systems - either directly, through piped house connections or through simpler systems based on hydrants. Lack of pure water is the main source of widespread gastro-intestinal diseqse., which, in turm is one of the main causes of high mortality. The rural sector is relatively better provided .nth electricity than with water, up to 60 percent of the population in some areas havring access to electricity, compared to a national average of 58 percent. The provision of electricity is often unrelated to the level of economic activity in individual villages and is largely determined by accessibility to the main power grid, to which vrillages can be linked at reasonable cost and without undue technical complication. lit. The availability, accessibility and quality of health services in rural areas is generally extremely poor. The numbers of comunity health posts (the lowest tier of health services), and of health centers, are grossly insufficient to satisfy normative levels of dmand, Moreover., the existing facilities are inefficiently operated because of a lack of auxiliary staff', the inadequacy of preventive services,, the deficiencies of environmental sanitation, and the insufficiency of recurrent cost financing. Only a small fraction of existing health centers are operating on the standard minimum budget required to provide effective services. The government, moreover, faces serious difficulties in attracting and retaining tlpasanteslt (medical graduates doing social service) in remote rural areas. People in these areas are therefore dependent on traditional healers and mid-wives and on self-referral to urban hospitals. Journeys of more than four hours to the nearest health post are not uncommon.

117. Illiteracy is pervasive and is as high as 80 percent in the southern and eastern parts of the central mountain valleys. While total enrollment in primary education varies between 60 and 100 percent of the 7 to 12 age group, the net enrollment ratio is substantially lower because of the large number of over-age students, The inefficiency of the school system is indicated by loiw retention rates; not more than 15 percent of students complete the primary cycle, one reason being that most rural schools do not offer a full, 6 year program, As a result, the lower grades are swollen by repeaters who cannot continue into higher grades. A constraint to the provision of improved primary education is the high level of dispersion of the rural population, about 7 percent of the total being inhabitants of communities of fewer than 300 inhabitants, the minimum settlement size for establishing schools on an economical basis. Another reason is that it is difficult to retain qualified staff in remote villages. 118. The population of clearly discernible ethnic groups number about 200,000, Most of them communicate in theix native tongues but only about 30,000 are monolingual. These latter groups, particularly the Chamulas in Chiapas and the inhabitants of some Zapotecos villages in Oaxaca, maintain their traditional customs and continue to be isolated from the outside world. - 31 -

However, ethnic groups such as the Huaves, Tzotzils, Popolocas, Mixes and Mixtecos have contacts with the market economy and are attempt-ng to improve their economic conditions. Experience in various pilot projects has in fact demonstrated that under favorable circumstances these groups are receptive to change, although in general cultural differences are an impediment to economic integration.

119. Geographic, inter-urban and rural-urban contrasts are all emphasized by the gradients shown in Figure 2, although the slopes vary somewhat along the same transects according to the index used. One contrast is that between Coatzacoalcos on the one hand and other municipalities (urban and rural, but particularly the latter) on the Gulf Coast and it is clear that with increasing distance from Coatzacoalcos, there is a declinin-g standard of welfare. Also, the north-south transect from Coatzacoalcos to Salina Cruz shows deteriorating welfare in the central area and a gradual improvement thereafter. This pattern also appears elsewhere as a function of distance from important urban centers. The transect from Salina Cruz to Tuxtla Gutierrez thus shows that the poorest conditions occur in the rural area between the two cities. Urban areas are not only better-off than rural areas, but have, by {ind large, failed to f1preadf' prosperity in the areas around them. One might argue this is hardly surprising with respect to smadil towns and cities, assuming the capacity to generate and diffuse development in an urban hinterland is in some way proportional to the size of the urban area concerned. But if this were true, a sharj. deterioration in welfare with increasing distance from Coatzacoalcos is not what one would expect. Moreover, the absolute levels of welfare in the urban and rural municipios of the Gulf Coast are almost as !w as can be \found anywhere in the entire region. This provides further evidence that in general, and largely irrespective of the population sizes of different usrban areas, the prosperity associated with urban development has not "trickled down" to the hinterlands of the towns and cities of the region (See Chapter 1).

(b) Determinants of Welfare

120, Standards of living in the region are detemLined by two factors, one of which is better documented than the other, Most of the following discussion therefore refers to income levels and income distribution and to the associated questions of wage levels, relative factor prices and variations in economic structure,> the discussion of the other factor - public expenditure - is necessarily less ambitious. Figure 2. (a) - WELFARE PROFILES v

6 L l Percet \Nitlout Pped; Water (1970

_ _ _ - ______, - , . i _ _ _ . . - - - - - _-l

7~&

45.4

Wol0an-50

Salina Cruz Uni6n Hidalgo Cintalapa Ocozcuatla Tuxtla Guti4rrez

World Bank-i 5600 Figure 2 (b) WELFARE PROFILES

7 = Percent Without Piped Water (1970)

L - 6 -

S 1Percent_illttera X

,,.0 4 __ 4-* , _ _

-Percent Not Eating Meat (1970)

1 ______Coatzacoalcos Minititlan Jaltipan Sayula San Juan Evangelista

World Bank-15599 - 32

1o Incomes and their Distribution

121, There are powerful contrasts between average incomes in the southern and northern parts of the region. The Veracrus sone (Mex$1900 per fasily per month in 1969/70) leads Tabasco (Mex$1576) but both are much higer tham either Chiapas (Mex$716) or Oaxaca (Hex$537), both of which are among the lowest income areas in the country, whereas Tabasco and Veracrus are only a little below the national average (Mex$1782). Given this, the rural-urban contrasts are also significant. They show average rural incomes in Oaxaca and Chiapas of only Mex$376 and Mex$504 respectively, compared with Mex$1 052 and Mex$1562 in veracruz and Tabasco. Urban incomes were higher, reaching 4ex$2122 in Veracrutz, Mex$ 754 in Tabasco, Mex$1288 in Chiapas and Mex$925 in Oaxaca. The ratio of rural to urban incomes was as follows:

Rural Urban Ratio

Oaxaca 376 925 1:2.5 Chiapas 504 1 ,298 1 :2.5 Veracruz 13052 2.122 1:2.0 Tabasco 1,562 1,*754 1.102

122. At this level of rather broad generality, incomes differentials lend explanatory support to the contrasts in economic welfare which have already been identified. There is a similar coincidence between welfare contrasts at the municipal level - which have been discussed above - and inter-municipal contrasts in income levels and distributive patterns0 Coatzacoalcos again stands out, this time as a high incoae concentration with a relatively less skewed distributive pattern than other urban municipios. Minatitlan also has a concentration of relatively high income families but with a more skewed pattern. For the rest urban municipios are clearly better off than rural municipios (Table 3t).0 Consistentlys however, the higher the average income, the less skewed the distributive pattern, giving rise to the self evident proposition that more developed areas generate more opportunities to obtain income More formally, Gini coefficients for both urban and rural municipios show that Coatzacoalcos, the highest income area, has the lowest anefficient, while the poorest rural municipios, such as San Juan, have the highest coefficients - implying that the degree of skewness is inversely related to income levels 0 - 33 -

2. ElEakio - And their Origins 123. Income variations thus seem closely related to differences in welfare. Incomes in turns, are a measure of earnings, which, in tumn, are a measure of wages which, in turns are related to contrasts in economic structure.

124. Before making a more detailed analysis of earnings by major branch of activity, we should note that wage earners represent a smaller proportion of tle population than non-wage earners - because most of the labor force is engaged in agriculture and many people are self-employed or are ejidatarios, Table 2.43 which gives an indication of patterns of earnings in the regLon should therefore be looked at with this in mind. 125. Earnings differentials within the region stem largely from three factors. First, they reflect intra-regional price differentials. Second, they reflect intra-regional differences in labor and product markets. Finally, they reflect intra-regional differences in occupational structures within the one-digit occupational classificationoj/ 126, Earnings tend to be lowest for agricultu-ral commercial and service workers. In the Coatzacoalcos Delta, 91 percent of all agricultural workers and 64 percent of all service workers earn less than 1 ,O0O pesos per month. On the other hand, only 8.0 percent of petroleum employees earn less than this amount and average earnings per month in the Coatzacoalcos Delta are relatively higher than in the Villahenmosa area or the rest of the region. The relative number of people earning less than 1 ,000 per month in the Coatzacoalcos Delta is 54 percent compared to 77 percent in Villahermosa and 85 percent elsewhere in the region. 127. A substantial percentage of the labor force in certain branches of activity earn less than the minimum wage. Forty eight percent of all workers in the Coatzacoalcos Delta and 63 percent of all workbers in the Villa ruosa area were in this category in 1970. More than 80 percent of all agricultural workers and more than half of all workers in commerce and services in both regions also reported earning less than minimum wages. If it is assumed that earnings approximate the (marginal) value of contributions to the social product, it follows that the contributions of many employed persons are extremely small.

For example, it would be expected if all professional people in the Coatzacoalcos Delta were physicians and all professionales in Villahermosa were nurses, earnings would be higher in Coatzacoalcos than Villahermosa. Also, because monthly earnings rather than earnings per hour are reported, some earnings differences might arise because of different amounts of time worked. - 34 -

128. An important institutional factor affecting wages in the region is the labor movement, which began to expand soon after the revolution. The broad labor provisions of the 1917 Constitution and the encouragement of successive governments thereafter (possibly due to the fact that most organized labor was working for foreign owned companies) provided the background to the expansion of labor unions, a measure of which was the fact that the immediate cause of the expropriation of the oil industry in 1938 was a dispute between the oil companies and the unionss with a geographic focus in this region.

1290 As the unions grew stronger, they negotiated work contracts, and in several instances established union shops and the principle of seniority giving certain industrial unions control over hiring for all unionized positions0 This system has probably undermined the effectiveness and attractiveness of vocational schools in the region because students are not motivated to stay in school - education being less important in securing a well paid job than early union membership and accumulated seniority. Clearly, however, the effect of a strong union in the petroleum industry has been to force wages upwards in the Coatzacoalcos Delta, and this, more than any other factor, explains why this area has very high minimum wages in a national context.

130. Wages are undoubtedly a major determinant of income differentials. The most obvious additional factors are the relative prices of agricultural and industrial goods. We have already seen that wages in agriculture are much lower than in other sectors. We have also observed that many people in the region are not wage earners but subsistence farmers whose incomes are determined by the volumes and prices of their surpluses. We would add that under the physical, tenurial and cultural conditions prevailing in many parts of the region, the volumes of agricultural output surplus to on-farm subsistence requirements are often meagre, one of the reasons being that the prices of agricultural products are relatively low. This, of courses is a consequence of low minimum prices for basic agricultural products and is a basic structural characteristic of Mexican farming and one which has many ramifications besides those which concern us here.

3, Public &p2nditures

131. Inasmuch as a significant par; of total employment in the region is provided by the public sector, notably PEMEX (but also other enterpris and agencies), one aspect of the effectis of public expenditure on regional economic welfare has been implicitly considered in the discussion of earnings and wages. Here, however, we are interested in the relationship between public expenditure on goods and services and its direct effect on economic welfare. Our concern is thus writh expenditures on health, educations, nutrition, housing and utilities - which represent incomes in kind for their recipients.

132. The data on municipal and state expenditures are extremely poor. Federal public investment is, however, an important part of the whole and one on which the state level data - with all its shortcomings for our purposes - are deta!,led and complete,g

133. The share of the four south-eastern states in Federal public investment fluctuated considerably in 1960-70. This was notably true in Chiapas, where the share rose in the mid-sixties and then declined through 1970, and also in Oaxaca, where the share fluctuated from year to year throughout the period. The average shares of the four states were however very different, ranging from 1.5 percent in Oaxacas, to 2.0 percent in Chiapass 5.0 percent in Tabasco '.nd 1000 percent in Veracruz.

134. Within this aggregate framework, per caita investment in social welfare also varied widely. In 1970, for example,, Chiapas accounted for 0o33 percent of total national investment in the social sectors, Oaxaca for 1.05 percent, Tabasco for 0,77 percent and Veracruz for 2.30 percent. These imply per ca figures of o11g, 28, .54 and .32 pesos respectively. This suggests rather strongly that the poorest states were also those which received the lowest levels of public investment per capita in social goods and services.

135. It is also true however, that in the relatively poorer states, a larger share of total federal public investments was devoted to social purposes than in the better-off states0 In Chiapass social welfare accounted for 9.4 percent of the total, and in Oaxaca the share was 16.8 percents whereas in Tabasco and Veracruz the corresponding shares were 4.4 and 6.8 percent although this is essentially a reflection of a low level of total investment in relatively poorer states. In the former, not much was spent on anything at all, In the latter, industrial and agricultural investments were relatively largers with the effect that the share of social investment in the total was rather small; the absolute level wasp as we have seen, higher.

136. It would be desirable to add something about the level and sectoral allocation of state and municipal expenditures on the social sectors, In practice however, there are no adequate data with which to conduct such an analysis and in the absence of a comprehensive picture, noe at all seems preferable. The Federal data alone suggest two things. First, that Federal social expenditures are directly related to welfare conditions ands on a pEr caita basis, are higher in well off than in poorer states. The incidence of public expenditure and imputed income is thus

/ The shortcomings refer to the fact that data are only available for the whole of the states of Veracruz and Oaxaca whereas only parts of these states are included in our definition of the Isthiic region. similar to variations in income fron one state to another. Second, and deriving from the first observation, public expenditures have not apparently been used as a measure to offset income differentials. Put another way, social investment has not been used as a tool with which to compensate for the relative deficiencies of local economies to generate income,. - 37 -

CHAPTER 3: THE DEVELOPMENT FRAMEWORK

A. INTRODUCTION

137. We noted in Chapter 1 that the development potential of the Isthmic Region had two foundations, Firsts a strong natural resource base and a framework of fixed investments. Second, a favorable location with respect to both internal and external markets. In this Chapter we shall elaborate on these arguments in order to assess the diversity and depth of the region's potential for futu-r1 economic growth and we shall also point to the major constraints to sustained regional growth and integrated development.

138. The discussion is organized along sectoral lines rather than in terms of a set of positive features juxtaposed to a set of constraints. But one feature of the environment for future growt-h cuts across sectoral lines. This is the human resource base and we shall therefore discuss it ahead of the prospects for thfi development of agriculture, forestry, fisheriess mining, petroleumj, industxry, transport and services. B. HUMAN RESOURCES

139. The human resources of the Isthmic region are relatively abundant if measured quantitatively, but scarce if measured qualitatively. As we have seen, the region's population is relatively large (3.1 million in 1970) but lacks the education and skills which would be needed if the region were to be rapidly developed; it is still, particularly in the south, characterized by traditional values and customs; it includes a larger proportion of people who speak only Indian languages than any other part of Mexico; its health is poor and its productivity is impaired by disease and malnutrition, particularly in rural areas 0 A large investment in human capital is therefore a sine LLa non of sustained development, although in the short term at leasts migrants with needed but presently unavailable skills could be seen as a partial solution, The seriousness of the human resource constraint to long tem development cannot be overemphasized yet it does not seem - on present evidence - that the authorities are sufficiently concerned about it.

140. Our discussion (in Chapter 2) of the size, ages sez and geographic distribution of the region's population is of course a basic part of any statement on human resources. But it tells us little about the region's population 9 (actual or prospective) labor force.

141. As we have seen (Chapter 2), some parts of the region are relatively well off in economic tems and in general, its urban areas are better off than its rural areas. Given, howevers that the region is predominantly rurals it follows that most people are poor. This has several mplcations, Firsts census data provide ample evidence that by comparison with the nation as a whole, nutrition is extremely poor. Direct investigations in the Chiapas highlands (see Gintzburger: 1973, pa 234), show that infant malnutrition is the norm rather than the exception, and that this has a fundamental bearing on adult development. 38 -

142o It is not therefore surprising that the population is generally unhealthy and that the incidence of gastro-enteritis and other intestinal diseases in particular, is very highs while life eopectancy is correspondingly low. Tho Chiapas highlands are an extreme case. But throughout the region, the evidence suggests that insofar as the health of most of the population is weLl below the national average (which in itselfs is below the average for developed countries), the productivity of the labor force is necessarily affected. 143. It is even more seriously affected by the fact that education standards in the region are generally lower than in any othor part of Mexico. The 1970 census shows that 36 percent of the population of the Isthmic region aged 10 and over was Illiterates the national average bed±ng 24 percent (Table 3.12)0 Furthermore, 44 percent of the population aged 6 and over had received no further education at all, and 96 percent had not progressed beyond the primary level. This latter fact reflects what is perhaps the most disturbing aspect of the current educational structure; that three quarters of those now ia the 6-9 age group are not receiving educatipn; many children eligible to attend school are obviously not doing so. There are several reasons for thist poverty; the rural naturO of much of the region - which implies that children are needed to work on farm at an early age; ignorance and negligence on the part of parents; and long distances from schools in rural areas. Moreovers schools can only acconmodate about half of those who are legally supposed to attend, the insufficient supply of school facilities being reflected in the fact that while only half of those who ar supposed to be in school'are actually there, the avsaage density of chlildren per classroom and the pupil teacher ratio are both very high (Table 3.13).

1440 In 1970, there were marked differences in the rate of illiteracy between urban and rural areas, and between the male and female popilationsS illiteracy in rural areas being 40 percent higher than in urban areas. In Chiapas, almost half of the rural population aged 10 and over was illiterates as compared to less than 34 percent in urban areas in the state. In Veracrus, illiteracy in rural areas was one and a half times greater thai in urban areas. Mliteracy among femals for the region as a whole was 42 percent higher than among sales, which may reflect the fact that when families have to make a choice, they often keep boys rather than girls in school.

145. Excluding the present 6-9 age group, the level 'of educational attairment has however increased substantially over time Table 2.15 shows that only 6.4 percent of the population aged 30 and over completed primary education but that the proportion was more than double for those in the 15-19 age group. The steady decline in illiteracy from the oldest to the youngest age groups applies to both urban and rural areas and to both the male and feale populations. Illiteracy rates were thus almost half as high for those in the 10-14 and 15-19 age groups as for their parents in the 30 years plus age group. Male-female differeoes in iLliteracy had also been sharply reduced, as exemplified by the fact that illiteracy among females was 54 percent higher than among males in the older age groups but was almost equal in the 10-14 age group. - 39 -

146. Against this background, the most serious problems of labor force quality in the towns and cities of the region arise from the fact that local populations are rarely equipped with the technical skills which are already in demand in the burgeoning industrial sector and, in most cases do not even have sufficient basic education to make in-plant training a realistic possibility.

117. Besides the relatively objective criteria of health and education standards, the quality of the labor force in particular and of the population in general (although the former is more relevant), is also affected by certain cultural factors. Some of thm have been deseribed by Nash (1958) who argues that the values, traditions and behavioral patterns of the indigenous populations of the region are generally unconducive to modernization., a factor which acquires importance because the proportion of the indigenous population in the total population of the region is higher than in any other part of Mexicoo Relatively few of these communities are entirely monolingual but even where there is no linguistic barrier, other factors may tend to impede development.

148. On balance thereforej, human resources represent a potentially severe constraint to the development of the Isthmus. This is not to say that the constraint cannot be overcome or that in the absence of a more or less determined effort to overcome it on the part of the responsible federal and state authorities, the region will languish. The fact that there is already a "boom" enviromnent in the Delta shows that a deficiency in the regional supplyr of human resources is not a detezrw..ning factor. But this is clearly an area which should be accorded a high priority in any strategy for the future.

C. AGRICULTUJRE (i) Recent Devloments (a) General Considerations 149. Until the 19501s,, agricultural development in the region was confined to the coastal zones of Chiapas and Tabasco, and to some of the upstream areas of the major river valleys. Even there, however, the extreme difficulty of getting anything that was produced to markets outside the region ands, conversely, of obtaining technical and material inputs from elsewhere., meant that the level of development was very limited, For the most part, agriculture was a subsistence sector characterized by shifting cultivation. - 4h

150. Improved communications during the 1950's and the establishment (in 1951) of the Grijalva-Usumacinta River Basin Commission, were major factors behind the development of the agricultural sector in 1 950-70e Like much else in the region therefore, modern agriculture is a relatively new arrival on the regional scene, although it is obvious that the agricultural sector is still far from having realized its apparent potential, particularly in the Gulf Coast lowlands. (b) Crop Production 151. According to the agricultural census of 1970,, 4 million ha out of a total area of approximately 14 million ha in the region are suited to both annual and perennial crops, including artificial pastures. Some 3 million ha are suitable for natural grazing, and another 3 million ha for forest use.1/ Agricultural productivity in the region,, both in terms of output per worker and output per hectare, is below the national average for virtually all crops and livestock. While some areas of more intensive agriculture stand out, e.g. the southern part of the Chiapas coast, traditioml production techniques predominate, and (with the exception of perennial crops) most output is consumed, on farms. Relatively low yields are however but one indication of low productivity. Another is the relation of the harvested area to total arable land. Using this measure we find that in Chiapas only about one-half and in Tabasco only about one-fourth of the total arable area was actually harvested in 1970O?/ 152. According to the 1970 agricultural census, there were 74,000 ha under irrigation in Chiapas and 14,,000 ha under irrigation in Tabasco.y SRHI statistics show, however,9 that only 71 percent of the irrigable area in these states is in fact irrigated, which reflects poor operation and maintenance standards and high water conveyance losses. Yields are also generally low,, and in some districts are only slightly higher than the national j The National Water Plan is completing a land use potential analysis based on ERTS imagery which will allow a more thorough assessment. j/ We refer mainly here to Chiapas and Tabasco because geographically dis- aggregated data for Oaxaca and Veracruz for 1970 are not yet available. y The difference between these figures and the total figure of 46,000 ha given by the Ministry of Hydraulic Resources for 1973, presumably results from the inclusion in the census data of privately irrigated areas outside irrigation districts and of double cropped areas. - 41 - averages for rainfed agriculture (e.g. 0.7 tons/ha for maize and 0.5 tons/ha for beans). The production value of individual irrigation districts, expressed in terms of 1974 prices varies between Mex$h82 and Mex$741 per 1000 m3 in the three irrigation districts on the Chiapas coast, compared with Mex$91 in the Tehuantepec district on the Cixaca coast0 While strong winds cause serious crop losses in the latter area, they are not sufficient to explain its low productivity.

153. Snall farms predominate in the irrigation districts except in the Suchiate district on the Chiapas coast. In general, however, the region is characterized by fairly large holdings compared to the nation as a whole. In Chiapasp the average size of e.jido and communal farms is 24 ha, compared to 78 ha for the average private farm, In Tabasco., the comparable figures are 26 ha and 39 ha, respectively (Table 6.1). More than half of the agricultural land in Chiapas is owned by SELito and small communal farmers, the comparable figure for Tabasco being just over 40 percent0 154. In terms of and use, maize is the major crops accounting for about 65 percent of the harvested area. Next in importance are coffee (11 percent), beans (8 percent), cacao (7 percent), coconut (2 percent) and sugar cane, cotton and bananas (1 5 percent each). In terms of production value, coffee is most important, followed by maize, cacao, cottons beans and sugar cane in that order.j/ Only a relatively small part of the output of maize and beans is marketed. Perennial crops like coffees cacao and sugar cane thus generate most of the cash incomes of the rural sector and hence constitute the basis for the purchasing power of the rural population (Table 6c3).

155 Coffee is thwus the leading cormaodity of the region and in 1972 the region accounted for about 45 percent of total coffee production in Mexico and probably an even larger share of the nation's coffee exports (estimated at Mex$1.3 billion)o?/ About 35 percent of the latter total was shipped through Coatzacoalcos and Salina Cruz.e/ The main producing areas are the Chiapas mountain valleys, and the Oaxaca and Veracruz highlands. All of these areas have elevations of between 700 and 1100 meters aos.l. where rainfalL ranges from 2,000 to 2,500 mme In 1970, approximately 140h,000 ha were planted with a total of about 90 million coffee trees of fruit-bearing age - mostly in Chiapas. Yields are reported to range from 450 kg/ha on large plantations of more than 1,000 has to 570 kg/ha on small farms with less than one hectare under coffee. j Based on 1970 production and prices. The use of 1975 prices would probably result in a different rank order. / See Appendix I for more details on the coffee sector. 2/ Most of the coffee in processed for.±, e.g. roasted, instant, is exported through the Mexican/US border towns of Nuevo Laredo, Mexicali and Tecate. 156. While the region has excellent soil and climate conditions for s. only about 32,000 ha are used for this purpose, 4h500 ha of which are irrigated.!/ About 18s000 ha of sugar cane are cultivated by ejidatarios. The average size of eJIdo farms producing sugar is 4.7 ha and that of private farms 33 ha. Present cane and sugar yields are very low by comparison with the rest of the country. The region thus averages 65 tons per ha and has a net sugar yield of 8 percent compared with a national average of about 80 tons per ha and a sugar yield of 10 percent, respectively. Fertilizer is used on less than 70 percent of the planted area and cane stands are old because they are usually ratooned up to 20 times before being replaced (Tables 6.4 and 6.5).

157. Nearly all of Mexico's cacao production comes from this region, the principal producing areas being the ncrthcenetral part of 4The Tabasco coast between Cardenas and Villahermosa, the northeastern part of the Chiapas mountain valleys, and the southeastern corner of the Chiapas coast near Tapachula .g/ These areas are tropical lowlands and foothills with year-round rainfall of more than 2,0O0 mm. Tabasco accounts for about four-fifths of the total value of the region's output and Chiapas for the remainder. There are approximately 90,000 ha planted with nearly 3 million trees, most of which are dispersed in, small lots of about 16,000 trees each. Statistical data show that only 60 or 70 percent of the planted area is productive and that yields are very low - between 40o and 500 grams per tree per year. Recently, some stands have been rejuvenated with higher yielding and disease resistant varieties and yield increases of between 20 and 30 percent could be achieved in the future. Only 10 percent of the total area can be considered well managed and only 35 percent of it is subject to pest and disease control. After a period of decline, cacao production has increased in recent years ;n the light of attractive world prices.

158. There are relatively few fruit tree plantations in the region.2/ But over 70 percent of those which exist are planted with bananas and plantains and the region is the most important producer of these fruits in the country.Citrus, mango and tamarind rank next in importance. While soil and micro climate conditions on the Oaxaca coast are relatively well suited to fruit production, periodic strong heavy and cold winds causing intermittent blossom and early ±'ruitfall are sexious constraints to large- scale development. If properly managed, however, fruit crops could play a very important role in many parts of the area, because profits on fruit exceed those on annual crops by a margin of three to one. Although farther development would have to be preceded by marketing studies because demand for fruit and vegetables is easily saturated.

/ See Appendix J for more details on the sugar sector. 2/ See Appendix K for more details on the cacao sectoro y See Appendix L for more details on the fruit sector0 159. There are about 35, 000 ha of coconut plantations. Three-fourths of this area is in northcentral Tabasco where rainfall ranges between 1,500 and 2,300 mm. Presentyields of between 900 and 1,000 kg of copra per ha do not, however, reflect potential.4/ In 1974, a rehabilitation program on 30,000 ha was started in Tabasco (at an average cost of US$800/ha), This program includes the replacement of diseased and unproductive trees, the establishment of leguminous cover crops, fertilization and disease control.

(c) Livestock / 160. It is estimated that about 15 percent of Mexico's cattle population (some 4 million head) is in the Isthmic region.j/ The ranches are generally large and operate.at low intensity0 A recent survey by the Fondo de Garantia seems to indicate, however, that the ranches which have participated in the Fondo's program have substantially increased their herds over the last five years. According to this source, the area under pasture on an average farm of 210 ha increased from 150 ha to 200 ha in this period. As a consequence9 and presumably because of better herd and pasture management, stocking rates - expressed in animal units (A.U.'s) have increased by 80 percent. During the same period, most participating farmers have achieved higher weaning rates and a reduction in finishing ages. While these performances cannot be considered as representative for the region, they show what can be done with :iproved practices (Tables 6.6.,6,7 and 6.&).

161. Another recent surveyL/ shows that large farners usually concentrate on breeding and fattening, while small farmers prefer mixed operations including dairy production. Calving rates range from 62 percent for large operators to 67 percent for medium and small operators0 Fixed capital (other than livestock) varies, between 7 percent for larger farmers and 13 percent for small farmers 0 The intensity of large scale operations varies considerably. While many farmers have stocking rates of less than 1 a.u./ha and are undercapitalized, some operate at an intensive scale using improved genetic material, sprinkler irrigation and artificial pastures. On these intensive units, milk yields of more than 30 lt per day over lactation periods of 210 days and meat yields of 800 kg per ha per year have been achieved (Table 6.2).

1] A recent Mexican report states that copra production in Mexico has decreased by about 22 percent between 1966-1973 while the planted area increased by some 453000 ha during the same period.

g/ See also Appendix Mfor more details.

3/ We should note that statistics on the livestock sector in Mexico in general and in the region in particular are incomplete and conflicting; those cited here represent our best judgment in each case.

P/ Centro de Invest1igaciones Agrariasp Tabasco 1974. 16., Sveral programs designed to improve ejido livestock operations have recently been introduced9 notably the "Plan de la Sierrat' which is being carried out by the staff of the Colegio Superior para la Agricultara T.-opi21 (CAST) at Cardenas. Other programs include the livestock production scheme of the Fondo de Garantia in the Chontalpa zone and a program which has been initiated by the Isi,hmus Commission in Guichevere (Oaxaca). These efforts are all at too early a stage to allow us to reach conclusions about them. We do not know, for example, whether mixed systems (under which some of the pasture is converted to cropland on a rotational basis) are superior to pure farming systems. We do know, howevery that the programs have encountered certain difficulties in the field of ejidatario organization where the objective has been to create cooperative livestock units. T-here have also been problems in obtaining credit for cattle purchases, in implementing farm improvements, and in coordinating the work of the various goverment agencies which provide technical support. 163. Of the total grazing area of about 3 million ha, only a relatively small amount is under artificial pasture. African star grass appears to be particularly successful among the improved varieties which have been introduced. It can be established rapidly, has good grazing qualities and feeding value and provides good protection against soil erosion - an important advantage in the central part of the regi ,n. Artificial pastures in the region are not, in general, properly managed and maintained3 fertilization, water control and stocking techniques all leave much to be desired.

164. Many parts of the region now under forest cover have a.high potential for livestock production. A major effort to develop the livestock .9actor in such an area has recently been made in the Isthmus saddle in the vicinity of Matias Romero, where some 8,000 ha of forest land has been cleared and is being put under artificial pasture. The plans here are ambitious and it is expected that between 15 and 20,000 heifers a year of approximately 250 kg each will be exported to the Huastecas area (to the north) for fattening. A close evaluation of this project in terms of pasture performance, live weight gains, and costs could provide valuable guidance for programs now being initiated elsewhere.

165- Dairy production in the region is still in its infancy although there are a few examples of successful dairy operations based on exotic breeds. Most dairy output, however, comes from small farmers who, on an.rage,. obtain less than eight litres of milk per day over relatively short lactation periods. At present, most of the milk is marketed by one e.aterp2is.,, which has established 'avirtual monopoly.

(ii) Future Prospects 166 The Gulf Coast of the Isthmic region is endowed with unusually av. .'ble resources for agricultural development. t- 167. First, the presence of three major river systems means that the Isthmic Region is far and away the best endowed in the whole of Mexico from a hydrological point of view. Estimates of present levels of water withdrawal and consumption show that only a minute percentage (0.5 percent) of the water which is available, is actually consumed. This compares with a national aver.age of 10.6 percent. The percentage of water withdrawn (0.9 percent), is also much lower than the average for the nation as a whole (32.0 percent). (Table 2.4).

168. Agriculture is by far the largest consumer of water, accounting for 97 pereent of regional consumption in 1970 but it accounted, in 1970, for only 13 percent of total water withdrawal. While the share of agriculture in total withdrawal is expected to increase in the future, the energy sector will continue to dominate given that energ generation in the region is mainly derived from bydro plants.

169. The abundant supply of wiater for agriculture is not however an mxed blessing because adequate water control is also vitally important to successful and productive farming under humid tropical conditions. The high rainfall of the region is thas not only a major resource but is also a source of serious problem in that extensive areas are liable to flooding. These problems are particularly severe along the Gulf Coast, where insufficient drainage often gives rise to yield losses. Farthermore, they prevent large areas from being productively utilized. While traditional protection measures sich ae river emban1ments may be adequate for relatively amall areas, they cannot provide adequate protection on extensive plains, where floods can only be controlled by means of proper drainage systems, deeper channels and additional outlets to the sea.

170. llow records for the Grijalva-Usumacinta river system show that most of the floods caused by these rivers occur in September and October, although a large part of the lower Delta is flooded almost all year round beamse of ixadeqaate drainage, the latter being attributable to flat topography,, insufficient sea outlets and heavy textared soils: GrilJava-Uemacinta River trstem Average monthl,y flow (% of yearly flow) Jan. Feb. March _ June g An . Oct. Nov. Dec ..- - ....- - Z- - - - . 0 6 4 4 3 3 3 7 11 15 18 11 7 171. At present therefore mach of the region.Vrequires better drainage to remove mea3s aurfwe vater, and to lower the water table. This problem is alosely related to the question of land ownership, because many farmers are unwilling to undertake investments and improvements without guarantees in this rgard. Publ-ic ivestment programs for drainage, flood control and land reclaation ill also have to be adjusted to the new legislation concerning the right aud obligations of beneficiaries in drainage districts.

1/ Carried out by the Colegio Saperior para la Agricultura Tropical. -46-

172. On balance however, in a country in which water is as scarce as it is in Mexico, and taking account of the fact that the cost of putting one hectare into productive use with improved drainage is only about a quarter of that of doing so with irrigation, the hydrological characteristics of the region represent a major advantage for its agricultural development.

173. A second major advantage - without which the hydrological endowment would not mean much - derives from its soils.

174. As a result of climatic conditions and topography, soils on the northern lowlands and coastal plains are general3y deep and heavy textured and call for extensive drainage but little irrigations to reach maximum agricultural productivity.

175. The predminnt soil types in the northern half of the region are Luvisols n deeply weathered reddish-brown soils of moderate to low fertility, typical of humid tropics - and Fluvisols (heavy textured, but inherently fertile, alluvial soils). The Luvisols are typical of the Uspanapa area in Suthexn Veracruz while the Fluvisols are found mainly around La Chontalpa and east of Cardenas.*In northeast Tabasco there are several hundred thousand hectares of land which are flooded for most of the year (Histosols). There ae also some smaller areas, one with volcanic soils (Andostols) in the hilly country around Catemaeo with locally high rainfall (up to 4,000 mam, and another limited area of dark heavy clays (Rendzina-Vertisol complex) around Acayucan (north of Jesus Carranza).

176. The narrow coastal plain of the south has lower rainfall than that of the north, but also suffers from seasonal flooding. Both drainage and irrigation would be needed to develop this part of the region for agricultural purposes.

177. On a region-wide scales the greatest potentials for agricultural expansion therefore occur in the lowlands and undulating foothills of the northern suLb-regiLon and the key to their development is adequate water control. The need is extensive along the coast, particularly in the northeast, but significant and rather imediate improvements in crop production could be achieved because the soils (particularly the Fluvisols) are inherently fertile, The major problem is that they tend to have a high or very high clay content which makes them difficult subjects for cultivation (ploughing and seed bed preparation). Proper regulation of the groundwater table is also needed to prevent "physiological drought" (lack of air in the root zone of crops) during the rainy season, and lack of moisture in the root zone during the brief periods of diminished rainfall0 - 47 -

178, Creation and legal definition of Drainage Districts will therefore te required for an efficient development and investment framework in the coastal zone of the north. But on the undulating land with alluvial-colluvial and ferrallitic soils on the northern slopes of the Chiapas highlands, external drainage is good because of favorable topographys, and little drainage (or irrigation) is required. Conditions in this zone (the foothills between Acayucan and Teapa) which are now used mostly for grazing are undoubtedly suited to more intensive use, particularly for growing tree crops and for mixed agriculture. The same applies to the area on the Pacific Coast between Pijijiapan and Tapachula, where the rainfall and soil conditions would lend themselves to more intensive use than the extensive to semi-extensive grazing which now predominates there.

179. In sun we can say that soils also represent a favorable aspect of the region's resource endowment and that given the relative abundance of water resources, the region's agricultural base appears to be unusually good, so much so that the Gulf Coast zone of the Isthuic region contains a substantial part of what seams to be Meoico's last agricultural frontier,

180, With regard to both crop and livestock production, there are of course a nmaber of general constraints to future development. First, there is the obvious question of capital availability. The public investment requirements will certainly be large - and substantial current outlays will also be required, particularly in respect of the development of the potentially productive areas of the Gulf Coast flood plain. Drainage on the one hand and also applied research in tropical agriculture on reclaimed areas on the other wi be particularly important.

181 In addition to the needs for substantial amunts of public capitals priY,ate capital will have to play a major role and there is an evident connection between the likely availability of private resources for investment in agriculture in the regions, and a number of other constraints of a general nature. One of these concerns entrepreneurial attitudes, in which regard the region has not, in the past, been generally perceived as a favorable area for agricultural enterprise although this attitude may now be changing.

1820 Another is that as long as land ownership rights in the region are not clearly establisheds many private farmers may not be prepared to intensify production, A recent study by the Centro de Investigaciones Agrarias ,/ demonstrated this point in showing that fixed capital investments in typical livestock operation in Tabasco were very low. Insecurity of land titles has clearly deterred many large ranchers in the region from using their land to its fullest potential. A vigorous effort to award titles of inaffectibility and/or to expropriate land exce'ding the limits stipulated in the Agrarian Refom Law appearsa to be a 9si u of the development of the livestock sector in this region and indeed in Mexico's tropical areas in general. Siilarly, i farmers and minifundistas. who have neither property rights nor capital for investment, canot be expected to achieve rapid productivity increases.

L dv Un Estudio en Tabasco (1974)o h48 -

183. Another constraint concerns the need for changes in the marketing arrangements for some of the region's leading commodities. A few large landholders have now monopolized much of the marketing system and while small scale production from smaller fanaers did not warrant government interference, the potential for increased production would seem to justify and, at the same time, be a prf)condition of, stronger public involvement and support. Similar considerations hold true for credit. i84. Following directly from the last point, improved technology cannot have a lasting impact unless it is embedded in an organizational and human framework capable of demonstrating its practical and economic advantages while providing the necessary services and infrastructure, such as qualified technical assistance, supervised credit5 seed multiplicatiDn centers, storage facilities and processing and marketing systems. Such a framework does not, at preseat, exist.

185e There can be little doubt however, particularly when the agricultural potential of the Isthmic Region is assessed in a nationwide perspective, that these problems must be overcome and that agricultural growth could be a major emphasis in the region's future evolution.,

D. FORETRY

186e Broadly speaking, the three major forest types found in the reginn are: Mbntane forests at elevations around 3,000 meters, usually consisting of degraded Oak-Pine formations; low deciduous and semi- deciduous forests at lower elevations; and tropical rainforests at sea level. The region's forest resources suffer, however, from serious degradation, uncontrolled timber extraction, and the lack of an adequate forestry policy. In the Isthmic saddle there is much scope for reforestation and soil conservation, particularly north of Matias Romero, where shallow rocky soils cover the extended central highlands.

187, Surveys show that centuries of shifting cultivation and past exploitation have virtually eliminated stands of such valuable tropical hardwoods as Mahogany and Cedar. The most common species now found in the rain forests of the region thus consist of low value varieties such as Ceiba, Paque, Ojache and Jobo. Estimates of the volume of exploitable timber very from 3m3/ha to 12m3/ha, out of standing volumes of between 100 and 170 m3/ha. It is believed that approximately 50 percent of the forest in the region is privately owned. Land tenure and other institutional problems appear to be an impediment to the evolution of a sound forestry policy. - 49 -

188. There can be little doubt however, particularly when the agricultural potential of the Isthnic Region is assessed in a nationwide perspective, that these problems must be overcome and that agricultural growth could be a major emphasis in the region's future evolution inter-oceanic corridor zone of Oaxaca, Veracruz and Chiapas. Broadly speaking, the three major forest types found in the region are: Montane forests at elevations around 3,000 meters, usually consisting of degradiedOak-Pine formations; low deciduous and semi-deciduous forests at lower elevations; and tropical rain,forets at sea level. The region's forest resources suffer however, from serious degradation, uncontrolled timber extraction, and the lack of an adequate forestry policy. In the Isthmic saddle there is much scope for reforestation and soil conservation, particularly north of Matias Romero, where shallow rocky soils cover the extended central highlands.

189, Surveys show that centuries of shifting cultivation and past exploitation have virtually eliminated stands of such valuable tropical hardwoods as Mahogany and Cedar. The most common species now found in the rain forests of the region thus consist of low value varieties such as Ceiba, Paque, Ojache and Jobo, Estimates of the volune of exploitable timber vary from 3m3/ha to 12m3/ha, out of standing volumes of betwieen 100 and 17C0n3/ha. It is believed that approximately 5O percent of the forest in the region is privately owned and that land tenure and other institutional problems are an impediment to the evolution of a sound forestry policy.

190. Forest resources are probably the most iiportant economic assets of the mountain areas of Chiapag and Oaxaca which, because of their physical and socio-economic characteristics, do not, in general, have good prospects for agricultural development. Programs of reforestation are urgently needed to facilitate efficient exploitation but there is little doubt that the forests of the Isthmic region are significant resources for its future development, although they are likely to be considerably less important than either agricultural or mineral resources. E, FISHERIES

191. The fisheries sector is of real significance only in Oaxaca where about two-thirds of the region's fish output is produced. Fisheries contribute a negligible proportion of the gross regional product while the region accounts for only 6 percent of the output of the nation's fishery sector, The growth of armual fish output has fluctuated around a trend of about 3 percent per annum over the last decade. About 70 percent of it i5 from the sea., and the remainder from coastal lagoons. Production from in- land lakes has, so far, been insignificant. Shrimp is the single most important species and accounts for more than half the total value of output. Oysters are second in importance, followed by tuna, avalon, turtle, lobster, haddock, red snapper and mackerel. - 50

1920 There are approximately I.,000 fishermen in the region, but only a few hundred are enployed full time. Most of then complement their income from other work, typically in a blend of agriculture and part-time activity in the urban sector. But even with this, fishing provides only subsistence living standards.

193. While deep sea fishing is commercially organized, lagoon fishing is mainly organized on a cooperative basis and the most economically attractive species - such as shrimp, oyster and lobster - are, in fact, reserved for cooperative exploitation. The cooperatives are, however, undercapitalized and generally inefficient and seem to provide few, if any, benefits for their members.

194. The generally meagre level of exploitation of marine resources in the region is attributable to several things: the age of the fishing boats; primitive fishing equipment and methods; inadequate training of fishermen and a rudimentary marketing system. And, fundwientally, a lack of capital and enterprise. Only 15 of the approximately 2,500 boats in the region have a carrying capacity of more than 50 tons. Some have outboard motors, but most are propelled by oars of paddles, and ccmmercial operations in larger boats are confined to a fleet of 19 tuna boats, most of which operate out of Salina Cruz which, together with Coatzacoalcos, is the only port with adequate facilities for deep sea fishing,

195 There is definite potential for developing ocean fisheries, particularly for tuna, and an area off Oaxaca, now fished mainly by foreign vessels is especially promising. The main growth of production will, ' however, have to come frm the lagoons, of which there are about 80,000 ha in Chiapa3, 60,000 ha in Oaxaca and 30,000 in Tabasco.

196x Between 1969 and 1973, the Goverment invested approximately US$10 million in the improvement of lagoon infrastructure in the region. These investments were primarily intended to improve ecological conditions for shrimp and other crustacea.

197. Lagoon development will not however be easy, more must be found out about feeding grounds, nutrient inflows, water temperature and salinity, the adaptability of high value species, production capacity, and operating methods, before large-scale operations can be successfully undertaken. Subject however to these reservations, the Isthmic region appears to have the best prospects of any part of Mexico for the development of lagoon fisheries which could, with time, become an important export industry. - 51 -

F. MINING AND PBTR0LEUM

198. The region as a whole has a fairly wide variety of non-metallic minerals in proven deposits and, allowing for the fact that exploration is by no means complete, its potential resources are almost certainly greater. 199. Even measured on the basis of direct emloyment, the petroleum industry is outstandingly important in the regional economy. Measured in terms of capital investment its significance is very much larger.

200, The antecedents of the modern petroleum sector in this region include the initial development of oil fields in Tabasco by expatriate enterprises before the Revolution, the nationwide expropriation of the sector in 1938 - in an act of great political, cultural, and economic significance for Mexico and the subsequent development of the sector within the monopolistic framework of Petroleos Mexicanos (PRE$E). This last fact - of a sector which is also an enterprise and a very large one by any standards lJ - is fundamental to the analysis of the petroleum industry in the region.

201 The regiongs share in the nation's primary petrolem sector can be measured in several ways, of which its share in the natiol's output of oil and gas (Table 7.6) and its share in primary petroleum investment (Table 7.13) are probably most significant. The pattern shows a decline from the 1940's through the 1960's. But in 1974 there was a sudden aud dramatic shift and the region again emerged as the country's leading zone for primary petroleum production. Through the sixties, it accounted for about half the national total, the remainder coming from Tamaulipas and Northern Veracruz, and until 1972, all oil and gas produced there was of tertiary origin./ In May of that year, however, cretaceous oil-bearing sediments were discovered in northern Chiapas and western Tabasco at avarag depths of about S500 meters (by comparison with depths of between 2000 and 3000 meters for tertiary strata). These cretaceous deposits were the source of a rapid increase in primary output in 1974 (Table 7.6). 202, The secondary petroleum incustry - refining, petrochemical production and other processing - is also highly concentrated in the Gul.f Coast area, almost entirely in the contiguous municipalities of Minatitlen Cosoleacaque and Coatzacoalcos 0

203. The Minatitlan refinery is the country's oldest and is one of the largest in Latin America (180,000 bbl/day throughout). It has over 4000 employees and is much the most important industry in the city. The region's major petrochemlcal installations are close by - in Cosoleacaque (ammonia) and Pajaritos (ethelene) - the latter being located in the municipio of Coatzacoalcos.

2/ PEMEX is the largest enterprise - public, private or mixed - in L^t:i America and one of the 60 largest enterprises in the world otoitLde the USAo i/ i.e., originated in tertiary sediments. 204. Since 1972, PEE has invested nearly 10 billion pesos in the Isthaic Region while employment in the enterprise in the region has risen from 25s000 in 1972 to about 30,000 by the end of 1974. It is self evident that the activities of any enterprise of this size must have a decisive effect on the economy of the region in which it is located. In the case of the Isthmic Region there is no doubt that the development of the petrolem sector has been the basis for much of the region's growth. First, in terms of the regional economy as a whole0 Second, in terms of the industrial sector. Third, in tems of the urban economies of Minatitlan , and to a lesser extent of Coatzacoalcos and, more recently, of Villahermosa. The petroleum sector is therefore more than the main source of industrial ekployment in the region and by far the most heavily capitalized sector. It is also the source of basic materials for the fertilizer and chemical industries which developed in the 1960's in the Coatzacoalcos Delta and is therefore linked with other parts of the industrial sector. Further,, in the case of Minatitlan, it is not only the economic base of the local economy, but because Minatitlan developed as a "company town" before expropriation (a pattern that has not been entirely changed under the aegis of PDEi), it has also provided the major threads of the social and political fabric of the urban area. More generally, but with an explicit emphasis on the Coatzacoalcos Delta, the development of PEMEX activities in the region has implied the presence of a dominant industry whose high wages have helped to force up earnings in other sectors, This may have had detrimental effects on their development and have implied the persistence of an undiversified economic base0 205. The full extent of the hYdrocarbons potential of the region is still unknown pending the completion of exloratory drilling in cretaceous sediments. But it is likely that over and above the proven tertiary reserves of the Isthmic region of about 1.5 billion barrels of petroleum, there are cretaceous reserves of at least 3.0 billion and perhaps as much as 10 billion bble These recent discoveries imply that the region is likely to remain by far the most important area for hydrocarbons production in the country although they do not imply a shift in the locus of primary production within the region because the cretaceous oil underlies tertiary sediments which have been exploited for many decades (Map 8), 206. For the future, the growth of the petroleum sector will undoubtedly be an important aspect of the region's development potential,

207. Among its advantages - if priorities were to be assigned to the development of different petroleum producing areas in Mexico - would be (i) the fact that a larger amount of infrastructure for primary and secondary production is already in place than, say, in Baja California; (ii) the fact that notwithstanding the relatively greater depth of the cretaceous resouxaes of Tabasco/Ghiapas, the flow rate is very high and the cretaceous fie'.ds are therefore very productive; (iii) the fact of the remarkable success ratios which have been achieved in both exploratory and development drilliig and (iv) the fact that the region is the bfst placed of any actual or potential petroleum producing area to serve as an export base, 208. After petroleum, sulphur is by far the most important mineral item of production in the region. The volume of sulphur output is sensitive however to extenal market conditions and the declining trend of production in the late 1960's was a reflection of dateriorating world prices rather than the depletion of resources - which are entirely in located the municipio of Jaltipan (Veracruz). Three fins were, until recently, involved in the sulphur industry, of which only two (Compaflia Azufrera Panamericana and the Cia, Exportadora del Istmo) are now active, from Sulphur the region is marketed throughout Mexico - where demand has increased at an average annual rate of 18 perc:ent since the mid-sixties larger - but a proportion is exported; domestic sales account for onl-y 25 percent of the region's total output. 209, In the future, depending on world market conditions - which, inter a will be affected by the growth of sulphur production extract as an of petroleum - sulphur exports will continue, although they are unlikely to grow rapidly. Other minerals will probably therefore play a relatively more important role in providing both exports and material for inputs industrial production within the region. Of those which have been located and subjected to a preliminary evaluation, the copper resources of Chiapas are among those which will almost certainly be developed within the next decade although the timing of such a development will depend on progress elsewhere in Mexico, notably at La Caridad in Sonora.

210, The present industrial significance of the region's mineral resources can be glimpsed frcm Table 7.7 which shows that they have alrea4 provided a material basis for the development of a variety of plants in the Delta. It shows too however that the excellent access to the afforded external markets by the port of Co-atz"acalcos has been a strongly favorable factor in accounting for the growth of minin activities.

211 The mineral resource base is therefore, particularly exclusively but not with respect to the hydrocarbons sector, another major comparative advantage of the Isthmwic region0 Allowing for the fact that evidence all the is not yet in - and will not be in for some time - this endowment represents an important part of the base for regional development. Its successful exploitation will however depend in large measure on bility the availa- of adequate capital for new investment. Given the predominant role of public enterprise in this sector there will consequently relationship be a direct between the growth of investment - for both exploration production and - and the evolution of Mexico's public finances, If public investment as a whole is subject to restraint in the next few years this could therefore affect the rhythm of new mining and petroleum development the Isthmic in Region although, at least in the case of petroleum, the Isthmic Region would almost certainly retain its present nationwide priority 0 G- MANUFACTURING

(a) Present Structure

212. Whereas petroleum has been a major element in the region's industrial base for many decades its manufacturing sector has more iecent origins, and is still small, accounting, by 1970, for only three percent of Mexico's mamnfacturing employment and only four percent of its manufacturing value added. Recent growth rates of both employment and output have however been rapid and manufacturing employment and output in the region have increased more quickly than in the country as a whole.

213. The manufacturing base of the region, like its industrial base in general, is strongly concentrated in the Coatzacoalcos Delta although the manufacturing base of the Delta is dominated by chemical production whicin, in 1970/71, accounted for almost 60 percent of its manufacturing value added (Table 7.1).

214. Within the chemical sector (but excluding petrochemicals), the fertilizer industry is strongly dominant; the specialized nature of Delta manufacturing shows up very clearly on a comparative basis in Table 7,2 where Coatzacoalcos and -Linatitlan both appear as specialized economies relative to the diversification of other large urban areas.

215. Notwithstanding that some of the region's heavy manufacturing activity is directly related to processing local resources,, the largest enterprises (Guanos y Fertilizantes and Fertilizantes Fosfatados) are almost entirely dependent on imported raw materialsj/ Two thirds of the output of the Guanos plant - which produces a range of urea-based fertilizers - is sold domestically, and the remainder is exported to Peru. In the case of Fertilizantes Fosfatados, about 20 percent of the total output is marketed in Mexico and the remainder is sold in Europe, South America and India. Tetraetilo de Mexicos a state enterprise, derives its basic material inputs from PEMEX as does Industrias Qtuimricas del Istmo which also uses salt produced in the region. Its products - chlorine,, sodas sodium hypochlorate and hydrochloric acid are basic inputs for the paper and petrochemical industries and, for the former purpose, are therefore exported from the region. This firm is verticaUlly integrated with Sales del Istmo which is located in the municipio of Ixhuatlan.

216. Sugars barbascos rice and vegetable oil are the key inputs for agricultural processing industries in the Delta subregion. The relative share of food industries is however, less important in the Delta than in other parts of the regions, while other areas also have larger absolute shares of some of the regionts food industries. These inlclude sugar, for which Tabasco and Chiapas are much more important than the Delta, both having greater refinery capacity.

1/ Except sulphuric acid. 217, Manufacturing in Tabasco is almost entirely concerned with food processing, the main products being sugar and cocoa and those of forest industries. Excluding those located in Villahenmosa, these raw-material- based activities are al,9 moreover, strongly localizeds, some of them in rural rather than urban areas,

218. In Villahermosa, there is more subsectoral variety than in the Delta, although food industries still dominate - accounting in 1970 for 58 percent of manufacturing employment,, while beverages accounted for a further 19 percent, a range of light manufacturing industries making up the remainder. As a result, Villahermosa, relative teo the country's other large cities, al;o has a fairly sDecialized msanufacturing sector - biased toward food processing - although it is less specialized than Minatitlan (Table 7.2). 219. In 'the south of the region, manufacturing development has been relatively meagre. Capital investment in both Chiapas and Oaxaca amounts to only a small fraction of that in the Gulf states, Food and beverages make up more than 60 percent of manufacturing employment in Chiapas while leather and wood industries account, between thems for a further 20 percent. The resource base of this subregion - timber, agriculture, and livestock production - therefore holds the key to the structure of manufactarlng employaent and investment, In Oaxacas, fish processing is the leading food industry and other important sectors include cement and ship repairing - although the latter is mw classified as a tertiary rather than secondary activity for census purposes0 Locationally, ufacturing is almost entirely concentrated in the largest urban areas (Juchitanp Ixtepecs Tehuantepec, 5alina Cruz) and in some instances (such as ship repairing in Salinea Cruz), a subsector is entirely concentrated in one plant and one location.

220. Few agricultural processing industries are "footloose" in the sense that their profitability is insensitive to location, Agro-4ndustries are generally therefore located in towns and cities near producing areas. Small and scattered villages do not, in general, provide attractive locations for such agro-industries as slaughterhouses, meat curing, packing and canning facilities, or dairy product, vegetable oilD extraction 'vr beverage plants. Furthermore, many agro-industries have a sincale )r efficient operation which requires num quantities of inputs. --4ost rural areas cannot meet these conditions and present production men- Ads do not always imply attractive input prices. Nevertheless, some manufacturing industries have rural locations. 221. Sugar refineres are the mJost important instance. In all, there are seven refineries in the region - four in Tabasco$ one in Chiapas, one in Oaxaca and one in Veracruz - with a combined cane processing capacity of three million tons. The mis are relatively mall compared to the national averages, their machinery is generally old, and thu,r operations are not very efficient, On average, only 60 percent of their installed capacity was used in 1972 and profits were consequently low0 A new mill is now, however., being installed in the Chontalpa area near Cardenas, This has a capacity of about one million tons which should facilitate the achievement of economies of scale, assuming a constant supply of cane throughout the harvesting periodo 222. Another rural manufacturing industry is a modem ohooolate plant in Rio Seco (near Cardenas) which has a total processing capacity of 2,500 tons a year. Although it is a modern installation, the facility operates at less than 40 percent of its capacity apparently because it does not have sufficient operating capital. There are also about, 300 small coffee processing, dehulling and drying facilities in Chiapas with a total capacity of 177,000 tons. This installed capacity seems to be out of proportion region's to the coffee production (87,,000 tons in 1972). Other rural plants include milk processing facilities (also in Tabasco) for the cream, production of cheese and yoghurt, all of which are of fairly recent origin; their owner planning is to exand the number of plants in the future, There are also cotton ginning plants and wheat mills in Chiapas. 2236 Ma of the agroindustries of the region are characterized by pronounced seasonal fluctuations in activity, which tend to intensify.rather than alleviate seasonal unemployment in rural areas. This is particularly true of sugar refining, cotton ginning and coffee processing. 2214 Because of inadequate storage and refrigeration facilities, most of the region's fish catch is sold directly fraa boats, There are plants processing for shrimp in Tonala and SLUna Cruz, a tuna processing plant and several cold stores in S Cruz,, and a cold store in Coatzacoalcos. shrimp The plants are equipped to shell, devein, cook, freeze and pack shrimpy, but the plant in Tonala is used for only three months of the year and works at an average capacity of 60 percent, 225, Given the above and in the light of observations made during our visit to the region. our first conclusion is that the outstan features of the manufacturing sector are that it is strongly concentrated in the Delta and is highly specialized in heavy industry subsectors. 226. Second - and this is something which particularly affects the Delta but also affects the region as a whole - man existing plants are operating at less than full capacity. The r ons for this vary from one plant to another, even in the same subseetor. One of the fertilizer plants for ple operates at full capacity while the other utilizes little more than half its potential. Capacity utilization in food processing fluctutates in some cases on a seasonal basis, although in others such as the barbasco plant in Acayucan - excess capacity reflects an inadequate supply primary materials, of

227. The third major characteristic is that most nufacturing plants in the rion are there because of the availability r aiaterial inputs than because rather of the size of or proximity to., do-r ,. or foreign markets. Intra-regional demand for manufactured goods pro&uced in the region thus accounts for a relatively small share of aggregate demand, most of originates which either elsewhere in Mexico or abroad. Concomitantlys most of the region's deands for manufactured goods are not satisfied by its own industries and such goods must therefore be impoxted, 228. A fourth and closely related characteristic is that many of the region's inter-industry (non-final) demands must be satisfied through inl;er-regional or international trade. There are few examples of either backward or forward linkages between the various manufacturing industries which have so far been established.

2290 A fifth characteristic is that notwithstanding the very high capita)./labor ratio in the Delta subregions, employment in heavy industries and in the petroleum sector account, between thems, for a large share of total industrial employment. This is partly because of the strength of the labor unions in high-wage activities - a fact to which attention has already been drawn with respect to the petroleum sector. The effect is that average industrial wages in the Delta are well above the national averages, and it could be argued that the high wage structure of the Delta has had a negative influence on the development of other branches of manufacturing, thereby accentuating the lopsided nature of the manufactuiring sector in the subregion.

(b) Future Prospects

230, The "heavy" industry characteristics of the Delta derived from past investments are likely to persist in the future and the industries concerned - particularly chenicals and petrochemicals - will provide the driving forces of its growth. There are, however, many opportunities for forward and backward linkages involving heavy industry subsectors, which have not yet been realized and which derive from its existing structure.

231. Some of these are further from immediate reality than otherss, but among the products which could be produced using the output of industries already located in the region are paper9 textiles, glasss, paints, plastics, soaps, detergents, steel anc! aluminum. The reasons for suggesting these subsectors vary from. one to another: paper because of the proximity of forest industries in the central Isthmus and also because of the availability of abundant water supplies and sulphur; glass because of the availability of petroleum, silica and basic chemicals; steel because of the availability of gas which is a basic requirement for HYISA sponge-iron process and easy access to imported materials through Coatzacoalcos; textiles because of the availability of petrochemical materials and water; paints and plastics for similar reasons; aluminum because of the availability of abundant water and cheap electricity and (as in the case of steel) easy access to imported materials (Table 7.4).

232. In the near future, the industrial base will be strengthened and diversified by the completion of new plants producing maize flour, teratalic acid, sodas, toluens, phosphoric acid (substituting for import s) and sodium hipersulphate. 4

233. A substantial - though specialized industrial structure is thus already in place in the Delta and constitutes a comparative advantage for the future development of heavy industry. (See Table 7.3 for details). 234. Moreover, whilst it is probably a less critical factor in the case of industrial development than in that of agriculture, the availability of virtually unlimited supplies of water means that the Isthmus is uniquely endowed among Mexico's industrial regions0 This has obvious ramifications for water supply per se. But it has other implications with respect to hydroelectric power.

235. About one-third of the nation's installed hydro-power capacity is in the Isthmic Region which is therefore of major importance in the present structure of Mexico's power sector. In the future, given the region's very favorable hydraulic endowment, it is likely to become even. more important in national terms. By 1980, it is planned to install an additional 3i6269000 kw capacity in the region, of which 1,940,000 kw is hydro-power. This plan, if achieveds, would imply an increase of 250 percent over the 1972 level of 777,788 kw. There are therefore several important factors which favor industrial growth in the Isthmic Region in the future, There are also, inevitably, some constraints.

236. First, as in the agricultural sector, it is self-evident that a region such as this, with a relatively weak human resource base, will not provide an adequate supply of entrepreneurial talent, although the empirical evidence on growth-pole development in other parts of the world suggests that an environment of rapid change is often associated with a spirit of risk-takings, particularly in the context of relatively small enterprises 0 As growth accelerates, propeled by a leading sector or sectors, the problem of a relatively deficient supply of local entrepreneurs may thus begin to resolve itself0 We see no chance, however, at least in the short-to-medium term, that local enterprise wiUl suffice to launch anything other than relatively small-scale activities0 Concomitantly., we conclude that migrant entrepreneurs will have to play a crucial role in the region's industrial growth - as they have done in the past, We can moreovers, in the light of the industrial dynamics of the region in the recent years, be fairly confident that this will happen.

237. Second, even if entrepreneurs are willing to invest, will they be able to find managers and executives who wish to live in the Isthmic Region?

238, This is, in part, a matter of the physical environment. Assessed in terms of comfort zones - which are defined on the basis of air temperature and relative humidity - the most attractive parts of Mexico are the altiplano and some of the central mountain regions. The Isthmic Region belongs to the less comfortable areas along the coasts and its situation may be more uncomfortable than most because of high relative humidity and the absence of pronounced seasonal temperature variations. But for all this it is, as we observed in Chapter 1, a more attractive place now than it used to be, because the use of air-cond:itioning has greatly eased the process of adjustment and adaptation for those coming to the region from elsewhere. It is nevertheless true that the region has a less than ideal physical climate0 And this statement also seems valid in cultural as well as in physical terms0 239. We have already observed (Chapter 1) that Mexico City reigns supreme in almost every seinse and many of those who have a choice, desire to live there rather than elsewhere. There are other cities, including Monterrey and Guadalajara and such saaller places as Cuernavaca and Merida, which might be looked on favorably by the nation's professional and technical middle classes. But Coatzacoalcos, Minatitlan and Villahermosa (not to mention Tuxtla, Salina Crutz or Tapachula) do not, in general, rank high on most people's lists of desirable places in which to live, work and raise children.

240. To the present scarcity of skilled industrial labor and enterprise it is therefore necessary to add a third constraint - managerial talent - to the list of disadvantages of the Isthmic zone with respect to rapid industrial work.

241. On balance however the actual or potential availability of a wide variety of material inputs - for agricultural processing &.dfor mineral processing together with the advantages conferred by its acceptability to internal and external markets (see below) are probably enough to offset these difficulties as well as those which derive from the nature of the existing industrial base and the paucity of external economies. H. COMMUNICATIONS

242. The physical layout of the transport network of the region is shown in Maps 11, 12, 13, 14 and 15 which point to the obvious coincidence between physical geography and the configuration of the rail and road systa±s The mountain barrier of Oaxaca has evidently been an effective constraint to integration between the Pacific CoasTs and the center of the country0 Also. the mountainous zones (covering most of the state) of Chiapas have not been penetrated to any significant extent by either roads or railways. Converse1v the major road and rail routes follow the natural lowland corridors of the Gulf Co'Rast Plain, the Pacific Coast Plain, and the Isthmic corridor. This is not to say that the Gulf Coast has provided the easiest of natural :utsr This is reflected in the fact that the railway through Tabasco actually skirts the coastal lowland in order to avoid the flood-prone areas near the sea; in the fact that the railway to Merida was not completed until 19: and in the fact that there was no major road to the east of Coatzacoalcos until l950. The trans-Isthmus railway was, however, finished im 1905 and the railway to Tapachula shortly after, although the trans-Isthmus road was not built until the 1950's while the Pan-American Highway which links Qaxaca City with the Pacific Coast also dates from that time. Until very recently, therefore (with the exception of the trans-Isthaus railway) ovelavrl.d communications within the region and between it and other regions were extremely difficult., and the normal route to Villah,mnosa from Mexico City was by sea via Veracruz. Given this, air travel ha. been a part of the transport systen of the region since the 1930's and regular flights between the major cities (Minatitlan., Tuxtla, Tapachula., Villahemosa) and Mexico City have been gradually developed. Even today, however, intra-regional routes do not exist on a significant scale. -60 -

W.l3. The second major feature of the transport and communications systas of the region is that there is a close relationsip between the structure of this system and the structure of the urban system. Adequate transportation connections are a sine qua_non of urban growth and it is evident that the places which have, in the past 20 years, grown fastest, are those with the highest indices of relative accessibility,r in particularj, Coatsacoalcoss Villahermosa, Cardenas, Huimanguillo and other smaller towns on the Gulf Coast. 244. The tiinz of network developments on the one hand and variations in relative accessibility between different parts of the region on the other implies that it is not surprising the region lags behind the rest of the country in respect of' transport developmient. At the state level9 much of the region has relatively poor transport infrastructure and services, In 19709 Chiapas and &3auca had the lowest relative levels of transport employmnt in the nation - one percent each, while Tabasco had the eighth lowest level (1.8 percent) and Veracruz ranked eighteenth (2.4 percent). Also, Oaxaca and Chiapas had the lowest relative levels of transport Tabasco the employment (3.6 and 40 8 percent of total state employment) and eighth lowest (7.0 percent) (Table 8.2). 245. In km of railway line per capitas, Chiapas and Oaxaca ranked fin 1960, among the six lowest in the countryo3,/ Railway tonnages to and from the region nevertheless amounted to about 10 percent of the national total, which impies more than proportionate use of their installed network capacity. Although the growth of railway tonnages declined steadily in Chiapas after 1940,9 regional increases were around 2-3 percent per annum after 1 965, and the route from Salina Cruz-Coatzacoalcos to Veracruz has had recent yearly increases well above the average for the rail network as a whole (Table 8-3), 246. Excepting the country's most densily populated areas (then Federal District and the State of Mexico)$ Chiapas, Oaxaca and Veracruz are among the nine states with the lowest length of paved roads per capita (Table 8.4). In spite of dramatic increases in motorization rates in the 501s and 60tas following the construction of main trunk roads in the region, Chiapas, Oaxaca and Tabasco atill have three of the five lowest state motorization rates. Within the region, Coatzacoalcos and Villahermosa have, by far, the highest and fastest growing motorization rates0 247. Table 8.5 su3arises the physical characteristics of the region's paved roads and Table 8.6 contains a summary of road driving times between the sight main crossroads and border points of the region. The highest ADTs owur on roads which converge on Coatzacoalcos: about 103,000 on the road to

j/ i.e., of those -tntr.' '.hJ ch he A railway lines. - 61 -

Minatitlan, about 7,000 on the road to Veracruz, and about 2,000 on the road to Salina Cruz. The points with maximum accessibility are Acayucan, which is a natural "crossroads", and Thhuantepec - also a "crossroads" but in an area with much lower growth potential. Points with low accessibility are Oaxaca, Tuxtla and Tapachula, although current long-run plans point to an improvement in their accessibility to the Gulf corridor. In between, Villa- hermosa has fair accessibility, which could however be improved given better road connections.

248. The present structure of the regional transport system is clearly deficient in several respects of this structure is assessed in terms of whether it is an advantage or disadvantage for future development. This structure is however less important than the physical distance between the region's main nodal points and the rest of the country. In these terms, irrespective of the fact that existing routes are poorly developed, the region is very well placed by comparison with others. In a nationwide perspective the Delta is located at the eastern end of a metropolitan corridor which begins in Guadalajara and it is also the terminal point of what may eventually become a Gulf coast development axis which stretches southwards from Monterrey. It is therefore relatively close to the country's major domestic markets. And bearing in mind that Coatzacoalcos is alread;y a major port and has the physical potential to become much larger, it has almost unrivalled access to the external markets of the Atlantic while the Isthmic corridor provides excellent potential access (through Salina Cruz) to the Pacific,,

249. As things now stand therefore, the transport and communication system is in need of further development if the agricultural and industrial potentials of the region are to be realized. But in terms of a longer run perspective, these constraints are relatively less significant than the potential ease of access to the rest of the world which is inherent in the region's geographic location.

SERVICES

250. The range of service industries in the region is, by comparison with those available elsewhere in the country - notably Mexico City - rather limited, althoagh between 1960 and 1970 there was significant expansion. Services however, to a much greater extent than any other sector of the regional economy, are geographically distributed on the basis of a network of central places such that the larger the place (in terms of population size), the larger the number of services available. It is assumed - on the basis of evidence for high order central places in Mexico as a whole 2/-that commercial activities have a similar pattern of geographic distribution. Ceteris aribus, we would therefore expect to find the most complete range of services in the large cities, particularly Coatzacoalcos-Minatitlan, and Villahermosa,

1/ See "Urban Development", Chapter 3. - 62 -

251. By 1970, Coatzacoalcos had one or more establishment in all three digit service industries with the exceptions of credit institutions (national, private and auxiliary) and insurance. This does not imply that Coatzacoalcos had an almost complete range of services; to know if this were true it would be necessary to have four digit data - which are unavailable. Implicitly however (judging from the small number of enterprises in some three digit subsectors), and from observation in the field, many four digit activiti'. s are not represented. 252. Comparing Coatzacoalcos - at the three digit level - with other municipios in the region, we find however that its services were probably more complete than those of any other city except Villahermosa. Minatitlan for example also lacked credit institutions (of any kind) and insurance institutions too but the total number of service establishments in 1970 was 563, as compared with 866 in Coatzacoalcos. By inference therefore, Coatzacoalcos offered a broader range. Tapachula (553 establishments) and Tuxtla (532 establishments) had a similar status to Minatitlan. Villahermosa however (700 establishments) fared better and being (like Tuxtla) a state capital, had govermnental functions uhich Coatzacoalcos does not.

253. The size-function relation generally holds good and as we go down the urban size hierarchy towards such towns as S .lina Cruz and Ixtepec, there are not only fewer establishments but also a more limited variety of service functions.

254. The service sector in the region has thus, by and large, developed in accordance with the geographic distribution of demand, the latter being a general function of population distribution although it is also affected by the geographic distribution of incomes. In the latter regard, the rela+.ively high income levels of the Delta subregion have obviously contributed to the relatively advanced level of development of its service sector.

255. In some parts of Mexico, notably the U.S. frontier zone, but also in Acapulco and certain other cities, service industries have been a leading sector in urban demographic and economic growth since 1940 (see "Urban Development" Chapter 2). But this is nowhere true in the Isthmic Region. Services, where they exist, have, with the partial exception of those in Villahermosa and Catemoco,s/ developed to meet commercial rather than touristic demands. Nor are there examples of other kinds of service industry whicY. have led to the development of anything but a "normal" range of central place functionsj, relative to the size of the urban areas concerned.

256. Taking Coatzacoaloos as an example, the service industries which experienced most growth in 1960/71 were recreation,, medical services, restaurantss realty and cleaning services - in all of which there was an increase of more than 100 percent in the number of establishments and a greater increase in both the level of employment and in the average size (in terms of employment) of each establishment. Given that we know there was a large increase in industrial investment and employment in Coatzacoalcos

j Where there is a small tourism industry. 63

in the sixties, we conclude that the industrial sector - service sector multiplier had the greatest impact on general rather than specialized services, i.e., the service subsectors in which there was most growth were all among the relatively important industries in 1960 (with the exception of realty servrices). In Coatzacoalcos, we find that in 1960 there were 7,681 jobs in industry and 4!,199 in services - a ratio of 1:0.54. By 1970, there were 12,,728 jobs in industryi/ and 6,753 in services - a ratio of 1:0653 This suggests that the growth of the urban population and structural changes in the urban economy had no effect on the relative size of the service sector. 257. In a large city like Coatzacoalcos., it might be assumed that the service sector grows a.s a function of industrial growth in the mechanica±l context of an urban industrial multiplier. But in smaller places - which have no industrial base to speak of - we assume that service industries develop in response to demands for "central place" functions on the part of the population of their geographic hinterlands. In doing so we should. not however ignore the fact that Coatzacoalcos is also a central place and that it has a hinterland for which it provides central services. 258. We also conclude, given their proximity, that Cotzaccalcos and Minatitlan should be regarded as a joint central place rather than as competing centres. As such, they occupy, with Villahermosa, the highest rank of the central place hierarchy, although the whole region depends for certain service functions on cities outside the region - particularly with respect to financial services and higher education. The fact of relative parity betwreen the Delta. cities and Villahermosa as central places within the region, obviously means however that even allowing for dependence on cities outside the region for certain functions, the region as such lacks a single dominant central place, and for the present, has not one, but two central place hierarchies.

259. In the future, we would expect this to change as the Delta becomes an increasingly important centre of secondary and tertiary activity. First in the quantitative sense that a relatively larger number of commercial and service establishments will locate there in response to the growth of demand from the urban population itself and from the population of the surrounding area. Second, and particularly relevant to the growth of extra- urban demand, 'uhe Delta is likely to achieve a qualitative superiority in that it will become the locus of many specialized functions, serving a regiomqide market Such functions., which have relatively high population "thresholds" and a large "range" will not exist elsewhere in the region. Similar qualitative differences are also likely to occur irn major sub-regional centres with respect to lower order central places in their sub-regional fields, with the effect that a discrete hierarchy of tertiary sector centres is likely to develow over the next 25 years.

1/ Manufacturing, mining, petroleum, construction and power. -64

260. In the meantime the structure of the service sector does not represent a particularly favorable aspect of the regionts potential for economic growth. Many financial and commercial services which may be regarded as essential from the viewpoint of industrial enterprises are not available there at, all, and it would be foolish to imagine that they are likely to develop very quickly in the future. On the other hand, the pattern of recent growth - referring in many cases to developments since the 1970 census, suggest that the tertiary sector will grow as fast sthe pattern of demand is changed. The present limitation to the range of services in the region is not therefore a serious constraint to agricultural or industrial growth.

J. ALL THINGS CONSIDERED

261. The case for developing the Isthmus as a priority region in a national spatial strategy is by no means one sided. It is all too easy - and there is reason to believe that some people in Mexico have found it so - to look at the advantages of the physical resource base and to conclude that the only questions concern how, and when - questicns of wt or if are not even considered.

262. We nevertheless believe that, on balance, the answer to these basic questions - "why" and 11if it - shouLld be positive. We believe too however tha.t this answer should not be equated with unqualified support for a massive program of public expenditure and that it should not lead to un- bridled optimism about the regionts development potential. Whilst we conclude that a development program should be attempted, it should not be, at least initially, on an enormous scale. Nor should it be expected to produce immediate results or to become an unqualified success; the problems are such that it almost certainly would not.

263a The challenge here is perhaps greater than anywhere else in Mexico, particularly as regards the avoidance of an enclave structure in the Delta and also with regard to the achievement of urban-rural integration. The fact is however that the region also presents unusual, and in many ways unique, opportunities for growth. Within the spatial strategy elaborated in "Spatial Development" and summarized in the first chapter of this report, regional development priorities should not be allocated on the basis of comparative disadvantages but, rather, of comparative advantages. To put this issue more specifically, the fact that we are dealing here with two of the poorest and least advantagedstates in the Federation (Oaxaca and Chiapas) is not because they are so poor. It is because, within a national framework for TpaFEI-policy, they happen to be logically related +o the growth centres of the other two states which, in whole or part, mr- up the Isthmic Region and which, in a nationwide perspective have suix' vlial development potential.

264. Our conclusion cannot be rigorously quantified. There is not an adequate basis for a comparative analysis of the costs and benefits of development in the Isthmic region vis-a-vis the costs and benefits elsewqhere. This applies to both public expenditures and to private expenditures even though the latter are seen from the viewpoint of the firm. And it applies even more to the aggregative advantages and disadvantages of development in one region versus another. However, the partial evidence suggests that the costs of providing social overhead capital in the Isthmic Region are generally lower than in Mexico City and other potential growth centres. The costs of urban-industrial growth would not therefore seem, on the evidence available, to be higher here than elsewhere and in many instances they would be lower.

265. This is even more clearly the case in the agricultural sector where the region's development potential is such that it can be legitimate- ly regarded as part of the country's last agricultural frontier. Given this, and assuming that land and water will be critical long-run constraints to development in Mexico, the eventual utilization of the agricultural base of the Isthmic Region is inevitable. That being so, there is an obvious reason for trying to ensure that agricultural growth is harmonized with national and regional objectives.

266. The Isthmus is thus a development region which, in a national perspective, deserves a priority rating. But this does not mean that the region or its growth centres, will provide a major part of the solution to the issue of centralization and concentration in Mexico City or that it will be able to make more than a moderate l.org-run contribution to national economic growth. - 66 -

CHAPTER 4: TOWARDS A DEVELOPMENT STRATEGY

A. ORIENTATION

267. We begin by reiterating the pinciple that the objectives of regional development - here as elsewhere in Mexico - are derived from the national priorities of sustained economic grow;rth with equity. It should thus be consistent with improving the long-run efficiency of the national economy and with creating conditions in which fewer people live in conditions of absolute poverty;

268. Regional growth in the Isthmus would address the former objective both directly and indirectly. First, to the extent that it implied the efficient utilization of natural resources it would thereby contribute to the growth of production. Second, to the extent that economic expansion was associated with attracting migrants from other regions who might otherwise have gone to Mexico City, it would contribute to the goal of maintaining the Federal Capital area as a viable metropolitan economy.

269, The second objective would be addressed through the achievement of rural-urban linkages to facilitate the "spread" of development from its principle metropolitan locus in the growth centres of the Delta (the region's core) to the largely rural areas of the region's periphery.

270. There are two fundamental issues to be faced in desigrning a development strategy for the Isthmic region. The first concerns the need to break out of the mould of enclave development which until now has characterized whatever urban-industrial growth has occurred there. Enclaves arise for various reasons. In general, few linkages are made within the local economy, and business services are imported from elsewhiere. Income multipliers remain small, because income is spent on goods produced outside the lo',ality and because a share of business profits are "repatriated" elsewhere. Finally, investment decisions in enclave economies tend to be made sequentially, in relative ignorance about otherst intentions. Thus, - 67 -

"leakages" and uncertainties prevent the conversion of initial growth into multiplicative and sustained growth. In enclave economies, multipliers are, for the most part, captured by larger, more established centers within and ou'tside the national economy. 271. The phenomenon just described is well understood but difficult to circumvent. The easiest method is to choose as growth centers those cities that are near to a theoretical threshold above which the local and regional markets of the city would be sufficiently large to generate their own momentum. For beyond the threshold market size. a given increment of internal demand generates income multipliers within the local econory that sustain further dynamic growth, subject of course, to the overall performance of the national and/or international economies of which the city is a part. Below this threshold size, "leakages" in the system prevent the economy from capturing most of the benefits of industrial or other investments and it remains excessively dependent on external decisions. The size of the market is, of course, only a proxy measure for other variables that bear on sustained economic growth, such as the existence of local business groups, high level services, advanced educational institutions, credit facilities, a professionally run public zector, and other agglomeration economies. But it is a useful first approximation.

272. No firm evidence exists in support o.l the threshold concept, though the theory itself is plausible. It is known for example, that the proportion of economic activity tied to local markets tends to increase with growing population size and income, and further, that certain specialized services locate only in cities of large or intermediate size. Other things being equal, larger cities will thus tend to have fewer "leakages" and larger income multipliers from increased production than smaller ones.j

273, Because many .business services are not completely fungibles a gradual, bit by bit increase in local production will therefore tend to shift the initial sources of supply to large centers such as Mexico City, Guadalajara, and Monterrey. If, on the other hand, a "big push" such as the building of an industrial complex, transports the local economy over certain thresholds of minimum business size, and if special consideration is given to the establishment of these services, it is possible to avoid their capture by a major metropolitan center.

/ The continued decline in the rate of growth of several Mexican border cities since the 1950's tends to support the threshold argument. Typical enclave economies because of their location, they received their initial impulse for growth from U.S. demand for Mexican labor. When this demand fell off, their growth, not being self-sustaining, declined to levels below the average for all major cities in the country. Since 1966, the border indastries program rnay h1ave begun to reverse these trends9 but, as is generally knotn-, the stability of footloose assembly industries is uncertain. Moreover, a sizeable part of the income earned in Mexico is spent in the United States. - 68 -

274. In Mexico, most cities of intermediate size such as Coatzacoalcosp Minatitlan and Villahernosa, are, to some extent, enclave economies New industries may often be located in a city, but they are not necessarily of the city. Their direct effect on local business tends to be small, and the wages they pay, generally representing from one-third to one-half of value added, mainly serve to expand markets for commodities produced in Mexico City, often sold through stores controlled by non-local concerns. Whether measured by income or employment, therefore, local multiplier effects remain small.

275. The benefits for the public economy may be even less than for the private economy. If they are exempt from local and also State taxes, new industries may impose financial burdens on the agencies of local goverLment. They require basic utilities and access roads. They attract people from rural areas and elsewhere who must be at least minimally served. They raise demands for schools, bus terminals, water systems, and hospitals. They put more traffic on the streets and more effluents into the sewers and rivers. But they pay little or nothing to the local authorities who are charged with maintaining and improving the city's facilities, and whose revenues do not stand in a necessary and defined relation to the amount of economic and demographic growth they are being asked to accomnmodate. 276. Local improvements in public services may be funded in several ways, usually through a collaborative effort involving municipal, State and Federal authorities. But in the past, the process of funding public investments has been generally unrelated to the growth experience of the local economy.j/ Beyond a basic minimum, chiefly for the maintenance of essential services, resources for physical urban development must be mobilized from federal sources and their availability may depend more on the astuteness of municipal and State officials, on their ability to present their case effectively, and on personal and political considerations, than on the conditions of the local economy, objective needs, or ability to pay.

277, None of the difficulties of avoiding enclave development in the Isthmic Region will be easy to overcome. But if they are not overcome and if, nevertheless, an effort is made to develop the region, the result here, as in countless other "resource frontier"t regions around the world, would be to produce a form of development which failed to contribute to a national strategy for decentralization because the regional economy would not "take- off It"

1/ Port and border cities are an exception to this rule. They receive a small proportion of all import and export duties for funding local r-,:ojects through a Junta Federal de Mejoras (Federal Board for Improvemnts). There Pre, in addition, a number of other financial and administrative arraig ments6 - 69 -

278, It is rather easier to outline this problem than to suggest how it should be resolved, But at the very leasts, the authorities siould be Tyre of its existence and should bear it in mind when. drawing up a strategy for regional development.

279. The second fundamental issue for regi:onal strategy relates to the fact that one of the basic ideas put forward in this Report, is that growth impulses will in time filter down the urban hierarchy and out into the periphery of each growth centero But in the past (as we have seen), spread effects of urban-industrial growth in Mexico have been uneven, where they have existed at all, and have usually deteriorated rather quickly with increasing distance from a given center.]/

280. The notion of spread effects involves belief in the operation of more or less spontaneous economic processes that will generate increased production in the periphery of an eisting growth center. The conditions that would allow "spread" to occur include at least the following:

1 Sustaineds cumulative economic expansion in the growth center itself.

GoodG physical access between the growth center and individual production units located in its periphery0 3e Creation of potential backward and forward linkages originating with new economic activities at the growth center that can be met by expanding and/or creating new product.ion in the periphery of the center, 4. Spatial diffusion of appropriate market signals concerning new production opportunities and availability of knowledge, entrepreneurial abilitys, credit facilities, and other objective conditions necessary for acting on this information.

5. Extension of efficient market organizations into the periphery of the growth center, thus increasing demand for rural Libor and agricultural profuctts, both of which will increase rural incomes and allow for increased savI'ags and invesatent propensities on the part of rural populations,

6. existence o suf ficient income thresholds to allow appropriate entrepreneurial innovations to "filter down' to individual prodcxtion units in the periphery.

281. These conditions have been met only infrequently0 Economic &-4ansion has usually been of the enclave type and has failed to generate j A a case study of spread effects, see Frank C. Miller, Old Villages a a New Town: Industrialization in Mexico. Menlo Park, California; Ct is Publishing Co., 1973. - 70 -

the sustained, cumulative growth that is required by the first condition. Access to individual production units has usually been poor, the peasant farming typical of rural areas being largely outside the market economr and consequently lacking the capacity to respond even to those market signals (however weak) it does receive. Furthermore, such additional income as may be generated through the extension of product and labor markets into the regional periphery has been more likely to be consumed than invested, given the low initial income of peasant operators and the lack of supporting programs that might facilitate a shift of at least part of the additional income to investment And finally, income thresholds may simply be too low for appropriate innovations (such as fertilizer use, use of improved seed varieties, or conversion of maize farms to dairy and poultry production) to "filter down" to individual production units.

282. Given these circumstances - and they are common enough in the region - it is not surprising that t"spread" has not often occured. In Mexico, it is only in cities such as Hern3sillo, Ciudad Obregon, and Culiacan on the Gulf of California where large-scale commercial farming has taken root, that urban growth centers have generated "spread effects" in a reci-r+ocal relationship with the rural economy. However, the lessons of this experience are capable of being applied in the Isthmic region notwithstanding that social conditions, topography, land tenure arrangements, and water availability differ substantially from those of, for example, Sonora and Sinaloa. The basic idea - to stimulate urban economic growth by increasing agricultural productivity and raising rural incomes, can nevertheless be applied but it muist be recognized that the rural structure of the region makes it unlikely that the process will be either easy or automatic.

283. From this, we derive two essential conclusions which have a major bearing on our approach to a regional strategy,. The first is that there is a clear and present risk that new investment in the region will mainly serve to encourage enclave development which would not lead to self- sustaining growth and would therefore be inconsistent with the central goal of improving the efficiency of the national economy. The second - which derives, in part, from the first - is that the improvement of interpersonal equity through the "spread' of development from the growth centres of the coast to the regional periphery will be hard to achieve. It follows from this th.at the design of an urban development strategy must take explicit account of the need to internalize the benefits of economic gicwth within the region; that the design of a rural development strategy must take explicit accoulnt of the need to facilitate integration with the urban sector, particularly with the growth centres, and that a strategy for transportation improvements should be designed with both of these objectives in mind.

284- In this Chapter we shall try .to respect all of these conditions; the fact that we have chosen to discuss urban development, rural development, and transport development separately rather than together does not therefore reflect a notion that these are separate processes but rather that the kinds of action required in each case can be most conveniently - 71

reviewed on a. sectoral bas: s even when the basic assumption is that they are interwoven.

B. QUANTIFYING THE OBJECTIVES

285. We begin by considering the general question of the possible magnitude of the development process in terms of both demographic and economic change. The projections wie offer are however extremely tentative, and represent the most expansive "scenario" which could be envisaged for the development of the region.

286. We assume that the region consists of a rapidly developing, resource based "corett on the Gulf Coast and a less dynamic "peripheryt ". Given the development of both and under conditions of maximum growth, it could, by the year 2000, account for a larger share of the nation's population, employment, output and investment than it does now. The "core" is composed of the "Delta" (5 municipios along the Say-ula-Coatzacoalcos axis) while Villahermosa represents a secondary core. The driving force for development in the Delta is the secondary9 specifically the industrial, sector, within which the growth of heavy chemical, petrochemical and electro- chemical industries and to a lesser extent agroindustries would be particularly important. Villahermosa would grow on the basis of the development of agroindustries and the provision of services - some of them of a specialized nature to roet the needs of the nearby petroleum fields. In the "tperiphery" -there are both urban and rural areas. The urban sector of the "periphery" will necessarily grow more slowly than either the Delta or Villahermosa but like Villahermosa will develop in close association with the growth of agriculture.

287. The illustrative projections shown in Table 6.1 represent a consistent set of relationships between the growth of population,. abor force, employment, output and investment in the region as a whole in 1970-2000. We begin with targets for population growth, aiming at the maximum feasible level of population absorption in the Region. We assume for this puxpose that an annual rate of population growth of about 10 percent is the limit of efficient absorption in urban areas because higher growth rates would imply that muricipal services would fall behind the growth of demand anc that diseconomies of growth would be incurred. Thus, we have a constrained maximum growth rate in the Delta - the most rapidly growing area. Slower population growth rates are assumed for Villahermosa and for both urban and rural areas in the Periphery.

2880 Given ambitious population growth rates and assuming that participation rates will not exceed the national average,l/ labor force (effective demand for employment) availability in each zone is derived.

/ See "Basic Report", Vol. IV. - 72 -

Labor force availability is then matched wi.n real. employment opportunities generated by output in the primary, secondary and tertiary sectors. For this, we assume historic rates of productivity incre.se in the secondary and tertiary sector, bnt al.so assume that productivity will rise more slowly in thF primary sectox-, Thus, we arrive at value added (net output) targets for each sector and zone, The output growth rates are also roughly consistent among themselves; that is, the elasticity of tertiary output to secondary output maintains its historical value. Finallyr we estimate approximate investment requirements by using sector and zone specific incremental capital-output ratios (ICOR's).

289. The projections suggest that by the end of the century, the region could account for 10.2 percent of the total national population (6.2 percent in 1970), 11.3 percent of the labor force (6.2 percent in 1970), 9.7 percent of GDP (4h7 percent in 1970), and would absorb 12.0 percent of national investments in the final decade of the period - 1990// 2000 (800 percent in 1970-80). The apparent disproportion between output and investment is mainly explained by the fact that we assume that investment will be more capital intensive than the natiorinal average because of the nature of the ind45 tries located in the Delta.

290. These projections, as we liave said, represent a very expansive "tscenariot". for regional development and assume that all of the constraints to de-elopment which are inherent in the region's economic and social structure, could be overcome. In practice therefore, one would expect less dramatic changes and less investment. The main points to emerge from this quantitative exercise .are that (a) even if the Isthmus region grew as rapidly as we have projected, it would absorb only a modest share of the nation's marginal population growth and (b) that any development effort in the region will be costly although this is true in absolute terms rather than in terms of comparisons with other regions and reflects the fact that peripheral developm!nt p s will require a large amount of resources. C URBAN DEVUOPMENT

(i) Introduction

291. An itintegrptedlt approach to urban development has four dimensions. First, the demographic developmaent of urban areas; this refers primarily to the development of a regional urban system and the evolution of an urban hierarchy. Second, the economic development of those sectors which, mainly for reasons of efficiency, tend to be located in towns and cities rather than in villages; this, by and large, implies the secondary and tertiary sectors. Third, the social framework of urban development in terms, particularly, of the prorvision of social services. Fourth, the physical development oI' urban areas in general and the major cities of the region in particular; this is mainly, but not entirely, a question of ;hat steps should be taken to promote the orderly and efficient development 73: -

of the metropolitan areas of the Delta and Villahernosa. Other aspects of urban development which are not considered here, surch as the process of cultural change in rapidly expanding urban areas$ t.ould eventually be dealt with in other studies; it will also be neces-ai' to carry out more detailed investigations of the topics discussed in this section.

(ii) The Demographic Framework (a) General Aspects

292. Our purpose here is to consider the demographic implications of the economic framework of urban development in the region. We shall do so with special reference to the geographic distribution of its urban population and the associated development of its urban hierarchy.

293, We assume some relationship between investment in directly productive urban activities (i.e. investments other than infrastructure) on the one hand, and urban population growth on the other,, and assume too, that the spatial allocation of industrial and tertiary sector inve-stment is a determinant of the geographic structure of the urban system.

294. These relationships are much less than exact. This is because, first, the industrial structure of the Delta will continue to be more capital intensive than that of other urban areas in tbe region a.Lthough with the gradual diversification of its industrial base, the relative cost of job creation will tend to fall by comparison with the le7el which has prevailed in the recent past. Second, both Mexican and international experience tends to suggest that the faster the rate of growth of real job opportunities in a given area, the relatively faster the growth of its population. This is reflected by migratory movements in a horizontally mobile labor market where the number of jobs is greatly exceeded by the potential number of workers. Thus, assuming the faster growth of investments in productive urban activIties in the Delta than elsewhere in the region (an assumption which derives from our earlier discussion), its population will increase disproportionately faster than that of other cities. Third, participation rates may vary from one urban area to another, in the light of the age and sex structures of their populations and in the light of their relative numbers of "discouraged workers" (a factor which will be strongly influenced by the relative population size and relative rates of growth of each urban area).

295e In the labor market conditions which have existed in Mexico over the last 20 years and which are likely to persist in the future (see Appendix H), any city where there is a rapid build up of investment will 2acqui,re an aura of opportunity. And migrants will inevitably knock on its doe'r. Since (in a free society) they cannot 'be kept out they will enter., i:eDpe.

297. In the absence of empirical evidence to show either the maximum feasible rate of urban population growth or the maximum number of people who can be absorbed in an urban area in a period of say, one year, it is difficult to be precise. Clearly however, Mexican cities which have grown at average rates in excess of 10 percent over a decade or more (Tijuana and Acapulco for example) have failed to keep up with the growth of demand for basic urban services. They have also failed to provide jobs for more than a relatively small proportion of those who have gone there seeking employment. We assume, therefore., that in planning the development of the urban sector in the region, the long run rate of increase in the population of a given urban area, should not exceed 10 percent; we assume too, that this "rule of thumb" would accomodate any maximum number of new inhabitants in a given city in a given period. It is thus assumed that a higher growth rate would impose intolerable financial and administrative burdens.

298, A possible approach to urban development policy in the region is therefore that it should embody a target population for each of the major urban areas, and that policies directed to the promotion of private investment as well as decisions about public investment should be formulated with this in mind, and also of course in the light of national labor market conditions as these evolve over time.

299. We now set out our demographic projections and related investment implications for each of the following urban areas: the Delta, Villahermosa and (in aggregate) the towns and cities of the "periphery". In each instance we consider the feasible (and desirable) rates of population growth, the likely size of the labor force (given the characteristics of the population and the probable level of marginal employment), the sectoral structure of the urban economy (assuming sector and zone specific ICORts and intersectoral elasticities), and finally the order of magnitude of the required investments. These calculations are consistent with those. for the region as a whole.

(b) The Dalta

300D The future size of the population of the even'ually contiguous urban area of the Delta (i.e. the municipios of Coatzacoalcos, Minatitlan, Cosoleacaques Jaltipan, Acayucan and Sayula) was projected on the basis of two alternative sets of assumptions, ' In the first, which yields a total population of 2.7 million in 2000, it was assumed that: - 75 -

1) Fertility rates will decline by 1 percent per year with respect to the previous year. This reduction would be derived from the effects of higher educational attainment, urban migration, and rising income levels, as well as the moderate success of deliberate goverrment policy.

2) Life expectancy at birth will increase by 8 5 yearss between 1970 and 2000.

3) Normal rates of decline in general mortality will occurs the future mortality trend being projected on the basis of an appropriate model life table according to United Nations estimates.

4) There will be an increase in in-migration. 301. In the second projection which indicates a total population of 3.3 million in 2000, the first three assumptions remain the same as in the first but there is a larger increase in migration. The results of these projections are shown in Table 3.12. For the purposes of the following discussion we shall however refer only to Projection B which shows the higher rate of migratory increase.

302. On these assumptions the population of the Delta will become "older" in the year 2000. The reduced proportion of youth (under 15) and the expansion of the proportion of those between the ages of 15 and 64 is very noticeable. The proportion of children under 15 years of age will thus decline from the 1970 level of 49.0 percent to 33.5 percent in 2000 and the proportion of those between the ages of 15 and 65 will rise from 51.0 percent to 66.5 percent. This age compcEition will substantially reduce the dependency load. In 1970, there was one potential worker for every person too young or too old to work. In 2000, there would, on this basis, be two people of working age for every dependent person, a similar relationship to that which prevails in developed economies today. Such a shift would result from declirning fertility., downward trends in mortality, higher life expectancy and substantial migration. It is assumed that the majority of migrants to urban areas would be between the ages of 15 and 39. 303. If the evolution of the labor force were to follow the trend in the age composition of the population and if the number of women in the labor force were to increase significantly, the overall effect would be a substantial increase in the participation rate (see Appendix H). In practice, however, the rate for Coatzacoalcos will not exceed that for the nation as a whole and will therefore rise only slightly above its present level - to about 29 percent by the year 2000Q This would imply a rather high level of marginal employment and a large number of discouraged workers. To the extent that education opportunities are increased, the role of young people in the labor force would be diminished and their place would, to some extent, be taken by women in the 20-49 age group. It is obviously impossible however to be precise aoout the age or sex characteristics of the economically active population even though it is possible to be fairly accurate about the age and sex structure of the population as a whole. - 76 -

304e Table 3.13 shows both population and labor force growth for the population of the Delta through 2000 and implies that by then, this area would account for 28 percent of the region's population, as compared with about 9 percent in 1970, and for a similar proportion of its labor force.

305. Given these assumptions, and assuming that the economy of the Delta (in terms of the composition of value added) woulld change as industry became increasingly important, we assume that the labor force would be increasingly concerntrated in the secondary and tertiary sectors. Whereas, in 1970, secondary sector employment accounted for only 35 percent of total employment, by 2000 its share would rise to 50 percent while that of the tertiary sector would increase from 39 percent to 50 percent. Assuming the sectoral productivity increases shown in Table 3.14, we derive the values shown in Table 3.15 which represent the approximate composition of value added in the Delta. There, the changes would be even more striking than in respect of emplbyment because the relative shares of the secondary and tertiary sectors would change from 44 and 49 percent in 1970 to 70 and 30 percent in 2000. By the latter date, the Delta would have become an industrial area of considerable national importance. Finally, assuming the ICOR values shown in Table 3.16, we derive a rough order of magnitude of investment requirements.

306. By the end of the period, the Delta would account (on these rough assumptions) for about 45 percent of all investments in the region. The fact that its share of investment greatly exceeds its share of the region's jobs is an inevitable consequence of the capital intensive nature of its industrial sector, which, alone, is estimated to account for a third of all investment in the region by the end of the period. (c) Villahermosa

307. We anticipate that the population of the Tabasco capital will grow more slowly than that of the Delta and that by 2000 it would be of the order shown on Table 3.13. Here too, we have made two alternative sets of projections but have adopted the higher one, the assumptions underlying each set being generally similar to those involved in the projections for the Delta.

308, On this basis,, therefore, Villahermosa would have almost 1.5 million inhabitants in 2000. Assuming a similar participation rate as in the Delta, the labor force at that time would be in the order of 425,000. The remaining estimation procedures are the same as those described for the Delta although the assumptions about economic structure are necessarily different; Villahermosa will be a less industrialized city and the relative size of its secondary sector will thus be smaller than that of the Delta measured in terms of either enployment or output. (Tables 3.14 and 3.15). Accordingly, the investment requirements are much lower and account, overall, for less than 15 percent of total investment in the region in the final decade of the century (Table 3.16). 77 -

(d) The "Urban Periphery' 309. Finally, the aggregated urban sector of the '"peripheryt is likely to account for about half of its total population the century by the end of (Table 3.13). Most of its employment will be in tin tertiary sector, serving the needs of rural hint(arland areas. Secondary is not industry expected to be very important, aggregate employment in secondary activities in all the urban areas of the periphery being estimated about at the same order of magnitude as secondary employment in Villahemuosa. 310. In terms of value added however (Table 3.15), the, urban sector of the periphery would account for a large share of its by total output and the end of the century the structure of value added and of employment in this part of the region would be similar to that of Mexico as a whole in 1970 (Table 3.17). Investment requirements for the urban would periphery ha,4ever, be relatively low by comparison with those of the Villahemosa. Delta or

(e) The Urban Hierarch 311. We have not attempted, with the exceptions of the Delta and Villahermosa, to project the urban population of each of the cities towns and of the region through 2000. We are not therefores in a position to establish the future stracture of the urban hierarchy in detailed terms of rank-order relationships. We assume however, that the leading cities of the periphery will be those which have already established relatively a important status as sub-regional centres. Tuxtla, Tapachula, and Salina Cruz-Juchitan-Tehuantepec (which will eventually contiguous become a urban area) are, therefore, likely to be leading urban while areas, other towns such as San Andres Tuxtla, Matias RThmero and Jesus Carranza, which are now relatively smaller, will become increasingly important sub-regional centres* All of these places, and indeed all of the cities and towns of the region which are likely to grow over years, the next 25 are actual or prospective centres for the development of agricultural sub-regions and their growth (as that of Villahermosa) will proportionate be generally to the relative growth of the rural areas around them. (iii) The Ficonomic Frameworkc 312. The future urban structure of the region will reflect the fact that it is not economically homogeneous and that the potential Coast of the Gulf will contrast sharply with the mountain zones of Oaxaca and in particular Chiapas but with the rest of the region in general. It will therefore comprise (a) an urban indu.strial "core" consisting of the Delta; secondary (b) a "core" in Villahermosa; and (c) the cit es of the largely rural "periphery" which will be sub-regional centers for their hinterlands, 313. Insofar as cities develop ac central places it is reasonable expect a to general relationship between population size and economic functions; this, as we have already seen is true now, and should remain true in the future. - 78 -

Insofar as they develop as industrial centres however, no such relationship need exist because the market area for the products of the secondary sector extends far beyond the region into both national and international markets. The relative dominance of thle Delta will thus derive from its industrial growth rather than its developiaent as a central place. The growth of Villahermosa will be partly based on industrial growth and partly on the development of central place functionss, while that of smaller t,wns in the periphery will depend almost entirely on the latter.

314., The sectoral structure of urban employment over the next 25 years will necessarily vary frm city to city. Industry of one sort or another will however develop in all of the larger urban areas, although, except in the Delta, the industrial structure will probably emphasize food processing. In the Delta, manufacturing industry (whether mainly food- processing or whether including other subsectors) will develop on the basis of demands which mainly arise outside the region and mainly on the basis of the local supply of raw material and labor. Given this, and allowing for the development of other "leading" sectors, notably petroleum but also transportation, the mechanism of urban eccnomic development will be that of the industrial multiplier.(see Appendix D). In the smaller towns, where industry is less likely to develop, the mechanism is simpler because the absence of a strong industrial sector will imply that the main source of demand for tertiary activities (and thus-urban growth) will be surrounding rural areas. While smaller towns may also develop some manufacturing functions,the economic base of the typical small-town economy will continue to be the provision of commercial and service functions for its hinterland population.

315. Virtually all of the industrial subsectors we have mentioned (see Chapter 2) as likely to grow in the future are based on local resources - including water and power. This does not mean of course that heavy industries in the Delta will not import materials; a steel plant or an aluminum plant would obviously have to do so. It is also assumeds notwithstanding the continuing emphasis on heavy industries in the Delta, that its industrial sector will be gradually diversified and that, in particular, many "light" industries would be added to the industrial base, taking advantage of Dresently unfulfilled demands' from established industries.

316. Such industries would grow in response to "linkages" and also population growth and firms would be established to provide such industrial services as the supply and maintenance of machine parts, specialized metal working, and forging. Many of these activities are now carried out on behalf of industries in the region by firms located elsewhere in the country, / but could be performed more efficiently by firms located in the regi

1/ The nearest foundry to Coatzacoalcos is in Orizaba, for example. 79 -

317. The Delta would clearly export a large proportion of its total industrial output, particularly of heavy industrial products. But this does not mean it would becone "self-sufficient" in industrial goods. Although it would be futile to project a "surplus workers"jl/ index through the end of this century, we can certainly assume there would be a relative "deficiency" in some subsectors and a "surplus" in others. We would not therefore, expect the industrial "profile" of the Delta, as measured by the index of specialization,?/ to became typical of t,hat of the nation as a whole.

318. As we have already observed, the eastern Gulf has the best agricultural base of the whole region, and the fastest growth of agro industries should, therefore, occur in Villahermosa. In the short run, this growth will be based on additional local processing of current production. But as techniques are developed for using the potential of this tropical regions the rate of production growth will increase more rapidly althou-gh the lead time on the development of agricultural research may be such that Villahermosa's agro-industrial expansion will not begin in earnest until the mid-1980's.

319. As Villahenaosa grows - as an administrative and commercial centre as well as an industrial city - it will acquire a larger internal market to support the growth of industries which can operate efficiently at a relatively small scale and in relation to intra-urban rather than regional or national markets. These wouldp in general, be consumer goods industries. But we would still anticipate a rather specialized industrial economy in Villahermosa, qualitatively similar to those which have emerged in the Northwest (Culiacans Ciudad Obregon, Hermosillo) over the last three decades,

320. Urban growth in western Oaxaca will receive some stimulus from the constraction of a new petroleum refinery in Salina CrUz (1978) but in the medium and long run, its expansion will be tied to local agriculture and fishing rather than to industrys and t'iill probably be modest. The agricultural forestry and fishing resources of Chiapas are sufficient to sustain some growth in agro-industries and even pending an increase in the rate of growth of output, additional local processing of agricultural products currently exported from the region would allow this to occur. Like Oaxacas however, this area has relatively little industrial potential. 321. Given this broad outline of the likely shape of future industrial development, a fundamental question concerns the respective roles of the public and private sectors as agencies of industrial investment.

See Appendix F. / See Appendix G. - bo -

322. The direct role of the public sector will inevitably focus, at least in the next few years, on the growth of PBMEX. In terms of the nation's installed petrochemical capacity, the region's status is already dominant, and with the addition of new capacity irn the already existing complexes at Pajaritos and Cosoleacaque and the completion of the new and even larger complex now under construction at La Cangrejera - located between Pajaritos and Minatitlan - the region's share of the nation's fixed investment in petrochemicals will soon exceed the present level of 70 percent.

323. The Delta also seems certain to remain a major centre for the secondary petroleum (refining) industry, In 1974-76, major additions to installed capacity or will include an expansion aT; the Minatitlan refinery (to a planned capa.rity of 200,000 bbl /day in 1976), the construction of a small refinery at Cangrejera (to provide inputs for the petrochemical complex) and the first stages of the construction of an intermediate refineryl/ with a capacity of 150,,000 bbl/day at Salina Cruz on the Pacific Coast.

3214. While the major petrochemical developments will be located at Cangrejera, another major expansion is also planned for Cosoleaca.que and a smaller expansion is planned for Pajaritos. The 1974/76 program (Table 3.9) has an estimated value of Mex$20.8 billion of which Mex$5.7 billion consists of petrochemical installations, Mex$2.0 billion of new refinery capacity, and Mex$2.0 billion of treatment and recovery plants. PEMEX investments in 1974-76 are expected to account for more than 50 percent of all petroleum investment in Mexico during this period.

325. The direet impact of this expansion program on the region's economy will be substantial, and its indirect impact larger. The petroleum sector is necessarily capital intensive,2/ and its capacity to generate direct employment limited. The scale of new investments in this sector over the next several years - assuming the expansion of the mid 70's continues through the 1980's - is nevertheless likely to have a major bearing on the growth of jobs. These will arise in the construction phase of new facilities, in the expansion of primary production, and in the new refinery and petrochemical installations when these have been completed.

326. The secondary effects of sectoral expansion will be even greater within the mechanical framework of the urban-industrial multiplier (see Appendix D). These effects can be broken down into three categories:

1l Induced investments in the manufacturing sector which may be stimulated by the availability of petroleum and petrochemical products in the region, ("supply side effects"t).

/ This will produce only certain products - it is thus "tintermediate" rather than "tcomplete".

/ Less so in Mexico than in many other places however. See "Basic Report" (Vol e 3). 2. Induced investments in industrial, commercial and service enterprises which would respond to the industrial needs of an expanded petroleum sector ("demand side effects"). 3. Induced investnents, primarily in commerce and services, which would respond to the household needs of those employed in the petroleum sector, and, by extension, those employed in other sectors which grow as a result of petroleum sector investments (i.e., the activities included in categories 1 and 2 above).

4. Assuming, as a matter of policy, that PEMEX is encouraged to contribute (through taxes) to the physical development of the region, its expansion would imply a more fravorable environment for the growth of other - related and unrelated - industries.

327. Apart from PEM,several other publicly owned manufacturing enterprises such as Guanomex, are already established in the region, and in the future it is assumed that ot'iers wilJ, f'ollow. Some of them will involve joint ventures, such as that which has recently been drawn up to establish an aluminum plant in the Delta, using Jamaican bauxite and alumina.21 This however, is but one of three obvious kinds of joint venture involving public investment. Firs' (as in the Jamaican example) there are those which might facilitate the provision of raw materials which, added to those available in the region (in this case power and water) give it a national and/or international comparative advantage in a specific industry or product. Second, there axe projects which would facilitate the transfer of large amounts of capital. Bearing in mind that some of the plant investments required in the region will be large - a point which applies to certain mining projects too - substantial amounts of external capital will be needed. The third type of joint venture would involve the transfer of technology, although in practice this would probably be part and parcel of any transfer of capital within a Joint-venture framework.

328. The major direct role of the public sector in future industrial development, wiUl therefore be concerned with petroleum, petUrochemicals, fertilizers and aluminum. To these, we can add the possibility of a steel plant (using the HYLSA sponge iron process) which has been proposed for establishment in Coatzacoalcos in the early 119301s and of other public sector j/ Each Government will own 51 percent of the enterprise in its own country (mining in Jamaica; processing in Mexico) and 29 percent of the installation in the other country. The remaining 20 percent will be open to private participation. For Jamaica the project implies an increase in value added because it will export alumina rather than bauxite. For Mexico the project will, at a national level, substitute for imports, and at the regional level, with which we are concemed here, add to the strength of the industrial sector in the Delta. - 82 - industrial enterprises now under consideration.

329. Inamuch aa an important part of the total amount of industrial investment in the region will have to come frca the private sectors, tbis aspect of industrial strategy may be discussed in terms of the indirect role of the public sector as a provider of investment iwentives and condltions0

330. Leaving aside the obvious requirements of an adequate infrastructure for tramport and communications and an adequate framework of health and education facilitiess there are several kinds of specifically industrial infrastructure which would be part of these conditions. The sost significant concerns the development of industrial parks and industrial complexes., Mexico's industrial parks program has not, so fars been successful. The reasons for this are discussed in *Spatial Developmntt (Chapter 4). Industrial parkss if located in the right places ny certainly be useful tools of industrial development but will usually fail if their locations are poorly chosen and will not therefore promote industrialization or decentralization. Industrialists will not locate in an industrial park, unless the area in which the park is located is such that the location is likely to be profitable.

331. If, howevers, an area seems to have important comparative advantages for industrial growth, and if it is apparently efficient to allocate resources to it, the construction of an industrial park can make excellent sense. There is one already in Villahermosa. We believe that serious consideration should be given to establishing another in Coatzacoalcos and, in the longer term, to yet another in Acayucan. We do not foresee it would be desirable to establish new parks elsewhere in the region within the next decade0 A rider to this reccosendatio,ns however, is that the national industrial parks strategy should be thoroughly revised and should mphasize a selective emphasis on a few well-chosen centres, rather than the broad diffusion which characterizes the existing program.

3324 Besides providing important external economies for small and mdium sized private firms, industrial parks could eventually be seen as part of the framework for the development of "assembly industries" of a kind which would take advantage of the link between the Atlantic and Pacific markets provided by the Isthmus. This possibility has already, in fact, attracted the attention of Japanese investors.

333. A second, and more ambitious frmeiork for industrial growth in the regions would arise frm the development of industrial complexes. Here, however, instead of providing infrastructure onlys the objective would be to link major public investaents inindustrial plants with the associated development of private enterprises.

334. The main general advantagesof creating industrial complexes ares - 83

- The achievement of substantial economies of investment expenditure because the investment for the whole complex is less than the sum of investment if each eerperprise invests separately.

- The achievement of efficient production, because of the advantages of specialization, economies of large-scale operation, and the organization of common managerial and infrastructural facilities.

- The possibility of coordinated exploitation of natural and raw material resources.

- Taking advantage of the opportunities for close control, rapid diffusion of technological innovations, and rapid overall development of the economy.j/

3a5. Mexico has not yet gained much experience of this type of development. Apart from Ciudad Sahagun, which was built in the 1950ts as a centre for engineering and veaicle building industries at some distance (100 km) from, but within the sphere of influence of Mexico City, there are no established precedents. And Cd. Sahagun is not an example to be followed although the lessons of that experience should certainly be absorbed. The more recent decision to proceed with the construction of the new city of Lazaro Cardenas in association with the construction of the new steel plant of SICARTSA may, in due course, provide another instance of how (or how not) to plan an industrial complex.

336. The provision of general and specific infrastructure is then, one way in which the public sector could help to create the conditions for the development of private sector industry in the Isthmic Region.

337. There is however another side to public policy which must also have a direct effect on private industrial development. This concerns the general framew^ork of incentive and disincentive conditions.

Y38 Inasmuch as many instruments might be designed to persuade mnvestors not to locate in Mexico City but to locate in the region instead, it may be r.ecessary to look at them from two points of view - the discouragement of plant locations in the central core and the attraction of investments to priority development regions on a discriminatory basis.

339. An obvious opportunity to employ the same instrument to achieve both purposes (which are really aspects of the same purpose), arises with respect to public sector prices, the principal instances being power, water and fuel. All three, as we have argued earlier, are available in the region to a greater extent than in other parts of the country. j/ In many ways, as Hermansen (1972) points out, the concept of the industrial complex is akin to Perroux's concept of the dominant firm in growth pole theory, "around which there tends to pick up a set of interrelated units based on forward and backward linkage effects.f' The difference between them is that in an industrial complex these inter-connections are planned in order to ensure the optimal composition f the entire complex. - 84 -

340. At present, electricity charges in Mexico do not reflect the costs of delivering power from the locus of supply to the locus of demand. Bearing in mind that the region has a surplus of hydroelectric energy which it now exports to other parts of Mexico, it would be ecoomically efficient to locate power-using industries there, thus saving on transmission costs. With this in mind, differential tariffs should be introduced to encourage the efficient use of electric power. These should include a preferential general rate for the region and special preferential rates for particularly energy-intensive manufacturing process* In the central core around Mexico City, rates should be concomitantly adjustdd to provide strong disincentives to the development of energy-intensive industries.

341. Water should also be priced so as to reflect its scarcity on a regional scale. Water-intensive industries, in particular, should be encouraged to locate in the region by charging for water at the marginal cost of supplying it. The sane principle should be applied to the center and other water-short regions. Discrimination between household and industrial use is however important. Whereas on grounds of equity it might be thought undesirable to require the inhabitants of Mexico City to pay the full marginal cost of water, this reasoning should not apply to industrial users, particularly heavy consumers. Our preliminary estimates suggest that even allowing for the quality requirements of industries which ares or which could be, located in the region, it will easily maintain its comparative advantage in water supply over all other parts of the country in the future.

342. Fuel prices, given that (like power and water prices) they do not now reflect the cost of delivering fuel from the areas in which fuel is produced, to those in which it is consumed, are also a suitable subject for discriminatory treatment. In particular, the cost of petroleum and diesel fuel should be increased in Mexico City and reduced in areas where accelerated development is to be encouraged - the Isthmic Region above all. There are administrative difficulties but they could be resolved.

343. Turning to fiscal measures, we recognize (as argued in "Spatial Development") that fiscal incentives are not likely to be effective instruments of decentralization. It should not then be expected that the existing industrial decentralization incentives introduced in July 1972 and modified in May 1974 wtl have much effect. First, one of the premises on which the legislation is based is extremely doubtful; that Monterrey and Guadalajara should be treated in the same way as Mexico City. We believe they should not. Second, the efficacy of fiscal incentives - unless they are very powerful - has yet to be demonstrated. This is not only a matter of Mexico because worlwide experience suggests that the main effect of fiscal incentives is that fiscal revenues are unnecessarily foregone. We are 'therefore doubtful as to whether the creation of "Zona 3-Istmo"l last year as a modification to the 1972 law, was a particularly useful initiative in favor of the region and we would ask - if it is to be retained - why it should extend throughout the Isthmus. Better, we think, to apply it to the specific locations where the growth of manufacturing industry is to be encouraged - the Delta and Villahermosa. 85 -

344e One of the fundamental weaknesses of the "Zonal' legislation is that it operates through a capital subsidy. In view of the high wage level of th5e areas an incentive working through the wage bill would make more sense. This could be done, for example, by relieving the employer of a portica of his contribution to INIFONAVIT and the social security system, which would.., of course, be made up out of general revenues. This kind of incentive would be particularly valuable to small-scale light industries both in the consumer non-durable and industrial service categories. 34;5 Another kind of fiscal incentive which might make sense refers to the advantages of the region with respect to export markets. Ani amendment to the existing GEDI1 / system for example, which would intiroduce a regional dimension, could provide additional incentives over and above those available elsewhere to exporters located in the region. The argument in favor of such a scheme would be, simply, that the location of export- oriented industries should emphasize areas which have relatively gi>od access to overseas markets - in particular (again) the Gulf coast. 346. To sumr up, an nabundant natural resource endowment and excellent market potential do not, by themselves, imply the unimneded growth of manufacturing industry in the region. The public sector must play a pivotal role. First as an entrepreneur. Second as an agent of development, providing favorable conditions for private investment, which, unless we assume a more statist economy than now exists, will have to carry the main burden of future industrial growth. (iv) The Social Framework (a) Introduction

347. If national economic growtlh were maintained at high levels, if it were widely distributed among the cities and regLons of the country, and if the income shares of the poorest part of the population were significantly raised, both unemployment and underemployment would cease to be major problems of local economies. But under present conditions in the region, the introduction of large-scale capit al-intensive industry is more likely to exacerbate than to alleviate the problem of urban poverty. For industrialization tends to accelerate migration to cities, and man migrants will be unable to find employment in relatively well-paying industrial jobs; instead, they will tend to be absorbed into the intermittent, low-productivity street jobs of the urban economy.

348. A growth centers strategy based on a presupposed harmony between industrialization and economic welfare would the.refore be simplistic because the capacity of urban economies to absorb increases in the labor force at re sc;nably high levels of productivity is limited by the high capital ccaffin`;:nts of modern industrialization. The fact - based on evidence from

/ Tax ?ebates on manufactured exports.