World Bank Document

ReportNo. 1081a-ME FILE COPY SpatialDevelopment in Mexico (In Three Volumes) Volume 1:The Text

Public Disclosure Authorized January31, 1977 RETURNTOLXA & CGFILES Development EconomicsDepartment Latin America and the CaribbeanRegion Urban ProjectsDepartment

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Document of the World Bank

Public Disclosure Authorized Thisdocument has a restricteddistribution and may beused by recipients only in the performanceof theirofficial duties. Its contents may not otherwisebe disclosedwithout WorldBank authorization.

FOROFFICIAL USE ONLY

This is one of two reports derived from the findings of a mission to Mexico in January/February1974. The mission was led by Douglas Keare (DevelopmentEconomics Department) and Ian Scott (Latin America and the CaribbeanRegion) and included Roberto Cuca (DevelopmentEconomics Department),Sadasumi Hara (Transportationand Urban Projects Department), Y.J. Hwang (DevelopmentEconomics Department),Anna Sant'Anna (Development EconomicsDepartment), Professor John Friedman (Senior Consultant) and Jaime Biderman (Consultant - Research Assistant).

The report has been prepared by Ian Scott with principal assistance by Douglas Keare. Editorial assistancewas provided by Linda Lessner.

This document has a restricteddistribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclod without World Bank authoraton.

SPATIAL DEVELOPMENT IN MEXICO

TABLE OF CONTENTS

Page No.

SUMMARY AND CONCLUSIONS ...... i - v

1. THE ISSUES OF SPATIAL POLICY ...... 1

A. Background ...... 1 B. The Issue of Centralization ...... 6 Background ...... 6 The Case Against Centralization ...... 9 Problems of Macro-Economic Efficiency .... 9 Social Problems ...... 12 Political Problems ...... 13 The Quality of Life ...... 13 Advantages of Centralization ...... 14 Advantages for Macro-Economic Efficiency.. 14 Non-Economic Advantages ...... 16 On Balance ...... 17

C. Regional Balance ...... 20 D. The Issue of Integration ...... 23 E. Conclusions: The Goals of Spatial Policy 27

2. THE PARAMETERS OF SPATIAL POLICY ...... 32

A. Non Spatial Parameters ...... 32 B. Spatial Parameters ...... 37 The Spatial Order ...... 37 The Resource Structure ...... 47

C. Conclusions ...... 60

3. APPROACHES TO A SPATIAL STRATEGY ...... 60

A. Introduction ...... 60 B. Alternative I: A Growth Centers Strategy 62 C. Alternative II: A Gulf Coast Strategy ...... 68 D. Alternative III: Radical Decentralization .... 69 E. Urban Growth: The Next Twenty Five Years ...... 70 F. Areas for Priority Development ...... 72 -2-

Page No.

4. INSTRUMENTS FOR SPATIAL POLICY ...... 74

A. Introduction ...... 74 B. Existing Instruments of Spatial Policy ...... 75 Instruments Related to Industrial and Commercial Location ...... 75 Instruments Related to Administrative Decentralization ...... 83 Instruments of Urban Development Policies ...... 84

C. Suggested Instruments for Implementing a Spatial Policy ...... 87 Organizing Spatial Planning and Development ...... 88 Implementing Growth Center Policies ...... 93 Training and Research Aspects of the Spatial Policy ...... 103 SPATIAL DEVELOPMENT IN MEXICO

SUMMARY AND CONCLUSIONS

Introduction

i. This report is concerned with the changing spatial dimensions of production, employment, and consumption in Mexico. Its aim is to organize and analyze available information on this so far relatively unexplored set of questions; to advance some tentative hypotheses concerning the desirability of affecting the spatial pattern of growth, as well as possible means of doing so; and, thereby, to inform, contribute to and stimulate the search for means of integrating "spatial concerns" into the processes of national policy formulation and investment allocation. To this end, its four chapters deal with the major issues of spatial policy, the parameters of spatial policy, alternative spatial strategies and finally instruments for spatial policy. The reader may find it useful to refer to a companion study, "Urban Development in Mexico", which analyses the historical evolution of the country's present spatial structure and provides a background to this report.

The Past as Prologue

ii. The beginning of Mexico's present spatial system can be traced to the last quarter of the nineteenth century. Until then, the nation's economic space had been divided into a number of largely self-contained and essentially agrarian economies in which towns and cities existed to serve the limited economic needs of the rural sector. With the development of railroads and the related growth of export-oriented mining and agriculture, these enclaves were gradually integrated and developed into a network of major cities providing the basic framework of the country's spatial system.

iii. As this happened, those cities which had already become relatively large and economically important by 1940 have since become larger and even more important. The membership and order of this group of (approximately 40) cities have remained quite stable during 1940-70 period. This notwithstanding, the continuing instability of size and economic roles within the group suggest that neither Mexico's urban system nor its spatial system has yet "matured". This apparent discrepancy is explained by two factors. First, the growth rates of the major cities have, with few exceptions, continued to fluctuate, sometimes widely, from decade to decade since 1960. Second, the only major exception to this rule has to do with a major "dis- tortion" in Mexico's urban system--the absolute size of the largest cities, particularly Mexico City. The composition of the set of cities at the top of the urban "hierarchy" has changed little, and their growth rates have fluctuated little, during the past three decades. In fact, Mexico City, Guadaljara and Monterrey have ranked first, second and third, respectively, for almost a century. Furthermore, Mexico City continues to dominate the system in such a way that the capital city may be characterized as the "core" and the rest of the country as the "periphery." - ii -

The Issues of Spatial Development iv. This background serves to frame the three major issues of spatial development policy in Mexico today: (1) the question as to the desirability of the heavy centralization of people, prosperity and production in Mexico City; (2) the problems of the manifestly "unbalanced" nature of development between different regions; and (3) the enormous contrasts between urban and rural areas.

For and Against Centralization v. It is widely believed that the overwhelming centralization of the Mexican space economy in one city is both inequitable and inconsistent with the nation's social and economic progress. But is this view justifiable? Although the present state of the art offers no feasible way of measuring the negative economic effects of concentration and centralization, it is often argued that important opportunities for economic growth are foregone as a result. The data do not permit a definitive conclusion; however, there is "circumstantial evidence" which may be cited. For example, it is evident that the resources of such well endowed parts of the "periphery" as the Gulf Coast have not been developed, and this can be represented as an opportunity cost of centralization. The costs of providing many kinds of social overhead in Mexico City are now higher than in any other part of the country, notably in respect to water, sewerage and electric power. It appears too that, among the ostensible economic disadvantages of centralization are those which refer to the structure of the national transportation network. First, it is highly centralized on Mexico City, which inevitably implies congestion of inter- regional traffic because so much of it passes through one place and also denotes congestion arising from traffic generated within the city. Secondly, the centralization of the transport system means that it fails to provide efficient access to, and especially between, many parts of the "periphery". vi. Not all of the adverse consequences of centralization are economic. Among the social disadvantages are several which lie beyond the scope of this report. Clearly, though, a strong relationship exists between urbanization and social progress, since the most urbanized states are the best- off in terms of general socio-economic welfare. A related problem is that of maintaining a manageable social order as Mexico City increases in size and as the absolute number of under-employed continues to grow. Linked to this is the political problem of efficiently governing an urban mass of more than 20 million people. Of a more sensitive political nature, is the feel- ing in some parts of the periphery that its needs and circumstances are misunderstood because of the centralization of decision-making in Mexico City. An unrelated consequence, suggested by the behavior of private firms, is that access to the Federal Government has a major bearing on commercial and industrial location. Finally, recent data suggest that environmental pollution in Mexico City is already a serious problem and will almost certainly intensify as the city grows. vii. Most of the economic benefits of centralization in Mexico City are derived from the effects of agglomeration, and refer, above all, to individual firms and industries, although some are external to both. However, as other cities grow, they will also offer an increasing range of competitive agglomeration economies. Even so, the "external" economies of Mexico City, such - iii -

as those arising from the location of the Federal Government, the uniquely varied supply of labor skills and the concentration of specialized financial and commercial services, are unlikely to wane in the near future. Nor are all of the advantages of centralization economic. The significance of some-- such as the political advantages of a primate urban system--may belong to the past rather than to the present or future. However, the unique cultural, political, social and economic characteristics of the nation's capital remain and are likely to remain powerful attractive forces.

viii. There is no means of reaching a conclusive, quantified judgment about the costs and benefits of centralization. The evidence nevertheless suggests that, even if Mexico City has not yet reached an unmanageable or uneconomic size, it will certainly do so at some time in the not too distant future. It will become more difficult to govern; it will become a less attractive place in which to live and work; it will become a strong factor in increasing distortions in the allocation of public expenditures on social welfare; and its growth will become incompatible with the pursuit of national economic efficiency and development.

Integration

ix. In dealing with rural-urban relationships the report shows that discontinuities between town and country are a significant issue because they represent a spatial dimension of social justice. In the northwestern states, urbanization and export-based agricultural development have gone hand in hand, but elsewhere in Mexico the urban sector has enjoyed a privileged and somewhat predatory status relative to the rural sector where the hinterlands have not been associated with a "spread" of development from Mexico's largest cities. It is important to learn more about why this has been so, and whether it may be possible to develop integrated (rural-urban) development strategies which are efficient but have so far been overlooked.

Regional Balance

x. There is conclusive evidence to show broad contrasts in living conditions between different parts of Mexico and that, over the last three decades, these contrasts have increased. The evidence also shows that the Federal District (which roughly corresponds to Greater Mexico City) has retained first rank at all times. Furthermore, with the exception of Baja California, the same nine states have remained better-off than the rest of the country since 1940, while the same three states have retained their status at the bottom of the scale. Throughout this period, spatial contrasts in development have been associated with the relative level of urbanization, and the states which urbanized most rapidly after 1940 were those which developed most quickly. Regional "imbalance" is certainly, therefore, a major characteristic of Mexico's space economy. But this report argues that regional "balance" is neither an appropriate nor an obtainable objective, and therefore is not a relevant issue for spatial policy. - iv -

The Goals of Spatial Policy xi. The issues of centralization, rural-urban integration and regional balance could each be translated into major policy objectives. The report argues, however, that they are not only of unequal importance but are also-- with respect to the relationship between regional balance and the other two issues--incompatible. It argues, too, that a policy addressed to the problem of centralization can and should be combined with a policy designed to promote rural-urban integration. xii. Decentralization implies a reduction in the relative size of Mexico City in the nation's urban system and the absorption of part of what would be, in the absence of countervailing trends, incremental demographic and economic growth in the capital. Decentralization also implies the need to adopt a selective and discriminatory strategy focussing on the growth of a few carefully chosen alternative urban centers and/or their hinterlands in the "periphery". A decentralization strategy is compatible with a strategy designed to promote rural-urban integration because, under certain conditions, development in "growth centers" will filter down through regional urban hierarchies to the "periphery" of each region. Conversely, as has occurred particularly in the northwestern states, rapid growth of agricultural sub-regions has spurred rapid growth of strategically located cities.

The Parameters of Spatial Policy xiii. Fundamental to the spatial framework are the parameters of spatial policy over the next 25 years, the approach to a spatial strategy and the policy related instruments. xiv. Some parameters, notably the probable growth of the national population, and the likely growth of employment opportunities are, as such, non- spatial. They are nevertheless fundamental parts of the framework of spatial policy, not least because the likely pattern of demographic and economic change during the remainder of this century will imply further urbanization and the evolution of a highly productive, capital intensive modern sector. xv. The other major parameters of spatial policy include the country's present regional structure and the geographic distribution of its natural resources. The report therefore shows how, on the one hand, the major regions of the northwest, the north, the northeast, the west, the center and the south are functionally linked; and, on the other, indicates the extent to which resource endowments suggest that some sub-regions, which have not done so until now, may begin to play major roles in future national development.

Approaches to a Spatial Strategy xvi. The report argues that the geographic distribution of future econcmic development in Mexico will depend to a considerable degree on the Government s willingness to adopt consistent and coordinated policies for spatial development. Such policies must account for the objective constraints to spatial -v- growth and must recognize that any changes in the present system of spatial relations should be consistentwith long term expansion. The basic question therefore concerns the identity of the centers -- other than the existing core -- which offer the best prospects for acceleratedand sustained growth, and which would promote the development of complementaryfunctions (including rural-urbanintegration) in the space economy. xvii. The report reviews three alternativeapproaches to a spatial policies framework: "A Growth Centers Strategy" (paras. 226-251); "A Gulf Coast Strategy" (paras. 252-254); and "A Strategy of Radical Decentralization" (paras. 255-257),the first and second being generally similar in concept; whereas the third is fundamentallydifferent. xviii. The report argues that the strategy of radical decentralization is unlikely to be effective because it implies that the resources devoted to decentralizationwould be spread too thinly. It states that a growth centers strategy or the more ambitious Gulf Coast strategy,because of their selectiveness,in that they would concentrateon a limited number of regional growth centers, would not suffer from this disadvantage. Both strategies recognize that the primate core (Mexico City) and the two subsidiary cores (Guadalajaraand Monterrey) will play important roles in the developmentof the spatial order, although the Gulf Coast strategy would further emphasize the development of an axis stretching from Monterrey to the Isthmus of Tehuantepec.

Instrumentsfor Spatial Policy xix. A spatial strategy - like any other development strategy - is as effective as the instrumentswhich exist to enforce it. The report therefore concludeswith a review of the present range of policy tools which - directly or indirectly- affect spatial development and with a discussion of the instrumentswhich might be introduced to complement or replace them. In doing so, it does not purport to provide a blueprint for future spatial development, but rather suggests a framework for approachingthe major issues.

1. SPATIAL POLICY ISSUES

A. Background

1. The roots of the existing spatial system in Mexico originated in the last quarter of the nineteenth century. Until then, the nation's economic space was divided into a number of largely self-contained, essentially agrarian economies, in which towns and cities existed to serve the limited economic needs of the rural sector and to provide a base for administrative control. 1/ The beginning of the present day spatial system dates from 1870 and is linked to the development of railroads and the expansion of the export oriented primary sector. The structure of the spatial system in Mexico has been changing over the past 100 years. Like any spatial structure, that of the Mexican economy has two principal components: a transport and communications network and a system of urban nodes linking the branches of the network. Towns and cities are the focal points of the spatial system. From the subnational and national perspective, they facilitate the growth of industry, provide centers for the diffusion of economic and social services and affect the development of surrounding rural areas. In theory, the relationship between urban and rural sectors is, symbiotic; however, in practice, the relationship often favors the former. Because the urban system provides a framework for the spatial system, its evolution has been examined at length in a forthcoming World Bank report, "Urban Development in Mexico" (hereafter referred to as "Urban Development"), which serves as background material for this report.

2. "In the normal case, a change does not call forth contradicting forces but, instead, supports changes, which move the system in the same direction, but much further. Because of such circular causation, a social process tends to become cumulative and often to gather speed at an accelerated rate." (Myrdal: 1953). Mexico is a case in point. Cities which had been relatively large and wealthy in 1940, and in many cases long before 1940, retained their relative size and wealth as they developed. The evolution of states followed the same pattern. (See Tables 1.1 and 6.1.)

3. The dominant role of Mexico City in the spatial order underlies the population distribution and economic activity at the national level. The growth of Mexico City has been sustained for more than four centuries. In pre-Columbian times it was the largest and most highly developed city in what is now Mexico. By the twentieth century it had become the center of an intergrated spatial system. The primacy of Mexico City resulted in the concentration of a massive proportion of the country's population and wealth in the Valley of Mexico, a relatively small intermontane basin, in what is customarily referred to as the "center" of the country (location here is based on economic and demographic rather than geographic criteria). When the country's railroad network was being developed during the late nineteenth century, Mexico City already offered a large market with substantial agglomeration economies supporting new industrial enterprises. It became the center of the railnet because of its size and role as an administrative

1/ The hacienda also fulfilled some essentially "urban" functions. - 2 -

center. Because of its large internal market and wide range of externalities, it became an industrial city. Having been established in the late nineteenth century as the hub of the modern transport net with a significant industrial base, Mexico City continues to offer powerful locational advantages. The growth of the central metropolitan core has been a self- sustaining cumulative process based on:

(a) the pattern of accessibility that was established by the railroad network and reinforced after 1910 by the subsequent development of the road, air and telecommunications networks;

(b) the greater relative size of Mexico City, which has provided a comparatively larger internal market in an environment of external protection;

(c) its location in a densely populated area of the country thereby providing greater regional market potential than any other city;

(d) the higher per capita income generated by the growth of its economic base leading to high levels of per capita demand for goods and services;

(e) the substantial external economies offered by its pre-existing economic structure at each successive stage of its industrial growth; and

(f) the highly centralized administrative system which limited access to political power to Mexico City.

Thus far the process shows only limited signs of slowing down. From 1940 through 1970, Mexico City grew at an average annual rate of 5.3 percent -- faster than the average for the nation's largest cities as a whole. After 1950, its primacy began to decrease (Table 1.2). Its average annual growth rate in 1960-70 was 5.1 percent, the same as in 1950-60 (Table 1.3).

4. Neither Mexico's urban system, nor its spatial order, have reached maturity. With the exception of Mexico City and to a lesser degree Monterrey, Hermosillo and Tijuana, population growth has fluctuated strongly from decade to decade during 1940-70. The growth rate of these four cities exceeded the average for the country as a whole. After 1950, Guadalajara, Leon, Coatzacoalcos and Acapulco joined this group. Others which had relatively large populations in 1940 grew slowly thereafter (Table 1.4).

5. Although cities which dominated the urban system in 1970 experienced very different growth rates in 1940-70, the set of cities which occupied the upper parts of the urban hierarchy during this period underwent little change (Table 5.1). The critical period for the evolution of the urban system coincided with the three decades preceding the Revolution of 1910, a period characterized by the simultaneous development of the resource base and the railroad network which enabled primary products to be exported. Since then, the relationship between accessibility and urban growth has been very close. - 3 -

Most of the cities which were relatively large in 1870, but not located on the railroad network, failed to develop thereafter. Some cities which lacked rail communications began expanding after the increase in public investment in the road system following the Revolution. By 1910, the structure of the urban hierarchy of the 1970s had generally been established.

6. The largest cities of the urban system, Mexico City, Guadalajara and Monterrey have ranked first, second and third in population size for nearly a century. Because the two latter cities are well removed from the immediate sphere of influence of the capital, they have, with the support of adequate resource bases, been able to sustain rapid growth over a long period. Monterrey's unusually dynamic entrepreneurial class had contributed to its continued expansion. In terms of the space of the Mexican economy as a whole, both cities are relatively close to the capital. Beyond them lies a vast, largely undeveloped and relatively unurbanized periphery. In the northwest the rapid urban growth in Sonora and Sinaloa has been associated with the development of commercial agriculture. On the US frontier, rapid urbanization has been based on the growth of demand for labor, tourism and, more recently, for "assembly industry" products in the USA. In the South, and elsewhere in the periphery, urban growth has been restrained and economic development retarded.

7. The relative stability of urban and spatial orders results from the tendency of some determinants of location to favor "core" locations at the expense of relatively less attractive "peripheral" areas. Consequently, core region institutions are organized to control peripheral economies for their benefit, thereby reducing the periphery to a state of relative depend- ency on central or exogenous decisions and increasing the development gap between them (See "Urban Development").

8. Cumulative growth in Mexico has been characterized by a set of interlocking, mutually reinforcing urban-spatial relationships. The initial advantage of a locality may derive from the history of its earlier settlement, its geographic position with respect to other major population centers and external markets, the confluence of traditional trade routes, early industrialization, or the location of government. These elements are subsequently translated into more dynamic growth factors, such as economic power, market size, external economies, and visible opportunities for productive investments. As the time frame shifts from period to period, all of these expand. Of special interest is the size of the internal market (and the scale of external economies generated by the local economy) because this determines the threshold levels of entry for new enterprises. As the internal market for certain products and services grows and new firms are established to exploit it, each round of investments increases the opportunities for business expansion and the consolidation of economic power.

9. Hirschman (1958) states that, in the early stages of development, cumulative advantages accrue to regions, which, in the first instance, have the greatest comparative advantages relative to others. He argues that these advantages derive from (a) agglomeration economies, (b) differential patterns of savings and investment, and (c) selective migratory movements, all of which - 4 -

are closely associated with the spatial distribution of urbanization. Less urbanized regions are generally less developed. Lacking industry and the growth generating effects of large scale production, underdeveloped regions usually do not experience urban growth. Savings and investment are below that of the more advanced, urbanized regions with capital flowing towards high growth regions. Moreover, selective outmigration robs the less developed regions of their most productive workers.

10. Growing numbers of migrants are attracted to the core because of economic considerations. They provide a supply of relatively low cost labor. Unable to find a sufficient number of jobs in manufacturing, they tend to be absorbed in large numbers by the "informal" sector in a great variety of licit and illicit activities. As long as real incomes remain above subsistence, migrants are willing to move to the core. Their arrival creates housing, education, health and public security problems compelling Government attention. Con5equently, public social investment is concentrated in the core area to the detriment of the periphery. 1/ With the growth of the core area comes increasing external contact, channelling consumer and entrepreneurial innovations from abroad towards the core. 2/ As the economy expands, the business elites in the core organize the periphery for purposes of securing sources of raw materials, primarily for export; of creating new distribution networks and of using the banking system to capture local savings and transfer them to the center.

11. Core-periphery relations are in many ways unbalanced. The periphery is organized to supply the core with food, raw materials, capital, and labor, while the core provides limited government services and sells some of its products to the periphery. The internal terms of trade are generally un- favorable to the periphery. Primary product prices rise more slowly than the prices which farmers and others living in the periphery pay for manufactured goods. Inflation generated in the core spreads to the periphery. Credit for local investment in the periphery is controlled by core institutions and is available only in restricted quantities. Migration to the core is positively selective with respect to education and age, so the core assures itself of continued economic (and often political) dominance over the spatial system -- a dominance that is extremely difficult to restrain through the usual instruments of public policy.

12. Mexico's recent spatial development closely resembles that of many other countries, and coincides not only with the Hirschman model but also the Myrdal (1953) model. Both authors draw attention to a second stage of

1/ Moreover, the bureaucratic and economic elites are able to divert increasing resources for building up an infrastructure that attends to their expensive needs (water for irrigated lawns, parking garages in the center of the city, museums, and the like).

2/ Frequently in the core, a cosmopolitan life style evolves that is disproportionate to the real abilities of the economy to sustain it. spatial development in which new forces eventually intervene to reduce the divergence between core and periphery until the balance is reversed. Both argue that these forces are likely to be of governmental origin, although others have stated that they are "natural" rather than "artificial." (See, for example, Borts and Stein, 1964.) Hirschman maintains that the concentration of activity and population with concomitant spatial inequalities is a necessary condition of the early stages of growth, and that as growth proceeds, economic disparities will generate political tensions. Thus the existence of localized "underdevelopment" inhibits the realization of maximum growth. Eventually, because of the need to reduce spatial inequalities and to foment more rapid growth, the periphery will be developed. Myrdal and Hirschman concede that autonomous market forces will reduce interregional contrasts because of the demand for larger markets and new materials in the growth cores, thereby leading to the development (albeit "dependent development") of the lagging periphery.

13. Public investment is accorded a major role, particularly in the Hirschman hypothesis. In the earliest phase of development, he argues, political pressures and a general lack of planning and engineering skills for large projects imply a wide dispersal of resources among many minor projects. However, as the core area develops, investment will tend in this first stage to concentrate there in order to provide the necessary infrastructure to facilitate rapid growth. 1/ Because the need for new investment becomes obvious and, if the core is also a politically important area, approval is readily obtained. In the second stage of development, when the periphery finds a coherent voice with which to express its discontent, the spatial allocation of investment tends to change.

14. Mexico appears to have reached a point at which the spatial order is about to pass from the first to the second stage of development. The last six years have witnessed a shift in governmental attitudes towards spatial development. Because of interest in achieving sustained economic growth, and distributive equity, the administration of President Echeverria has paid greater attention than any of its predecessors to the spatial distribution of the "fruits of development". In the process it has come increasingly to stress its dissatisfaction with the existing pattern of spatial development, and its preference for greater decentralization.

15. While there are several direct relationships between past Govern- ment policy, on the one hand, and the processes of urban and spatial development on the other, such relationships are fully consistent with the precepts of the general model of spatial development outlined in preceding paragraphs. Economic policy, particularly after 1940, reinforced a spatial-industrial structure which was already determined to a large extent by autonomous market forces. Little effort was made to induce any change in the expected outcome, for to have done so would have been extremely difficult. Apart from possible

1/ Both power and irrigation investment have, however, been concentrated in the periphery, although they too have benefited the core. - 6 -

negative trade-offs for industrial and national development which might have arisen from an attempt to alter the spatial distribution of urban-industrial growth, it is unlikely that any such effort would have been effective.

16. The nature of the present spatial system is best understood by studying the past. (See "Urban Development" for relevant background material; this report attempts to clarify the issues rather than to criticize past economic policies.)

17. The rest of this chapter concentrates on three major issues of spatial policy:

(a) demographic and economic centralization;

(b) interregional balance as measured by contrasts in income and welfare in different areas; and

Another major issue concerns land use and patterns of interaction within urban areas, which is outside the scope of this paper but is discussed in a recent Bank report on "The Economic Development of the Isthmic Region of Mexico".

B. The Issue of Centralization

Background

18. Discussions concerning the consequences of the dominant role of Mexico City are apt to generate more heat than light. There is - as in other strongly "primate"' countries -- a widespread view that the centralization of economic power in Mexico City is inequitable and a block to social and economic progress. This is based on the concept of the parasitic city which, because of its initial advantages vis-a-vis other cities is able to draw on, and in certain respects, "live-off" the rest of the country. While this view is often carried to extremes, it is closely related to the general concept of the core-periphery framework which was advanced earlier in this Chapter as an appropriate model for interpreting Mexico's urban-regional development up to the present time.

19. Another viewpoint implicitly assumes that the absolute and relative size of Mexico City is incompatible with the maximization -- particularly in the long run -- of national economic growth. This position is not necessarily based on the idea of an optimum city size. It rests rather, on the fact that Mexico City, with a 1975 population of 11.0 million is already among the world's largest cities, and that even if its future growth is slower than that of the recent past, it will soon be the world's largest city. The general concern is that apart from the disadvantages of location, its great size will pose increasing problems for both the metropolitan and national economies and will constrain national economic growth. - 7 -

20. There is no corollary to either point of view which calls for reducing the size of Mexico City. No one is suggesting the relocation of substantial parts of the urban economy, although there have been recent initiatives to move certain Federal Government agencies out of the capital. Nor has anyone seriously proposed even to arrest the growth of Mexico City, because it is generally appreciated that in a free market and a free society, there is no practicable way of enacting legislation to halt vigorous urban growth. The interpretation of these theses has been, rather, that in the future, incremental urban growth should be encouraged outside Mexico City. First, this would ameliorate the problems associated with excessive centralization. Second, it would enhance the prospects for the rational development of resources in the periphery, which frequently tend to be ignored. While supporters of decentralization may be motivated by diverse reasons such as national economic growth, distributive equity and social and political equilibrium, there is a general concensus that it is desirable. So far, however, little progress towards its achievement has been made.

21. "In Mexico, all roads lead to the capital of the country; the Federal District is the chief political and governmental center of the nation. Moreover, it is the economic, educational, social and cultural center . . . its influence is all pervasive. Other cities are satellites of greater or lesser magnitude, held in their orbits by the central sun." Tucker's (1957) description, although somewhat exaggerated, presents a fairly objective indication of Mexico's socio-economic spatial structure.

22. The extent of demographic concentration in Mexico City for the period 1940-70 is shown in Table 1.6. It indicates that the year-to-year rate of increase decreased in the 1950s and 60s in comparison with the 1940s, while the growth rate of the national population accelerated. The components of population growth in the capital have changed significantly; migration having become much less important than it was in the 1940s, while natural increase has become, both relatively and absolutely, more important. By 1970, Mexico City accounted for 18 percent of the total national population, for 31 percent of its urban population, and for half of the population of "large cities" (i.e., those with more than 100,000 inhabitants).

23. The degree of economic concentration, as measured by various indices, is generally greater than the degree of demographic concentration. Measured in terms of the overall concentration of the economically active population, participation rates are higher in Mexico City than elsewhere, implying that employment is more concentrated than population. At the sectoral level, we find that Mexico City accounted, in 1970, for 30.1 percent of national employment in manufacturing, 38.9 percent of employment in services, 27.9 percent of employment in commerce and 68.9 percent of employment in government. It is now, as it has been throughout the pre-industrial and industrial period, more important as a commercial and service center than as an industrial city. Nonetheless, it is also the unchallenged industrial capital of the nation as well as its principal market place, financial center, and its seat of government. Its share of the nation's industrial employment has increased over time (Table 3.3) and its share of industrial output has increased even faster (Table 3.3) against the background of changes - 8 -

in productivity and in light of the fact that Mexico City's industrial sector is relatively more "modern" (i.e., has a relatively larger share of dynamic growth industries than most other cities (Table 3.1). Moreover, vis-a-vis the industrial sector of the nation's largest cities as a whole, Mexico has a relatively diversified industrial profile (Table 3.2).

24. Non-employment indicators show the concentration of tertiary activities in Mexico City. Measurements refer to the Federal District rather than to the whole of the metropolitan area because of the way in which census data are recorded. 1/ However, they clearly indicate that commercial activity is heavily concentrated, since in 1965 the Federal District accounted for almost half the national value of sales (Mex$ 32 billion out of Mex$ 74 billion) and for a similar proportion (Mex$ 20 billion out of a total of Mex$ 43 billion) of capital investment in commerce. In relative terms, the Federal District has a notably higher level of sales per capita than any other federal governmental entity (Table 4.1).

25. Data constraints also limit the measurement of the concentration of services in Mexico City, but do show that the services sector has a greater rate of concentration in the capital than does the commercial sector. In 1965, the value of services accounted for Mex$ 9.3 billion out of a total of Mex$ 16.8 billion, and capital investment in the sector accounted for Mex$ 11.4 billion out of a total of Mex$ 19.7 billion. Further, in 1972, more than 90 percent of the country's banks had their head offices in Mexico City, with savings deposits amounting to more than 60 percent of the national total. The hotels and restaurants of the capital accounted for more than half the incomes generated in these subsectors in the nation as a whole. Up to 90 percent of the assets of professional activities, foreign trade agencies, consulting firms, research organizations and investment services are concentrated there. As the seat of the Federal Government, Mexico City accounts for almost 70 percent of national employment in this sector, the significance of its governmental functions being even greater than is implied by such employment data alone.

26. Mexico City is the economic, demographic, cultural, political and social "core" of the country, dominating the nation. It is a less "primate" city than the capital cities of many other Latin American countries, and its primacy in some respects, particularly demographic, has been decreasing since 1960. Other urban areas, including Monterrey and Guadalajara among the five largest cities, and Mexicali, Acapulco, Tijuana and Coatzacoalcos among other large but relatively smaller cities, have been growing comparatively faster. The problem of centralization, measured in these terms, seems to be less pressing.

1/ If available, data for Mexico City would show much greater concentration. - 9

The Case Against Centralization

27. The historical dynamics of the growth of Mexico City embodied in the core-periphery relationship are of less concern than the question of whether the consequences of centralization are now, or are likely to become, malevolent rather than benevolent. In this context, it is not important to ask whether the growth of Mexico City has been parasitic. Instead, it is important to establish what kinds of disadvantages from the viewpoint of the national economy are associated with its relative and absolute size, either now or in the future. These concern economic, social and political problems at a national level; and problems associated with the quality of life in Mexico City.

Problems of Macro-Economic Efficiency

28. At present, there is no feasible way of measuring the cumulative negative effects of centralization. If major opportunities for national economic growth are being forgone as a result of centralization in the core, centralization is inefficient. The opportunities generally refer to untapped natural resources in the periphery. Evidence strongly suggests a negative correlation between the location of unused economic resources and the level of economic development. The southern states of Oaxaca, Chiapas and Guerrero are well endowed with mineral resources, the exploitation of which would be in the national interest. However, these states have been historically neglected because they lack the necessary infrastructure and human resources. The tropical Gulf Coast, a potentially rich agricultural region, has not been developed because economic decision makers in the metropolitan core regard the area as a valuable source of petroleum, but of little else. In such circumstances, development, to the extent that it occurs at all, is likely to leave the periphery in a dependent status vis-a-vis the core.

29. Although the data are incomplete and do not enable us to arrive at a definite conclusion, the costs of certain types of social overhead are much higher in Mexico City than elsewhere. The best example concerns water supply and sewerage. In recent years it has become increasingly expensive to supply the capital with water because it has been necessary to bring it from increasingly remote sources. The option of obtaining water in situ from the Valley of Mexico - which involves the mining of acquifers below the city - no longer exists. Mexico City is built on a lake bed and acquifer mining accelerates the long since begun process whereby the city is sinking into the lacustrine subsoil. Subsidence is already a serious problem having caused the urban area to sink about 25 feet during this century. This greatly increases the costs and reduces the possibility of building upwards. It also increases the cost of underground tunneling and of some kinds of road building. Water supply problems combined with subsidence problems will probably result in increased drainage and sewerage costs. The main part of the urban area is already 40 feet below the surface of the basin, with the result that sewage must be pumped up in order to get it out. Acquifer mining not only exacerbates this problem but also involves a greater risk of seismic tremors, because greater plasticity implies greater vulnerability. - 10 -

30. The only alternatives to water mining are inter-basin water transfers, the marginal costs of which have risen steeply in recent years (Table 2.2). This occurs because the volume of demand is large and because of geographic circumstances which require very high pumping lifts to the valley as well as transfers over very long distances, the most recently tapped source being the Miguel Aleman dam, 200 miles away in the State of Veracruz. Water supply is already a serious issue, and represents a comparative disadvantage. Assuming that the costs of water supply 1/ in other cities are likely to rise less sharply in the future than those in the capital, this issue will become increasingly significant.

31. A similar, but less powerful, argument against centralization concerns the costs of supplying Mexico City with electric power. The area immediately around the capital is endowed with neither thermal nor hydro power resources. All of its power requirements must thus be met with energy generated elsewhere and transported through the national grid. Moreover, it seems that the efficiency of the power sector in Mexico City is lower than elsewhere. This is because the very size of the urban area implies the need for a more complex distribution network than in other cities, and because the administrative efficiency of the power sector in Mexico City is comparatively low, stemming from difficulties with metering and revenue collection. The power sector, therefore, has run up against diseconomies of scale in Mexico City.

32. With respect to other types of social overhead the evidence is extremely diffuse. It appears that construction costs in Mexico City are higher because not only is the cost of materials, and in many cases of labor, relatively high, but there are also severe and unique problems associated with the physical conditions of building in the metropolitan area. These are closely related to the phenomenon of subsidence which we mentioned earlier and with the need to build with due regard to the risk of earthquakes. The momntains surrounding the Valley of Mexico greatly restrict and increase the cost of developing suitable land for urban expansion. In the past, the city has tended to grow towards the south and west of the original core because the soil and subsoil conditions were relatively better. Now, however, urbanization has expanded as far as the mountains in most directions, so that the future thrust is planned to be through the gap in the mountains to the north and the southeast which will tend to increase the costs of new infrastructure.

33. Another economic disadvantage of centralization refers to the operation of the national transport network. Here the issue is one of congestion at two levels. First, the national railroad and road systems are strongly centered in the capital, which means (Tucker 1957) that "most roads lead to Mexico City." This inevitably implies the possibility of congestion of inter-regional traffic because so much of it must pass through one place. Second, and this is a matter we shall refer to again when discussing the quality of life, congestion within the city has, with the latter's increasing

1/ See National Water Plan (1975). - 11 -

size, become an increasingly serious issue, and the economic costs of agglomeration certainly include those arising from the fact that communications within the urban area are slow and are becoming slower. This problem has existed for at least 20 years. Although the metropolitan authorities are well aware of its existence, there is no evidence that it is being resolved. Unlike public services, passenger transit is privately owned and, even with the completion of a three-route underground railway system in 1972 (the latter is publicly owned), the journey to work and all manner of routine communications within the city have become generally more difficult and less efficient over time. In brief, transport problems arise because of (1) the large number of vehicles (currently over a million registered automotive vehicles in the metropolitan area), (2) the inefficiencies in the urban transport system resulting in a duplication of some passenger routes, a lack of service on others, and a general disregard of timetables, (3) the unor- ganized traffic control system, and (4) the disregard of parking regulations in the city center, although recently they have been more strictly enforced. 1/

34. Since 1970, besides the construction of the metro and the tightening up of parking controls, efforts have been made to improve traffic flows through the construction of a new inner-urban beltway. The latter illustrates the costs of urban centralization because, if the city were not so big, an inner-beltway would not be needed, and it is clear that its costs, both direct and indirect (the latter being substantial because the road is built through an already urbanized area and thus involves substantial dis- investments) are very high.

35. A final point concerning the relationship between the efficiency of the transport system and centralization is that because both the urban and transport systems are so heavily concentrated, the latter fails to provide an adequate framework for the development of the periphery. There are still relatively few east-west routes across the country, and the density of both the road and rail systems is inversely related to the development of less developed states. It is less important that inadequate transport explains, ex post, the relative backwardness of the periphery than that national economic growth in the future may be retarded by the unbalanced nature of the transport system, not so much because of congestion but because it will continue to limit the growth of the periphery.

36. These are the principal economic disadvantages of centralization. While not particularly overwhelming, the non-economic disadvantages are perhaps more substantial.

1/ A detailed review of the transport problems of Mexico City will be found in The Transport Sector of Mexico (1971). - 12 -

Social Problems

37. It is easy to fall prey to fears of gigantism when considering such social consequences of centralization as crime, the weakening of the family and the erosion of the social fabric, none of which fall within the scope of this report. But the social consequences of centralization have several other dimensions which can be divided into macro-social or national consequences and micro-social or intra-urban consequences; the latter belong to our discussion of the quality of life, so we shall only consider the first in this section.

38. On a national scale, there is a clear (and inevitable) relationship between urbanization and social progress. When the latter is measured by a composite index of socio-economic development (Table 6.1), the most urbanized entity (the Federal District) is most developed, and the least urbanized entity (Oaxaca) is the least developed. The concentration of such a large proportion of the nation's urban development in one city has been harmful to the rest of the nation, particularly to the least advantaged parts of the periphery. To say this implies that in an alternative scheme of things some of the urban growth which has occurred in Mexico City could have been equit- ably distributed around the country. It could be argued that, in some other scheme, a less concentrated urban system might have evolved -- especially had there been a less protected internal market which might have led to a lesser degree of concentration -- but the goals of social justice would not necessarily have been served in such a system. Even though the concentration of the urban system may have been associated with a geographic allocation of public social expenditures which has strongly favored Mexico City, it does not necessarily follow that, for the nation as a whole, this concentration has led to greater inequities in terms of interpersonal welfare.

39. A related aspect of the social consequences of centralization does not directly concern equity, but refers rather to the consequences of a massive agglomeration of people. Given Mexico's present economic conditions, this also means a concentration of underemployment, and thus low incomes, in the metropolitan area. The larger this mass, the more critical it becomes. Although there is clearly a political side to this question (see below), it may be inferred that the sheer size of the problem provides a compelling reason for allocating Federal resources to the Federal District to maintain a manageable social situation. In the past, the inhabitants of Mexico City have received subsidized tortillas, subsidized electricity and even subsidized fuel. And while all of these things may be viewed in terms of economic efficiency, they may also be seen in terms of equity. The question is whether basically, it is fair that Mexico City, because of i s size and its delicate social situation, shiould absorb a disproportionate .hare of the available amount of public expenditure for social welfare. W4hat happens as it grows? Surely, the existing imbalances will become even greater and more inequitable. This argument focuses on the question of whether, given the present and likely future levels of underemployment in Mexico City (estimated in 1970 at around 30 percent), larger and larger amounts of public resources - 13 - will have to be allocated to social outlays in the capital to prevent socisd disorder. By the end of this century the Mexico City metropolitan area will probably contain at least 20 million people. Assuming (for reasons explained in Chapter 2) that the percentage of underemployed may not be reduced from its present level, this would imply the presence of almost six million underemployed in the capital at that time. In such circumstances, large social outlays would probably be needed to maintain any semblance of social equilibrium.

Political Problems

40. The political consequences of centralization are closely related to the social consequences, in that the problem of preserving social equilibrium in an urban mass of 20 million people is also, almost by definition, a political problem. There are two other closely related political dimensions to centralization. One concern is that the Federal Government is by far the most powerful agency of public action in the Mexican political system and is strongly concentrated in Mexico City. Decision making has been centralized to a degree which implies that the needs and circumstances of the periphery have often been disregarded and misunderstood in formulating national policies. Relating this to earlier arguments, we find that this has both an economic and a social dimension. On the one hand, the economic potential of the periphery may have been ignored and on the other, the social conditions of the periphery may have been disregarded. As a result, there is considerable hostility towards the capital on the part of those in the periphery, who find no doubt to an exaggerated extent, that the concentration of political power in the Federal District leaves them with little voice in determining their own futures.

41. A second consequence of political concentration is that private firms often behave in such a way as to suggest that access to the Federal Government is a major location variable. Businesses have, to an increasing extent, found it necessary to locate their headquarters and sometimes their plants in the capital. There are several large firms which have their plants in Monterrey, Guadalajara or Puebla, but their head offices are in Mexico City. From a national point of view, Mexico City may be a desirable location for industrial growth, but it may clearly be undesirable that political accessibility should play such a powerful role in industrial location decisions. However, alternatives within the Mexican political system are not obvious.

The Quality of Life

42. We come, finally, to the negative implications of centralization with respect to the quality of life in the metropolitan area. Some of these have been mentioned earlier, among them traffic congestion, which not only has negative implications for national economic efficiency, but also has a negative impact on the quality of life affecting the physical environment and polluting the atmosphere. - 14 -

43. Several recent measurements show that Mexico City has the highest level of atmospheric pollution of any major city in the world. Its major causes are (a) the presence of more than one million motor vehicles, a third of which ate more than eight years old and which produce 60 percent of atmospheric impurities, and (b) industrial effluence from more than 40,000 industrial plants and more than 4,000 boilers which emit numerous toxic gases. Given the heavy concentrations of motor vehicles and industry in the capital, both causes of pollution may be directly linked to the structure of the urban system. If the economy were less centralized, Mexico City would be less polluted. Industry and traffic do not, however, account for all of the pollution. Other factors include the use of oil for domestic purposes in many households and the deficiency of refuse services, resulting in the deposit of more than 4,000 tons of garbage on the city outskirts each day and in a limited amount of "green space" within the metropolitan area. A 1973 United Nations study shows that toxicity in the Federal District is 100 times above the admissible level, and carbon monoxide content being twice that of Manhattan Island in New York. The same study notes that the city now con- sumes more than three million cubic meters of gas and that, in aggregate, this produces 5,000 tons of toxic matter a day.

44. Wherever Mexico City were located, the quantity of pollution would be serious. But its location in an intermontane basin undoubtedly makes matters worse because it gives rise to the phenomenon of thermal inversion. This means that some of the impurities which might, were Mexico City located on a coastal plain, be diffused into the atmosphere, are instead "dumped" onto the city. Further, the existence of the dried-up bed of Lake Texcoco to the north of the city, and the prevalence of north-south wirds, means that, in addition to other environmental impurities, there is dust which carries silicone particles and pathogenic germs (estimated to reach 750 kg per sq km). This dust falls like rain on the urban area, at the rate of about 500 tons per day. To judge from interviews with a cross- section of the city's population, there is no question that inhabitants are increasingly aware of the costs -- psychic and physical -- which this imposes on their everyday lives. And there are few visitors who fail to remark on the "smog" which on most days lies like a grey blanket over the V'lley of Mexico.

Advantages of Centralization

45. Some of the arguments in favor of centralization have been mentioned earlier. LHost of them concern agglomeration economies, but there are also several types of non-economic advantages.

Advantages for Macro-Economic Efficiency

46. The principal categories of an agglomeration economies are (1) economies which are internal to the firm, (2) economies which are external to the firm but internal to the industry, and (3) economies which - 15 -

are external to both firms and industries. The apparent importance of each category in determining the spatial structure of Mexico's industrial sector in the twentieth century, is reviewed in Chapter 2 of "Urban Development", which shows that the growth of Mexico City may be largely explained in terms of its location in the country's largest market, not only in terms of aggregate population size but also, and more significantly, in terms of the concentration of incomes. Many firms have located in Mexico City because of proximity to the largest market and because the communication links between the capital and the rest of the country provide easy access to other markets within Mexico. The structure of freight rates has tended, in the past, to favor a central market location even for firms producing goods which involve the use of heavy, bulky, raw materials. A core location was almost inevitable for many firms in many industries because any other would have imposed substantial cost disadvantages.

47. Industrial concentration has been closely linked with a policy of industrial protection. Were the importance of the domestic market to decline and the economy to become more open and competitive, a central location would be less crucial. The same applies to the future development of domestic markets elsewhere in Mexico. With the growth of demand in the periphery, one could expect new minimum threshold sizes to develop elsewhere. Within a framework of changing geographic demand, the overwhelming advantages of market proximity may become less important.

48. Mexico City offered and still offers many economies which are external to firms but internal to industries, the main examples being those derived from the development and maintenance of specialized labor and material markets and of forward and backward linkages between industrial branches. Mexico City's dominant status as an industrial center which can be documented from 1900, 1/ left most of the rest of the country in a state of inertia. By 1940, when rapid industrialization began, it was Mexico's main center of manufacturing and it continued to attract new enterprises because any other location would have suffered from the lack of access to ancillary and auxiliary industries, particularly in the case of small firms.

49. For the immediate future, this situation seems likely to continue. Insofar as new firms depend on the availability of specialized markets, Mexico City will retain its initial advantage as an industrial location. Will these advantages also be available elsewhere? To some extent they already are, because the size and industrial complexity of Monterrey and Guadalajara imply a significant array of external economies while both are sufficiently diversified to provide a viable footing for most branches of industrial activity.

50. Finally, there are the external economies which derive from increases in total economic size at given locations. More relevant than those already mentioned, these indicate the advantages of agglomeration which are referred

1/ See "Urban Development", Chapter 1. - 16 - to as "urbanization" economies. In this case, the argument about the relative attractiveness of Mexico City as a center for continued growth appears quite strong. First, the presence of the Federal Government is, as noted previously, a powerful magnet for industrial firms, offering a major externality which is unique to Mexico City. Second, the city has a large and in many respects unique supply of labor, especially of managerial talent. Because Mexico City provides an attractive social, cultural, political and economic milieu, it attracts middle and senior managers in both the public and private sectors and many entrepreneurs, despite the drawbacks of the quality of life of the city. Third, Mexico City's traditional role as the center of financial and commercial services implies that firms have a natural tendency, unless they are strongly tied to another location, to look to the capital for loans or equity capital.

51. Finally, Mexico City previously offered significant scale economies for many public services (notably in health and education), although this picture had already begun to change by the 1950s (see Yates: 1960). It is now doubtful that the argument remains valid. Nonetheless, certainly the past and perhaps the present advantages of agglomeration are not trivial, for it is difficult to envisage that Mexico could have achieved its remarkable record of sustained economic growth for more than 30 years without the externalities which were available to promote industrial development in its capital city.

Non-Economic Advantages

52. Historically, and to the point at which the economies of scale are exhausted, centralization has made it possible and may still make it possible to provide certain social services in Mexico City which could not be provided elsewhere, except at greater cost. Turning to less tangible social consequences, centralization has perhaps helped to consolidate the nation's fabric over the last half century. The same thing could perhaps be said with respect to the political advantages of a centralized urban system, in that the concentration of Federal authority has been a significant factor in developing the nation's political structure since the Revolution.

53. The social and political environment of the city are, moreover, important aspects of the advantages which it offers to individuals whose decisions about the location of households are strongly influenced by the social, political, educational and cultural as well as economic opportunities offered by Mexico City. In Mexico, Mexico City is equated with the image of personal success. The capital is after all the center of innovations, the setter of new trends and the arbiter of the nation's cultural values; there is a powerful desire on the part of many Mexicans to live there. But this does not apply to all Mexicans. For one thing, Mexico City has not been in the past nor is it now, the only source of entrepreneurial spirit in the country. Indeed, Monterrey is probably more remarkable in this respect. 1/ Nor is it, in the present era of rapid communications and

1/ See "Urban Development," Chapter 2. - 17 -

cultural diffusion, the only center for the transmission of international values; many cities are closer to the United States, which is an important source of such trends. But many of those who live in the cities of the periphery feel they are denied the excitement and the involvement in new developments that come from living in the center of things. And whether this advantage is -- for most of them -- more imaginary than real, there is no denying the adverse effects of this attitude on the development of a number of less dynamic peripheral cities. How much these attitudes affect the quality of life is perhaps debatable. While some may measure it in terms of physical criteria (which point to its shortcomings), others believe that it refers to cultural and psychological criteria as well. In these terms, Mexico City is far and away the most desirable place in which to live and work, because it offers a range and diversity of cultural facilities which have no parallel in other parts of the country.

On Balance

54. As has already been noted, there is no way of reaching a conclusive and quantified judgment about the trade-off between the advantages and disadvantages of centralization, even if we confine ourselves to economic matters; the addition of social, political and cultural factors further complicates arriving at a definite conclusion. Since we are less concerned here with trying to understand the causes of the country's present spatial structure -- which are dealt with in "Urban Development" -- than with trying to interpret its significance for Mexico's future socio-economic progress, the essential question is even more difficult to answer because it concerns not the present but the future.

55. A key issue is obviously the future size of Mexico City and its implications for national economic efficiency, social justice and the quality of life. We therefore begin our summing up with an assessment of the probable course of the future growth of the metropolitan area.

56. From 1940 to 1970, the population of the Mexico City metropolitan area grew from 1.8 million to 8.6 million, and it will continue to grow, regardless of whatever else happens. Carrillo Arronte (1973) suggests that, even if all further migration to the area were to have ceased in 1970, Mexico City's population would still amount to 24 million by the year 2000. He cal- culates however that a more probable figure, assuming a 50 percent reduction of migration compared to the last decade, would yield the astounding population of 35 million, representing 26 percent of the country's projected population by the end of the century and that even this may be a conservative estimate. 1/ An exact population projection is not necessary for this report; it is enough to know that over the next 25 years Mexico City's population will at least double and could grow by a much larger multiple. This is of central

1/ Those who regard Mexico City as already too large may have to revise their thinking. - 18 -

importance in arriving at some tentative conclusions about the issues of centralization from the viewpoint of spatial policy.

57. Looking first at the economic advantages and disadvantages, we have noted earlier that there seems to be a close relationship between the historical process of import-substitution led industrial growth in an environment of external protection and the process of centralization. In thie future (see Chapter 2) export growth, including that of the manufacturing sector, will be a sine qua non of sustained economic growth. This implies a more open economic environment featuring a lower level of protection and a gradual rise in the ratio of exports to GDP from the current level of 0.20, as well as an increase in the import/GDP ratio. As this happens, the role of the central market will be modified by the increased importance of external markets. Consequently, it will become less important to locate in Mexico City in order to maximize access to effective demand. From a national efficiency standpoint, location in the periphery close to points of exit for manufactured exports, would be more efficient than location in Mexico City in terms of transport costs.

58. Further, while Mexico City now offers a unique range of externalities, the further growth of cities in the periphery will necessarily dampen that advantage because, as their internal markets reach minimum threshold sizes for successively higher order commerce and service functions and for the production of increasingly complex manufacturing products, these cities will also tend to acquire a wider array of business facilities. Moreover, the attractiveness of Mexico City as a place to live depends partly on the q(ualityof life in the urban area. If Mexico City deteriorates while growing peripheral cities offer more conveniences and amenities, the cultural dominance of the capital may tend to weaken. As this happens, the willingness of entrepreneurs, executives and managers to live in other cities should increase, particularly if public sector resources are allocated in such a way as to improve the conditions of life elsewhere with respect to schools, hospitals and other public services. It can also be reasonably expected that as opportunities develop, the private sector will tend to provide other facilities, such as entertainment and recreation.

59. We observed earlier that the marginal costs of providing certain public services and of constructing some categories of social overhead are now higher in Mexico City than elsewhere, the most dramatic example being water. Insofar as this is already the case, it will become intensified in the future. We suspect that, in general, Mexico City has already exhausted whatever scale economies it once offered to the public sector and that national economic efficiency, as well as equity, would be better advanced by providing services and social capital elsewhere.

60. The question of whether decentralization is economically desirable also depends on whether it is considered more efficient or otherwise prefer-- able to exploit the resources of the periphery on the basis of a "colonial" rather than an "integrated" type of development. While there is no final - 19 -

answer, a fundamental and obvious distinction exists between the attitudes of the firm and the benefits to the national economy. For the firm the decision may be relatively easy in that the question can be answered in terms of the overall balance of the costs of production and of distribution in alternative locations. When the question is raised from a national point of view, the relevant perspective is that of social cost. Subject to the caveats introduced above, the evidence suggests that in some cases resource development may be more efficient if undertaken in the context of integrated regional growth.

61. With respect to the social consequences of the continued growth of Mexico City, the likelihood is that this would almost certainly lead to a disproportionate concentration of public as well as private resources in the capital. First, it is probable that the marginal efficiency of capital in Mexico City will be reduced in the future as compared with the past because scale economies and other agglomeration economies have been largely exhausted. Second, it would become necessary to concentrate social outlays to compensate for an increasing mass of underemployment in the urban economy. If this were to happen, urban concentration would certainly be even more at odds with the concept of interpersonal equity, for those who live outside the capital would continue to receive less -- in terms of per capita outlays -- than those who live in it. And to the extent that the problems of metropolitan government become so severe that only federal intervention could resolve them, this imbalance could, moreover, become threatening.

62. We come, finally, to the quality of life and begin with the pro- position that to speak of the metropolitan area of Mexico City as a "city" as if it were a single, homogeneous urban space, is to overlook the actual physical pattern of its settlement. The next 10 to 15 million people are not likely to move into the physical space now occupied by the first ten. Most of them will seek a place to live beyond the boundaries of the presently built-up areas in the valleys of Toluca, Cuernavaca, Puebla, and Tlaxcala. These and other areas, capable of being reached from the Federal District in less than an hour, are so closely linked with the old center, that they can be thought of as forming one coherent economic and social unit. The internal cohesion of this region is likely to be greatly strengthened in the future.

63. A comparison with Los Angeles is relevant. At the present time, Mexico's metropolitan area occupies only 22 percent of the land area of Los Angeles County. 1/ Without suggesting that the future of Mexico's capital can already be detected in the Southern California metropolis, one may nevertheless conclude that its functional unit may be preserved even if its total urban space should grow to several times the size of the existing one.

1/ Los Angeles County, with a population of 7.0 million, covers an area of 10,541 sq km. The corresponding figures for Mexico City's metropolitan area are 8.6 million persons and 2,286 sq km. -20-

64. Some of the major problems of this massive region will lie in the form of its spatial organization and the way in which it is governed. In some ways the quality of life of its inhabitants will depend on how these problems are resolved and not on the size of its population. Major changes will no doubt occur, as some areas decline in population (suggesting the need for their physical redevelopment to lower densities), while others will experience explosive growth. 1/ These problems are, however, primarily internal to the region and will not affect its relations with the rest of the country. The world has no experience of how to manage an urban agglomeration of upwards of 20 million people. But it is not hard to envisage that the problems of management may become extremely difficult to resolve. If, as seems likely, there is a tendency for the city to spread into surrounding valleys, which essentially means into the State of Mexico, what will happen to the tax base of the Federal District? Will it be able to maintain essential public services? The answer is that nobody now knows. But the problems of governing and of maintaining some kind of cohesion and order in the metropolitan area may become overwhelming and result in a deterioration of the quality of life. Moreover, in the absence of much firmer policies for dealing with the problems of environmental pollution it is hard to envisage that Mexico City will, physically speaking, become a more attractive place in which to live. Assuming that Mexico City continues to grow, but at a somewhat slower rate than before, it is likely to become more difficult to govern and less agreeable to live there. It will require an increasing share of public social welfare expenditure, and its development will be less compatible with the pursuit of national economic efficiency and sustained growth.

C. Regional Balance

65. The data reflect the wide contrasts in socio-economic development between different parts of the country. Interregional balance does not exist and probably never has existed in Mexico, although this assertion can only be demonstrated from 1940 onwards. Table 6.4 indicates wide variations in income levels between federal entities, and emphasizes the relative wealth of the 2 Federal District. Table 6.5 shows a high degree of correlation (r = .78) between variations in income levels and variations in the pattern of income distribution as measured by the Gini coefficient; the higher the income level, the better the distributive pattern.

66. The historical trend cannot be determined because comparable data are not available prior to 1970. Based on the strong indications derived from a composite index of socio-economic development which measures both contrasts

1/ During the recent decade, for example, some areas in the State of Mexico contiguous with the Federal District, doubled, tripled, quadrupled, and even sextupled their population (Tultitland, Tlalnepantla, Naucalpan, Atizapan and Netzahualcoyotl). - 21 - and changes over time, it appears that there is a tendency towards increas,_ig differentiation between rich and poor statss. The variables of the index are: (1) state product per capita; (2) industrial output as a share of gross state product; (3) industrial employment as a share of total employment; (4) cap-' investment in agriculture; (5) irrigated area as a share of the cultivated area; (6) electricity consumption per capita; (7) gasoline consumption per capita; (8) infant mortality per 1,000 live births; (9) sugar consumption per capita; (10) percentage of houses with water; (11) percentage of population with shoes; and (12) literacy.

67. Table 6.1 shows that the trend of state development reflected trends in the national economy, but progress was far from even. Twenty-four states maintained the same rank over 30 years. But Baia California Sur, Mexico, Tabasco, Sinaloa and Morelos all improved their ranking while Yucatan, Quintana Roo and Durango declined. These changes do not fundamentally alter the general pattern of stability. The Federal District ranked first throughout the period. With one exception, the states ranked among the first nine remained in that group from 1940-1970. Oaxaca ranked thirty-second, remaining at the bottom, with Chiapas and Guerrero alternating beteen thirtieth and thirty-first throughout the period.

68. In regional terms, eight of the fourteen most develoned states were in the north, three of the others were in the center a-;ound Mexico City (Distrito Federal, Mexico, Morelos) and one in the Pacific Southwest (Jalisco). Almost all of the poorest states were in the south. Most of the states in the "intermediate" category were geographically between these extremes. This suggests a three-tier pattern of development, broken only by the central area (around Mexico City) and Jalisco, which fell into the highly developed rather than the intermediate category. In order to test the hypothesis of circular and cumulative causations, the same 12 component index was employed as a dynamic measure of relative development. This shows trends in the relationships between the development levels of each state over three decades.

69. The measurements are based on the position of each state relative to the highest ranking state in each year (the Federal District) and are shown in Map 1 which indicates the tendency towards increasing disequilibrium vis-a- vis the Federal District in the southern states, only moderate disequilibrium in the north and a variable situation in the states of the center.

70. Table 6.1 shows that the states which in 1940 were most developed, tended in general to maintain their relatively higher status. The trend over the whole period is shown in the 1970 index which indicates that the states which suffered the least amount of change relative to the Federal District were the highest ranking in terms of differential development vis-a-vis the Federal District in 1970. Baja California Norte, however, stands out as an area which developed more rapidly than any other. Conversely, the lowest ranking states in 1970 were among those in which the annual rate of differentiation vis-a-vis the Federal District was greatest -- notably Quintana Roo, - 22 -

Zacatecas, Guerrero, Chipas and Oaxaca. However, some of the states which had intermediate levels of development also experienced relatively rapid deterioration in relative status, the outstanding instances being Durango and Yucatan.

71. Spatial contrasts in development are consistently linked to spatial contrasts in urbanization. In 1940 (Table 6.2) the relative index of state 2 development was highly correlated with the level of urbanization (r = .75). 2 In 1970 (Table 6.3) the association was even stronger (r = .85). This tends to confirm that relative development, whether measured on the narrower basis of income level or on the broader basis of the 12 component index, was strongly related to urbanization. The degree of association between relative development and relative urbanization was close in both 1940 and 1970, but was closer in the latter than in the former, suggesting a close relationship between the trend of state development and the trend of state urbanization.

72. A comparison of state trends in urbanization with state trends in development, confirmed the dynamic relationship between relative development and relative urbanization. Tests showed that the states (led by Baja California Norte) which urbanized most quickly after 1940 were also those which developed most quickly.

73. As we have seen, inter-regional balance does not and apparently never has existed in Mexico. Is "balance" necessary to maximize growth? Is it a realizable goal? Those who favor a more balanced space economy have not satis- factorily explained why they believe balance is a good, a natural, or an achiev- able condition. Probably, it is none of these things. One could also argue that nothing is more "natural" than a core-periphery relationship and nothing is more normal than regionally differentiated development. Looking at the space economy in terms of whether its configuration is generally consistent with the maximum growth of output, there is no reason why an unbalanced structure -- measured in terms of interstate contrasts in income levels and other indices of development -- is not consistent with maximizing the growth of GDP. As stated earlier, it is difficult to envisage an alternative structure for the past. For the future it is also difficult to find a logical or necessary relationship between inter-regional balance, on the one hand, and national economic growth or social equity, on the other. The problem is rooted in a common tendency to speak of the inter-personal and inter-regional distribution of the benefits of economic progress as if they were one and the same thing, and to look upon regionally balanced development as a means to the end of social justice. The equalization of economic opportunities and economic welfare throughout the nation is not a realistic objective for the basic reason that different natural resource endowments mean that some regions have more development potential than others. It is though, as noted earlier, fair to argue that centralization has implied an inequitable allocation of resources between the core and the periphery. But this should not lead to an inevitably fruitless attempt to equalize development throughout the nation. - 23 -

74. In brief, while "regional balance" is a matter of concern, it is often confusedwith the issue of centralization. The latter is a major issue for economic policy matters, the former is not. A solution to the problem of centralizationimplies a concerted attempt to decentralize,thereby changing the present core-peripheryrelationship. But there is no reason to assume that this would necessarily produce greater balance within the periphery; it could in fact produce less.

D. The Issue of Integration

75. A third issue concerns the discontinuityof economic and cultural relationsbetween urban and rural areas. Nationally, the process of urbanization has been closely associatedwith economic growth. This follows from the close relationshipbetween urbanizationand the developmentof the secondary and tertiary sectors, and the fact that the shift out of agriculture has been associatedwith rising factor productivity. At the state level, the degree of urbanizationis also associated with the level of economic development;the more urbanized the state, the higher the level of economic development.

76. We also find, however, that many of the country's largest cities are located in relatively poor and undeveloped states, such as Puebla, the country's fourth largest city, located in a state which in 1970 ranked among the five least developed in the nation. The prosperity of the city of Puebla contrasts sharply with the poverty of the state. Furthermore,some of the more developed states do not have high indices of urbanization. In the northwest, for example, Sonora and Sinaloa ranked among the ten relatively most prosperous states in the country in 1970, though they ranked low with respect to degree of urbanization. Nor did these states include any of the country's largest cities. Culiacan, the largest in either state ranked ninth in the urban size hierarchy for 1970.

77. Both urbanizationand the growth of large cities have been generally associatedwith relatively advanced economic developmentat the state level, but neither is a sine qua non of economic developmentat the subnational level. Why? First, because in some parts of the country -- even in the relative absence of a high degree of urbanization-- economic developmenthas occurred. Second, because urban developmenthas often (probablymore often than not) occurred without inducing development in the surroundingarea. There is considerabledisjunction between the urban and rural sectors, as seen in the enormous contrasts in incomes and socio-economicwelfare between rural and urban areas (Tables 6.6, 6.7). As a result, the issue of rural-urban integrationis a legitimate aspect of spatial developmentpolicy representing a spatial dimension of the broader issue of social equity. The operational question is whether improvement is possible. A review of past urban-rural relationshipswill provide the necessary background to understandwhy disjunction has occurred and to evaluate the prospects for future change. - 24 -

78. In some parts of the country, the northwest in particular, economic development has been strongly associated with agricultural development. In such circumstances, neither urbanization nor the development of a large city (in terms of the national urban system) have been necessary conditions of economic progress. We should note that, to the extent urban development has occurred in the northwestern states, it has been closely associated with the development of the agricultural sector. This point is revealed by looking at the industrial and commercial structure of Culiacan, Obregon or Hermosillo (see Tables 3.2, 4.2). In this region, agricultural development has been coordinated with urbanization. We also find much less disjunction between the urban and rural sectors here than in other parts of the country. What is the background to this apparently successful process of integrated development, and why has it not occurred elsewhere?

79. Since 1940, the northwestern states have been the recipients of a major share of public investment in irrigation. In earlier times, the only areas of Mexico which could be used for intensive agricultural production were those with adequate rainfall. The technological change which came about with the development of new techniques for large scale irrigation and the decision to invest large amounts of public resources in new irrigation works resulted in a spatial emphasis on the northwest, because this was the only area in which irrigation was permitted by tenurial conditions and demanded by climatic conditions. It is also clear, however, that as an effect of this strategy the agricultural development of the north leaped ahead of that of other parts of the country. In the absence of countervailing measures to stimulate the development of rainfed agriculture in the south and center, the regional differences in the agricultural sector were thus exaggerated.

80. Prior to their emergence as major areas of agricultural growth, the northwestern states were relatively undeveloped. Urban development and the growth of the secondary and tertiary sectors were consequences of agricultural development, which implies that urbanization in this region was conceptually associated with the development of an agricultural export base. This was a common phenomenon during the government of Porfirio Diaz 1/ but less so in the twentieth century.

81. The "export base" argument contends that initial development in a resource oriented sector tends to lead to the development of other activities, including, first, raw materials sectors such as agriculture, mining, and quarrying and later, service industries producing inputs for the export sector and sustaining the local population. Finally, economic growth may attract unattached industries, thereby further enhancing the region's growth.

1/ 1877-1910. - 25 -

82. The likelihood of developing new industries from an export base largely depends on the nature of the base. When its development leads to the construction of large-scale infrastructure (particularly in transport), production and distribution costs for many activities may be lowered. Growing internal and external economies of scale will thus tend to stimulate export growth, thereby expanding the base. If, however, the external demand for a region's product falters, stagnation will likely ensue; but a sufficiently diversified local economy reduces the likelihood that this will occur.

83. Development of the export base thus depends on the successful generation of new activities from the original export oriented activity, and there is ample evidence to show that this is precisely what happened in the northwest after 1940. Driven by massive public investment in irrigation, the regional economy generated large surpluses of agricultural output for the rest of the country and for national exports. The growth of agriculture also generated new demands for services and, to an increasing degree, was linked to the growth of manufacturing (with special reference to food processing industries). In sum, urbanization and agricultural development in this region were intimately linked, which explains the higher level of rural-urban integration here.

84. The more usual relationship between urban and rural development in Mexico has been that towns and cities have generally developed in such a way that they are not closely integrated with the areas around them, but have their major linkages rather with other cities in the region or indeed with the national urban system as a whole. 1/ This is particularly true of the urban areas of the center and especially of Mexico City. The roots of dualistic relationships between urban and rural economies in such relatively poor and/or unurbanized states have many dimensions, including the allocation of investments, particularly public investments, and the relative prices which favor urban growth and facilitate the expansion of industrial activities in cities far removed from the sources of raw materials and foodstuffs. Under these conditions, a city can apparently grow almost indefinitely without particular regard to the surrounding rural area.

85. Many, and perhaps most, of Mexico's largest (and also of course smaller) cities have not therefore been associated with the "spread" of development to their hinterlands, and urbanization has not usually had substantial beneficial effects on surrounding areas. 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 center of Toluca about an hour and a half away in the State of Mexico; then to a small town,

1/ The existence of a relatively complete transport network is another obvious condition of this type of urban growth (see "Urban Development"). - 26 - say 20 km from Toluca; then, to any one of the many villages. First hand observationof these areas shows that the smaller the place, the lower the level of absolute and relative welfare. The data also support this. The suggested travel route represents the most extreme developmentalcontrasts that one might find in an area of less than 100 km in the whole of Mexico, but the pattern would be essentiallysimilar if the starting point were any one of the country'smajor cities. The transition from the urban to the rural sector is rather abrupt as seen in Figure 1.3 which shows the developmenttra- jectory for part of the Isthmus Region.

86. Spatial diffusion, or the "spread" of the benevolent effects of urbanization,depends on the existence of certain conditions. For example, a city whose locational rationale is based on the existence of a mineral resource, but which is located in the middle of an arid and unirrigatedplain, 1/ may continue to grow for as long as the resource base endures and is in demand. Its developmentwill not however "cause" the developmentof the hinterland. It is generally argued that if the physical, economic and social conditions of an area surroundinga city do not facilitate the diffusion of the developmentwhich may occur in the city, such diffusionwill not take place. In areas of Mexico where the conditions of the rural sector are unfavorableto the diffusion of development impulses from the urban sector, developmenthas not in general occurred. There are several states in which the presence of a large city does not coincide with a high level of overall developmentat the state level, resulting in a disjunctionbetween urbanization,in terms of urban size growth, and development.2/

87. The overall level of urbanizationin these states in 1970 was relatively low: 23 percent in Mexico and 28 percent in Puebla. The overall development index was also relatively low: -3.1 in Mexico and -3.3 in Puebla. The indicators of agriculturaldevelopment were also low. In terms of capital investment per agriculturalworker for example, Mexico and Puebla ranked 23rd and 25th out of 32 states. In terms of labor productivity,they ranked, respectively, 29th and 30th. Thus, in spite of the presence of large, industrialized urban areas in each state (which ranked 2nd and 6th in respect to rural population density), it seems likely that the conditions of the rural sector impeded the diffusion of the benefits of urban industrial growth. It also seems that the conditions of the rural sector may have impeded the diffusion of urbanizationper se, inasmuch as in these states a very large share of the total urban populationwas concentratedin the largest city. It is less easy to understandwhat these "conditions"are, how they come to be and how they operate to "reject" the demands--particularlyin agriculture--generatedby developmentin nearby urban centers. One may surmise that the general answer has much to do with the mobility of the labor force, such that equilibrium

1/ One example is Chuquicamatain northern Chile.

2/ This is seen in the states of Puebla and Mexico in relation, respectively, to the city of Puebla and the Mexico City metropolitanarea. - 27 -

is sought summarily through migration either to the cities themselvesor to alternate, more distant, centers of agriculturalproduction, rather than through increased production in situ. But further research is required to produce more certain answers to guide policy formulation.

88. To sum up, the urban and rural sectors have generally developed dualistically,not harmoniously. This is the heart of the issue of social justice. An attempt to improve matters by achieving closer and more interdependent relationshipsbetween the urban and rural sectors must therefore be an essential feature of any long run program for socio-economicdevelopment in Mexico. It must be preceded by a carefully designed research program designed to improve understandingof the underlying relationshipswhich policies would attempt to change, or to which they must adapt more successfully than hitherto.

E. Conclusions: The Goals of Spatial Policy

89. The conclusion concerns an assessment of long run policy objectives. Each of the three issues we have examined--centralization,balance and integration--couldbe translated into policy objectives. However, in terms of reasonable and viable objectives these issues are of unequal importance.

90. The first issue, centralization,translates directly into the objective of decentralizationand, in the same context, deconcentration. It is important to distinguishbetween these two terms. As used in this Report, deconcentrationpolicies refer to measures which aim to deflect future growth in Mexico City to locations not more than 100 km from the Federal District. A policy of decentralizationrefers to measures that will strengthen the growth prospects of regional centers beyond this radius. Although addressing the same issue, the problems involved in the design and execution of these policies are different. Mexico City is already generating substantialgrowth of its own, but its future growth must be guided with respect to the spatial organizationand physical planning of the emerging region around it. In contrast, a decentralizationpolicy not only guides location choices but also generates new growth in the periphery.

91. Decentralization(and deconcentration)appear to be consistent with the achievementof long-run national economic efficiency. They also seem consistent with the pursuit of social justice and a tolerable quality of life in Mexico City. The polemical debates which surround the subject sometimes obscure the fact that these objectives are only a means to an end, not an end in themselves. Decentralizationimplies a reduction in the size of Mexico City relative to the national urban system, assuming the absence of countervailingtrends and the absorption of incrementaldemographic and economic growth in areas outside the nation's capital. This is the point of departure, which must be accompaniedby a point or a series of points, of arrival. Some will be around Mexico City and will be part of a deconcentration strategy.Others will be much further away, but all will be cities which for one reason or another have unusually good prospects of achieving sustained and rapid growth in the future. - 28 -

92. What is the correct number of such "growth centers" for an economy the size of Mexico's? First, too many centers would lead to an excessive dispersal of resources. To illustrate this, suppose that US$100 million were available for investing in a growth centers policy. If this were spread evenly among 50 centers of 80,000 people each, each city would receive only US$2 million or US$25 per capita (the equivalent of two to three times its very limited municipal budget). But spread over 10 larger cities of 250,000 inhabitants, each city would receive a transfer payment of US$10 million or US$40 per capita (the equivalent of four to five times its municipal budget). In the former case nothing much could be expected to happen to the country's spatial structure. In the latter case, although success could not be guaranteed, the chances would certainly be much greater. If there were too many centers, locational attractions requiring major investments would be difficult to develop on a significant scale and both the external economies and income multipliers generated would be insufficient to induce sustained growth within a reasonable period. On the other hand, if the centers were too few, their combined impact on the overall growth rate of Mexico City would probably not be substantial. For example, doubling Mexico City's population in 15 years would add another 9 million people whereas doubling the population of, say, Leon, over the same period would add only 400,000. Less than half of this gain could be properly ascribed to a decentralization policy, since some growth would have occurred in any event. In this hypothetical case, therefore, the maximum number of people potentially withheld from Mexico City would be only 200,000 or roughly two percent.

93. A related objective of any decentralization strategy is to achieve sustained growth, rather than enclave development in the periphery. Enclave economies refer to centers whose growth requires continued public assistance in the form of investments and subsidies. If the aid should cease, growth would revert to the "natural" long-term rate of the local economy. Enclaves arise for various reasons. In general, few linkages are made within the local economy, and business services may have to be imported. Income multipliers remain small, because a portion of the new income is spent on goods produced outside the locality 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 others' intentions. Thus, "leakages" and uncertainties prevent the conversion of initial growth into multiplicative and sustained growth. In enclave economies, multiplier effects are, for the most part, captured by the larger, more established centers within and outside the national economy. Clearly this should be avoided in the development of future growth centers.

94. These are some of the basic aspects of the decentralization objective. Of the remaining objectives--balance and integration--balance is not an issue which deserves high priority.

95. There is, however, an evident link between decentralization and balance. In the pursuit of the type of decentralization we have proposed, there would clearly be a change in the core-periphery relationship because the periphery, as a whole, would become relatively stronger vis-a-vis the - 29 - core. In this sense it could be argued that the "balance" of the economy would thereby be improved. But it is in a limited sense because it would lead to the selective development of certain parts of the periphery, which would, in general, be those with the greatest comparative advantages for sustained growth. In the process of periphery development it could well happen that while overall differentiation between the core and the periphery would be reduced, differentiation within the periphery would be increased. Pursuing the objective of decentralization would not imply the generalized development of areas outside the metropolitan core and would not necessarily lead to a better "balance" as described earlier. Thus decentralization should not be seen as a means of achieving balance; rather it is a means of relieving concentration and of promoting the growth of those parts of the periphery which might have substantial development potential and which might otherwise have been ignored.

96. The final issue is the objective of integration. We argued earlier that this should be seen as an essential part of any macro-economic strategy for Mexico. The question therefore is: how does it relate to other aspects of spatial strategy? Specifically, how does it relate to a growth centers policy designed, primarily, to confront the problem of concentration? Growth centers are likely to serve multiple purposes only to the extent that local/regional conditions permit. Nevertheless one of the ideas underlying a growth centers approach to decentralization is that growth impulses will in time filter down the urban hierarchy into the periphery of each center. Until now, as we have seen, the effects of urban-industrial growth have tended, where they exist at all, to be quite uneven, and to deteriorate rather quickly with increasing distance from a given center. 1/

97. The notion of spread effects is based on the assumption of the existence of more or less spontaneous economic processes that will generate increased production in the periphery of an existing growth center. The conditions that would allow "spread" to occur include:

(a) sustained, cumulative economic expansion in the growth center itself;

(b) good physical access between the growth center and individual production units located in its periphery;

(c) creation of potential backward and forward linkages originating with new economic activities at the growth center that can be developed by expanding and/or creating new production in the periphery of the center;

1/ For a case study of spread effects, see Frank C. Miller, Old Villages and a New Town: Industrialization in Mexico. Menlo Park, California; Cumming Publishing Co., 1973. - 30 -

(d) spatial diffusion of appropriate market signals concerning new production opportunities and availability of knowledge, entrepreneurial ability, credit facilities, and other objective conditions necessary for acting on this information;

(e) extension of efficient market organizations into the periphery of the growth center, which will increase the demand for rural labor and agricultural products, both of which in turn will increase rural incomes and allow for increased savings and investment propensities on the part of rural populations;

(f) existence of sufficient income thresholds to allow appropriate entrepreneurial innovations to "filter down" to individual production units in the periphery.

98. These conditions are met infrequently in Mexico. Economic expansion at growth centers is frequently of the enclave type and fails to generate the sustained, cumulative growth that is required by the first condition. Access to individual production units is often poor, especially in the mountainous agricultural regions of the central and southern parts of the country. The peasant farming that is typical of these areas remains largely outside the market economy and consequently lacks the capacity to respond even to those market signals (however weak) that it does receive. Most of these signals, which refer to potential backward and forward linkages, tend to be "captured" by large commercial enterprises in Mexico City, by the subsidiary core areas of Guadalajara and Monterrey, and by the highly capitalized and rationally oriented farming enterprises in major irrigation districts. It is these enterprises that tend to have the available knowledge, entrepreneurial ability, credit facilities, and other objective conditions which facilitate an appropriate response. The ejido farmers, small-holders, and small town merchants in the immediate periphery of the growth center do not have these tools. Furthermore, such additional income as may be generated through the extension of product and labor markets into the periphery is more likely to be consumed than invested, in view of the low initial income of peasant operators and the lack of supporting programs which 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 use of fertilizer and improved seed varieties, or conversion of maize farms to dairy and poultry production) to "filter down" to individual production units.

99. Given these circumstances--which are common--it is not surprising that "spread" effects occur infrequently. Much of the potential "spread" is in fact absorbed by major core region economies and commercial farming areas. As shown earlier it is only in cities such as Hermosillo, 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" resulting in a reciprocal relationship with the rural economy. The lessons of this experience may be applied elsewhere, especially to some of the poorer States such as Tabasco, Chiapas, Guerrero, Puebla, Oaxaca, and Durango, where urban growth is being held in check by the small size and stagnation of local rural markets. Of course, social conditions as well as topography, land tenure - 31 -

arrangements, and water availability in these areas differ substantially from conditions in, for example, Sonora and Sinaloa. But the basic idea--to stimulate urban economic growth by increasing agricultural productivity and raising rural incomes--can still be applied profitably. This could be done through small-scale irrigation, reforestation, flood control works, rural roads, rural electrification, and improved land use practices. Town and country are complementary concepts. An exclusively town-based approach to economic growth, which growth centers strategy usually implies, may not work or work as well as one which pays equal attention to the rural population and the rural economy. But we stress again that the use of growth centers as a means to the end of rural-urban integration may not work everywhere. Even where it seems to have a good chance of working, the processes involved are not perfectly understood and the risk of failure is high.

100. If growth centers are not the answer to integration other alternatives are by no means clear. But economic policy concerning development should embody an effort to achieve more symbiosis in the space economy.

101. We conclude, therefore, that the outstanding issues of spatial policy would be easier to solve if the pressures generated by Mexico City's rate of population growth could be reduced from the very high levels that have prevailed in the past and if employment and income-earning opportunities could be improved in other parts of the country. The achievement of such a result implies a comprehensive decentralization policy which would seek to accelerate economic growth in certain favorable areas of Mexico's periphery. Such a policy would not be justified only because it would help alleviate some of the problems of managing Mexico City's growth, but the other major reasons include the possibility of a wider sharing of the benefits of economic growth among the cities and regions of the country and, consistent with the national objectives of rapid economic growth, the efficient use of national resources, as well as the pursuit of interpersonal equity.

102. Given these tentative conclusions, and noting that we are drawing a major distinction between what was valid for the past and what may be valid for the future, we shall in the next three chapters explore the following questions. First (in Chapter 2), what will be the major parameters of spatial policy over the next 25 years? Second (in Chapter 3), what should be the general outlines of a spatial strategy based on the growth centers approach to concentration and integration? Third (in Chapter 4), what are the apparent shortcomings of present policies for spatial development, and what new policies would be most useful in articulating a spatial strategy? - 32 -

2. THE PARAMETERS OF SPATIAL POLICY

103. Having identified the major objectives of spatial policy and having reviewed some of the relationships between them, we turn to the definition of the parameters of spatial policy. This refers to the macro economic and geographical conditions and constraints which affect the achievement of the goals of decentralization and integration based on a growth centers strategy. First, we consider the non-spatial parameters of population growth, and second, the geographical parameters which deal with the distribution of natural resources and the existing spatial structure of the economy.

A. Non-Spatial Parameters

104. In mid-1970 Mexico's population was 50.4 million, and was increasing at an average annual rate of 3.5 percent. In projecting possible trends of population increase through 2000 A.D., it is assumed that life expectancy at birth is likely to rise from 60.0 years for males and 63.8 years for females in 1970 to 68.4 and 70.4 years, respectively, in 2000 A.D. Further, it is assumed that fertility may either continue at the recent level or, alternatively, decline with the rate of decline depending upon the efficacy and success of population planning. It is estimated that the range of fertility in 2000 may thus vary from 6.3 to 3.5 children per woman. The latter assumption would imply a decline of 46 percent in fertility from 1970 to 2000. While the latter trend is not out of the question, it is at least improbable and would depend upon a highly successful effort to promote planned parenthood. We can expect a more limited decline in fertility, assuming moderate success with population programs.

105. Based on these assumptions about life expectancy and fertility, three population projections are shown in Tables 7.1, 7.2 and 7.3, the variable factor being fertility. The intermediate projection (shown in Table 7.2), indicates a population of about 140 million in 2000 A.D. and is probably the most realistic. If realized, it would give Mexico the seventh largest population of any country in the world by the end of the century.

106. The range of population size in 2000 A.D. thus varies from 122 million to 152 million -- a difference of 30 million, which is not enormous. But if the end year (2000 A.D.) population is regarded as the base year for population growth from 2000 A.D. to 2050 A.D., the implications become very important because the extrapolation of the highest and lowest trends over a longer period would naturally accentuate the contrasts between them.

107. On the basis of a population projection for 2000 A.D. and 140 million, the economically active population in that year is estimated at 40 million (Table 7.5). By comparison with the economically active population in 1970 (13 million), this would asume a greater decline in the participation - 33 - of those under 14 and over 64 years of age and an increase in the participation of women, but would imply almost no change in the size of the economically active populationas a proportionof the working age population (42 percent in 2000 A.D. against 41 percent in 1970). Further details of our assumptions concerning the size of the economicallyactive population are given in the Basic Report. I/

108. It is impossibleto forecast, except in the most general way, how these people are to be employed and where they are to live? But some of the major determinantsof the distributionof the population between rural and urban areas may be identified. These are the likely rate of national economic growth, the possible course of technologicalchange and, derived from these considerations,the probable sectoral structure - in terms of output and employment - of the national economy.

109. Given a time-span of a quarter century it would be futile to predict a long run GDP growth rate with any pretense of accuracy. There is, however, no reason why, with appropriatepolicies of external and internal adjustment,Mexico should not be able in the next 25 years to sustain a GDP growth rate equivalentto the historic average of the 1950s and 60s of six to seven percent. A considerationof what this achievementwould entail, in terms of short and medium run economic policies, will be found in a recent updated memorandum on the Mexican economy. Sustained long run growth will depend mainly on two factors: (1) a dynamic export sector in an open economy, and (2) a stronger and more self reliant public sector where performance is measured by the growth of public savings and its impact on the marginal national savings ratio.

110. Fundamentally,Mexico has a strong and diversifiedeconomic structure. The entrepreneurialability of the private sector has been demonstratedand the record of public sector management is excellent. It possesses a rich, diversifiednatural resource base, and profits from the enormous quasi-rent which derives from its geographic contiguitywith the world's largest market -- the USA. Thus, we shall assume that Mexico will be able to continue its past GDP growth pattern in the future.

1. The relationshipbetween future labor force growth, G132growth and technologicalchange shows a substantialincrease in employment in "other" sectors and in turn, a consequent increase in marginal employment (see Table 7.7). If past levels of productivityin "other" sectors were to be sustained, the amount of labor required would be considerablyless than the projections indicate. The difference amounts to 10.6 employees -- about 25 percent of the projected labor force in 2000 A.D. The distribution of sectoral employment for 2000 A.D., as shown below, reflects the large amount of marginal employment in "other" sectors. If marginal

1/ The Economy of Mexico: A Basic Report ME192, June 1973. - 34 - employment is excluded from the labor force, the sector shares are substantially modified and become similar to the breakdown for cross section data.

Projected Employment Shares for 2000 A.D. at a 6.3% GDP Growth Rate

% of labor force % of labor force % of labor force (excludingmarginal (cross section data employment in other with per capita GDP sector) at $1,400)

Industry 18 25 35 Agriculture 15 21 20 Other sectors 66 54 45

112. A faster than historical rate of GDP growth would thus be required to absorb projected labor force growth. If past productivity trends in agricultureand industry were to continue, and if productivity in other sectors were to rise only moderately faster than in the past, the economy would have to grow at no less than 8.0 percent to maintain underemployment at its 1970 level. In order to reduce underemploymentin relation to the economicallyactive population, a rate of GDP growth in excess of 8 percent per year would be needed.

113. A GDP growth rate of 8.0 percent would produce a level of GDP per capita in 2000 A.D. of about US$2,450 in 1970 prices. If there were no increase in marginal employment, it could be further assumed there would be no deteriorationin the pattern of income distribution. This would imply that those in the lowest income decile, who had an average per capita income of US$90 1/ in 1969, would, in 2000 A.D., receive an average per capita income of US$325. This would enable the population as a whole to enjoy a standard of living superior to that of 1970.

114. Faster growth however, is only one of two hypotheticalmeans to achieve more employment. Another involves the assumption that the development of labor-intensivetechnology in industry and/or agriculturewould create more jobs at given levels of output.

115. Are future productivitytrends in industry and agriculturelikely to differ from those of the past? In the industrial sector the answer will probably depend largely on the evolution of labor relations. In a free enterprise system (and it is assumed that Mexico will retain this type of system), entrepreneurialdecisions about labor/capitalcombinations will be made primarilywith reference to profitability. Whereas an increasingly elastic supply of labor may tend to encourage entrepreneursto substitute

1/ Current (1969) prices. - 35 - labor for capital, institutionalfactors, such as minimum wage laws and strong trade unions will tend to counteract any tendency to substitute labor for capital. It may be argued that a policy of reducing minimum wages in order to "spread" employment opportunitiesamong a larger number of workers would encourage the use of labor, but labor unions would almost certainly resist such as attempt.

116. There are also technologicalconstraints to capital/laborsubsti- tution. As Mexico's manufacturingsector moves increasinglyinto capital and durable consumer goods production,it is unlikely that substitution will become easier; it may become increasinglydifficult unless new techniques specificallydesigned for economieswith labor surpluses are evolved over the next two or three decades. Mexican industrializationhas proceeded primarily on the basis of imported techniques,most of which were initially developed and successfullyused in countrieswhere labor was relatively scarce and capital relatively abundant. The problem of disequilibrium between labor force growth and employment opportunitiesis not unique to Mexico. It applies, in some degree, to almost all developing economies. But, in light of the massive growth of population of the past and the expected persistenceof this growth in the future, the Mexican case is particularly salient.

117. Certain problems may be alleviated by responding to the particular requirementsof the Mexican economy. Technology could be developed in Mexico, for Mexico, which would be better suited to her needs and conditions than that which is now imported. The Government could play an increasingly important role in guiding the choice of technology. The developmentof appropriate,effective legislationin this regard is not easy, but greater influence could be exerted on choices of factor combinations.

118. The data on the agriculturalsector in Table 7.6 may reflect an underestimationof the economicallyactive population. Consequently,the implicit increase in agriculturalproductivity from 1950 to 1970 would be less than is indicated,as would the projected increase in productivity through 2000. In this case, there would be more employment in agriculture in both 1970 and 2000 and less in "other" sectors. However, this statis- tical change would probably imply nothing more than a shift of under-employment from "other" sectors to agriculturebecause under-recordingprimarily refers to marginal activity in the agriculturalsector. The difference, therefore, concerns the location of marginal activity (in one case, rural; in the other, urban). Irrespectiveof this change, substantial increases in agriculturalemployment seem unlikely because the future growth of agricultural output will largely depend on the adoption of more advanced technology. I/ There is, moreover, no prospect that any substantialpart of

1/ This finding is corroborated-bythat of "CHAC", an econometricmodel of the Mexican agriculturalsector constructedby the Ministry of the Presidency with IBRD assistance. - 36 -

the potentially underemployedpopulation could be settled into subsistence agriculture,because there is little unused land available for distribution. The 1971 Water Law, which restricts the size of individual farms in new irrigation districts, may provide a means for enabling more families to obtain land. Although the agriculturalsector's capacity to absorb labor would be increased, the quantitativeimplications are insignificant.

119. It is difficult to substantiatea case for assuming patterns of industrial and agriculturalproductivity and labor absorption rates different from those suggested in Table 7.6. Consequently,it may be difficult for either sector to absorb much more labor than has been estimated. A trend towards labor intensive technologywould help mitigate the employment problem but would probably not solve it.

120. In view of these trends, the distributionof the population between the urban and rural sectors, cannot be establishedwith any certainty. But even if there is a substantial shift out of agriculture,Mexico's rural population will continue to increase in absolute numbers. A reasonable guess would be a growth rate of 2 percent a year, which would place the total rural population at 38 million by the year 2000 (Table 7.4). This would represent an increase of 17 million people over 1970 and would mean that approximately the same number of peasant farmers would have to be absorbed in agricultural activities even though the cultivated area is unlikely to expand much beyond its present size. Thus, further crowding on the land, smaller farm units, and more intensive cultivation can be expected, with the result that land resources, at least in the already overpopulateddry-farming areas in central and southern Mexico, would be subject to further deterioration. The multiple problems of rural poverty in all but a few areas of large-scaleirrigated farming where methods of production will be increasinglycapital-intensive, are likely to become more severe.

121. The projected increase in urban population is even greater. Com- pared to 30 million in 1970, 1/ estimates of urban population for the year 2000 amount to between 84 and 115 million (i.e., 70 to 75 percent of the total population). Even though a good part of this increase will be the result of natural growth (i.e., the difference between birth and death rates), rural to urban migration will continue to be a major, though declining, factor in the growth of Mexico's cities.

122. These non-spatial parameters imply the probabilityof accelerated urban population growth, growing poverty in rural as well as in urban areas, a highly productive capital-intensive"modern" sector geared to export markets, and a slowly expanding domestic market concentratedin the major cities. From the standpoint of national economic growth, it can be inferred

1/ Defined in terms of a 2,500 threshold. - 37 -

that the urban export sector should be located as close as possible to points of exit. This suggests a concentration in and around major port cities, especially along the Gulf coast. However, in view of the enormous discre- pancies of per capita income among the states, distributional efficiency will not be served solely by refocusing urban-industrial development along the Gulf of Mexico, but will also require policies to encourage growth in key development areas in other parts of the country.

B. Spatial Parameters

The Spatial Order

123. Two sets of parameters for long run spatial development will be considered. The first concerns the regional structure of the economy which we shall define in terms of the functional spatial framework of economic interaction and exchange. The second concerns the geographic distribution of natural resources.

(a) The Status Quo

124. We are concerned neither with identifying homogeneous socio-economic conditions across geographic space, nor with identifying programatic development regions. The focus, is on how the space-economy works and in particular, on how the country's major cities fulfill organizational roles in that process.

125. A fundamental premise underlying the analysis of the urban system after 1940 (see "Urban Development") is that the system was articulated, in the sense that the national economy developed along interdependent lines with a sufficient national transport system, to facilitate macro-geographic interaction. Thus, every part of the nation's territorial space was related to each other part on the basis of access to the country's major cities which, together, constituted the framework for national spatial integration.

126. There are many levels of interaction and many levels of integration. But inasmuch as we are concerned with macro-geographic space (i.e., that of the nation as a whole), the relevant level here refers to a high order of functional interaction. The basis for identifying the urban-regional framework is therefore that of the city as a major center of economic activity dominating the economy of the area around it. This relationship is most obviously expressed in terms of the structure of the tertiary sector where major cities provide services not only for their own populations and those of immediately proximate areas but also for more remote populations. Given the close relationship between urban size and the level of manufacturing activity (see Table 3.4) and that, with some exceptions, this relationship is generally strongest with respect to consumer goods industries, we must assume that major cities also serve as manufacturing and distribution centers for associated regions. - 38 -

127. Assuming (a) that all parts of the nation were, by 1970, more or less integrated into the national space economy, and (b) that integration was achieved through linkages to major cities, there are three complementary ways of looking at Mexico's spatial structure. The first focuses only on Mexico City. From this point of view one can regard the whole country as a single region, which indeed for certain purposes it is, given Mexico City's dominant economic and social role. From any angle, Mexico City's primate status in the Mexican space economy is its most important feature and has many implications.

128. However, Mexico's space economy can also be seen in other terms. Map 2 shows how all of the nation's space can be "allocated"to one of the three largest metropolitanareas -- Mexico City, Guadalajaraor Monterrey. While there are certain functions (those of the Federal Government in particular) which are performed exclusively in Mexico City, other relatively high order functions are also performed in the second and third largest cities but not elsewhere. The most striking feature of this pattern is that the largest territorialarea is assigned to Monterrey, although the pattern of population density emphasizes the relative dominance of the zones associatedwith Guadalajara and Mexico City, particularlythe latter. Territory alone does not determine the relative size of each zone, but it implies that the zone associatedwith Monterrey is so vast that actual functional interactionbetween Monterrey and the western reaches of this zone must be questioned. This leads to the contiguityof the northern zone with the US frontier. While the frontier representsan impediment to spatial economic interaction,it does not represent an absolute barrier. Of relevance here is that to a very large and perhaps inevitabledegree, the economies of the northwesternstates (which are associated in this scheme with Monterrey)have developed close functional ties with the USA and that, as a result, a substantialpart of the northern zone "looks" towards and across the frontier to cities in the US border states, includingLos Angeles/LongBeach (1970 population 7.0 million), San Diego (1970 population 1.4 million), and El Paso (1970 population 800 thousand). There- fore, these massive "zones" cannot really be thought of as "regions" because they are too large to correspond to anything other than approxi- mate territorialdivisions between the three largest cities with respect to high order service functions.

129. The third level of spatial organization,shown in Map 3, represents an approximateurban-regional structure built around major cities. The regions thus defined vary greatly in territorial and demographic size and in socio-economicconditions, both as between one region and another, and as between different parts of each region, although some are more homogeneous than others. They vary too with respect to the size and characteristics of their central cities or regional centers. But, within the commonly accepted bounds of accuracy for regional demarcationand allowing for the fact that for purposes of measurement regional boundarieshave been adjusted to coincide with state boundaries, the six major regions, some of which are subdivided so that we have a total of 12 subregions,appear to correspond to zones of general socio-economicintegration and as such represent what may - 39 - be termed "general purpose" regions. These do not necessarilycorrespond to development regions if the latter are defined in terms of areas which can be used for the purpose of integrated developmentplanning. However, the relationship between functional regions and developmentregions is of necessity close.

130. The major regional capitals associatedwith the regions thus identified are: Mexico City, Guadalajara,Monterrey, Tijuana/Mexicali,Chihuahua, Culiacan, San Luis Potosi, Queretaro, Puebla, Veracruz, Oaxaca and Merida. As with any such scheme of allocation,there are certain anomalies, most of which fall into one of two categories. The first category consists of problems which arise with respect to the regional allocation of states which do not include major cities and which do not have strongly developed linkages with any of the leading metropolitanareas. These are, in general, either poor, small, or both. Examples are: Oaxaca, Chiapas, Hidalgo, Guerrero, Colima, Nayarit and Michoacan. The allocation of these states to their respective regions is a somewhat arbitrary matter. The second category concerns cities, the main examples being Leon, Torreon and Tampico, that are located on state boundaries. Their location in one or the other region is also somewhat arbitrary, because, in a regional scheme which did not have to respect state boundaries,these cities would themselves be important regional centers. In one sense, these problems emphasize that no scheme of regional allocation can be perfect when the availabilityof regional informationis an important criterion (i.e., when it is necessary to be able to describe and compare the demographicand socio-economicchar- acteristics of different regions). On the other hand, the urban-regional structure shown on Map 3 is generally consistent with the basic definitional framework of the urban system and thus represents a reasonably accurate out- line of Mlexico'sspatial economic structure in 1970. Demographic,social and economic indicators pertaining to each region (measuredon the basis of states) are shown in Table 6.8, which serves as an importantpoint of reference throughout the following discussion.

(b) The Northwest

131. The four states in this region, Baja California Norte, Baja California Sur, Sinaloa and Sonora, fall into two sub-groups: (1) Baja Californiaforte and Sur, and (2) Sinaloa/Sonora. The former is centered on Tijuana/Mexicali,and the latter, on Culiacan. The northwest as a whole is, as noted in Chapter 1, distinguishedby an advanced level of agricultural development,and a relatively high level of socio-economicdevelopment, although it is neither highly urbanized nor highly industrialized. Its major cities -- Tijuana, Mexicali, and Culiacan -- have generally poor social conditionswith high levels of service provision (for a more detailed discussion see "Urban Development",Chapter 2).

132. The ncrt-v-esthas a low average population density, covering about 20 percent of Mexico's land area but containing less than seven percent of its population. From 1960/70 it was the country'smost rapidly urbanizing area with all four states' average rate of population increase well above the national average. - 40 -

133. Besides its demographic dynamism, the northwest has become an aggressive and upwardly mobile socio-economic region with the highest levels of agricultural productivity in the nation, an average per capita income level almost 50 percent above the national average, and a relatively good pattern of income distribution as measured by the Gini coefficient.

134. Whilst these generalizations apply to the region as a whole, there are sufficient contrasts between the Tijuana/Mexicali subregion comprising Baja California (North and South), and the Culiacan subregion comprising Sonora and Sinaloa, to provide major subregional identities within the northwest.

135. The Tijuana/Mexicali subregion stands out as an area of rapid demographic expansion in the 50s and 60s, particularly with regard to its urban areas. It also stands out in terms of its economic dynamism and high average per capita incomes which, notwithstanding a high degree of skewness in its core cities, is relatively well distributed. A large proportion of the region's population is concentrated in Tijuana and Mexicali (67 percent in 1970) and the twin regional capitals account for an even larger proportion of its urban population (85 percent in 1970). There is moreover, no doubt that the northwest as a whole is strongly integrated, one measure of this being the fact that a larger proportion of road transport movements in 1970 both originated and ter- minated within the region than in any other of the six major regional areas (Table 5.1). Although these data refer to both subregions, they are strongly influenced by the inward-looking nature of the Baja California economy vis-a- vis the rest of Mexico. Inevitably, given its location and economic structure, the Tijuana/Mexicali subregion has very strong linkages with the economy of Southern California, implying that this subregion is not completely autarkic. Distance is, and will remain, a major impediment to more complete integration with the Mexican economy; for example, it still takes 44 hours to travel by road from Mexico City to Tijuana and 41 hours from Mexico City to Mexicali.

136. In sum, the Tijuana/Mexicali subregion is in many ways set apart from the rest of the country and its thriving economy is a result of the development, since 1940, of intense relations with the even more thriving and highly prosperous economy of Southern California. It is also, however, an area with many problems which are, for the most part, related to the proximity of the United States. The rapid growth rates of Mexicali and Tijuana have been strongly affected by migration from other parts of Mexico and there is no doubt that the principal motivation for migrating to Baja California has been the opportunity to move to the USA. Whilst these cities are relatively prosperous, they have also received a much larger migratory influx than they have been able -- either economically or socially -- to absorb in view of their extremely poor welfare conditions.

137. The Culiacan subregion is more closely integrated with the rest of the Mexican economy than that of Baja California. But the development of prosperous agricultural economies and of thriving cities whose growth has been closely related to the impetus of the agricultural sector in Sonora and Sinaloa, has been strongly affected by influences from the USA, particularly - 41 -

in terms of market opportunities and also in terms of enterprise and technological diffusion.

138. This subregion has been demographically and economically mobile, and its core city of Culiacan has grown at a rate well above the national average, while its secondary cities - Ciudad Obregon, Hermosillo and Mazatlan -- have, with the exception of the last, also been dynamic (Table 1.4). Income per capita here is much higher than for the nation as a whole and income distribution is among the most equitable in the country; the Gini coefficient in 1970 being less than 0.50 as compared to the national average of 0.58.

139. Accessibility between the Culiacan region and the rest of the country is better than that of the Tijuana/Mexicali subregion (see Table 5.8), which is explained by the much shorter distance (exemplified by a driving time of 18 hours from Culiacan to Mexico City vis-a-vis more than 40 to Baja California), and by the relatively well developed transport services to the rest of the country.

140. Table 5.3 shows that Culiacan has relatively more intensive linkages with the northwest (Monterrey, Monclova) and the Southwest (Guadalajara, Salamanca) than with Mexico City although its intra-regional links (with Hermosillo, Mazatlan, Nogales and Ciudad Obregon) were stronger still. The pattern of traffic to and from Hermosillo shows that Culiacan does not dominate this subregion to the same extent that Tijuana/Mexicali dominate Baja California. Hermosillo has strong links with the center (Mexico City and Puebla, in particular), with the northwest and the southwest. The pattern of telephone traffic (Table 5.7) confirms strong linkages with Mexico City although these are notably weaker than those of most other large cities, as is the case of Mazatlan. There are some problems of data interpretation arising from the fact that railroad freight movements inevitably emphasize long land journeys and thus de-emphasize intra-regional movements, while the same shortcoming applies to the patterns of air-traffic (Table 5.6). All of these data suggest that the Culiacan subregion is less closely tied to the rest of the country than the Tijuana/Mexicali subregion.

141. There are also two subregions here: one includes the states of Chihuahua and Durango with a regional center in Chihuahua City and the other includes the states of Zacatecas, Aguascalientes and San Luis Potosi with a regional center in the city of San Luis. The region as a whole has little homogeneity and can best be described in terms of its two subregions.

142. The first subregion is extensive, occupying almost 20 percent of the national territory, but accounting for less than 5.0 percent of its population. It is generally not a dynamic region, either demographically or economically; its rate of population growth and income growth in the 1960s was lower than any other parts of the north. Compared with other - 42 -

parts of the country, it is relatively well-off, but income levels and income distribution are inversely related, and the Gini coefficient is relatively high.

143. Compared with the center and the south, the Chihuahua subregion is not heavily urbanized. Chihuahua and Ciudad Juarez dominate the urban structure. The latter is considerably larger than the former. But, because of its frontier location, it does not fulfill the functions of a regional capital, its economy, like those of Tijuana and Mexicali, being closely linked with that of the United States. On the basis of road traffic data, the region as a whole (i.e., including the San Luis subregion as well as the Chihuahua subregion) appears to be strongly integrated with the northeast (Table 5.1) but has relatively weak connections with the northwest, the west, and the center and hardly any at all with the south (see rail traffic data in Table 5.3). Linkages between Chihuahua and other parts of the country are weak, but Ciudad Juarez has strong linkages with both the center (Mexico City, D.F.) and Guadalajara. These are related to through traffic from the US rather than to traffic originating in the Ciudad Juarez area and the structure of the strictly interregional flows is therefore less distorted than would seem to be the case. Air traffic data show that linkages with the center are an important part of the total air-traffic pattern. As in the northwest, traffic with Mexico City accounts for a smaller share of total traffic than is the case in the northeast, the west or the south (Table 5.6).

144. The second subregion of the northern zone is, by comparison with the first, much smaller (occupying little more than seven percent of the country's land area), more densely populated (particularly in Aguascalientes), less urbanized, and poorer. Agriculture provides more than half of all employment in this region and productivity, except in Aguascalientes, is very low with the result that the level of per capita income is well under the average for northern Mexico as a whole and is only slightly above that of the southern states. Consistent with earlier findings, income is poorly distributed, the average Gini coefficient being above 0.60.

145. This subregion is quite strongly dominated by San Luis which is its largest city, the only other sizable urban center being Aguascalientes. Intra-regional rail traffic between San Luis and other cities shows strong linkages with Aguascalientes and Zacatecas, and it also shows that the region has a strong relationship with the ports of Tampico and Matamoros and with the inland cities of Monterrey and Nuevo Laredo, all of which are in the northeast. In spite of the relative proximity of the San Luis region to Mexico City and to the states of the center (San Luis is only five hours by road from the capital), it should be regarded as part of northern Mexico.

(d) The Northeast

146. Occupying nearly 15 percent of the nation's territory, this region is one of the best integrated in the country. It contains several major cities besides the regional capital of Monterrey, including Nuevo Laredo, - 43 -

Reynosa and M4atamoroson the US frontier, the port of Tampico in the southeast cornor of the region, and Saltillo and Torreon in the west. While its population amounts to more than eight percent of the national population, the fact that this is a highly urbanized region means that its share of the nation's urban population exceeds 11.0 percent. It is also prosperous. More than 25 percent of the population is employed in manufacturingas compared with an average of 14 percent in the northern states. Its prosperity is also linked to the fact that agriculturalproductivity is unusually high. Per capita income is consequentlywell above the national average, but the Gini coefficientis comparable to that of other northern states. This region is both demographicallyand economicallydynamic, having had higher rates of population growth and income growth than most other regions during the 1960s.

147. Rail freight data (Table 5.3) suggest that the northeast is well integrated internallyand strongly linked to all other parts of the country, particularlythe central region (See Table 5.6 air passenger traffic and Table 5.1 road freight traffic). The latter table also shows strong connections with the northern region. The pattern of telephone traffic (Table 5.7) underlines the importance of both intra-regionallinkages and connections with the center.

148. In sum, the northeast is a large, prosperous,upwardly mobile and well integratedregion enjoying a large internal market, close connections with the USA (which provides its northern frontier)and strong linkages with the rest of the country, emanating in particular from its unchallengedre- gional capital in Monterrey.

(e) The West

149. A comparison between the west and the northeast is particularly interestingbecause these regions are dominatedby the country's second and third largest cities,which show marked socio-economicand structural differences.

150. Territorially,the western region is not very large, but it contains about 10 percent of the nation's population and, in the 1960s, was one of the country'smost demographicallydynamic areas. However, despite the presence of almost one and a half million people in Guadalajara in 1970, the southwest was less urbanized than might be expected. Its urban populationwas about the same as the national average while its rate of urbanizationin the 1960s was somewhat slower than that of the nation as a whole. The level of employment in agriculturewas similar to that for the nation as a whole, but productivity was relativelyhigher. This, and the fact that its share of manufacturing employment in 1970 was less than proportionateto its share of total employment, suggests that agriculturewas the mainstay of the region's economy. Notwithstandingrelatively good productivityhowever, average incomes per capita were below those of the northern and central states, although the distribution pattern was relatively favorable. - 44 -

151. Whereas the northeast boasts a number of large metropolitan areas besides Monterrey, which provide a strong framework for regional integration and growth; the west does not, and, a- regional level, Guadalajara is a strongly primate city, being more thbn _ times larger than Morelia, the only other city in this region with acGrerhian 100,000 people.

152. Rail traffic movements suggest a strong pattern of inter-regional interaction with the northwest, particularly with the Culiacan subregion, the Federal Capital region centered in Mexico City, and the Bajio Region which (see below) lies between Guadalajara and Mexico City with which it enjoys a relatively high level of accessibility (Table 5.8). Road freight traffic (Table 5.1). air passenger traffic (Table 5.6) and telephone traffic (Table 5.7) support this pattern although rail freight data emphasize the importance of linkages with the Chihuahua subregion to the north.

(f) The Center

153. Mexico City is, without question, the functionally dominant center for the whole of the central region -- an area which includes the States of Mexico, Morelos, Guanajuato, Queretaro, Hidalgo, Puebla and Tlaxcala, as well as the Federal District. Because of the diversity of this region because it contains a number of functionally effective regional centers, the central area may be divided into three subregions. The first includes the Federal District, Mexico and Morelos, with its center in Mexico City; the second, Guanajuato, Queretaro and Hidalgo with its center in Queretaro; and the third, Puebla and Tlaxcala, with its center in Puebla.

154. The central region covers less than eight percent of Mexico, containing no less than 36 percent of its total population, with nearly 25 percent residing in the D.F. and the state of Mexico. More than 70 percent of the population was urbanized in 1970. It is a densely populated region -- more so than any other in Mexico. Outside Mexico City, the states of Queretaro, Guanajuato and Puebla remain largely rural, while the population density of Queretaro and Hidalgo is notably lower than that of the region as a whole. Demographically it has, in general, been a less dynamic region than most of northern Mexico and with the notable exceptions of the states of Queretaro, Mexico and Morelos, the pace of urbanization has been less dynamic.

155. Despite the largely urban nature of the central region, agriculture remains the source of livelihood for much of its population, accounting for half or more of total employment in Hidalgo, Guanajuato, Puebla and Tlaxcala. Agricultural productivity, particularly in Morelos, is generally high. The average income is over 150 pesos/ha in all parts of the region except Tlaxcala. The manufacturing and tertiary activities of the central region distinguish it from the national economy, accounting for more than 50 percent of all manufacturing employment in the nation and an even larger share of tertiary employment in 1970. Given this, it might be expected that income per capita would also stand out in a comparative context. Although this is the case of the Federal District, it is not the case in many other - 45 -

parts of the region -- Guajuanuato, Hidalgo, Puebla, Gueretaro, Morelos and Tlaxcala -- all of which have relatively low income levels and relatively skewed patterns of income distribution. This, rather than the relatively favorable nature of the aggregative indices of its employment structure, reveals the region's dichotomous nature. The intense contrasts in socio- economic welfare arise, for the most part, from the highly unequal pattern of land distribution in its rural sector and the widespread rural poverty which occurs within a framework of high average levels of agricultural productivity.

156. Transport flows, revealing the patterns of economic interaction, show a very high level of centralization within the region. Patterns of rail traffic (Table 5.3) are not a good measure of intraregional structure, given the relatively short distance involved and the excellence of the road transport system. This is reflected in the short journey times between Mexico City and other cities in the region. Puebla is only two hours away; Queretaro, two-and-a-half; Leon, less than five; Toluca, only one; and Pachuca, slightly more.

157. Traffic data show that while Mexico City and other cities of the central region were strongly linked with other parts of the country, rail linkages with the northeast, and northwest and with the port. of Veracruz to the east were particularly strong (Table 5.3). The pattern of road traffic distribution shows strong internal ties with the west (Table 5.1) and strong external links with both the west and south. This is also reflected in air traffic (Table 5.6). Although the northeast had strong linkages with the center in 1970, the western region accounted for more than 40 percent of the central region's outgoing traffic. The strength of connections between the center and other regions -- when measured in terms of different transport modes -- points to its traditional enjoyment of powerful links with all other parts of the country, whilst having a relatively strong network of internal linkages, although the latter may be comparatively weaker than those in the northeast.

158. Among the sub-regions of the Center, the Mexico City sub-region stands out by virtue of its large, urbanized population, its emphasis on manufacturing, its high level of personal incomes and the dynamism of its recent demographic and economic growth. This is not only a tightly knit subregion; it is also the core of the national economy. Inasmuch as Mexico City accounts for a major share of the sub-regional structure, it may be viewed as an expanded version of the Federal Capital area, the national role of which has been discussed earlier.

159. The Bajio subregion includes the states of Queretaro, Guanajuato and Hidalgo and four of the nation's 37 largest cities in 1970: Leon, Irapuato, Queretaro and Pachuca. The role of Leon within the regional scheme is -- like that of Torreon and Tampico -- somewhat anomalous. In 1970, it was Mexico's seventh largest city. Straddling the border of Guanajuato and Jalisco, Leon occupies an uncertain status between the western region and the Bajio subregion. Despite its size, it does not - 46 -

have a dynamic recent history. Visits to the region suggest that Queretaro should be the regional capital, although a case can be made for the existence of a nascent linear metropolis, stretching from Queretaro to Irapuato, which enjoys strong intra-subregional linkages as well as a close relationship (but one preserving some independence) with the Federal Capital region.

160. In the eastern portion of the central region, the city of Puebla is the undisputed center of a densely populated and generally poor subregion, characterized by low and skewed incomes, the nature and causes of which have been considered earlier.

(g) The South

161. Compared with the regions thus far considered, the southern states present a picture of almost unrelieved poverty and underemployment. However, unlike the central region where the strength of Mexico City provides a single dominant center, the south divides into three subregional components:

(1) Veracruz and Tabasco, with a principal center in the city of Veracruz;

(2) Oaxaca, Guerreo and Chiapas with a center -- albeit weak -- in Oaxaca City;

(3) Yucatan, Quintana Roo and Campeche with a relatively strong center in Merida.

162. The Veracruz subregion is markedly better off than the rest of the south. It is relatively large, accounting for five percent of the nation's area; relatively populous, containing almost 10 percent of the country's population, and, in the 1960s, was quite dynamic. It is unurbanized, despite the fact that in 1970 it contained six cities with more than 100,000 people: Veracruz, Coatzacoalcos, Minatitlan, Jalapa, Orizaba and Villahermosa. Most of its population is employed in agriculture. Although the productivity of this sector is quite high, incomes per capita are low relative to those of the states of the northern and central regions.

163. Railroad linkages within the region are still rather weak, although the Gulf Coast serves as a traffic axis between Villahermosa and Veracruz. There are strong inter-regional ties to the central region with respect to outward and inward freight, with a roughly balanced flow in both directions. This also applies to air passenger movements and telephone traffic.

164. In sum, the Veracruz region is strongly integrated with the central region and somewhat integrated with the northeast. It is clearly an area which depends on internal linkages for its develpment. As such, it is an outstanding example of how the core-periphery relationship operates to the general detriment and backwardness of the periphery. - 47 -

165. The Oaxaca subregion is different in that it is hardly developed at all -- either as a client of the core or ctherwise. Geography has had a lot to do with this. The mountainous terrain -- which characterizes the states of Guerrero, Oaxaca and Chiapas -- inhibits economic progress. The area encompassed by this fairly homogeneous but barely integrated region amounts to almost 12 percent of the national territory and populated by about the same share of the national population (its average population density is close to the national average). It is little urbanized and, except in Acapulco and Oaxaca, lacks large cities. Its agriculture is poor, productivity is low, and incomes here are the lowest in Mexico and very badly distributed. Its major inter-regional links are with the Cen- tral region and the northeast (Torreon) and with the other subregions of the south, via the Isthmus of Tehuantepec. This is, in sum, an underdeveloped, poorly integrated region which may present greater challenges to development strategy than any other in Mexico.

166. We come, finally, to the Merida subregion and here the city of Merida, twelfth in population rank in 1970, provides an eccentrically located but nonetheless dominant center for the states of Yucatan, Quintana Roo and Campeche. There are no other cities of any size.

167. It is comparatively large, sparsely populated, unurbanized and poor. Here too, geography is a critical factor in explaining why this subregion has remained underdeveloped. In sum, the problem with the Yucatan is that it is at one extremity of the nation, and does not possess a resource base capable of offsetting the disadvantage of this relative isolation. In the nineteenth century it became prosperous because of henequen cultivation but as world demand for that crop declined, so did the fortunes of the Yucatan; they have never recovered. This region is still heavily agricultural with moderate productivity. Although the average level of income is somewhat higher than in other parts of the south, income is poorly distributed. Its linkages today are mainly with the center which has to some extent replaced the intensive links which this region once enjoyed with the southern USA (New Orleans), and with Cuba, although its rail links with the northeast are also (but only in a relative sense) quite strong.

168. This region is, in several respects, the antithesis of the northwest. Both are, as it were, "out on a limb" at the extremities of the nation. But whereas the Yucatan borders Central America, the northeast borders the USA. This, rather than resource endowment or enterprise has made the fundamental difference in the development experience of the regions.

The Resource Structure

169. The significance of the present spatial order as a parameter of future spatial policy, derives from the inherent advantages of existing agglo- merations and the external economies associated with fixed urban and infrastructural investments. However, the historical development of most of Mexico's cities was, at least in the early stages, based not on agglomeration economies, but rather on the development of an export base. There were important exceptions, above all Mexico City. The early growth of some cities, such as San - 48 -

Luis Potosi and Aguascalientes,was primarily attibutable to a privileged location on the nation's evolving transport network. Elsewhere however, in a process which is exemplifiedby the experience of Monterrey, urban and regional developmentwas based on the exploitationof agriculturaland/or mineral resources. Given that this process has been of focal importance in the past, it is assumed that, subject to the development of yet unexploited resources, future urban and regional growth and thus spatial change could also -- to some extent -- be related to the development of new export b-:. , Thus, a general appraisal of the country's natural resources is anothe important parameter of spatial policy. Certain natural resources have negative, as well as positive aspects. In particular, the geographic dis tribution of hydraulic resources in Mexico is such that although they ma be said to represent important advantages for the development of certain areas, they are likely to become an increasinglysevere constraint on the development of others. The second category of spatial parameters for spatial developmenttherefore concerns the geographic structure of Mexico's resource endowment.

(a) Hydraulic Resources

170. Mexico's water resources are not only scarce but are also concentrated in a relatively small portion of the national territory. Furthermore, the location of developmentto date has not correspondedat all closely with the availabilityof water resources. While water is available in abundance in many areas where economic developmenthas lagged far behind that of the rest of the nation - specificallyin the south - there is little water in areas where major industrial and agriculturaldevelopments have taken place and where population growth has been concentratedin recent decades.

171. The southeast accounts for 40 percent of the known water resources of the country, but covers only 7 percent of the national territory and contains only 8 percent of the national population. The central plateau and the north cover 51 percent of the national territory, contain 60 percent of the national population,but have less than 12 percent of the nation's water resources. More than 85 percent of all of Mexico's water is found in areas below 500 meters, whereas 70 percent of the population and 80 percent of the nation's industrialactivities are located at altitudes above 500 meters. More than 50 percent of the arable land is in the arid north and 25 percent of it is at altitudes of more than 500 meters. Population growth, urbanization and industrializationare endangering scarce water resources by the pollution of river systems. This problem is already serious in the Central Plateau and in some parts of the Gulf Coast. It can be expected to worsen as urban-industrialdevelopment proceeds.

172. Until now it has been possible for Mexico to achieve rapid economic growth without confrontingserious water constraints. However, during the 1970s many cities, especiallyMexico City, will have to face increasingly severe water shortages. Important irrigation districts, based on groundwater development,will experience a critical reduction in water availability. It is necessary here to distinguish between water withdrawal and water - 49 - consumption. Water withdrawal from surface or ground sources for such activities as the production of hydropower, is not "consumed" to any significant extent and most of it is returned to streams or groundwateraquifiers. Other economic activities,especially agriculture,consume (through evapotranspira- tion or evaporation)a high percentage of the withdrawn water. A certain percentage of the withdrawn water may be returned, but usually to a different location and with a different quality, which may limit its usefulness.

173. Attempts have been made to project water demands for the main sectors of the Mexican economy. These estimates are not very accurate as far as present actual withdrawal and consumptionfigures are concerned and may be even less accurate for future years. The data neverthelesssuggest a rapid increase in future demand.

174. Table 9.1 facilitatesa comparison between water withdrawal and consumptionin different sectors. Clearly, agriculture,household and urban public services are the main sectors of water consumption. The data show however, that agricultureaccounts for by far the highest percentage of total consumption (95 percent in 1970). The water requirementsof the agricultural sector are expected to more than double from 1970 to 2000; those of the domestic and municipal sectors are expected to quadruple over the same period and those of the industrial sector are expected to increase as industry acquires an increasinglyimportant role in the Mexican economy. An 3 overall comparisonbetween the volume of water supply (400,000 million m annually) and that of water demand, may lead to the conclusion that no real water shortage exists. However, the regional differencesare so marked that water shortages are occurring in some parts of the country.

175. Several alternativeregional divisionshave been proposed for the purpose of analyzing the geographic structure of water availability and water demand, most of which are based on the boundaries of major river basins. The latest effort at regional breakdown as proposed by the Plan Nacional Hidraulico (PNH) is presented in Table 9.2 and Map 4.

176. Water consumption in different regions is shown as a percentage of annually recurringwater within each region. The figures for Regions I, VI and XIII show that consumptionexceeds availability;the excess demand is met by mining groundwater reserves and transferingwater from other regions. (See Map 5).

177. Although the most arid regions are situated in northern Mexico, the increasing concentrationof population at the center is giving rise to the greatest water scarcity at a regional level. A sub-divisionof Region XII (Lerma), which includes parts of the Santiago basin, shows that consumption will exceed available supply in the near future. As a consequenceof extremely high levels of water consumption,pollution is a growing problem in these regions. Contaminationendangers the aquatic life of rivers and lakes as well as the water supply for many communities. - 50 -

178. The most promising areas for future water development are identified in Table 3.12. They include the south and the southeast where only a very small percentage of the available water is now consumed.

179. While this generalized regional analysis provides a rough impression of contrasts in water balances, the true nature of the water problem is revealed only by detailed examination of individual subregions. A brief review of prevailing conditions in some of the critically water-short regions is presented below.

180. A. Valle de Mexico. The Comision de Aguas de Valle de Mexico was created in 1972 to help satisfy the rapidly rising demand for potable water in the Mexico City metropolitan area. It is currently engaged in a US$174 million project which is intended to satisfy urban water demands through 1977. When the present project is completed nearby water resources will be nearly exhausted and future increments in supply will become far more costly per unit of additional water obtained. The projects under consideration include those of the Upper Balsas (located at a distance of 80 km from Mexico City and 1,000 m below it) and the Panuco (located at a distance of 200 km from Mexico City and a pumping lift, 2,000 m below it). Such high pumping lifts would be unprecedented even for large cities. Moreover, in view of currently rising energy costs they would be very expensive. An alternative would be to increase water imports from the Upper Lerma basin, which is controversial because it would reduce the availability of irrigation water in the basin.

181. Besides considering alternative sources of supply, the search for solutions must also consider reducing future demands. These include the recycling of waste water and possible reductions in water use per capita. So far this has been assumed to be 360 liters per day, which is relatively high compared with other metropolitan areas in Latin America, such as Bogota (215), Caracas (280), Sao Paolo (310). Such reductions in per capita use may require sharply increased tariffs for high volume private consumers and licensing and other forms of rationing during drought periods. These would be consistent with strategies for restricting Mexico City's rapid growth in that they would help divert population and industries to other areas where water is more abundant. The water shortages in the Valley of Mexico may reach crisis proportions by 1980 if additional sources are not developed.

182. Most of the deconcentration cities (see Chapter 4) which are within a limited distance from the capital and which may be considered suitable for development, are in a more favorable situation concerning water supply. However, the available sources appear to be sufficient for medium size cities only, leaving no surplus which could be transferred to Mexico City.

183. B. Lerma Basin. In the center of Mexico at an altitude of between 1,500 and 2,500 m is the Lerma Basin (Region XII), characterized by rapid population, urban and industrial growth focused on Guadalajara. The water - 51 -

resources of this region appear to be sufficient to support projected agricultural and industrial water demands to 1980 and beyond. However, these data show only long-term average flows, and do not reflect the reduced flows which occur during the prolonged droughts experienced in the past.

184. The Lerma Basin now contains seven cities with populations of between 50,000 and 400,000, the average rate of growth of which during the decade 1960-70 was about 5 percent. Indications are that the rate of growth since 1970 has been even higher. Recent investigations have pointed to a high degree of pollution at various locations along the river. In stretches of the Lerma River, where the river-bed is relatively permeable, there is serious danger of infiltration of pollutants into the underground aquifiers which are an important source of supply for several of the cities in the Basin. This could result in damage to this source of water.

185. Lake Chapala, at the western end of the Basin, is the principal source of supply to the city of Guadalajara. During the drought of 1948-54, water stored in Lake Chapala and available to the city of Guadalajara was almost completely exhausted, and it was necessary to use an emergency bypass from the Lerma River. Should a drought of similar magnitude recur (which is entirely possible), Guadalajara would certainly suffer a major water shortage. A possible new source for Guadalajara is the Rio Verde. This would require the construction of either a high-cost tunnel and siphon under the Rio Santiago or a pumping lift of 500 m from that river. The current engineering and economic feasibility of these schemes has not yet been established. In view of uncertainty regarding the Rio Verde project, as well as the threat of a serious water shortage, immediate consideration should be given to conserving the city's water sources and rationalizing their use.

186. Another serious aspect of Guadalajara's water supply problem concerns quality. Lake Chapala is now the city's only important source of supply and it is in danger of eutrophication. Even more serious is the fact that the industrial corridor between the lake and the city along the Rio Santiago is a major source of pollution. Untreated wastes are discharged into the river upstream of the .city's water intake. Irrigation, both present and planned, in the area between Lake Chapala and Guadalajara represents a further source of pollution which is damaging to the city's potable water.

187. The industrial corridor between the cities of Queretaro and Irapuato also depends on the very limited water resources of the Lerma Basin. Because of the relatively high concentration of industry in this region, the pollution of the Lerma River is a major problem (which poses a serious threat to the Basin's urban water supply systems). Water quality conservation measures (which are almost non-existent in Mexico) need to be implemented with great urgency in this region.

188. C. The Pacific Northwest Region has been the focus of major government and private investments in irrigation works which have permitted the development of a flourishing agricultural sector. At present, some 734,000 - 52 -

hectares are irrigated with surface water and 100,000 hectares with groundwater. The region now accounts for over 30 percent of the value of farm output from the nation's irrigation districts. Possibilities for agriculture in the northwest would be further expanded if additional irrigation water would be provided. But SRH projections of water availability and use indicate that within the next decade, deficiencies of considerable magnitude will appear in the northern section of the region (the Guaymas and Hermosillo areas) owing to population increase and industrial growth as well as agricultural expansion. In these same areas, the mining of groundwater has already caused some salt water intrusion, threatening a reduction in the irrigated areas.

189. D. The Peninsula of Baja California, the most arid region of Mexico, is already facing a serious water shortage. Despite this shortage, demand is expected to increase rapidly, one important reason being the development of tourism. At the same time, small-scale irrigation projects are being carried out by SRH which depend on the same limited water supply. The value of water is higher in the tourism and industrial sectors which can afford to rely on desalination--the only feasible alternative. A few desalination plants are already working and with the research going on in this field it is expected that these methods will become economically feasible and will have wider application in the near future.

190. E. In the Northern Interior Basins as well as in the Rio Bravo Basin, most of the economically active population depends on agriculture, and agriculture depends on irrigation. The limited availability of water is especially acute where agriculture is competing with increasing water demand in the domestic and industrial sectors.

191. The most important city in this region is Monterrey. Among the major constraints to further industrial growth in the Monter5ey region is an adequate supply of water. The present system supplies 4.5 m of potable water. However, most industries do not buy water from the municipal system but operate their own wells. The city should be able to supply forecasted demands until 1980 or 1982 although very recent data, not yet fully evaluated, may point to a more optimistic prognosis.

192. A potential source is the surface water passing through the State of Nuevo Leon which is used in irrigation districts in Tamaulipas. However, while the new Water Law of 1972 establishes the priority of domestic over agricultural use, strong political action would be required to reallocate water from irrigation districts.

193. As a means of water conservation, industries in Monterrey are already purchasing untreated raw sewage and are considering the idea of improving the sewer collection system and the construction of treatment plants which would increase the volume as well as the quality of sewage effluent so as to make its use more attractive to industry. - 53 -

194. F. The Gulf Coast. The Gulf Coast cities from Veracruz through Coatzacoalcos, and Mintitlan to Villahermosa as well as Tampico and Merida have sufficient water supply sources even if sizable extensions of the present systems were to be required. The major problem in these areas is pollution which needs immediate attention in cities depending on surface water. Major extensions of the present systems will naturally increase the volume of waste-water and would require adequate treatment or disposal facilities which are lacking in all the above cities except Veracruz.

(a) Agricultural and Other Natural Resources

195. The prospects for spatial change based on the exploitation of new economic resources are subject to periodic re-evaluation because their economic significance depends on their perceived value, which may change over time. Current appraisal shows that the major resource bases for future development in Mexico fall into six categories: agriculture, forestry, fisheries, mining, petroleum and tourism.

196. A. Urban Growth and Agriculture. During 1940-1970, to a much greater extent than in any earlier period, urbanization was closely linked with changes in the rural sector. It has been argued that urban growth during the Porfirian period was partly based on the development of agricultural exports. It has also been argued that in 1910-40, the rhythm of urban development was responsive to rural change and, in particular, to the effects of land reform policies. After 1940, the process of utbanization might well have been modified had conditions in the rural economy been different. These conditions are of fundamental importance in explaining the urbanization process because they concern the environment from which much of the urban population originated, given a communications system which facilitated (a) the dissemination of information about rural/urban contrasts, and (b) movement between rural and urban areas.

197. After 1940, government strategies for agriculture emphasized the use of public investment, prices, credit and the physical regulation of imports. The strategy was (at least in terms of the growth of output) remarkably successful for more than a decade. It enabled Mexico to become self-sufficient in basic foodstuffs, to produce raw materials for the manufacturing sector and to increase agricultural exports. It facilitated the transfer of savings to the urban sector and implied a growing market in the rural sector for Mexican manufacturers.

198. Less than half the threefold increase in agricultural output between 1940 and 1970 was attributable to the expansion of the cultivated area. The main thrust came from increased productivity, with a main contribution from public investments. Agricultural progress after 1940 was not sustained, and a shift away from agricultural investment in the public sector after 1950 coincided with a decline in the rate of sectoral growth from more than 7.5 percent between 1940 and 1950 to less than 4.0 percent between 1956 and 1970; in 1965-1970 the rate fell further to 2.0 percent. While the sector had provided substantial export surpluses in the 1940s, and early 1950s, in 1956-70 - 54 -

the sector's share of exports was greatly reduced, the annual rate of growth falling to 1.4 percent. This was in part due to the increase in domestic demand for agriculturalproducts at an average annual rate of about 5.5 percent per annum from the mid-1950s through 1970. It also showed that (a) the output of the modern (commercial)sector did not expand sufficiently to meet domestic demand (restrictingexport growth and thus import capacity), and (b) the traditionalsector remained technicallybackward. Moreover, and of particular importance from the standpoint of urbanization,it became increasinglydifficult to absorb the rural labor force within the agricultural sector.

199. Two structural characteristicsof Mexican agricultureaccount for this. The first is the relatively small size of the cultivated area relative to the total area of land in farms. The 1960 AgriculturalCensus classified the 169 million hectares of land in farms as follows:

(millionha) (percent)

Cultivated area /1 23.8 14.1 Range and pasture land 79.1 46.8 Forests 43.6 25.8 Unproductive 11.2 6.6 Productive reserve 11.3 6.7

/1 Area cultivated at least once in the previous five years. Only about two-thirds of this area is cultivated in a given year.

In 1970 the harvested area was reported at 16.4 million ha, of which nearly 3 million were under irrigation. The high proportion of fallow was explained by sufficient rainfall and/or fertilizationto produce crops in successive years, and by the high proportion of crop failures (estimatedat an average of 15 percent of the value of output).

200. The second factor concerns land distribution. The process of land reform which had been so vigorously pursued by Cardenas in the 1930s was followed less vigorously after 1940. Moreover, while the tenurial system continued to be modified by redistributiveaction, the issue of certificates of inaffectability1/ with regard to livestock farms and certificatesof ownership with regard to holdings of up to 100 hectares irrigated equivalent, had a countervailingeffect. As a result, there were divergent trends in the historical evolutionof the tenurial system which thereafter featured the growth of relatively large commercial farms and the developmentof small- holdings (throughongoing agrarian reform).

1/ Guarantees against expropriationor other action to break up land tenure structure. - 55 -

201. Thus, while the resurgence of the small private farm and the ejido were important characteristicsof the period, the concentrationof land (not in terms of ownership as much as of usufruct) actu:allyincreased after 1940. By 1960, 1.3 percent of the total number of farm units occupied more than 50 percent of private cropland. With respect to farm size (the statutorymaxi- mum of 100 hectares irrigated equivalentnotwithstanding), the 1960 census recorded over 2,000 private farms with more than 2,300 hectares of cropland. At the bottom of the land distributionscale, 77 percent of private landowners in 1960 controlled only 11 percent of private cropland, the average unit size being 1.6 hectares, and about 900,000 smallholdershad less than 5 hectares of land. The situation of the ejidos was better; fewer than 700 ejidatarios had farms of less than 4 hectares of cropland.

202. In 1960, aggregatingprivate farms and elidos, 1.4 percent of all farms accounted for more than 36 percent of total cropland,while half of the total number of farms occupied less than 12 percent of the cropland area. It is calculated that the Gini coefficient of distributionof cropland rose from 0.464 in 1940 to 0.535 in 1960, although average farm size increased from 6.2 to 8.7 hectares in this period. 1/

203. The distributionof cropland does not provide an adequate index of agriculturaldistribution, the distributionof irrigated land being perhaps more significant. In 1965, 5 percent of farms in public irrigation districts accounted for more than 40 percent of the irrigated area and the average farm size on irrigated land was 2.5 hectares. Given that the productivity of irrigated land was on the order of four times that of rainfed land, even those with small irrigatedplots were relativelybetter-off than most farmers in rainfed areas.

204. The skewness of land distributionwas reflected in agriculturaloutput. In 1960, 54.3 percent of total output was attributableto 3.3 percent of farms; the same 3.3 percent of farms accounted for 80 percent of the increase in output from 1950 to 1960. This highlightedthe contrast between the traditional sector, which had backward technologyand low productivity,and the modern sector which was, by internationalstandards, technologicallyadvanced and highly productive. The relative sizes of each of these categoriesmay have changed somewhat over time, but a recent study (SRH 1970) suggests that some 53 percent of the 3 million farms in Mexico in 1970 were subsistenceunits producing negligiblemarket surpluses,40 percent were traditionalunits producing cash crops with traditionaltechniques, and only 7 percent (mostly in irrigated areas) were "modern" operations.

1/ The Gini coefficientprobably fell after 1960 in view of further redis- tribution. - 56 -

205. Against this background, the failure of the agriculturalsector and thus the rural economy, to generate a sufficient volume of new employment opportunitiesto absorb the growing labor force or even to retain that which already existed, given better opportunitiesin the urban sector, is hardly remarkable. Clearly, however, the fact that the growth rate of agricultural employment in 1950-1970was only 0.25 percent was a major factor contributing to the flow of rural population to urban areas. The relative "failure" of the rural sector to retain a larger share of labor force growth was thus a fundamental cause of rapid urbanization.

206. The following four agriculturalregions of Mexico have been described by Bassoco and Rendon (1972):

(1) "The northwest -- an arid zone of large scale irrigation along a thousand mile coastal strip between the Gulf of California and the Sierra Madre Occidental, plus Baja California. Agriculture is more extensivelymechanized here than anywhere else in the country.

(2) The north -- the rest of the northern part of the country; this region is also extremely arid and cultivable only with irrigation except for the eastern portions near the Gulf of Mexico.

(3) The Central Plateau -- an area of mixed rainfed and irrigated farms, concentratedalong the course of the River Lerma; the farms are generally smaller than in the north and northwest; 20 years ago (1950) this was the most productive agricultural region in Mexico, but it has been surpassed by the northern regions.

(4) The south -- tropical agriculturewith very few systems of water control; due to the mountainous terrain this region is the most remote from the major urban markets."

207. The spatial structure of agriculturetherefore contrasts somewhat with the spatial distributionof population dependent on agriculture (Maps 6 and 7). In particular, the north with the Gulf Coast, has become an area of highly developed agriculture,but the density of its rural population remains relatively low (compareMap 6 with Map 7). Thus, by 1970, the Yucatan, the Center and the South (Morelos,Guerrero, Oaxaca) had 42 percent of the agricultural labor force but provided only 18 percent of agriculturalproduction. The northwest and the Gulf Coast area (Veracruz,Tabasco, Chiapas) with 14 percent of the labor force, accounted for 10 percent of agriculturaloutput. The highest proportion of cropland actually harvested was in the Center and West Center (Jalisco, Colima, Michoacan), where population pressure was strongest.

208. Moreover, when livestock production is taken into account, the contrast between the north and the rest of the country is accentuated. The economic dimension of these contrastingpatterns of agriculturalactivity and - 57 -

rural population is revealed in contrastingpatterns of agriculturalproductivity and income. Average labor productivityand income on the commercial farms of the northwest (Baja California, Sonora, Sinaloa, Nayarit) were, at the end of the period (1970), some five times higher than in Central Mexico (Hidalgo, State of Mexico, Puebla and Tlaxcala), where agriculturewas pre- dominantly traditionaland subsistencebased (Table 8.1). The fundamental distinction between large scale and small scale agriculture thus had a very strong impact on productivityand output, although regional differencesin the value of output per hectare were less pronounced than those for labor productivity. Average output per hectare in the northwest surpassed that for the Peninsula (Campeche,Yacatan, Quintana Roo) by only 2.5 times while labor productivitydifferentials between these regions were on the order of 1:4 (see Table 8.1). Table 8.2 shows that for 1940, 1950 and 1960 there were certain changes in relative productivitylevels over time. Thus, while Baja California Norte was firmly establishedas a high productivitystate in 1950 and even in 1940, it was not until 1960 that Sonora became an outstanding productive area. There were also dramatic changes in the productivity of agriculturallabor in Chihuahua, Durango, Sinaloa and Colima between 1950 and 1960.

209. Table 8.3 shows interstate contrasts in capital investment per hectare in 1940-60 and points to the privileged status of the northern states, together with Jalisco, in 1960. (The Federal District should be disregarded in this respect because the cultivated area was very small.) To a large extent, these results were a direct consequenceof investment in irrigation,most of it publicly financed. The importance of irrigation in capitalizationis best illustratedby the case of Sonora, where by 1960, more than 70 percent of all agriculturalland was under irrigation. Moreover, although the geographic distributionof irrigated land is largely explainedby climatic conditions (see Map 9), it is unmistakablethat the preponderantshare is in the northwestern states (Map 8).

210. Given the importance of irrigation in explainingproductivity differentials, the importance of Federal expenditure in accounting for irrigation investments,it is apparent that Government agriculturalpolicy, of which irrigation investment strategy was a major feature, had much to do with the emergence of spatial contrasts in agriculture. In general, after 1940, agricultural policy stressed the achievement of output objectives rather than those of distributiveequity. This was, in many ways, a contrast with the policies of the 1930s and also stands in contrast to the policy objectives which have begun to emerge since 1970.

211. Detailed data on the geographic breakdown of Federal investment in irrigation are not available prior to 1959. But in the period 1940-60, large- scale irrigation accounted for an average of 13 percent of total Federal investment and most of it was concentratedin the north. Even after 1960, irrigation investment in Sinaloa alone accounted for an average of more than 2.5 percent of Federal investments in all sectors. About 15 percent of total Federal investment during the 1960s was allocated to irrigationworks, with a fifth of this going to Sinaloa. From the viewpoint of the national economy, - 58 -

the results of the agriculturalstrategy was successful. The massive increases in outputs on irrigated land satisfied domestic demand and permitted significant agriculturalexports; by 1970 the irrigatedareas accounted for 57 percent of agriculturaland livestock exports. As Barraza and Solis (1973) point out, the policy was associatedwith a tendency to aggravate traditional contrasts within the agriculturalsector. Moreover, its success was not sustained throughout the period and its results were particularlydisappointing after 1960.

212. From an area developmentpoint of view it is evident that the same strategy which produced growing contrasts between large, commercial,irrigated and efficient farms, and small, rainfed and less efficient farms, also implied growing interregionalcontrasts. Differences in tenurial structure and population density were of course derived from an historic past in which the only areas of Mexico which could be used for intensiveproduction were those with adequate rainfall. The technologicalchange which came about with the developmentof new techniques for large scale irrigationand the decision to invest large amounts of public resources in new irrigationworks could only have led to a spatial emphasis on the northwest, because this was the only area in which irrigationwas permitted by tenurial conditions and demanded by climatic conditions. This strategy meant that the agriculturaldevelopment of the north leaped ahead of that of other parts of the country. In the absence of countervailingmeasures to stimulate the development of rainfed agriculture in the south and center, the regional differencesin the agriculturalsector were intensified.

213. Taking account of the basic parameter of water resources described above, the nation's major underutilizedagricultural potential probably lies in the south and east. In view of the unexploitedpotential of the area, the Gulf Coast plains of Tamaulipas, Veracruz and Tabasco are underutilized. Elsewhere, especially in the north, which has been the major source of agricultural growth, water shortages may eventuallybecome a very strong constraint to further development. This does not, however, mean that the northern and central zones will not continue to produce a major share of the country's agriculturalproducts. It implies that if the problems of developing the tropical lowlands of the Gulf coast are overcome, the area should produce a much larger share of the nation's food and agricultural raw materials. A major requirement is the developmentof research for the intensive exploitationof the Gulf Coast lowlands as predicated on the achievement of successful drainage schemes. The implicationfor spatial developmentis that the southeast can be expected to generate much more agriculturalproduction and to support higher levels of urban activity related to this export base.

214. B. Urban Growth and Other Resources. Mexico's forest resources are abundant but little developed. The Sierra Madre Occidental, particularlyin Durango, Guerrero and Oaxaca and the Chiapas Highlands in the far south appear to offer the best long-run prospects. The difficult terrain in most of the forest areas, the lack of accessibilityand the absence of detailed forest - 59 - management studies pose developmentproblems. In these regions, forest development may provide a promising export base but is unlikely to be a major factor in spatial development.

215. At the local level the inland water resources of Mexico offer important opportunities for fishery development, although their existence has only recently been recognized by the Government. Of much greater significance are the opportunitiesfor onshore and lagoon fisheries which have been evaluated on a preliminarybasis during the past five years. The Pacific coast of Chiapas holds considerablepromise for intensive lagoon fishery development. Because of its limited on-shore implications,the Pacific coast offers many opportunitiesfor the further expansion of the fisheries sector. With respect to lagoon development, the role of fisheries in macro-spatial change is likely to be a very modest one given the limited amount of direct and indirect employmentwhich it could be expected to generate.

216. A very large proportion of the cities which now dominate the economies of northern and central Mexico owe their origins to mining. With few exceptions (Pachuca being the best example), their economies have long since diversified. The Ministry of National Patrimony considers that only a small fraction of the country'smineral resources have been discovered and that the prognosisbased on general indicationsof mineral wealth is excellent, so mining could again play an important role in regional, and possibly spatial, development. The northern zone has been explored to a much greater extent than either the center or the south. But current plans imply a gradual shift of allocationsfor resource explorationand evaluatLon towards these areas. The effort will be impeded to some extent by m;upower constraints and also by the greater difficulty of mineral explo-ationin the forested areas of the center and the south than in the north. The potential development of large-scale resources of copper, in particular, implies that new primary resource bases for urban and regional growth may become important within the next decade.

217. The recent discovery of major cretaceous oil deposits in Tabasco and Chiapas implies that in 1976 this area will produce more than two-thirds of the nation's oil and gas output; the remainderwill continue to be produced in Tamaulipas and Veracruz further north along the Gulf Coast. It is, as yet, too soon to anticipate the size of the new cretaceous fields. It is reasonable to expect, however, that they may be sufficientlylarge to imply that the southeastwill continue to be the major source of oil and gas in Mexico for some time. PEMEX has not undertaken much exploratory activity elsewherealthough the prospects for eventually discoveringoil and gas in the north and northwest are thought to be good (Map 10).

218. The significanceof tourism as an agency of spatial change has been recently demonstratedby the developmentof a new resort complex at Cancun (QuintanaRoo). In 1970, prior to the developmentof this complex, the population of the area was 117. It has now reached 18,000 and is still growing as work on the complex continues. It is unreasonableto suppose that the tourism sector will be a dominant source of new opportunitiesin - 60 -

the periphery in the future. But it should be borne in mind that the populations of Acapulco, Mazatlan and some of the frontier cities have increased to more than 100,000 in a period of less than 30 years, wholly or partly on the basis of tourism. The large-scale resort complexes planned for Baja California and southern Oaxaca and the on-going development of Ixtapa- Zihuatanejo in Guerrero represent significant developments of the natural resources of beaches and other physical attractions which may, in the long run, have a measurable impact on the spatial order as well as on regional and urban growth.

C. Conclusions

219. Non-spatial parameters and spatial parameters will have a fundamental impact on the course of future spatial development of Mexico. The analysis presented in this Chapter leads to the following major conclusions. First, Mexico's population will continue to grow, both absolutely and relatively, over the next 25 years. Second, quite a lot of it is going to be underemployed and that underemployment may tend to shift from the rural to the urban (tertiary) sector. Third, that different regions and different cities have strongly contrasting development prospects judging from (a) recent trends with respect to their economic and demographic dynamism or lack thereof, and (b) the wide contrasts between regions and between citites with regard to the availability of water and other development resQurces. In the next Chapter we shall try to show how these factors may be woven together in formulating a growth-centers approach to spatial strategy.

3. APPROACHES TO A SPATIAL STRATEGY

A. Introduction

220. A spatial framework for development policy represents a series of choices which are determined partly on objective grounds and partly on the basis of normative judgment. The geographic distribution of future urban and spatial growth will depend, to a considerable degree, on the willingness of the Government to pursue with great consistency a coordinated set of policies for spatial development. These policies will have to emphasize some areas more than others. The path of least resistance would be to give equal attention to all areas or to devise a formula that would allocate development resources in direct proportion to the local population. But the limitations of such a formula, are that some areas would receive too little to affect their economic fortunes, while other areas would receive too much. In either case, resoures would be wasted. - 61 -

221. Another formula, based on distributional efficiency, proposes that government expenditures (and other financial flows) should go as a matter of priority to those areas with the lowest economic growth rates during the last decade. This is commonly called the "worst first" policy which is based on the all-too-facile assumption that economic growth can be stimulated anywhere as long as financial resources are available and are correctly applied. But this policy does not take into consideration that prospects for sustained growth also depend upon an economy's capacity to respond to new stimuli and on the size of the local market. A study of the space economy of Mexico reveals that the options are few and difficult to accomplish. A policy based on a criterion which ignores the objective constraints on growth possibilities will probably not succeed.

222. Fundamental to any development policy for an economy such as Mexico's is that any changes introduced into its system of spatial relations must effectively contribute to its long-term expansion. All other policies, including those motivated by considerations of regional equity, must meet this basic requirement. Thus the appropriate issue is to determine which centers, beyond the existing core, offer the best prospects for accelerated economic growth.

223. It could be argued that the present metropolitan core of Mexico City is the only area which consistently offers the cheapest increments to production and that further concentration there would be consistent with maximizing growth efficiency. This is doubtful. Although Mexico City will undoubtedly continue to receive an important share of all public resources, there are many other areas throughout the country whose productive capabilities could be organized and strengthened without a loss in overall efficiency. Mexico City's past growth did not happen "spontaneously" but was in part the result of public sector policies which facilitated the expansion of industry. Unprecedented population growth inevitably followed. The disadvantages resulting from this exclusive preoccupation with the "top of the pyramid" have become increasingly apparent, and since 1970 the Government has been endeavoring to strengthen urban as well as rural economies in the periphery. This chapter purports to review some options for spatial policies which may serve as a guide to future efforts. 1/

224. In devising a spatial framework for development, two criteria underlie each policy option. First, major cities and metropolitan areas are selected according to their general prospects for economic growth, and grouped into sets in descending order, from high to low, according to the prospects of each city for stimulating secondary growth in the surrounding rural and small-town economies. The second criterion, which relates to the

1/ No such priorities have been established to date, but a team from the Secretaria de_la Presidencia and the United Nations Economic Commission for Latin America is making efforts in this direction. - 62 -

first, was to achieve a spatial system that would be potentially integrated on the basis of complementaryfunctions. 1/ One result of such a system would be a more balanced distributionof economic opportunitiesamong the cities and regions of the country.

225. The following sections review three alternativesfor a spatial policies framework. The first is termed a "Growth Centers Strategy", the second a "Gulf Coast Development Strategy", and the third a "Strategy of Radical Decen- tralization". To the extent that a coherent policy has been formulated, the third alternativeseems to be the Mexican Government'spresent policy. It provides a useful basis for comparing the other two alternatives.

B. Alternative I: A Growth Centers Strategy

226. This strategy attempts to integrate regional economies through an interconnectedhierarchy of cities and to increase spatial integrationon the basis of interdependentregional sub-systemswithin the national economy.

227. Map 11 summarizes the essential informationfor a growth centers strategy. In addition, Tables 1.8, 2.3 and 2.4 show demographicand economic indicators for each center. Map 11 presents a four-levelhierarchy of growth centers consisting of (1) a Primate Core Area, (2) two SubsidiaryCore Areas, (3) thirteen Regional Growth Centers, and (4) nineteen Local Growth Centers.

228. (1) Primate Core Area. This includes the Federal District and 10 additional municipalitiesin the State of Mexico which comprise the Mexico City MetropolitanArea. In 1970 this area had a population of 8.6 million. (Its present population is probably well over 10 million.)

229. (2) Subsidiary Core Areas. The Guadalajaraand Monterrey Metro- politan Areas are the logical candidates for this category. Both are important urban regions in their own right, with present estimated populations of

1/ As in France, economic relations in Mexico are extremely centralized. Most cities and regions relate to Mexico City but few have commercial relations among themselves. This is evident from an analysis of inter- regional traffic, commodity flows, and telecommunications. An alternative view is that powerful economic interests in Mexico City have organized the national economy in order to maximize their own profits. A spatial policy seeking to decentralizegrowth will have to break free from this traditionalpattern and try to build up regional economies in ways that will make them complementaryto each other. For example, what can the southeastern region produce that is needed in the North (and vice versa)? It is by analyzing comparative regional advantages along these lines that the basis for an appropriate spatial policy can be evolved. - 63 - about 1.5 million each. Part of their economic achievementmay be ascribed to the distance which separates them from the Federal Capital, a sufficient distance to allow for a certain degree of autonomy in developmentdecisions, but near enough to benefit from its services and exploit its market. As a result of past growth, the area of influence extends for about 200 kilometers in the principal directions of contact. (Being the Primate Core, Mexico City exerts an influencethroughout the entire country, but it also has an area of immediate influence,as shown in Map 11).

230. (3) Regional Growth Centers. These include the following cities: Chihuahua, the Torreon MetropolitanArea, Saltillo, San Luis Potosi, Leon, Irapuato, Queretaro, 1/ Morelia, Puebla, the Tampico MetropolitanArea, Veracruz, Coatzacoaloc-Minatitlan,1/ Villahermosaand Merida. The largest of these areas is Pueblo, with six percent of the Primate core area population, while the smallest (Coatzacoalcos-Minatitlan)has only two percent.

231. Three criteria were used to select regional growth centers. First, the center had to have a reasonablechance of reaching or surpassingthe estimated thresholdsize of between 600 and 800 thousand people within the next two decades. 2/ This implies a current population on the order of at least 200,000 and a sustained annual growth rate of between 5 and 7 percent to be maintained over the period. Second, the center had to have a high degree of present connectivitywith other potential regional centers and with at least one core area. Third, the center had to be so situated with respect to other cities and rural population as to suggest the possibility of eventually exerting a strong regional, as opposed to merely a local, economic influence.

232. Past growth experiencewas rejected as an additional criterion because as shown in "Urban Development",Mexico's urban system is still immature and shows considerablefluctuations from decade to decade. Past growth behavior was therefore not considered a reliable indicator of future prospects.

1/ Both Irapuato-Queretaroand Minatitlan-Coatzacoalcosshould be thought of as metropolitanzones. The first two cities lie at a distance of about 100 kilometers from each other, but comprise within their areas of influence two additional cities of medium size: Salamancaand Celaya. The second set of cities are only 24 kilometers apart and may be considered as an integrated urban-industrialcomplex.

2/ The concept of threshold size refers to the size of the internal market for which population is used as a proxy measure. Because of lower per capita incomes, the threshold size of Mexico is likely to be greater than for either Europe or the United States, where it is estimated that the threshold size of a city lies at about a quarter million. - 64 -

233. Five groups of other centers were excluded. First, there were the Border Cities. None of these cities has an extensive hinterland to which growth impulses might be diffused; moreover, backward linkages with the rest of the Mexican economy are weak due primarily to distance frictions. As a result of these two factors, a substantial share of the income earned in these cities eventually finds its way back across the border. Many Mexican workers spend part of their income in the US, and the (mostly) American firms locating in these areas repatriate a substantial share of profits. It is thus more accurate at present to think of them as constituting the "periphery" of American counterpart cities (San Diego, El Paso and Brownsville), and of participating in the growth of these cities rather than of generating their own.

234. In these circumstances, any help by the Mexican Government to further stimulate growth in border cities would tend to subsidize the United States as well as benefit the local Mexican economy. There are of course potential ways of improving this balance over time: one would be to expand the economic base of these cities, including their limited hinterlands; another would be to stimulate backward linkages with the rest of the economy. One present evidence, however, the latter option, which would presumably require large investments in transportation infrastructure, appears too costly. Attempts of the former kind (such as the Government's financing of "commercial centers" in a number of border cities, such as Mexicali, in hopes that this may possibly help offset income flows across the border) remain untested.

235. This explains why, in this strategy, all northern regional growth centers were "removed" into the interior of the country where more of their total economic impact might be captured for Mexico. The centers which might substitute for the growth of the border cities include Chihuahua, Torreon and Saltillo. Two of the three are located in the northeast where their economies can be tied in more effectively with the Subsidiary Core Area of Monterrey and where they would also have direct access not only to the major eastern markets of the United States, but also to the rapidly growing Gulf Coast region in Texas. 1/

236. Second, there were the Gulf of California cities (Hermosillo, Cuidad Obregon and Culiacan). These medium-sized cities on the Gulf of California owe their past growth primarily to the expansion of irrigated farming in their immediate vicinities. But, as argued in Chapter 2, water problems in these areas will become increasingly severe over the next decade and the further expansion of irrigation would mean importing water from other regions at a cost likely to be excessive. As far as manufacturing is concerned, their comparative advantage for many kinds of industry is substantially reduced by the distance to major domestic markets in the Central Zone and by their location, which is an advantage only with respect to exports to the western portion of the United States. (Agricultural processing industries, which form the backbone of the manufacturing sector in these cities, are exempt from both limitations.) For these reasons, it is unlikely any of the Gulf of California cities will attain a minimum threshold size before the turn of the century.

1/ Tijuana, Mexicali, Nogales and Ciudad Juarez are at a disadvantage with respect to these markets, since they are located with primary access only to the western parts of the United States. - 65 -

237. Third, there were the Pacific Coast Ports (Mazatlan,Acapulco). Both have experienced rapid growth in recent years, chiefly because of their attractiveness for internationaltourism. But, as a port, Mazatlan is less promising than Manzanillo,which is a much smaller city further south, or than Acapulco with its superior access to the Mexico City area. Both cities suffer from being wedged between the sea and the mountains. Lacking a significanthin- terland, they are unlikely to be able to spread growth much beyond their immediate boundaries.

238. Fourth, there were the cities of the Southern Mountain States (Michoacan,Guerrero, Oaxaca and Chiapas). With one exception, none of these States have major urban centers of sufficient size to warrant desig- nation as regional growth centers. The exception is Morelia, the State Capital of Michoacan,which has been identifiedas a regional growth center. As a whole, these four states are among the poorest, least accessible, most traditionalareas of Mexico and, in relation to more favorably situated regions, offer few dramatic prospects for economic growth, with the possible exception of certain parts of Oaxaca and Chiapas in the context of the development of the Isthmus of Tehuantepec.

239. Finally, there were the DeconcentrationCenters for Mexico City (Pachuca,Toluca, Cuernavaca). No city less than 100 km from Mexico City was considered suitable as a regional growth center, regardless of its present population. This is the "overspill"or deconcentrationarea for Mexico City and existing centers are likely to become absorbed into the metropolitan economy well before the turn of the century.

240. A projection of these excluded areas on Map 11 shows that the options for regional growth centers are sharply reduced as a result and that the areas which remain for considerationare: (1) the North and Northeast below the border (Chihuahua,Torreon and Saltillo, but not Durango, which is deep in the mountain and disadvantageouslylocated with respect to national markets); (2) the Gulf of Mexico cities (Tampico,Veracruz, Coatzacoalcos-Minatitlan,Villahermosa and Merida but neither Orizaba, which is a declining industrial center half-way between Veracruz and Puebla, nor Jalapa, the state capital of Veracruz, which is primarily an administrativeand educational city); and (3) the cities of the Center (Puebla, Queretaro-Irapuato,Morelia, Leon and San Luis Potosi).

241. This last set requires additionalcomment. By all standards,the most promising of these centers is that of Queretaro-Irapuato,which defines the region which is traditionallyknown as El Bajio. It is located on the main road between Mexico City and Guadalajara and has been industrializingrapidly during the last decade. It is also a highly productive agriculturalregion. The two cities are less than an hour's drive apart and enclose two additional towns of less than 100,000 population each -- Salamanca and Celaya -- both of which are well on the way to becoming important industrialcenters. From Queretaro,it is only an hour and a half to the northern industrialdistricts of the Mexico City metropolis via a limited access highway. And, once this highway is extended beyond Irapuato to Guadalajara,the distance to the State - 66 -

Capital of Jalisco will be reduced to three hours. In addition, the area is well-connectedto the northeasterncities of Saltillo, Monterrey and Terreon and, from there, on to the US border. Outside the immediatevicinity of the Federal Capital, there are no major areas in Central Mexico which offer better opportunitiesfor economic expansion. From the standpointof Mexico City industrialists,the area may be regarded as a deconcentrationcenter. But from the standpoint of the region, it is better thought of as a growth center with considerablepotential.

242. The other four cities each have their special characteristics. Puebla is an old industrial center on the edge of Mexico City's deconcentration area and the fourth largest city in the country. Its growth has picked up substantiallyduring the past decade and its future appears promising. Morelia is the State Capital and the only major city on the alternate route connectingGuadalajara with Mexico City. It is also tied by road to the Bajio Region. Leon is an important regional center of some size (420,000 in 1970) that has a long tradition of local shoe and leather manufacturing. And San Luis Potosi, a city of importance in Mexican history and a state capital, lies astride a key transport junction between the Mexico City-Monterreyhigh- way and the Guadalajara-Tampicoroad. Because socio-economicindices (see Tables 2.3 and 2.4) are more promising for San Luis Potosi than Aguascalientes, the former was included as a regional growth center, but the latter was not.

243. (4) Local Growth Centers. This is a residual category. Except for Pachuca, they include urban municipios and metropolitanareas of more than 100,000 people in 1970. Many of these cities are primarily administrative, service or commercial centers. Their growth prospects are relatively limited. But they also include ports and tourist centers, border towns, and older manufacturingcenters, such as Orizaba, which encounter different growth problems but, for reasons stated above, were not considered as regional growth centers. This does not mean that they should not receive the attention they deserve. In the context of a spatial development policy, an area designated as a local growth center should not receive the highest priority in programming national investments. This point will be developed further in the final section of this chapter.

244. In addition to the principal core regions and growth centers, Map 17 shows several major developmentaxes as well as primary and secondary road networks.

245. DevelopmentAxes were drawn to connect the three designated core areas of the Mexican economy, subject to the constraintthat they pass through as many regional and/or local growth centers as possible. The one exception is the developmentaxis which joins Mexico City with Veracruz and represents an extension of the main Guadalajara-MexicoCity axis. Development axes are likely to be the most heavily travelled long-distanceroutes of the national highway system. They are highly urbanized and provide access to the principal domestic markets. Because of this they can be expected to induce industrialization at major nodes intermediateto the core areas themselves (the Queretaro- Irapuato industrial "corridor",Morelia, San Luis Potosi, Saltillo and Pueblo). - 67 -

Development axes should be built as multilane, limited access highways, capable of carrying a heavy and growing volume of traffic. The shorter the time-distance between major points along these axes, the greater the prospects that they will grow into the spatial scaffold of the Mexican economy. The four major development axes are shown in a simplified form on Map 12, which also shows distances between major cities in kilometers.

246. The Primary Road Network (Map 12) connects every Regional Growth Cen- ter to at least one other Growth Center or Core Area, and every Core Area to at least one port or border city. (If a developmentaxis already provided for higher-orderlinkages, the criterion was thus satisfied.) The developmentaxes and the primary road network define the main physical structure of Mexico's emerging spatial system.

247. Once the primary road network has been identified,the spatial system falls into two main subsystems. The northern subsystem focuses on Monterrey and links up with Saltillo, Torreon and Chihuahua to the west, with Nuevo Laredo to the north and Reynosa and Matamoros to the east. (Except for Chihuahua, all of these cities fall directly within the area of influence of the Monterrey metropolis.) The central subsystem concentrateson the Gudalajara-MexicoCity-Veracruz development axis. To the southwest it joins the ports of Manzanilo and Acapulco, and to the east the main road along the Gulf of Mexico at Tampico and Poza Rice (Veracruz).

248. The northern and central subsystem are joined in two places: along the North-South developmentaxis between Mexico City and Monterrey and along the primary road network between Irapuato-Queretaroand Torreon.

249. This strategy (althoughthere is one in the Gulf Coast strategy discussed below) does not include a consolidatedsubsystem for the southern zone, chiefly because it lacks a subsidiary core through which to articulate such a system. However, the coastal highway extending from Merida to Tampico may eventually define a linear subsystem of some importance. The Gulf Coast States of Quintana Roo, Yucatan, Campeche, Tabasco, Veracruz and Tamaulipas, with which it interconnects,have considerablepotential for development (oil, sub-tropicalagriculture and manufacturingfor export) and are likely to experience accelerated growth over the next 20 years.

250. The definition of regional urban subsystems (and their inter-connections) provides a framework for highway, regional and spatial planning. It suggests a basis for identifyingpriorities for improving highway connections among cities with unusual potential for economic growth and population expansionand serves as a starting point for establishinga functional hierarchy of cities as an aid to locating essentialpublic services and facilities in health, education and transportation(among other sectors). For example, the concept of a regional airport could benefit from an analysis of urban subsystems as defined above. For spatial planning, the demar- cation of regional subsystems is the first step in the establishmentof developmentregions for the intensive study and programming of public investments. It also suggests a basis for the allocation of functional - 68 -

(economic)roles among cities within a larger system of economic inter- dependencies.

251. The Secondary Road Network, provides the essential linkages among all other cities (local growth centers) included in the original study design, with emphasis on the roads connecting cities along the Gulf of California and in the mountainousparts of Puebla, Oaxaca and Chiapas.

C. Alternative II: A Gulf Coast Strategy

252. This strategy is a variant of Alternative I. Its principal difference lies in shifting the main thrust of national developmentfrom the Central to the Gulf Coast States (see Map 13). A less probable framework than the first, it is also more costly. But the resulting benefits may well be worth the added cost.

253. A Gulf Coast strategy would offer a number of advantages over the first alternative. It would combine agriculturaland urban-industrialpro- grams, leading to further diversificationof the regional economy. It would concentrateeconomic expansion in water surp'lusrather than deficit areas. It would help to internalizethe multiplier effects of export-orientedin- dustries in the area. It would open a vital new frontier for Mexico's development, less hampered by tradition than some-of the older areas of the Central Zone. It would materially assist in reducing population pressures in the depressedagricultural regions of Chiapas, Oaxaca, Hidalgo and San Luis Potosi. And it would help to integrate the economy of the Southeast, one of the most depressed and relatively isolated regions in the country, by providing export outlets for agriculturaland manufacturedproducts through the ports of Coatzacoalcoson the Gulf and (possibly)Salina Cruz on the Pacific. In view of the drastic need to expand export production, this carries considerableweight.

254. A Gulf Coast Strategy is implied in some of the recent activities of the Government, including the expansion of port facilitiesand industrial plants at Coatzacoalcosand the development of new oil fields in the Tabasco- Chiapas region. But an explicit formulationand adoption of Alternative II as a spatial policies framework for the next twenty years would further emphasize improvinghighway connectionsbetween the principal coastal activities in the area, the developmentof urban infrastructureand agriculture,conserving resources, abating pollution and promoting physical planning. Moreover, a subsidiary core with regional facilitieswould be created at Coatzacoalcos. Both alternativeswould work with a growth centers concept, but the Gulf Coast Strategy would aim to shift the bulk of Mexico's future development to the cities of the Gulf of Mexico coastline and their associated regions. - 69 -

D. Alternative III: Radical Decentralization

255. In 1973, the Ministry of Public Works (SOP) published a development map (Map 14) that differs markedly from those which have already been discussed. Based on well-known French concepts, this map shows a four-level hierarchy of "poles" and other cities that appear to be more or less evenly distributed over the national territory. Lacking the equivalent of a Subsid- iary Core Area category (probably because of the questionable view that Monterrey and Guadalajara are already too large), the SOP map shows 13 Re- gional Equilibrium Metropolises and 40 Intermediate Metropolises. Among the former are such cities as Mexicali, Hermosillo, Acapulco and Oaxaca which, given the criteria developed in this chapter for the selection of growth centers, were specifically excluded from the growth center category under Alternative I. On the other hand, five cities, identified in Alternative I as Regional Growth Centers (Irapuato-Queretaro, San Luis Potosi, Puebla and Coatzacoalcos), are assigned by SOP to the lower category of Intermediate Metropolises. Finally, the SOP strategy does not attempt to identify either Development Axes or Primary/Secondary Road Networks. As a result, it fails to provide a well articulated system.

256. If the strategy implicit in Map 14 were to be used as the guiding framework for spatial policy over the next twenty years (failing a time span of this length, it would represent little more than an academic exercise), it would probably result in a very different spatial organization and imply a quit-edifferent spatial allocation of resources. It would tend to distribute public investments over a much larger cross section of cities than could reasonably be inferred from Maps 11 or 13. The question rests on the extent to which development resources should be concentrated (or dispersed) among cities. Because it shows a much larger number of growth centers (53, excluding Mexico City, in contrast to 13), the SOP map suggests a degree of dispersion that would leave each city with only a small share of the resources available for public investment. Moreover, being scattered over a much larger area, these resources would probably fail to bring about a spatial structure which was significantly different from that which would emerge without a spatial policy. This would mean: continuation of long-term rates of above-average growth for a small number of major cities, below-average growth for a larger number of cities, and a "spontaneous" spill-over of growth into areas adjacent to the Mexican City metropolis -- such as Puebla, Tlaxcala, Pachuca, Queretaro, Toluca and Cuernavaca. Such a pattern might be realized without such investments as the industrial parks that are now being built, but it would do little to promote regional "spread" effects. Indeed, the opposite tendency would probably occur and many areas would be drained even further by the inexorable expansion of Mexico City's urban field. Because much of the Government's effort would then be concerned with accomodating this explosive growth, decentralization would be weakened, and the growth of the region would continue uninhibited by any countervailing forces. Within a few years, the growth pole strategy of radical decentralization would probably have to be abandoned. - 70 -

257. Alternative I and II would also have to face the "overspill" problem, and the kind of selectivity that is intended may not be accpetable to the Government. But overspill can be dealt with more effectively if there is a manageable number of alternative centers and the hierarchy of growth centers recognizes the existence of major core areas, such as Guadalajara and Monterrey, whose further sustained growth may help alleviate the many urban problems of the national metropolis, while giving structure and cohesion to the two major spatial subsystems of the Mexican economy.

E. Urban Growth: The Next Twenty-Five Years

258. Table 1.7 and Maps 15 and 16 suggest the relative growth prospects of urban and metropolitan areas under two alternative assumptions. The first envisages the continuation of present policies (essentially the Radical De- centralization Strategy of Alternative III), while the second would see the implementation of the Gulf Coast variant of a Growth Centers Strategy (Alter- native II). Both of these assumptions are carried forward for about two decades and imply long-term average rates of growth.

259. The prospective growth rates are "informed guesses" concerning the future performance of urban economies. 1/ They illustrate general growth patterns and are neither forecasts nor projections. The future cannot be known and only spurious accuracy would be achieved by adopting more scien- tific procedures for estimating future urban populations. The growth patterns shown on Maps 15 and 16 are useful in that they offer a quantitative dimension for interpreting the alternative spatial policy framework presented earlier in this chapter. It will, for example, be noted that a few local growth centers under Alternatives I and II have higher growth rates than some of the Regional Growth centers, and that some of the latter are themselves divided into fast and slow growing centers. The hierarchy of growth centers, therefore, does not in itself predict relative rates of growth, but suggests patterns of regional influence in a context of potential growth.

260. The "informed guesses" (see Table 1.7) are based on the growth experience of each urban area since 1940. More specifically, under the alternative of Radical Decentralization, Mexico City could be expected to exert a strong gravitational pull on both economic activities and population.

1/ Growth intervals are based on the assumption of a 3.5 per annual natural rate of increase of Mexico's population. Any cities with less than this rate were assumed to experience net-outmigration. Other growth intervals were established for each percentage point increase in the average annual rate of growth. - 71 -

At the same time a spontaneous process of "overspill" into the closely adjacent centers of Toluca, Cuernavaca, Puebla and Tlaxcala would continue. Because their 4nternal markets are already sufficiently large to generate self- sustaining growth, both Guadalajara and Monterrey are expected to maintain higher than average rates of growth over the period. Other high growth centers include Acapulco (tourism) and Coatzacoalcos Metropolitan Area (port expansion and heavy industry). Growth prospects for border cities, except Tijuana, seem relatively unpromising. During the 1960s, the growth rates for these cities decelerated sharply and all except Tijuana actually grew at less than the average rate for all major cities.

261. Under Alternative II (the Gulf Coast Strategy) growth prospects for certain areas change significantly. In general, the urban subsystems focusing on the subsidiary core area of Monterrey receive new impetus, as do cities along the major development axes between Guadalajara and Veracruz. Decentralization of economic activities and population around Mexico City is reinforced, especially in the Irapuato-Queretaro, Morelia, Puebla and Pachuca areas. And equally significant changes occur along the Gulf Coast, as illus- trated below:

City From To

Merida low medium-low Villahermosa medium medium-high Veracruz low medium Orizaba MA low medium-low Tampico MA medium-low medium Matamoros medium-low medium Coatzacoalcos- Minatitlan medium-high high

262. Because of the cumulative impact of these shifts towards higher growth rates in its periphery, the Primate Core Area (Mexico City) has a somewhat lower rate of growth under the Gulf Coast Strategy than on the assumption that present policies will be continued (medium-low vs. medium).

263. Finally, a number of urban areas remain more or less unaffected by the assumed policy changes and under either assumption continue to grow at approximately the same rates. These include:

Tijuana Hermosillo Durango Jalapa Mexicali Ciudad Obregon Aguascalientes Ciudad Juarez Culiacan Acapulco Nuevo Laredo Mazatlan Oaxaca

Although both Monterrey and Guadalajara are shown with unchanged rates of growth under either assumption, under the Gulf Coast Strategy, they are expected to shift towards the upper end of their respective growth intervals (5.5-6.4 percent a year). - 72 -

264. Under both assumptions,urban areas such as Durango, Aguascalientes and Oaxaca, which are located in essentiallymountainous regions and poorly linked with the main growth centers of the economy are expected to have very low growth prospects.

F. Areas for Priority Development

265. A final step in the preparation of a spatial policies framework is the identificationof priority areas for development. This implies a regional approach. However, the regions in this case are not the river basins traditional to Mexican planning, but regions that are defined by, and articulated through, systems of cities and large metropolitan areas. The purpose of this exercise is to focus attention on a limited number of major areas that, for one reason or another, present special problems and/or opportunitiesfor their development. Chapter 4 will suggest specific policy measures. Map 17 roughly indicates the location and physical extent of each area.

266. There are five in all. The first is the Federal Capital Region and includes, in addition to the presently built-up areas of the Federal District and the municipios in the State of Mexico which are immediatelyadjacent to it, an "urban field" that extends outwards from Mexico City to a distance of about 100 km. This vast metropolitanregion is expected to grow to perhaps 30 million people by the end of the century and covers, besides the Federal District, portions of the States of Mexico, Hidalgo, Tlaxcala, Puebla and Morelos.

267. Map 18 shows how waves of population growth have been steadily moving outward from the Federal District since 1940, first to the North and, more recently, to the South, East and West. A general pattern emerges: relatively slow growth in the beginning, succeeded by a period of super-rapid expansion of 200-300 percent in the course of a single decade during which the area gets "filled up" followed by a gradual decline in population growth during succeeding decades. (In the case of Mexico City itself, this growth has stopped and the capital may actually show some absolute population losses during the 1970s.)

268. A study of this pattern suggests that the next "wave" of explosive urban growth may "jump" the mountain barriers that surround the Valley of Mexico and engulf the outlaying cities of Tlaxcala, Puebla, Cuernavaca and Toluca which, during the 1960s, reached expansion rates of 70 percent or more. Growth in the direction of Pachuca is currently impeded by Texcoco Lake. But the lake is drying up, and will eventually give way to urban-industrialex- pansion to the northeast of the Federal District. The main problems to be faced in this enormous region are those of articulatingits territorialex- pansion, the integrationof subcommunitieswithin it, housing, pollution abatement, location of physical facilities,land use and water and sewage systems, in short, the whole panoply of physical planning problems that will attend the emergence of one of the great urban regions of the world. - 73 -

269. The second region comprises the Metropolitan Area of Guadalajara. Guadalajara lacks a peripheral urban system as this is a rather tightly bounded area. A major problem concerns the future of Chapala Lake to the South of the city, because it is not only a major recreational source for the area but is also beginning to experience rapid industrialization cum urbanization. (One of NAFINSA's industrial parks is located on its shores.) If the Lake is to serve the multiple demands which are being made on it, land use as well as water quality problems will have to be given close attention.

270. The third region is focused on Monterrey and includes the border cities of Nuevo Laredo, Reynosa and Matamoros as well as Saltillo, capital of the adjoining State of Coahuila, and cities to the southeast of Monterrey, such as Montemorelos and Linares. This is the most important development area in Northeastern Mexico. It has very high growth potential, is strategically located with respect to US markets, and presents challenging problems in allocating region-serving activities in public sector industries, transport development, water supply and industrial location.

271. The fourth region comprises the emerging industrial corridor between Queretaro and Irapuato (Map 19). As pointed out earlier in this chapter, this is one of the most promising new development zones in central Mexico and is currently receiving "overspill" industries from Mexico City. Its future population may well rise to one million, and its connections with the principal core areas of the country underlie its key role as an area of intermediate location. Major problems include water and waste disposal, the resolution of rural-urban conflicts in land use, industrial location and service facilities--problems that will become increasingly severe as the growth rate reaches its projected sustained level of about 6 percent a year.

272. The fifth region, in the southeast, is focused oni Coatzacoalcos- Minatitlan and the Isthmus of Tehuantepec, but extends further along the Gulf Coast to Veracruz in the west and Villahermosa in the east. The region offers unusual opportunities for economic growth. In the States of Veracruz and Tabasco, it includes some of the best remaining land for agricultural development in Mexico; in Chiapas there are large reserves of hydroelectric power; in Tabsco and Chiapas there are major petroleum resources. It also contains two major ports, a heavy industrial complex at Coatzacoalcos-Minatitlan, and reasonably good connections (although they will need to be improved) to the center of the country. Across the Isthmus, it also has access to the Pacific Coast port of Salina Cruz which may acquire importance to the extent that Mexico expands its trade with the Far East (China, Japan, India). Portions of this region are currently under study, but an even more intensive treatment on a regionally coordinated basis would appear to be indicated. This would represent the first step towards the more precise formulation and implementation of a Gulf Coast Strategy whose main features were outlined earlier.

273. The next chapter will deal with policy measures and administrative arrangements to implement a spatial strategy as discussed here. It argues that existing decentralization instruments are too weak to bring about significant changes in Mexico's spatial structure and that new instruments will be required to implement the major policy alternatives which have been discussed here. - 74 -

4. INSTRUMENTS FOR SPATIAL POLICY

A. Introduction

274. This chapter will assess the nature and efficacy of policies introduced by President Echeverria's government 1/ and consider what other instruments might be introduced to further the aims of spatial policy. Although definite conclusions regarding the full impact of recent Echeverria policies on Mexico's spatial development may be premature, it is possible to reach preliminary conclusions about the strategy implicit in present efforts, and about their likely effectiveness in relation to the spatial strategies discussed in Chapter 3. The general nature of the spatial objectives of current policies complicates the assessment of their implementation. These programs do not yet constitute a clearly and completely articulated strategy which could be expected to fulfill the expectations that have been built up around them. The inertia which characterizes spatial systems is very great indeed and can be overcome, if at all, only with a comprehensive and consistent set of policies, firmly based on an accurate analysis of existing conditions and vigorously applied. Experience with similar programs (or attempts) in countries such as England, France, Italy and Japan reveals that these conditions are rarely fully met, and it seems clear that many more resources will have to be devoted to analysis and policy formulation if the Mexican experience is to be notably more successful than what has occurred elsewhere.

275. Recent policies have not distinguished between decentralization objectives and local development policies. The policies may be complementary, but a policy that stimulates local development in certain areas does not necessarily lead to decentralization. In Mexico, all existing programs tend to be seen as instruments for the simultaneous achievement of both objectives, thereby obscuring the distinction. For example, policies designed to promote small and medium-sized industry at the local level are called decentralization policies. Although these policies may strengthen local capacity to generate or respond to growth impulses, their impact on decentralization from Mexico City is probably negligible.

276. Spatial policy has so far tended to focus on inducing growth in all places at the same time in the hope of reducing the economic dominance of the larger metropolitan areas, without accounting for differences in the growth potential of various cities. Rather than focusing on targets with comparative advantages which would make them potential counter-magnets to Mexico City or true regional growth centers, current spatial policy is so far attempting to spread limited investment resources and provide fiscal incentives across an undifferentiated periphery.

1/ See "Urban Development" for a review of the relationship between economic policies and urban development prior to 1970. - 75 -

27'. Spatial policy instruments range from new, highly complex institu- tioiial arraugemerits e.g., the trust funds of technical and financial assis- ,ance operited tlroug1iNacional Financiera) to more traditional fiscal in- C&:lL.xeS cm2 irndutl4rit1 infrastructure programs, most of which are designed is ifoct industr-el iocation decisions. The second category also concerns administra-tive decentralization which is oriented towards industrial location dec'isio.s. The third category includes a number of instruments for urban irwr.astructural development, which focus on objectives besides the spatial order of the economy, although this is usually an implicit objective of all pclicy instruments. 1/

B. Existing Instruments of Spatial Policy

Instruments Related to Industrial and Commercial Location

278. These instruments include the following: fiscal incentives to industries to locate outside the three largest urban centers (1971-1972 legislation); the construction and promotion of industrial parks, cities and complexes, as well as commercial centers in a large number of cities (through trust funds, since December 1970); the establishment of trust funds in every state to identify and promote small and medium-sized industries (since June 1971); the provision of credit and other forms of assistance to small and medium-sized industries, through the National Fund for Industrial Development (FOMIN) and the Guarantee and Development Fund for Small and Medium-Sized Industry (FOGAIN); and the generation of employment through the assembly industries or "maquila" program (initially confined to the northern border cities, it was expanded nationwide in October, 1973).

(a) Fiscal Incentives Legislation

279. A decree of July 20, 1972 established fiscal incentives to promote industrial decentralization and regional development. This decree was an elaboration of a more general decree of November, 1971, which pointed to the

1/ Many things of relevance for spatial policy have, of course, occurred since the conclusion of the analyses (January-November, 1974) leading to preparation of this report. Though time and resources do not permit a full updating of information, one important "new element" in the field of spatial policy is worthy of mention. In June, 1976 the Mexican Government established the basis for a new and potentially powerful spatial policy by enacting the Law of Human Settlements ("Ley general de asentamientos humanos"). Although it is still much too early to estimate just how -- and with what effect -- the law will be implemented, its principal features may be described. This is done briefly in the Appendix. - 76 - desirabilityof these aims, linking them to the objectives of national economic efficiency and social justice, the generation of exports and employmentand a more equitable distributionof economic welfare.

280. To achieve these incentives,the country was divided into three zones: Zone 1 included the three largest metropolitancenters (includingsome of the surroundingmunicipios); Zone 2, the secondary cities of Puebla, Cuernavaca, Queretaro and Toluca, as well as two municipios adjacent to Guadalajara;and Zone 3, the remainder of the country. Industries locating in Zones 2 and 3 were eligible for reductions of 50 to 100 percent on import duties, income, sales, stamp and capital gains taxes, as well as accelerated depreciationand lower interest rates. In addition, firms with investments of less than five million pesos could receive technical assistance in the form of preinvestment studies, market research, and assistance in obtaining credit.

281. The incentives to industries located in Zones 2 and 3 were almost identical (see Table 3.5); Zone 2 includes many cities that are close enough to Mexico City to share some of its advantages but far enough away (at least for the present) to avoid some of the problems. Some, such as Queretaro and Puebla, are likely to undergo accelerated growth without incentives. Because the legislationdoes not distinguishbetween areas which require fiscal incentives for rapid growth and those which would grow any way, it serves only to reinforce existing patterns. The additional 10 percent reduction in tax payments that a firm may forego by establishingitself in Zone 2 rather than 3, is more than amply compensatedby the locational advantages of Zone 2 which is close to the main national market, to sources of intermediateinputs and to external economies in production. Unless the incentives alter the opportunity costs at various locations quite considerably,they are not likely to attract industries out of these central zones. If the tax savings offered in Zone 3, for example, coupled with lower labor costs, do not exceed the locational advantages of Zone 2, industries will continue to prefer the latter. More- over, within Zone 3, which comprisesmost of the country, no distinctions are made between different areas with the exception that, in March 1974, a special zone called "Zone 3, Istmo" was created with special incentives to locate in the Isthmus of Tehuantepec.

282. The effect of current fiscal incentives for decentralizationmay be either insignificantor undesirable. Some taxes, such as import duties on raw materials and capital goods, are already so low that a further reduction is not likely to affect private location decisions; thus, tax exemptions may represent an unnecessaryloss of public revenue. Despite the government's association of decentralizationwith the creation of jobs in lagging areas, some incentives,such as accelerated depreciation,subsidize capital and may lead to an increase in capital-intensivefactors which is inconsistent with the government'semployment objectives.

283. As presently structured,the incentives may result in the "suburbani- zation" of employment opportunitieswithin or immediatelyoutside major metropolitan areas. The incentives offered in adjacent areas (for example, in two - 77 - suburbs of Guadalajara)may be conducive to this "sprawl" phenomenon,which would substantiallyincrease transportationcosts for workers and, in the longer run, lead to higher infrastructurecosts as well.

284. Finally, the exlusion of Monterrey and Guadalajara from consideration for fiscal and other incentivesreveals some confusion about the objectivesof a decentralizationpolicy. Monterrey and Guadalajara,with 1970 metropolitan populations of between 1.2 and 1.4 million, are not gigantic cities, and have in fact reached a size at which relatively self-sustainedgrowth should occur. Although it might be a very good idea to regulate their growth so that physical and social infrastructurecan keep pace, there is neither a theoreticalnor an empirical basis for contendingthat either city has reached its optimum size, or is already "too big." On the contrary, these cities and the spatial subsystem around them are among the most promising "counter-magnets"to Mexico City.

285. The Ministry of Industry and Commerce, the agency charged with processing applicationsfor tax exemptionsunder the decentralizationdecrees, indicates that in 1973 (the first full year of operation),the applications of 167 firms were accepted. These firms had a total capitalizationof 14.8 billion pesos and claimed to have provided incrementalemployment for about 15,000 workers. The data do not indicate the geographicaldistribution of the firms involved and it is not possible to discern whether they were new plants, relocated factories or expansions of older firms in local areas. Moreover, some of the same firms would undoubtedlyhave expanded without fiscal incentives. These factors complicate the assessment of the effectiveness of current fiscal incentives as instruments for decentralization. But the average yearly increase of nearly 40,000 manufacturing jobs in the Mexico City area between 1960 and 1970 clearly dwarfs the figure of 15,000 new jobs. 1/

(b) IndustrialComplexes, Parks and Cities and Commercial Centers

286. Trust funds for the promotion of Industrial Complexes, Parks, Cities and CommercialCenters were establishedby President Echeverria in December 1970. The program was announced as "an instrument with which to re- shape the economic geography of the nation" 2/ and has three main components:

(1) Constructionand promotion of industrial parks and cities in or near a large number of urban centers in order to attract industries,and to regulate their future physical growth. The selection of these centers was

1/ The average yearly growth of manufacturing employment in the Mexico City MetropolitanArea was calculated by taking the decennial growth rate and prorating on a yearly basis.

2/ See "IndustrialDecentralization in Mexico": Nacional Financiera: (1973). - 78 - based on transportationstudies carried out by the Ministry of Public Works (S.O.P.). 1/ The program is jointly executed by this Ministry and Nacional Financiera. A distinctionis drawn between the industrial "cities", which include housing and other services for employees, and industrial "parks", which do not. However, for purposes of discussion,they will be considered together.

(2) Promotion of conjuntos, or complexes of existing industries in a given geographic area in order to "rationalize"production. Unlike the industrial parks and cities program, conjuntos are largely aimed at existing industries,and do not necessarily involve the constructionof physical infrastructure. The program is run by Nacional Financiera, which also selects the locations and provides technical and administrativeassistance to the small and medium-sizedindustries included in the conjuntos.

(3) Establishmentof commercial centers in northern border cities, in order to stem the negative flow of foreign exchange generated by consumer imports from the United States to these cities.

287. As of September 1975, the industrial parks and cities program had nine developmentsthat were either operationalor under construction (Table 3.5). These were located in the following cities: Durango, Merida, Queretaro, Veracruz, Tepic, Villahermosa,Tijuana, Guaymas (fishing complex), and Mexicali (commercialcenter).

288. The official program projects at least ten additional industrial parks. These projects, as well as those financed by sources outside the official program, appear on Maps 18 and 19. As shown in Table 3.6, non- official industrial parks and cities constitute an important element in the spatial distributionof industrial infrastructure. Sources of financing include state governments in Cuernavaca and Puebla, AURIS in the State of Mexico and private organizationsin the northern border cities. The other industrial parks and cities have not been analyzed in the context of the S.O.P. - NAFINSA program. The relationshipbetween industrial infra- structurebuilt by AURIS around Mexico City, for example, and the probability of success of the S.O.P. - NAFINSA program, has not been explored.

289. The Mexican industrial parks and cities program is not a powerful instrument for decentralization. It is hampered by the absence of industrial location studies. Support for the program is based on the argument that physical infrastructureis important to industrialists. The limited evidence on the subject indicates that it is debatable that industrialistsweigh the existence of an industrial park very heavily in their location choices. If an area is likely to be chosen by industries because of its resource endowment

1/ For a discussion of the S.O.P. approach see Chapter 3. - 79 - or comparative advantages, the industrial park may facilitate and accelerate the process, and may help regulate the physical growth which is implied by industrial expansion. But if an area's industrial prospects are limited to start with, there is little justification for such a costly, supply-oriented investment as an industrial "city".

290. The approach so far has been to build physical infrastructure in places which are selected according to the criteria of the Ministry of Public Works. The policy implications of these criteria seem to have been poorly estimated. Industrial Parks are being constructed in various places throughout the country, without much concern for the industrial potential of the areas chosen. This has resulted in an excessive dispersal of investment funds and great efforts will be required to generate a demand for under-utilized facilities in relatively unpromising places. The current division of functions between the Ministry and NAFINSA allows the Ministry to proceed independently, without considering the generation of this demand. After the city or park is built, Nacional Financiera is charged with the difficult task of filling it up. NAFINSA officials are reluctant to admit the inherent high risks of failure in the program, but they recognize that there are many problems.

291. Of the 177 firms which either located or expressed an interest in the ten initial projects, 63 were interested in Queretaro. The interest expressed in Queretaro's industrial "city" shows the effective demand for industrial locations in this area. Unlike some of the Ministry's "growth centers", Queretaro (and the spatial sub-system centered around it and Irapuato) appear to fulfill the requirements for regional industrialization (see Chapter 3). A more selective strategy would concentrate on these targets rather than dif- fusing resources to many cities with lower growth potentials.

292. The objectives of NAFINSA's program of conjuntos are less ambitious than those of the industrial parks. A conjunto seeks to eliminate some of the problems associated with small and medium-sized industries by encouraging the creation of joint facilities wherever possible. Industries banding together as a conjunto would typically be engaged in similar or complementary activities and be established within a single geographic area. This program seeks to alleviate the lack of technical and administrative capability, the inadequate use of machinery and equipment, the difficulties of acquiring raw materials and credit and the inefficient commercialization of products. By centralizing many functions, the costs of which are prorated among individual enterprises, the program attempts to integrate many small producers.

293. Six conjuntos have already been set up; they include a shoe complex in Leon, a clothing and artisan complex in Aguascalientes, and an agro- industrial complex (among others) in Guadalajara. From the list of projected investments it is clear that Jalisco and other relatively prosperous states, are likely to receive the bulk of the projected investments. Nacional Fi- nanciera finds great promise in this approach. - 80 -

294. Although the effects of the conjuntos program on the rationaliza- tion of production and on employment and incomes in certain places may be significant, its impact in terms of the national space-economy appears so far to be limited. Both propositions, however, may be tested. One reason for the relative attractiveness of this program compared to that of the industrial parks is that greater emphasis is placed on evaluating the results. The proposed criteria include rates of return, employment and earnings effects, and other benefits to the local community.

295. The final component of the Trust Funds established in 1970 is the program of commercial centers in northern border cities. One of the problems of the border areas that has greatly concerned the Mexican government is the enormous "leakage" of income from this area in the form of imports from the United States. 1/ In order to stem this flow of foreign exchange, commercial centers are being established in border cities, such as Mexicali, which are expected to reorient the consumer habits of border city residents. Although it is too early to determine the impact of the program, it seems unlikely that it will integrate border city residents more fully into the Mexican economy. NAFINSA officials cited surveys carried out in the area which revealed that preferences for US products are extremely strong; it is doubtful whether the commercial centers program can modify these tastes significantly.

296. Small and medium-sized industries account for a very large share of industrial employment in Mexico and have been concentrated historically in only a few places, principally Mexico City. In contrast, the periphery has suffered from a chronic lack of resources, initiative, and knowlege of investment opportunities. To ameliorate this situation, the present government has created several programs to encourage the growth of small and medium- sized industries outside the core. Conceptually, these programs seem to have dual and potentially complementary purposes. The credit-granting institutions reviewed below aim at increasing the resources available for local investment. The Trust Funds for Pre-Investment Studies stress the need for project identification and the encouragement of local enterprise. While credit institutions may affect the supply of resources in local areas, they are often unable to generate the demand for these resources. Presumably this demand can be stimulated through the identification of suitable investment opportunities and the generation of local initiative. Mexican programs aimed at small and medium- sized industries should be examined with this conceptual framework in mind.

(i) Trust Funds for Pre-Investment Studies

297. Since June 1971, Trust Funds (Fondos Mixtos Revolventes para Estudios de Pre-Inversion) have been established in every State in order to identify and promote feasible investment projects. The administrative structure of

1/ See "Urban Development", Chapter 2. - 81 - each Fund comprises a Technical Committee whose membership is drawn from Nacional Financiera, the State Government, the local private sector and public agencies.

298. The State and the local private sector provide the initial capital for each Fund, and Nacional Financiera provides technical contributions as* well as overall coordination. The technical staff of the Technical Committee is basically responsible for feasibility and pre-investment studies in a given area (including studies of very specific sub-sectors), and for the presenta- tion of the projects to the Committee. The Committee ranks these projects and intervenes with the local private sector, NAFINSA, and the private and public banks, and State Ministries in order to get them implemented.

299. Forty Trust Funds of this kind already exist, and 2,500 projects have been identified. Some states have more than one trust fund, but every state is limited in the number of projects that can be financed. Because of this constraint, the Technical Committee must rank projects in order of priority. The Regional Development Department at NAFINSA selects the top ten priority projects from each State for financing and monitors the entire program.

300. Although the Trust Funds were initially dependent on capital sub- scriptions by the states and by the local private sector, it is foreseen that, once they become operational, they will be able to obtain working capital from other sources. For example, the cost of the studies done before the establishment of a new industry are repaid to the Fund by that industry. In addition, the local Fund can undertake pre-investment studies for private parties and derive additional income from doing so.

301. The Trust Funds for pre-investment studies constitute an important element in the government's overall program for local development. While their significance for decentralization is probably marginal, they are an innovative mechanism for generating local growth and stimulating the development of small and meduim-sized industries. By identifying neglected opportunities in local areas, they contribute to a better utilization of the country's natural and human resources. It is noteworthy that those who formulated this program are interested in going beyond a project-by-project approach and in relating each investment project to the overall development of the State. Each Fund is required to produce a program outlining the development prospects of its State or geo-economic region, to be used as a framework for both the identification and evaluation of specific projects.

(ii) National Fund for Industrial Development (FOMIN) and Guarantee and Development Fund for Small and Medium- Sized Industry (FOGAIN)

302. Along with tax incentives, access to credit has been used in the recent past to stimulate industrialization. The creation of greater industrial capacity in Mexico is the central objective of the National Fund for Industrial Development (FOMIN). To this end it contributed up to 33 percent of initial capital requirements for new industries promoted by the Trust Funds - 82 - for Pre-InvestmentStudies (i.e., industrieswith an initial capital investment not exceeding 25 million pesos). When the industry achieves self-financing capability or there are interestedprivate investors, FOMIN sells its share. FOMIN is also one of the main instrumentsfor implementingNAFINSA's program of industrialcomplexes. The Guarantee and Development Fund for Small and Medium-SizedIndustry's failure to establish "preferentialtreatment" according to regional criteria is reviewed in "Urban Development",Chapter 2. In May, 1970, the Fund received an IDB loan of 62.5 million pesos to be granted as credit to small industrieswhich were "preferentialylocated in provin- cial areas."

303. The small interest rate differentialsamong the three zones established by the decree of July 20, 1972 for loans by the Fund, are unlikely to affect location decisions. The interest rates at that time were 11 percent for Zone 1, 10 percent for Zone 2, and 9 percent for Zone 3. Although the rates have since changed, the fundamentalipointis that the differential is not great enough to induce an industry to locate elsewhere than in its preferred location.

304. FOMIN's financing of local development projects generated through the pre-investmentfunds or through the industrial conluntos project is likely to be of some local importance. The similar program operated through the Guarantee and Development Fund for Small and Medium-Sized Industry is already well established. In terms of decentralizationpolicy, the significance of both is almost negligible. For instance, the inability (or unwillingness) of the Guarantee and Development Fund to shift the geographic incidence of credit means that most of the credits continue to go to a few dynamic areas. But if failure to diversify the destinationsof industrial credits can be partly ascribed to "demand" factors (for example, a lack of entrepreneurialinitiative and hence a low level of credit applicationsin the "periphery"),NAFINSA programs such as the Fondos Mixtos which encourage local enterprises,may represent a proper, if partial, solution to the problem.

(d) The Assembly-IndustriesProgram

305. This program, which is discussed in some detail in "Urban Development" (Chapter 2), was originally confined to the border area where it led to rapid growth in exports and employment after 1966. It was extended to the rest of the country in October 1973.

306. Though the maguila program may be viewed as relatively successful in terms of its effects on employment-creation,it is a mixed blessing. Border industrializationis an enclave-typedevelopment with all the implications, such as the failure to reinvest profits in the area, the expenditureof a large proportion of wages on imported goods, and considerablelocal depen- dence on the vagaries of foreign markets and changes in US and Mexican government regulations.

307. Nevertheless,by late 1974 when the effects of the US recession began to be felt, the program was thriving. Data on the assembly industries indicate a 119 percent increase in the number of firms accepted for exemption - 83 - from import duties between 1972 and 1973 and a 192 percent increase in employment for the same period. The figures for 1973 may already reflect the establishment of some assembly industries in the interior, but it is reasonable to assume that the bulk of the increase occurred in the border areas.

308. Mexican government efforts to reduce the "leakage" of income outside the border area -- i.e., the establishment of commercial centers -- have already been mentioned. In the long run, however, the most effective way to ensure that the full benefits of the income multiplier effects generated by the maquilla industries are captured by Mexico, may be to persuade the industries to locate in the interior of the country. The expansion of the maguila program to the rest of Mexico, may have a negative impact on urban economies along the border.

Instruments Related to Administrative Decentralization

309. Recognizing that the concentration of public offices in Mexico City is an important factor in industrial location decisions, the public sector has tried to decentralize public agencies. Nacional Financiera has opened 14 regional offices since 1971, the Ministry of Industry and Commerce has authorized its regional offices to renew licenses for temporary import permits for border assembly industries; the Ministry of Finance has decentralized several tax collection functions; the Mexican Coffee Institute is moving its headquarters to Jalapa; and the Ministry of Agriculture is moving to Queretaro in 1976. In view of the administrative centralization which characterizes Mexico, these efforts, however limited, are clearly desirable.

310. In addition, the current administration has started to create an institutional framework for spatial policy. Since March, 1972, 17 State Economic Development Committees (Comites de Desarrollo Economico y Social) now coordinated by the Regional Development Department in the Ministry of the Presidency 1/ and two Regional Commissions (Comisiones Coordinadoras) have been created. These are federally-funded bodies whose main purpose is to promote and coordinate development in a given state or region. Between May 1972 and March 1974, six state committees were established (for Oaxaca, Yucatan, Sonora, Guerrero, Nuevo Leon and Guanajuato). The two commissions were created to develop, respectively, Bala California and the Isthmus of Tehuantepec. The committee began to operate on the basis of several different criteria and, although all of them depended directly on the Ministry of the presidency, there was little if any contact between them.

311. The establishment, in March 1974, of a Regional Development Office in the Ministry of the Presidency was intended to fulfill the purpose of coordinating the plans and actions of the committees and to oversee the establishment of committees in every state of the country; and, between March and October 1974, another 11 committees were set up. The two commissions are, at present, not subject to coordination by the Regional Development Office.

1/ Established in March, 1974. - 84 -

3.12 These initiativesare important insofar as they reflect a concern to foster the developmentof the periphery and to enable the periphery's needs and desires to be heeded in the capital. With regard to the committees, it is as yet too early to evaluate their work. With regard to the commissions, a separate report is being prepared on the development of part of the southern zone for which the Comision Coordinadora para el Desarrollo Integral del Istmo de Tehuantepec,is responsible.

313. None of these innovationswas conceivedwithin the framework of a national spatial developmentplan, and the structure of the Mexican spatial system does not seem to be well understood by policy-makers. As has been noted throughout the discussion above, current policy instrumentsare, in most cases, insufficientfor bringing about a major change in spatial organization. Effective interventionin Mexico's spatial system, characterizedas it is by very strong centripetal forces, will require much stronger policy measures, a powerful institutionalframework, and an informationsystem that permits the evaluation of policies and program implementation. However, without a deep analysis of regional economic forces for change within the framework of a national policy, the work of the committees and commissionsmay remain a largely "hit-or-miss"operation. No general criteria exist for project evaluation beyond the usual technical feasibilitymeasures and in the absence of an overall spatial strategy, the regional and local impact of given projects is difficult to judge.

Instrumentsof Urban DevelopmentPolicies

314. Several public sector and official agencies are actively engaged in programs of urban development. For the most part their activities are confined to housing, but in some instances they are also concernedwith the development of urban infrastructure. There is very little coordinationbetween them and, with some exceptions,there seems to be little recognition of the potentially important role of urban development in the planning and execution of regional and spatial developmentpolicies. The major agencies are the Banco Nacional de Obras y Servicios Publicos (BNOSP), the Instituto del Fondo Nacional de Vivienda para Trabajadores (INFONAVIT),the Instituto Nacional para el Desarrollo de la Comunidad Rural y Vivienda Popular (INDECO),and the Ministry of National Patrimony.

(a) BNOSP (Banco Nacional de Obras y Servicio Publicos)

315. BNOSP is second only to NAFINSA among Mexico's public lending agencies, and has been active since the 1930s in municipal public works projects. BNOSP's primary clients are the 32 state governments,and all loans are guaranteed by the states, as shareholders,on national fiscal revenues. Its present equity is about 2,000 million pesos, 80 percent of which is held by the Federal Government.

316. Although theoreticallyan independentlending institution,BNOSP is a large commercialbank. The respective Ministries conduct feasibility studies, evaluate projects and take decisions on sectoral priorities,with BNOSP providing the funds. - 85 -

317. BNOSP has little or no direct impact in determining spatial policy, although it has financed much of the infrastructural framework across the country, particularly water supply and sewerage projects, and road and street construction. BNOSP is essentially a conservative, traditional institution whose capacity for continued involvement in development activities is based largely on its experience and its acceptance as an established development loan institution, rather than as an agency for innovative programming.

(b) INFONAVIT (Instituto Nacional del Fondo Nacional de Vivienda para Trabajadores)

318. INFONAVIT was created in May 1972 as a result of negotiations among entrepreneurs, labor and government following the 1971 constitutional amend- ment guaranteeing all workers access to housing. The Institute was granted 16 million pesos initial financing from the Federal Government. According to its bylaws its funds are replenished by a 5 percent payroll tax paid by all employers except government. 1/ From the date of its creation through January 1975, INFONAVIT had accumulated US$30 million in capital and reserves, including the initial government contribution, the payroll tax, and profits from capital investments of these funds.

319. Although its principal programming and financial operations are located in Mexico City, INFONAVIT officials hope that the Institute can gradually decentralize. INFONAVIT's goal, in the first phase of its operations, is to address the immense needs of Mexico's housing sector. By 1975, it had expected to finance the construction of about 100,000 units throughout the country. Each INFONAVIT site is designed to accommodate mixed types and prices of dwellings. The Institute estimates that its prices are about 30 percent below current market prices for equivalent units.

320. While 55 percent of the Institute's resources come from Mexico City, only 30 percent is reinvested there, the 25 percent surplus being used to generate development projects across the country. The locational criteria used to distribute this surplus are based on identified needs. The border towns and tourist centers, for example, have benefited from recent national economic policies, but have not had corresponding support for urban development. For this reason the border cities are high on INFONAVIT's list of priorities. INFONAVIT now owns 60 million square meters of undeveloped urban land and its goal is to purchase enough land in each city to support a five- year development program. Land price negotiations take place directly with private owners in each city; INFONAVIT is not involved in land expropriation. In cases where INFONAVIT's technical and financial advisors recommend the purchase of land beyond the urban periphery, the Institute finances infrastructure extension which is generally compensated by the State Government, with reductions in the land development taxes.

1/ Excludes firms with less than 100 employees. - 86 -

321. INFONAVIT supports a policy whereby local communitieswill participate in developmentplanning, although local capacity for planning is far from sophisticatedand INFONAVIT's role in technical assistance is therefore growing. Further, the Institute will attempt to provide as much as possible in the way of community services. In this context, it works in close cooperation with CONASUPO (the Federal agency concernedwith price stabilizationfor agriculturalproducts) and CAPCE (the AdministrativeCommittee for the Constructionof Schools). INFONAVIT'scontribution to community services varies according to the size of the project. In Tlalalalco (a project of 6,000 units and 35,000 residents north of Mexico City), constructionis completed or underway for a civic center, a commercial television station, and a water purificationplant. At the project in Rosario, also in the northern metropolitan area, 100,000 housing units are served by three man-made lakes, a civic center, 100 commercial units, a fire station and other services. Rosario is INFONAVIT'slargest project to date; its size was basically determined by the amount of land available for development. The Institute does not plan to attempt another project of this size. Its general policy in the largest cities is to select several smaller sites in different parts of the city. Aguascalientesis the smallest project, with 23 units, although INFONAVIT studies have determined that 100 units is the minimum economically viable size.

322. INFONOVITis essentiallya housing agency, rather than a spatial development institution. However, inasmuch as it is explicitly recognized by INFONAVIT that housing can be used as an instrument of spatial policy to affect industriallocation decisions, its role as a spatial developmentagency is implicit and potentially important. Its management recognizes this and it is likely that INFONAVIT will eventually play a more direct role in this regard.

323. INDECO was created as an autonomous,decentralized agency in 1970. Ten years previously, its predecessor,the Instituto Nacional de Vivienda (INVI) had acted as a general, "all purpose" developmentagency. The creation, in 1971, of INFONAVIT has limited the scope and jurisdictionof INDECO, particularly in the housing field. The institute is based in Mexico City, with representativeagents in other states.

324. INDECO's activities are vaguely defined. However, its primary function is that of the expropriation,development and resale of eiido lands adjacent to cities. The latter process includes the legalizationof titles held by eiido squatters. In this capacity, INDECO coordinateswith the Department of Colonizationand Agrarian Affairs (DAAC) as well as with the Federal Government (throughPatrimonio Nacional).

325. As a housing developmentagency, INDECO is active in both rural and urban areas. Recent projects include the building of a 10,000 unit housing - 87 - developmentin Tlalnepantla, State of Mexico, as well as another project nearby which will include 15,000 dwellings. INDECO housing prices range from US$4,000 to US$8,000 per unit. Other developmentoriented activities include the creation of Centros INDECO which provide organizationaland technical assistance to urban and rural communities. INDECO is also involved to some extent in the sale and rental of building materials and tools in certain areas. There is no evidence that it has any kind of spatial strategy.

(d) The Ministry of National Patrimony

326 This Ministry is the agency of the Mexican governmentmost directly involved in the coordinationand management of Federally-ownedproperties. It is not involved directly with property transactionsat the municipal or state level, although its land acquisition and management activities take place throughoutMexico and include frequent interactionswith representativesof state, local and private sectors.

327. In each of the port and frontier cities, the Ministry is locally representedby a Junta Federal de Mejoras Materiales, which administersthe share of import and export taxes retained by the town. This proportion corresponds to 2 percent of import and 3 percent of export taxes, although in exceptionalcases (e.g., in Veracruz, Tampico and Matamoros), the city retains higher shares.

328. The Ministry acts primarily as an administrativeagent of the Federal government but is also involved in the acquisition of land, much of which is leased on a long-termbasis to private developers. One hundred acres in downtown Juarez were purchased as an urban reserve; in Mexicali and Matamoros, center city tracts have been acquired for commercial projects; purchases in Laredo, Tijuana and Acapulco involve tracts of 50,600 and 2,000 acres, respectively. The Ministry is also active in the expropriationof ejido lands, in collaborationwith the Departamento de Asuntos Agrarios y Colonizacion (DAAC). Federal purchases of land for commercial operations involve the participationof the Banco Nacional de Obras y Servicio Publicos (BNOSP).

329. The Juntas Federales are the primary instrumentsof urban infrastructural development and planning in the cities where they are located. There is no evidence that the Federal Government considers them a tool of a specific spatial policy, or that the geographic pattern of activities is related to any overall design.

C. Suggested Instrumentsfor Implementinga Spatial Policy

330. To give substance to any of the spatial policy frameworks laid out in Chapter 3 or, indeed, even to formulate a set of new alternatives,will require instrumentationthat goes considerablybeyond the measures adopted by the Mexican government in recent years. However, the very existenceof - 88 - any measures at all underscores the concern of policy makers and politicians with the consequencesof the past distributionalpatterns of economic growth. While recent innovationssuch as the promotion of small-scaleindustries or the creation of Regional Development Committees constitutean insufficient base on which to build, they neverthelessrepresent a promising beginning for an explicit spatial policy. In the future, these measures should be emphasized.

331. This section discusses some of the possible means of dealing effectivelywith the imperatives of Mexican spatial development. It deals with: (1) an administrativesystem for spatial planning; (2) specific measures for implementinga selective growth centers strategy; and (3) some aspects of training and research in support of a long-term spatial policy.

Organizing Spatial Planning and Development

332. Presently Mexico has only a few of the basic underpinningsfor the administrativeframework needed to tackle spatial planning. The workings of the present system and suggestions for implementingspatial development at the national, regional and local level are outlined below.

333. At the national level, every Government Ministry must consider location as an aspect of its activities;but there are no points of reference to help in making this decision. Consequently,each Ministry or public agency produces its own assumptions about where growth and developmentwill occur and where it should be supported, and also where it should be allowed to proceed without public assistance. And the investment review that takes place at the General Directorate of Public Investmentsin the Ministry of the Presidency must judge the spatial implicationsof each project on the basis of fragmentary evidence.

334. Nor is there much guidance for developmentactivities at the local level. Major metropolitanareas, such as Guadalajara,Monterrey and the Federal District, have their own planning staffs, and several states have started to do some physical planning for localitieswithin their jurisdictions; the outstanding example is the State of Mexico, which has created a semi-autonomousinstitution, AURIS, for this purpose. But elsewhere, the level of technical competence is still very low. Consequently,municipalities are, for the most part, passive recipients of "blessings from above", and their suitability to receive these "gifts from heaven" is decided elsewhere without the benefit of municipal counsel. Local priorities are neither systematicallystudied nor developed. When a project, such as a new circum- ferential route or an industrial city, may set off a series of chain reactions throughout the urban system that will impose financial burdens on the munici- pality, there is no systematicway to analyze the possible impacts of such a project. Further, especially in rapidly growing areas such as Tijuana, Coatzacoalcos-Minatitlan,and Cuernavaca, the lack of technical competence in the municipalitiesmeans that it is impossible to guide their growth into a spatially harmonious and efficient pattern allowing for the possible effects of expansion. - 89 -

335. These shortcomingscan be corrected by strengtheningthe planning function at all relevant levels -- Federal, State, regional and local. While not a panacea, planning may lead to more carefully deliberated decisions and provide a framework for discussion and evaluation that would ultimately lead to greater growth efficiency and greater distributionalefficiency.

336. This kind of planning need not be prescriptive; it need not even produce a blueprint or a plan. What is important is to bring together the relevant information for spatial planning at each appropriate level, to make this informationcompatible with common assumptions regarding both the objective constraintsand the normative guideposts of a national policy, to establish appropriatemechanisms for the systematic testing of specific projects and to program ideas against these assumptions. Because spatial planning is primarily concernedwith the location of households, firms, and public investments,it can proceed with the orchestrationof the relevant decisions even in the absence of national developmentplanning. Its functions are essentiallyindicative. As long as there is physical change -- e.g., migration -- and as long as the government undertakes large-scale investments that will have a differentialeffect on the growth prospects of various areas, spatial planning has a significant role to play in guiding 1/ the decision- making process along specific lines. A spatial policies framework would help to focus the dialogue, allow for a more rational considerationof alternatives, and serve as a basis for evaluating the impact of projects. At an intermediatelevel of synthesis, it would permit judgments to be made on the question of intersectoralcoordination at critical points of growth conver- gence and lead to the selection of areas for more intensive study and action. Spatial planning is a valuable tool of development,and in Mexico, where the concern is with implementinga policy of selective decentralization,it may well be an indispensablepart of the policy "package."

337. In light of these considerations,some suggestionsmay be made that would materially strengthenMexico's capacity for spatial planning in the years ahead.

(a) StrengtheningSpatial Policy Planning at the National Level

338. As noted earlier, a Regional DevelopmentOffice was establishedwith- in the Ministry of the Presidency in March 1974, but it is, as yet, too early to evaluate its work. Clearly it should attempt to work in close liaison with the economic research unit of the Ministry and with the Interministerialin- vestment Commission and it should gradually evolve into a Spatial Develop- ment Office. As such it should not only support the Regional Committees and similar planning bodies currently responsibleto and operating out of the

1/ But, being indicative, it can only guide, not determine, as shown in France and elsewhere. - 90 -

Ministry, but should also develop and periodically update a spatial policies framework. Once adopted, this document would serve as a basis for locational planning and evaluation by all sectoral Ministries, autonomous agencies, and regional planning groups (Committees, Commissions). The Office should provide technical assistance to these agencies on questions of locational planning and, with this in view, should also work to establish a national information system to allow for the continuous monitoring and evaluation of public investment expenditures and their effect on local economies. Finally, the spatial policies staff would encourage and support applied research, an in-service training program and basic education for spatial planning.

(b) Strengthening Regional Development Planning

339. Important as the central staff would be for spatial planning, it could not function effectively isolated from the daily realities of development in the cities and regions of the country. This is primarily a question of information flows, much of which is not formalized or not available except through personal contact or direct observation. But in spite of the regular and systematic collection and reporting of data, the necessary contextual information would be missing, unless decentralized planning units could supply it or, better yet, prepare the initial interpretation from the perspective of the region (or city) in which they are located. For it is at regional and local levels that opportunities for investment and program development are best ascertained, and it is at these levels that the activities of operating agencies can be most readily coordinated. The role of the state committees in this respect is crucial.

340. However, to perform effectively, the Spatial Development Office must be able to balance the conflicting claims of different regions. Besides this function, the Spatial Development Office should safeguard the technical quality of regional operations, develop general methodologies for regional and local planning, organize training courses, circulate data and other information available only at the national level, and synthesize the regional reports into a national framework of spatial development. 1/

341. A special condition exists with regard to the Coordinating Commissions in the Peninsula of Baja California and in the Isthmus of Tehuantepec. These Commissions were created in areas of focal interest for the purpose of studying, promoting, and coordinating the overall development of regional resources. They too should be coordinated through the central policies staff of the Presidency. These bodies are an extremely useful device for concentrating public attention on priority development areas. One should consider establishing additional Commissions for the Northeast of the country, the Guadalajara region, the El Bajio Region at Queretaro and Irapuato, and for the "overspill"

1/ A similar system for spatial planning in Chile during the 1960s provided a workable arrangement. - 91 - areas around Mexico City. This last region is so important in the national scheme, and its problems are so unique, that it will be discussed separately.

342. The Federal Capital Region extends over a five-state area within a radius of roughly 100 km from the Federal District. This region, whose population is growing at 5 to 6 percent a year but whose overall rate of growth, may eventually be reduced to 4 or 5 percent, is expected to reach 35 million people by the end of the century. It will then have a productive capacity and level of income comparable to that of a middle-sized European country, such as Poland, today. Yet this massive urban cor.plexwould be compressed into a much smaller area at high densities, with the accompanying problems of distributing new urban settlements, locating industrial and office expansions, managing competing land uses, articulating an efficient transport system, delivering an adequate supply of water, managing pollution and solid waste disposal, developing sites for intensive recreation, meeting regional needs for specialized food production, and undertaking large-scale urban redevelopments. There is, as noted in Chapter 1, little relevant experience to date, either in Mexico or anywhere else in the world, in managing an urban complex on this scale -- not to mqention under conditions of very rapid growth. Clearly, failure to look ahead and to coordinate land uses and public investments, to consider alternatives, and to establish an efficient monitoring-information system will lead to such adverse conditions ten or fifteen years from now that subsequent attempts to introduce solutions will be either vastly more expensive, quite impossible or both.

343. To meet this challenge, it is suggested that a Federal Capital Commission which would include representatives from the five states adjacent to the Federal District, from the District itself, and from the major sectoral Ministries and autonomous agencies that have a special interest in the area be established. Its tasks would include (1) the preparation of comprehensive long-range planning studies for the region, concentrating on the relevant aspects of settlement, industrial and office location, circulation, airports, water distribution, waste disposal, agricultural development, recreation, and environmental protection; (2) recommendation of appropriate policies for implementing key provisions of a physical development plan for the region; (3) recommendation of priority investments for the public sector, together with their location, covering multi-year periods of varying duration as well as annual periods in conformity with the plan; and (4) coordination of policy plans and programs with state and local governments and major city- building agencies, such as AURIS in the State of Mexico and INFONAVIT.

344. As with the Regional Development Committees and the other Coordinat- ing Commissions, the Federal Capital Region Commission would become part of a national system of spatial planning and would coordinate its work with, and be supported by, the policies staff for spatial planning located in the Ministry of the Presidency.

345. Although regional in scope, the work of both Committees and Com- missions would include urban areas as well, since any regional/urban distinctions are at best arbitrary, and at worst, misleading. This does not - 92 - mean, however, that intra-urban or metropolitan planning would be absorbed by these arrangements. There is, additionally, a special concern for the quality of local planning.

346. Because of its virtual non-existence in the middle-sized and smaller cities, it is tempting to conclude that there has been very little need for urban planning in Mexico. As long as cities were small and growing at moderate rates, problems could be solved on an ad hoc basis without having recourse to the more sophisticated concepts and methods that are useful in extrapolating and dealing with the problems of a large, turbulent metropolis.

347. Another possible explanation for this lack of interest in planning on the part of local authorities is that they felt themselves powerless to do very much about their cities. Municipal budgets on the order of US$10 per capita (in 1974 prices) are for the most part spent on essential services, wages and salaries, and debt retirement, and leave very little for anything else. The gap between local financial resources and local needs has to be plugged by either state and federal governments or the private sector. Fre- quently it has not been plugged at all.

348. With advancing urbanization, these explanations are beginning to ring hollow. Cities are doubling their size every 15 years, and today's city of 125,000 will have a quarter of a million people by 1990. The simpler approaches to urban development that rely on direct and immediate knowledge of the relevant circumstances are appropriate to the scale and complexity and accelerated change which characterize Mexico's spatial structure.

349. In accordance with its architectural origins, urban planning (urbanismo) has usually been regarded in Latin America as an extension of architectural practice into large-scale design. But this is no longer the accepted view within the profession, where planning is now seen as a form of technical guidance of the development process itself. Given this new image, planners work in close cooperation with political authorities, business groups, local citizens and others in the concerted effort to improve urban conditions. They act as mediators, information generators, synthesizers, analysts, evaluators, civic promoters, negotiators, fund raisers, and catalysts for action. The base of their work is technical, but the substance revolves around a dialogue with others to produce desired change.

350. If Mexican cities are going to be successful in translating economic growth into human and social development, a new kind of planning will have to evolve. The technical base is important because without it the planner loses recognition of his multiple roles. It is through technical studies that planners learn to approach the problems of their communities; how to accommodate population growth rates of 4 to 7 percent a year without disrupting the essential social fabric; how to ensure the functional unity and efficient operation of sprawling urban and metropolitan areas; how to promote the design of energy-conserving cities; how to achieve environmental - 93 - integrity;how to resolve conflicts between urban and agriculturalland uses; how to integrateurban and rural economic development;how to provide for the harmonious integrationof rapidly growing private and public transportation systems and how to program massive public investment in urban facilities.

351. To strengthen local planning along these lines will require financial resources as well as time and vision. It will imply the risk of human capital through technical training and more basic professional education. The crucial local link for Mexico's spatial planning can be prepared by encouraging and supporting a technical function at the level of the municipio (or metropolitan area) that extends beyond civic design to the effective articulation of local needs and the control and guidance of growth processes.

352. One possibility for strengtheningthe local planning function is through INFONAVIT. As indicated above, this powerful new housing agency is already active throughoutMexico, buying up land on a huge scale, and pre- paring to change the face of many cities through its ambitious construction program. Indeed, INFONAVIT could use both its influence and its money to build up local capabilitiesfor planning since, in any event, the agency will need to do some planning for itself. A small but vitally important part of INFONAVIT'sbudget might thus be set aside to create the necessary capabilities. 1/

ImplementingGrowth Center Policies

(a) Some General Criteria

353. The three alternativesoutlined in Chapter 3 used a growth centers concept. Underlying this are several assumptioniswhich are axiomatic for spatial planning: (1) within a national economy, urban areas will have different potential for economic expansion; (2) the growth potentials of individual cities are linked to each other in systematic ways; (3) the pattern of future urban growth is capable of being modified through public intervention;and (4) concentratinginvestments in a few centers of relatively high economic potential increases the probability of achieving sustained growth in these locations.

354. Thus, almost any growth-orientedspatial policy for Mexico would focus on selected growth centers in the "periphery" beyond the area of deconcentration for Mexico City. But before consideringsome of the more promising methods for doing this, three principles provide the foundation for such a policy.

1/ In Brazil, which has a housing bank (BNH) in many ways quite similar to INFONAVIT, the promotion of local planning and related teaching and research is being conducted through a specializedsub-agency of the Bank, the Federal Service for Housing and Urban Development (SERFHAU). - 94 -

355. The first is that growth centers should not become economic enclaves; this is easier said than done. The easiest method is to concentrateon cities that are approachinga theoretical threshold market size in an environmentof local and regional markets that are sufficientlylarge to generate their own momentum. For above the thresholdmarket size, a given increment of internal demand would generate income multiplierswithin the local economy that would sustain its further dynamic growth, subject of course, to the overall performance of the national and/or internationaleconomies of which the city is a part. Below this threshold size, "leakages" in the system would prevent the economy from capturingmost of the benefits of industrial or other investments and it would remain excessivelydependent on external decisions. The size of the market is 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 educationalinstitutions, credit facilities,a professionally run public sector, and other agglomerationeconomies; but it is a useful first approximation.

356. There is no empirical evidence to support this threshold concept, although the theory is plausible. It is known that the proportion of economic activity tied to local markets tends to increase with growing population size and income; further, certain specialized services locate only in cities of -large or intermediatesize. Ceteris paribus, larger cities will thus tend to have fewer "leakages"and larger income multipliers from increased production than smaller ones. 1/

357. Because many business services are not completely fungible,a gradual increase in local productionwill tend to shift the initial sources of supply to centers such as Mexico City, Guadalajara, and Monterrey. If a "big push", such as the building of an industrial complex, were to transport the local economy over certain thresholds of minimum business size, and if special considerationwere given to the establishmentof these services, it might be possible to prevent the gains from being captured by one of the metropolitan centers. A "big push" approach in a small number of selected development areas might also be interpretedas confirmationof the Government's intention to support growth at leading centers in these regions.

1/ The continued decline in the rate of growth of several Mexican border cities since the 1950s tends to support the threshold argument. Typical enclave economies, because of their location,received their initial impulse for growth from the US demand for Mexican labor. When this demand fell off, their growth, not being self-sustaining,declined to below average levels for all major cities in the country. Since 1966, the border industriesprogram may have begun to reverse these trends, but, as is generally known, the stability of footloose assembly industries is uncertain. Moreover, a sizable part of the income earned in Mexico is spent in the United States. - 95 -

358. The second principle is that the physical developmentof any center should be closely related to its economic performance. This is not the case in Mexico, where the two types of development -- economic and physical -- proceed independentlyof each other. The translationof economic growth into physical developmentshould help to build the conditions for sustained urban growth. In Mexico, most cities of intermediatesize are, to some extent, enclave economies. New industriesmay thus 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 representingfrom one-third to one-half of value added, serve mainly to expand markets for commodities produced in Mexico City, often sold through large chain stores controlledby non-local concerns. Whether measured by income or employment, therefore, local multiplier effects remain small.

359. The benefits to the public economy are even less than those to the private sector. Exempt from local and, in most cases, from State taxes, new industries impose financial burdens on the agencies of local government. They require basic utilities and access roads. They attract people from rural areas and elsewherewho must be at least minimally served. They increase 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 authoritieswho are charged with maintaining and improving the city's facilities,and whose revenues are not well defined vis-a-vis the amount of economic and demographic growth that they must sustain.

360. To illustratethis point, Table 2.1 shows a more or less random pattern of local water service. Urban municipios and metropolitanareas are arranged in descending order of their growth rates between 1960 and 1970, followed by the proportion of the population that was without access to a nearby water supply in 1970. Instead of presenting an orderly pattern, the water index varies stochasticallywith respect to the growth rate. Both low and high growth areas share mixed records in supplyingwater to their inhabitants. (In both categories,however, the proportion of the population not served with water is extraordinarilyhigh.) It appears that economic growth and urban physical developmentare not joined in any systematicway.

361. Local improvementsin public services are funded in a variety of ways, usually through a collaborativeeffort involvingmunicipal, State and Federal authorities. The process of funding public investmentsis generally unrelated to the growth experience of the local economy. 1/ Beyond a basic minimum, chiefly for the maintenanceof essential services, the resources for the physical developmentof cities must be mobilized from federal sources. Their availabilitydepends on the astuteness of municipal and state officials, on

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 projects through a Junta Federal de Mejoras (FederalBoard for Improve- ments). There are also other financial and administrativearrangements. - 96 - their ability to present their case effectively,and on personal and political considerations,rather than on the conditions of the local economy, objective needs or ability to pay.

362. The second principle for growth center development is that cities should receive funds for the expansion and improvementof their physical plant in an amount which is commensuratewith their actual economic performance. If this were done, the demand for and supply of local services, especially housing, could be maintained in a rough equilibrium.

363. The third principal is that the primate core area should not only pay fully for its own expansion but should also generate a surplus to finance the physical development of lower-ordercenters. This follows from the conclusion that Mexico City's economic growth has been subsidized by the periphery -- through direct capital transfers, especially in the private sector, and through systematic underpricingof key public services -- without giving much in return.

364. A reversal of the traditional flows of capital from periphery to core appears justified and necessary for achieving a wider regional distribution of economic growth. If channelled to the right places (e.g., to the priority developmentareas identified in Chapter 3) and applied in full knowledge of existing development opportunitiesand needs, investments in the periphery would be unlikely to reduce the growth performance of the national economy. On the contrary, they could lead to a more growth-efficientdistribution of resources and, by creating multiple interregionallinkages, set in motion a pattern of self-reinforcingregional growth. There are many ways in which these criteria could be taken into account; some are consideredbelow.

(b) Revising Existing Tax Incentives Legislation (July 20, 1972)

365. The intention of current tax incentives is, as noted earlier, to induce industrial locations in the periphery by means of drastic reductions in certain taxes and import duties for manufacturerswho are willing to move their plants outside the principal metropolitanareas of the country. These reductions affect not only Federal taxes (import duties on capital equipment and raw materials, capital gains, accelerated depreciation,and income) but also certain state taxes (sales tax, stamp tax). In addition, most states already reduce the amount or remove the burden of local land taxes for industries. (There are no significantmunicipal taxes on manufacturing.)

366. Ignoring the question of the effectivenessof these measures in promoting regional development,it is clear that they impose a major loss of potential revenues at all levels of government, and that state and local governments in particular are failing to recover the cost imposed on them by industrial expansion within their own jurisdictions. This situation violates the principle that the physical developmentof cities should be more closely related to their economic performance. To satisfy this principle a revision of tax legislationmight be considered. This would involve, first, - 97 - a change in the basic intention, from one which emphasizes inducementsto move from core areas to the periphery, to one which would impose penalties to remain. 1/ Second, it would involve a change in policy from tax exemptionsto tax contributions.

367. The following is a brief, hypotheticalillustration of how such a revised system might work. A local developmenttax would be levied on the profits of all business enterprises,including manufacturing,regardless of location. This tax, collected by the Federal Government,would be returned to the state and/or metropolitanarea where the profits were generated to finance local infrastructure,public works facilities and services. 2/ The tax, however, would be substantiallyhigher for Mexico City than for any other growth center or subsidiary core. If the general tax level, for example, were 10 percent of all profits in excess of say 20 percent, the tax rate for the Mexico City area might be set at 50 percent. 3/ A fixed proportion of these taxes would be deposited in one or more Growth Center Trust Funds (Fideicomisos)4/ to be used to finance projects in selected regional growth centers.

1/ In the present context, "core area" is taken to mean the region encompassed by a radius of 100 km from the Federal District.

2/ A practical problem arises here. If production facilities are physically separated from management offices, as they usually are, profits would be shown to accrue to either Mexico City or Monterrey. In the case of a single plant, this may not matter very much, since the total amount of profit could be attributed to the single production facility. The difficulty arises when there is more than one production plan. In this case, some appropriate accounting formula would have to be devised for allocating tax revenues to the several states or areas of production.

3/ Since the intention is to discourage business locations in the core region, the tax rate of Mexico City will have to be set very high. With a 50 percent excess profits tax, an enterprise earning 35 percent profit on total sales would find its profit margin reduced to 27.5 percent, which is still viable. The question is whether the same enterprise could earn a significantlyhigher rate elsewhere. The presumption is that this would be possible in a significantnumber of cases.

4/ The question of who would administer this trust fund is somewhat prob- lematical. Growth center investmentscould be applied to urban and rural development (see section on raising rural incomes) as well as to metropolitan development. Several possibilitiesmight be considered, including NAFINSA, the Regional CoordinatingCommissions, the State Development Committees, local Juntas Federales de Mejoras Materiales y Sociales, metropolitandevelopment corporations,etc. - 98 -

368. The actual figures used in this illustrationare hypothetical. With the high rates of business profits in Mexico, it is unlikely that an excess profits tax of even 50 percent would signal a serious disincentiveto invest. I/ Foreign entrepreneurs,would still find the same incentives of prevailing low wages, access to the US market, the existence of certain raw materials, and, in general, a favorable business climate. 2/ A shift to a regionally differentiatedlocal developmenttax would not only channel development funds to local jurisdictionsroughly in proportion to their economic growth, and to the Federal Government, but would also tend to discourage locations in the primate core area, without jeopardizingthe overall rate of private investment in the national economy. 3/

(b) Trade Policies

369. It has been argued in Chapter 3 that a "Gulf Coast Strategy"would have several advantages,one of the most important of which is that it would provide an efficient locus for the production of industrial exports, while encouragingspatial decentralizationin the economy.

1/ One possible reaction and, indeed, the expected one, would be for management to seek out more efficient locations for their plants, for example, in terms of lower labor costs. In most regional growth centers, minimum wages are from 10 to 25 percent below the general minimum wage for the Federal District.

2/ According to Gordon C. Cameron, there is no evidence in the British case that the rather stiff Industrial Development Controls have resulted in transfers of projects outside the country or even in the abandonment of projects. Nor is there evidence that small innovative companies that typically spring up in large cities have in any way been hampered by the controls. See Cameron, "Constrainingthe Growth of Employment" in London, Paris, and the Randstadt - a Study of Methods. Unpubl. Ms., 1974.

3/ Though a persuasive theoreticalargument can be made in favor of such taxes, and their use has been frequently advocated, there are very few instances where fiscal instrumentshave been applied this way -- i.e., as sticks rather than carrots. There are, indeed, a number of practical difficulties to be overcome (e.g., should the tax be on all activities or just incremental ones; if the latter, how does one identify the "increment"; what should be the base for the tax: establishment, payroll, investment, sales, profits?). And, while these problems would appear to be surmountable, they have seldom in fact been "surmounted." France provides the example where a similar tax has been applied in pursuit, inter alia, of similar objectives. But the efficacy of this tax has not been evaluated. - 99 -

370. While the growth of the maguila or assembly industries on the northern border has had an important impact on local and regional economies in the area affected, it has also had the effect of encouraging the development of a dependent relationshipwith the USA and has been characterizedby substantial "leakages"of incomes generated. From a policy point of view, the further encouragementof assembly industries as part of a strategy of industrial exports development is, at best, a highly uncertain approach. These industries are vulnerable to unforeseeablechanges in the attitude of US labor unions and to fluctuationsin US demand -- as witnessed by the dramatic downturn in the real output of the assembly industries in 1975 during the US recession.

371. Moreover, the assembly industries concern only a few subsectors; electronics,clothing and office equipment account for more than two-thirds of the total. In view of the concentrationof a few products and the large share (50 percent) that Mexico now accounts for all of US imports under articles 806.30 and 807.00 of the US tariff regulations,their rapid expansion would seem unrealistic. Such a policy could lead to demands within the US for repeal of articles on which the existence of the maguila program depends.

372. Thus, the expansion of the maguila program, notwithstandingthat it has recently been broadened to include other parts of the country, is unlikely to be the answer to Mexico's needs for more industrial exports.

373. However, the advantages offered to Mexico under Articles 806.30 and 807.00 have not been fully exploited through the "maquila"program. The regulations would permit the production of non-assembly industry products in Mexico, using some capital-intensiveparts imported from the USA. In this way, it would be possible to broaden the range of manufacturedgoods now exported to the US within the framework of Articles 806.30 and 807.00, while establishingan inherently more satisfactorybase for further industrial growth in Mexico. This exchange would dampen the threat of animosity on the part of US labor unions towards Mexican manufacturedimports.

374. Assuming appropriateexchange rate policies, Mexico's exports should be geographicallydiversified. The Gulf Coast Strategy is compatible with such an objective. Given the importance of transport costs in industrial locations, new industrial development should be encouraged along the Gulf Coast, from which access to Europe as well as to the US is possible. Moreover, with respect to Asian markets and to Japan in particular, the development of the Isthmus of Tehuantepec offers the prospect of access to the Pacific, although port development in or near Salina Cruz would be required.

375. A program of export promotion based on a growth strategy focusing on the Gulf Coast could be linked to a shift away from "assembly" industries to other products, and to an attempt to diversify the direction of trade. The instrumentswhich might be used in pursuit of this strategy would include a revision of the export subsidy scheme; a revision of the system of import licensing; and a shift to tariff-basedprotection. A growth centers strategy should thus be regarded, explicitly,as an export promotion strategy, an important part of which would refer to the modificationof the status quo in respect of external protection and export promotion. - 100 -

376. A broad gamut of new tax and tariff policies might be considered as instruments to encourage decentralization. Among them, the revision of public sector prices in order to abolish discriminatory treatment in favor of Mexico City is of high priority. This implies, in addition, that subsidies on consumer goods should not occur, although this would have a negative effect on the poor in Mexico City.

377. There is accumulating evidence that, after a period of more than 15 years, during which public sector prices for a wide range of goods and services were maintained at an uneconomically low level, they will hence- forth be modified in accordance with changing economic realities. Revisions have recently occurred in the prices of water in the Federal District, as well as electricity rates, hydrocarbon prices and railway tariffs. The policy of maintaining low and fixed prices was congruent with that of encouraging national industrial development in the 1950s and 60s but also had the effect of facilitating geographic concentration.

378. In the new context of a flexible pricing policy, urgent consideration should be given to the introduction of spatially discriminatory tariffs. Water charges in Mexico City should approach the full cost of water production - at least for industrial users. Electricity tariffs may be modified in order to include the costs of transmission (again for industrial users in particular). Similarly, geographically uniform pricing for hydrocarbon products might be modified in order to discourage consumption in Mexico City (which would not be administratively impossible given that PEMEX has a monopoly role in this sector). Finally, whereas the current approach to railway freight tariffs has discriminated in favor of the movement of raw materials rather than finished goods, an alternative approach which discouraged the movement of new materials would be desirable. In addition, route-by-route and regional discrimination should also be considered as a means to discourage concentration in Mexico City.

379. With regard to tax instruments other than those which have been mentioned, property taxes should be reviewed in order to generate badly needed Federal revenues and to create a disincentive to locate in the Federal District. The sales tax might also be reviewed for the same reasons, and consideration should be given to the abolition of the counterproductive system whereby each state grants countervailing sales-tax exemptions as part of an industrial location incentive policy.

(d) Public Investment

380. Major developments such as those implied by the growth centers strategy, will obviously be expensive. The role of the public sector in providing the basic infrastructure which will be required to make this strategy work, is therefore crucial. Roads, including some new primary routes will be required. New ports, airports and telecommunications investments will also be indicated. In the Gulf, for example, it is clear that there are major deficiencies in each of these respects; and, unless these are remedied, the - 101 -

Gulf will not play the major role it could play in export growth and decentralization. It is clear too that social investments in growth center regions would be a vital part of the strategy and that they will also be expensive in terms of both investment and current expenditures.

381. The public sector will also have to provide direct investment in productive industry and its activities will not be confined to infrastructural developments. To the extent that the Gulf Coast Strategy is pursued, PEMEX, for example, would be one of the major industrial enterprises in the region. Uribe (1973) has speculated (not with respect to PEMEX) on the possible future of joint ventures between the Mexican Government and foreign enterprises, the latter providing capital and knowhow, and the former guaranteeing the interests of the foreign firm with respect to security against the risk of expropriation.

382. Some of the specific tax measures which might be considered as instruments for encouragingdecentralization within the framework of a growth centers strategy have already been mentioned. More generally, it is clear, even from the unquantifieddimensions of public investment requirements,that a massive effort at resource mobilizationby the public sector will be part and parcel of the successful decentralizationeffort in the next 25 years. An increase, and a large one, would be required in public sector savings. Some of the necessary resources could derive from the same measures which promote decentralization. It is also clear that external capital -- either in the form which Uribe has proposed or in the more conventionalforms of public-externalborrowing -- would be required. As observed in Chapter 2, to the extent that such borrowingwere undertakenwith the understanding that it would finance export-orientedgrowth, the implicationsfor longer- term balance of payments management would not be unduly disquieting,although external borrowing,should not be used as a substitute for domestic effort.

(e) Equalizing Access to Social Services

383. With the exception of housing, the actual distributionof present service levels among urban areas in Mexico does not seem to correspond to any "rational" overall pattern. Their seemingly random occurrence may be explained by the prevailing tendency for economic growth to proceed independently of physical development.

384. It would be useful to establishminimum service standards for each group of centers as well as for nearby rural populations. To the extent that these norms become accepted as guideposts for the agencies charged with the provision of these services, the agencies would be encouragedto allocate resources by giving priority to raising the level of sub-standardareas.

385. This effort to equalize access to social services among growth centers would tend to reduce the arbitrary advantages that some have gained with respect to others, at least within the same category or class of center. - 102 -

It would also enhance the growth prospects for all centers rather than continue to favor a small number of places which, for one reason or another, have achieved more acceptable service levels in the past.

386. In setting these standards, care should be taken not to raise the levels for core areas too far above those for growth centers, while rural areas should not be allowed to fall too far below the levels establishedfor the latter. For if either should happen, the propensity to migrate towards the higher-ordercenters might be increased.

(f) Raising Rural Incomes

387. Long-standingneglect of traditionalpeasant farming areas in Mexico has engendereda number of increasinglysevere problems for spatial policy: increasing rural poverty, rural over-populationin relation to existing land resources despite high rates of outmigration,and rising levels of low-productivity employmentin major urban centers. These conditionshave led the present Government to a number of rural development initiatives,notably the IntegratedRural Development Program (PIDER).

388. Rural development is too important to be treated casually in a study of national spatial policy and urban growth. Yet it cannot be ignored because a growth centers strategy such as that being discussed here rests in part on the assumption that economic growth will spread to the surroundingareas as the result of automatic market processes. It has been observed earlier however, that for a number of reasons such spread effects have not occurred on any major scale, at least not in the peasant farming areas, in Mexico. The growth centers strategy should be complementedwith appropriate actions in rural areas. Two lines of action might be considered: first, to improve agriculturalproductivity in dry-farmingmountainous states such as Aguascalientes,Zacatecas, Durango, Guerreo and Chiapas; and second, to increase off-farm employment opportunitiesfor rural populations in the vicinity of regional growth centers throughout the country.

389. The first of these proposals assumes that the prosperity of rural towns and service centers is primarily dependent on the purchasing power of the surroundingfarming population. To the extent that agriculturalproductivity could be improved, rural incomes would then rise, and economic growth would filter "up" the hierarchy of urban centers as farmers make their purchases in cities. The second proposal would have a double objective: to reduce the rate of rural-urbanmigration, while drawing rural populations more directly into near-by urban economies. This might be called a "filtering down" policy, because the effect of urban economic growth would then spread down the hierarchy from regional to local growth centers to rural areas. Such a policy would seek to encourage rural commuting in place of permanent migration to a city and this would help to relieve the pressure on cities while creating a new category of farmers who participate in both the urban and rural economies.

390. A policy of increasing agriculturalproductivity in dry-farming zones might be given substance by organizing a small watershed land and water _ 103 - management program in selected areas. A program organized on this basis would make local water resources available for small-scaleirrigation (such a program already exists), reduce flood hazards, combat erosion, and promote the reforestationof denuded mountainsides. These practices, supported and carried out by local people with the help of the Government, could be supple- mented, where appropriate,by efforts to convert land use from the traditional emphasis on maize to cotton or wheat, or to improve pastures for livestock production and dairy farming.

391. At the same time, and logically within the framework of the Inte- grated Rural Development Program, a limited number of strategicallylocated rural service centers would be connectedwith major product markets through a system of improved feeder roads and endowed with basic services such as primary schools, health clinics, improved water systems, storage facilities, and rural credit, in support of ongoing rural development.

392. The second policy suggestionof increasing off-farm employment, implies a very different spatial focus. Primarily applicable in the vicinity of expanding urban labor markets, it would be implementedby facilitating commuting from rural areas to the city. It is therefore predicated on the growth of urban employmentopportunities and transportation. The area from which the bulk of the commuterswould be drawn will generally not exceed 20 to 30 kms in road distance from a given center, and it is within this radius that the policy should be primarily applied. Implementationwould involve two main components: (1) the improvementof roads and bus services between the rural commuting areas and the center; and (2) the upgrading of local service levels in rural townships located within commuting distance. This should encourage a closer integrationbetween the rural and urban economies of the area, reduce migration, stimulate commerce in the principal city, raise rural income through off-farm employmentvia reinvestmentand better marketing arrangements,and through higher productivitywithin agriculture itself.

393. To carry out such a policy would require close collaborationamong municipalities,states, and the Federal Government, as well as rather sensitive, detailed, micro-planning. But this is not a new feature in Mexico and would simply expand an existing tradition.

Training and Research Aspects of Spatial Policy

394. As Mexico has begun to pay more attention to questions of spatial development,the need for extending the base of technical skills and knowledge has become more evident. Spatial planning is an interdisciplinaryfield of professionalexpertise that requires the contributionsof economists, en- gineers, sociologists,anthropologists, architects, and functional planners such as specialists in transport, housing and health. Although many spatial planners learn their vocation on the job, specializedprofessional education can help assure a steady supply of competent people familiar with the language, literature,concepts, theories, analytical skills, and synthetic approaches of the discipline. For Mexico, possible target figures for the next decade - 104 - might be 1,000 professional planners and 100 planning students enrolled in one-year post-graduate courses. 1/ Meanwhile, and to meet the more immediate needs, short-term training courses could be offered to professionals schooled in other disciplines but who will be the future spatial planners.

395. It is equally clear that new efforts will have to be supported on the research side. Developmentally oriented regional studies will probably be carried out routinely as part of ongoing planning efforts. More specialized studies, however, will also be required.

396. In both training and research, Mexico is fortunate in that it can follow the lead of a number of Latin American countries in which the tradi- tions of spatial development planning have already taken hold, among them Venezuela, Brazil, Argentina, Chile, Peru, and Colombia. In these countries, there are not only professional organizations of planners, and high quality journals but also a number of institutions for research and education in spatial planning which are affiliated with the Latin American Council for the Social Sciences (CLACSO). Should it be decided to support the growth of the planning profession, planning education in Latin America should be evaluated for whatever guidance it may afford, while the support from organizations such as CLACSO, the Inter-American Planning Society (SLAP), and the Latin American Institute of Economic and Social Planning (ILPES) would be almost certainly assured. More concrete suggestions for implementing these general points are made below.

397. (1) Establishing a National Center for Spatial Development. Such a center should ensure high standards of excellence in professional education for students wishing to enter public services, and should provide a model for other schools that might subsequently be established. Its course of studies would initially be for only one year and would enlarge the previous professional education of the students. The curriculum would be closely geared to the evolving needs of spatial development planning in Mexico and would combine theory with practice. Contract research would respond as directly as possible to national needs, while consulting and internship arrangements would strenghthen relationships between the Center and the public.

398. (2) Promoting Short-term Training Courses. This would be an intermediate measure and could be initiated on relatively short notice. ILPES has been routinely conducting such courses for public officials for a number of years and would undoubtedly be prepared to help, but other arrangements, involving for example CLACSO or SIAP, could be equally feasible.

1/ There are no liberal arts colleges in Mexico: generally in Latin America, all post-high school education is professionally oriented. This makes it possible to think of one-year, post-graduate planning courses that would add a planning point of view and some knowledge of urban and regional economics and related subjects to young professionals trained in other disciplines. - 105 -

399. A variety of courses might be designed, ranging from two-week seminars for senior governmentofficials to three-monthspecialized courses with a more technical orientation. It would be important, however, to coordinate these courses through the policies planning staff of Presidencia,not only to ensure their high quality and relevancebut also to allow for the best timing and selection of course participants.

400. (3) ConductingMajor Regional Development Studies. Two kinds of studies might be consideredhere. The first would consist of basic planning surveys in the principal developmentareas, such as the Northeast, the West, El Bajio, the Southeast, and, with a somewhat different focus, the Federal Capital Region. The second would estimate the expected regional impact of major investment programs, such as the Las Truchas steel plant and the nearby tourist development scheme at Zihuatanejo.

401. (4) Conducting General Research into Questions of Spatial Develop- ment Policy. The present report has raised a number of questions concerning spatial development policy in Mexico which cannot be answered with any great degree of assurance at this time. The policies planning staff of Presidencia would be the logical promoter of, and ultimate client for, studies which should be designed to answer these questions.

402. The following topics might be given priority:

(a) Industrial location decision-making: A study of this topic is now underway at the National University,but its scope may be too narrow to provide an adequate understandingof the issue.

(b) Social and economic indicators for subnationalarea development: This study would involve devising indicators of social and economic performanceof sub-nationalterritorial units (municipios, metropolitanareas, states, and developmentregions) on a periodic, intercensalbasis. As much as possible, indicator research should endeavor to relate inputs to outputs in measuring performance. The design for a regional and urban information system might also be included as part of the study.

(c) Impact of local development tax scheme: The reform of current tax incentive legislation suggested in this chapter would obviously be controversial,and should be carefully examined before adoption is considered. In question are such problems as probable yield, effects on the rate of national investment, effects on locational decisions, and cumulative impact on local areas economies.

(d) Minimum standards for social services: the formulation of minimum service standards (suggestedabove) is a very difficult undertaking and invovles an analysis and evaluation of existing service levels, the tentative formulationof social norms differentiatedby type of service and community,detailed cost analyses,measures of effective demand, demand elasticities,and budgetary impact. A careful - 106 -

investigation into the norms for key social services such as water, sewerage, and education should precede the implementation of a policy for equalizing access to social services. The analysis of cost should take account of interregional and inter-city differentials and relate them to physical conditions, city size and urban economic structures.

(e) Financing municipal investments and services: This study would delve into municipal finance, including sources of revenues, functional distribution of expenditures, incidence, debt burden, inter-governmental arrangements for joint financing, pricing of municipal services, and accounting procedures. It would assess the adequacy of existing administrative arrangements as well as possible reforms of the structure of local finance. A series of case studies covering a variety of situations would be the most appropriate procedure.

(f) Rural commuting: There is some evidence that rural commuting to urban jobs is a fairly common practice in Mexico. But the conditions under which it occurs are not well understood. What is the frequency of rural commuting in relating to the distance from a given center of employment? Is this a constant or variable ratio and, if the latter, what affects changes in the ratio? What conditions influence the choice to commute vis-a-vis alternative choices of migrating or remaining in an exclusively agricultural occupation? Is all commuting on a daily basis or is there, and to what extent, also commuting on a weekly or longer-term basis? How does such commuting affect the local housing situation in the center? How does non-farm employment affect family incomes and the distribution of expenditures between consumption and investment, particularly in farming enterprises? What are the income multipliers of increased rural incomes in terms of both production in agriculture and the purchase of commodities in central city markets?

403. (5) The Question of Priorities. Neither professional education nor research into spatial planning will have much success unless there exists a demand for spatial planners and for the results of their research. This demand must come from organizations whose long-term viability depends on having access to professional skills and knowledge in spatial development. For this reason, planning organizations, such as those suggested earlier in this chapter, must be established before going ahead with the establishment of a National Center for Spatial Development. Some progress might be made by proceeding simultaneously on several fronts, since organizations, skills, and knowledge are obviously interrelated. But unless an effective demand for skills and knowledge is created, expenditure of resources on the latter would be wasted. Because the Government appears to be moving in this direction, with the recent creation of a Regional Development Office in the Ministry of the Presidency, there is a reasonable expectation that Mexico's future spatial development will come increasingly under public guidance. APPENDIX

SPATIAL POLICY UNDERTHE LAWOF HUMANSETTLEMENTS (Principal Features)

1. The structure for spatial policy under the law has four basic elements: (a) a set of laws, regulations,and plans; (b) institutions that will make, revise, and enforce these laws and plans; (c) instruments to regulate land use; and (d) instruments to control public investment.

Laws, Regulations and Plans

2. The basic Law of Human Settlements calls for a national urban development plan, state and municipal urban development plans to be drawn up under directions set by the states, and plans for particular urban areas ('Zonasconurbadas").

Institutions

3. On the national level, both the Ministry of the Presidency and the M4inistryof Finance have potentiallyimportant roles. The Ministry of the Presidency is to make and revise a national plan, perform studies, chair the conurbation commissions (see para. 6 below), advise state and municipal governments on their own relevant laws and plans (at their request), and execute the national plan. For technical inputs to this work, the Ministry has within it the Connission Nacional de Desarrollo Regional y Urbano (CNDRU), which will be composed of representativesof relevant ministries, development banks, etc. and which is instructed to invite the participation of state governors and other officials as relevant to particular issues being discussed; the DireccionGeneral de Desarrollo Regional y Urbano (DGDRU),which is to be the technical secretariatto the CNDRU; and the Centro de Documentation, Informacion,y Estudios de Desarrollo Regional y Urbano, which will have a technical staff of about 30 to draft the national plan, study legal issues, study the functioningof the coordinationof the many laws, plans and institutions, advise state and local governments,and run a data bank. Also within the Ministry, under the CNDRU, are five sectoral working groups: urban, social, industrial,transport, and primary.

4. The two main purposes of this part of the machinery appear to be (1) formulatingthe national plan and (2) providing a body to coordinate national ministries so that they act in accordance with the plan.

5. The Ministry of Finance is charged with ensuring that credit institutions authorize only financing that is consistent with the national, state, and local plans. In practice, this will probably mean review of federal investments. In this case, the Ministry of Finance would in effect be a check on CNDRU, to assure the coordinationthat the latter is supposed to perform. APPENDIX Page 2

6. The Law of Human Settlementsprovides for new institutionson a new level: the conurbation commissions. Any urban area that is in more than one state, or that simply consists of more than one municipio, can be declared a conurbation (by the national or state governments, respectively, in the two cases mentioned). The Commissions will be chaired by the Minister of the Presidency, and composed of appropriate state governors, mayors, etc. Their powers are to make a plan for the area(subjectto approval by the President), to try to persuade local, state and national governments to act in accordance with the plan, and to regulate land use within the conurbation area. It appears that large metropolitan areas (Mexico City was the first) and small areas, where either present structure or desired future growth crosses state boundaries,will be declared conurbation zones.

Instruments to Regulate Land Use

7. The kinds of action contemplatedare (1) to determine future uses of specified land (in accordance with the various relevant plans), (2) to prohibit uses in conflict with such determinations,and (3) where appropriate, to expropriatethe land; all this is to be carried out within the constitu- tion and existing laws. It appears that the state governments have the power to determine how this will be done within each state -- by local governments, state governments,conurbation commissions, where they exist, or some combina- tion of the above.

Federal Investments

8. The power in the Ministry of the Presidency to make a national urban plan, with the participationof representativesof relevant ministries, and together with the Ministry of Finance to ensure that the national government's spending is consistent with that plan, gives the government the means to implement a strong urban-regionalpolicy. At present, however, it is not knnownjust how these powers will be used. How much the various ministries will affect the plan, and how much they will shape their own programs to con- form with it, will obviously depend on political factors and on the personal perceptions of the important actors. But the potential for coordinated action exists.