FILECOPY 1972/14

DOCUMENTOF INTERNATIONALBANK FOR RECONSTRUCTIONAND DEVELOPMENT INTERNATIONALDEVELOPMENT ASSOCIATION Not For PublicUse Public Disclosure Authorized

I'n'+0 >n.5 ttn&Ce1FIlES ReportNo. 192-ME

THE ECONOMY OF MEXICO

Public Disclosure Authorized A BASIC REPORT

(in Six Volumes)

VOLUME I Public Disclosure Authorized

SUMMARY AND CONCLUSIONS Public Disclosure Authorized June 27, 1973

Latin America and the Caribbean Department

This report was prepared for offiial use only by the Bank Group. It may not be published,quoted or cited without Bank Group authorization. The BankGroup does not accept responsibilityfor the accuracy or compl.teness of the report. CURRENCYEQUIVALENTS

US$1 = Mex$12.5 Mex$l = us$0.08 Mex$1 million = Us$80,000

FISCAL YEAR

January 1 - December 31 THE ECONOMYOF MEXICO

A BASIC REPORT

(in six volumes)

VOLUMEI

SUMMARYAND CONCLUSIONS

June 27, 1973

Latin America and the Caribbean Department

THE MISSION

This Report is based on the findings of a mission headed by Guy Pfeffermannwhich visited Mexico in October 1972 and included:

Chief Economist Ian Scott

Fiscal and Financial Oktay Yenal Economist

Fiscal and Financial Agustin Que Economist

Public Investment Analyst Henri Meier

Public Investment Analyst Peter Ruof

AgriculturalEconomist Peter Scherer

Agricultural Economist Maurice Perkins (Consultant)

Agricultural Economist Eugenio Maffucci (Consultant)

Agricultural Economist Miguel Angel Cuadra (Consultant)

Hydrocarbons Economist Alirio Parra (Consultant)

Population Economist Roberto Cuca

Quantitative Economist Nicholas Carter

Statistician Raul de Campos

External Debt Analyst Alberto Eguren

The mission was also assisted by Thomas Hutcheson (Industrial Economist).

The mission secretarywas Martha-ElenaYanez.

ALNNiXI Page 1

COUNTRYDATA - MEXICO

AREA POPULATION DENSITY 54l.0 million (mid-1972) 27.4 per km2 1,973,000 km2 Rate of Growth: 3,4p. (from 1960to 1972) 1843 per km of "arable" area /

POPULATION CHARACTERISTICS (1972) HEALTH (1o65) Crude Birth Rate (per 1,000): 43.1 Population per physiciar; : 1,852 (1968) Crude Death Rate (per 1,000): 3.2 Population per hospital bed 510 (1966) Infant Mortality (per 1,000 live births) : 58.4

INCOME DISTRIBUTION (1969) 2/ DISTRIBUTION OF LAND OWNERSHIP (1960 % of national income, lowest quintile: 4.0 % owned by top 10% of owners : 72.0 highest quintile 64.0 % owned by smallest 10% of owners

ACCESS TO PIPED WATER (147) 31 ACCESS TO ELECTRICITY (1910 % of population - urban 61 2 of population - urban 59.6 - rural 61.2- rural

NUTRITION(1968) _v EDUCATION(1970) Calorie intake as % of requirements 120 (average) Adult literacy rate % :76. Per capita protein intake: 85.05 gr/day (average) Primary school enrollment % : 70 (ages 6-11) 1/ 10/ GNPPER CAPITA in 1971 US $67C

GROSS NATIONAL PRODUCT IN 1971 ANNUAL RATE OF GROWTH M. constant prices)

US $ Nln. e/ 1960-65 1965-70 1971

GNP at Market Prices 36,042 100.0 7.6 6.6 3.8 Gross Domestic Investment 7,152 19.8 9.2 5.8 - 8.1 Gross National Saving 6,347 17.6 9.3 4.2 - 4.5 Current Account Balance - 805 - 2.2 Exports of Goods, NFS 2,924 8.1 4.3 5.0 5.5 Imports of Goods, NFS 3,383 9.4 3.5 7.4 - 3.9

OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1970

Value Added Labor Forced V. A. Per Worker US $ Mln. % Mln. % US $ %

Agriculture 3,795 11.3 5.1 38.8 746 29.2 Industry 11,293 33.7 3-0 23.1 3,733 146.2 Services 18,776 56.1 4.2 32.0 4,469 175.0 Unallocated -_ 368 - 1.1 o.8 6.1 total/Average 33,496 100.0 13.1 100.0 2,554 100.-0

GOVERNMENT FINANCE General Government Federal Government Gesos Mlin.) % of GDP Pesos Mln.) % of GDP 1970 1970 1968-70 1971 1971 196-7l

Current Receipts 51,481 12.3 12.1 36,339 8.0 7.9 Current Expenditure 44.737 10).7 10.9 2937E 6.5 6.3 Current Surplus 6,744 1.6 1.1 6,962 1.5 1.3 Capital Expenditures 17,811 4.3 3.1 14,349 3.2 3.5 External Assistance (net) 1,033 0.2 0.4 L40 0.1 0.2

1/ In terms of estimated cultivable area. 2/ Source: 1969 Survey by Ministry of Trade and Industry. Source: 1970 Census of Population. As percentage of minimum daily requirements established by FAO. Data from Bank of Mexico Survey, 1968. 5/ Sourcet WHO. @/ In terms of total land in farms, including range land, etc., in 1960. Source: IV Census of Agriculture, 1960. 7/ Sources 1970 Census of Population. Source: 1970 Census of Population. / Source: Percentage enrolled of corresponding population in age group 6 - 11. / The Per Capita GNP estimate is at 1970 market prices, calculated by the same conversion technique as the 1972 World Bank Atlas. 11/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job. Census figures adjusted to mid-year.

.. not available . not applicable ANNEXI Page 2

COUNTRY DATA - WXIXCO

MONEY, CREDIT and PRICES 1965 1969 1970 1971 1971 1972 (Million outstanding end period) (January to September) Money and Quasi Money 86,11,.4 164,572.7 191,286.4 220,700.3 213,406.3 246,169.0 Bank Credit to Public Sector 1/ 21,421.3 42,310.6 47,147.2 51,764.9 ) 20 2 Bank Credit to Private Sector 2/ 66,404.3 124,374.5 146,835.2 168,284.2 )29,7 237,353.7

(Percentagesor Index Numbers)

Money and Quasi Money as % of GDP 34.1 43.8 45.6 48.4 46.86 49.14 4/ General Price Index (1963 = 100) 3/ 108.1 123.0 128.5 134.8 . . 14o.o Annual percentage changes in: - Gene-.alPrice Index 2.3 3.9 4.5 4.9 3.8 Bank credit to Public Sector 66.6 20.2 11.4 9.7 ) 13.2 5J Bank credit to Private Sector 8.7 20.6 18.0 14.6

BALANCEOF PAYMENTS MERCHANDISEEXPORTS (AVERAGE1969-71)

196 9 197 p 197) US $ Mln % (MillionsUS $) Manufactures 462 32.9 Cotton 146 10.4 Exports of Goods, NFS 2,617 2,710 2,924 Beef and Live Cattle 115 8.2 Imports of Goods, NFS 2,890 3,408 3,383 Tomatoes 94 6.7 Resource Gap (deficit= ) 73 - 697 - 4ua 91 6.5 Coffee 80 5.7 Interest Payments (net) - 182 - 217 - 234 Shrimp 59 4.2 Workers' Remittances 6/ 280 323 349 All other 25.4 Other Factor Payments (net)-436 - 474 - 489 Total: - 100.0 Net Transfers 16 35 27 EXTERNAL DEBT, DECEMBER 31. 1971 Balance on Current Account 595 1,030 - 805 US 8 Mln Direct Foreign Investment 298 323 293 Net MLT Borrowing 450 276 275 Public Debt, incl. guaranteed 4,244 Disbursements 975 859 799 Non-GuaranteedPrivate Debt 7/ 19 Amortization 525 -iaL 524 Total outstanding & Disbursed 4,263 Subtotal 748 599 568 Capital Grants - - - DEBT SERVICE RATIO for 1971S Other Capital (net) - 19 -12 -1 7% Other items n.e.i - 86 5L L3_- Increase in Reserves (+) 48 102 200 Public Debt, incl. guaranteed 22.b Non-GuaranteedPrivate Debt 7/ o.6 Gross Reserves (end year) 718 820 1,020 Total outsi:anding& Disbursed 23.4 Net Reserves (end year) 654 751 952

RATE OF EXCHANGE IBRD/IDA LENDING. (latest month) (MillionUS $):2/

Through - 1971 IBRD IDA US $ 1.00 = 12.50 1.00 = US $ 0.08 Outstanding& Disbursed 986 Undisbursed 343 Since - 1971 Outstanding incl. Undisbursed 1,329 US $ 1.00= 12.50 1.00= US $ 0.08

1/ Federal Government and States only. 2/ Lending to enterprises and individuals. No breakdown between public and private . . not available sector enterprises. not applicable 3/ GDP deflator. 4/ Jan-Sept in relation to Jan-December GDP estimate. 51 September to September. 6/ Includes remittancea of agriculturalworkers which are treated as transfers.

7/ Partial Data. 8/ Ratio of Debt service to exports of goods, non-factor services and workers remittaroes. 9/ April 30, 1973. April 30, 1973 PREFACE

This Report is presented in six volumes. Volume I contains a summary of the principal arguments and conclusionsof the main body of the Report, which is contained in Volumes II, III and IV. These deal respectivelywith the Past, the Present, and the Future. The analysis of the Past (Volume II) is designed as an analyticalintroduction to the Present (Volume III) rather than as a self-containedaccount of the economic history of Mexico from 1900 to 1970. Volume III is dedicated to the analysis of current problems, policies and prospects in the period 1970 through 1976 - co- incident with that of the administrationof President Echeverria. Volume IV (The Future) deals with issues which are likely to mature after 1976, - many of which have implicationsfor immediate action by the present Government. Volume V contains a StatisticalAppendix. Volume VI contains a Technical Appendix.

SUMMARY AND CONCLUSIONS

1. Mexico's per capita income in 1972 was $744. Among the world's less developed countries it was therefore a relative- ly wealthy nation. But the distributionof its wealth - measured in terms of goods and services and of disposable income - was strikingly uneven. After three decades of sustained and increas- ingly diversifiedgrowth and 50 years after a decade of social and political change which began with the Revolution of 1910, Mexico has not found a way to eliminatepoverty or to achieve a relativelybalanced distributionof consumption - between income groups, between urban and rural areas, or between regions.

2. It cannot be said that attempts have not been made to resolve these problems through legislation and direct Government action. This was particularlyevident during the Cardenas adminis- tration (1934-1940)when energetic efforts were made to deliver some of the promises which had been made to those who had fought for social and economic justice during the Revolution. Public expend- itures were reallocated to finance social services and the develop- ment of an improved infrastructureand a vigorous program of land reform was implemented. And notwithstandingthat these changes were made at a time when Mexico was in many ways isolated from the world community,the country managed to achieve both social progress and fairly rapid economic growth.

3. The spectaculareconomic success of the period from 1940 to 1970 was, however, achieved on the basis of a somewhat differentmodel of development. The primary strategy was to achieve rapid growth by means of capital formation in the private sector. To this end savings incentiveswere made attractive (in- cluding a low tax ratio rising to only 9 percent of GDP by 1970), and the allocationof a limited volume of public sector resources (emphasizinginfrastructural development) supported the growth of private sector productionwhile the adoption of low prices for the products of public sector industries (includingpower, hydro- carbons, water, and railroad freight charges) helped to promote pri- vate sector profitability.

4. The strategy was consistentlyeffective in promoting the growth of GDP and sufficientlyflexible to make it possible to achieve (in the late 1950s and 1960s) rapid growth without in- flation - an achievementwhich attests to skillful economic manage- ment and which has been equalled in few other countries.

5. Because, perhaps, of this success relatively little attention was paid to the fact that the poor not only remained poor - particularlyin the countryside - but may have become increasingly poor in relation to those whose living standards had increased as the - ii -

economy grew. Insofar as a more equitabledistribution of goods and services was an objective of economic policy, it appears to have been implicitlyassumed that it would be achieved through the "trickle-down"t effects of economic growth.

6. The fact that this did not - on the evidence - happen, and that the persistence of widespreadpoverty is increasingly incompatiblewith sustained growth and rising per capita incomes has been recognized as a major policy issue by the governnent of President Echeverriawhich took office in December 1970. There is evidence, however, not only that the search for greater econ- omic justicemay have begun (althoughit is as yet too early to say that it will be successful)but also that it is not a single- minded pursuit. For the Echeverria Government like its predeces- sors is also clearly committed to the achievementof sustained economic growth within the constraintsof relative monetary and balance of payments stability.

7. This Report suggests that the goals of economic jus- tice and of economic growth are not incompatibleand argues that the public sector must play a decisive role as an agent of social change while remaining responsible for the promotion of sustained expansion. It suggests, in particularg,that in both respects the key to these achievementslies in a modified fiscal and financial strategy.

Fiscal and Financial Analysis

8. New revenue and expenditure (particularly investment) policies are not only desirable but essential, both to the achieve- ment of sustained growth and the improvement of welfare. Moreover, with judicious economic management, a new strategy appears to be entirely feasible. The current framework of the fiscal and finan- cial systems is examined in the Report from the points of view of growth and social progress. First, in the absence of increased prices for public sector goods and services (particularlyhydro- carbons, power and transport),very large transfers from the Federal Governmentto the enterprisesconcerned, or an intolerable increase in external indebtedness,it is seen as almost inevitable that their productive capacity will be severely constrained and that in the late 1970s and 1980s this would inhibit the expansion of the economy. Therefore, tariffs must be increased in order to generate additionalpublic revenues. Second, any ambitions to achieve social progress by means of public sector expendituresare clearly contingenton the procurement of additional tax revenues: without them it would not be possible to finance some of the social programs which the Governmenthas in mind without reoourse to such - iii -

levels of internal or external borrowing as would be prejudicial to monetary and balance of payments stability.

9. The contrast between the investment program which (without incurring risks of instability)could be financed on the basis of past revenue trends and that which could be financed with fiscal change is quite substantial. The magnitudes related to the first option are shown in Table I-t.

Table I-1 : MEXICO : PUBLIC SAVING AND POSSIBLE INVESTMENT EXPENDITURE1973-1976 : BASEDON PAST TRENDS

(Billions of Current Mex$)

1973 1974 1975 1976

Public Saving 18.1 19.3 20.8 22.5

Public Borrowing (net) 19.6 21.7 24.1 26.8

- Internal (15.1) (16.8) (18.6) (20.7)

- External (4.5) (4.9) (5.5) (6.1)

Total Resources for Investment 37.7 41.0 44.9 49.3

Public Savings as Percent of GDP 3.2 3.1 3.0 2.9

Public Investment as Percent of GDP 6.7 6.6 6.5 6.4

10. This suggests that the maximum amount of investment which could be financed on the basis of trend levels of public borrowing and of the revenues which could be expected from existing fiscal provisions would not exceed Mex$37.7 billion in 1973. This is certainly insuffi- cient to finance the investment which would be required to sustain growth and to diffuse its benefits more widely. While the Government has not indicated its detailed expenditure plans for 1974, 1975 or 1976, the discrepanc-ybetween feasible and required investment expend- itures would be increased rather than reduced. - iv -

11. Relatively modest changes in fiscal policy would, however, generate sufficient additional resources to finance higher levels of investment in public enterprisesand addition- al current and investment expenditureson social goods and ser- vices. The changes would necessarily include both tax and tar- iff revisions, and within the tax field, both the direct and in- ci-ect taxes. The pattern of resource mobilizationand alloc- which would emerge under these circumstancesis shown in Table I-2.

Table I-2 MEXICO : PUBLIC SAVINNGAND POSSIBLE INVESTMENT EXPENDITURE1973-1976 : WITH ADDITIONALPUBLIC REVENUEAND INCREASEDBORROWING

(Billions of Current Mex$)

1973 1974 1975 1976

Public Saving 20.5 26.1 29.3 33.5

Public Borrowing (net 23.0 26.0 29.1 32.3

- Internal (16.8) (18.6) (20.5) (22.6)

- External (6.2) (7.4) (8.6) (9.7)

Total Resources for Investment 43.5 52.1 58.4 65.8

Public Savings as Percent of GDP 3.6 4.2 4.3 .4

Public Investment as Percent of GDP 7.7 8.4 8.5 8.7

12. In respect of both growth and inflation, the success- ful implementationof fiscal changes will be contingent on the preservationof private sector confidence in the Government's economic managenment. In and of themselves, however, fiscal changes should not be expected to have a negative impact on the economy. Any which occurred (in terms of a decline in GDP or faster inflation)would probably be marginal and would, more- over, in terms of both longer run (post-1976)growth prospects and of social develolmient,be compensatedby the fulfillmentof - v -

major policy goals; they should, specifically,make it possible to finance essential investment in the public enterprises and in the social sectors without prejudice to either internal or external stability.

Sectoral Analysis

13. The nature of the sectoral analysis varies somewhat from sector to sector, depending particularlyon whether the sectoral level of public investmentis an important criterion of sectoral performance.

14. The problems of the agriculturalsector derive in large measure from the structuralrelationship between agrarian structure and population growth. Underemployment,income con- centration, and rural-urbanmigration are closely linked with the failure of the agrarian system to provide an adequate socio- economic environment. Government policy for agriculturenow has four broad objectives; the improvementof agriculturalincomes; the generationof more employment;the satisfactionof domestic demand for agriculturalproducts, and the generation of foreign exchange from agriculturalexports. These objectives are direct- ly related to Governmentpolicies for agrarian reform, irrigation, research, extension,price and credit policies.

15. The 1970 Agrarian Reform Law remedied several import- ant shortcomingsin the previous Agrarian Code. In particular, it provided a basis on which the ejido could be transformed into an efficient productionunit and contained provisions to prevent fur- ther land fragmentation. The current objective is to complete the legal aspects of agrarian reform by 1976; this may be an over- optimistic target and it is debatable whether this goal would be compatiblewith the achievementof an efficient structure for livestock production because there is, at present, no clear agree- ment on appropriatestocking levels for livestock farms.

16. The Federal Water Law (1972) seeks to rationalizewater management; it defines property rights and establisheswater-use priorities. The Ministry of Hydraulic Resources (SRH) has been authorizedto plan, execute and operate all water projects in which there is public participation. The law imposes upper and lower limits on farm size of 20 ha and 10 ha in new irrigation districts in order to achieve a more equitable distributionof the benefits of public irrigation projects. It is anticipated that the historical (post-1940)concentration of irrigation de- velopment in the northern coastal regions will be modified and that the southern river deltas will become a new focus for water - vi -

management. The physical characteristicsof these areas are, however, markedly different from those of the north and their developmentwill imply a reductionin the scale of engineering projects and relatively greater emphasis on drainage, flood control and soil conservation.

17. A further goal is the improvement of water manage- ment; an intensive program designed to achieve this objective has been launched by SRH. Its success appears to depend on a greater degree of cooperationwith the extension services of the Ministry of Agriculturethan has yet been achieved. Im- provements in reservoirmanagement and rationalizationof water prices also deserve attention. The National Water Study now being carried o-uitshould provide a valuable adjunct to irriga- tion policy-making. An expanded program of irrigation invest- ment is clearly required but analysis suggests that the rate of irrigation expansion should be explicit ly related to other agriculturaldevelopment options and to the growth of effective demand for agriculturalproducts.

18. Agriculturalresearch will play an important role in the future of the sector. Mexico has already achieved a world- wide reputation for excellence in the development of hybrid grains but a major effort will neverthelessbe required in order to make research relevant to the needs of small farms in rainfed and tropical areas. The utility of new research will largely depend on the expansion and efficiencyof Government extension services, since improvementsin cultivation techniques on small farms are unlikely to occur unless this happens.

19. Other policy objectives will be sought through CONASUPO, the Government'ssemi-autonomous price and marketing agency. Price support programs have so far been of special benefit to maize and wheat producers in irrigated areas and small farms have been large- ly excluded. Recent efforts have, however, been made by CONASUPO to increase grain purchases from smallholders. Price support for maize has a prospectivelyimportant impact on small farm incomes and welfare but the maintenance of price support programs for maize and other crops in commercial agricultureshould be critic- ally evaluated.

20. Agriculturalcredit policy will also emphasize the needs of the smallholder sector. This, however, will imply a need to achieve a greater degree of coordinationbetween credit and extension services, and will therefore imply some reorganization of credit institutionsand some growth in extension services. - vii -

21. Given sufficientresources to finance new public sector programs for agriculturaldevelopment and some success in overcoming administrativeand other non-financialconstraints, it is estimated that a sector growth rate of about 5 percent a year could be achieved through 1976 and that some progress could be made towards alleviatingthe poverty of the rural population by means of policies which have explicit reference to income distributionand small-farmwelfare.

22. The prospects for the forestry sector are somewhat contingent on a clearer definition of government policy and on the resolution of some basic structuralproblems - reflectedin high production costs and under-exploitationof an abundant natural resource. A similar conclusion applies to the fisheries sector; both inshore and offshore resources (subject in some areas to further evaluation)are generally abundant but there is no clear sectoral strategy. Recent legislativechanges may, how- ever, lead to a more intensivelevel of resource exploitationand to faster sectoral growth in both sectors.

23. The problems and prospects of the industrial sector differ greatly from one industry to another. First, the outlook for the energy sector is tied more closely to public investment policy than that of any other industry. In view of serious under- investment in hydrocarbonsexploration during the last decade, the implicationsof failure to implement a much larger investment pro- gram than has been implementedin the recent past would include a declining trend of production and rising import requirements. These trends would start to become evident before 1976 but their main impact would be felt thereafter. A PEM XI investmentpro- gram in the order of Mex$40 billion in 1973-1976 is thus indicated as a means of avoiding capacity constraintsto sectoral and, by extension, to GDP growth, in the medium term. A similar justifi- cation for a high level of investment applies to the electric power sector. In both cases there are direct links between macro- economic prospects, sectoral growth, public investment and re- source mobilization strategy.

24. This does not apply to the manufacturing sector. Mexico has reached a stage of development at which manufacturing output is growing faster than total output. There are, however, some outstanding issues which include those of protection, de- centralization,technological transfer and employment. Although protection in Mexico is, by internationalstandards, not excessive, the issue has a long history. Certain advantagesmight derive from a reduction in effectiveprotection but the Government appears to

9' PetroleosMexicanos. - viii -

be strongly interested in reducing present incentive differentials between domestic sales and exports of manufacturedgoods by means of export incentives. Several export promotion incentives have been introduced since 1971 and the recent trend of manufactured exports shows a strong upward tendency although it may be too early yet to evaluate these policies.

25. The issue of industrial decentralizationis intimately related to the past and present concentrationof people, production and prosperity in Mexico City. The Government has expressed in- creasing concern over this issue and in 1971 introduced fiscal in- centive legislationto encourage industrial growth in other parts of the country. Other measures having the same purpose include the developmentof industrial parks, regionalminimum wage policies, the developmentof a new steel complex in a hitherto undeveloped area of the Pacific seaboard,and the development of manufacturing activitiesnear the US-Mexico frontier. As yet there is little evidence that these measures have had a significanteffect on con- centration.

26. The issue of technologicaltransfer has recently attracted considerablepublic attention. New legislation imposing constraintson technology imports was introduced in 1973. Its pro- visions are generallycompatible with those of similar laws in other developing countries and the Government has stressed that the new law is not intended to impede the use of foreign technology but rather to ensure the technology used is both appropriate and is obtained on satisfactoryterms. With respect to the issue of em- ployment in manufacturing,it is suggested that certain aspects of Governmenteconomic policy may have encouraged the use of capital rather than labor.

27. The mining sector has experienced only slow growth in recent years in the light of world price trends and of investment uncertaintyin Mexico. The resource potential (as in forestry and fisheries) is, however, good. Recent legislativeprovisions may imply more intensive exploitationin the near future than in the past.

28. Transport in Mexico is in many ways dominated by the public sector; in addition to infrastructuraldevelopment, its involvementincludes whole or partial responsibilityfor rail, road and air services. The major problems of the sector refer to coordination,efficiency of operations, adequate investment planning, and rational pricing policies. There have been en- couraging developmentsin a number of subsectors since 1970, particularlyin respect of port reorganization. It is clear, - ix -

however, that many problems remain; coordinationbetween sectoral agencies is still ineffective,a number of pricing issues are still outstanding (although a decision has been made to revise railway freight charges in 1974), and there is no indication of how the urban transport problems of Mexico City are to be resolved.

29. Tourismi/,which contributes40 percent of foreign exchange earnings, appears to have excellent prospects for future growth. The public sector (through a Banco de Mexico trust fund) is now engaged in the developmentof two major projects (at Zihuatanejoand Cancun) and other projects are being considered.

30. The public sector is also involved in the "social" sectors - education, health, housing, nutrition and rural develop- ment. In all of these areas the outstandingproblems are very severe and irrespectiveof financial constraints it would not be possible to resolve them before the end of the present Administra- tion in 1976. This is largely because of personnel constraints - particularlyin the education and health sectors. It is also clear, however, that the financial resources necessary to provide the whole population with adequate food and shelter could not be mobil- ized. Two conclusionsemerge. First, every effort should be made to utilize such resources as can be used (given non-financial constraints)to promote social development during the next four years, and particular stress should be laid on the problems of the rural poor. In this regard, the Government'srural development program - which provides basic infrastructurefor settlements of between 500 and 2,500 inhabitants - is a major priority. Second, any effort made by the Government to increase expenditure will, at best, facilitate a relative reduction in existing dis- parities between socio-economicgroups, between rural and urban areas and between different parts of the country.

31. By 1976 poverty will still be very much in evidence in Mexico. But a strategy to reduce imbalances and to improve the conditions of the poor is not only a major social and political priority but is also financiallymanageable - provided appropriate public revenue policies are followed.

Balance of Payments Analysis

32. The process of import substitutionin consumer goods has now advanced to the point at which three quarters of Mexico's imports are made up of investmentgoods, raw materials, and fuels. The level of investment and year to year changes in the GDP growth rate are therefore closely linked with import capacity and import j Includingborder tourism. - x -

shortfalls are likely to bring about an immediate reduction in economic activity. Conversely,any deteriorationin the balance of payments must be countered by action to dampen domestic demand in order to contain imports. The recent trends of GDP growth and balance of payments conditions are thus closely related.

33. Mexico's export status has been strengthenedby the diversificationof the export structure. Manufactured exports now account for 40 percent of total merchandise exports compared with only 15 percent in 1960, and are expected to increase their share in the future. The traditionallyclose link between the U.S. and Mexican economies continues and some 70 percent of Mexico's merchandise trade is with its northern neighbor. It was therefore inevitable that the peso should have maintained parity with the dollar in 1972 and 1973, thereby improving Mexico's competitiveposition vis-a-vis countries which did not follow the dollar.

34. The debt service ratio which has traditionallybeen high, has been reduced since 1968 when it reached the record level of 24 percent. This can be largely attributed to better govern- ment control over the external borrowing of decentralizedpublic agencies which has not only helped to reduce the volume but also to improve the terms of the external debt; in 1972 the debt ser- vice ratio was below 20 percent.

35. On the basis of sectoral prospects in the next few years, particularlyin the manufacturingand tourism sectors, and of Mexico's competitiveposition vis-a-vis European and other countries, it is consideredlikely that the trend of export earn- ings should be much better than in the 1960s. On the import side, however, the fact that petroleum imports will rise sharply between now and 1976 (irrespectiveof PEMEX investment in exploration) means that the achievementof faster export growth is a matter of crucial importance.

36. Provided that sound fiscal policies are continued and that the necessary growth of public expenditureis financed without excessive external borrowing, it should be possible to maintain a debt service ratio of less than 25 percent in the foreseeable future,while assuring rapid economic growth. Given this, Mexico will continue to be one of the most creditworthydeveloping countries in the world.

Long-Run Analysis

37. Turning from the short and medium to the longer term, the issues which seem likely to dominate the final quarter of the twentieth century are, in many instances, issues which can already - xi -

be defined. However, the extension of the time horizon gives them greater influence over developmentprospects than that which they cormand over a shorter period.

38. The central issue is whether the Mexican economy can be expected to provide the whole population in 2000 A.D. with at least a minimum standard of prosperity. The key determinantof welfare (other than that of public sector action to produce and distribute goods and services) is employment and with a given labor force the major parameters of employment are economic growth and technologicalchange. The size of the future labor force derives from the projected size of the population and from its age and sex profiles. There is little prospect that the total population in 2000 A.D. will be less than 140 million - above the mid-point in a predicted range from 122 to 152 million. The lower end of the range would imply a dramatic and improbable decline in fertility,while the higher figure would imply the persistence of current fertility trends. On the basis of a pro- jected population of 140 million, and taking account of other relevant factors, it is estimated that the labor force in 2000 A.D. will be in the order of 39 million.

39. Although there is no firm basis on which to predict trends in labor productivityand GDP growth, it can be shown that the persistenceof recent (1950-1970)trends (given labor force growth as estimated),would imply a very large increase in under- employment above the current level (which is undoubtedlyhigh but cannot be accurately quantified for lack of data). The economy would probably have to grow substantiallyfaster than in the past in order to alleviate the unemploymentproblem.

40. There can be no doubt that the amounts of scarce inputs required to maintain the growth of the economy will in- crease substantiallybefore the end of the 20th Century. How- ever, in respect of water, there is already a severe imbalance between the geographic sources of supply and demand. Over time, this imbalance is likely to be accentuatedunless measures lead- ing to the effective geographicredistribution of population and activity are introduced - those which have been adopted so far are unlikely to have such an effect. Moreover, the balance bet- ween aggregate supply and demand for water will become increasing- ly delicate.

41. There is, moreover, every indication that Mexico, which has until now been essentiallyself-sufficient in all types of energy, will, in the future, have to rely increasinglyon crude petroleum imports. This much seems certain although speedy govern- ment action to provide additional resources for PEMEX investment - xii -

would have the effect of buying time because reliance on external supplies could be postponed if additional reserves were located and exploitedin the near future. In the longer run, even if a major effort in this direction is made, it may be necessary to depend increasinglyon imported fuel. This will inevitably im- pose a heavy cost on the economy and it is by no means unlikely that 25 to 30 percent of the total value of imported goods and services will consist of petroleum by the end of this century.

42. There are, therefore, serious constraintsto long run growth which may be difficult to overcome, although the feasibilityof faster-than-historicalgrowth rates is, in part, dependent on doing so. It is also clear, however, that the expansion of exports would make a substantialcontribution to faster GDP growth and that the rate of export growth may be the key determinant of economic success as measured in these terms; it may be a prerequisiteof a lower unemploymentratio.

43. Given, however, that growth is not an end in itself but rather a means to the end of generating sufficient resources to improve the material welfare of the population as a whole, these improvementsdo not depend exclusivelyon growth. Tech- nological change and population increase (and thus labor force growth) are also major parameters.

44. Innovative and effective policies which succeeded in encouraging the use of labor rather than of capital would have a potentially important impact on employment prospects and thus on the improvement of welfare. Moreover, it is clear that the problems arising from scarcity of natural resources are com- pounded by the rapid increase of population. In no other country with a population of 50 million or more is the rate of population increase as high (3.5 percent) or the national current rate faster than any historical rate. The efforts required to improve living standards and to spread the benefits of growth more equitably are, therefore,not only greater in Mexico than in any other country of comparable or superior population size, but are greater now than ever before.

45. President Echeverria has shown that he is aware of the long run consequencesof unchecked population increase and has re- cently liberalized the attitude of the Government and its public health services towards "responsibleparenthood". This change in traditionalattitudes is an important break with the past but it cannot in itself be expected to influence demographic trends very much when less than a third of the population have access to mod- ern medical care. The Mexican economy grew rapidly while the - xiii -

population increased from 20 million (1940) to 54 million (1972). But the prospectiverelationships between population growth, employmentand welfare and the likelihood of a population of 140 million by the end of the century suggests that an unequivo- cal commitment to a population policy might be the most important policy position which could be developed by the Echeverria admin- istration.