PP 000i-34.rrd 4/4/01 10:59 AM Page i Mexico Public Disclosure Authorized A Comprehensive Development Agenda for The New Era Edited by Marcelo M. Giugale, Public Disclosure Authorized Olivier Lafourcade, and Vinh H. Nguyen Public Disclosure Authorized THE WORLD BANK WASHINGTON, DC Public Disclosure Authorized PP 000i-34.rrd 4/4/01 10:59 AM Page ii Copyright © 2001 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing April 2001 1 2 3 4 03 02 01 The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organ- izations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, col- ors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. The World Bank encourages dissemina- tion of its work and will normally give permission to reproduce portions of the work promptly. Permission to photocopy items for internal or personal use, for the internal or personal use of specific clients, or for educational classroom use is granted by the World Bank, provided that the appropriate fee is paid directly to the Copyright Clearance Center, Inc., 222 Rose- wood Drive, Danvers, Massachusetts 01923, USA; telephone 978-750-8400, fax 978-750- 4470. Please contact the Copyright Clearance Center before photocopying items. For permission to reprint individual articles or chapters, please fax a request with com- plete information to the Republication Department, Copyright Clearance Center, fax 978- 750-4470. All other queries on rights and licenses should be addressed to the Office of the Publisher, World Bank, at the address above or faxed to 202-522-2422. The cover illustration is Aprendiz de Agorero (1969) by Carlos Mérida, reproduced courtesy of Galería de Arte Mexicano (GAM), Mexico City and © Estate of Carlos Mérida/VAGA, New York/SOMAAP, Mexico ISBN 0-8213-4914-7 Library of Congress Cataloging-in-Publication Data has been applied for. PP 000i-34.rrd 4/4/01 10:59 AM Page iii Contents Acknowledgments . xix Foreword. xxiii Acronyms . xxvii Synthesis . 1 I. Rationale and Organization . 1 II. Core Messages. 2 Consolidating Macroeconomic Gains . 4 Accelerating Growth through Enhanced Competitiveness . 8 Reducing Poverty through Human Capital Development . 12 Balancing Growth and Poverty Reduction with Protecting Natural Resources . 17 Building an Efficient, Accountable, and Transparent Government . 18 III. Conclusion: Putting It All Together . 21 Synthesis (in Spanish) . 23 Part I Chapter 1. Fiscal Sustainability. 51 I. Introduction . 51 II. Government Solvency and Sustainable Debt. 52 III. Conceptual Distinctions: Explicit and Implicit (Real or Contingent) Fiscal Deficits. 53 IV. Recommendations. 54 Fiscal Sustainability. 54 Public Debt Management . 55 Pension Reform . 57 Chapter 2. Growth and Competitiveness . 59 I. Macroeconomic Overview . 59 iii PP 000i-34.rrd 4/4/01 10:59 AM Page iv iv MEXICO—A COMPREHENSIVE DEVELOPMENT AGENDA FOR THE NEW ERA II. The Financial Sector . 60 Overview . 60 Need for Increased Efficiency . 64 Need for Improved Accessiblity . 66 Need for Increased Stability and Soundness . 68 III. Infrastructure . 69 Consolidating and Extending Sectoral Reforms . 71 Financing Infrastructure Services . 78 IV. Agriculture . 79 Table 1. GDP: Average Yearly Growth Rates by Sector . 61 Figure 1. Foreign Direct Investment . 62 Figure 2. Exports by Region . 62 Figure 3. Evolution of the Minimum Wage . 63 Figure 4. Evolution of Mean Daily Earnings Per Worker, Manufacturing Sector. 63 Figure 5. Public Investment versus Oil Prices . 65 Figure 6. Mexico: Public, Private, Total Investment as Percent of GDP . 70 Figure 7. Economic and Agriculture Growth Rates. 80 Chapter 3. Poverty and Inequality . 85 I. Introduction . 85 II. Providing Security . 89 Evaluating Government Programs . 89 Identifying Key Risks and Gaps in Coverage . 94 III. Building Opportunities . 95 Health . 98 Education. 101 Urban Labor Markets . 104 Rural Development. 108 IV. Empowering Specific Groups . 111 Indigenous Peoples . 111 Gender Issues . 115 Figure 1. Broad-based and Targeted Policies. 86 Figure 2. An Alternative Framework for Poverty Reduction . 86 Figure 3. Resources Channeled to Poverty Alleviation Programs . 89 Figure 4. Government Spending for Poverty Alleviation . 89 Table 1. Managing Social Risk in Mexico: Main Risk Indicators, Size of At-Risk Groups, and Best Practice Policy Responses . 96 Chapter 4. A Sustainable Future . 117 I. Recent Developments . 117 International and Domestic Context . 117 PP 000i-34.rrd 4/4/01 10:59 AM Page v CONTENTS v The Legal and Institutional Response . 118 Some Initial Successes and Achievements: Biodiversity and Air Pollution . 120 II. Issues . 121 Environmental Degradation . 121 Policies and Incentives . 123 Institutions and Environmental Management. 124 III. Options for the Future . 126 Institutional Strengthening . 126 More Clout to Core Functions . 127 Mainstreaming . 129 Table 1. Sectoral Distribution of Depletion and Degradation, 1996. 122 Figure 1. Environmental Responsibilities . 127 Chapter 5. Accountability and the Demand for Quality Government. 133 I. Rationale and Overview. 133 II. Decentralization: Assuring the Sustainability of a Process Already in Motion . 134 III. Justice: Making Reforms Work. 136 IV. Corruption: A Broad, Pending Agenda . 139 Part II Fiscal Sustainability Chapter 6. Macroeconomic Assessment. 145 I. Introduction . 145 II. Macroeconomic and Financial Vulnerability . 148 III. Fiscal Sustainability and Opportunities to Increase Potential Growth . 152 IV. Fiscal and Monetary Policies: Their Role in Macroeconomic Management . 154 V. The Choice of an Exchange Rate System . 155 VI. Options with Regard to Monetary Policy Regime . ..