Public Disclosure Authorized MEXICO SOUTHERN STATES DEVELOPMENT STRATEGY Public Disclosure Authorized Volume 1: Synthesis Report October 20, 2003 Public Disclosure Authorized Public Disclosure Authorized This synthesis was written by Gillette Hall and Christopher Humphrey, with extensive assistance from Heather Layton. We are grateful to the World Bank Southern States Development Strategy Team for the background papers upon which this volume is based (see Annex 1). Special thanks to the following World Bank colleagues and Mexican government counterparts who provided input to this document: World Bank Staff Pacífico Hugo Orantes Montes José Maria Caballero Lic. Jacinto Robles Ramírez Mark Cackler Biol. Moisés Silva Cervantes Tania Carrasco Krishna Challa Guerrero Sandy Davis Mtra. Sonia Amelio Amador Joost Draaisma M.C. Jorge Briceño Hinojosa Marianne Fay Profra. Ma. Guadalupe Castillo Díaz Indermit Gill Lic. Marco Antonio Castrejón Lobato Marcelo Giugale Ing. Fulgencio Díaz Díaz Christian Gonzalez Arq. Fernando Figueroa Camacho José Luis Guasch Lic. Antonio Gaspar Beltrán Isabel Guerrero Lic. Heriberto Huicochea Vázquez Mark Hagerstrom Lic. Francisco Leyva Jiménez John Kellenberg Dra. Verónica Muñoz Parra Olivier Lafourcade Dr. José Ignacio Ortiz Ureñas Daniel Lederman C.P. Daniel Pano Cruz Gladys C. López Lic. Héctor Popoca Boone Miguel López Lic. Raúl Reducindo Ramírez Connie Luff Lic. Juan Salgado Tenorio Claudia Macías Lic. Marcelo Tecolapa Tixteco Mario Polese Lic. Wilibaldo Valente Pastor María Guadalupe Toscano Eloy Vidal Oaxaca Michael Walton Lic. Celestino Alonso Alvarez Steven Webb Ing. Omar Juárez Quentin Wodon Lic. Daniel Pérez Montes Lic. Daniel Vanzini Sepúlveda Presidencia de la Republica Lic. José María Villalobos Rodríguez Lic. Jorge Diez de Sollano Elcoro Lic. Pilar Rivero Laborde Lic. Monica Tapia Chiapas Dr. Fernando Alvarez Simán Ing. y M. en F. Sergio Araiza Bahena Ing. Rafael Camargo Vidal Lic. Maria de los Ángeles Cruz Hernández Ing. Gustavo de la Rosa del Valle Ing. Efrén Fuentes Montero Lic. Roger Grajales González M. SC. Walter López Baez 1 Table of Contents Executive Summary………………………………………………..……………………3 The Southern States: Mexico’s Poorest Region………………………………………6 International Comparisons……………………………………………………..7 Is the Poverty Gap Closing?……………………………………………………8 Why is the South so Poor?…………………………………………………………….11 High Cost of Doing Business…………………………………………………11 Not Specializing in Competitive Sectors…………………………………… 15 Inefficient Government Activity………………………………………….….18 Policy Options for More Successful Poverty Reduction in Mexico’s South……..24 Focus First on Increased Efficiency…………………………………………..25 Increase Resource Allocations for Poverty Reduction in the South………28 Stimulate Economic Growth in the South…………………………………...30 Address Social Exclusion and Conflict in the South………………………..34 Annex 1: List of Southern States Development Strategy Policy Notes and Authors………………………………………………………………………….36 2 Executive Summary The Southern States Development Strategy was undertaken in 2002 at the request of the Mexican government. Building on the 2001 World Bank Report “Mexico, a Comprehensive Development Agenda for the New Era,” this volume consists of a set of 22 Notes, each addressing one specific aspect of the development prospects and problems in Mexico’s southern region—from macroeconomics and labor markets to themes such as gender and indigenous peoples. The report focuses on the three states of Chiapas, Guerrero, and Oaxaca, the poorest states in the country, which together present the Mexican government with perhaps its greatest challenge: How to harness the potential of a region that, despite a wealth of assets (water, extensive biodiversity, and a vibrant indigenous cultural heritage), is nevertheless plagued by excruciating poverty? This synthesis draws together the main findings from a large body of work that encompasses two questions, simple to pose, but exceedingly difficult to answer: Why is the region so poor? And what can the Mexican government, both federal and state, do to address this poverty? The synthesis is organized as follows: Section one briefly sets the stage, cataloguing the extent of poverty in the south, its historical roots, and its potential for improvement without further policy change. We find that the south is unlikely to meet the first Millennium Development Goal of halving poverty by the year 2015 under current conditions. Section two asks why incomes are so low in the south as to produce this persistent poverty, and finds that it is because the south is unproductive—the value of goods and services produced per person in the south is less than half as much as in the rest of Mexico. We group the reasons for this low productivity, and hence low income, into three categories: (a) high cost of doing business that reduces the income that can be generated from economic activity and raises risk, ranging from poor infrastructure to insecure land tenure and violence; (b) not pursuing competitive advantages , which means that the pattern of economic activity currently in the south is concentrated in products and technologies with low productivity, particularly in the agriculture sector; and (c) inefficient government activity ranging from federal transfer and pricing policies that have in some cases been biased against the south, to inefficiencies and misuse in the administration of government resources, poor education quality, an inefficient judicial system, and inconsistent protection of social rights, which together reinforce the problems and perpetuate the cycle of poverty in the south. Section three discusses a series of policy options that might be taken at the federal and state level to hasten the pace of poverty reduction in the south. Major policy recommendations include the following: 1. Focus first on improved poverty reduction outcomes through increased efficiency. To provide immediate improvements in poverty reduction, existing federal and state resources for poverty reduction in the south should be used 3 more efficiently by reforming how federal resources are distributed and how state governments use those resources. Eliminate or reduce rigid restrictions on federal resource transfers, which impede state governments from undertaking sectoral reforms. Reorient federal and state spending patterns, which currently favor urban, non-poor residents (particularly in education, housing, and pensions) to free up resources for poverty reduction. Reform inefficient and redundant services, such as dual federal–state education sectors, and programs with high administrative overhead and low poverty-reduction impact, for example, family assistance, and housing. The scope for efficiency gains in social infrastructure provision is particularly great. Should the south attain international levels of service delivery costs, universal coverage in water, sanitation, and electricity could be attained in five years even at current spending levels. 2. Selectively increase resource allocations to the southern states, tied to efficiency gains. While efficiency improvements can have a significant and immediate impact, it is evident that the poverty gap between the south and the rest of the country will not be closed without an increase in federal resources to the southern states. A massive immediate increase in federal transfers to the south, however, is neither recommended nor realistic. Instead, a modest boost in federal resources should be directed at certain key bottlenecks to poverty reduction and economic growth in the south. These resources should be preconditioned on improved results by state and municipal governments. Greater resources also should be dedicated to expanding poverty reduction programs such as Oportunidades, which successfully reach the poor with little overhead. Further resource gains for the south can be made by eliminating regional biases that exist in certain aspects of federal subsidies and pricing policies. 3. Stimulate economic growth in the south. Poverty reduction is not just a matter of garnering and efficiently spending federal resources, but in fostering higher levels of economic activity in the south itself. It is equally important to increase income potential for southern workers by eliminating key obstacles to economic activity in the south. Transportation can be improved by completing a few key missing transportation links, particularly highways connecting the south to the rest of Mexico, and by completing deregulation of the local freight industry. State and federal governments should mediate and resolve the numerous land titles and boundary disputes, which create tremendous uncertainty over land holdings and constrain profitable economic activity on the land. Improvements in the lagging agricultural sector should be promoted through agricultural technology, the organization of producers for processing and marketing, the production of more competitive agricultural products, the development of agro- industry, and seeking out new markets. As well, rural development strategies should focus not just on agriculture, but also on latent economic potential in rural areas, such as the exploitation of wood and non-wood forest resources and tourism (particularly specialized products such as eco-tourism). Value- added manufacturing presents another potential sector for growth if constraints 4 such as low education levels, expensive transportation, and limited credit can be eased. 4. Address social exclusion and conflict in the south. Gains in efficiency, resources,