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June 2004

Document of the World Bank

Report No. 28612-ME

Mexico Poverty in Mexico: An Assessment of Conditions, Trends and Government Strategy

Colombia and Mexico Country Management Unit Latin America and the Caribbean Region Poverty Reduction and Economic Management Division

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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This document has a restricted distribution and may be used by recipients only in the performance of their Official duties. Its contents may not otherwise be disclosed without World Bank authorization.

MAIN ABBREVIATIONS & ACRONYMS

ACERCA

APAVER

BANRURAL

CEC

CENDIS

CIDE

CIESAS

CONACYT

CONADEPI

CONAFE

CONAFOVI

CONAPO

CONASUPO

CONAZA

DICONSA

DIF

ECLAC

Program for Comercialization Support (Programa de Apoyos para la Comercializacibn)

Program for Drinking Water and Sewerage in the State of Veracruz-Llave (Programa de Agua Potable y Alcantarillado del Estado de Veracruz-Llave)

National Bank for Rural Credit (Banco Nacional de Crkdito Rural)

Strategic Community Centers (Centros Estratkgicos Comunitarios)

Child Development Centers (Centros de Desarrollo Infantil)

Center for Economic Research and Education (Centro de Investigacibn y Docencia Econbmicas)

Center for Social Anthropology Research and Studies (Centro de Investigaciones y Estudios Superiores en Antropologia Social)

National Council on Science and Technology (Consejo Nacional de Ciencia y Tecnologia)

Commission for the Development of Indigenous Communities (Comisibn para el Desarrollo de 10s Pueblos Indigenas)

National Council for Educational Development (Consejo Nacional de Fomento Educativo)

Housing Development Commission (Comisibn Nacional de Fomento a la Vivienda)

National Council on Population (Consejo Nacional de Poblacibn)

National Company for Popular Subsistence (Compaiiia Nacional de Subsistencias Populares)

National Commission on Arid Zones (Comisibn Nacional de Zonas h i d a s )

CONASUPO Commercial Distributor (Distribuidora Comercial CONASUPO)

Integrated Family Development System (Sistema para el Desarrollo Integral de la Familia)

Economic Commission for Latin America

ENCASEH

ENESTYC

ENEU

ENIGH

FAIS

FAPPA

FIFONAFE

FIRA

FIRCO

FONACOT

FONAES

F O V I

FOVISSSTE

I M S S

INDESOL

INEGI

INFONAVIT

IN1

Household Economic Characteristics Survey (Encuesta de Caracteristicas Socioecon6micas de 10s Hogares)

National Survey on Employment, Salaries, Technology and Training in the Manufacturing Sector (Encuesta Nacional de Empleos, Salarios, Tecnologia y Capacitacibn en e l Sector Manufac turero)

National Urban Employment Survey (Encuesta Nacional de Empleo Urbano)

National Survey on Household Income and Expenditure (Encuesta Nacional de Ingreso-Gasto de 10s Hogares)

Social Infrastructure Contributions Trust Fund (Fondo de Aportaciones para l a Infraestructura Social)

Fund for the support o f Productive Projects by Agrarian Organizations (Fondo Para el Apoyo a Proyectos Productivos de las Organizaciones Agrarias)

Trust Fund for the National Ejido Development Fund (Fideicomiso Fondo Nacional de Fomento Ejidal)

Agriculture Trust Funds (Fideicomisos constituidos en Relaci6n con la Agricultura)

Trust Fund for Shared Risk (Fideicomiso de Riesgo Compartido)

National Fund for Workers’ Consumption Development and Guarantee (Fondo de Fomento y Garantia para el Consumo de 10s Trabajadores)

National Fund for Support to Social Enterprises (Fondo Nacional de Apoyo a Empresas Sociales)

Fund for Housing Banking Operation and Financing (Fondo de Operaci6n y Financiamiento Bancario a la Vivienda)

ISSSTE Housing Fund (Fondo de l a Vivienda del ISSSTE)

Mexican Social Security Institute (Instituto Mexican0 del Seguro Social)

National Institute o f Social Development (Instituto Nacional de Desarrollo Social)

National Statistics, Geography and Informatics Institute (Instituto Nacional de Geografia, Estadistica e Informhtica)

National Institute for Housing Development (Instituto Nacional de Fomento a l a Vivienda del Trabajador)

National Indigenous Institute (Instituto Nacional Indigenista)

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INSP

ISSSTE

LICONSA

OECD

PAC

PAREIB

PEC

PET

PEMEX

PIASRE

PROBECAT

PROCAMPO

PRO CEDE

PRODEFOR

PRODEI

PRODEPLAN

PROMUSAG

PRONABES

PRONASOL

National Public Health Institute (Instituto Nacional de la Salud Piiblica)

Social Security and Services for the State Workers Institute (Instituto de Seguridad y Servicios Sociales de 10s Trabajadores del Estado)

CONASUPO Industrial Milk (Leche Industrial CONASUPO)

Organization for Economic Cooperation and Development

Coverage Expansion Program (Programa de Ampliacicin de Cobertura)

Program to Bring Down the Educational Lag in Primary Education (Programa para Abatir el Rezago Educativo en Educaci6n Inicial y BBsica)

Program for Quality Schools (Programa de Escuelas de Calidad)

Temporary Employment Program (Programa de Empleo Temporal)

Mexican Petroleum (Petrbleos Mexicanos)

Comprehensive Program o f Sustainable Agriculture and Productive Transformation in Areas o f Loss Record (Programa Integral de Agricultura Sostenible y Reconversicin Productiva en Zonas de Alta Siniestralidad)

Training Scholarships Program for the Unemployed (Programa de Becas de Capacitacicin para el Desempleo)

Program for Direct Support to Agriculture (Programa de Apoyos Directos al Campo)

Program for Ejido Rights Certification (Programa de Certificacicin de Derechos Ejidales y Titulacidn de Solares Urbanos)

Forestry Development Program (Programa de Desarrollo Forestal)

Program for the Development o f Pre-scholar Education (Programa para e l Desarrollo de la Educacicin Inicial)

Program for Commercial Forestry Plantations (Programa de Plantaciones Comerciales Forestales)

Program for Women in the Agricultural Sector (Programa de l a Mujer en el Sector Agrario)

National Scholarship Program for Higher Education (Programa Nacional de Becas para l a Educacicin Superior)

National Solidarity Program

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(Programa Nacional de Solidaridad)

SAGARPA

SFP

SEDESOL

SEMARNAT

SEP

SHCP

SRA

SSA

STPS

U D L A

UNDP

W D I

WDR

Ministry of Agriculture, Livestock, Rural Development, Fisheries and Food (Secretaria de Agricultura, Ganaderia, Desarrollo Rural, Pesca y Alimentaci6n)

Ministry o f Public Function (Secretaria de la Funci6n Pitblica)

Ministry o f Social Development (Secretaria de Desarrollo Social)

Ministry of Environment and Natural Resources (Secretaria de Medio Ambiente y Recursos Naturales)

Ministry o f Education (Secretaria de Educaci6n Pliblica)

Ministry o f Finance (Secretaria de Hacienda y Crkdito Pitblico)

Ministry of Agrarian Reform (Secretaria de l a Reforma Agraria)

Ministry of Health (Secretaria de Salud)

Ministry of Labor and Social Prevision (Secretaria del Trabajo y Previsi6n Social)

Universidad de Las Amdricas, Puebia

United Nations Development Program

World Development Indicators

World Development Report

This report was prepared by a team led b y Gladys Ldpez Acevedo and Michael Walton of the World Bank. Members o f the team included: Alain de Janvry and Elisabeth Sadoulet (University o f California at Berkeley); Marcela Rubio Siinchez, Jorge Moreno, William Maloney and Laura Rawlings (World Bank); Mdnica Tinajero, Maria Caridad Araujo, Jesds Torres and Sean Scott (consultants); Odracir Barquera (World Bank -production assistance). Material on the incidence o f public spending was provided by John Scott (CIDE, Mexico) as part o f parallel work on public spending managed by Steven Webb (World Bank).

Specific inputs were provided by Ricardo Paes de Barros (PEA-Brazil); Jonathan Fox (University o f California at Santa Cruz); Luis Felipe U p e z Calva, Gloria Martha Rubio and Isidro Soloaga (Universidad de las AmCricas Puebla, Mexico); Lourdes Rodriguez Chamussy (UNDP-Mexico); Juan Martinez, Mauricio Santamaria, Cristian Baeza and Mario Torres (World Bank).

Extensive comments on earlier drafts helped shaped the report. We would especially thank the peer reviewers, Rodrigo Garcia Verd6 (Banco de MCxico); Margaret Grosh. and Norbert Schady (World Bank). Valuable comments were also provided by Jose Mm’a Caballero, Mark Hagerstrom, Gillette Hall, Miguel U p e z Bakovic, Ernest0 May. Gobind Nankani, Jaime Saavedra, Guillermo Perry and Steven Webb (World Bank). The work i s being undertaken under the general direction o f David de Ferranti (Vice President, Latin America and the Caribbean, World Bank).

The team received valuable feedback from Miguel SzCkely, Gonzalo Herniindez-Liconz and Carlos Maldonado (SEDESOL) and Rafael Freyre and Rodrigo Gallegos (Social Cabinet Secretariat) o f the government o f Mexico; the Poverty Measurement Committee and, at the design stage, from the joint government o f Mexico-World Bank workshop or July 24th-25th, which involved representatives from all members o f the Social Cabinet Thanks also to other members o f the CONTIGO secretariat. During May, revisior meetings were held with the Social Cabinet and members from the ministries o f Socia Development, Health, Agrarian Reform, Agriculture, Education, Finance, the Office foi Public Policy in the Presidency, and with president Vicente Fox. W e thank t h e i comments and feedback.

1 This report exclusively represents the views o f the World Bank team.

TABLE OF CONTENTS

Summary and Key Messages A. Poverty Conditions and Trends 3 . Government Strategy C. Concluding comments: on action and further work

’

1. Introduction and Framework A. Concepts: what i s poverty and why does it matter? 3. Frameworks for reducing poverty C. The Government’s CONTIGO framework for poverty reduction D. Summary

2. Well-being in Mexico in International Perspective A. Patterns o f progress in well-being in international perspective 3. An overview of the relationship between well-being and indicators of

C. Conclusion country conditions

3. The Structure and Trends in Deprivation A. Trends in education, health, and basic infrastructure services B. The Structure, Correlates and Trends in Income Poverty C. Vulnerability D. Regional and Ethnic differences in well-being Annex

4. Public Spending, Poverty and Inequality A. Public spending, taxes and inequality 3. Selected Issues in the Design o f Social programs C. Decentralization D. Conclusions and issues for future work Annex

5. Influences on growth, distribution and poverty reduction A. Growth, inequality and future prospects for income poverty reduction B. Structural and policy influences on growth and distribution C. Strengthening income growth for the moderate urban poor D. Income growth for rural households in extreme poverty E. Conclusions and questions

6. The Role and Design o f Evaluation A. Mexico’s pioneering role in impact evaluation 3. RBM: The Mexican Experience within a Global Trend C. International Lessons for Design o f Result-based Management Systems D. International Lessons for the Implementation o f Result Based Management E. Challenges o f Results Based Management

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1 2 8

16 20

22 22

29 38

39 39 48 71 80 99

108 108 130 151 160 162

165 165 167 179 189 202

204 207 209 21 1 216 217

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F. Conclusions and Recommendations Annex

Appendix

References

219 221

228

233

LIST OF TABLES

Table 1. Percentage o f people living below $2 per day Table 2. Mexico’s social protection system b y poverty status Table 3. Federal transfers Table 1.1 Official Poverty Lines in Current Pesos per month Table 2.1 Income inequality in Mexico in international perspective Table 2.2 Enrollment rates o f young people in poor and rich Mexican households, 1992 and 2000 (in percent) Table 2.3 Years o f education o f males and females in Mexico b y age group Table 2.4 The relationships between mortality, education and economic and social variables Table 3.1 Steady progress but large gaps in schooling o f Mexican adults Table 3.2 There has been major progress in educational indicators, but gaps and problems remain, especially at higher levels Table 3.3 Enrollment rates are much lower for poorer groups at higher levels o f education Table 3.4 Comparative Health Outcome Indicators: Chiapas, Oaxaca, and Guerrero versus National Table 3.5 Many basic infrastructure services are reaching the bulk of the population Table 3.6 There has been large progress in access to water and electricity amongst the rural extreme poor, but not in sanitation Table 3.7 Marginalized rural communities have l o w access to public services Table 3.8 The composition o f extreme poor in 1992 and 2002 b y Household Head Characteristics Table 3.9 The composition o f the moderate poor by Household Head Characteristics (excluding the extreme poor) in 1992 and 2002 Table 3.10 Decomposition o f rural-urban differences in per capita income Table 3.1 1 Overview of Poverty Trends for Extreme and Moderate Poverty with Income and Consumption Table 3.12 Inequality has declined at national but risen in rural areas over the past decade, 1992-2002 Table 3.13 Patterns o f income and spending growth, 2000-2002 Table 3.14 The evolution o f real wages for different groups in the urban labor force, 1994-2002 Table 3.15 Marginal Value o f Education by Level along the Conditional Earnings Distribution, Mexico 1988-2002

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27 28

37 40

48 48

5 1 54

60 62

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Table 3.16 The evolution o f real wages for different groups in the rural labor force, 2000-2002 Table 3.17 Contribution o f Transfer Income to the Level in Overall Income, 2002 Table 3.18 The pattern o f annual change in incomes in a panel o f rural and urban Mexican households, 2000-2003 Table 3.19 The pattern o f annual change in incomes in a panel of Mexican households in poor rural areas, 1998-2000 Table 3.20 Poverty by region with Standard Deviations Table 3.2 1 Municipal attributes, by 2000 classification o f municipalities according to population Table 3.22 Municipal attributes, by 2000- 1990 marginality reduction Table 3.23 Poverty amongst indigenous groups Table 3.24 Coverage o f health insurance by region and indigenous status Table 3.25 Municipal attributes, b y presence o f indigenous Table 3.26 Municipal attributes, by share o f municipal migrants in 2000 Table 3.27 Municipal attributes, by 1980-2000 population growth Table 4.1 Federal Government’s overall pattern o f revenues and spending with respect to GDP, 1990-2002 Table 4.2 Growth in public spending categories, 1990-2002 Table 4.3 Public expenditure on 44redistributive” programs Table 4.4 The distribution of spending on all public programs analyzed was roughly equal 2000-02 Table 4.5 The distribution o f additional public education spending, by education level, 1992-2002 Table 4.6 The distribution o f household expenditure before and after public transfers, 2002 Table 4.7 Indicators o f deprivation over the l i f e cycle Table 4.8 Indicators o f the coverage o f selected program in relation to deprivation over the l i f e cycle Table 4.9 Numbers and spending on social programs, 2002 Table 4.10 A Stylized presentation o f the Mexico’s Social Protection System by Poverty Status (coverage rates refer to 2002) Table 4.1 1 Quality Educational Programs Table 5.1 Both growth and inequality make a difference to the pace of poverty reduction Table 5.2 Contributions to Mexico’s past growth changes predicted b y a global analysis o f growth determinants Table 5.3 Mexico’s predictedfuture long-run growth, based on a global analysis o f determinants o f growth Table 5.4 Structural factors and macro-stability are associated with changes in inequality Table 5.5 There are large but declining differences between rural and urban wages Table 5.6 The potential impact between selected structural reforms, inequality and poverty

68 70

79 82

88 89 9 1 92 92 95 97

110 113 116

117

120

122 1 24

125 126

133 150

167

169

170

177

178

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Table,5.7 Mexico has a high regulatory burden in international context 185 Table 5.8 The use o f formal financial instruments increases with income 188 Table 5.9 School attendance and work participation among 15 to 18 years o l d in marginal rural communities 190 Table 5.10 The composition o f rural income in 1992 and 2002 191 Table 5.1 1 Programs in support o f incomes in rural areas 196

LIST OF FIGURES

Figure 1. Long run trends in infant mortality and GDP per capita Figure 2. Long run trends in secondary school enrollment and GDP per capita Figure 3. Overview o f Poverty Trends for Extreme and Moderate Poverty

a. Extreme Poverty (food-based poverty line) b. Moderate Poverty (assets-based poverty line)

Figure 4. Patterns o f Growth for National Accounts, Survey Mean, and Bottom Quintile, 1994-2002

a) Income b) Private Consumption

Figure 5. Trends in Inequality (Gini coefficient) Figure 6. Unemployment and Informality in Mexico Figure 7. Proportion o f employed who earn less than two minimum wages at the state (left) and municipality (right) level Figure 8. CONTIGO: Areas o f public action over the life cycle Figure 9. The relationship between total tax revenues (in percent o f GDP) and GDP per capita Figure 10. There i s huge variation in the inequality o f different government programs Figure 11 Public expenditure i s much larger in relation to private spending for the poor Figure 12. Closing the poverty gap: the impact on per capita household expenditure o f the bottom five deciles o f full reallocation o f electricity subsidy and VAT subsidies to Oportunidades Figure 13. Investment in Infrastructure 1980-2002 Figure 1.1 A simple conceptual framework for the changes in well-being Figure 1.2 The major actors and relationships o f accountability for service delivery Figure 1.3 CONTIGO conceptual organization o f areas o f public action Figure 1.4 CONTIGO: Interactions Between Public Action Areas and the Life- Cycle Figure 1.5 An application of the CONTIGO conceptual framework to rural development Figure 2,l Trends in measures o f well-being Figure 2.2a Difference in average years o f education between top and bottom quintiles Figure 2.2b Difference in average years o f education between top and bottom

x v i x v i

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x x i

x x i i xxiv

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xxxi

x x x i i

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xxxiv x l i 10

12 18

21 24

quintiles. B y age cohort, around year 2000 Figure 2.3 Mexico has l o w average quality, but l o w dispersion, in the quality o f education Figure 2.4 The relationship between Income and Measures o f Well-Being Figure 2.5 The long-run relationships between incomes, infant mortality and secondary enrollments Figure 2.6 Relationship between Income and Measures o f Governance Figure 3.1 There have been steady gains in test scores across a l l school types Figure 3.2 There have been large improvements in health indicators, including those related to diseases o f the poor

a) L i f e Expectancy b) Infant Mortality

Figure 3.3 Household Insurance b y Institution Figure 3.4 Patterns o f Growth for National Accounts, Survey Mean, and Bottom Quintile, 1994-2002

a) Income b) Private Consumption

a) 2002 b) Rural, 1992,1996 and 2002 c) Rural 2000 and 2002 d) Urban, 1992,1996 and 2002 e) Urban, 2002 and 2002

Figure 3.5 Frequency Distributions o f per Capita Income

Figure 3.6 The Proportion o f Workers Earning Wages below Levels Corresponding to Different Poverty Lines; Rural and Urban 2000-2002 Figure 3.7 Yearly Rates of Return to Education Level Figure 3.8 Real Urban Wages by Informality Figure 3.9 Wage Gap between Informal and Formal Workers, 1997-2002 Figure 3.10 Remittances vs. Foreign Direct Investment Figure 3.11 The Pattern o f Annual Change in Incomes in a Panel of Rural and Urban Mexican Households 2000-03 Figure 3.12 The Pattern o f Annual Change in Incomes in a Panel of Households in Poor Rural Areas, 1998-2000 Figure 3.13 Average grades of schooling at the state (left) and municipality (right) level (among those age 15 and older) Figure 3.14 Proportion of population ages 5 and older that speaks an indigenous language at the state (left) and municipality (right) level Figure 3.15 Proportion o f households who o w n no appliances at the state (left) and municipality (right) level Figure 3.16 Proportion o f employed who earn less than two minimum wages at the state (left) and municipality (right) level Figure 3.17 Changes on socioeconomic variables over the 90s in Mexican municipalities Figure 3.18 Poverty and share o f non-agricultural employment Figure 3.19 2000 Share o f population born in a different municipality andlor state Figure 3.20 1980-2000 population growth

28 30

32 35 43

64 65 67 68 69

86 90 94 96

x i

Figure 4.1 Mexico’s tax collection effort i s low b y international standards Figure 4.2 Total and social spending has grown significantly in Mexico, apart from the crisis Figure 4.3 Social spending was strongly pro-cyclical in the 1994-95 crisis but continued to grow in the 2000-02 period o f stagnant growth Figure 4.4 Social spending i s dominated b y education, health and social security Figure 4.5 Education and social security spending has grown most in absolute terms Figure 4.6 There i s huge variation in the inequality o f different government programs Figure 4.7 The inequality o f rural and urban spending on programs in 2000 and 2002 Figure 4.8 Public expenditure i s much larger in relation to private spending for the poor Figure 4.9 Closing the poverty gap: the impact on per capita household expenditure o f the bottom five deciles o f full reallocation o f electricity subsidy and VAT subsidies to Oportunidudes Figure 4.10 Number o f beneficiary families o f O p o r ~ u n i d ~ d e ~ Figure 4.1 1 Proportion o f extreme poor, moderate poor and non-poor families receiving ~ p ~ r t u n i d ~ e s transfers in 2002 Figure 4.12 School continuation rates in poor rural communities in treatment and control villages under Progresa, late 1990s Figure 4.13 Geographic patterns o f public resource use in relation to state level GDP per capita: total resources, education spending, poverty-related spending and agricultural spending, 2002 Figure 4.14 Geographic patterns o f outcomes in relation to federal transfers 2000 Figure 5.1 Investment in infrastructure in Mexico and Latin America fell steeply in the 1990s Figure 5.2 Average wages, growth and unemployment Figure 5.3 The evolution o f the relative demand for workers with tertiary education, Mexico Urban Areas, 1988-2001 Figure 5.4 There are large differences in the pattern o f wages amongst self- employed, informal and formal workers Figure 5.5 Poorer workers experience greater informality across many dimensions Figure 5.6 Labor productivity in the structured and non-structured sectors Figure 5.7 The policy framework o f the Impulso strategy Figure 5.8 The share o f farm income in total rural income has been falling, even for the extreme poor Figure 5.9 Returns to education for children from marginal rural communities Figure 5.10 Role o f assets (human capital on horizontal axis) and economic context (vertical shift) on the incidence o f poverty in 506 Mexican rural communities (Progresa data for 20,895 households) Figure 5.11 Role o f geographical location relative to a cluster for growth in manufacturing and services employment in semi-urban and rural municipalities Figure 6.1 Results Based Management Framework

111

112

112 114

114

118

119

121

130 136

136

137

153 155

172 174

175

181

182 183 184

191 193

194

195 206

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LIST OF BOXES

Box 1. The Law on Social Development (Ley de Desarrollo Social) Box 2. Dimensions of Decentralization Box 3. Selected experience with Results Based Management in Latin America Box 1.1 Mexico’s Technical Committee on Poverty Measurement and the Choice of Income Poverty Lines Box 3.1 Using the Oaxaca-Blinder Method for Rural-Urban Decompositions Box 3.2: Poverty trends in 2000-2002 Box 4.1 PRONASOL and the political use of programs Box 4.2. Veracruz Box 5.1 Examples of income generation amongst indigenous groups Box 6.1 Building Results Based Management systems: Lessons Learned Box 6.2 Definitions: Monitoring and Evaluation Box 6.3 Engaging relevant government and non- government actors in the design and implementation of a RBM in Mexico

xxviii xlv

xlviii

6 53 55

131 156 201 21 1 213

217

... X l l l

Poverty in Mexico An Assessment o f Conditions, Trends and Government Strategy

Summary and K e y Messages

This report presents the results o f an assessment o f poverty conditions in Mexico and government strategies to reduce poverty. The report constitutes the first phase o f a longer-term work program on poverty reduction in Mexico that the World Bank i s undertaking in collaboration with the government o f Mexico between 2003 and 2006. While the work has involved extensive collaboration with both the government and Mexican specialists working on poverty, the views expressed are those of the World Bank alone.

This summary distills the report main conclusions and messages. The current situation i s mixed with respect to poverty. In terms o f well-being, Mexico has experienced major progress in some dimensions -notably related to basic service access- but much weaker progress on others -notably on the income o f the poor. Despite the gains between 1996 and 2002, particularly for the extreme poor, poverty remains widespread and i s only slightly below levels prevailing before the 1994195 crisis.'

Related to government strategy, there are many strengths. The CONTIGO framework i s excellent as a conceptual framework, especially in i t s attempt to integrate the multiple dimensions o f well-being and public action into a life-cycle approach. There are notable successes in specific programs -with ~ p o r t ~ n i d ~ e s unusual in i t s combination o f highly effective targeting and broad reach amongst the extreme poor. The emphasis on evaluation (especially in SEDESOL) i s commendable. The recent introduction o f the Ley de Desarrollo Social i s a potentially valuable attempt to institutionalize social development strategy and in particular provide more continuity across government administrations.

But there are also many challenges. There i s some way to go to implement the principles o f the CONTIGO conceptual framework across government programs. The quality o f services i s a major issue in many sectors. Social policies for the extreme poor are well developed, but not policies for their income growth. There i s a broader pending agenda for the moderate poor, especially with respect to improving the productivity o f the self- employed and informal enterprises. Most o f the extreme and moderate poor fall outside the formal social protection system, and face significant risks, for example from health, unemployment or lack o f income in o l d age. And there are a wide range o f institutional issues to be tackled -from strengthening accountability, especially under decentralized structures, to social incorporation of excluded groups and linking o f rigorous evaluation to results-based management.

' This i s defined in terms o f those with incomes below the food-based poverty line.

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Section A discusses poverty conditions and Section B reviews government strategy. Section C provides brief concluding comments on public action and future analysis.

A. Poverty conditions and trends

Despite significant government efforts, poverty in Mexico remains widespread, and i s closely linked to high levels o f inequality. Poverty has many dimensions, including human capacities (especially education and health status), access to infrastructure, incomes, vulnerability and social status. Recognizing these multiple dimensions can be thought o f as an imperfect approximation to the approach to well-being developed b y Amartya Sen, in terms o f a person’s freedom (or capability) to pursue a life o f their choosing. This depends both on their human capacities, and their ability to convert these into “beings and doings”.2 This ability i s powerfully shaped both b y the economic context -especially opportunities for productive work- and the political and social context in which people live. In this regard, Mexico has been going through two major transitions. In the economic sphere it has been experiencing a major deepening o f integration in the international economy, while in the political and social sphere it has been going through a process o f deepening o f democratization. Yet both are complex and o f a long-term nature. These transitions are central aspects o f the environment for living conditions and government policy.

Conditions and trends are reviewed for the various dimensions o f poverty -that are matched to the dimensions laid out in the Government’s CONTIGO strategy. We also review geographic aspects o f poverty.

(I) Human c u p i t a l ~ c a p ~ ~ ~ e ~

Mexico has made important progress in terms o f the human capacities o f the population, including health, nutrition and education. For both health and educational status and levels o f service provision, Mexico i s now reasonably close to where it might be expected to be for i t s income level. There have been large, long-term advances with respect to both infant mortality and secondary enrollments (Figures 1 and 2). In both cases the progress was as good or better than the East Asia success^' case o f Malaysia, one o f the high- performing East Asian countries that has the most similar structural and socio-economic characteristics to Mexico. However, despite this success on average, large differences exist both between social groups, and between regions within Mexico.

See Sen, 1999.

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Figure 1. Long run trends in infant mortality and GDP per capita 2 0 0

1 8 0

1 6 0

1 4 0

g 1 2 0 P = 1 0 0 8 0-

8 0

6 0

4 0

2 0

1M = 4 4 4 . 0 4 - 7 8 . 3 9 * 1 n ( G D P ) + 3 . 4 9 * l n ( G D P ) ' R ' = 0 . 6 5 1 1

0 2 , 0 0 0 4,000 6,000 8 , 0 0 0 1 0 , 0 0 0 1 2 , 0 0 0 G D P p e r c a p i t a ( 1 9 9 5 U S D )

Source: WB s t a f f calculations from World Development Indicators.

Figure 2. Long run trends in secondary school enrollment and GDP per capita 1 0 0

8 0

6 0

4 0

2 0

G S E = - 9 4 . 6 - 2 4 . 0 9 * 1 n ( G D P ) - 0 . 4 9 * l n ( G D P ) * R ' = 0 . 6 0 7 1 N=Z,OOS

- 2 0 G D P p e r c a p i t a ( 1 9 9 5 U S D )

0 0

Source: WB s t a f f calculations from World Development Indicators.

Progress in human capacities was supported by a combination o f expansion o f programs that have aimed for universal service provision and have been increasingly pro-poor as they have expanded (especially basic education, public health programs, and water supply) and, in recent years, demand-side measures, that combine transfers with incentives for income-poor households to send their kids to school and attend health clinics. Oportunidades i s the flagship program for these transfers. These measures have been supported by a large expansion in social spending b y the government -especially for education and poverty reduction programs (see below).

While this progress i s o f a long-term nature, it has been consolidated and deepened under current administration. Growth in social spending since 2000 i s especially commendable in light o f the stagnation in growth and revenues in this recent period. By contrast, public

x v i

spending on health has declined in the 2000-02 period, despite significant issues in the ~ e c t o r . ~ More generally, there remain major issues o f low and uneven quality for both education and health services.

(2) Assets p o v e r ~ / P ~ t ~ m o n i o

With respect to infrastructure there have been major advances in access to electricity and improved water sources4, and a more modest expansion in the coverage o f improved sanitation. At the national level access rates were 9896, 90% and 80% respectively for electricity, water and sanitation in 2002. While the poor have systematically lower access rates, they also experienced gains in the past decade. For example, for the rural extreme poor -the most disadvantaged group with respect to services- access to electricity increased from 63 to 90% between 1992 and 2002, while access to improved water increased from 38 to 58% in the same period. By contrast, access to improved sanitation for this group only rose from 22 to 26%.

There has also been steady growth in the ownership o f household durables, that i s driven more by private savings and investment. However, there remain large inequalities in the ownership o f housing and financial savings, with very little use o f formal financial institutions. For example, while close to 70% o f the moderate poor own their house, only 5 percent reported that they were paying for their houses- an indicator o f the predominantly self-financed process o f house acquisition and construction.

There i s evidence o f Mexico lagging behind comparators -especially East Asian ones- in infrastructure provision, and this could emerge as a major problem for income dynamics in the future. Mexico’s investment f e l l in absolute terms in the early 19900’s, and despite some recovery, s t i l l remains below 1990 levels. This occurred in a period in which the average shortfall in Latin American infrastructure relative to fast-growing East Asian countries was rising (Calderh and Servtn, 2003).

(3) Income p o v e ~ / O p o r t u n ~ e s de ingreso

Poverty changes in terms o f incomes are driven by the interactions between growth and income inequality. Even with steady growth, poverty reduction tends to be slow, as a consequence of Mexico’s high income inequality. And growth has not been good. One way o f reading Figures 1 and 2 i s o f large advances in social indicators, despite markedly slow progress along the income axis -with Malaysia leapfrogging over Mexico from an initially lower level o f mean income.

Over the past decade, the pattern o f overall poverty changes has closely followed the macroeconomic cycle and the associated rhythm o f the labor market (Figure 3). The crisis o f 1994-95 constituted a massive setback. Extreme poverty in 2002 was 16 percentage points below the 1996 level, but s t i l l only one percent below the pre-crisis 1992 level.

Actual spending for 2003 i s not yet available. Estimates indicate that health spending grew almost 24

Access to potable water: running water in house, running water out of house, and by pipe-track. gercent from 2002 to 2003 (SHCP, 2003).

x v i i

While open unemployment i s not o f great importance for the poor, low labor returns (in self-employment and wages) and under-employment are, especially so for the poor.

While poverty has only recently recovered from pre-crisis levels, , the measured trends in the 2000-02 period are encouraging, with a significant decline in extreme poverty, despite stagnation in average incomes. This was driven by a combination o f substantial income growth in rural areas, combined with a decline in inequality in both rural and urban areas in this period,

Figure 3. Overview of Poverty Trends for Extreme and Moderate Poverty a) Extreme Poverty (food-based poverty line)

1992 1994 1996 1998 2000

+ N a t i o n a l 1 R u r a l & U r b a n

2002

x v i i i

b) Moderate Poverty (assets-based poverty line) 9 0

70 b L 6 0

5 50

6 40 2 30

2 0

h I

a G .* .- a - a c

.I2 r)i

1 9 9 2 1994 1 9 9 6 1 9 9 8 2000 2 0 0 2

+National R u r a l +Urban

Source: WB s t a f f estimates using the methodology o f the Technical Committee for Poverty Measurement.

There has been some debate within Mexico as to whether the measured changes in poverty reflect lack o f comparability across surveys, since the 2002 ENIGH involved changes in both the questionnaire and the sample size. Recently, the Technical Committee on Poverty Measurement (CTMP) concluded that the 2000 and 2002 surveys are broadly 'comparable, at least for total incomes o f households (CTMP, 2004). This report concurs with the CTMP's conclusions. I t judges the 2002 surve to be superior, and comparable with 2000 for total household (and per capita) income. This report also provides estimated confidence intervals for poverty comparisons, where feasible. This conclusion i s further supported by comparison with independent evidence on trends, especially from the series o f labor force surveys (the ENET since 2000), for which the survey instrument did not change.

While the pattern o f measured changes in income poverty i s consistent with the official estimates, not all the changes were sufficiently large to be statistically significant. The most important changes that were statistically significant were the notable reduction in extreme poverty in both rural areas and at the national level. When poverty i s measured in terms o f consumption rather than incomes, declines in moderate poverty were also statistically significant at both rural and national levels; f a l l s in extreme poverty at rural and national levels continue to be significant. Measured declines in urban poverty are not significant whichever concept i s used.

The results both from the ENIGH and from the ENET (the labor force survey), are consistent with the view that there was growth in income o f the poor despite economy- wide stagnation, driven by two factors: first, rapid growth in labor incomes, especially for

A t the level of sub-categories o f incomes-such as transfers-the surveys were not designed to be strictly comparable, and the statistical assessment has to be undertaken on a case-by-case basis.

x i x

rural unskilled wages (that increased b y over 20% between 2000 and 2002, according to the ENET), with some reduction in the premia to higher levels o f education and formal urban work; and second, a substantial measured contribution from remittances and transfers (that include Oportunidades) for the rural extreme poor.

To put Mexico’s poverty reduction in an international context, we can compare it with the most recent global poverty analysis that uses standardized poverty lines of approximately one and two dollars a day, at 1993 Purchasing Power Parities (Chen and Ravallion, 2004). While the methodology i s different, the two dollars a day line i s quite close to Mexico’s extreme, food-based poverty line, and the patterns over time are similar. As Figure 4 shows in relation to the Latin American average, Mexico has generally had slightly lower poverty incidence. This i s because incomes are above average, and inequality close to the (high) Latin America average. Over the past two decades, and over the past decade, progress has been weak in both Mexico and Latin America, but Mexico’s performance has been faster than the average since the 1994195 crisis. East Asia, by comparison, started very much poorer than Latin America two decades ago, but then made much faster progress. Only some five to ten percent of Mexico’s population s t i l l live under $1 a day. This i s a line that i s close to those used in the some or the poorest countries in the world, and would represent a deep level o f deprivation in the mexican context (as well as probably being more subject to measurement error).

Figure 4. Tendencies in poverty incidence in Mexico, Latin America and East Asia using international poverty lines.

(a) At “two dollars a day” (at 1993 purchasing power parities)

- = _---- I - l o ’

E a s t A s i a - L a t i n A m e r i c a a n d C a r i b b e a n - - - M e x i c o

(b) At “one dollar a day” (at 1993 purchasing power parities) 60

3 50 E ’ 4 40 H

= 30 .- * $ 20 a c

et _ e - - - -u 2 10

* - - * - - c a s 0

S R 3 - a ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ S s ~ 8 ~ ~ ~ ~ ~ ~ ~ East Asia - L a t i n America a n d Caribbean - - - M e x i c o

Note: The World Banks 1993 consumption PPP exchange rate for Mexico i s 2.102. The PPP one dollar per day poverty line i s about 68.8195 pesos per person per month i n 1993 prices. Source: Chen and Ravallion (1994) and W B staff calculations.

The impact o f the macroeconomic crisis and recovery i s abundantly clear from the poverty trends shown above. However, there have been notable changes in the relationship between macroeconomic performance and poverty reduction in the past decade. This i s illustrated by the significant divergence between growth in income and consumption from the national accounts, survey means, and the mean income of the bottom 20% o f the distribution (Figure 5). Changes in measured average income and consumption from the surveys do not track National Accounts figures because o f different concepts and measurements. Both suffer from measurement error, but survey- based evidence i s generally considered a better measure o f the welfare o f households. In the 1994-95 crisis, income and spending from the surveys f e l l much more than in the national accounts, for both incomes at the mean and the bottom 20%. Survey-based income and spending rose fast in the 1996-2000 period, but less for the poorest. Finally in the 2000-02 period, survey and national accounts estimates both show little change, but there i s substantial growth for the poorest 20 percent.

x x i

Figure 5. Patterns of Growth for National Accounts, Survey Mean, and Bottom Quintile, 1994-2002

a) Income

b) Private Consumption 40%

30% I

I 205L i 0% I

10%

1 .lo% j

i 1

-20%

-30% L -___- _-___ 199419% 19962ooo 2aX)-2002 1994-2002

Period H MmIe Consumption per capita .Mean Current Expenditures per capita lsf qufntiie

Mean Current Expendlturs per caplta

Source: WB s t a f f calculations using ENIGH, and National Accounts.

The observed changes in poverty reflect changes in both mean income and in inequality. High levels o f inequality are associated with higher poverty, and are also o f interest in their own right. Inequality has tended to be counter cyclical (in contrast to characteristic patterns in Latin America in the 1980's), with the 1994-95 crisis mildly equalizing, the 1996-2000 recovery disequalizing, and the 2000-02 period o f stagnation equalizing for incomepigwe 6). Mexico has moved from being around the (very high) Latin American average, to slightly below the average in 2002. While the pattern o f inequality changes may in part reflect genuinely cyclical forces, there also appear to be longer-term structural factors at work.

x x i i

Figure 6. Trends in Inequality (Gini coefficient based on income) 60

4 0 .

30 1992 1994 1% 1998 UHW) 2002

Latin America and the Caribbean (without Mexico) -CRural +Urban +National

Source: WB staff calculations from ENIGH, various years, using the approved methodology by the Technical Committee for Poverty Measurement for the calculation o f income. Note: The Latin American averages are unweighted, there i s l i t t l e difference when using weighted averages.

There are several features o f the changes in inequality that may reflect structural forces, and are noteworthy.

First, the returns to tertiary education o f workers in the labor market rose significantly in the decade to 1997, but have fallen since. This i s generally attributed to the skill-biased technological changes induced b y the large-scale opening o f the Mexican economy to trade and foreign direct investment, which was consolidated under Chile -which also went through a profound opening to international markets- also experienced a large rise and modest fall in the wage premium to college graduates, suggesting that the effect o f opening could be transitional, especially with vigorous expansion o f education.

Second, the last decade has witnessed a reduction in average wage differentials between rural and urban areas, probably reflecting rising integration between rural and urban labor markets, especially in the more developed parts o f Mexico. This has been reinforced by relatively large remittance flows to rural areas in the more recent past . Third, within rural areas, there has been a significant rise in inequality since the mid 1990’s, with a sharp increase through 2000, followed b y a more moderate fall

See D e Ferranti et a1 (2003) for discussion of overall patterns o f wage inequality in Latin America and Lederman, Maloney and ServCn (2003) for a review o f the effects o f NAFTA.

x x i i i

in 2002 (Figure 5). The 2002 distribution i s now more like the 1992 pattern. There has tended to be more rapid growth in higher-productivity agriculture, and in non- farm rural income growth in areas closer to manufacturing and service centers.

(4) Vulnerabili~/Proteccidn Social

Vulnerability to a variety o f adverse shocks i s widespread, affecting rural and urban poor and non-poor alike. Adverse shocks due to ill-health, employment conditions, meagre harvests and natural disasters tend to deepen poverty for the poor, and cause some of the non-poor to fall into poverty. Rural and urban workers appear to experience quite similar patterns o f income fluctuations, though the self-employed and informal sector workers experience higher income variability; t h i s i s particularly marked in rural areas, where farming i s a major activity for the self-employed and informal workers. Large-scale crises, such as the 1994-95 macro shock, affected aEZ groups adversely, without markedly altering the pattern o f changes across group^.^

The major gain from the perspective o f vulnerability since 1995 has been the avoidance o f a macroeconomic crisis. Yet there remain important covariate r i s k s associated with natural disasters and the climate, and idiosyncratic health and employment risks. There i s also the risk o f having insufficient savings or support for old age. Some o f these are systematically related to the characteristics o f households -as with the greater fluctuations o f incomes for the self-employed.

While many individual workers move to the informal sector out o f choice, there are structural reasons for the large size o f the sector, associated in particular with the regulatory and tax burden o f formalization and the weak links between social security costs and benefits. An important correlate o f this i s the large fraction o f the population that i s not covered by formal mechanisms for provisioning against risks. The proportion o f the work force in formal work experienced a large long-run decline from the late 1980’s to the mid-l990’s, followed by a partial recovery in the late 1990’s, while the 1994-95 crisis and the 2000-02 period of stagnation tended to increase both unemployment and informality (Figure 7).

Chapter 3 provides the analysis, findings, and literature review on vulnerability in Mexico.

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Figure 7. Unemployment and Informality in Mexico 8 1 . 4

In the recent period, weaker labor market conditions were reflected more in higher unemployment rather than lower wages. This may reflect a change in how the labor market i s functioning, that could be associated with l o w inflation, that means that the mechanism o f effecting broad real wage declines via price increases has to a large extent gone. It i s possible that future shocks could be associated with more long-term unemployment, as in countries such as Argentina and Colombia. This has potentially important implications for social protection policy, increasing the need for efficient mechanisms for dealing with unemployment risk.

(5) Social pover~/Incorporaci~n social

This important area i s the hardest to assess quantitatively. A tentative qualitative assessment i s that problems of both social exclusion and weak accountability o f public institutions to poor groups remain o f widespread importance, despite important progress in the recent democratic opening. There have been very valuable initiatives regarding greater transparency and accountability under the present government, but experience from other countries shows that for greater transparency to be eflective it i s crucial to have complementary institutional structures and processes in place. This can be challenging and can take time, especially where there are strong traditions o f patron- client relationships and social exclusion. There i s now a need to take stock o f how much efforts in this area are leading to better services and responsive to poor groups.

The position o f indigenous groups i s o f particular importance because o f historical patterns of social exclusion and deeper levels o f poverty. The ENIGH does not include a question on ethnicity, but according to the 2000 Census, 4.4% o f indigenous groups are in the bottom 20% o f the overall distribution of income, and 80% in the bottom 50%. Using the bottom quintile as a measure o f extreme poverty (this i s close to the incidence under the food-based poverty line from the ENIGH), indigenous peoples account for about a fifth of the extreme poor, that i s over twice their population share according to answers to the question on language at home in the 2000 Census. Indigenous groups typically suffer higher levels o f deprivation in terms o f education and health status and access to services. (6) Spatial aspects of well-being

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Cutting across the different dimensions o f well-being i s variation b y geographic location. Living in a poor area can make a profound difference to life prospects. There are large differences in income poverty and other indicators o f well-being across different regions, with a generalized gradient from north to south. The high level o f deprivation in the south i s confirmed b y both CONAPO’s index o f marginality (based on access to basic infrastructure services, housing conditions, education attainment, and wage earnings), and the UNDP’s Human Development Index (based on per capita GDP, educational achievement and enrollment, and l i f e expectance). For both indexes, the southern states have the lowest rankings among all states (World Bank, 2002).

These overall regional differences hide a great deal of spatial heterogeneity within states, both in terms o f levels o f well-being and patterns of change. In terms o f numbers, there are large groups o f the extreme poor living outside the poorest states (roughly a quarter o f all the extreme poor in Mexico live in urban areas in the center states). Indeed, all parts o f Mexico have steep gradients in conditions o f living, from more developed urban areas, through peri-urban areas and smaller towns, to the more remote rural areas (as well as significant inequalities within any location). The heterogeneity across and within states i s , illustrated by one indicator -the proportion o f employed people earning less than two minimum wages in Figure 8. A s i m i l a r pattern o f heterogeneity exists for other measures o f well-being, such as schooling, access to various services and ownership o f consumer durables.

Figure 8. Proportion of employed who earn less than two minimum wages at the state (left) and municipality (right) level

Source: WB staff calculations from 2000 Census.

There i s an overlap between indigence and spatial indices o f well-being, especially for rural indigenous groups. There are high concentrations o f indigenous groups in many municipalities in the south Pacific states and in the Yucatan peninsula as well as in some municipalities o f the west and northwest o f Mexico. Among those who are self-identified

x x v i

as indigenous, or speak an indigenous language at home, a relatively high fraction live in relatively small rural villages, with l o w levels o f services.

In terms o f trends, regional differences have long historical roots. There has been some long-term spatial convergence in most indicators o f services and social conditions, but a tendency toward divergence in income and wage measures in the 1990’s, that appears to be associated with the differential effects o f heightened international integration both before and after NAFTA. Areas closer to the border, or to urban centers, typically grew faster.

B. Government Strategy

In this section we turn to the role of government strategy in reducing poverty. I t covers the following: an overview on the administraion’s CONTIGO framework for poverty reduction; issues o f public finance and the distributional incidence o f spending (this draws on work conducted jointly for a parallel public expenditure review and this report); and key issues o f policy design. The third subsection on policy design discusses policies on social service provision, policies for income growth o f the poor, and a set o f cross- cutting institutional questions.

The Government’s CONTIGO framework for poverty reduction and social development

The Government has framed i t s strategy for reducing poverty in terms of an explicit framework on the nature o f poverty and how public action may improve the well-being o f the poor. This framework i s known as CONTIGO, which i s both a conceptual framework, and a set o f programs that are particularly concerned with poverty reduction under the social cabinet. As a conceptual framework CONTIGO i s excellent. Two features stand out (Figure 9). First, i t explicitly recognizes both multiple dimensions o f poverty and the complementary domains of public action, including human development, income generation, physical asset accumulation and social protection. Second, i t embeds this within an understanding o f well-being and poverty over the l i f e cycle o f individuals and households. I t i s unusual to have such a well-developed and coherent approach to assessing poverty and framing policy as part o f official policy.

Within the CONTIGO framework, there are two areas that could be articulated further to underpin analysis and action. First, more attention could be given to the design of the supply side o f social policy -articulating a framework for understanding the determinants o f the coverage and quality o f the full range o f public services that affect the lives o f the poor. A particular dimension of this concerns how the federal government can influence the coverage and quality o f provision o f services at subnational levels; this i s of rising significance, in light o f the relatively recent extensive decentralization in Mexico. Second, there i s a case for giving more weight to issues o f formal and informal institutional conditions, especially with respect to social incorporation and accountability. These are central determinants o f both service performance and economic potential of poor groups. While issues of social inclusion and accountability are indeed treated as

xxvii

between social and economic development, and it i s crucial that a poverty reduction strategy i s not limited to a social development strategy.

This assessment o f CONTIGO’S operationalization in the initial years o f the administration i s preliminary because o f the difficulty of analyzing intended impacts, and the small amount o f readily available information on actual progress in terms o f results. This i s not a critique o f the work of the social cabinet -who have made significant advances over the past three years- but rather a comment on the complexity o f the challenge and the inheritance o f programs from previous governments. Coordination between social and economic programs i s made more difficult since the social cabinet i s concerned primarily with social programs, while many complementary economic programs fa11 under other organizational structures, including the economic cabinet.

The government i s now revisiting the operationalization o f CONTIGO, placing the coordinating function o f the social cabinet under the Presidency and exploring ways to focus on a more limited number o f priority programs, rather than seeking to coordinate all programs that are important for poverty reduction. These appear to be sound moves.

In addition to these developments within the executive branch, Congress recently passed a Law on Social Development (Box 1). This represents an important step to institutionalize a state policy for social development. I t institutionalizes social policy in Mexico through a series o f bodies to oversee social development policy and implementation, including a board for evaluation, a national commission on social development, an inter-ministerial commission and an advisory committee, which w i l l include members from c i v i l society. I t also states that the principal (though not exclusive) executors o f some social development programs w i l l be municipalities, and includes a requirement that social development spending not be reduced in real terms in any year. The law has challenges in implementation, especially with respect to the workings of the various commissions created, and the primary emphasis given to municipalities. While the guarantee on not reducing social spending as a share o f GDP i s desirable in principle, this introduces a significant inflexibility into the already inflexible budget (World Bank, 2004). As discussed below, not all social spending i s effective and pro-poor, and other categories o f spending (including parts o f economic sector spending) are important for poverty reduction.

Box 1. The Law on Social Development (Ley de Desarrollo Social)

The Social Development Law, enacted in late 2003, establishes the principles and general guidelines to shape and institutionalize a state social policy that transcends the sexennial policies.’ The law establishes the creation of a National Commission o f Social Development, the creation o f an Evaluation Council, and the budgetary mandates for social development programs that w i l l permit the effective planning and coordination of social policy in Mexico. The law includes a chapter on priority areas; regions where inequalities are deeper and the conditions of poverty and marginality are broad and complex. I t seeks to concentrate the energies and resources of public institutions and society so that Mexicans suffering high levels o f deprivation in these areas reach, in the least possible time, acceptable levels o f well-being. The

* The Law w i l l be fully implemented once the President decrees the specific operational rules and guidelines.

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law stipulates that the principal executors o f the programs, resources, and federal actions for social development w i l l be the municipalities, except in those cases where actions or programs are explicitly assigned to the federal government or another institution.

One o f the contributions o f the law i s in the guidelines and criteria for the financing o f the social policy. These are defined in such a way that the programs, funds, and resources aimed at social development are considered priority and o f public interest. Spending on these programs cannot be lower, in real terms, than in the previous fiscal year and must increase, at least at the rate o f growth o f GDP. I t empowers the federal government to establish and administer a fund o f social contingency i n light o f economic and budgetary developments o f unforeseen phenomena, o f which the amount and minimum rules will be included in the Federal Expenditures Budget.

The institutions created by this Law are:

9 National System of Social Development. This system w i l l group actors and institutions concerned and involved with social development. I t will be established as a permanent mechanism o f attendance, collaboration, coordination and consensus building o f the three levels o f government, as well as civil society and private sectors.

National Commission of Social Development. This entity w i l l be an instrument o f coordination o f the programs, actions, and investments for the achievement o f the objectives, strategies, and priorities o f the national policy o f social development. The creation of this entity i s fundamental for institutionalizing social programs.

National Evaluation Council. This entity may carry out i t s duties by itself or through one or more independent agencies. I t s objective i s to periodically review the goals, actions and results o f social programs, in order to correct, modify, add, reorient or suspend programs. Institutions o f higher education and o f scientific research, and nonprofit organizations can all participate as evaluation agencies, chosen through a competitive bidding process. The law stipulates that for the mandated performance audit, the evaluations o f social programs must include outcome, management, and service indicators in order to measure and report on their coverage, quality, and impact. The existing evaluation mandate now acquires the status o f a legal. requirement. This helps assures its continuation into the future. The Council also lays the foundations, guidelines and criteria for poverty definition, identification, and measurement.

Inter-secretarial Commission of Social Development. T h i s entity w i l l be an instrument o f coordination o f the actions o f the Federal Executive in order to guarantee the comprehensive nature i n the design and execution o f the national policy o f social development.

Advisory Committee of Social Development. This entity w i l l analyze and propose programs and actions that affect the fulfillment o f the national social development goals.

Source: Diario Oficial de l a Federaci6n (2004).

The role of public finance in supporting programs for poverty reduction

There has been a substantial increase in social development spending since the 1994-95 crisis, including support for basic services and at least some well-targeted subsidies? This was important to some of the service coverage gains and reductions in extreme poverty.

The Ministry of Finance’s functional classification o f spending includes the following three categories o f spending: “economic sector”, “government management”, and “social development”. “Economic sector” spending covers infrastructure, rural development, energy, transport, communication, and other services and economic activities, while social development spending includes education, health, social security, social assistance, regional and local development, and labor policy. Government management includes legislation, law and order, national security, election processes, governance and environment.

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While overall spending rose an average o f 6.3% per year from 2000 to 2002, social development expenditure rose an average o f 5.3% per year, and poverty reduction spending” rose 14.2% per year. Overall, the growth in social spending since the mid- 1990’s was achieved despite fiscal astringency, especially through large reductions in “economic sector” spending.

Expenditure on programs specifically targeted to the poor now represents 1.3% o f GDP compared to 0.7 percent in 1990. Programs involving transfers to the poor, led by ~ ~ o r t u n i d ~ e s since it was created, grew b y an average o f 8.4% per year during the ~ O ’ S , and by even more -9.8% per year- after 2000. However, the most striking pattern i s the rapid pace of growth o f social security spending - o f 35.2% per year since 1990- that i s not targeted to the poor.

The long-run reductions in economic sector spending are a possible cause for concern from a poverty reduction viewpoint because o f the potential impact on both aggregate growth and the inclusion o f the poor within the growth process. This i s especially true in light of the different patterns o f progress in different dimensions of poverty, noted above -with much weaker gains in income poverty than in human capital. There has been some recovery in economic sector spending in the 2000-02 period, but spending levels remain below those prevailing in the early 1990s. It is, o f course, crucial that economic sector spending be effectively oriented toward pro-poor growth. This i s discussed further in the section below, when we discuss policies for income growth o f the poor.

In light o f the likely need to increase economic sector spending, continued demands for social development spending, and the transitional costs o f the pension reform, the fiscal position for spending affecting poverty reduction w i l l be very tight in the absence o f a tax reform. A tax-increasing reform can be one o f the most poverty-reducing actions the state could take, provided increased resources are used eflectively. Along with many Latin American countries, Mexico has a Low level o f tax revenue (Figure 10) and this greatly reduces the capacity o f the state to take redistributive action. Even a proportional increase in taxes can be highly progressive i f resources are well used. The latter implies a combination o f channeling o f incremental resources into areas that are documented to be effective now, while linking incremental spending in other areas to institutional reforms to make spending more efficient and equitable. In contrast to earlier periods there i s now greater capacity to design transfers to offset lower benefits o f a tax increase for poorer groups.

lo This refers to programs specifically targeted to the poor.

x x x i

Figure 10. The relationship between total tax revenues (in percent of GDP) and GDP per capita

0.45

0.40

0.35

0.30

0.25

0.20

0.15

0.10

S I

= I =

0.05

0.00 4.5 5.5 6.5 7.5 8.5 9.5 10.5 11.5

L o g o f GDP p e r capita (1995 USD) 1 9 9 0 - 2 0 0 0 A v e r a g e

Source: W B staff calculations, based on data from the World Development Indicators.

While increasing taxes i s an important part o f a poverty-reduction strategy, there i s also great potential for more effective use o f public spending." Within social spending plus subsidies, there i s enormous variation in incidence, with some programs highly equalizing (mainly benefiting the poor) and others highly unequal (mainly benefiting the non-poor).12 On average, public spending appears to be much more equal than incomes, and at the margin, i s becoming more equal and pro-poor, but there remain large areas o f spending with very unequal incidence, and some with rising inequalities in incidence, for example ISSSTE pensions, tertiary education and I M S S benefits for active workers. This i s illustrated in Figure 11 using a summary measure of the incidence o f spending across different income groups in the population: the concentration coefficient (that i s similar to the Gini coefficient) goes from -1 when all spending goes to the poorest, through 0, where everyone receives the same spending, to +1 when all spending goes to the richest.

'' Spending analyzed here accounts for over half o f total programmable spending and almost 1% o f GDP in 2002. The coverage i s primarily on social spending, plus subsidies -since few economic sector programs can be linked to specific households.

The incidence analysis involves matching the use of programs from survey data to administrative costs from budget data. I t makes no allowance for quality or for behavioral responses from households (Van de Walle, 2003). Despite these limitations it i s a useful measure o f the orientation of government efforts across the population. Households are ranked in terms o f "autonomous" spending per capita, or spending before monetary transfers. T h i s concept i s directly comparable to autonomous income (or incomes pre-monetary transfers), with the assumption that the marginal propensity to consume from transfers i s 50% (for details on the methodology see World Bank, 2004a).

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Figure 11. programs (Concentration coefficients for 2000 and 2002)

There i s huge variation in the inequality of different government

4.8 4.6 -0.4 -0.2 0.0 a2 a4 0.6 0.8

Note: The GINI refers to the distribution o f private income. Procampo i s not reported in 2000 because the sample o f beneficiaries captured b the 2000 survey i s not representative. VAT fiscal spending refers to exemptions and the zero VAT rate. Source: Background work for World Bank (2004) and SHCP (2004) for the VAT fiscal spending.

While the distribution o f government social spending across different groups i s only mildly unequal on average, with wide variation, the size o f spending in relation to private (pre-transfer) spending i s much larger for poorer groups. This i s precisely because their incomes and spending are so low. Figure 12 shows the ratio o f the value o f measured public spending going directly to households to their private (pre-transfer) spending. The cost o f such public programs i s actually larger than private spending for the bottom three deciles o f the rural population, and over 50 percent of the private spending o f the bottom 20 percent o f the urban population. This i s only part o f the story o f their benefit to households, o f course, since that also depends on the quality o f the services, and how much they are valued by the recipients. Question o f quality, which are discussed further below, are o f major importance.

l3 For details, see chapter 4.

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Figure 12 Public expenditure i s much larger in relation to private spending for the poor

(The ratio of program spending to autonomous household expenditure, b y major program, national, 2002)

10 Primly mu. W SSA

opoltunidades

Lower Sec. mu. Preschool

H I M S S Health

WProcampo Upper Sec. Edu, Electricity Subsidy PEMEX Health

IMSS Active Workers W ISSSTE Health W Tertiary mu. 2

0% 20% 40% 60% 80% 100% l20% 140%

Source: WB staff calculations; see also World Bank 2004a.

A further aspect o f the story concerns the reach o f different programs in relation to the “needs” o f different groups from the poverty profile. The analysis for this report suggests a mixed picture. Some basic services -basic education, water, electricity- have near- universal coverage among the whole population. While not necessarily highly progressive, they reach most o f the poor. In general, programs that are highly targeted to the poor actually have relatively modest reach -both in Mexico and elsewhere in the region (De Ferranti et al, 2004). Oportunidades i s an important exception, with already 60% reach among the rural extreme poor from the household survey in 2002 and an estimated total 80% reach in 20O3l4. There remain gaps in basic service provision, especially for the extreme poor, and incomplete coverage o f the social protection system -for health, old age, and unemployment. These are particularly marked for those amongst the moderate poor who have neither access to the formal social security nor to Oportu~idades.

The analysis o f incidence and reach suggests there i s considerable scope for redistribution within the budget for greater impact on the poor. To explore this, scenarios were developed which involved shifts either from the electricity subsidy or from the removal o f exemptions under the VAT, with reallocations going to a hypothetically expanded

l4 Information provided by SEDESOL:

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O~ortunid~des. l5 These programs were selected for the scenario since they would in principle be good for both efficiency and equity. The electricity subsidy and VAT exemptions are quite inequitably distributed now (with concentration coefficients o f 0.24 and 0.41 respectively), implying more o f the resources go to richer groups. Despite this, they do account for non-trivial amounts of spending o f the poor: electricity subsidies are equivalent to around 3% o f private spending o f the extreme and moderate poor, and VAT exemptions are equivalent to some 4.5% o f their private spending.

However, if these programs were cut and resources saved were redistributed, for example, with a pattern similar to O p ~ r t u n i d ~ e s , the net benefits to the poor would be substantial. l6 Oportunidudes i s equitable (with a concentration coefficient of -0.58) and probably has positive efficiency effects, since it provides incentives for investment in human capital. Two scenarios for redistribution are shown in Figure 13. The first redistributes the resources in line with existing distributions o f programs, while the second assumes the 2002 gaps in coverage o f households b y O p o r ~ u n i ~ ~ e ~ would be fully filled for the bottom decile, 50% for the second decile and 25% for the third decile. Under these assumptions the bottom three deciles would experience large gains - making a substantial impact on extreme poverty- while the fourth and fifth deciles (as well as higher deciles) would experience small losses. While this i s only one among many illustrative scenarios, it shows the great potential for more effective use o f the budget as an instrument o f efficient redistribution. For example, for illustrative purposes on the tax side, we selected a tax change (exemption removal) that would have some negative effects on the poor which are then more than offset b y the redistributive action. T o the extent the same tax gains could be obtained by other tax reforms with less effect on the poor, the potential benefits from redistribution would be even greater -if potentially at some cost in terms o f efficiency or administrative feasibility in the short run.

'' These should be treated as illustrative only, since a further expansion of Oportunid~des, for example to '' I t i s important to mention that this impact w i l l not be achieved if another instrument i s used instead o f O ~ o r t ~ ~ i d a ~ e ~ .

roups not now covered, would raise new questions of design.

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Figure 13. Closing the poverty gap: the impact on per capita household expenditure of the bottom five deciles of full reallocation of electricity subsidy and VAT subsidies to O p o r t u n i d ~ e s

1 4 . 0 0 0

1 2 , 0 0 0

1 0 , 0 0 0

8,000

6,000

4,000

2,000

m P r e - t r a n s f e r - P o s t - t r a n s f e r ( C o r r e n t ) W P o s t - t r a n s f e r ( R e a l l o c a t i o n ) W P o s t - t r a n s f e r ( R e a l l o c a t i o n + T a r g e t i n g R e f o r m )

1 2 3 4 5 D e e i l e s b a s e d o n E x p e n d i t u r e s N e t o f T r a n s f e r s p e r c a p i t a

Note: The targeting reform scenario assumes design changes that would close the coverage gap fully in decile 1,50% in decile 2, and 25% in decile 3. Source: WB staff calculations.

Key issues of policy design for poverty reduction

O f equal importance to potential shifts in tax and spending composition are issues o f program and policy design. The discussion i s divided into three areas: the provision o f social services; policies influencing income growth; and a set o f crosscutting institutional issues.

(1) The design of public service provision: social services and s o ~ ~ l protection

Human c~pitallCapacidades. Mexico, l i k e many countries in the region and elsewhere, w i l l have to run fast to keep up with the dynamics o f returns to skills. Returns to primary and secondary education have been flat and are particularly low for rural areas. Returns to tertiary education are high, reflecting large rises in this premium in the early 1990s. While there i s evidence of declines in the premium to tertiary education since 1997, tertiary enrollments remain highly concentrated in the children o f richer households - who both appropriate the high subsidies and enjoy the high private returns. In the 1990’s expansion o f tertiary enrollment was actually disequalizing, with an increase in the gap between net enrollments from high and low income households. A continued push on both access and quality for secondary, and mechanisms for giving bright poor children access to tertiary education w i l l be key to future progress. There are initiatives to provide funding or access for poorer children to tertiary education (including support to inter- cultural establishments, with a particular orientation to indigenous groups) but a broad- based student loan scheme w i l l be challenging to implement in light of weaknesses in the tax collection system, which could make loan recovery difficult.

A central issue, which i s well documented for education services (and also appears to apply to health and other services) i s quality; it i s l o w on average and displays significant

xxxvi

variation, with the poor, and especially indigenous groups (at least those in indigenous schools), experiencing the lowest quality in schooling outcomes as measured by test scores. While socio-economic status i s a major determinant o f individual test scores, there i s an agenda o f change on the supply side, where teaching reform to increase the accountability o f teachers to outcomes w i l l be central if the s k i l l s o f the poor are to be upgraded. There are probably also opportunities for strengthening the resource base o f schooling in deprived areas, with indigenous schools being one example.

The design o f any additional support for education would, however, need to take account o f the risk that expanded spending could be captured b y increased rents o f public sector workers rather than better services for the poor. For both quantity, and especially, quality the primary focus should be on efficiency-improving reforms, International experience suggests that this i s likely to involve complex institutional issues within the sector, between national and local governments, and between schools and the communities they serve. There are now an array o f programs, including Carrera Magisteriul (Magisteria~ Career), Incentives for Higher Education Teachers, Escuelas de Calidad (Quality Schools), Compensatory Programs and Apoyo a Gestidn Escoluv (Support for School Exertion). Some o f those which have been evaluated show specific gains, but also potential for design improvements. Others have not been evaluated. Consolidation o f programs and systematic evaluation i s probably desirable; it i s likely that deeper reforms to increase the accountability o f teachers to outcomes w i l l be central if the s k i l l s o f the poor are to be upgraded.17

As an incentive program for human capital investment, O~ortunidades has had a significant impact on nutritional status and secondary school attendance amongst the poor, as shown by i t s impact evaluations. With the recent expansion into poor urban areas, it i s a program o f national significance, which already reaches a high fraction o f the rural extreme poor, as noted above. Since 2001, Oportunidudes extended education benefits to individuals 14 to 20 years old in poor households enrolled in upper secondary education. After only one year o f implementation, the program provided more than 400,000 scholarships for upper secondary, yielding a net impact o f 38% increase in enrollment rates in rural areas and 6% in urban areas (Rubalcava and Teruel, 2003). A further extension i s Jdvenes con Oportunidudes, which consists o f a savings fund for lower secondary graduates wishing to continue their upper secondary education and finishing it before reaching 22 years old. Students can cash out their accumulated points and use them as collateral for micro credit, as down payment to buy a house or for home improvement, to buy health insurance, or finance higher education. This design i s promising, but the component has not yet been evaluated.

Areas that could be strengthened in Oportunidades, especially as a potentially integrating part o f the CONTIGO strategy, include improving the connectivity with local service delivery and assessing i t s accountability mechanisms and procedures for graduation from the program. There i s also a case for clarifying the balance between the program's dual objectives o f increasing attendance at schools and clinics and transferring income to the

l7 Education quality i s the topic of an ongoing work program in the World Bank, and any statements here are necessarily preliminary.

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extreme poor. The extensive transfers to primary schooling do not have a large impact on attendance, since most children already attended school, but they can be justified as part o f a comprehensive redistribution and social protection system, for which the objective o f transferring resources to the extreme poor i s key; this i s taken up next.

Managing vulnerabili~!/Proteccidn Social. Social protection has two objectives: supporting efficient risk management o f households, and redistributive transfers to the poor. These are sometimes mixed in the same program -and indeed this can bring political economy benefits, if the risk management component increases middle class support for programs that also redistribute to the poor. A sound strategy for risk management involves a balance between strategies to reduce risks, self-insurance and pooling o f risks. The poor typically have relatively weak capacity for self-insurance, while r i s k pooling i s especially limited to extended families or other informal mechanisms, which tend to be costly, and to break down in the context o f covariate risks. Government action can be crucial in these areas.

Within such a framework, an important part o f an overall risk management strategy for the poor and vulnerable involves building rural and urban asset bases and strengthening o f financial systems (including micro-finance). I t i s thus closely linked to an asset- building strategy discussed below. There i s a two-way relationship between assets and vulnerability: assets can be a means o f managing vulnerability; conversely high levels o f vulnerability can lead to reduced levels o f investments, because o f the r i s k s these entail when credit and insurance markets are incomplete.

However, an assets-based strategy needs to be complemented b y government social protection programs to deal with the risks that cannot be efficiently managed b y individuals and groups themselves. A sketch o f the current system i s given in Table 2. The core o f current structure o f social protection i s oriented to the formal sector, including pensions, health and unemployment benefits. Beneficiaries o f social security and health services from the two largest social security institutes, I M S S and ISSSTE, are primarily among richer and some middle groups in the population (Figure 10); the incidence o f benefits o f these institutes i s roughly as unequal as the overall income distribution.” This reflects the “truncated” welfare state that i s so typical o f Latin America (De Ferranti et al, 2004). Diagnosis o f the formal system lies largely outside the scope o f this study, though there are clearly areas for reform. With respect to the uncovered population, that i s the primary concern o f a poverty report, there i s a clear need to expand social protection to the poorer and informal households.

l8 There are several other smaller federal and state social security institutes discussed in Chapter 3.

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Table 1. Mexico's social protection system by poverty status (an illustration) Extreme Poor Moderate Poor Non-poor

Old Age N o significant coverage I M S S (19% with rights) I M S S (27% with rights)

Major Health PAC (SSA) Risks Seguro Popular (SSA)

IMSS- Oportunidades Seguro de Salud para la familia (IMSS) Private providers

Unemployment Very partial coverage Risks o f PET

Natural Disasters FONDEN and Harvest Oportunidades Failure

Social Assistance Oport~nidades (42%) and Children DIF

ISSSTE (3% with rights)

I M S S (34% with rights) ISSSTE (5% with rights) Private providers

Partial coverage with formal severance pay and SICAT.

FONDEN

Partial coverage o f Oportunidades (16%) DIF

ISSSTE (12.4% with rights) Other social security institutes (federal and state) I M S S (47% with rights) ISSSTE (15% with rights) Private providers Other social security institutes (federal and state)

Partial coverage from formal severance pay

Largely inapplicable

Not applicable

Notes: Percentages refer to population covered in each group. Full program titles are: PAC-Program de Ampliacio'n de Cobertura; FONDEN-Fondo Nacional de Desastres Naturales; DIF-Sistema de Desarrollo Integral de la Familia. Source: WB s t a f f calculations from ENIGH 2002.

The main poverty-targeted transfer programs, especially ~ p o r ~ ~ n i d a d e ~ and Procampo, have good to very good targeting properties as redistributive social assistance (Figure lo), and also he1 reduce risk for recipients, since transfer amounts are not generally subject to shock^?^ However, these have incomplete coverage o f vulnerable groups, and there i s scope for broadening in two respects: (i) conditional transfers for groups in extreme poverty not covered b y ~ p o r ~ ~ n ~ d ~ e ~ that i s focused on children; this might include adults in community service, and aged extreme poor; (ii) strengthening risk-based programs, such as public works, that can kick in automatically in response to covariate shocks (PET, the decentralized public works program has relatively small coverage and uncertain impact). This should be complemented b y strengthening o f information and accountability systems.

With respect to health risks, Mexico has multiple providers: social security rights-holders have access to I M S S l I S S S T E based curative care; there i s a network o f public curative hospitals and clinics provided b y the health services of the states (SESA) and regulated b y the Ministry of Health (SSA), as well as subsidized parts o f I M S S ; and an extensive private system serving all parts o f the population. A striking feature o f the health system i s the extent o f use o f private providers for major health risks, from the uninsured poor to

l9 However, Procampo did decline significantly in the wake o f the 1994-95 crisis, underscoring the cost of such macro-fiscal crises.

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the well o f f with social security rights. This i s indicative o f access or quality problems, at least for the poor.

The Government has recently taken measures to extend health insurance for the uncovered population. The flagship program i s the Seguro Popular that was introduced in 2002, offering a package o f specific services and medicines to those not covered b y social security, with highly subsidized premia linked to ability to pay -with a zero premium for the bottom quintile o f the population. This was complemented by a 2003 decree designed to progressively extend health insurance to all by 2010. The primary objective o f Seguro Popular i s to increase public resources going to curative care for poorer groups. This i s highly desirable in light o f the generally inequitable pattern o f overall spending in health. In 2000, the World Health Organization (WHO) ranked Mexico’s health system 51 out o f 191 in terms o f overall performance, but 144 out o f 191 in terms o f financial fairness (assessed in terms o f distribution o f potential health care costs in terms o f ability to pay rather than need). Moreover, Mexico spends less on health than international comparators. Seguro Popular i s complementary to Oportunidades since i t provides resources conditional on health risks. Like Oportunidades, it works on the demand side -albeit via finance o f the in-kind provision o f health services rather than a cash transfer. Seguro Popular also provides a potential instrument for changing incentives within the health system. The major challenges here are providing a means for Secretaria de Salud to provide genuine stewardship o f the health system, through i t s “compact” relationship with the states, and for the state secretarias to fulfill a comparable stewardship role over public sector providers within their states.

B y end-2003, 625,000 families had been affiliated to Seguro Popular in 24 o f nation’s 32 states. This i s a notable achievement. However, since Seguro Popular has only just been introduced, there i s not yet information on i t s impact. Indeed, i t s actual impacts w i l l depend greatly on the behavior o f households, on service providers, and on interactions between the federal secretaria and the states. While it has the potential to deliver major benefits, the extent o f these remains uncertain. For example, there i s uncertainty over the extent to which Seguro Popular w i l l lead to households actually increasing use of public health services, shifting from private to public providers (saving out o f pocket expenses) or choosing not to enroll in formal social security. There are also unknowns on the behavior o f health service providers. This uncertainty i s comparable to the situation when Oportunidades was introduced (then as Progresa) in the late 1990’s. Getting information on these issues w i l l depend on structured monitoring and evaluation both on household behavior and service provider performance. While current plans do indeed put considerable emphasis on monitoring and evaluation, there i s a need for particular attention to the design o f impact evaluations, especially including mechanism to track the behavior o f households and service providers over time (as was undertaken as an intrinsic part o f Progresa’s design with, in particular, the use o f longitudinal household surveys).

Seguro Popular potentially covers health r i s k s for all uncovered families -with higher subsidies for the extreme poor. For other risk categories, a strategic issue for the future concerns middle groups in the population -especially amongst the moderate poor- who w i l l never be reached b y ~ p o r t ~ n ~ ~ a d e s and related programs that are primarily focused

x l

on the extreme poor, and w i l l only participate in the formal social security system in the longer term. This constitutes a policy challenge for social protection that w i l l be the focus o f the next phase o f work -it parallels the challenge o f providing income opportunities for this group that i s the focus o f the government’s Zmpulso strategy, that seeks to improve the productivity and formalization o f the informal sector and raise the potential productivity o f workers (see below).

Finally, a different type o f vulnerability concerns risks o f violence. Criminal violence i s o f particular importance in some urban neighborhoods, affecting both personal well- being and economic security. Rural violence continues to be an issue in some o f the poorer areas o f the country, where i t i s often associated with land conflicts, political or social divisions. Effective access to justice systems in Mexico, as elsewhere in Latin America, i s biased against poorer groups. OECD (2003) found that there are serious and persistent problems in the judicial system in Mexico, as illustrated by long judicial processes, poor enforcement o f judicial decisions especially at the local level, and high corruption. Actions to address these issues are required both at the federal and the state levels. While violence was not a focus o f analysis in this report, i t i s flagged here as an issue of major concern for the poor.

(2) Promoting income growth amongst the poor

As seen in Section A, there has been much weaker longer-run progress with respect to income poverty than for social dimensions o f well-being. Future income gains amongst the poor w i l l depend on both overall growth and the pattern o f growth, and especially the pattern o f job creation. Scenarios undertaken for this report show that both growth and inequality matter for poverty dynamics. Slow growth, o f 2% per annum, between 2002 and 2015, would have little impact on poverty if inequality does not decline, or reverts to 1998-2000 levels. But if inequality fell b y lo%, extreme poverty would fall to 8% b y 2015. Growth o f 5% per annum would bring extreme poverty rates to 6% b y 2015 if inequalit reverts to 1998-2000 levels, but bring them down to 2% if inequality fell b y 10 percent, 2;

The core o f any job-creating strategy lies in the environment for private investment. In other words, a poverty reduction strategy i s inseparable from the design o f a competitiveness and growth strategy. This relates to the current overall competitiveness agenda, which i s currently under public scrutiny in light o f Mexico’s poor international performance relative to competitors such as China, especially after the initial gains from NAFTA were realized. This i s a complex agenda, in which international evidence suggests that macro stability, infrastructure provision, tackling of protections o f the private sector, and a range o f measures to improve logistics are all important.

Economy-wide measures to strengthen competitiveness w i l l need to be complemented b y strategies specifically oriented toward income growth o f the poor -both the extreme poor (mostly in rural areas) and the moderate poor (mostly in urban areas). Current government strategy for the extreme poor i s much more developed in the social arena

2o See scenarios in Chapter 5.

x l i

than the productive arena; this i s a priority for the future. With respect to the moderate poor, the government has recently formulated a new strategy, termed Impulso, whose central thrust involves a variety o f measures to increase the productivity, security and dynamism o f the self-employed and small- enterprise sector, that i s now largely informal. This i s based on sound diagnosis, but there i s an important agenda in policy design and execution. We sketch issues in asset-formation and the policy and regulatory framework for income growth in both rural and urban areas.

In~rastructure and A s s e t s / ~ a t r i m ~ ~ i o . Throughout Latin America, infrastructure investment has fallen sharply in the 1990’s -with rises in private investment not offsetting the fall in public investment, except in telecommunications. Recent work on cross-country growth finds that higher infrastructure stocks are associated with both higher growth and lower inequality (Calderrin and Chong, 2003, Calderrin and Serv6n 2003). In Mexico, during the ~ O ’ S , investment levels have been at best flat and, after a short-lived boom in telecommunications in the late 1990’s, private investment recently displayed a significant decline. Public investment has recovered since 2001 particularly in sectors such as electricity, roads and water. However, levels o f investment remain low by international standards, and more effort w i l l be needed to reactivate investment in infrastructure in both the public and private sectors.

Figure 14, Investment in New Infrastructure in Mexico 1990-2003 (excluding PIEMEX)

3.5%

3.0%

2.5%

P 2.0% g

e, 2 1.5% m

1.0%

0.5%

0.0% 1990 1991 1992 1993 1994 1995 1994 1997 1998 1999 2000 2001 2002 2003

Note: Investment in infrastructure includes roads, electricity, railways, airports, ports, water, and telecommunications. Data for 2003 are estimates. Source: Anexo del Tercer Informe de Gobierno 2003.

While more spending on infrastructure i s undoubtedly necessary, issues o f policy and institutional change are fundamental for both efficiency and equity, whether these involve privatization, the regulatory framework for private production, or the possibly more challenging goal of reforming public provision. However, privatization in Mexico has led

x l i i

to a mixed performance. In some sectors privatization has led to significant positive results -notably in ports, railroads and telecommunications. But in many areas privatization also created considerable market power for the incumbent, reducing the pressure for quality, low-price service, This may include telecommunications, airlines, toll roads, and commercial banks. Important parts o f mexican infrastructure are either o f l o w quality (electricity) or high cost (telecommunications, transport). In addition to these general concerns, specific issues for the poor include completing access to water and sanitation, improving service quality, and restructuring o f electricity subsidies.

Electricity subsidies are regressive and large, despite recent reductions. Those who consume more receive higher subsidies, except for the very top o f the income distribution. The benefits o f a hypothetical redistribution from electricity subsidies to ~ p o r t u n i d ~ e s were illustrated above. There i s scope for price rationalization within the residential subsidy, which could maintain lifeline subsidies for the poor, and release resources for other investments. A reduction in electricity subsidies could have large impacts on the poor, if combined with compensatory mechanisms both within the price schedule and from other programs. However, pressure groups are successfully blocking implementation o f the 2002 price increase. Moreover, in April 2003, the Senate approved an increase in subsidies for residential electricity prices in some regions in the north and southeast (“with difficult climatic conditions”). This decision i s clearly a step backward, and it can only further reduce the ability o f the Comisidn Federal de Electricidad to invest in new capacity. There i s also potential for savings in the electricity subsidy for irrigation, that mainly goes to large farmers.

For the rural poor (and especially the extreme poor), there i s an ongoing agenda o f strengthening their productive asset base. Part o f this involves the continuation o f the complex process o f land management and rights, notably PROCEDE (Programa Nacional de Certijkacidn de Derechos Ejidales y Titulacidn de Solares Urbanos). This i s a demand-driven program o f land regularization which was created in 1993. The program allows groups o f producers to choose their property rights regime, delineates ejido boundaries, measures individual plots, and eventually issues certificates to individually owned plots (including house plots) as well as communally managed lands to each individual. PROCEDE has led to positive results such as increased land access, improved governance and transparency at the grassroots level, increase in household welfare, and improved functioning o f land markets. However, challenges remain, including improving investment and management skills, building capacity for conflict resolution, especially through alternative mechanisms and out-of court settlements, and seeking alternatives for reducing the costs o f the program t (World Bank 2001b). Equally important i s the provision o f economic ~ n ~ r a ~ t r u c t ~ r e and access tofinance. I t i s important that this be designed in ways that supports diversified production patterns. There appears to be potential for building on existing local financial intermediation, with a particular area o f opportunity being the inclusion o f the substantial flows o f remittances that are being received by some 13% o f rural households, and a fifth o f the poorest.

It should be mentioned that other work indicates that land reform remains an important issue for the poor in many parts o f Mexico (World Bank 2001b, Finan, Sadoulet and D e

x l i i i

Janvry 2002). In some areas the challenge i s in facilitating the individualization of tenurial systems under the 1992 land reform. I n others i t i s a case o f supporting indigenous groups who prefer to keep communal systems. Issues of land conflicts are important in many areas. However, resolving land issues w i l l only yield benefits if complemented by measures to strengthen the competitiveness o f land beneficiaries with close links between titling, technical assistance to manage land independently, and structural measures to raise productivity.

For the urban poor -who account for the bulk o f the moderate poor- the assets-based agenda i s centered on regularization o f settlementlproperty rights, strengthening the quality o f urban infrastructure, and broadening access to financial savings. Hdbitat i s designed to face the challenges o f the urban poverty, through a model of action that combines, among other aspects, the improvement o f infrastructure and equipment in the urban-marginalized areas, and the implementation o f social services and community development actions. With i t s different modalities, Hdbitat tries to support the population in a state o f assets poverty who live in cities and metropolitan areas whose size, location, social and economic significance, converts them into strategic points, with particular care for the needs o f women, people with different capabilities, children, teenagers, young adults, and the elderly. While o f promising design, there are not yet impact evaluation results o f this program.

Policies and regulations. T o complement an assets-based strategy, there i s scope for strengthening the policy and regulatory environment for income growth o f the poor. For the moderate poor, the Impulso strategy correctly focuses on the dynamics o f growth in the informal sector, including self-employed and small-scale producers. A central issue i s the costs o f formalization. The costs, due to inflexibilities in the labor market, taxes, costs o f registering businesses, and other bureaucratic burdens, outweigh benefits for most self- employed and micro and small f i r m s .

One element o f this involves the functioning o f the labor market. The existing legislation probably has only minor effects on the overall pace o f job creation, but i t does constitute a constraint on the poor getting good jobs, since i t increases the incentives for informal work (on the part o f f i r m s and workers). The debate on the modernization o f labor legislation that started in 1997 (with the signing o f “the agreement for a New Labor Culture”) resulted in 2002 in a formal law proposal that i s s t i l l under discussion in Congress. The reform proposal could represent a significant step forward in making the formal market more attractive, for example through the introduction o f probation periods, initial steps in easing regulations concerning permanent contracts, efforts to modernize industrial relations, some simplification of bureaucratic requirements for small and medium size enterprises, measures to promote labor force training and measures to reduce corruption and legal uncertainty. However, the proposed law does not yet address the main issues affecting the labor market, especially those which are sources of inflexibility in hiring and firing.

Beyond changes to labor market legislation, other initiatives could be taken in the short to medium-term to improve the balance between the formal and informal sectors. They

xliv

include enhancing the quality o f services provided to formal workers and reducing the tax wedge, in particular employers social security contributions for low-skilled workers.

Within rural areas, there i s a wide range of programs, whose coordination i s unclear. An effort i s being made under the Programa Especial Concurrente mandated by the Ley de Desarrollo Rural Sustentable to coordinate different programs but only modest progress has been made. While Procampo continues to be progressive, most existing programs under Alianza para el Campo are probably regressive, and agricultural productivity growth o f the recent past was weakest in the poorest regions.21 Since 2001, the following improvements were introduced in Procampo: the transfers are paid earlier in the crop cycle to facilitate the purchase o f inputs and to encourage investments among producers by providing a more secure expected income; producers are allowed to use part o f their payment as a collateral for loans; and the eligibility criteria was simplified and awareness of these criteria was promoted. Also since 2001, improvements were introduced in Alianza para el Campo, including: dissemination in the ejido sector so that a larger proportion o f ejidatarios are aware o f the program, understand i t s objectives, and are clear on how to access the resources; elimination of requirements for group participation (which may be difficult for the poorest) in some subprograms; and allowing ejidatarios to purchase their own inputs directly from local distributors (rather than government- certified distributors).

A broader consideration concerns the scope for a more structured and coordinated territorial strategy, that could build on existing programs such as ~icrorregiones and the Ley de Desarrollo Rural Sustentable. These programs need to be institutionally linked and integrated into productive territorial strategies for agricultural and non-agricultural growth, and strategies for technological change. In shaping such strategies it w i l l be important to focus on the role o f rural non-farm sources o f income. As a share o f rural income this has risen sharply in the past decade, from 50% in 1992 to 70% in 2002?2 Even for the bottom quintile, that i s more dependent on agriculture, this proportion rose from 30 to over 50%. In addition, the non-poor w i l l typically be the key agents o f economic dynamism, and i t i s o f great importance to develop approaches to production strategies that support alliances and economic connectivity between the poor and the non- poor.

Finally, there i s a particular agenda around income growth o f rural indigenous groups. This i s both because these groups suffer high levels o f poverty, and also because o f distinct preferences and practices -for example in attitudes to the natural world and in collective modes o f organization. Ongoing projects, for example in communal forestry and coffee cooperatives, show that it i s possible to support dynamic productive products

'' Thus, between 1990 and 2002 productivity in the production o f grains in the north Pacific region (Baja California, Baja California Sur, Sonora and Sinaloa) grew at 1.47% per annum, while in the southern states (Guerrero, Oaxaca and Chiapas) i t grew at 0.63% (Work-in-Progress, Mexico Rural Poverty Study). 22 This i s the share of total household income from non-agricultural sources, from the ENIGH, in settlements o f less than 2,500 people. Non-agricultural income includes rural non-farm labor and enterprise income, remittances and transfers and rents. In 2002, the proportion o f total income from rural non-farm labor and enterprises income was over 40% for all rural households.

xlv

through working with the organizations of indigenous groups. Where an external agent has directed or assisted the initial process, there are common characteristics, including: initial seed capital (not loans) by a grass-roots development agency; a large dose of technical assistance, but provided with a view o f an exit strategy; and building upon local models of intervention and a local socio-cultural vision o f the goals and objectives o f indigenous groups.

(3) Crosscutting institutional issues: accounta~i~ity and decentral~zation? social inclusion, and evaluation

Cutting across specific programs and social and economic strategies are broader institutional questions that w i l l play a powerful role in the design and, especially, the implementation o f poverty-reducing strategies.

C l ~ e n t e l ~ s ~ ~ a ~ r o n a g e and service delivery. As with much of Latin America, and indeed much of the developing world (World Bank, 2003), Mexico has been struggling to reduce the importance o f clientelistic and patronage-based relations with poor groups. There have been some notable successes, such as the shift from strongly patronage-driven programs associated with PRONASOL to the much less captured approach of ~ ~ o r t ~ ~ i d ~ e ~ . However, the legacy o f history on institutional functioning i s deep, and especially so in the complex area o f service delivery. Both the use o f services as sources o f patronage (for jobs and service access), and the particular formation of interest groups amongst service providers, can make reforms for quality and equitable services a challenging and complex undertaking. Mexico i s in the midst o f a major political, social and institutional transition, broadly associated with the deepening of democracy, but it i s important not to underestimate the difficulties and complexities in this transition.

Transparency and u c c o ~ n t u ~ i l i ~ . Greater accountability i s in principle a central part of the answer to problems of clientelism and weaknesses in service delivery. An emphasis on transparency, participation and the building o f the capacities to engage poorer groups are ways to both mitigate these risks, and strengthen use o f local knowledge and capacities in design and implementation. There has been important progress in the overall objective and recent laws, but this needs to be systematically introduced into specific local and sectoral settings -from municipalities to schools. However, there are even less blueprints in this area than in others.

Experience elsewhere suggests there are significant complementarities between measures that seek to improve incentives between policymakers and implementing agencies (including lower levels o f government) and local mechanisms for accountability that seek to strengthen the “voice” o f poor and non-poor clients. There are also complementarities between processes o f social movilization and reforms that increase local accountability, often working to reduce the capture by local elites -in what Fox (1992) has termed a “sandwich” strategy, that has occurred in some successful cases in Mexico (notably in parts o f the DICONSA programs and some municipalities). There i s again a strong case for experimentation linked to systematic monitoring and rigorous evaluation to give concrete information on what does and does not work in different contexts.

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Managing ~ecen~ruz~zulion. Decentralization i s a political fact o f life, and is, in principle, desirable. Already a high proportion o f poverty-related spending takes place at sub- national levels -with the new Law on Social Development- emphasizing municipalities as the core level for government action in the social arena, except in certain federal programs. In Mexico, there have been significant shifts o f spending and program management to states and municipalities (Box 2). The implications o f this for institutional interactions, program management, and distributional impacts are complex. Little i s known about the impact of decentralized expenditure on poverty outcomes. I t i s unclear how the CONTIGO programmatic orientation can have a purchase under decentralized auspices. It i s noteworthy that the flagship success -0porlunidades- i s a federal program. This report concurs with a World Bank study (2003) that concludes that relatively weak social outcomes in the poorest states o f Mexico are the product o f multiple influences, including lack o f funding, inefficient use o f funds, and difficult initial conditions (from high levels o f income poverty, to highly dispersed populations and relatively underdeveloped infrastructure networks).

Box 2 Dimensions o f decentralization

A series o f institutional reforms took place during the Zedillo administration to decentralize public spending. These included the creation in 1998 o f a new modality o f federal transfers implemented through a budgetary branch: Ramo 33 (R33): Fondo de Aportaciones Federales para 10s Estados y Municipios. R33 comprises seven funds: Fondo de Aportaciones para l a Educacidn Brisica y Normal (FAEB); Fondo de Aportaciones para 10s Servicios de Salud (FASSA); Fondo de Aportaciones para l a Infraestructura Social (FAIS): Fondo para l a Infraestructura Social Estatal (FISE) and Fondo para l a Infraestructura Social ~ u n i c i p a l (FISM); Fondo de Aportaciones para el Fortalecimiento Municipal (FORTAMUN); Fondo de Aportaciones ~ ~ l t i p l e s (FAM); Fondo de Aportaciones para la Educacidn Tecnoligica y de Adultos (FAETA); and Fondo de Aportaciones para la Seguridad Pliblica de 10s Estados y el Distrito Federal (FASP).

Today, close to 65% o f total educational spending and 75% o f public health spending for the uninsured population are decentralized. The bulk o f these resources are spent by state governments, with only 13% o f R33 i s spent directly by municipal governments.

T a b l e 2 Federal Transfers FUNDS OBJECTIVES BUDGET ALLOCATION CRITERIA (% R33) CRITERIA FAEB (62 4%) Previous Budget

Established Infrastructure and Personnel, Basic education

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FUNDS OBJECTIVES BUDGET ALLOCATION CRITERIA (% R33) CRITERIA

Established Infrastructure and Personnel, Previous Budget

Equity (1 %)

2.5 % Federal Revenue

Health for uninsured population Formula: minimal per capita health spending, non-covered population, mortality, poverty. Equal state shares (transitional)

FASSA23 (12.2 %)

Basic infrastructure: clean water, sewerage, drain, municipal urbanization, electricity for rural and poor urban areas, basic health and

roads, rural productive infrastructure. FISM (2.197 %) electricity, housing, income. Institutional Development

FAIS (9.7 %) education infrastructure, housing, rural FISE (0.303 %) Formula: illiteracy, education, drain,

Max 2 % FISM FAM Social Assistance 0.814 % Federal (3.1 %) Education Infrastructure Revenue

FAETA Technical education (1.7 %)

FORTAMUN Institutional Capacity Building o f the (9.9 %) Municipalities particularly in the area o f Population’s size

infrastructure

Established Infrastructure and Personnel, Previous Budget 1 Formula: Illiteracy, basic education, work trainin .

Public Security Support Trial and convicted population FASP (1.4 %) Source: World Bank Staff from the Statistical Annex o f the President’s State o f the Union, 2003.

Decentralization brings a classic tradeoff -with lower levels o f government having advantages in greater information on local conditions and needs, but higher r i s k s o f local elite capture and weaker institutions. Community and municipal level participation has enormous potential. But both decentralization and “participation” carry r i s k s o f strengthening o f local elite capture and patronage-based approaches, whether at state, municipal or community levels. This constitutes a major agenda for future experimentation, and diagnosis, in light o f the central importance o f subnational governments in service provision.

Excluded groups and the hard-to-reach poor. While there have been many initiatives over the years, indigenous groups (identified b y language in the home, or self- identification) are on average much poorer than others in most dimensions o f well-being, as noted above. This i s true both unconditionally and conditionally with respect to characteristics such as education. As noted above, they account for some 10% o f the overall population but 21% of the extreme poor in terms o f income. There i s a major outstanding agenda around indigenous groups, in terms o f recognition, evaluating and strengthening experiments in bilingual education and conflict management. More work needs to be done to assess the importance o f other social excluded groups, but a prior would be that socio-cultural processes are important for others -such as poor urban

23 A f t e r the 2003 r e f o r m to the health sector, the F A S S A resources were split into t w o funds, F A S S C and FASSP, which respond t o the d i v i s i o n of health goods into public goods, also k n o w n as community services, and personal services respectively. F A S S P resources w i l l b e allocated t o the states by a formula based o n number o f families t o b e covered, health needs, as w e l l as e f f o r t and performance of the states. T h e reform, however, contemplates that the states should not receive less total resources (FASSP and F A S S C together) as compared to the total amount of resources they received through F A S S A in 2003.

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youth and slum-dwellers- as well. There has been a wide range o f programs aimed at indigenous groups, and a careful stocktaking would be useful to assess their effectiveness.

There can be other reasons why some categories o f the poor w i l l be difficult to include in development processes and w i l l require special efforts. Two issues are highlighted.

Remote areas. There are a large number o f very small rural settlements in Mexico, including many indigenous communities, which are typically very income poor and under-served by services. They raise special challenges because o f the higher cost o f service provision, and the fact that they can fall outside the net o f those transfer programs that are linked to service provision or attendance at schools or health centers. This w i l l require innovative action: for example strengthening the program o f board-schooling for poor indigenous children.

Shaping programs to the needs of very poor households. There w i l l also be particular individuals, households, and groups within rural and urban communities, who have a weak capacity to respond to general initiatives -often because of histories o f extreme vulnerability and exclusion. For these groups there i s also scope for experimentation with approaches that seek to have public agents or social workers mold responses to the multiple needs o f particular groups and households, on the model o f the Puente program in Chile.

Streamlining or redesigning of social programs. A different category o f institutional issue concerns the large number o f programs that directly or indirectly seek to reduce poverty. This i s a reflection of the long history o f introducing programs -there has, if anything, been a decline in the number of activities under the present government, at least in SEDESOL. However, this report did not form a position on whether the numbers of programs should be cut or not.

During the present administration, as an example o f the actions of one ministry, SEDESOL has made a significant effort to adjust social programs to better serve the needs o f the poor. These programs fall under four categories. First, SEDESOL has created new programs such as Hdbitat, which contributes to overcoming urban poverty and improving housing conditions. Second, i t has reinforced and extended existing programs: as noted above ~ p o r t u n i d ~ e s was significantly expanded and new components introduced, notably Jo'venes con Oportunidades, which provides additional incentives for youth to complete high school. Third, some programs were transformed: Liconsa now distributes milk enhanced with iron and zinc, because the 1999 National Nutritional survey found a lack o f these nutrients in urban children. Fourth, SEDESOL has eliminated a few programs that were not found to be effective, like the Tortilla subsidy. Other ministries such as Labor and Education have also re-structured their programs (Cravioto, 2004). The Ministry o f Finance and a consulting firm, GEA, did a review o f the re-structuring o f social programs,

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Perhaps o f greatest importance i s continued stocktaking concerning what does and does not work, building on successes, and pursuing opportunities for integration and complementary action. Further streamlining and coordination can possibly occur at the level o f central ministries. Greater payoffs w i l l probably come from designing experiments and greater coordination o f programs at the local level. This takes us to a final issue.

~ o n i t o r i n g and evaluation. Last, but not least, monitoring and evaluation have a major role to play at both the technical and institutional level. There are some impressive aspects o f evaluation in Mexico and SEDESOL in particular i s a pioneer in the effort to deepen and extend this. Recent initiatives are in line with best practice, including Mexico’s congressional mandate calling for annual evaluations, and i t s extension in the Ley de Desarrollo Social; the establishment and monitoring o f presidential goals; SEDESOL‘s registry o f programs’ beneficiaries; and the citizens’ manual ~ ~ a n ~ a l Ciudadano), which provides information on SEDESOL’s functions in addition to providing a medium for citizens’ complaints and suggestions.

There have been important efforts to improve the Padrdn de Beneficiarios (beneficiaries’ registries) o f the social programs. This i s with the aim o f further developing the areas of targeting and efficiency, and avoiding duplication o f recipients. In this administration, SEDESOL has made significant progress in having the complete beneficiaries’ registries for all its programs. I t has also signed agreements with some state governments to complete the lists. A further effort w i l l be made to eventually include other ministries and programs.

However, effective monitoring and evaluation i s confined to only a few areas and Ministries, with the world-renowned evaluation o f rural ~ ~ o r ~ n i d a d e s being exceptional in the Mexican context. Congress’ mandate requiring annual impact evaluation o f all the one hundred and four programs providing public subsidy i s highly commendable in spirit, but brings a serious bias toward undertaking quick and superficial evaluations that bring few benefits. Moreover, the ~ ~ o r t u n i d ~ e s model o f impact evaluation, based on comparing the effects o f treatment and control cases with randomized allocation o f treatment, has limitations. It i s state o f the art for a bottom-line assessment o f whether a treatment i s beneficial. I t i s weaker for ongoing learning about the processes behind observed effects, and for understanding the role o f local context. Both are key for the improvement o f the design o f interventions. What i s desirable i s to combine the treatment and control approach and external evaluation approach, with systems o f monitoring o f progress across interventions structured both to maximize ongoing learning and improvement in design, and to provide information in a user-friendly way to the public to increase social pressures for accountability (see Box 3 below on international experiences). SEDESOL i s currently exploring a broadening o f i t s evaluation agenda. To be effective in affecting government behavior, this needs to be integrated within an overall program o f results based management. This i s under development in both SEDESOL and government-wide though the Social Development Law.

Box 3 Selected experience with Results Based Management in Latin America

Chile: The Government o f Chile initiated the design and implementation o f a Results Based Management (RBM) system in 1994 (Sistema de Control de Gesticin y Presupuestos por Resultados) i n order to improve public management. The Ministry o f Finance launched the initiative, developing a number o f instruments to foster a more transparent budgeting process, strengthen i t s analytical capacity, and improve program management. Although the chilean approach i s decentralized (i.e., no single entity i s responsible for developing and maintaining a national system as in Colombia), the processes are relatively well coordinated by a cabinet level inter-ministerial committee. The budget office in the Ministry o f Finance plays a key role in coordinating the various decentralized initiatives, and uses performance data in formulating i t s budget on an annual basis. Performance i s evaluated at the level o f policies, expenditures, organizations, programs and individual public servants. The government has begun to link performance evaluations to organizational incentives.

Colombia: Colombia began i t s performance evaluation system, SINERGIA, in the mid-1990’s as part of the national development planning process. The exercise i s led by the technically competent National Planning Department (DNP), which carries out the performance evaluations o f ministries and programs. DNP presents annual reports on the government’s strategic objectives and performance indicators to the Economic and Social Policy Council (CONPES) responsible for the oversight o f social policy in Colombia. W h i l e the system i s well conceived from a technical point o f view, it s t i l l lacks full coverage -as i t i s centered on evaluating public investment programs in the National Development Plans and does not cover recurrent Government activities- and the performance information generated from the system i s not systematically taken into account in government decision-making.

Bolivia: The 1990 SAFCO (Sistema Integrado de Administracicin Financiera y Control Gubernamentales) Law required government entities to prepare annual operational plans with performance indicators. Most recently, the government attempted to develop a new performance evaluation system (Sistema de Seguimiento y Evaluacicin de la Gestibn Pu’blica por Resultados, SISER) located in the Ministry of the Presidency and supported by the multi-donor Institutional Reform Project. In specific sectors, especially education and health, donor support for sectoral reforms has also resulted in better specification o f sectoral goals and performance indicators. Overall, however, the system i s far from fully operational. POAs (Annual Operational Plans) have always been treated in perfunctory fashions by both sectoral ministries and the Ministry o f Finance, and the SISER project has been discontinued. A reform o f the budget system that was supposed to accompany the development o f the SISER never took off, in spite o f the notable recent progress with a new financial management information system.

Brazil: Since the mid 1990s, the Ministry o f Planning, Budget and Management has led an ambitious effort to turn the federal government’s multi-year plan (PPA) into a strategic instrument for results-oriented resource allocations and program management. Most o f the PPA programs are assessed each year, and the report i s submitted to Congress prior to the beginning o f the annual budget cycle. Although the new PPA framework has enhanced government transparency and contributed to better strategic discussions about program goals and designs within the bureaucracy, there i s little evidence that the annual assessment reports are seriously reviewed, let alone debated, by the Congress, and that evaluation results are systematically influencing resource allocations decisions. High degrees o f rigidities in the budget structure and public management regulations limit the government’s ability to manage for results. In spite o f the multi-year character o f these plans, they are s t i l l steps away from a robust medium-term expenditure framework as found in advanced OECD countries.

Source: World Bank (1997), Ospina Bozzi and Ochoa (2003), Montes (2003), and World Bank (2002b).

C. Concluding comments: on action and further work

This overview o f Mexico’s situation with respect to both the poverty conditions and strategy has revealed a mixed picture. There has been considerable progress in the outcomes for the poor in both the long term and the recent past. But long-term progress has been much greater for health and education than for the incomes o f the poor. And the

recent, and noteworthy, short-run gains in incomes o f the poor, has only just reduced poverty below levels prevailing in the early 1990’s. Moreover, because o f Mexico’s high inequality, poverty levels are high for an upper middle-income country. Other dimensions o f well-being -especially the insecurities associated with the range of risks faced b y the poor and near-poor -are also of great concern.

W i t h respect to strategy, there has also been commendable progress, especially in provision o f services, both over the long term, and in the actions o f the present government. This applies both to the expansion o f basic services, and to the extension of programs specifically targeted to the poor, with O p o r t u n i d ~ e s particularly impressive in both i t s targeting and i t s reach. But there remains a major agenda ahead, notably in sustained growth of incomes o f both the extreme poor and the moderate poor, in raising quality o f all basic services, and in dealing with risks. We conclude with some comments both on areas for action and future work plans.

Areasfor action in the short and ~ e d i u ~ term. This overview already provides a number o f results with implications for action for poverty-reducing policy, in both the short and medium term. Some examples are:

0 P u ~ l i c ~ n a n c e . In the short run, a tax reform that increases tax collections can be powerfully poverty-reducing. Even the removal o f food and medicine exemptions under VAT could lead to substantial poverty declines if the resources are well- used, through channeling into an expanded version o f Oportuni~ades, for example. T o continue improving the progressivity o f electricity subsidies i s another prime target with large benefits for equity and efficiency.

Social protection. In the short run, there i s potential for further extension and consolidation o f Oportunidades, looking to gaps in coverage for the extreme poor, backed b y continued careful attention to monitoring, evaluation and accountability in light o f the program’s size. In the medium term, there i s a need to reform the highly inequitable ISSSTE, and design options for the missing middle o f the moderate poor. Seguro Popular shows great promise for helping the poor with health risks, but i t s impact i s not yet established and rigorous evaluation w i l l be important.

Sewice quality. The service quality agenda i s fundamentally a medium-term one o f strengthening the accountability o f providers -teachers, nurses, doctors- both upwards in terms o f linking incentives to results, and outwards to clients and communities. In the short-term there are many initiatives (e.g. Currera Magisterial for teachers; Cruzada Nacional por la Calidad de 10s Servicios de Salud for health workers) where specific design changes can increase effectiveness in improving service quality. The broader agenda of linking performance to results i s likely to require substantial strengthening both in accountability structures, especially at subnational levels, and in providing instruments whereby the federal government can influence reward the performance o f service providers at the state and municipal level.

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Competitiveness and income growth of the poor. The competitiveness agenda i s intimately linked to a poverty reduction agenda because of the centrality of employment creation. As one example, economy-wide measures both to expand infrastructure spending and deal with high costs and inefficiencies (whether in electricity, telecommunications, or roads) o f infrastructure services, can be good for both growth and distribution. This type o f measure w i l l need to be complemented by targeted action for the poor in both rural and urban areas:

2+ In rural areas, two areas for short-run action including genuine experimentation with territorial approaches -that w i l l imply solving current coordination problems in some infrastructure programs, and continued facilitation o f flows o f remittances.

2+ In urban areas, there are short-term options for reducing the cost o f formality -for example through increased flexibility o f hiring and firing and reducing tax and regulatory burdens- and a more complex longer- term agenda of broadening financial and infrastructure services, titling, and providing technical assistance to micro and small firms.

Accountability. Getting effective accountability o f government programs to citizens i s a complex and medium-to-lon term endeavor, but one that i s fundamental to effective government policy . There have been notable initiatives in this, including the L a w on Public Access to Information (2002) and the Law on Social Development (2003). However, international experience indicates that accountability also requires strong formal and informal institutions, including at local levels, to make such laws work effectively.

Evaluation and results-based management. Monitoring and evaluation are fundamental for the review and ongoing redesign o f poverty reduction programs. The government has good frameworks for evaluation (especially in SEDESOL) and a relatively new results-based management system (for example in Presidenciu) but these are weakly institutionalized. In the short run, there i s scope for extending systematic evaluations of particular programs -especially extending the plans for systematic evaluation under development in SEDESOL to other ministries. Institutionalizing results-based management i s intrinsically a medium to long-run activity.

Future work plans. There are many areas where deepening the analysis and exploring policy options are needed. Areas currently planned under World Bank’s work program include the following:

Rural and urban poverty. Parallel studies are under preparation on the particular characteristics o f poverty in urban and rural areas. These w i l l focus in particular on the structural and institutional influences on income growth -identified as a

24 Examples include the Citizens’ Report Card i n Bangalore, India and Cd’mo vamos? in BogotB.

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major issue in this overview- patterns of vulnerability and coping, and issues of social incorporation, as well as analyzing government programs in these areas.

Social protection. To complement the diagnostic on vulnerability in urban and rural areas, this study w i l l focus on the effectiveness o f current policies and institutions to support risk management. I t i s expected to focus both on options for consolidating policies for the extreme poor, and the important middle groups not covered b y formal social security or likely to be reached b y ~ p o ~ t ~ n i d ~ e s .

Decentralization and service delivery, Following the above studies, it i s planned to deepen the understanding of how to get effective and quality service delivery under decentralized auspices. This i s o f rising importance with the large and growing devolution o f responsibilities to states and municipalities, and the complex issues o f equity, institutional functioning and accountability that this raises.

Both the current poverty assessment and future work are intended as a contribution both to government policy formulation and to broader debates, to strengthen efforts to reduce poverty in Mexico. I t i s hoped that they can play a useful role in these important endeavors.

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