Mexico - Basic economic report (Vol. 1 of 6) : Summary and conclusions

FILE COPY 1972/14 DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use I'n'+0 >n.5 ttn &Ce1FIlES Report No. 192-ME THE ECONOMY OF MEXICO A BASIC REPORT (in Six Volumes) VOLUME I SUMMARY AND CONCLUSIONS June 27, 1973 Latin America and the Caribbean Department This report was prepared for offiial use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or compl.teness of the report.  CURRENCY EQUIVALENTS US$1 = Mex$12 .5 Mex$l = us$0.08 Mex$1 million = Us$80,000 FISCAL YEAR January 1 - December 31  THE ECONOMY OF MEXICO A BASIC REPORT (in six volumes) VOLUME I SUMMARY AND CONCLUSIONS June 27, 1973 Latin America and the Caribbean Department   THE MISSION This Report is based on the findings of a mission headed by Guy Pfeffermann which visited Mexico in October 1972 and included: Chief Economist Ian Scott Fiscal and Financial Oktay Yenal Economist Fiscal and Financial Agustin Que Economist Public Investment Analyst Henri Meier Public Investment Analyst Peter Ruof Agricultural Economist Peter Scherer Agricultural Economist Maurice Perkins (Consultant) Agricultural Economist Eugenio Maffucci (Consultant) Agricultural Economist Miguel Angel Cuadra (Consultant) Hydrocarbons Economist Alirio Parra (Consultant) Population Economist Roberto Cuca Quantitative Economist Nicholas Carter Statistician Raul de Campos External Debt Analyst Alberto Eguren The mission was also assisted by Thomas Hutcheson (Industrial Economist). The mission secretary was Martha-Elena Yanez.   ALNNiX I Page 1 COUNTRY DATA - MEXICO AREA POPULATION DENSITY 54l.0 million (mid-1972) 27.4 per km2 1,973,000 km 2 Rate of Growth: 3,4p. (from 1960 to 1972) 1843 per km of "arable" area / POPULATION CHARACTERISTICS (1972) HEALTH (1o65) Crude Birth Rate (per 1,000): 43.1 Population per physiciar; : 1,852 (1968) Crude Death Rate (per 1,000): 3.2 Population per hospital bed 510 (1966) Infant Mortality (per 1,000 live births) : 58.4 INCOME DISTRIBUTION (1969) 2/ DISTRIBUTION OF LAND OWNERSHIP (1960 % of national income, lowest quintile: 4.0 % owned by top 10% of owners : 72.0 highest quintile 64.0 % owned by smallest 10% of owners ACCESS TO PIPED WATER (147) 31 ACCESS TO ELECTRICITY (1910 % of population - urban 61 2 of population - urban 59.6 - rural 61.2- rural NUTRITION (1968) _v EDUCATION (1970) Calorie intake as % of requirements 120 (average) Adult literacy rate % :76. Per capita protein intake: 85.05 gr/day (average) Primary school enrollment % : 70 (ages 6-11) 1/ 10/ GNP PER CAPITA in 1971 US $67C GROSS NATIONAL PRODUCT IN 1971 ANNUAL RATE OF GROWTH M. constant prices) US $ Nln. e/ 1960-65 1965-70 1971 GNP at Market Prices 36,042 100.0 7.6 6.6 3.8 Gross Domestic Investment 7,152 19.8 9.2 5.8 - 8.1 Gross National Saving 6,347 17.6 9.3 4.2 - 4.5 Current Account Balance - 805 - 2.2 Exports of Goods, NFS 2,924 8.1 4.3 5.0 5.5 Imports of Goods, NFS 3,383 9.4 3.5 7.4 - 3.9 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1970 Value Added Labor Forced V. A. Per Worker US $ Mln. % Mln. % US $ % Agriculture 3,795 11.3 5.1 38.8 746 29.2 Industry 11,293 33.7 3-0 23.1 3,733 146.2 Services 18,776 56.1 4.2 32.0 4,469 175.0 Unallocated -_ 368 - 1.1 o.8 6.1 total/Average 33,496 100.0 13.1 100.0 2,554 100.-0 GOVERNMENT FINANCE General Government Federal Government Gesos Mlin.) % of GDP Pesos Mln.) % of GDP 1970 1970 1968-70 1971 1971 196-7l Current Receipts 51,481 12.3 12.1 36,339 8.0 7.9 Current Expenditure 44.737 10).7 10.9 2937E 6.5 6.3 Current Surplus 6,744 1.6 1.1 6,962 1.5 1.3 Capital Expenditures 17,811 4.3 3.1 14,349 3.2 3.5 External Assistance (net) 1,033 0.2 0.4 L40 0.1 0.2 1/ In terms of estimated cultivable area. 2/ Source: 1969 Survey by Ministry of Trade and Industry. Source: 1970 Census of Population. As percentage of minimum daily requirements established by FAO. Data from Bank of Mexico Survey, 1968. 5/ Sourcet WHO. @/ In terms of total land in farms, including range land, etc., in 1960. Source: IV Census of Agriculture, 1960. 7/ Sources 1970 Census of Population. Source: 1970 Census of Population. / Source: Percentage enrolled of corresponding population in age group 6 - 11. / The Per Capita GNP estimate is at 1970 market prices, calculated by the same conversion technique as the 1972 World Bank Atlas. 11/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job. Census figures adjusted to mid-year. .. not available . not applicable  ANNEX I Page 2 COUNTRY DATA - WXIXCO MONEY, CREDIT and PRICES 1965 1969 1970 1971 1971 1972 (Million outstanding end period) (January to September) Money and Quasi Money 86,11,.4 164,572.7 191,286.4 220,700.3 213,406.3 246,169.0 Bank Credit to Public Sector 1/ 21,421.3 42,310.6 47,147.2 51,764.9 ) 20 2 Bank Credit to Private Sector 2/ 66,404.3 124,374.5 146,835.2 168,284.2 )29,7 237,353.7 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 34.1 43.8 45.6 48.4 46.86 49.14 4/ General Price Index (1963 = 100) 3/ 108.1 123.0 128.5 134.8 . . 14o.o Annual percentage changes in: - Gene-.al Price Index 2.3 3.9 4.5 4.9 3.8 Bank credit to Public Sector 66.6 20.2 11.4 9.7 ) 13.2 5J Bank credit to Private Sector 8.7 20.6 18.0 14.6 BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1969-71) 196 9 197 p 197) US $ Mln % (Millions US $) Manufactures 462 32.9 Cotton 146 10.4 Exports of Goods, NFS 2,617 2,710 2,924 Beef and Live Cattle 115 8.2 Imports of Goods, NFS 2,890 3,408 3,383 Tomatoes 94 6.7 Resource Gap (deficit = ) 73 - 697 - 4ua 91 6.5 Coffee 80 5.7 Interest Payments (net) - 182 - 217 - 234 Shrimp 59 4.2 Workers' Remittances 6/ 280 323 349 All other 25.4 Other Factor Payments (net)-436 - 474 - 489 Total: - 100.0 Net Transfers 16 35 27 EXTERNAL DEBT, DECEMBER 31. 1971 Balance on Current Account 595 1,030 - 805 US 8 Mln Direct Foreign Investment 298 323 293 Net MLT Borrowing 450 276 275 Public Debt, incl. guaranteed 4,244 Disbursements 975 859 799 Non-Guaranteed Private Debt 7/ 19 Amortization 525 -iaL 524 Total outstanding & Disbursed 4,263 Subtotal 748 599 568 Capital Grants - - - DEBT SERVICE RATIO for 1971 S Other Capital (net) - 19 -12 -1 7% Other items n.e.i - 86 5L L3_- Increase in Reserves (+) 48 102 200 Public Debt, incl. guaranteed 22.b Non-Guaranteed Private Debt 7/ o.6 Gross Reserves (end year) 718 820 1,020 Total outsi:anding & Disbursed 23.4 Net Reserves (end year) 654 751 952 RATE OF EXCHANGE IBRD/IDA LENDING. (latest month) (Million US $):2/ Through - 1971 IBRD IDA US $ 1.00 = 12.50 1.00 = US $ 0.08 Outstanding & Disbursed 986 Undisbursed 343 Since - 1971 Outstanding incl. Undisbursed 1,329 US $ 1.00 = 12.50 1.00 = US $ 0.08 1/ Federal Government and States only. 2/ Lending to enterprises and individuals. No breakdown between public and private . . not available sector enterprises. not applicable 3/ GDP deflator. 4/ Jan-Sept in relation to Jan-December GDP estimate. 51 September to September. 6/ Includes remittancea of agricultural workers which are treated as transfers. 7/ Partial Data. 8/ Ratio of Debt service to exports of goods, non-factor services and workers remittaroes. 9/ April 30, 1973. April 30, 1973  PREFACE This Report is presented in six volumes. Volume I contains a summary of the principal arguments and conclusions of the main body of the Report, which is contained in Volumes II, III and IV. These deal respectively with the Past, the Present, and the Future. The analysis of the Past (Volume II) is designed as an analytical introduction to the Present (Volume III) rather than as a self-contained account of the economic history of Mexico from 1900 to 1970. Volume III is dedicated to the analysis of current problems, policies and prospects in the period 1970 through 1976 - co- incident with that of the administration of President Echeverria. Volume IV (The Future) deals with issues which are likely to mature after 1976, - many of which have implications for immediate action by the present Government. Volume V contains a Statistical Appendix. Volume VI contains a Technical Appendix.   SUMMARY AND CONCLUSIONS 1. Mexico's per capita income in 1972 was $744. Among the world's less developed countries it was therefore a relative- ly wealthy nation. But the distribution of its wealth - measured in terms of goods and services and of disposable income - was strikingly uneven. After three decades of sustained and increas- ingly diversified growth and 50 years after a decade of social and political change which began with the Revolution of 1910, Mexico has not found a way to eliminate poverty or to achieve a relatively balanced distribution of consumption - between income groups, between urban and rural areas, or between regions. 2. It cannot be said that attempts have not been made to resolve these problems through legislation and direct Government action. This was particularly evident during the Cardenas adminis- tration (1934-1940) when energetic efforts were made to deliver some of the promises which had been made to those who had fought for social and economic justice during the Revolution. Public expend- itures were reallocated to finance social services and the develop- ment of an improved infrastructure and a vigorous program of land reform was implemented. And notwithstanding that these changes were made at a time when Mexico was in many ways isolated from the world community, the country managed to achieve both social progress and fairly rapid economic growth. 3. The spectacular economic success of the period from 1940 to 1970 was, however, achieved on the basis of a somewhat different model of development. The primary strategy was to achieve rapid growth by means of capital formation in the private sector. To this end savings incentives were made attractive (in- cluding a low tax ratio rising to only 9 percent of GDP by 1970), and the allocation of a limited volume of public sector resources (emphasizing infrastructural development) supported the growth of private sector production while the adoption of low prices for the products of public sector industries (including power, hydro- carbons, water, and railroad freight charges) helped to promote pri- vate sector profitability. 4. The strategy was consistently effective in promoting the growth of GDP and sufficiently flexible to make it possible to achieve (in the late 1950s and 1960s) rapid growth without in- flation - an achievement which attests to skillful economic manage- ment and which has been equalled in few other countries. 5. Because, perhaps, of this success relatively little attention was paid to the fact that the poor not only remained poor - particularly in the countryside - but may have become increasingly poor in relation to those whose living standards had increased as the  - ii - economy grew. Insofar as a more equitable distribution of goods and services was an objective of economic policy, it appears to have been implicitly assumed that it would be achieved through the t"trickle-down" effects of economic growth. 6. The fact that this did not - on the evidence - happen, and that the persistence of widespread poverty is increasingly incompatible with sustained growth and rising per capita incomes has been recognized as a major policy issue by the governnent of President Echeverria which took office in December 1970. There is evidence, however, not only that the search for greater econ- omic justice may have begun (although it is as yet too early to say that it will be successful) but also that it is not a single- minded pursuit. For the Echeverria Government like its predeces- sors is also clearly committed to the achievement of sustained economic growth within the constraints of relative monetary and balance of payments stability. 7. This Report suggests that the goals of economic jus- tice and of economic growth are not incompatible and argues that the public sector must play a decisive role as an agent of social change while remaining responsible for the promotion of sustained expansion. It suggests, in particularg, that in both respects the key to these achievements lies in a modified fiscal and financial strategy. Fiscal and Financial Analysis 8. New revenue and expenditure (particularly investment) policies are not only desirable but essential, both to the achieve- ment of sustained growth and the improvement of welfare. Moreover, with judicious economic management, a new strategy appears to be entirely feasible. The current framework of the fiscal and finan- cial systems is examined in the Report from the points of view of growth and social progress. First, in the absence of increased prices for public sector goods and services (particularly hydro- carbons, power and transport), very large transfers from the Federal Government to the enterprises concerned, or an intolerable increase in external indebtedness, it is seen as almost inevitable that their productive capacity will be severely constrained and that in the late 1970s and 1980s this would inhibit the expansion of the economy. Therefore, tariffs must be increased in order to generate additional public revenues. Second, any ambitions to achieve social progress by means of public sector expenditures are clearly contingent on the procurement of additional tax revenues: without them it would not be possible to finance some of the social programs which the Government has in mind without reoourse to such  - iii - levels of internal or external borrowing as would be prejudicial to monetary and balance of payments stability. 9. The contrast between the investment program which (without incurring risks of instability) could be financed on the basis of past revenue trends and that which could be financed with fiscal change is quite substantial. The magnitudes related to the first option are shown in Table I-t. Table I-1 : MEXICO : PUBLIC SAVING AND POSSIBLE INVESTMENT EXPENDITURE 1973-1976 : BASED ON PAST TRENDS (Billions of Current Mex$) 1973 1974 1975 1976 Public Saving 18.1 19.3 20.8 22.5 Public Borrowing (net) 19.6 21.7 24.1 26.8 - Internal (15.1) (16.8) (18.6) (20.7) - External (4.5) (4.9) (5.5) (6.1) Total Resources for Investment 37.7 41.0 44.9 49.3 Public Savings as Percent of GDP 3.2 3.1 3.0 2.9 Public Investment as Percent of GDP 6.7 6.6 6.5 6.4 10. This suggests that the maximum amount of investment which could be financed on the basis of trend levels of public borrowing and of the revenues which could be expected from existing fiscal provisions would not exceed Mex$37.7 billion in 1973. This is certainly insuffi- cient to finance the investment which would be required to sustain growth and to diffuse its benefits more widely. While the Government has not indicated its detailed expenditure plans for 1974, 1975 or 1976, the discrepanc-y between feasible and required investment expend- itures would be increased rather than reduced.  - iv - 11. Relatively modest changes in fiscal policy would, however, generate sufficient additional resources to finance higher levels of investment in public enterprises and addition- al current and investment expenditures on social goods and ser- vices. The changes would necessarily include both tax and tar- iff revisions, and within the tax field, both the direct and in- ci-ect taxes. The pattern of resource mobilization and alloc- which would emerge under these circumstances is shown in Table I-2. Table I-2 MEXICO : PUBLIC SAVINNG AND POSSIBLE INVESTMENT EXPENDITURE 1973-1976 : WITH ADDITIONAL PUBLIC REVENUE AND INCREASED BORROWING (Billions of Current Mex$) 1973 1974 1975 1976 Public Saving 20.5 26.1 29.3 33.5 Public Borrowing (net 23.0 26.0 29.1 32.3 - Internal (16.8) (18.6) (20.5) (22.6) - External (6.2) (7.4) (8.6) (9.7) Total Resources for Investment 43.5 52.1 58.4 65.8 Public Savings as Percent of GDP 3.6 4.2 4.3 .4 Public Investment as Percent of GDP 7.7 8.4 8.5 8.7 12. In respect of both growth and inflation, the success- ful implementation of fiscal changes will be contingent on the preservation of private sector confidence in the Government's economic managenment. In and of themselves, however, fiscal changes should not be expected to have a negative impact on the economy. Any which occurred (in terms of a decline in GDP or faster inflation) would probably be marginal and would, more- over, in terms of both longer run (post-1976) growth prospects and of social develolmient, be compensated by the fulfillment of  - v - major policy goals; they should, specifically, make it possible to finance essential investment in the public enterprises and in the social sectors without prejudice to either internal or external stability. Sectoral Analysis 13. The nature of the sectoral analysis varies somewhat from sector to sector, depending particularly on whether the sectoral level of public investment is an important criterion of sectoral performance. 14. The problems of the agricultural sector derive in large measure from the structural relationship between agrarian structure and population growth. Underemployment, income con- centration, and rural-urban migration are closely linked with the failure of the agrarian system to provide an adequate socio- economic environment. Government policy for agriculture now has four broad objectives; the improvement of agricultural incomes; the generation of more employment; the satisfaction of domestic demand for agricultural products, and the generation of foreign exchange from agricultural exports. These objectives are direct- ly related to Government policies for agrarian reform, irrigation, research, extension, price and credit policies. 15. The 1970 Agrarian Reform Law remedied several import- ant shortcomings in the previous Agrarian Code. In particular, it provided a basis on which the ejido could be transformed into an efficient production unit and contained provisions to prevent fur- ther land fragmentation. The current objective is to complete the legal aspects of agrarian reform by 1976; this may be an over- optimistic target and it is debatable whether this goal would be compatible with the achievement of an efficient structure for livestock production because there is, at present, no clear agree- ment on appropriate stocking levels for livestock farms. 16. The Federal Water Law (1972) seeks to rationalize water management; it defines property rights and establishes water-use priorities. The Ministry of Hydraulic Resources (SRH) has been authorized to plan, execute and operate all water projects in which there is public participation. The law imposes upper and lower limits on farm size of 20 ha and 10 ha in new irrigation districts in order to achieve a more equitable distribution of the benefits of public irrigation projects. It is anticipated that the historical (post-1940) concentration of irrigation de- velopment in the northern coastal regions will be modified and that the southern river deltas will become a new focus for water  - vi - management. The physical characteristics of these areas are, however, markedly different from those of the north and their development will imply a reduction in the scale of engineering projects and relatively greater emphasis on drainage, flood control and soil conservation. 17. A further goal is the improvement of water manage- ment; an intensive program designed to achieve this objective has been launched by SRH. Its success appears to depend on a greater degree of cooperation with the extension services of the Ministry of Agriculture than has yet been achieved. Im- provements in reservoir management and rationalization of water prices also deserve attention. The National Water Study now being carried o-uit should provide a valuable adjunct to irriga- tion policy-making. An expanded program of irrigation invest- ment is clearly required but analysis suggests that the rate of irrigation expansion should be explicit ly related to other agricultural development options and to the growth of effective demand for agricultural products. 18. Agricultural research will play an important role in the future of the sector. Mexico has already achieved a world- wide reputation for excellence in the development of hybrid grains but a major effort will nevertheless be required in order to make research relevant to the needs of small farms in rainfed and tropical areas. The utility of new research will largely depend on the expansion and efficiency of Government extension services, since improvements in cultivation techniques on small farms are unlikely to occur unless this happens. 19. Other policy objectives will be sought through CONASUPO, the Government's semi-autonomous price and marketing agency. Price support programs have so far been of special benefit to maize and wheat producers in irrigated areas and small farms have been large- ly excluded. Recent efforts have, however, been made by CONASUPO to increase grain purchases from smallholders. Price support for maize has a prospectively important impact on small farm incomes and welfare but the maintenance of price support programs for maize and other crops in commercial agriculture should be critic- ally evaluated. 20. Agricultural credit policy will also emphasize the needs of the smallholder sector. This, however, will imply a need to achieve a greater degree of coordination between credit and extension services, and will therefore imply some reorganization of credit institutions and some growth in extension services.  - vii - 21. Given sufficient resources to finance new public sector programs for agricultural development and some success in overcoming administrative and other non-financial constraints, it is estimated that a sector growth rate of about 5 percent a year could be achieved through 1976 and that some progress could be made towards alleviating the poverty of the rural population by means of policies which have explicit reference to income distribution and small-farm welfare. 22. The prospects for the forestry sector are somewhat contingent on a clearer definition of government policy and on the resolution of some basic structural problems - reflected in high production costs and under-exploitation of an abundant natural resource. A similar conclusion applies to the fisheries sector; both inshore and offshore resources (subject in some areas to further evaluation) are generally abundant but there is no clear sectoral strategy. Recent legislative changes may, how- ever, lead to a more intensive level of resource exploitation and to faster sectoral growth in both sectors. 23. The problems and prospects of the industrial sector differ greatly from one industry to another. First, the outlook for the energy sector is tied more closely to public investment policy than that of any other industry. In view of serious under- investment in hydrocarbons exploration during the last decade, the implications of failure to implement a much larger investment pro- gram than has been implemented in the recent past would include a declining trend of production and rising import requirements. These trends would start to become evident before 1976 but their main impact would be felt thereafter. A PEM XI investment pro- gram in the order of Mex$40 billion in 1973-1976 is thus indicated as a means of avoiding capacity constraints to sectoral and, by extension, to GDP growth, in the medium term. A similar justifi- cation for a high level of investment applies to the electric power sector. In both cases there are direct links between macro- economic prospects, sectoral growth, public investment and re- source mobilization strategy. 24. This does not apply to the manufacturing sector. Mexico has reached a stage of development at which manufacturing output is growing faster than total output. There are, however, some outstanding issues which include those of protection, de- centralization, technological transfer and employment. Although protection in Mexico is, by international standards, not excessive, the issue has a long history. Certain advantages might derive from a reduction in effective protection but the Government appears to 9' Petroleos Mexicanos.  - viii - be strongly interested in reducing present incentive differentials between domestic sales and exports of manufactured goods by means of export incentives. Several export promotion incentives have been introduced since 1971 and the recent trend of manufactured exports shows a strong upward tendency although it may be too early yet to evaluate these policies. 25. The issue of industrial decentralization is intimately related to the past and present concentration of people, production and prosperity in Mexico City. The Government has expressed in- creasing concern over this issue and in 1971 introduced fiscal in- centive legislation to encourage industrial growth in other parts of the country. Other measures having the same purpose include the development of industrial parks, regional minimum wage policies, the development of a new steel complex in a hitherto undeveloped area of the Pacific seaboard, and the development of manufacturing activities near the US-Mexico frontier. As yet there is little evidence that these measures have had a significant effect on con- centration. 26. The issue of technological transfer has recently attracted considerable public attention. New legislation imposing constraints on technology imports was introduced in 1973. Its pro- visions are generally compatible with those of similar laws in other developing countries and the Government has stressed that the new law is not intended to impede the use of foreign technology but rather to ensure the technology used is both appropriate and is obtained on satisfactory terms. With respect to the issue of em- ployment in manufacturing, it is suggested that certain aspects of Government economic policy may have encouraged the use of capital rather than labor. 27. The mining sector has experienced only slow growth in recent years in the light of world price trends and of investment uncertainty in Mexico. The resource potential (as in forestry and fisheries) is, however, good. Recent legislative provisions may imply more intensive exploitation in the near future than in the past. 28. Transport in Mexico is in many ways dominated by the public sector; in addition to infrastructural development, its involvement includes whole or partial responsibility for rail, road and air services. The major problems of the sector refer to coordination, efficiency of operations, adequate investment planning, and rational pricing policies. There have been en- couraging developments in a number of subsectors since 1970, particularly in respect of port reorganization. It is clear,  - ix - however, that many problems remain; coordination between sectoral agencies is still ineffective, a number of pricing issues are still outstanding (although a decision has been made to revise railway freight charges in 1974), and there is no indication of how the urban transport problems of Mexico City are to be resolved. 29. Tourismi/, which contributes 40 percent of foreign exchange earnings, appears to have excellent prospects for future growth. The public sector (through a Banco de Mexico trust fund) is now engaged in the development of two major projects (at Zihuatanejo and Cancun) and other projects are being considered. 30. The public sector is also involved in the "social" sectors - education, health, housing, nutrition and rural develop- ment. In all of these areas the outstanding problems are very severe and irrespective of financial constraints it would not be possible to resolve them before the end of the present Administra- tion in 1976. This is largely because of personnel constraints - particularly in the education and health sectors. It is also clear, however, that the financial resources necessary to provide the whole population with adequate food and shelter could not be mobil- ized. Two conclusions emerge. First, every effort should be made to utilize such resources as can be used (given non-financial constraints) to promote social development during the next four years, and particular stress should be laid on the problems of the rural poor. In this regard, the Government's rural development program - which provides basic infrastructure for settlements of between 500 and 2,500 inhabitants - is a major priority. Second, any effort made by the Government to increase expenditure will, at best, facilitate a relative reduction in existing dis- parities between socio-economic groups, between rural and urban areas and between different parts of the country. 31. By 1976 poverty will still be very much in evidence in Mexico. But a strategy to reduce imbalances and to improve the conditions of the poor is not only a major social and political priority but is also financially manageable - provided appropriate public revenue policies are followed. Balance of Payments Analysis 32. The process of import substitution in consumer goods has now advanced to the point at which three quarters of Mexico's imports are made up of investment goods, raw materials, and fuels. The level of investment and year to year changes in the GDP growth rate are therefore closely linked with import capacity and import j Including border tourism.  - x - shortfalls are likely to bring about an immediate reduction in economic activity. Conversely, any deterioration in the balance of payments must be countered by action to dampen domestic demand in order to contain imports. The recent trends of GDP growth and balance of payments conditions are thus closely related. 33. Mexico's export status has been strengthened by the diversification of the export structure. Manufactured exports now account for 40 percent of total merchandise exports compared with only 15 percent in 1960, and are expected to increase their share in the future. The traditionally close link between the U.S. and Mexican economies continues and some 70 percent of Mexico's merchandise trade is with its northern neighbor. It was therefore inevitable that the peso should have maintained parity with the dollar in 1972 and 1973, thereby improving Mexico's competitive position vis-a-vis countries which did not follow the dollar. 34. The debt service ratio which has traditionally been high, has been reduced since 1968 when it reached the record level of 24 percent. This can be largely attributed to better govern- ment control over the external borrowing of decentralized public agencies which has not only helped to reduce the volume but also to improve the terms of the external debt; in 1972 the debt ser- vice ratio was below 20 percent. 35. On the basis of sectoral prospects in the next few years, particularly in the manufacturing and tourism sectors, and of Mexico's competitive position vis-a-vis European and other countries, it is considered likely that the trend of export earn- ings should be much better than in the 1960s. On the import side, however, the fact that petroleum imports will rise sharply between now and 1976 (irrespective of PEMEX investment in exploration) means that the achievement of faster export growth is a matter of crucial importance. 36. Provided that sound fiscal policies are continued and that the necessary growth of public expenditure is financed without excessive external borrowing, it should be possible to maintain a debt service ratio of less than 25 percent in the foreseeable future, while assuring rapid economic growth. Given this, Mexico will continue to be one of the most creditworthy developing countries in the world. Long-Run Analysis 37. Turning from the short and medium to the longer term, the issues which seem likely to dominate the final quarter of the twentieth century are, in many instances, issues which can already  - xi - be defined. However, the extension of the time horizon gives them greater influence over development prospects than that which they cormand over a shorter period. 38. The central issue is whether the Mexican economy can be expected to provide the whole population in 2000 A.D. with at least a minimum standard of prosperity. The key determinant of welfare (other than that of public sector action to produce and distribute goods and services) is employment and with a given labor force the major parameters of employment are economic growth and technological change. The size of the future labor force derives from the projected size of the population and from its age and sex profiles. There is little prospect that the total population in 2000 A.D. will be less than 140 million - above the mid-point in a predicted range from 122 to 152 million. The lower end of the range would imply a dramatic and improbable decline in fertility, while the higher figure would imply the persistence of current fertility trends. On the basis of a pro- jected population of 140 million, and taking account of other relevant factors, it is estimated that the labor force in 2000 A.D. will be in the order of 39 million. 39. Although there is no firm basis on which to predict trends in labor productivity and GDP growth, it can be shown that the persistence of recent (1950-1970) trends (given labor force growth as estimated), would imply a very large increase in under- employment above the current level (which is undoubtedly high but cannot be accurately quantified for lack of data). The economy would probably have to grow substantially faster than in the past in order to alleviate the unemployment problem. 40. There can be no doubt that the amounts of scarce inputs required to maintain the growth of the economy will in- crease substantially before the end of the 20th Century. How- ever, in respect of water, there is already a severe imbalance between the geographic sources of supply and demand. Over time, this imbalance is likely to be accentuated unless measures lead- ing to the effective geographic redistribution of population and activity are introduced - those which have been adopted so far are unlikely to have such an effect. Moreover, the balance bet- ween aggregate supply and demand for water will become increasing- ly delicate. 41. There is, moreover, every indication that Mexico, which has until now been essentially self-sufficient in all types of energy, will, in the future, have to rely increasingly on crude petroleum imports. This much seems certain although speedy govern- ment action to provide additional resources for PEMEX investment  - xii - would have the effect of buying time because reliance on external supplies could be postponed if additional reserves were located and exploited in the near future. In the longer run, even if a major effort in this direction is made, it may be necessary to depend increasingly on imported fuel. This will inevitably im- pose a heavy cost on the economy and it is by no means unlikely that 25 to 30 percent of the total value of imported goods and services will consist of petroleum by the end of this century. 42. There are, therefore, serious constraints to long run growth which may be difficult to overcome, although the feasibility of faster-than-historical growth rates is, in part, dependent on doing so. It is also clear, however, that the expansion of exports would make a substantial contribution to faster GDP growth and that the rate of export growth may be the key determinant of economic success as measured in these terms; it may be a prerequisite of a lower unemployment ratio. 43. Given, however, that growth is not an end in itself but rather a means to the end of generating sufficient resources to improve the material welfare of the population as a whole, these improvements do not depend exclusively on growth. Tech- nological change and population increase (and thus labor force growth) are also major parameters. 44. Innovative and effective policies which succeeded in encouraging the use of labor rather than of capital would have a potentially important impact on employment prospects and thus on the improvement of welfare. Moreover, it is clear that the problems arising from scarcity of natural resources are com- pounded by the rapid increase of population. In no other country with a population of 50 million or more is the rate of population increase as high (3.5 percent) or the national current rate faster than any historical rate. The efforts required to improve living standards and to spread the benefits of growth more equitably are, therefore, not only greater in Mexico than in any other country of comparable or superior population size, but are greater now than ever before. 45. President Echeverria has shown that he is aware of the long run consequences of unchecked population increase and has re- cently liberalized the attitude of the Government and its public health services towards "responsible parenthood". This change in traditional attitudes is an important break with the past but it cannot in itself be expected to influence demographic trends very much when less than a third of the population have access to mod- ern medical care. The Mexican economy grew rapidly while the  - xiii - population increased from 20 million (1940) to 54 million (1972). But the prospective relationships between population growth, employment and welfare and the likelihood of a population of 140 million by the end of the century suggests that an unequivo- cal commitment to a population policy might be the most important policy position which could be developed by the Echeverria admin- istration.