Mexico - Development strategy : prospects and problems

Report No. 3605-ME I Mexico: Development Strategy-FrI'F COPY Prospects and Problems August 31, 1981 Latin America and the Caribbean Regional Office FOR OFFICIAL USE ONLY Document of the World Bank 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.  Currency Unit - Peso (Mex$) Since September 1,' 1970 the Mexican peso has been floating; it fluctuated around Mex$22.60 to the US dollar from mid-1977 to the end of 1980. On August 4, 1981, the peso traded at 24.66 per US dollar. US$1.00 = Mex$24.66 (August 4, 1981) Mex$1.00 = US$0.0405 (August 4, 1981) Abbreviations and Acronyms ACF Average Cost of Funds BANAMEX Banco Nacional de Mexico BANCOMER Banco de Comercio, S.A. BANRURAL Banco Nacional de Credito Rural CEDI Certificados de Devolucion de Impuestos CETES Certificados de Tesoreria de la Federacion COCOFI'bT Comite Coordinador y de Evaluacion Financiera del Programa de Desarrollo de la Industria de Bienes de Capital COMERMEX Banco Comercial Mexicano, S.A. CONASUPO Compania Nacional de Subsistencias Populares COPLAMAR Coordinacion General del Plan Nacional de Zonas Deprimidas y Grupos Marginados DIF Desarrollo Integral de la Familia EEC European Economic Community FERTIMEX Fertilizantes Mexicanos, S.A. FIRA Fideicomisos Instituidos en el Banco de Mexico en Relacion con la Agricultura FOGAIN Fondo de Garantia y Fomento a la Industria Mediana y Pequena GSP Generalized System of Preferences IMF International Monetary Fund INN Instituto Nacional de Nutricion LAFTA Latin American Free Trade Agreement NPC National Price Commission PAI Industrial Development Program PEMEX Petroleos Mexicanos PIDER Programa Integral para el Desarrollo Rural PLANAT Plan Nacional de Apoyo a la Agricultura de Temporal PRONALFA Programa Nacional de Alimentacion Familiar SAM Sistema Alimentario Mexicano SICARTSA Siderurgica Lazaro Cardenas, Las Truchas, S.A. SMI Small and Medium Scale Industry SOMEX Sociedad Mexicana de Credito Industrial, S.A. SSA Secretaria de Salubridad y Asistencia  FOR OFFICIAL USE ONLY Synopsis The present report deals with the economy during the period of rapid growth, following the crisis of the mid-1970s and subsequent stabilization effort. It examines the achievements of the recent years, such as reduction in poverty and in the rate of population growth, increase of employment opportunities and Government's initiatives to correct regional imbalances and to stimulate agricultural production. It also deals with the main issues facing the economy, particularly the measures needed to reduce the inflationary pressures and avoid over-dependence on oil, a stated objective of the Government. The report examines important aspects of economic management, especially of fiscal and monetary management, of pricing and subsidies and policies affecting exports of manufactured products. Finally, it evaluates the alternative policy options for maintaining a high rate of growth along with stability of the economic and financial structures. 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.   This report is based on the findings of a mission that visited Mexico in February 1980. The mission was composed of: Gabriel Sciolli, Chief of mission Caroline Doggart (Consultant), Exports Marisa Fernandez-Palacios, Income Distribution Jorge Garcia-Mujica, Macro Economist Chandra Hardy (Consultant), Investment Program Joseph Macisco (Consultant), Population Marko Voljc, Fiscal Incentives Isabelle Wieviorka (Research Assistant) The drafts were discussed with the Government officials in November 1980, June and July 1981. Mr. Alexander Nowicki, Senior Economist of the Department, made important contributions to the mission and to the text of the report. Miss Nadereh Chamlou (Research Assistant) also contributed to the report.   MEXICO DEVELOPMENT STRATEGY - PROSPECTS AND PROBLEMS TABLE OF CONTENTS Page No. COUNTRY DATA MA .................................... IBRD 15553 SUMMARY AND CONCLUSIONS . .................. ....... . . . . . .. . . . . i - xvii As THE PAST ........................ ............ e ...... O.... 1 1. Main Trends and Problems: An Overview ......... .......... 1 2. Medium-Short Term Fluctuations in the Seventies 4 (i) The Growth Performance ............................. 4 (a) Moving Towards the Crisis of the Mid-Seventies . 4 (b) The 1976-1977 Recession ..... ............. 4 (c) The Late Seventies - Oil, High Growth and Persistent Inflation .* ...........** ........... 5 (ii) Impact of the Medium-Short Term Fluctuations and Policies on the Structural Problems of the Economy .. 6 (a) Impact of the Decline in the Overall Growth .... 6 (b) Impact of Public Expenditure .............*..... 7 (c) Pricing Policies .............................. 9 3. Partially Solved.Problems * ..... * ........... * ............. 11 (i) The Foreign Exchange Constraint . .11 (ii) The Domestic Savings Constraint 13 (iii) Population - A Good Beginning ....................... 16 4. Tasks Remaining ..... *....... .* ..... . .............. 18 Ci) Income Distribution, Nutrition and Health 18 (ii) Agriculture ..21 (iii) Regional Imbalances and Increasing Urbanization ..... 23 B.* THE PRESENT ....25 1. New Policies and Programs . 25 (i) Planning .........O-...... ..O.. 25 (ii) Tax Policy and Tax Incentives 27 (iii) Credit Policies ........ .*.o .* .o ............ 32 (a) Credit Availability and Interest Rate Policy 32 (b) SMI's and Small Farmers' Access to Credit Market - A Problem Area . 33 (c) Regional Aspects of Credit Distribution o .. 34 (iv) The "Mexican Food System" (SAM) 36 (v) Industrialization.. .37  TABLE OF CONTENTS (Continued) Page No. 2. New Problems ........ ..................................... 41 (i) The Oil Boom - The Other Side of the Coin ........... 41 (ii) Persisting Inflation and its Sources ........ ........ 42 (iii) Pricing Policies .................... 44 (a) Pricing of Public Goods and Services .... ....... 44 (b) Price Controls ................................. 47 (iv) Exports of Non-Traditionals .......... .. ............. 50 (v) Import Liberalization and the Exchange Rate ......... 55 C. THE FUTURE .......................... .......................... 57 1. Growth for Whom? ......................................... 57 2. A Critical Aspect of the Growth Strategy: Creating a Non-Oil Export Basis ................................... 60 3. From Growth to Development: The Social Aspects .......... 66 (i) Income Distribution ................................. 66 (ii) Population and Labor Force .......................... 67 (iii) Regional Disparities and Urbanization .... ........... 68 4. Alternative Development Scenarios .......... .. ............ 70 ANNEX I Alternative Policy Options: Sensitivity Analysis ... 74 STATISTICAL ANNEX ......................... ......................... 91  TABLE OF CONTENTS (Continued) Page No. TEXT TABLES A. Table 1: Selected Employment Indicators 6 Table 2: Increase in Public Expenditure - Sectoral Distribution 8 Table 3: Social Welfare: Real Per Capita Expenditure 9 Table 4: Expenditure for Agriculture and Rural Development 9 Table 5: Prices of Selected Price Controlled Goods and Services - 1970 10 Table 6: Prices of Selected Price Controlled Goods and Services - 1978 10 Table 7: Impact of Oil on Foreign Exchange 11 Table 8: External Capital Requirements and Their Financing 13 Table 9: Domestic Savings as % of GDP 13 Table 10: Private Savings 14 Table 11: Public Savings as % of GDP 15 Table 12: Distribution of Income by Deciles 18 B. Table 13: National Development Plan Global Supply and Demand by 27 Expenditures Table 14: Geographical Distribution of Deposits, Total Credit and 35 Credit Given by Main Trust Funds Table 15: Current Account of Public Enterprises by Sector 45 Table 16: Energy Subsidies 46 Table 17: A List of Price-Controlled Products 48 Table 18: Structure of Exports by Main Sector 1965-1979 51 Table 19: Growth and Diversification of Manufactured Exports - 52 1970-1979 Table 20: Offshore Assembly and Other Manufactured Exports - 54 1974-1979 C. Table 21: Labor Costs, Wages and Salaries per Employee in Manu- 62 facturing Industries - 1970-1979 Table 22: Scenarios for the Future 71   Page 1 of 2 pages COUNTRY DATA - MEXICO AREA 2 POPULATION DENSITY (Persons) - 1980 1972.5 (thousand km2 69.Smilion 35 per km' Rate of Growth: 3.3% (from 1970 to 1980) 71 per km2 of arable land POPULATION CHARACTERISTICS (1978) HEALTH (1976 preliminary figures) Crude Birth Rate (per 1,000) 38.0 Population per physician 1,350 Crude Death Rate (per 1,000) 8.0 Population per hospital bed 910 Infant mortality (per 1,000 live births) 52.0 INCOME DISTRIBUTION (1977) DISTRIBUTION OF LAND OWNERSHIP (1970) % of national income, highest quintile 57.7 % owned by top 10% of owners 37.1% lowest quintile 2.9 % owned by bottom 10% of owners 0.3% ACCESS TO SAFE WATER (between 1973 and 1977) ACCESS TO ELECTRICITY (1970) % of population - urban 70.0 % of dwellings - urban 80.7 - rural 49.0 - rural 28.0 NUTRITION (between 1973 and 1977) EDUCATION (1976-1979) Calorie intake as % of requirements 114.0 Adult literacy rate % 82.4 Per capita protein intake (grs.per day) 66.0 Primary school enrollment % 116.0 GNP PER CAPITA IN 1980 US$ 2,340 GROSS NATIONAL PRODUCT IN 1980 ANNUAL RATE OF GROWTH (%, constant prices) US $ Mln. Z 1965-1970 1970-1975 1975-1980 GNP at Market Prices 162,641.4 100.0 7.0 5.7 5.6 Gross Domestic Fixed Investment 42,682.1 26.2 9.4 8.0 7.6 Gross National Savings 36,059.3 22.2 6.2 5.6 7.4 Current Account Balance -6,946.7 - 4.3 Exports of Goods, NFS 23,199.7 14.3 3.9 2.9 13.4 Imports of Goods, NFS 25,596.3 15.7 6.9 8.8 10.9 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1978 (at 1972 prices) Value Added Labor Force V.A. per Worker US $Bln. X Million US S Agriculture 5.7 10.0 4.9 29.2 1,163 34.3 Industry and Mining 19.5 34.3 3.7 22.0 5,270 155.6 Services 3*.7 55.7 8.2 48.8 3,860 114.1 Total 5t 9 100.0 16.8 100.0 3.387 1.0IL GOVERNMENT FINANCE General Government Federal Government Pesos Bln. % of GDP Pesos Bln. % of GDP 1979 1979 1977-1979 1977 1979 1977-1979 Current Receipts 500.60 18.1 13.6 397.02 14.3 14.1 Current Expenditures 444.58 16.0 13.3 036.56 13.0 13.1 Current Surplus 56.02 2.1 1.3 36.46 1.3 1.0 Capital Expenditures 178.28 6.4 4.4 151.07 5.5 5.1. August 7, 1981  Page 2 of 2 pages COUNTRY DATA - MEXICO MONEY, CREDIT and PRICES 1975 1976 1977 1978 1979 1980 (Billion pesos) Money and Quasi Money 235.5 289.7 372.1 450.8 651.6 883.1 Bank Credit to Public Sector 35.8 66.6 95.8 81.1 109.6 148.7 Bank Credit to Private Sector 255.1 325.6 427.0 572.1 790.7 1,168.8 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 23.8 23.6 22.2 21.2 23.5 23.1 General Price Index (1972=100) 161.0 195.2 260.2 308.8 370.8 470.1 Annual percentage changes in: General Price Index 16.8 21.2 33.3 18.7 20.0 26.7 Bank Credit to Public Sector 21.4 86.3 43.9 -15.4 35.2 35.7 Bank Credit to Private Sector 25.9 27.6 31.1 34.0 38.2 47.8 BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE (1978-1980) 1978 1979 1980 (Millions US $) US $ Mln. % Exports of Goods, NFS 11,176.4 14,965.9 23,199.7 Coffee 458.8 2.75 Imports of Goods, NFS 11,466.4 217t02 25,596.3 Cotton 313.0 1.90 Resource Gap (deficit = -) - 290.0 -2,087.0 -2,396.6 Other Agricultural Goods 1,251.4 7.50 Minerals and Metals 375.3 2.25 Interest Payments (net)* -2,311.9 -3,029.4 -4,416.0 Workers' Remittances 277.0 320.0 370.0 Petroleum 5,396.7 32.35 Other Factor Payments (net) -477.4 -590.9 - 772.3 Manufactured Products 2,310.9 13.85 Net transfers 197.9 223.9 268.2 Non-classified 6,571.2 39.40 Balance on Current Acct. -2,604.4 -5,163.4 -6,946.7 Total 16,677.3 100.00 Direct Foreign Investment 530.0 971.9 1,313.0 Net MLT Borrowing (Public) Disbursement 8,343.3 10,415.0 7,771.1 EXTERNAL DEBT, DECEMBER 31,1980 Amortization -4.264.3 -7.285.9 -3.723.4 Subtotal 4,079.0 3,129.1 4,047.7 US $ Mln. Other Capital (net) -1,766.3 1,393.7 2,652.6 Non-guaranteed Private Deb 34t612 Other Items n.e.i. - 15.8 87.6 84.3 Notarandivate Debtrsed Increase in Reserves - 222.5 -418.9 -1,150.9 Total Outstanding & Disbursed DEBT SERVICE RATIO for 1980 Public Debt, incl. guaranteed 33.5 Non-guaranteed Private Debt - Total Outstanding & Disbursed - RATE OF EXCHANGE IBRD/IDA LENDING (Dec. 1980) (Million US $) IBRD IDA Averages - 1979 US $ 1.00 = Mex$ 22.8 Outstanding & Disbursed 2,063.3 - Pesos 1.00 = US $ .043849 Undisbursed 1,485.2 - Averages - 1980 Outstanding incl. Undisbursed 3,548.5 - US $ 1.00 = Mex$ 23.0 Pesos 1.00 = US $ .043571 August 7, 1981 *Includes interest on private and short-term debt. Note: Data contained in the present table are the latest available (as of June 1981).  IBRD 1553 ';oo ,. 90. 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