Mexico - After the oil boom : refashioning a development strategy

Report No. 6659-ME Mexico After the Oil Boom: Refashioning a Development Strategy June 23,1987 Country Programs Department I 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.  Current Unit - Peso (Mex $) On June 16, 1987, the exchange rate in the controlled market was US$ = Mex$1,312.00.  FOR OMCIL USE ONLY MEMICO APTEM THE OIL BOOM: REFASHIONING A DEVELOP1INT STRATEGY PREFACE This report is based on the findings of an economic mission which visited Mexico in 1986, and of subsequent updating missions in April-May 1987. The missions included the following individuals: John R. Johnson (Mission Chief) Jorge Garcia-Mujica (Macroeconomic Analysis and Projections) Tarcisio Castaneda (Social and Employment Policies) Hector Dieguez (Consultant-Social Sectors) Turgay Ozkan (Public Sector Investment) Roberto Rocha (Financial Sector) Thien Pham (Research Assistant) Florencia Frantischek (Research Assistant) The report examines economic developments over the past three years, with particular emphasis on the crisis brought on by the collapse of international oil prices in 1986. The report highlights the major policy achievements of the Government's growth-oriented adjustment program imple- mented during 1986-87 in terms of averting a balance of payments crisis, setting the economy on a new outward-oriented growth strategy, and initiating far-reaching structural reforms. The report notes that these domestic ad- justment measures took place in an exceptionally unfavorable external envi- ronment characterized by record hig;i real international interest rates, a drastic decline in Mexico's terms of trade after 1981, burdensome net ex- ternal transfers, and, more recently, sluggish demand and growing protec- tionism in the major industrialized countries. The report concludes that three elements are critical to sustain economic recovery: (a) prompt action to curb accelerating inflation (mainly through coordinated trade and fiscal adjustments), (b) clear and sustained progress toward opening the economy, and (c) stable macroeconomic signals to the private sector, especially as regards the currently favorable real exchange rate. The report also recom- mends a number of measures to advance incipient sectoral reforms in agricul- ture, industrial incentives, the financial sector, and public sector manage- ment. Finally, considerable attention is devoted to the question of how the economic crisis has affected employment and the plight of the poorest. Some suggestions for speeding employment generation and for targetting social services on the neediest are offered, although the complex nature of the search for viable solutions is readily acknowledged. 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.  COUNrY DAA - MEXIOD Page 1 of 2 AREA POPULATION M1SITR (1985) Total: 1,973 kmn 80.4 milUinn (1986) 39.5 per kmf (OOCb) Rate of Growth: 2.3% p.a. (1980-1985) PPATION ARAR (1984) HAf Crude Rirth Rate (per 1,000) 33.2 Population per physician (1983) 1,2DO Crude Death Rate (per 1,000) 6.6 Population per hospital roon (1980) 1,780 Infant MDrtality (per 1,000 live births) 50.6 INUOWE DISTRBIUTDON (1978) DISIOIBUII FN Cl IAND (hE3U3LP % of national income, bighest 20% 57.7 % of frum below 5 ha.: *0 lowest 40% 2.9 ACCESS TO SAFE MM (1981) AOCESS MX) ELC1RICITY (1982) Z of population - urban 61.4 of popu3atlon 74.6 - rural 51.0 NUIXTI (1983) EDUCATION Calorie intake as % of requiremnnts 125.9 Adult lLteracy rate X (1980) 83.0 Per capita protein intake (gVs/day) 72.4 Primary s8bool enrollmnt X (1983) 119.0 GNP PER CWM'IT IN 1985 US$2,080 RSS DCMESTIC PROUCT IN 1986 ANNUAL RATE CF GROWM (%, constant 1970 priCes) US$Kln. % 1976-1980 1981-1985 GDP at Market Prices 128,109 100.0 6.7 0.8 Gross Dhmestic IDVestmelnt 22,931 17.9 9.4 -5.5 Gross National Savg 21,266 16.6 10.8 -4.6 Current Account Balance -1,700 1.3 - Exports of Goods, NFS 21,300 16.6 12.2 7.6 Ianorts of Goods, NFS 16,200 12.7 13.6 -10.0 WMWT, IABCE POf AND PRWflVIT!M IN 1984 Value Added labor Force V.A. Per Worker US5Mn % Th8. % US$ Agriculture 14,772 9.6 5,-342 26.6 2,765 Mining 1/ 17,214 11.2 271 1.3 63,520 Industry 2/ 51,057 33.1 3,897 19.4 13,102 Services 71s125 46.1 10,582 52.7 6,721 Total/Average 154,168 100.0 20,092 100.0 7,673 GWHOM YENT FINANCE General Goviernaent 3/ Public Sector (Mex$ B) (X of GDP) Mex$_B B. % of_GDP 1985 1985 1980-84 1985 1985 1980-84 Current Revenues 9,043.4 19.9 19.6 14,684.0 32.2 31.2 Current Deficit -1,411.9 -3.1 -1.0 -1,412.3 -3.1 -1.5 Capital Expenditures 2,087.2 4.6 5.8 2,733.5 6.0 9.6 .. Not available for a recemt year. 1/ including petroin. 2/ Including fac , utilities, and constructlon. 3/ Inludirg the Federal GDverr nt, the Federl District, and the Socia Security system.  ONTRMY DAT.- MPXIa) Page 2 of 2 MOMEY, CREDIT AND PRICES 1981 1982 1983 1984 1985 1986 (Bankid Systemi) (llions of Mex$ Outstandirg at End of Period) (Oct.) Mwney and Quasi Mkney 1,940 3,311 5,398 9,012 13,136 19,240 Bank Credit to Public Sector 1,025 2,883 4,498 6,048 10,136 19,342 Bank Credit to Private Sector 1,020 1,366 2,030 3,709 5,777 9,165 (Percentages or Index Numbers) Money and Quasi Money as Z of GDP 33.0 35.2 31.5 31.4 28.8 26.5 Coawumer Price Index (1980-100) 1/ 127.9 203.3 410,2 679.0 1,071.2 1,994i.9 (Dec.) Annmal Percentage changes in: Conaumer Price Index 1, 27.9 59.0 101.8 65.5 57.8 86.2 (Dec.) Bank Credit to Publi Sector 54.5 181.3 56.0 34.5 78.7 101.0 Al Bank Credit to Private Sector 45.9 33.9 48.6 82.7 55.8 73.97/ BAIANCE OF PAYMENS US$ B. Merchandise Ebports (Averaes) (US$ B.) 1974 1979 1984 1986 1980-86 % Exports of Goods, NFS 5.2 13.7 30.1 21.3 Petroleum Products 13.5 66.8 Imports of Goods, NFS 7.4 16.2 16.2 16.2 Mach. & Equipmeit 1.7 8.4 Reswirce Balance -2.2 -2.5 13.9 5.1 Gurden Vegetables 1.3 6.4 (deficit -) Mining Ores & Metals 0.9 4.5 Agroiundustrial Prods. 0.8 4.0 Interest Payments (net) -0.7 -3.0 -9.7 -7.0 Chemcals 0.6 3.0 Workers' Remittances 0.2 0.2 0.3 0.3 Coffee 0.5 2.5 Other Factor Paymants (net) -0.3 -0.4 -0.7 -0.6 Maruf. Nnr-ferr.Metals 0.4 2.0 Net Transfers 0.1 0.2 0.4 0.5 Others 0.5 2.4 Balance on Current Acc. -2.9 -5.5 4.2 -1.7 7btal 20.2 100.0 EMMML EBTO, DEMR 31, 1986 US$ B. Direct Foreign Investzint 0.7 1.3 0.4 1.0 Public Debt, Incl. Guaranteed 76.5 Net MKT Borrcwing (Public) 1.2 1.1 2.0 0.6 Naw4gnteed Private Debt 5/ 23.7 (Disbrsements)J/ (1.4) (5.2) (8.2) (7.1) Tbtal Outstandixg & Disbursed 100.2 (Azmrtization) / (0.2) (4.1) (6.2) (6.5) Other NLT (Net) 1.2 2.7 0.7 -0.5 Subtotal 3.1 5.1 3.1 1.1 IBT SERVIM RATO FOR 1986 % 6/ ST Public Capital (Net) - - 0.2 -0.7 Private ST & Errors & Omds. -0.1 0.7 -4.5 0.2 Public Debt, Icl. Guaranteed Chwe In Net Reserves -0.1 -0.3 -3.0 1.1 Nn-Giaranteed Private Debt s (- G eas ) Total Outstandirg & Disbxred 47.9 RAlE OF E,AI, 1986 AVERAGE IBD/Ik DIG, (Dec. 31, 1986) (US$ Mn.) n ED mA US$ 1.00 - Mex$611.8 Outstandirg and Disbursed 6,934.7 - Mex$1.00 - US$O.00163 Outstanding lnl. TUdisbursed 9,359.1 - 1/ Amual awage. 2/ Annalized rate. 3/ Including refinancig. _ TIwJuil postpn nt and restrubing. 5/ Includig U$7.8 billion wd by nationalized domtic ctmrcial bans. _/ As a shre af expors of goods and rn-factor serices.  MEXICO AFTER THE OIL BOOM: REFASHIONING A DEVELOPMENT STRATEGY TABLE OF CONTENTS Page No, PREFACE COUNTRY DATA TABLE OF CONTENTS LIST OF TABLES LIST OF FIGURES SUMMARY AND CONCLUSIONS i-xxvi CHAPTER I AFTER THE OIL EXPORT BOOM: RUFASHIONING A STRATEGY FOR DEVELOPMENT.... o. ....... ............. 1 Developments Since the Last Economic Memorandum..., 0* ...e........ e*0o ............ 2 1. Completion of the Stabilization Process.***,** 3 2. Non-oil Export Promotion and Trade Liberalization .......14 3. Enhancing the Role of the Private Sector in Economic Recovery ........ 29 (a) Industry.............. 33 (b) Agriculture .......... .. 34 4. Population and Employment..................... 39 B. Mexico't Growth-Oriented Program for Adjustment and Structural Change a n ge**............ 42 1. Parastatal Enterprise Management*****#ment**** 44 2. Foreign Direct Investment..................... 44 3. Subsidies and Price Controlstrols*............ 46 4. External Capital Flows.******.. ****...**.*.**e 46 C. Policy Content of the Program, 1986-876-87....o... 47 1. Macro-economic Policy*.**..* i cy**.**********.* 48 2. Financial Package for 1986-87...........,..... 49 3. Contingency Money....... 51 (a) Oil Contingency Mechanism and Contingency Investment Support Fac ilii ty... ............. .............. .. 51 (b) Growth Contingency Co-financing Faciiity ........ , ~54 D. Key Economic Issues............................... 55 1. Managing the Risks of Economic Recovery, .............. ...... .. ................... 56 2. Accelerating Trade Liberalization.l.....satlon 61 3. Raising the Efficiency of Resource Usee....... 61 (a) Rationalizing Industrial Incentive Programas*ooosooooooo*ooo 62 (b) Completing Agricultural Reform.....,..... 63 (c) Strengthening the Financial System..*.... 65 (d) Improving Public Sector Management...e... 67 3. Reassessing the Policy Framework for its Social and Employment Impact p a ct....*..... 67 E. Medium-Term Macroeconomic Prospects*.............. 70  - ii - CHAPTER II. THE SOCIAL COST OF THE CRISIS: ISSUES AND RECOM ENDATIONS...................................... 77 I. The Extent of the Social Cost.................... 77 A. Wage and Non-Wage Incozes.o.... ..............** 77 B. Employment and Unemployment................... 80 Ce Subsidiessoo .............. * 82 D. Consumption and Nutrition......4*............. 83 E. Social Spending ................ 83 II. Main Issues and Recommendations ................... 89 A. Generating Employment******.#.*# ............ 90 (i) Reducing the Taxation of Labor.O*..,..... 90 (ii) Strengthening Special Employment and Training Programs.................. . 91 B. Reducing Extreme Poverty....e*oo., ..".... 91 (i) Targetting Subsidies .................... 91 (ii) Increasing the Redistributive Impact and Efficiency of Social Spending**...... 92 ealth .................. . .... ......... 93 Education ....... . .... ............... e 93 Housiag, Water, and Sewerage......... 94 ANNEX I. PUBLIC SECTOR INVESTMENT: AN VVERVIEW................... 95 A. Evolution of Public Investment,.................. 95 1e Sector Reviews. ............................ 97 2. Summing Up ............... 108 B. Management of Public Investment..o.o........o.o. 109 STATISTICAL APPENDIX...... ...... 111-214 MAP  LIST OW TABLES Table Page No. Number CHAPTER I I-1 Macroeconomic Balances, 198O-864.......*..,..........vo 4 I-2 Key Macroeconomic Indicators, 1980-86............,.....* 5 I-3 Key Incentives Indicators, 1980-86. * ..,............... 6 I-4 Key External Trade Indicators, 1980-86..*....*......... 8 I-5 Balance of Payments, 1980-66................,,.....,... 9 I-6 Origin and Destination of Credit, 1980-85......e*..*,.. 11 I-7 Financial Mobilization in the Banking System, 1985-April 1987 , 12 I-8 Consolidated Public Sector Accounts, 1980-86........... 13 I-9 Petroleum and Gas Production and Exports, 1980-86 ...... 15 1-10 Public and Private External Debt and Debt Service, 1980-86,..... ........ ,. ....... ........ ................. 16 I-11 Non-Oil Exports by Value of Major Products or Services, 19-6. .. 17 1-12 Non-Oil Export Growth by Major Products or Services, 1980-86,99.,..... 999@e9*@9~........... 9.9....... * ..... 18 1-13 Non-Oil Exports by Shares of Major Products or Services, Selected Years, 1980-86...................... 21 I-14 Direction of Exports, 1980-86o......................... 22 I-15 Trends in U.S. Dollar-Denominated Monthly Wages in Eight Selected Competitor Countries Vis-a-Vis Mexico, 1982-84.... .................... 27 I-16 Structure of Controlled Non-Oil Merchandise Exports as of July 31, 1985o 98o5......s................ 28 I-17 Selected Indicators of the Public and Private Sector Roles in Economic Activity, 1980-86....0-...eeo6 30 1-18 Growth of Economic Sectors Classified by Degree of Public or Private Participation, 1980-85*.....**.... 31 I-19 Patterns of Industrial Structural Adjustment******#**#* 34 I-20 Comparison of Producer Guarantee Prices with Average CONASUPO Sale Prices for Corn, Selected Years, 1965-83............... ..... 37 1-21 Selected Farmer Input and Credit Subsidies as a Share of World Unit Price Equivalent, SON0RA9, 95.... 3 I-22 Comparison of CONASUPO Food Subsidies and Transfers Received from Federal Government, 1982-86............................................ .,. 40 I-23 Selected Trends in Population, Employment, and Wages, 1980-86 ..... oe