Mexico - Basic economic report (Vol. 6 of 6) : Technical appendix

FILE COPY 1972/74 DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 192-ME THE ECONOMY OF MEXICO A BASIC REPORT (in Six Volumes) VOLUME VI TECHNICAL APPENDIX June 27, 1973 Latin America and the Caribbean Department This report was prepared for official 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 It may not be published, quoted or cited without Bank Group authorization.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 completeness of the report.  CURRENCY EQUIVALENTS US$1 = Mex$$12.5 Mex$1 = US$0.08 Mex$1 million = US$80,000 FISCAL YEAR January 1 - December 31  292-3XE THE ECONOMY OF MEXICO: A BASIC REPORT (in six volumes) VOLUME VI TECHNICAL APPENDIX June 27, 1973 Latin America and the Caribbean Department   CONTENTS TECHNICAL NOTE # 1 Classification of Mexican Federal Government Budgetary Expenditure by Type of Emphasis. # 2 National Accounts. # 3 Mean and Standard Deviation of Inflation Indexes for Mexico, 1940-1969. # 4 The Gini Coefficient. # 5 Adjustments of Income Distribution Data. # 6 Mexican Projection Model. # 7 The Demand for Liquid Assets in Mexico. # 8 ICOR Projection. # 9 Agricultural Demand Projection. # 10 Balance of Payments. # 11 Economically Active Population (EAP).   TECHNICAL NOTE # 1 (see Volume II, para. 44) Classification of Mexican Federal Government Budgetary Expenditure by Type of Emphasis Economic Expenditure Commerce and Industry (including National Economy and Statistics) Communications and Public Works Agriculture, Livestock and Forestry (Fomento) Agricultural Credit Agrarian Department Hydraulic Resources and Irrigation Tourism Investment in trust funds, stocks, bonds, railways, electrical industry, etc. Economic Share of Unclassified Category: Transfers to industry and commerce, price supports (Compania Nacional de Subsistencias Populares, etc.), subsidies to decentralized agencies (Puertos Libres Mexicanos, Comision Nacional de Valores, railways, etc.). Social Expenditure Education and Physical Education Indian Affairs Public Health, Welfare and Assistance Potable Water and Sewage Disposal Labor Social Share of Unclassified Category: National Housing Institute and Social Security Institute Social and Cultural Aids (including agricultural insurance, Banco National Hipotecario Urbano y de Obras Publicas, S.A., and Patrimonio Indigena del Valle de Mezquital). Payments to government employee medical services Military and civilian insurance programs Administrative Expenditure Public Debt (including redemption, interest and costs) Military (including army, navy, and military industry) Legislative Executive Judicial Foreign Relations Interior (Gobernacion) Attorney-General Treasury (including Accounting Department) General Expenses: Department of General Supply (1919-192h) Department of Press and Publicity (1937-1939) National Resources (1947-present)  TECHNICAL NOTE # 1 Page 2. Administrative Share of Unclassified Category: General Services (including interest and contingency funds) Transfers (including subsidies to states and territories), government pensions and administration of pensions. Source: Mexico, Secretaria de Hacienda y Credito Publico, Presupuesto General de Egresos de la Federacion (cited as Presupuesto) and Cuenta Publica by year. For the Leyes de Secretarias y Departamentos de Estado, from 1821 to the present, consult the Revista de Administracion Publica (Mexico City) 10 (1958) 49-165 and 11-40.  TECHNICAL NOTE # 2 (see Volume II, para. 50) National Accounts General 1. The GDP estimates for 1900-1950 contained in the Statistical Appendix were obtained by extrapolating and aggregating the 1950 sectoral estimates presented in Cuentas Nacionales y Acervos de Capital, 1950-67 by the sectoral growth rates estimated by Leopold Solis. 2. Since the estimates contained in the latter source were calculated using 1950 as a base year, while the figur% for 1950 contained in Cuentas Nacionales (op.cit.) were revised using the 1960 input-output matrix, the resulting series presents a slightly altered sectoral distribution than that presented by Solis. This linking procedure was adopted in order to benefit both from the sectoral growth rates estimated by Solis while still maintaining consistency regarding absolute levels with data for later years. 3. For the period 1950-60, with the exception of breakdowns between public and private investment see below), all data was taken as presented in Cuentas Nacionales. Furthermore, estimates for changes in stocks and capital consumption for later years were based on the relationships between GDP and these expenditure items in the 1950-60 period. The exceptions are the estimates on consumption expenditures (residual) and foreign transactions, presented in the Statistical Appendix, since the latter were made to agree with the balance of payments data. It should be pointed out that in all expenditure data produced by the Banco de Mexico, consumption is estimated as a residual. 4. Although the Cuentas Nacionales contains data for the period 1960-67, these have, since its publication, been substituted by more recent information. For 1961-71 therefore, the data presented on GDP by sector of origin is that published in the Informe Anual, 1971 of the Banco de Mexico, while that on expenditure is based on unpublished information supplied to the mission by the Banco de Mexico. As in the period 1950-60, consumption has been re-estimated as a residual after substituting the data on the foreign sector by the balance of payments estimates contained in the Statistical Appendix. Moreover, estimates of changes in stocks are also broken down from the residual consumption data presented to the mission. Changes in Inventories 5. Although the GDP estimates since 1960 have been revised after the publication o' Cuentas Nacionales, the more recent data are not as complete, lacking data on specific indicators, namely changes in inventories and capital consumption. To estimate these items, the 1950-60 period was used as a sample of observations from which the relation between GDP, related data, and these indicators could be used for estimation purposeso  TECHNICAL NOTE # 2 Page 2. 6. For estimating inventories, the economy was divided into four sectors - agriculture, livestock, industry and commerce, and other - based on examination of the data for the 1950s. The data used was in constant terms. The estimates resulting from the equations below were then applied to 1960 end of year inventories, thus obtaining a series for 1960-72 end of year. These were then deflated into current prices, using for 1960-67 the deflator for stocks in each of these sectors from Cuentas Nacionales. For more recent years, the price index used was extrapolated from 1967 using the sectoral deflator from the revised series on GDP by origin. 7. The equations used are: Industry: SD = -486.4 + 0.3163 (Mp) + 0.28018 (Ym) + 0.54368 (Ymi) Livestock: SD = 1708.6 + 1.303 (YL) - 3.882 (XL) Agriculture : AS = -750.1 + 0.104 (Y ) - 0.612 (Sj) - 0.6295(XcR) + 4.947 (PR) Commerce and Other: SD = 6901.2 + 0.4478 (M) + 0.15262 (YG - L\SG -Y where: SD = inventories at end of year - = changes in inventories Mp = imports of producer goods Ym = GDP in manufacturing Ymi = GDP in manufacture of producer goods Yi = GDP in livestock XL = exports of livestock YA'- = GDP in agriculture Sj = stocks at beginning of year XCT = cotton exports PCT = cotton production M = imports YG = GDP in goods producing sectors aSG= increases in inventories of goods producing sectors YR = GDP in trade For each of the regressions an R2 of over 0.9 was obtained with T-statistics over 2 for all independent variables. Capital Consumption 8. As with changes in inventories, the data for 1950-60 presented in Cuentas Nacionales were used as a basis for regression. The equation used was: DEPR = -629.1 + 0.0411 (GDP ) + 0.0055 (K t1) t starting from capital stock (K) in 1960, depreciation was computed for each subsequent year and together with Gross Fixed Investment in that year was used  TECHNICAL NOTE # 2 Page 3. to update the capital stocks. The figures used were in current prices. The R obtained for this regression was o.9956 with T-statistics of 3.64 for GDP and of 1.20 for lagged capital stock. Other Estimates 9. For 1960-67 indirect taxes and subsidies were taken from Cuentas Nacionales. For 1968-70, the estimates are based on data on indirect taxes collected by the Federal Government and state tax revenues published in the Anuario Estadistico. Data on subsidies were obtained from Cuentas Publicas. For 1971 and 1972 the data are rough estimates. 10. Public Fixed Investment was obtained from Inversion Publica Federal for the Federal Government and Federal District and from rough estimates based on State and municipal data from the Anuario Estadistico. In the former case the concept used was "autorizado"', and therefore understates actual investment. However, it is the only concept for which data is available for the entire period. For State and municipalities, the Anuario Estadistico has published for certain years data on public works expenditures. For others, when only total expenditures were available, the share of public works expenditures in total expenditures of the benchmark years were used as proxies for the actual share.   TECHNICAL NOTE # 3 (see Volume II, para. 51) MEAN AND STANDARD DEVIATION OF INFLATION INDEXES FOR MEXICO, 1940 - 1969 1940-54 1955-69 Wholesale prices of 210 articles in Mexico City 11.9 9.0 3.4 3.1 Food cost at retail prices of 16 articles 12.2 13.5 4.4 4.4 Workers' cost of living 13.0 10.0 4.8 4.2 GNP implicit price deflator 10.5 10.4 4.7 2.5 Source: Bank of Mexico, Informe Anual  TECHNICAL NOTE # 4 (see Volume II, paras. 96 and 140) The Gini Coefficient The Gini coefficient is a global indicator of distributive inequality. Its value fluctuates from zero when equality is perfect, to one - at an extreme level of inequality.  TECHNICAL NOTE # 5 (see Volume II, para. 140) Adjustments of Income Distribution Data 1/ l. Income distribution data may be adjusted on the following assumptions: that (a) only those income groups with roughly equal income and expenditure levels accurately reported income; (b) income groups which reported a deficit between income and expenditure, underreported incomes in kind and fringe benefits, and (c) income groups which reported a surplus of income over expenditure underreported money income - the higher the income level, the greater the degree of underreporting. (Table TN5-1). Application of this adjustment implies a progressive deterioration in income distribution over time, and implies that the income levels of the poorest 20 percent of the population would have fallen from 6.1 percent to 3.9 percent between 1950 and 1969, whilst the income share of the 20 percent with the highest income levels would have increased from 59.8 percent to 62.4 percent. The income of an average family in the latter category would have been 9.8 times that of an average family among the poorest 20 percent in 1950. By 1969 that figure would have been 16 times. 2. Such a deterioration would not have implied an absolute decline in the real income of the lowest income groups, but rather a deterioration of income status relative to that of the highest income groups. Absolute income would thus have risen at both ends of the income scale, but much faster at the top. The absolute increases at the bottom of the scale were small, whereas those at the top were substantial. The fact that the 1950 census reported only 72 percent of total income, the 1958 survey only 62 percent and the 1963 and 1969 surveys also reported only 73 percent of total income may imply that results based on adjusted data are not conclusive. 1/ Following Ifigenia de Navarrete: "La Distribucion del Ingresos", op.cit.  Table TN5-1: ESTIJIATE OF ThE 1AL FAMII;Y ICOME IN MEXICO, 1969-1970 ~~zni~i^^'n< r T'tl icon.e Corre-tive Fa+ctor t- o>.e Brac&:ets ,v of ( * in ttousand % of Tt A tl of Adj. (:nt- AeszS) Frm.-iis pesos) incomre Rcop Repor-ing (in thorsandnesos) lhccma L t' ia ',, 500 21.0 639.953.7 4.0 153 979,639 7:<, C - 1_v) t2.] 691,569.2 4.4 132 912,871 .8 731 -- 1 (0ICO 15.3 1,211,492.8 7.6 115 1,393,217 5.8 -, ', 0_ 0) 01 27.7 3,617 6ili..3 22.8 110 2 4p172*728 17.5 2C,000 - 3000 10.6 2,367,818.9 14.9 100 31 3,098;o57 13.0 :,000 ?'Os 13.2 7,317437. ! 6.2 00 82 13,3e6, Br 55.8 100.0 15,8h54486.5 100.0 - - 23,862,000 100.0 Sourcee: TBRD Fstimates. The correction coefficients are derived from the methodologr used for 1963 by Ifigenia (do Navarrete -in E1 Perfil de Mexico en 1980, La Distribucion del Ingreso en Mexico, Mexico (1570).  TECHNICAL NOTE # 6 (See Volume III para. 16, and Volume IV para. 62) Mexican Projection Model 1. The model used to project the Mexican economy is essentially the same type of model that has been used in past IBRD Economic Reports on Mexico, the difference lying mainly in the length of the Drojection period, which in this case is to the year 2000. In actual use however the model has two phases, the Drojection for medium term analysis to 1980 and the longer run analysis to the year 2000. j 2. The model is a target model which selects a rate (or rates) of growth and asks what will happen, oarticularly to the balance of payments aggregates. Three rates are selected. The basic equation i3 1) Yt = Yt..l(l + g) where Y is GDP and g is the growth rate of GDP. For the base or standard run the value of g averages out to be 6.31 between 1970 and 2000. In terms of soecific periods we have projected a rate of growth of 6.5% between 1972 and 1976, with an acceleration to 7!J by 1980 (reflecting the maturity of the export boom). The rate then falls to 6% by 1990 (reflecting a waning of the export drive and an increasing burden of petroleum imports) and remains at that level until the year 2000. 3. Allied to this basic equation we have made calculations of the probable sector outputs for 9 sectors. These have been done simply on the basis of sectoral elasticities applied to the overall GDP/growth rate. These are uced mainly to derive sectoral shares and slay no part in determining other Darts of the model, although they would of course be a good base for future sections on employment. The elasticities used are esetimated from the period 1960-72 and as such are additive only at the mean of the time period involved. In the projections no attention is given to the additivity constraint, but it is violated only by 0.24 in 1980, 2.29 in 1990 and 8.5I in 2000. As the projections play no vital part in the model at this point we did not force additivity; the dominant sectors are manufacturing, electricity, construction, and commerce. 4. As the model is a target model, and as the model is assumed to have a dominant import constraint, the investment function only concerns the use of resources and slays no key role in the determination of the behavior of the model. Thus we have used a very simple investment equation: 2) I = kgY Where I is gross domestic investment and k is the incremental capital to outout ratio. The value of k is set at 3.0 which is fairly close to the historical va]ue. Consumption then becomes a residual and j For medium-term projections see Appendix Tables 2.12 (National Accounts) and 3.24 (Balance of Payments)  TECHNICAL NOTE # 6 Page 2. is also a user of resources: 3) C = y + M - X - I Where X and M are exports and imoorts of goods and non-factor services. In a similar vein, savings is also a residual: 4) S = I - M + X - TT Where S is gross domestic savings and TT is the adjustment due to changes in the terms of trade (see below). 5. The concentration of the model is on the balance of payments side of the economy. We begin with the export equations. Current price exports of goods and non factor services are composed of five main categories: cur= k + Xt + Xf + Xa + Xo Where Y, is exports of merchandise, Xt is tourism, , is frontier transactions, Xa is excorts of gold and silver, and O is other exports (mainly non-factor services). For the purposes of the srojection model X is ke-pt constant at $50 million. This clearly could be better moaelled, but it is fairly minor in the overall total and thus we have left it at its recent level. X is allowed to grow at 8.5% per annum, the recent growth rate; currently this item amounts to about $150 million. Frontier transactions are defined to include only the goods exoorted from the border zones; the earnings of workers are included under factor payments. The border exports were worth $687 million in 1972 and for the purposes of the model we have projected them at their recent growth rate of 8.3% per annum. Tourism, currently worth about $700 million should grow by at least 0.h 4 oer annum. 6. In runs involving higher growth rates of GDP (8 and 10%) we have allowed tourism to accelerate to l14 by 1980 and then fall back to 10% by 2000. Thus in the basic run tourism earns $11.2 billion in the terminal year of 2000 while in the higher growth rate version it earns $16.7 billion. The qualitative implications of figures of this magnitude are substantial. However, these estimates are considered conservative by the Mexican authorities and it should be remembered that these are current orice estimates over 27 years. Given the assumed international inflators, the two figures are 9 and 13 times the current real levels, while real GDP itself is projected variously at 6, 8 and 13 times current levels.  TECHNICAL NOTE # 6 Page 3 7. Thus we have the following equations: 6) X a 50 7) Xot = XOt_l (1.085) 8) Xft . Xft-l (1.083) 9) Xtt = Xt-l (1 + gt), gt - .104; - variable averaging .120, 1972-2000 Exports of merchandise are divided into seven categories: g Xag + Xiv + kin + X fg + Xchm + Xotm + XU agriculture, livestock, mining, manufacturing, chemicals, other manufacturing, and unclassified. In this breakdown manufacturing includes processed foods, textiles and leather products while other manufacturing includes mineral based products such as steel, glass, and ceramics as well as items such as books. (See Table 3.4 in Statistical Appendix). An analysis of the 48 different items in this classification is presented in Table 3.23 of the Statistical Appendix. This refers to the volume trends in the period 1961-72, recent price trends, the outlook for prices to 1976 and the prospects in terms of volume to that year. Using the average of 1970-72 as the base year (centered on 1971), growth rates of earnings for the seven major categories were calculated; these are also shown in table 3.23, the overall growth rate being 12.3% per annum. A separate calculation was made of the implicit price index over the same period. This figure was 2.95% per annum, thus the real growth rate of merchandise exports is projected at 9.1%. In current prices, we therefore have the following equations: 11) Xagt = Xagtl (1 + gag) 1) Xlivt Xlivt-l( 1 + gliv) 13) Xint Xint-l(l gmin) 14) knfgt = Xmfgt_ (l + gmfg) 15) chmt X htl (+ 16) Xotmt Xotmt-l (1 + gotm) 17) Xunct = Xunct_l (1 +gunc) The seven growth rates are variable over time and also with respect to the target growth rate. In fact, with the 8% and 10% GDP projections, the exports are adjusted so as to answer the question "what growth in exports is needed in order to support a given growth rate of GDP?".  TECHNICAL NOTE # 6 Page 4. The rates used in the model are shown in Table TN6 -1. It should be noted that for mining and unclassified the rates are constant over time./, the former because of basic Dessimism about the industry, the latter because of lack of information. In agriculture, livestock and chemicals the rates increase as the target growth rates increase, while in the two categories of manu- facturing the strategy appears to differ between 8% and 10%. This is mainly ad hoc selection on the part of the model builder and has little or no policy implication. 8. As indicated above, the calculations for exports are in current prices. This is appropriate for analysis of the balance of payments, but for use in the national accounts equations (3 and 4), the values must be in constant prices. Thus: 18) X = X /P cons cur x where ?x is the export price index, 1967-69 average = 1.00.2/ As mentioned above, 19) Pxt = Pxt-l (l1+pe), where gpe = .0295 to 1976 and then falls to .02 by 1980. Similarly, the import price index; 20) Pmt Pmtl ~(1+ m), where gpm = .04 until 1976 and 20 mt mt-1 p then falls to .02 by 1980. where we use a rough estimate of future import price increases of 4% per annum in the short run falling to 2% by 1980. The index of the terms of trade is simply the ratio of the two; 21) TIN = Px/Pm and the adjustment due to changes in the terms of trade is; 22) TT = X /Pm-Xcur/px 2 curmcu x Moving now to the imports of goods and non-factor services we have; 23) Mcur = Mg + Mf + Mt + MO + Ma where the categories and the notation are identical to the export equations; goods, frontier transactions, tourism, other imports and gold and silver. As before, the gold and silver account is small and constant, 1/ Also with respect to different growth rates. 2T/ The national account variables are calculated in constant orices average of 1967-69. 3/ In exact technical terms, the service component of exports is deflated by the import price index, not the export price index. We have simplified the treatment above for clarity of presentation.  TECHNICAL NOTE #6 Page 5. 2h) Ma -15 Tourism by Mexicans going abroad is currently $200 million and is projected to grow at its recent rate of 1h.31 per annum. Frontier transactions are about $650 million and are growing at 10.2% while other transactions are $180 million growing at 5.5-4. Thus: 25) Mtt = tt-1 3) 26) 1ft Mft-l(1.12) 27) Mot = Mot-l (1.054) Imports of goods are classified into four categories, consumer, intermediate, capital, and petroleum; 28) M = Mc + Ml + Mk P Consumer goods are based on consumption. We use a regression line through the data from 1959 to 1972; 29) Mc = -98.33 + 0.029 C In like fashion, raw materials are related to GDP and the equation is based on data for a similar period; 30) Mi,= -380.27 + O.O34Y In the case of capital goods, we have used the same equation (but re-estimated) which was employed in the last IBRD Reoort on Mexico. Capital goods imports are related to the previous years imports of these goods and also the change in investment between the two years; 31) Mkt = 383.75 + 0.877Mkt1 + 0.023(It-Itl1) With the relationships for petroleum imports we come to a sector that has never been treated explicitly before in our projections and which now is clearly seen to have serious imDlications for the long run growth and balance of payments of Mexico. 'Whereas such irmports were only $93 million in 1972, they are conservatively expected to be at least $12 billion in the year 2000. In the model we have simply incorporated the detailed relationships 1/. W4e begin with the volume price identity; 32) MD = ? . P where the subscripts are volume and price. The prices are suDOlied exogenously to the model and can be found in Table 8.21 of the Statistical Appendix. Currently $3 per barrel, they are projected at $9.07 per barrel in the year 2000. Petroleum 1/ See Volume III, para. 248; Volume IV, para. 55.  TECHNICAL NOTE # 6 Page 6. import volume is expressed in millions of barrels, but in order to treat the problem in the terms of petroleum economics} these values must be converted into the daily rate of usage (barrels per day). 33) P = 0.356 BBL v and barrels per day is the difference between supply and demand; 34) BBL = ?D - PS Supply is expected to grow through the 1980's and then to taper off; 5) Pst PSt_1 (1 + gp), gp = .05 to 1980, .045 to 1985, -.025 to 1990, and-.035 to 2000 w-ihile demand, which continues to grow must be related to the demand for hydrocarbons, less the supply of gas; 36) PD = HD - GAS 37) GASt = GASt- (1 + gG)' gG = *048 to 1976, .0h4 to 1980, .015 to 1990, and-.025 to 2000. Hydrocarbon demand is related Lo total energy demand by a factor which is currently 8h% and which is expected to rise to 86% during the 1,080's and then to fall back to 83% by 2000; 38) HDt = ft . IDEMt, where ft is the factor of relation. Finally, energy demand is related to GDP through an elasticity coefficient; 39) EDEMt = EDEMt_, (1 + ge) where g is the growth of GD? and e is the elasticity of energy demand. This elasticity is currently 1.2 and is orojected to fall to 1.17 in 1977 and 1.1 in 1991. The detailed formulation of the petroleum imports allows the model to automatically adjust to changes in the growth rate of GDP and at the same time provides scope for experimentation with the various paramners of the projection. This part of the model has only been used in a limited fashion for this report, but has substantial potential for further analysis. 9. Having now arrived at an estimate of the resource gap; ho) F = Mcur - Xcur we proceed to describe the Darts of the model that relate to the financing of this gap. First let us treat thee uations for direct foreign investment. Total direct foreign investment is expected to continue to grow at its recent average; 41) DFIt = DFIt i (1.125)  TECHNICAL NOTE # 6 Page 7. In lookina at the payments on this investment we tried a number of different functions and came to the conclusion that the most sensible alternative was to relate it to the foreign capital stock in Mexico. Estimates of this stock are not very reliable but we do have data on direct investment and on the payments. If we hypothesize a constant profit rate and a constant depreciation rate, we find a "best fit" with a stock of $2.5 billion in 1970 and a depreciation rate of 2.5%. The stock figure is in the range of the various estimates and the depreciation rate, although seemingly low, is in fact the same rate as is imDlied in the national accounts for domestic capital stock. Thus the function for stock: 42) KFt =0.975 KF t1 + DFIt and for profits; 0)ITr Ft = -33.12 + 0.225 KFt In terms of strict balance of payments accounting we have all the necessary variables for foreign direct investment. However, the Mexican authorities present their balance of payments on a non-standard, net basis, i.e. they report the actual flows in and out rather than the potential. Thus we need to calculate retained orofits (that part of profits which is reinvested). An analysis of the data indicates that these are fairly well related to direct foreign investment, and that the proportion is increasing; 44) RI = -16.h4 + o.468 DFI the coefficients being taken from a regression of the data over the period 1960-72. In addition to payments on direct foreign investment, factor income payments also include interest paid and earned and remittances of workers. The former we treat below in the discussion of the debt portion of the model. Payments to workers mainly represent the earnings of workers in the border zones who cross to the U.S.A. to work and return on a daily or weekly basis. The earnings from the braceros program, to the extent it still exists, are classified under transfers. Workers remittances are currently at a level of $3830 million and are exoected to grow at a rate of 12% per annum; 45) STRt wR t-l (1.12) Completing the balance on current account we have transfers which are currently $50 million and are not expected to change; 46) TRN = 50 The balance on current account is thus defined: b7) BOCA = -F --t F + W4R - INT + TRN where INT is net interest Daid on all types of borrowing, long and short term.  TECHNICAL NOTE # 6 Page 8. 10. Moving to the financing of the capital account we first look at reserve changes. In recent years the ratio of reserves to imports has risen to a level which is equivalent to about 5 months imports. The authorities do not intend that this level should persist over the long run; the policy would appear to be that reserves should represent about 2 m.onths imports. Thus: 48) CRES = 3.167 (Mt - Mt-1) where CRES is the change in reserves. 11. Short term capital is much less well understood in Mexico than it would ideally be. It seems fairly clear that there is a substantial amount of autonomous capital flowing into the financieras from abroad to take advantage of the combination of high interest rates and a stable currency. We have made a rough estimate that this type of flow was about $200 million net in 1972 and that it would be reasonable to exoect it to grow by 6% per annum, thus: h9) STCt STCt_l (1.06) In addition there is also a more clearly defined category of short term capital inflow. This has ranged up to $200 million in the past few years. For the purposes of projection we have allowed it to be a gap filler up to a limit of $400 million in any one year and with the provision that such borrowing costs 8% per annum. Likewise, if the availability of capital is such that this item is an outflow, then 8% would be earned. Thus: 50) OSTC = -(BOCA + N?B = STC + CRES + DFI) where NPB is net borrowing by the public sector on long term, and where CRES is defined so that an increase in reserves has a negative sign. However; 51) if OSTC > 400; then NPB = 400 - OSTC,and OSTC = 400 12. Finally we look at the system describing net borrowing by the public sector. The largest part of this borrowing is defined from commi-ttment patterns representing our best estimates of the likely levels of lending from various multilateral and bilateral sources. These are translated with the use of profiles into disbursement patterns. The committed debt leads to a fixed amortization schedule and once disbursed to a fixed interest schedule. 1/ Thus the model has sufficient information to calculate, for each year, the interest and the amortization to be paid; 1/ There are a few types of loans that have a fixed equal payment instead.  TECHNICAL NOTE # 6 Page 9. 52) INT =