Mexico - Public investment program 1957-1958

| ETURN TO PORETUF ro I R E S T R I C T E D REPORTS WEEK Report No. WH-59a ONE WEEK L This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT MEXICO'S PUBLIC INVESTMENT PROGRAM 1957 - 1958 September 17, 1957 Department of Operations Western Hemisphere  CURRENCY EQUIVALENTS U.S. $1 12.50 pesos 1 peso . 0.08 U.S. $ 1 million pesos = 80,000 U.S. $  TABLE OF CONTENTS Paae No. FOREWORD vi MAIN CONCLUSIONS OF THE REPORT vii CHAPTER I - PROBLEMS OF ECONOMIC GROWTH 1 CHAPTER II - THE 1957/58 PUBLIC INVESTMENT FROGRA4: ITS SIZE, 7 COMPOSITION ANT) FINANCING I. Introduction II. Size and Composition of the Program III. Financing of the Program CHAPTER III - AGRICULTURF, 19 I. Recent Trends II. Government Efforts for Agricultural Development III. Future Production Needs IV. The 1957/58 Investment Program CHAPTER IV - TRANSPORTATION 32 I. Introduction II. Railroads III. Roads IV. Ports CHAPTER V - THE PETROLEUT INDUSTRY 53 I. Development and Present Situation II. Future Investment Requirements and their Financing CHAPTER VI - ELECTRIC POWER 62 CHAPTER VII - EDUCATION, PUBLIC HEALTH AND WELFARE 64  - ii - TABLE OF CONTENTS (cont'6) Page No. APPENDICES 1. The Investment Commission 67 2. Projection of the Balance of Payments 70 (3 tables attached) 3. The Government Budget. Projection of Ordinary Reserve and Expenditure 81 4. Mexico's Ability to Assume Neu Long-term Debt 83 5. Pemex's Investment and its Financing, 1952-1956 85 (3 tables attached) Statistical Appendix. Tables 1 to 58 inclusive. 90 (see page iii for list of titles)  - iii - Stati stical Apnendix Table No. 1 Economic Growth: Indices of Volume of Production, 1950-56 2 Economic Growth: Supply and Demand of Resources 3 Economic Growth: Gross National Product and Gross Fixed Investment, 1950-56 4 Economic Growth: Savings in Relation to Gross National Product 5 Economic Growth: Import Components of Consumption and Investment, 1953-65 6 Public Finance: Federal Government Budget Performance 7 Public Finance: Federal Government Revenue 1955-56 and Projection for 1957-58 8 Public Expenditures, Savings and Revenue 1952-58 9 Monetary Situation: Origin of Changes in Money Supply (1955 and 1956) 10 Price Indices 1950-56 11 Public Investment Program 1957-58 12 Difference between "Original" and "Reduced" Investment Programs for 1957-58 13 Financing of Public Investment 1955-58 14 External Public Debt: Balances Outstanding 15 External Public Debt: Estimated Service 16 External Public Debt: New Money Utilized 17 Agriculture: Gencral Indices of the Volume of Production, Production for Domestic Consumption and for Exports and Domestic nisappearance 18 Agriculture: Production of Important Crops 19 Agriculture: Imports and Exports of Important Agricultural Commodities  Table No. 20 Agriculture: Indices of Increases in Production by Major Crop Groups, 1954-56 Compared With 1950-52 21 Agriculture: Area of Crops Grown in Irrigation Districts 1953-54 22 Agriculture: Agricultural Development Expenditures Included in the Budget of the Ministry of Agriculture for 1957 23 Agriculture: Present and Possible Yields of Principal Crops 24 Agriculture: Estimated Acreage Required in 1960 and 1965 as Compared with 1956 25 Agriculture: Estimated Production Requirements, Yields and Acreage for Grains and Beans and Sugar, 1960 and 1965 as compared with 1956 26 Agriculture: Public Investment and its Financing 27 Agriculture: Proposed Investment for Regional Develooment Commissions and Major Irrigation - 1957 and 1958 as compared with 1956 28 Agriculture: Increases in Neu Irrigated Lands Expected in 1957 and Later Years in Irrigation Districts of the Ministry of Hydraulic Resources and the El Fuerte Commission 29 Transportation: Public Investment and its Financing 30 Transportation: Public Investment in Transportation in Relation to Total Public Investment 31 Transportation: Growth of Railroad and Road Traffic 32 Transportation: Railroad Traffic 33 Transportation: Investment in Rehabilitation and Construction of Railroads 34 Transportation: National Railroads - Various Data on Operation 35 Transportation: Federal Government Payments to the Railroads 36 Transportation: Road Traffic 37 Transportation: Investment in Federal Highway Construction  Table No. 38 Transportation: Investment in Road Construction and Maintenance 39 Transportation: Road Maintenance 40 Transportation: Length of Roads 41 Transportation: Road Expenditures, Gasoline Taxes and Special Taxes on Car Assembly and Tire Plants 42 Transportation: Loadings and Unloadings of Dry Cargo in Selected Ports 43 Transportation: Investment in Port Construction 44 Petroleum: Crude Oil Production, by Major Fields, 1938, 1946-1956 45 Petroleum: ^apacity of Pemex Refineries, 1938-1956 46 Petroleum: Wells Drilled, 1938-1956 47 Petroleum: Relation of Reserves to Total Consumption of Hydrocarbons 48 Petroleum: Output of Refined Products 49 Petroleum: Crude Oil and Natural Gas Production 1938-1956 50 Petroleum: Apparent Consumption of Hydrocarbons in Mexico 51 Petroleum: Imports and Exports of Petroleum and Petroleum Products 52 Petroleum: Imports of Petroleum Products, Pemex and Total, 1938, 1946-1956 53 Petroleum: Pemex Investments 1938-1956 54 Petroleum: Investment, 1956; Proposed Investment 1957-59; Approved Investment, 1957 55 Petroleum: Wholesale Prices of Petroleum Products, Mexico and U.S. Mid-1956 56 Petroleum: Retail Price of Regular Gasoline, Mexico City and Houston, Texas. Mid-1956 57 Capacity and Generation of Electric Power 58 Education, Public Health and Welfare: Investment and Financing  - vi - FOREWORD In September 1956 the Mexican Government requested the International Bank to send a Mission to Mexico to appraise a program of public investment for 1957 and 1958, the two remaining years of the present presidential term. This program was then being prepared by the Investment Commission, and was submitted to the Bank in January 1957. The Bank accepted the invitation, and a Mission of four of the Bank's staff members spent most of February and March in Mexico studying the program in close collaboration with the staff of the Investment Commission. The following report presents the conclusions of this Mission, which have been discussed. with the Mexican Government. I/ J2/ The Mission consisted of Jonas H. Haralz, Chief, and Barend A. deVries, Maurice F. Perkins, and Cicely A. Ryshpan.  MAIN COUCLUSIONS OF THE REPORT 1. Public investment of the size of the program (pesos 5.2 billion in 1957 and 5.9 billion in 1958, or 5 to 6% of GNP3 is necessary to provide the public services necessary to sustain a satisfactory rate of economic growth. For 1957 and 1958, however, some reduction in the program could be made with- out harmful effects by slowing down some road, railroad and pert construction projects as well as two flood control projects below the pace envisaged in the program. 2. The composition of the program is on the whole appropriate. Petroleum is the only sector where proposed expenditures are clearly too low. The report concludes that in order to keep abreast of rising petroleum demand and reduce present oil imports, investments of pesos 1,200 million a year are required for the next four years. Lack of financial resources has, however, mado it necessary for the program to limit petroleum investment to pesos 700 million in 1957 and 900 million in 1958. 3. Within individual sectors, change in emphasis is called for in some cases. In agriculture more attention should be given to research and extension services and to the maintenance and rehabilitation of irrigation works. Although regular road maintenance is presently adequate, more fund3 need to be devoted to take care of deferred maintenance and weather damages. 4. The Mission largely concurs in the estimates of financial resources available for public investment in 1957 and 1958, prepared by the Investment Commission early this year. These resources are, however, inadequate to finance all of the investment program as it is currently being planned. If the budget of the Federal Government is to be balanced, and Government agencies are not to increase their present indebtedness, domestic resources available to finance the program should amount to pesos 3.9 billion in 1957 and 4.2 billion in 1958. This estimate assumes that the Government will be successful in resisting increases in ordinary current expnnditures, food subsidies and aid to the agricultural banks. 5. Over and above presently available domestic resources, financing of the program will require pesos 1.3 billion in 1957 and 1.7 billion in 1958. If the program were to include adequate investments in petroleum, these figures would have to be increased by pesos 0.5 billion in 1957 and 0.3 billion in 1958. Looking beyond 1958, the exeess of necessary investment over presently available domestic resources is estimated to increase to 2 to 2.5 billion pesos (in 1956 prices) as current expenditures continue to increase and it becomes more difficult to meet urgent needs in some investment sectors by reductions in other sectors. 6. Approximately one third of the pesos 1.3 billion and 1.7 billion, required for the years 1957 and 1958, can be financed out of the unutilized portions of Eximbank and IBRD loans already contracted. The Mission has the impression that the possibilities of using more long-term external loans  - viii - during 1957-58 are limited because for many projects the studies required by lending agencies are only in a preliminary stage. Similarly, a sufficient increase in domestic resources will probably not materialize since that would require new decisions on economic policy which the present Government is not likely to take during the last year and a half of its term. 7. For the time being, therefore, the only feasible solution will be to reduce the investment program, and to increase the medium-term external credits of Pemex. The Mission estimates that a reduction of about 400 million pesos in 1957 and 600 million in 1958 would bring public investment approxi- mately in balance with available resources. Such a reduction will be difficult to carry out, because most of the projects included in the program are far advanced, and because work has already been stepped up and men and machinery would be left idle if it were now curtailed. Nevertheless, the necessary reductions could probably be achieved by slowing down the pace of railroad, road and port construction, and irrigation and flood control projects, without cutting investments in such high priority fields as power, petroleum and rail- road rehabilitation. On the other hand, if the program were not reduced, the resulting budget deficit would most likely upset the prevailing economic stability. 8. Looking farther ahead than 1957 and 1958, Mexico can find adequate resources for financing of public investment by augmenting its intcynal resources and increasing its use of long-term credits. The outlook for Mexico's economic growth is favorable. The variety of exports and the high income from tourism give stability to exchange earnings, and the large internal market favors production of import substitutes. Appropriate increases in priows of public services and tax reforms could, over time, enable the public sector to support a higher level of investment and debt service. 9. Mexico has a considerable margin for contracting additional long- term external loans. In 1957 Mexico's external debt service will reach 10 per cent of foreign exchange earnings; 4 per cent of this vill be for the service of long-term debt and 6 per cent for the service of medium-term suppliers' and private bank credits, mostly with maturities belou three years. As the suppliers' and private bank credits are being rolled over, debt service cannot be expected to decline below this level for the next few years. The report points out that 10 per cent of foreign exchange earnings is the level of debt service which the Mexican agency regulating external debt -- the Special Commission for External Financing -- has considered as the limit over which service should not pass. In case Mexico chooses to keep its external debt service at this level and also to maintain its present level of suppliers' and private bank credits, there would be a margin for assuming new long-term obligations of approximately $40 million a year (500 million pesos) for several years ahead. This margin is opened up partly by the decline in amortization of existing long-term debt and partly by the anticipated gradual increase in exchange earnings. In case Mexico should prefer to use more long-term credits, an additional margin for servicing $20 million per annum (or a total of $60 million, equivalent to pesos 750 million) could be created by some reduction in suppliers' and private bank credits.  - ix - 10. External loans could thus cover almost one third of the pesos 2 to 2.5 billion additional resources required. This would leave some pesos 1.6 billion to be financed by augmenting internal resources. Increased sales of bonds to the public cannot provide these resources to any significant extent because the funds obtained in this way, principally by the Nacional Financiera, will be required to help financing private industrial investments. Neither are increases in general tax revenue likely to be sufficient, both because the rate increases would have to be high and the Government is likely to maintain its previous position that substantial rate increases should not be adopted until tax collection has been improved. 11. Special attention needs therefore to be given to the possibility of increasing the prices of goods and services provided by the public sector and the special taxOs levied on the users of these services. Both these prices and special taxes are low, and the report estimates that in 1957 the Federal Government will be paying 1.5 billion pesos for the benefit of the users of transportation and irrigation services and of the consumers of electric power in excess of the special taxes levied on these same groups. In addition, because of low petroleum prices, Pemex will in 1957 lack 750 million pesos for investment financing. The report concludes that if net Government contributions to transportation, irrigation and power could be reduced by one half through increases in rates and in special taxes, and at the same time petroleum prices raised adequately, Mexico's problem of investment financing would be solved. If these adjustments were not made, on the other hand, public investment would either have to remain below the requirements of economic growth or it would have to be financed through inflation leading to balance of payments upsets.  CHAPT1R I PROBIEMS OF ECONOMIC GROWTH Past Growth The growth of the Mexican economy since 1939 has proceeded in two stages. During the first stage, 1939-1945, output increased by ae much as 8% per annum. Such rapid growth was achieved with investment not exceeding 10% of total gross product. 4uch of the war-time increase in production was made possible by more intensive utilization of existing capacity which at the outbreak of the war had been partly idle. During the second stage, 1946-1956, investment was higher than before, but economic growth was slower. The growth of the economy and the relationship between investment and growth was, however, still satisfactory, with investment averaging 14% of gross product and output increasing by 5 to 6% per year. (See Table 3). Economic growth in the post-war decade proceeded in a cyclical pattern. Each of the two periods 1947-1951 and 1952-1956 atarted with years of recession in which output increased by no more than 1%, or even decreased. The recessions in these years were caused by stagnation in export industries and in domestic industries competing with imports as well as by adverse weather conditions for agriculture. They were overcome to a large extent by deva7ca- tions (1949 and 1954) which were followed by rapid expansion in indu3trial production. In both cases this coincided with more favorable weather and improvement in world market prices. Thus, following the devaluation of the peso in early 1954, the Mexican economy has experienced a period of rapid growth. Domestic production, especially of manufactures, was stimulated by the competitive price advantage over imported goods. This induced a great rise in investment in the private sector, which was aided by a large volume of direct investment by foreign companies. The increase in private investment offset a decline in public investment expenditures so that total investment remained at around 14% of gross national product. The expansion took place under conditions of relative stability, as central bank policy kept private credit expansion wqithin bounds and, particularly in 1955, the Government showed great restraint in increasing expenditures despite a sharp rise in revenue. As a result, the price rise followling the devaluation came to an end in 1956 at a new equilibrium level. The Present Situation and the Outlook for 1257 and 1958 The period of rapid growth which followed the devaluation is now coming to an end. In 1956 there was still a highly satisfactory increase of 10% or more in manufacturing, electric power, construction and the service industries. However, the effects of poor we%ther on agriculture probably lowered the overall increase to around 7% (compared with 10% in 1955). In 1957 and 1958, a further slowing down of economic growth is likely. Now that the price-advantage created by the 1954 devaluation has all but disappeared, further increasesin domestic manufacturing production will  necessarily be slower. In several sectors manufacturing industry seems to have reached the absorption limit of the domestic market and inventories have tended to increase. Under these conditions private investment is also likely to level off. The rapid expansion of private investment in 1954-56, amounting to some 50% in real terms, was largely financed by manufacturers' own resources. However, with a deterioration in the favorable cost-price relations of the past three years, thero is not likely to be much further expansion beyond the high level rsached in 1956. On the other hand, the economy will still benefit from the recent large addition to private production facilities and from the basic improvements made in the public sector. The Mission anticipates economic growth at about 6% per annum in 1957 and 1958. The fact that, in 1956, domestic prices came close to a level consistent with balance of payments equilibrium seems clear from last yearts developments in Mexico's external trade and capital movements. Although last year the gold and foreign exchange position of the Bank of Mexico improved by $55 million (reaching $469 million in December 1956), this was not due to a strengthening of the current balance of payments. Instead the increase in reserves can largely be attributed to a short-term capital inflow of about the same size ($57 million). The current balance of payments position weakened considerably during 1956 when it was about in equilibrium as compared with a $71 million surplus in 1955. However, the 21% increase in imports in 1956 over the previous year would have caused a slight deficit in the current balance of payments, had not Mexican exports benefited from an unusually high cotton crop in 1955-56. Under these circumstances the principal aim of Mexican economic and financial policy will be the maintenance of domestic stability. The success of this policy will vitally affect Mexico's chances for continued economic growth in the period ahead. If prices were permitted to rise much further beyond their present level, in relation to U.S. prices, domestic production would soon experience recessionary tendencies and the balance of payments could not be kept in equilibrium. On the other hand, at the present price level, domestic production can successfully compete with imports and it should be able to continue its growth albeit at a somewhat slower pace. This provides a clear advantage compared with the 1951-53 period when the post-devaluation rise in prices went beyond the equilibrium level, thereby creating conditions under which another devaluation became necessary. In maintaining domestic stability little respite can be obtained from temporary import surpluses financed from foreign exchange reserves. The Mexican authorities want to maintain the present strong reserve position in order to inspire confidence in the peso and encourage the use of peso securities as an investment medium. Any substantial reduction in the foreign exchange holdings of the Bank of Mexico would rapidly reduce confidence in the peso and encourage capital flight. To some extent the potential for capital flight is being reduced by keeping liquidity of private individuals and enterprises low, and by a reduction in Bank of Mexico support of mortgage securities, conversion of which helped to facilitate the capital flight in 1954. Moreover, Nacional Financiera has stopped issuing new peso securities rsdeemable at par, although the old securities which were redeemed during the 1954 capital flight have been  - 3 - again largely sold to the public. In addition, the Bank of Mexico has been attempting to limit increases in short-term foreign obligations by banks to the financing of export crops, in particular cotton. Under present circumstances, domestic stability and balance of payments equilibrium can be maintained only if domestic credit expansion is kept within the limits set by the gradual increase in real income. It is unlikely that this objective will be endangered by private credit expansion. The Bank of Mexico is likely to continue its stringent credit policy for the private sector, as a result of which private credit has expanded less than gross product in the last two years. The most important problem in maintaining domestic stability will be encountered in the financing of the public sector, including the Federal Government, decentralized agencies and government banks. The danger to domestic stability emanating from the public sector was already clear in 1956. In particular, the government banks (especially the two agricultural credit banks, the Foreign Commerce Bank and Nacional Financiera) who had reduced their debts to the Bank of Mexico by some 750 million pesos in 1955, increased their indebtedness by at least 600 million pesos in 1956. Most of this increase was needed to finance imports of basic foodstuffs (particularly corn) by CEIMSA, the agency charged with stabilizing supply and prices of basic foods. Mioreover, the government budget surplus which amounted to 677 million pesos in 1955, was reduced to 296 million pesos in 1956. As a result of these developmen;is, 19%i witnessed a drastic reduction in the contractionary impact which the public sector had had on moneuary conditions in 1955. (See Tables 6 and 9). Thus, even ifit is the policy of the pvernment to balance its 1957 and 1958 budgets, domestic stability may still be endangered by the food subsidy and agricultural credit operations which remain largely outside the sphere of public budget planning. As mentioned above, these operations were important expansionary forces in 1956, and in the period immediately ahead they are likely to continue as unpredietable elements which could upset the budget or unduly increase Central Bank credit to the public sector. The financial authorities in Mexico are well aware of the dangers to domestic stability discussed above and are prepared to take the measures necessary to achieve their aims. To some extent, however, adverse developments may be beyond their immediate control, and this applies particularly in the fields of agricultural credit and food subsidies and budget assistance to cover operational losses of public enterprises, particularly the raiJroads. In addition, the present outlook for the balance of payments (discussed in detail in Appendix 2) does not preclude the possibility of some decline in foreign exchange reserves in 1957. In view of the present strong reserve position and of the various measures which are now being used to limit the short-term capital flight potential, a decline of $50 to 100 million in one year is not likely to lead to a dangerous situation, provided that fiscal and monetary measures prevented its recurrence in subsequent years. A balance of payments deficit, even if small, would tend to offset the effects of expansion- ary public financing on the domestic price level.  - 4 - The eventual deficit financing in the public sector in 1957 is under no circumstance likely to be very large. On t1D basis of present evidence, the increase in public outlays for agricultural subsidies and increase in wheat stocks (either charged to the budget or financed by government bank credit) would not be higher than 300-400 million pesos. If no further deficit is created by increases in public investment, there will be no immediate threat to stability. Provided the Mexican authorities continue their present vigilance and do not expand public investment beyond available budgetary sources and external loans, 1957 and 1958 are likely to be years of overall stability, in which Mexico's competitive price position will not undergo any serious deteriora- tion. Economic Growth and Stability during 1959-65 The outlook for economic growth in the years beyond 1958 will be much influenced by the success in maintaining domestic stability during 1957 and 1958. Assuming that there will be stability in the period immediately ahead, it would seem likely that in the years till 1965 the Mexican economy will grow at an average rate of about 5% per annum, i.e., not much below the average rate for the past decade. Such a rate of growth, however, will require total investment at close to 15% of gross product. During the first part of the period, gross product could perhaps grow by 5% per annum even if investment were somewhut below 15% of gross product, as there are no substantial bottlenocks in the economy at present, and those existing in transportation, petroleum and poNer could be overcome in the medium-term by proper direction of public investment. These projections assume that the yield of investment, i.e., its effectiveness in increasing total output, will not show any substantial decline from the level maintained over the past decade. During the post-war decade the overall yield of investment was maintained at a more or 'ess stable level and did not show any clear signs of decreasing. For the years ahead Mexico cannot count on an increase in investment yields, and some decline is likely, especially because of a reduction in relatively high-yielding investments in agricultural export production. An investment of 15% of gross product is somewhat higher than that of the past ten years. The question which immediately arises is: How can Mexico finance investments at such a level without endangering stability? In past years total domestic savings have but rarely come up to 15% of gross product, and this only in two years of above-average growth following devaluation of the peso. Such unusual circumstances are not likely to be repeated if Mexico manages to maintain stability and avoid devaluation. Exporience in the past decade suggests that the level of savings which can be expected under conditions of stability would be somewhere betwecn 12% and 13% of gross product, i.e., somewhat lower than the average of the minimum during years of stagnation which preceded devaluation and the maximum during years of expansion which followed devaluation. During 1951-56 the net inflow of long-term official capital and eirect foreign investment averaged $105 million per year. On average this amounted to 1.7% of gross product, a percentage which in part reflected the high level of direct foreign investment and of utilization of medium-term credits  - 5 - for financing of public investment during 1955 and 1956. If the same level of long-term capital inflow is maintained in the future, normal savings, supplemented by inflow of capital, would sustain a volume of investment about 14% of gross product. The gap between investments required to maintain satisfactory economic growth and the available savings and long-term external capital is thus of the order of magnitude of 1% of gross national product, or 1 to 12- billion pesos. This is a relatively small gap which 't ought not to be too difficult to bridge over a period of time. To a large extent an increase in foreign capital inflow will depend on the maintenance of domestic stability which, by inspiring greater confidence in the peso, would attract a growing inflow of private investment capital. But this would not remove the need for increased domestic savings. In achieving the necessary increase in savings only a minor contri- bution can be expected from the private sector. A substantial part of private savings is generated by business enterprises. Their profits largely depend on the extent to which domestic costs and prices can be kept low in relation to the price level of imported goods. Thus, if Mexico maintains its competitive position, private savings could remain close to the relatively high level of recent years. A gradual increase in private savings could perhaps be achie;-Yd by greater use of peso securities as an investment medium which may be expected to result from continned stable conditions at home. The bulk of the increase in savings must come from the public sector. In the first place this will require that government agencies and public enterprises are put on a sounder financial basis by an increase in the prices of their products and services (e.g., petroleum, transportation and power), so that they will be able to assume a larger share in the financing of their own investments. By freeing large amounts of federal budget funds, this would make a substantial contribution to the stability of public finances. Moreover, it is necessary that public savings be increased by a strengthening of the government revenue position by improved tax collections and higher tax rates. In addition to the need for increasing domestic savings, a policy of maintaining stability will have to face up to strong structural pressures upon the balance of payments. If balance of payments equilibrium is to be maintained, a progressively smaller portion of the growing level of consumption and investment will have to be supplied from abroad. If Mexico is to cope successfully with these pressures, it needs to continue vigorously to substitute domestic production for Importe of both eofivnur and investment goods. The magnitude of the problem involved may be gauged from the fact that, while gross product is expected to increase by some 5% per annum, from 1957 to 1965, current foreign exchange earnings are not likely to rise by more than 3% per annum. While gross product in 1965 would be almost 60% above the 1955-56 level, current foreign exchange earnings would be at best 30% higher.  - 6 - Foreign exchange earnings cannot be expected to increase much faster than this since in comparison with the level reached in 1955-56 agricultural and mineral export earnings -- accounting for half of total exports -- will hardly show any growth over the years till 1965. This is due partly to the decline in prices of cotton, coffee and mineral exports and partly to a slow-down in the growth of cotton exports and a decline in exports of copper and lead. A stagnation in total exchange earnings will be prevented primarily by the steady growth in tourist earnings, anticipated at some 7% per annum, and the continuation of the upward trend in exports of manufactures. If Mexico is to maintain balance of payments equilibrium, imports cannot increase faster than exchange earnings. Thus during 1957-65 the rate of increase in imports can be no more than half the rate of growth in gross national product. This is about in line with the relationship which prevailed on average over the past decade. However, in the past this relationship could not be maintained without the devaluations which Mexico wants to avoid. This problem will be most acute in the field of investment goods production, particularly if total investment is to increase its share of total resources available. If gross fixed investment is to reach 15% of gross product by 1965, it will have to increase by 65% over the 1955-56 average. However, under conditions of balance of payments equilibrium, imports of investment goods could not rise by more than 30% unless their share of total imports were to increase by reducing imports of consumer goods and raw materials, the possibilities for which are limited. (See Table 5).  CHAPTER II THE 1957/58 INVESTENT FROGRAM: ITS SIZE, COMPOSITION AND FINANCING I. INTRCDUCTION As presented to the Bank Mission, the Investment Program for 1957/58 proJects a total of public investment of 6.1 billion pesos in 1957 and 6.4 billion in 1958 (the "original program", Table 11). This includes expenditures for several projects which are not likely to be carried out because technical preparations have not been completed, or because the Govern- ment in fact has decided to postpone them. If these projects are excluded, the program would amount to 5.2 billion pesos in 1957, and 5.9 billion pesos in 1958 (the "treduced program", Table 11). The following discussion will be based on this reduced program which the Mission believes to be a realistic expression of the Government's present intentions. The principal questiornsarising with regard to the program as a whole are the following: (a) Is the size of the program sufficient and its composition appropriate to provide the various public services required to sustain a satisfactory rate of economic growth? (b) Are sufficient resources available to finance the program without creating inflation or overloading the country with external debt? In the following, the size and composition of the present two-year program are appraised against the background of trends of economic growth and of requirements for public services over a longer period. Similarly, the consideration of the problems of financing takes into account solutions which may be possible over a longer period as well as those which can be more immediately applied. II SIZE AND COMPOSITION OF THE PROGRAM Public investment of 5.2 billion in 1957 and 5.9 billion in 1958 would be of a similar size, relative to national product, as that maintained in Mexico from 1948 to 1954. During those years, public investment remained at a level of between 5 and 6% of gross national product; the programmed investment for 1957 and 1958 would be 5.3% and 5.6% of gross national product, respectively. It was only the over-riding importance of maintaining stability after the devaluation of 1954 which led the Government to curb public investment and maintain it at about 4.7% of gross national product during the years 1955 and 1956 (See Table 3).  - 8 - The Government believes that unless public investment is now restored to its previous level, the ensuing shortage of public facilities would impede economic growth. The Government also considers an increase in public invest- ment important in case of a decline in private investment in 1958. Last but not least, as the end of its term draws closer, the Government is naturally anxious to complete as many projects now under construction as possible. The Federal Government, its enterprises and agencies, provide practically all basic transportation facilities in the country, produce all petroleum and natural gas and much of the electric power, supply water for irrigation and provide a number of other services to agriculture. Over and above these tasks, the Government must meet increasing demands for investments in education, public health and welfare. Past experience and estimates of future trends indicate that all these requirements could not be met with public investment expenditures of less than 5 to 6% of gross national product, approximately the size of the 1957/58 investment program. Although this would be the necessary level of public investment in the longer run, temporary reductions from this level might well be possible without harmful results. This was in fact what took place in 1955 and 1956, and the Mission believes that in some fields reductions introduced in those years could be continued for some longer time. For instance, most of the road, railroad and port construction projects could for a few years be continued at a slower pace than envisaged in the program, without serious consequences. The same is true of the new irrigation and flood control projects scheduled to start in 1957/58, and of several of the projects in education, public health and welfare. In other sectors, reductions in the program would soon have a harmful effect on the economy. This is true of power where serious shortages are likely to develop unless expansion of capacity continues at a rapid rate; it is true of railroads where delays in rehabilitation will especially hurt mining and heavy industry; it is true of road maintenance and the rehabilitation and main- tenance of irrigation works, where inadequate expenditures will imperil previous investments; it is most certainly true of petroleum where a failure to keep production abreast of growing demand is leading to greatly increasing imports. As far as the Mission was able to ascertain, the scheduled investments for power and railroad rehabilitation are adequate to take care of the needs in these fields. The scheduled expenditures for rehabilitation and maintenance of irrigation works are, on the other hand, much too low, and to a lesser extent the same holds true for road maintenance expenditures. It is possible, however, that further increases in expenditures for these purposes could be postponed for one or two years without serious consequences. In petroleum a postponement for even that short a period would be harmful. The Mission concurs with Pemex's own estimate that annual investments of pesos 1,200 million are required in petroleum over the next four years. However, for lack of financial resources, the program had to limit petroleum investment to pesos 700 million in 1957 and 900 million in 1958.  - 9 - Failure to reach the 1,200 million investment target already in 1957 and 1958 would make an increase in petroleum imports unavoidable by 1959-1960, and would impair Pemex's financial position and make it more difficult to finance increased investments in subsequent years. As discussed in detail below, a reduction in the present investment program may be unavoidable if it is to remain within the limits of available financial rssources. The Mission considered it outside its scope to make detailed recommendations of reductions although some possible cuts are con- sider:d in the chapters on agriculture and transportation. The Mission estimates, however, that the order of magnitude of feasible reductions in the program would be about pesos 400 million in 1957 and 600 million in 1958, out of the total of 5.2 billion and 5.9 billion respectively. These reductions could be achieved mainly in road, railroad and port construction and in irrigation and flood control. They would not require cuts in the sectors where investments are presently most needed to prevent shortages of public services from obstructing economic growth. At the end of 1956 the Investment Commission had estimated that funds available for investment financing would not permit a higher investment than pesos 4.8 billion in 1957 and 5.2 billion in 1958, and its initial authoriza- tions for investments in 1957 did not exceed the first of these figures. Never- theless, the Commission had expected additional funds to be obtained during the year and in most projects the rate of activities was stepped up from the 1956 level. If work were now curtailed, men would be left unemployed and equipment idle. III. FINANCING OF THE PROGRAM Careful consideration was given by the Ministry of Finance and the Investment Commission to the resources available to finance the investment program. A distinction Was made between projects financed with "available funds" and those for which "additional funds" were required. The "available funds" were such funds as reasonably could be expected to come from the Federal Govern- ment budget without incurring a deficit, from the own resources of Government agencies and enterprises, and from external loans which already had been contracted or were about to be contracted. Financing of investment not covered by these sources was not immediately available, and the Investment Commission apparently looked towards new external loans as the main source for this purpose. This report will, in what follows, use a presentation somewhat different from that of the Investment Commission. It will, on the one hand, consider the domestic resources already available to finance the program and, on the other hand, the difference between the total costs of the program and these domestic resources. This difference indicates the magnitude of the problem M4exico is faced with in financing its public investment, not only in the years 1957 and 1958 but over a longer period as well. The means to cover this difference will have to come from external loans and an increase in domestic resources above their present level.  - 10 _ Reduced Program L957 1958 (millions of pesos rounded to nearest ten) Available funds from domestic sources 3,910 4.18_ Federal Government budget 2,470 2,510 Own resources of public agencies and entsrprises 1,400 1,570 and of Federal District Internal borrowing 40 100 Additional funds required from external or domestic sources 1320 1.720 Utilization of long-term loans already contracted / 450 470 Net increase in medium-term loans of Pemex and other 370 430 Government enterprises Additional funds not yet secured 500 820 Total Investment Prozram 5125. Note: Based on Table 13. lJ For 1958 this includes utilization of an Exim Bank loan to the National Railroads which has not yet been granted, but is expected to be granted before 1958. Available Funds from Domestic Sources The program estimates that available funds from domestic sources would amount to pesos 3,900 million in 1957 and 4,200 million in 1958. These domestic sources include the Federal Government budget, the own resources of agencies and enterprises and internal borrowing. These funds would be avail- able without incurring a Federal Government budget deficit, and without increasing the indebtedness of Government enterprises and agencies except for the small amount of internal borrowing scheduled for the two years. As dis- cussed in some detail in Appendix 3, the Mission believes this estimate, on the whole, to be reasonable but considers it important to point out the underlying assumptions and the Government policies necessary to meet them.  It is assumed that new loans will cover amortization payments on all the internal loans and most medium-term external credits in 1957 and 1958. New internal loans up to the amount of amortization payments (around 230 mil- lion pesos for the Federal Government) could probably be obtained without inflationary risks. No change is assumed in the outstanding volume of external suppliers' and bank credits of the Government and its agencies and enterprises. In particular, the amortization payments of about 210 million pesos per annum in 1957 and 1958 on external loans incurred by the National Mortgage Bank for financing of public works are assumed to be covered by new external loans of the same type. Similarly, the estimate of own resources of public agencies and enterprises in the foregoing table assumes medium-term suppliers' and private bank credits to be rolled over in 1957 and 1958. On the other hand, the estimates of expenditures include the amortization of external long-term loans of the Federal Government and its agencies, so that from the point of view of financing the program any use of new long-term loans can be regarded as a net addition to resources. The estimati assumes current exp?nditures to remain constant, except for increases in salaries granted in 1956, and minor increases in exppnditures other than salaries resulting from price rises. As current expenditures have increased rapidly in recent years, and the most pressing requirements have thus been taken care of, this assumption is not likely to be upset, especially since the Government intends to resist any further increases. The estimate also implicitly assumes that food subsidies and aid to the agricultural banks will remain at the 1956 level. These are payments over which the Ministry of Finance has but little control as the Government's agricultural and social policies may make large unforeseen expenditures almost inevitable. Such expenditures can, for instance, arise from a shortage of corn to be covered by imports, a surplus of wheat entering Government stocks, or increased assistance to the agricultural banks necessitated by a bad crop or expansion of their operations at the rate to which they have become accustomed. Moreover, the Ministry of Finance has little control ovAr the amounts that have to be spent to cover operational deficits of Government enterprises, especially the National Railroads. In spite of the Government's intention to resist increases in expenditures for food subsidies and for the operations of the agricultural banks and other Government enterprises, it may be that additional e3enditures for these purposes of pesos 300 to 400 million will become unavoidable during 1957. In that case, funds available for public investment financing would be reduced by the same amount, if a deficit is to be avoided. Additional Funds Required Over and above available domestic resources, financing of the 1957/58 investment program will require 1.3 billion pesos in 1957 and 1.7 billion pesos in 1958. Additional resources required will be even higher if current govern- ment expenditures and budget support to agricultural banks will exceed the levels assumed above. Moreover these figures have to be increased substantially  -12 - if the investment program were to include the additional outlays necessary to make investment in the petroleum sector adequate (estimated at 500 million pesos in 1957 and 300 million in 1958). Looking beyond 1958, the problem of financing public investment in excess of domestic resources, at present available, is bound to increase. ,Thile in the short term the most urgent needs in some sectors can be met by cutting investment in others, this solution cannot be relied on over a longer period of time. Ivbreover, public funds available for investment outlays may shrink as current expenditures continue to increase, probably at a rate higher than gross product. From 1959 onwards, additional funds required may therefore reach 2 to 2.5 billion pesos (in 1956 prices), approximately 2% of gross national product. Mexico's possibilities of meeting this financial problem during the two years covered by the investment program, 1957 and 1958, are quite limited. At present there are $69 million (pesos 860 million) unutilized of long-term loans already contracted with the Eximbank for the National Railroads and the Altos Hornos steel plant, and with the IBRD for the Pacific Railroad and the Federal Electricity Commission. These loans, together with an additional loan for the National Railroads expected to be contracted with the Eximbank, r-c;7re- sent the 450 and 470 million pesos expected in the investment prograi to ba covered by ]ong-term external Loans in 1957 and 1958, respectively. It was not within the scope e.f the Mission to study individual projects from tha point of view of possible external financing. However, the Mission has the impression that the practical possibilities of using more long-term external loans during the period immediately ahead are limited because the necessary studies are only in a preliminary stage. At present such studies are ready only for certain power projects. Moreover, in some fields, especially roads and irrigation, expenditures are mainly for domestic goods and services. Possibilities to augment domestic resources during 1957/58 are equally limited. This would require fundamental economic policy decisions which the Government did not take in the earlier years of its term and is un- likely to take during the remaining year and a half. For 1957 and in part for 1958, therefore, the only feasible solution, however undesirable, is to reduce the investment program. A reduction of 400 million pesos, together with the utilization of long-term loans and the scheduled increase in medium-term credits of Pemex, would bring the 1957 investment program approximately into balance. The reduction in the 1958 programcould be lower depending on the extent to which the use of external long-term credits could be increased and domestic resources augmented. On the other hand, if no reductions are made in the present program, it will most likely result in a substantial budget deficit which would upset the prevailing economic stability. Looking farther ahead, other solutions will be practicable, and to some extent, at least, they might be applied during 1958. These solutions will be considered in the remaining part of this chapter.  - 13 - External 1L'-ans Since the end of the war, Mexico has been using substantial amounts of external loans to finance public investment and the operations of the agricultural banks. Before 1953 these loans were mainly long-term loans obtained from the Eximbank and the IBRD, principally for railroad rehabilita- tion and power expansion. Since 1953 large amounts of medium-term loans from foreign suppliers and private banks have been used in addition to the long- term loans. (See Tables 14 and 16). During the five years 1948 to 1952 the annual average utilization of external loans was $36 million, of which i29 million were long-term loans from the 7xtilbank and the IBRD. In the four subsequent years, 1953-1956, the average utilization of external loans increased to $94 million a year, out of which $34 million were long-term loans and $60 million suppliers' and private bank credits. The use of medium-term loans continued to increase throughout this period; in 1956 the total utilization of external loans reached a record figure of $133 mtllion, out of which $104 million were medium-term loans, and $29 million long-t'erm loans. The major part of the suppliers' and private bank credits (about 70% in both 1955 and 1956) has been used by four Government agencies: Pemex, the National Mortgage Bank, and the two agricultural banks (the Banco Agricola and the Banco Ejidal). The loans obtained by the National Mortgage Bank have been turned over to the Government to finance public works, mainly road con- struction and irrigation. The greatly increased use of medium-term credits in recent years has been a consequence of the inadequate increase in the revenue of the Government and its agencies at a time of strict fiscal and monetary policies. It has also been associated with the fact that only relatively small amounts of long-term external credits were contracted during this period. After the devaluation of 1954, the Government banks were no longer allowed to follow the inflationary practice of making use of Bank of Mbxico resources to augment their lending capacity. The Government was not, however, able to make up for this by increased budget appropriations. At the same time, Pemex was not permitted to increase its prices adequately to meet its ever-growing invest- ment needs. As a temporary solution, the banks and Pemex began,with the Govern- ment's consent, to use medium-term credits, usually with maturities of less than three years. In order to control these credits, the Government in 1954 established a Special Commission for External Financing, which has to grant permission to all loans of more than one year's maturity, and through the Nacional Financiera keeps a record of all external debt transactions. At present the Commission is not permitting further increases in the external indebtedness of the Government banks. Payments of amortization and interest on long-term external loans have been relatively low in Mexico. During the years 1950 to 1956 they remained fairly constant at about $40 million a year, of which $30 million was for amortization and $10 million for interest. This amounted to 4.7% of foreign exchange earnings in the years 1950-54; with the sharp increase in exchange earnings of the years 1955 and 1956, the ratio declined to below 4% where it is estimated to remain during the next few years. (See Table 15).  - 14 - With the rise in suppliers' and private bank credits, however, total debt service increased greatly. In 1957 payments of amortization and interest of suppliers' and private bank credits are estimated at $73 million, or 6.1% of foreign exchange earnings. This will bring Mlexico's total debt service in that year to about $116 million, or 10% of foreign exchange earnings. As most of the suppliers' and private bank credits are being renewed or new ones are being contracted when the old ones fall due, no decline in this ratio can be expected for the next few years. If a reduction had to be made, however, the resulting burden would not be of long duration as most of the present medium- term debt is scheduled to be paid off from 1957 to 1959. Mexico is in a strong position to service external debt. The outlook for the country's economic growth is favorable; its variety of exports and high income from tourism gives stability to exchange earnings; its relatively large internal market as well as its industrial experience favors production of import substitutes. Mexico's position can be strengthened further, since over time it could raise savings by appropriate increases in prices of goods and services provided by the Government and its enterprises, and by referms in taxation. Increased savings could support higher level of investment and higher debt service than is possible at present. Mexicots external debt service is at present close to the level which the Special Commission for External Financing has considered as the unper limit, neanely, 10 percent of foreign exchange earnings. In case Mexico chcoses to keep its total external debt service at the present level, and also to maintain its present level of suppliers' and. private bank credits, there would still be a margin for assuming new long-term obligations of approximately $40 million a year for several years ahead. This margin is opened up partly by the decline in amortization of existing long-term debt, and partly by the gradual increase in exchange earnings. In case Mexicm should prefer to use more long-term credits, an additional margin for servicing $20 million per annum (or a total of $60 million) could be created by some reduction in suppliers' and private bank credits. (See Appendix 4). The use of long-term external loans of no more than $40 million would probably be limited to the same fields where such loans have previously been utilized: railroad rehabilitation, power and industry. According to the plans of the Investment Commission, there will be need of external loans for the National Railroads of about $25 million a year and for the Federal Electricity Commission of $10 million a year for the next four years or so. If more external long-term loans are to be utilized, this would have to be in new fields, such as road construction and maintenance, railroad construction and irrigation and flood control. The Mission has the impression that, in these fields, project studies suitable for presentation to long-term lending agencies are only in a preliminary stage. Present procedures in carrying out projects also differ from those usually required by lending agencies. In road building, for instance, detailed studies are not completed for entire projects before work is started and competitive bidding is not employed. Moreover, in road construction, irrigation and flood control projects, foreign costs are only a small part of total costs. The Ministry of Public Works  estimates that depreciation of machinery and use of spare parts -- normally the only external part of road construction costs -- do not exceed 15% of total costs. Only in the Northwest where gasoline, lubricants and asphalt are imported, would foreign costs go as high as to 45% of the total. Augmenting Internal Resourens The problem of finding adequate resources for financing of public investment is primarily one of augmenting Mexico's internal resources. No more than about one-fourth of the 2 to 2.5 billion pesos additional resources re- quired can be covered by external loans if their total amount would fall in the $40-60 million range discussed above. This would leave some 1.6 billion pesos to be financed by augmenting internal resources. These resources are princi- pally the revenues of the Federal Government, its agencies and enterprises. It seems unlikely that internal resources for public investment could be augmented to any large extent by increased sales of bonds by the Government or its banks. Necional Financiera, an important seller of bonds, presently uses most cf the proceeds from the sale of bonds to help finance private industrial investments. The need for this type of financing may be expected to continue, especially since it is likely that the present strict control on private bank credit will have to be maintained. There are two major possibilities of increasing the revenues of the Government, its agencies and enterprises. One is to increase revenue from general taxes such as income, production, and import and sales taxos, through higher rates and better collection. The other is to increase the specific taxes on users of public services, such as gasoline and vehicle taxps, and the prices paid by the users of irrigation and railroad services and by the consumers of power and petroleum. The first of these ways is the one which the lIexican Government has been following. In recent years, some tax rates have been raised, although quite moderately, and determined efforts have been made to improve tax collec- tion. Partly as a result of these measures, Government revenue has been increasing in relation to gross product since 1953. The increase has been only moderate, however, and Federal Government revenue at slightly above 8% of gross product is not substantially higher today than it was in 1949-1950. A slight decline of revenue in relation to gross product is expected by the Ministry of Finance during the next two years because of a reduction in export taxes. (See Table 8). It is evident that if a substantial part of the 1.6 billion pesos is to be obtained from general taxes, drastic increases in rates are required. The income tax presently yields about 3 billion pesos, production, commerce and sales taxes about 2 billion, and import taxes 1 billion. The average increase in rates of all these taxes necessary to obtain an additional 1.6 billion pesos would be at least 25%. If the new funds were to come exclusively from the income tax, or exclusively from indirect taxes, the increase in rates would have to be as high as 50%.  - 16 - In giving the main emphasis to improvemrnts in tax collection, the Government has maintained the position that substantial increases in rates were not advisable until collection was better than it is at the present time. If the Government would find that these reasons continue to be valid for several years, no substantial increase in revenue from general taxes could be expected for a considerable time to come. In any case, it seems unlikely that the full amount of 1.6 billion pesos can be obtained through higher tax receipts, Thus special attention ne-ds to be given to the second alternative of improving the Government's revenue position, namely, an increase in the prices of goods and services provided by the public sector and the special taxes levied on the users of these services. Since both these prices and special taxes are low in Mexico, the Federal Government has to pay substantial amounts from its receipts from general taxes and other sources to the agencies and enterprises providing transportation and irrigation services and producing power. In most cases these expenditures are for investment purposes, although they serve to cover the operational deficits of the railroads as well. Avail- able information does not lend itself to calculate the extent to which the Federal Government, instead of the user, is paying for the cost of public services. These costs would include an allowance for obsolescence of the capital invested as well as expenditures for operation and maintenance and a reasonable return on the investment. The following summary is, therefore, limited to the expenditures being made by the Federal Government in 1957 to the agencies and enterprises providing services of transportation an1J i-rigation and producing power. From these expenditures the revenue from special taxes on the users of these services is deducted. Millions of pesos (figures rounded to nearest 50 million Railroads Federal GovArnment service of railroad debts, payments of operational deficits and of grants-in-aid for rehabilitation 750 Less: 10% tax on gross earnings of railroads 150 600 Roads Federal Government expenditures for construc- tion and maintenance 650 Less: Federal Government revenue from gasoline taxes 250 400 Irripation Federal Government expenditures for construc- tion, operation and maintenance of irrigation works 600 Less: Revenue from export tax on cotton 300 300 Electric Power Federal Grrernment contribution to the Federal Electricity Commission 350 Less: 10% tax on sales of electric power lO0 250 TOTAL 1,550  - 17 - In 1957, therefore, it may be expc.cted that the Federal Government will be paying about 1.5 billion pesos for the benefit of the users of trans- portation and irrigation services and consumers of electric power in excess of the special taxes levied on these same groups. In addition, benefits are being conferred to the consumers of petroleum through the low prices Pemex has to maintain. As a result, Pemex will in 1957 lack about 750 million pesos for investment financing. The Government contributions might not have serious economic conse- quences were the Government able to collect enough revenue from general taxes to meet them. As this has proved to be difficult indeed, the question arises whether the low prices of public goods and services, as well as the low special taxes on thair users, result in any substantial gain for the economy as a whole, or for any particular group of the population. The general view in Mexico has been that these payments promote economic development and create a more equi- table distribution of income. This is very doubtful, however, under the conditions actually prevailing. In the first place, the availability and quality of public services is much more important for economic development than relatively minor differenes in the prices of these services. For the industrial entrepreneur and the agriculturalist, the important thing is to have roads, railroads, power and irrigation available so that he will not have to provide these facilities him- self, a task which is frequently beyond his capacity or which he can only under- take at an expense greater than that of public agencies operating on a large scale. Within reasonable, and usually rather wide limits, it is, on the other hand, of minor importance for the entrepreneur what prices he is paying for the services. In the second place, it is doubtful to what extent low prices of public services compensated by Government payments actually change the distri- bution of income. They would do so, if the Government could finance its payments through taxation of other groups of the population than those benefiting from the low prices. However, when the Government is unable to obtain sufficient tax receipts to meet its expenditures, it is forced into inflationary financing. The result is likely to be that whatever benefits were originally m nferred to the users of public services will be taken back through inflation. The low prices of public services and the low special taxes on their users present, on the other hand, a major problem in the financing of economic development. The contributions to a particular group of users, such as for instance the consumers of electric power, may appear small in relation to total Government revenue and expenditures, and therefore within the financial capacity of the Government. However, taken together, the contributions made to the users of railroads, roads and irrigation, to the consumers of power, and, through low prices, to the consumers of petroleum, add up to very large amounts. It is indeed difficult to see how Mexico could find the additional 1.6 billion pesos required for investment financing, except through increases in the prices of public services and in the special taxps on their users. Such increases would not have to be so high as to eliminate all Federal Government contributions to transportation, irrigation and power. A reduction in these contributions by one half together with an adequate increase in petroleum prices would probably be sufficient.  An increase in transportation and power rates, in prices of petroleum products and in taxes on gasoline vould, of course, result in some increase in the general level of prices. The indications are that even if all necessary adjustments vere made at the same time this increase vould be only moderate, maybe 3 to 4% at the maximum, and that by itself it would not upset the present equilibrium of Mexican and U.S. prices at the existing rate of exchange. However, through the reaction of entre- preneurs and trade unions, this increase in prices could possibly set off a secondary increase in prices and wages, which could upset the present economic stability. These repercussions may be mitigated if the new government policy of charging adequate prices be applied gradually. In any case the success of an action to adjust prices of public services would to a large extent depend on the Government's ability to resist secondary price increases. This risk should, however, be measured against the certainty that if the adjustments are not made, public investment will either have to remain below the requirements of economic growth, or it will have to be financed through inflation, leading to balance of payments upsets.  MAP I ._Meocoi p '*Kr 11,, . (UNITED STATES X -' X''*. I X k