Mexico - Industrial Sector Policy Loan

D_nt of The World Bank FOR OFFICUL USE ONLY Rbpwb 12239 PROJECT COMPLETION REPORT IDUSTRIAL SECTOR POLICY LOAN (LOAN 3087-ME) AUGUST 10, 1993 MICROGRAPHICS Report No: 12239 Type: PCR Country Operations I and Environment Division Country Department II Latin America and the Caribbean Regional Office This document has a restricted distibution and may be used by recpients only in de performane of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENC;Y INT - PESO (MEXS) Mexico has a managed exchange rate with a pre-announced devaluation of a maximum of 40 centavos daily. On Ocober 1, 1992, the exchange rate was US$1.00 = MEX$3,103.6. ESCAL YAR January 1 - December 31 EDP Export Development Policy ESW Economic and Sector Work EQ Export Quota GATT General Agreement for Trade and Tariffs GD)P Gross Domestic Product GOM Govemment of Mexico iMP International Monetary Fund ISPL Industial Sector Policy Loan NAFIN Nacional Fnanciea, S .N.C. NAFTA North American Free Trade Agreement PACTO Economic Solidarity Pact PECE Stabilization and Growth Pact QR Quantitative Restriction SDR Special Drawing Right SECOFI Ministry of Trade and Industia Development TPL Trade Policy Loan  FOR OFFICLAL USE ONLY THE WORLD BANK Wahington, D.C. 2049 U.SA Office of DlrOetor Gneral Operation. Evaluation August 10, 1993 MEMORANDUM TO THE EXECUTIVE DIRECIORS AND THE PRES1DENT SUBJECT: Project Completion Report on Mexico - Industrial Sector Policy Loan (Loan 3a87ME) Attached is the Project Completion Report on Mexico - Industrial Sector Policy Loan (Loan 3087-ME) prepared by the Latin America and the Caribbean Regional Office, with Part H of the report contributed by the Borrower. ISPL formed part of a comprehensive and consistent program of Bank support to the Mexican Government's objectives of stabilizing the economy and resuming growth. This suceof adjustment project aimed at modernizing and deregulating the industrial sector. Many of the policy measures proposed under the project were implemented in advance of agreed schedules and exceeded targets. Many second tranche release conditions were left open and made contingent on the outcome of studies. This allowed for time to define and build political consensus on the scope and timing of the actions to be taken. The sharp rise in private sector investment and the resumption of growth during the project period suggest that the goal of establishing a framework conducive to private sector investment was achieved. A critical factor in the successful design and implementation of the project was the close collaboration and fundamental agreement on the major direction of reform between the Bank and successive Governments. Overall, the project is rated as satisfactory and its sustainability as likely. The institutional development achievements are rated substantial The PCR is generally of good quality. However, it does not adequately cover the impact of some of the specific measures supported under the project, such as the impact on technological change. An audit is planned for this operation. Robert Picciotto by H. Eberhard Kdpp Attachment Ihis document has a restricted distribution and may be used by recipients only in the performance of their -:: dutiea. Us contents may not otherwse be disclosed without Wodd Bank authorization.  FOR OMICIL USE ONLY aLDAN NO. 3087-MM PREFACE ......... .......................................... i EVALUATIONSUMMAWRY ..... ....... ii PARTI PROJECTREVJEWFROM THEBAINK'SPERSPECTVB ........................ I Ptoject Idenit ................................ I Backstound ............................................ 1 ProjtObjectives andDeacziption ......................................... 3 PtojectDeopad Organization . .................... ................... 4 P je n i ................................................ 7 Result ................................................... 7 hIvacueco n nic Developnet ...................................... I 8 Secr Pefwmance ............................................. . 9 Ev: of Refrm and RemningAgend .................................. 10 Ad.cohimsofOvweaUObjeWives .................................... 10 otivasecoK ............................................. 10 uSotinahtyofdeRefnamPscesw ........................................ 12 Porfoznano ofthe3Bnnk ............................................... 12 PrfomnzlmnoftheBotrrowr ............................................ 13 Lemons Leaned ................................................ .. 13 PART U PROJECT REVIEW FROM THE BORROWMERSPERS PECIE .................... 16 PART m STATISTCAL INFORMATION ........... . ...... ... . 24 TableIRetdBankLo .................................................. 24 Table2PotrjTmnabl ............ . .... 24 Tabb 3 LamE*baw" .. .5.... a TaWb4Pmajec aCos_and Fins cing. . ............... ..... 25 Table5UsoffBankRauro.... .. ............... ........ 2S ANNEBS Annex I A. LetterofIndustuial Poicy ...7....................................... 2 B. Poblicya Mtx .................................................. 31 Annex h Pj Action Pogm ................................... 44 Annex MIMexico:Economiclndicators .......................................... 49 Annex IV SftuctureofImnportTari ........................................... 52 Annex V Flow of Direc Foreign nwestment .......... . ........................... S3 Anmex VI StuctUr ofManuActuiviyA. .i.i . ................ 54 AnexVlStuctute ofMwidcn Expots .............................................. S5 ATrACHMENT1Commentsonde PCRbytdeExport-hWport BanrofJ ...n...... 56 AT2ACHMENT2 uontan th PCR by DdP .....t.F.. ......................... S9 This document has a restricted distribution and may be used by recipients only in the perfoma.nce of their offlcial duties. Its contents may not otherwise be disclod without World Bank authorization.  -i- INDUISTRLAL SEC POLCYl= LOAN NO. 3087-ME P2Qfl COMPlLONREPORT This is the Project Completion Report (PCR) for fte Industial Sector Policy Loan to Mexico (Loan 3087-ME) in an amount equivalent to US$500 million approved on June 13, 1989. It was closed on June 30, 1991, one year behind schedule. The last disbursenueat was made on June 26, 1991. An undisbursed balance of US$2,490,429.05 was canceled effective November 6, 1991. The PCR was prepared by the Mexico Country Opeaons Division (LA2Cl) in the Ian Amerca and the Caribbean Regional Office (Prfc, Evaluation Summary, Parts I and I), and by the Guarantor's Ministies of Trade and Industrial Development and of Labor and submitted by the Borower (Part H). The cofinanciers, the Export-Import Bank of Japan and the IMP, provided comments (Attachments 1 and 2). Preparation of this PCR was started in June 1992 and is based, inter-aia, on the Report and Recommendations of the President, the Loan and Guarantee Agreements; supervision reports; corespondence between the Bank and the Borrower; internal Bank memoranda and industrial sector work performed by LA2C1.  - ii - M.Q UIBIL WERCPELCY LAN LAN NO. 387-ME PROTI COPlQ REPI EVALUATO SUMMARY 1. Qives.ix The industral Sector Policy Lom (ISPL) was prepared at a crtical time for Mexico. in 1988, faced with a deteriorating economy, continued weakness in oil prices and the rise in inional interest rates, the incoming Mexican administration was ready to take extraordinary measures, which meant extension of its stabilization program and undertaing of further comprehensive and deep policy reforms to restructure the economy. Upon the Government of Mexico's request, the Bank suggested a weighty assistance package to support the govemment's policy initiatives and to achieve a rapid transfer of resources. Major areas of reform were identified and a comprehensive set of three sector adjustment loans was idendfied and prepared in a short time. (paras. 1-8) 2. The ISPL was part of three sector adjustment loans of US$500 million each, presented to the Board simultaneously in June 1989, to support the Government of Mexico's objectives of stabilizing the economy and resuming growth. The other two loans supported public enteir and financial sector reforms. The three loans together provided a comprehensive reform package combining macroeconomic policies with micro adjustments in key areas, and followed up on earlier sector adjustnent loans supporting trade reforms and industrial sector zestructuring. The focus of the ISPL was to support a program of reforms to modernize the industrial sector by removing market distortions and creating an appropriate administrative and regulatory environment to enable enterprises to be internationally competitive. The objective of the program was to stimulate private sector investment and growth. (pa. 14) 3. Implementation Experience. Project implementation went well. The ISPL was signed two days after Board approval and became effective the following month. The second tranche was released in February 1990, i.e., two and a half months behind schedule. The target date of end November 1989 turned out to be too ambitious in light of the political sensitivity of some of the changes and the time required to develop action plans. The loan closed one year behind schedule, on June 30, 1991, in response to the request by Government for more time to disburse the US$3.0 technical assistance component. After closing of the loan, the remaining balance of US$2.5 million was canceled from the technical assistance category. (pam. 21)  4. Many of the measures required prior to second tanche releas, i.e., preparadon of action progrms, or implementation of exsting ones, concerning technology, dirt foreign investment, trade, idustrial secw progams and ae simplification, were taken in advance of the agreed schedue. Moreover, the actions taken often exceeded the established target. In serl areas, second tranche release was conditidonal on t'he prept of es for elaboration of action plans. Only one study was finalized in time for review of tranche r.lease, but preliminay findings of the other studies were used by the Government to provide action plans satisfactory to the Bank. (para. 25) s. Reus, Itis difficult to separate the effects of the meaur supported by the ISPL from the effects of other policy changes implemented at the same time. Nonetheless the evidence suggests that the measures supported by the loan contrbuted to a positive change in the business climate, to increased efficiency and to the removal of obstacles to competitive market forces. There was a remarkable improvement in economic stability (inflation dropped from tree digit levels in 1987 to under 20% by 1991). The sbarp increase in private investment (more than 12% per year over 1989-91) and the resumption of growth (GDP grew by 3.7% over 1989-91) suggest that the goal of establishing a framework conducive to private sector investment was achieved. (paras. 27-32, Annexes m-V) 6. Since 1987 manufacturing output has shown steady gowth after the yearly fluctations which marked the 1980-86 period. The major fctor underlying the recorded growth was the expandon of exports of manufictures, which played an important role in offsetting the decline in earnings from petroleum exports. (Annex VII) Data on actual expenditures for indusial investment suggest major efforts at modernizaton of the sector to increase efficiency and competitiveness but only marginaly to increase capacity. The data on foreign investment suggest that numerous (arge) projects, involving substantial expansion of output capacity, are now under constructon or in the pipeline. (pans. 33-36) 7. Sustaimkin Ihe main risk that had been identified was possible political resistance to carrying out the reforms at the speed envisaged. However, a momentum was built up early in the current administration propeling the Govemment to move quickly and decisively in announcing policy and implementig reforms. Moreover, executive decisions have been followed up with legal amendments and new legisation to reinforce the post- reform policy framework. The GOM has carried the progrm further forward and has consolidated it with completion of the negotiations for NAPTA. The various steps which have been taken to tie Mexico into the world trading system provide reassurance that reversal is highly unliklly as it would be very expensive. (pam. 45) 8. Lessons 1 The widespread coincidence of views of the GOM and the Bank on economic policy issues and the extraordinarily high quality of the Bank's countewarts created "ideal" conditions for the elaboraton of the Bank's 1989 assistance package. It might be dangerous to genealize that experience for applications to ote counties, but an important lesson is to realize the high returns that can be gained from the time and resources spent to build up a meaningful and extensive dialogue with key decision-  - iv - makers an the economic policy issues and to maintain an open and frequent channel of communications. Another key aspect of the relationhip was tle close contact that was estblished between the teams of economists on the Mexican and he Bank side with some of the Mexican economists providing important inputs in the Bank analysis and sector work, and the Bank contributing to the ficing of the Mexican studies under technical assistance components of existing loans. 9. The fruitful dialogue on economic policy which had been developed between the Bank and the Guarantor had already resulted in several large adjustment opetions referred to in paragraph 2. The biannual Country Strategy Implemcntation Review (CSIR) process, initited in 1985, provided an important vehicle for continuing discussion on broadening of the ESW program, preparation of studi