Mexico - Agricultural Sector Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 12834 PROJECT COMPLETION REPORT MEXICO AGRICULTURAL SECTOR ADJUSTMENT LOAN (LOAN 2918-ME) MARCH 9, 1994 Agriculture Operations Division Country Department II Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used bv recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS Currency Unit = Mexican Peso (Mex$) US$1 = Mex$3,000 Mex$1 million = US$333 (May 1993) FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 kilometer (Cm) = 0.62 mile (mi) 1 hectare (ha) = 10,000 m2 = 2.47 acres 1 square kilometer (1m2) = 0.38 square miles (mi2) = 100 ha 1 metric ton (m ton) = 2,205 pounds  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Oiflce of Director-General Operations Evaluation March 9, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT Subject: Project Completion Report on Mexico - Aricultural Sector Adjustment Loan (Loan 2918-ME) Attached is the Project Completion Report on Mexico - Agricultural Sector Adjustment Loan (Loan 2918-ME) prepared by the Latin America and the Canbbean Regional Office. The Borrower prepared Part II. The Report presents a satisfactory assessment of project results. The loan was designed to help shape and accelerate the process of structural adjustment in Mexican agriculture. It aimed to liberalize prices and trade for most crops; to abolish restrictions on exports of beef, cattle and other products; to divest public production and marketing enterprises; and to increase the efficiency of public investment in agriculture. It called for a substantial reduction in general food subsidies but substituted subsidies targeted to the poor in a new food-security program. The project that resulted was somewhat complex. But the results were favorable. Most of the programmed reforms were implemented and in some cases the achievement exceeded the program. This was not easy since, as the PCR states, "Mexico had perhaps the most thoroughly state-controlled agricultural trade and marketing policy in Latin America, with major interventions in production, credit, technology, inputs, storage and processing." The key element in this success story was the Borrower's decided ownership of the program growing out of the strong commitment to structural adjustment per se. This was enhanced by the food-security initiative that reduced political opposition to the reforms. Mexican ownership of the program was also deepened by the long, in-depth, and frank discussion between Bank staff and the authorities during both preparation and implementation. In the PCR's phrase, this led to an "intellectual consensus" concerning the wisdom of moving from administrative to market allocation of resources and production. The outcome of the project is rated satisfactory; sustainability is likely; institutional development (establishing the food-security program; reform of a large number of public enterprises) was substantial. An audit is planned. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official | duties. Its contents may not otherwise be discloeed without World Bank authorization. I   FOR OFFICIAL USE ONLY MCO AGRICULTURAL SECTOR LOAN (LOAN 2918-MDE) PROJECr COMPLETION REPORT TABLE OF CONTENTS Page PREFACE ............................................................... i EVALUATION SUNMMLARY ................................................. iii PART Ik Project Review from the Bank's Perspective ................................ 1 A Project Identity .......................................................... 1 B. Background ............................................................ 1 The Government's Economic Stabilization Programs ............................. 2 World Bank and IMF's Roles in Mexico's Adjustment Process ...................... 2 The Agricultural Sector .............. ..................................... 3 C Loan Objectives and Description ............................................ 4 Objectives and Design of the Project ......................................... 5 Loan Implementation ............... ..................................... 6 D. Loan Conditionality and Compliance ......................................... 6 Removal of Global Food Subsidies and Targeting of Remaining Food Subsidies .... .... 6 Reducing Government Intervention in Establishing Producer and Consumer Prices ...... 7 (a) Guarantee Prices Maintained at their Average Real Level of 1987 ..... .......... 8 (b) Guarantee Prices Maintained within a Band of 90-125 Percent of International Prices 8 (c) Study of Guarantee Prices ............................................. 9 Reducing the Role of Parastatals ............................ 9 Agricultural Trade Liberalization ........................................... 10 Reduction of QRs on Imports of Agricultural and Agroindustrial Products by 5 Percent of Total National Production from the Level of such Production Existing on November 30, 1986 ...................................................... 11 Removal of Export Controls on High Quality Rice and Cuts of Beef and No Imposition of Export Controls or QRs on Fruits and Vegetables, except for Hygienic Reasons .... ... 11 Variable Import Tariff Study .............................................. 11 Reducing Subsidies on Agricultural Inputs .................................... 11 Increased Investment Budget for Agriculture .................................. 12 Disbursement Procedures ................................................ 12 E. Overall Evaluation of the Loan ............................................ 13 Project Sustainability ............... ..................................... 14 Bank Performance . ...................................................... 14 Borrower's Performance ................................................. 15 Conclusions and Lessons Learned .......................................... 15 PART II: Project Review from the Borrower's Perspective ........................... 19 A Background ........................................................... 19 B. Structural Change Stage ................................................. 20 C Commercial LIberalization ................................................ 20 PART m: Statistical Information ............................................... 23 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   MEXICO AGRICULTURAL SECTOR ADJUSTMENT LOAN (LOAN 2918-ME) PROJECT COMPLETION REPORT PREFACE This is the Project Completion Report (PCR) for the Agricultural Sector Adjustment Loan in Mexico (AGSAL--Loan 2918-ME) in the amount of US$300 million. This loan was approved on February 22, 1988, and declared effective on March 16, 1988. The loan was closed on November 15, 1990, nearly 17 months behind what was initially intended. It was fully disbursed with the last disbursement on April 3, 1990. The PCR was prepared jointly by the Food and Agriculture Organization Cooperative Program (FAO/CP) for the Agriculture Operations Division (LA2AG) of the Latin America and the Caribbean Regional Office (Preface, Evaluation Summary, Parts I and III), and the Borrower (Part II, still pending). Preparation of this PCR is based on the findings of a FAO/CP mission to Mexico in June 1991, interviews of Bank staff and Government officials involved in the preparation, appraisal and implementation of the project, and the review, inter alia, of the President's Report; the Loan, Guarantee, and Implementation Agreements; supervision reports; correspondence between the Bank and the Borrower; and internal Bank memoranda.   - iii - MEXICO AGRICULTURAL SECTOR ADJUSTMENT LOAN (LOAN 2918-ME) EVALUATION SUMMARY Loan Objectives 1. The Agricultural Sector Adjustment Loan (AGSAL I) was the first sector adjustment operation for Mexican agriculture. Approved on February 22, 1988, the loan was intended to strengthen policy reforms and to sustain an agricultural policy dialogue with the Government. Specific objectives were to: (a) remove global food subsidies and target remaining food subsidies to the poor; (b) reduce government intervention in agricultural markets, including movement from guaranteed prices for wheat, barley, rice, sorghum, soybean, sesame, sunflower, safflower, cottonseed and copra towards market-determined pricing; (c) abolish export controls and quantitative restrictions (QRs) on key products; (d) reduce the role of agricultural parastatals; (e) liberalize agricultural trade; (f) cut subsidies to inputs; (g) better the efficiency of public investment in agriculture and raise it in real terms; and (h) decentralize and cut staff of the agricultural ministry. Implementation 2. Implementation of the US$300 million loan was satisfactory. The loan was approved on February 22, 1988 and declared effective on March 16, 1988. The first tranche of US$100 million was to be disbursed in two parts: up to US$25 million at effectiveness and US$75 million after agreeing on terms of reference for key studies which were to establish the analytic basis for further trade and price reforms. Release of the US$75 million was in fact delayed until January 1989 because the Bank and the Government did not agree on the terms of reference for studies of sugar, nutrition and food consumption, recovery of irrigation operating and maintenance costs, variable tariffs, and guarantee prices. A lengthy internal Government discussion of the terms of reference for the variable tariff and price stabilization studies reflected the politically sensitive nature of the subjects. Of the US$200 million second tranche, US$175 million was re-allocated as part of the Bank's support to Mexico's debt reduction agreement with the commercial banks. Mexico complied with the second tranche release conditions, but the second tranche release was delayed by implementation problems with some of the policy reforms and the funds for the US$25 million policy-based lending component were only released on March 15, 1990. Both tranches were fully disbursed. The loan was closed on November 15, 1990, seventeen months behind schedule. Results 3. The main historical problem of Mexican agriculture was the detrimental effect of policy interventions on growth and income distribution. Price, trade, and regulatory policies instruments hampered the efficient working of product and input markets and distorted the size and nature of public investment. Reforms beginning in the mid-1980s, and later supported by AGSAL I (and AGSAL I1), appropriately addressed these problems and bettered the policy framework for Mexican agriculture. The effects of reforms on growth cannot yet be established quantitatively, however, because: (i) a short time has passed since the beginning of the reforms; (ii) restrictive fiscal and monetary policies since 1987 have favored stabilization over growth; (iii) poor weather caused a decline in real agricultural Gross Domestic  - iv - Product (GDP) in 1988 and 1989; and (iv) the sector's improved 1990 growth (approximately 6.1 percent) resulted from several factors, including better weather, and cannot be attributed to the reforms alone, as suggested by the fall to 0.5 percent growth in 1991. The reforms had no noticeable effect on the real value of agricultural exports, which did not change between 1988 and 1991. 4. AGSAL I did produce significant benefits. It achieved its guiding objective of improving efficiency by replacing statist mechanisms with market ones. It assisted reform in prices, trade, public investment, poverty alleviation, fiscal transfers, and the role of parastatals. The Government has realized fiscal savings and has a more efficient public investment program in agriculture. The economy bears fewer costs of inviable parastatals. Though costs of reforms were borne mostly by consumers, the impact on the poor was softened through the targeted food subsidies. The agricultural economy moved close to a market-pricing system. Arbitrary and costly trade restrictions have been abandoned. While the ultimate effects of the reforms will depend on the Government's long-term commitment, a better environment for private-sector led growth and for appropriate and cost-effective public interventions now exists. Project Sustainability 5. The President's Report identified two major risks to the sustainability of reform: political resistance and macroeconomic policy. The first referred to opposition within and outside Government, combined with the possibility that a new administration to take office might reverse some of the reforms. The President's Report noted that this risk was mitigated by the steps taken before the loan and the Government's strong commitment to liberalization and to sound macroeconomic management. Opposition to reform within Government did delay meeting some of the conditions but on the whole the will to reform, particularly of the Salinas Administration (which took office in December 1988), prevailed. AGSAL II, approved in June 1991, has further strengthened reforms begun under AGSAL I and the risk of a political reversal of reform is now almost nonexistent. 6. The second risk was a return to expansionist fiscal and monetary policies. It was agreed that such expansion might then have caused inflation and an appreciation of the real exchange rate, thereby weakening the impact of the reforms and jeopardizing the prosperity of agriculture. According to the President's Report this risk was to be mitigated by the Government's efforts to control its budget deficit and thereby to master inflation. In the budget area Government performance has been exemplary and, after the implementation of a stabilization program in 1987, inflation has been largely brought under control. The 1989 debt reduction and the subsequent flows of external assistance, as well as private foreign capital, have assured adequate financing for the macroeconomic program. The exchange rate risk has, however, been harmful as the real exchange rate has appreciated since 1987. This appreciation has delayed a supply response to the specific price and trade policies promoted under the loan. Findings and Lessons Learned 7. The lessons from this operation include broader issues and the specific objectives of the operation. The broader issues are: a. Linkage between stabilization and liberalization. Some of the conditionality of AGSAL I was superseded by price stabilization considerations during implementation. This was true of the conditions to maintain real producer prices at their 1988 level and to increase public investment in agriculture. Attaining the price liberalization and public expenditure objectives of AGSAL I would have benefitted from a closer coordination with the Government's price stabilization program;  - v - b. Sector Strategy. The period of the reform process might have been shortened if the Bank had better elaborated and explained up-front a long-term strategy for Mexican agriculture, especially regarding assistance to small farmers and marginal areas during structural adjustment. Poverty alleviation measures, notably steps to improve nutrition among the rural poor, were included in AGSAL I, but other actions to distribute benefits of reforms were not elucidated until after the loan had been signed."' Dialogue between the Bank and borrowers about structural adjustment operations should not be limited to policy reforms, but should be expanded to explain complementary actions that would ensure related sectors will benefit from the new incentives; and c. Poverty Alleviation. AGSAL I not only helped reduce the burden of adjustment on the poor, thus making the package politically more acceptable, but also set the basis for the Government's National Food Security Program for 1990-1994. Three appropriate features of the design were the restriction of additional general food subsidies to an existing institution (the National Basic Food Company--CONASUPO), so as to be able to monitor their cost, and the linking of savings on general subsidies to the additional transfers to the poor and the targeting of food subsidies to the poor. 8. More specific lessons of the operation are: a. Design of the Loan. A successful feature of the operation was its largely comprehensive design. Major gaps in the operation's coverage were agricultural finance and maize and beans. Agricultural credit was to be dealt with in a separate operation because of its size and complexity. Maize and beans were considered to be too sensitive for reform at the time of the operation, and the Government was not convinced of the benefits of reforms affecting those crops. The design ensured that most related issues could be discussed within a unified policy framework, with the exceptions noted here and in para. 7b; b. Timing of the Loan. The lengthy discussion within the Government about reform consolidated the reform strategy but may have incurred costs by missing the chance to change policy when the agricultural sector was stronger. This was the case during the 1986-87 real depreciation of the peso when the sector's terms of trade were much better than in 1988. The Government could not have changed its policies at the earlier moment, however, because it was not unanimous about the need for, and scope of, reform. Hence, a positive feature of the loan was the linking of the tranche conditions to specific reforms and studies needed to prepare other actions, despite the possible costs of delay; c. Linkage to other Bank operations. Close linkages to other Bank operations were a successful feature of the operation. They were established in close connection with other sector adjustment loans, such as the two Trade Policy Loans of 1987 and 1988 (Loans 2745-ME and 2882-ME) and the Fertilizer Sector Adjustment Loan (Loan 2919-ME); d. Targeting food subsidies. Close monitoring is necessary to determine the income distribution and public finance effects of targeted food subsidies. The condition that new subsidies could only be given by CONASUPO was an effective one as it made the fiscal cost of subsidies easier to monitor and, hence, more transparent; " These formed part of subsequent investment operations such as PROCATI (Project for Organization, Training, Technical Assistance and Research-Loan 2859-ME).  - vi - e. Reducing government intervention in markets. The operation succeeded in liberalizing prices of 10 major crops though there was later backsliding in wheat and barley. A related lesson was the importance of developing an intellectual consensus within the government about the shift from controlled pricing to market pricing. While it is too early to measure economic benefits from the relative price changes caused by this policy shift, the principles of the reform are now solidly established because the Mexican Governrnent is convinced that they are correct--not because the loan imposed conditions; f. Abolishing parastatals. The most immediately successful action under the project was the abolition or curtailment of parastatals in agricultural production and marketing. The lessons were: (i) public enterprise reforms have to be supported by an intellectual consensus within the Government, just as with market liberalization; and (ii) generating that consensus was greatly facilitated by the immediate benefits of abolishing parastatals, in terms of the fiscal deficit. Any efficiency gains of substituting private for public enterprises are likely to require a longer time period to become evident; g. Cutting input subsidies. The one action in this area was an action plan to raise charges for irrigation water which is now being implemented under the Irrigation and Drainage Sector Project (Loan 3419-ME) of December 1991.' The lesson is that it is best to include such highly technical conditions in investment loans managed by qualified technical agencies, not to the sectoral operation; and h. Making public investment more efricient. The agricultural public investment objective was not consistently implemented because it conflicted with the government's macroeconomic objective of controlling public sector expenditures. A lesson from that experience is the need for a comprehensive overview of all public expenditures in agriculture, not just those made by the Ministry of Agriculture and its dependencies, because of the trade-offs which occur between investment expenditures and spending to support consumption. A further lesson, which has also been noted in the Program for Integral Development of the Humid Tropics (PRODERITH II--Loan 2658-ME) and the Agriculture Training, Extension and Research Program (PROCATI--Loan 2859-ME), is that unusually close supervision of budget conditions is required if they are to be consistently implemented. a1 Changes in fertilizer subsidies were supported under the complementary Fertilizer Sector Adjustment Loan (Loan 2919-ME). By mid-1992, Mexico had eliminated all subsidies to nitrogen and phosphorus fertilizers.  MEXICO AGRICULTURAL SECTOR ADJUSTMENT LOAN (2918-ME) PROJECT COMPLETION REPORT PART I: Project Review from the Bank's Perspective A. Project Identity Project Name: Agricultural Sector Adjustment Loan (AGSAL) Loan No.: 2918-ME RVP Unit: Latin America and the Caribbean Country: Mexico Sector: Agriculture B. Background 1. Mexico enjoyed three decades of high and stable growth from the 1940s through the 1960s (with GDP growth averaging 6.2 percent per year), and growth continued at a similarly high rate (6.2 percent again, in fact) in the 1970s. An import substitution-based industrialization strategy was followed during this period, and central administrative controls were increasingly used to allocate the resources available to the economy. The apparently high rates of growth masked, however, a growing degree of inefficiency in the economy, with total factor productivity growth, for example, declining from about 4.5 percent per annum in the 1940s, to just a little over 1.0 percent per annum in the 1950s and 1960s, and to only zero growth in total factor productivity in the 1970s. By 1970 Mexico had exhausted the easier possibilities for import-substitution, and the Government of Mexico (GOM) was concerned that growth would slow. GOM attempted to stimulate the economy by expanding public sector expenditures and by encouraging even further import-substitution. However, public revenues did not match expenditure. The inflation tax and external debt became increasingly important sources of public revenue. The strategy of domestic stimulus failed and in 1976 Mexico experienced a serious financial and economic crisis. 2. Increased revenues from major oil discoveries in 1977 led to an apparent quick economic recovery. Those revenues also allowed Mexico's foreign borrowing to expand, thus lessening the urgency of major economic adjustments. Public external debt grew from US$40 billion in 1979 to US$78 billion in 1981. The ensuing prosperity lasted until 1982, when falling oil prices, rising world interest rates, and massive capital flight led external creditors to refuse to provide further finance to cover Mexico's deficits or to roll over its short-term debt. 3. An International Monetary Fund (lMF)-supported stabilizationprogram, launched in 1983, stopped the deteriorating fiscal and payments trends briefly. By 1985, however, inflation began to recur. The Government then adopted a deeper stabilization program designed to eliminate structural rigidities in the economy. The program comprised a move towards integration with the world economy and a disengagement of the state from the economy. Major trade reforms--notably joining the General Agreement on Tariffs and Trade (GATT) in 1986--were undertaken to open the economy to international competition and to encourage efficiency in export and import-substitution activities.  4. Fiscal discipline was strict in the face of adverse terms of trade changes3' and difficulties in accessing the international capital markets. Growth halted and per capita income declined at an annual rate of 2.4 percent between 1982 and 1987. Inflation accelerated to 99 percent in 1982 and a peak of 159 percent in 1987. The Government's Economic Stabilization Programs 5. In December 1987, the Government reached an Economic Solidarity Pact (PACTO) with labor and business to cut inflation which had then run into triple digits.4 The PACTO included tightening of fiscal and monetary policy and renewed efforts to liberalize trade, de-regulate credit and divest public enterprises. These measures were supplemented by a temporary freeze of minimum wages and of public sector service prices and, initially, by fixing the nominal exchange rate against the US dollar. 6. Performance under the PACTO has often exceeded expectations, even given the further decline in oil prices and the high real interest rates on foreign debt at the end of 1988. The fiscal deficit was brought in line with the PACTO's low inflation targets and the PACTO was extended at three months intervals through 1988. 7. In December 1988, the PACTO was renewed and refocussed to improve the budget situation and to consolidate price stability. Under this renewed PACTO--now called Economic Stabilization and Growth Pact (PECE) prices have been in general decontrolled, while the levels of public sector prices and the minimum wage have been adjusted. The currency was to be depreciated by one peso per day, later lowered to Mex$0.8, then to Mex$0.4, and then to Mex$0.2. The PECE has been extended several times and is still in force.5' 8. The PACTO/PECE measures have helped reduced inflation from 159 percent in 1987 to 52 percent in 1988 and to 20 percent in 1989. Although inflation rose to 25 percent in 1990, it later fell to 19 percent in 1991 and it seems that serious inflationary pressures are now under control. 9. Throughout this macroeconomic turmoil, Mexico continued reforming its trade policies and became one of the more open economies in the world. Trade liberalization, mostly between 1985 and 1988, lowered the coverage by import quotas of domestic (non-oil) tradeable production from 100 percent in 1984 to less than 15 percent. Maximum import tariffs were cut from 100 percent to 20 percent with support from Bank Trade Policy Loans (see para. 11). Non-oil merchandise exports, which were less than one third of total exports in 1984, have doubled their share. World Bank and IMF's Roles in Mexico's Adjustment Process 10. The role of the Bank changed once it became evident that Mexico's economic crisis of the early 1980s was not transitory and the Government began to address the country's structural problems. In 1984, the Bank proposed to the Mexican Government a change in its lending strategy which, before the 1985 crisis, had comprised only one trade-related loan.6' As Mexico negotiated a loan 5' Mexico's terms of trade fell by more than 35% between 1982 and 1988, implying a cumulative loss of US$40 billion. 4' Mexico's reforms included an international debt management strategy, which is described in the Project Completion Report of the Public Sector Enterprise Reform Project (Loan 3086-ME). 5I In the most recent renewal, in mid-October, 1992, there was a move to a more flexible exchange rate system, with an explicit band where the ceiling is being raised by Mex$0.4 per day. 4' The Export Development Loan (EDPI, Loan 2331-ME) was approved in 1983 for US$350 million.  -3- package with its commercial bank creditors in 1985, the Bank began to play a central role in the policy dialogue, since the release of much of the commercial bank money was linked to various policy reforms. II. The Mexican Govermment, while fully committed to structural reforms, did not want a Structural Adjustment Loan (SAL) for political reasons. The Bank consequently agreed to address the long-term structural issues through a series of sector adjustment loans, which, taken together, covered thoroughly the major elements of a SAL program. The two Export Development Loans (FY83 and FY87 for US$350 million and US$250 million, respectively) and the two Trade Policy Loans (FY87 and FY88 for US$500 million each) were the first such operations and were followed by adjustment loans in agriculture (FY88; US$300 million), steel (FY88; US$400 million), fertilizer (FY88; US$265 million), roads and telecommunications (FY90; US$380 million), the Financial Sector Adjustment Loan (FY89; US$500 million), the Industrial Sector Policy Loan (FY 89; US$500 million), the Public Enterprise Reform Loan (FY89; US$500 million), and the Interest Support Loan (FY90; US$1.26 billion). These operations formed a policy package to build the framework for the increase in private investment necessary to spur growth. An AGSAL II was approved in 1991 for US$400 million (Loan 3357-ME) to continue the actions started under AGSAL I. 12. With respect to the IMF, Mexico has, since 1982, benefitted from an extended arrangement for SDR 3.4 billion, a special emergency drawing for SDR 291 million after the 1985 earthquake, a stand-by for SDR 1.4 billion in 1986 and, in 1989, a drawing of SDR 453 million under the compensatory facility, and another extended arrangement of SDR 2.8 billion through 1992. Most of the Bank's sectoral adjustment lending was carried out concurrently with IMF programs. The Agricultural Sector 13. Mexican agriculture expanded at over 4 percent annually after World War II until the mid-1960s, in excess of the population growth rate of about 3 percent. Output growth resulted largely from the expansion of cultivated area: irrigated area increased by 4.5 percent annually from 1947 to 1965 and total harvested area grew at more than 6.3 percent. Beginning in the mid-1960s agricultural GDP growth fell to around 3.0 percent between 1965 and 1980 and to less than 1.0 percent during 1980s. The slippage in agriculture's growth resulted as limits were reached on suitable land for expansion and from the cumulative effects of the inefficient agricultural policies which had been in place for three decades. 14. The central theme of agricultural policy had long been to resolve the conflicting objectives of low prices for consumers and high prices for producers. On the consumer side, the government provided untargeted food subsidies, which were about US$1 billion per annum at their 1980 peak. On the producer side, Mexico had perhaps the most thoroughly state-controlled agricultural trade and marketing policy in Latin America, with major interventions in production, credit, technology, inputs, storage, and processing. 15. More specifically, the chief agricultural policies were: a. The state guaranteed prices of 12 major crops (maize, beans, wheat, barley, rice, sorghum, soybeans, safflower, cottonseed, copra, sunflower and sesame). CONASUPO implemented the guarantee prices by buying from 15 percent to 50 percent of the output of those crops. Guarantee prices were uniform throughout Mexico, thereby penalizing production close to consumption centers and subsidizing production far away. Guarantee prices were adjusted infrequently during the year, distorting production decisions, making private storage unprofitable, and taxing producers heavily at times of high inflation;  - 4 - b. Prices for products without guarantees were also subject to Government intervention. Parastatals were involved in the production, processing, and marketing of cotton, tobacco, coffee, feeds, tropical fruits, seeds, and cocoa; c. In an effort to raise output while restricting producer prices, the Government tried to increase the cultivated area through direct investments in land clearing and input subsidies, especially to credit for the purchase of machinery; and d. The consumer prices of key industrial inputs and basic foods were manipulated with fixed price regulations, trade controls, and direct subsidies to private and parastatal processors. CONASUPO administered general food subsidies and targeted ones to the poor. Consumer price controls covered more than half of agricultural production in 1987, though this level was slightly less than earlier. 16. The objective of low food prices forced the GOM either to depress producer prices to the level of cheap urban food prices or to subsidize consumers while maintaining high farm prices. In the late 1970s and early 1980s, the GOM was able to achieve the latter--it successftilly subsidized consumers and maintained producer prices generally higher than their world price equivalents for many goods. The economic crisis of 1982 eliminated those dual subsidies. Government financial constraints resulted in a decline in untargeted food subsidies to less than US$90 million in 1987. The concomitant rise in real controlled consumer prices affected the poor more than other classes. The budgetary crises also cut the government's ability to support farmers and, in 1986/87, domestic producer prices dropped to historical lows relative to international prices, in some cases falling below them. 17. Policy had many negative effects on agriculture. Trade controls, leading to an overvalued exchange rate, discriminated against agricultural imports and exports. Protection of the industrial sector harmed the domestic agricultural/non-agricultural terms of trade; for example, by 1982, quantitative restrictions affected 100 percent of agricultural and industrial production. Subsidized imports and price controls reduced efficiency in the sector. While subsidies for credit, water, fertilizer, seed, and other inputs counterbalanced in part the lower prices for farm products, they induced other allocative efficiency costs in addition to putting a fiscal burden on the state. Subsidized parastatals in production, marketing, storage, and processing added to the fiscal deficit. Results of these policies were to hamper private investment, to slow growth and to ensure that rural areas remained poor relative to urban. Though intervention was intended to aid the rural poor and to compensate for an inadequate marketing infrastructure, it actually benefitted richer farmers and suppressed development of private marketing, storage, processing and rural finance. C. Loan Objectives and Description 18. The Bank pursued a policy dialogue about the main agricultural questions during the adjustment period. A significant step was the Bank's agricultural sector issues paper of January 1986,-' which proposed an agricultural sector adjustment loan to achieve policy objectives in: (a) agricultural export promotion and trade reform; (b) subsidy control and targeting; (c) price deregulation; (d) marketing deregulation; and (e) public sector expenditure. These reforms were supported and reinforced by the two Trade Policy Loans and the entry of Mexico into GATT, which began the reduction 7' These were subsequently greatly expanded and improved and were published as W.B., Mexico: Policy Notes on Agriculture, Food and Rural Development, Yellow Cover (LA2AG, Report No. 8144-ME, 1 February 1990); the first version was issued in 1987 and has been periodically updated and expanded.  - 5 - of industrial protection and provided the basis for improved internal terms of trade for agriculture. The Bank proposed to maintain the momentum of reform with an AGSAL. Work on the loan began during 1986. 19. The Bank had good knowledge of Mexican agriculture before preparing AGSAL I from its project experience in irrigation, credit and livestock. Additional knowledge was gained through studies of agricultural trade, the sugar industry, food and nutrition, including the dominant institution, CONASUPO, done during AGSAL preparation and included in an agricultural sector report.' Additional papers had analyzed food subsidies and various other sectoral issues. 20. Faced with the negative effects of its previous interventions, the Government sought to achieve greater allocative efficiency and equity through new agricultural and food policies. The general objectives of the new policies were to: (a) improve resource allocation efficiency by strengthening market mechanisms; (b) increase productivity by raising public and private investment; (c) reach the poorest by increasing income transfers towards them and by targeting food subsidies; and (d) broaden and deepen policy dialogue through studies on agricultural prices, trade and food consumption policies. The next section details the specific reforms supported by the operation. Objectives and Design of the Project 21. Together with the Fertilizer and Steel Sector Adjustment Loans, AGSAL I was part of the set of loans for the first Mexican debt reduction package while being the first sector adjustment operation in Mexican agriculture. It sought to strengthen the reforms initiated by the Government and had these detailed policy objectives: (a) removing global consumer subsidies and targeting of remaining subsidies to the needy; (b) eliminating much of the public intervention in setting producer and consumer prices; (c) reducing the role of parastatals in marketing, storage, and processing; (d) liberalizing agricultural trade; (e) reducing subsidies to agricultural inputs; (e) achieving a larger and more efficient public investment program in agriculture; and (f) reducing and decentralizing the Ministry of Agriculture and Livestock (SAG) staff. The comprehensive design of the project was appropriate given the pervasive public intervention in Mexican agriculture in everything from farm planning to choice of inputs to processing, marketing, international trade and consumer pricing. A major excluded area--agricultural finance--was left out because it was to be included in a separate rural financial subsector operation. Two major crops, maize and beans, were left out because the GOM was not convinced of the benefits of reforms affecting them. 22. It was understood during loan preparation that there was insufficient information to make good policy about several key issues in the agricultural sector. These included: (i) the role of government intervention affecting producer prices, including the system of guarantee prices, and the associated trade regime supporting intervention; (ii) the costs of public policy affecting sugar production and consumption and the reforms necessary to reduce those costs; (iii) the need for public actions to improve nutrition of certain segments of the population; and (iv) the adequacy of irrigation water charges. " See World Bank Mexico - Agricultural Sector Review: Background Paper - Agricultural and Agroindustrial Trade Regime, May 24, 1988; and Compafiia Nacional de Subsistencias Populares (CONASUPO): A Report on its Restructuring and Other Policy Changes, March 1988. Per Pinstrup-Andersen and Alan Berg in World Bank Mexico - Agricultural Sector Review, Report No. 7609-ME, January, 1989; See inter alia Instituto Nacional de la Nutrici6n- CONACYT, La Alimentacidn en el Medio Rural, 1980, and La Situaci6n Nutricional de Algunos Barrios Urbanos de Mexico, 1981; Roger D. Norton and Leopoldo Solis M., ed., The Book of CHAC: Programming Studies for Mexican Agriculture, Baltimore: The Johns Hopkins University Press, 1983; Louis W. Goodman, Steven E. Sanderson, Kenneth Shwedel and Paul L. Haber, Mexican Agriculture: Rural Crisis and Policy Response, Working Paper Number 168, The Wilson Center, Washington, D.C., July 1985.  - 6 - During negotiations, a schedule of four studies was agreed to provide adequate information for policy- making, to prepare further policy reforms, and to enrich the policy debate within Mexico about these issues. The implementation of all but the nutrition study was slow. Loan Implementation 23. Implementation of the US$300 million loan was satisfactory. The loan was approved on February 22, 1988 and declared effective on March 16, 1988. The first tranche of US$100 million was to be disbursed in two parts: up to US$25 million at effectiveness and US$75 million after agreeing on terms of reference for key studies which were to establish the analytic basis for further trade and price reforms. Release of the US$75 million was in fact delayed until January 1989 because the Bank and the Government did not agree on the terms of reference for studies of sugar, nutrition and food consumption, recovery of irrigation operating and maintenance costs, variable tariffs and guarantee prices. A lengthy internal Government discussion of the terms of reference for the variable tariff and price stabilization studies reflected the politically sensitive nature of the subjects. Of the US$200 million second tranche, US$175 million was re-allocated as part of the Bank's support to Mexico's debt reduction agreement with the commercial banks. Mexico complied with the second tranche release conditions, but the second tranche release was delayed by implementation problems with some of the policy reforms and the funds for the US$25 million policy-based lending component were only released on March 15, 1990. Both tranches were fully disbursed. The loan was closed on November 15, 1990, seventeen months behind schedule. D. Loan Conditionality and Compliance9' 24. Policy reforms were agreed in prices, trade, public investment, poverty alleviation, fiscal transfers and the role of parastatals. The actions supported by the loan and their implementation are discussed in the following paragraphs. Removal of Global Food Subsidies and Targeting of Remaining Food Subsidies 25. The Government's previous food and nutrition policy consisted mainly of price controls on basic commodities, resulting in general subsidies. Much of the subsidy did not reach the poorest but did benefit the more affluent. Public food distribution mechanisms were unnecessarily costly. Little was done for rural areas, where the poorest individuals were often found. The Government could not, moreover, measure efficiently the effects of its food and nutrition policy (see para. 28). With the objective of directing food subsidies to the poor, the loan provided for: (i) targeted food stamps or other programs of approximately US$250 million; (ii) modification of eligibility criteria to ensure that the poor receive food assistance; (iii) linking tortibonos (food coupons) prices to tortilla (maize cakes) prices;"' and (iv) a pilot program of food assistance to the rural poor. The Government further agreed not to introduce new global food subsidies outside CONASUPO or its affiliates. 26. Four of the five conditions were fulfilled as designed. Expenditure in targeted food assistance programs reached US$456 million in 1988, compared to the project goal of at least US$250 million. Eligibility for food assistance programs was tightened to exclude higher-income consumers. A 9' A summary of compliance with conditions for the first and second tranches of the loan are presented in Annex 1 to the report. 101 Tortibonos are coupons issued to consumers allowing them to purchase tortillas (maize cakes) at subsidized prices. Torribonos were replaced in 1991 by the similar tortivales.  pilot program for food assistance in rural areas operated successfully. The nutrition study carried out under the loan (see para. 28) provided the basic data for the preparation and implementation of food security programs. No new general food subsidies were introduced outside CONASUPO or its affiliates. The fifth condition--that the prices of tortibonos and tortillas be linked--was met by definition because tortilla prices were not adjusted after the PACTO began (see para. 31).1II 27. The numbers of poor families reached by public food programs grew from roughly 4.4 million in 1983 to 10.7 million in 1988. About half of the growth in numbers of families assisted was during 1987 and 1988, the period of reforms supported by AGSAL I. The programs reaching these families appear to have been appropriately targeted to rural areas, marginal urban populations, to the poor, and to particularly vulnerable women and children. There is not enough information about the benefitting populations of public food programs to conclude that the increased coverage was only a response to the greater numbers seeking assistance during the economic crisis--and who would leave public assistance if economic activity rebounded--or if they were persons needing help before the crisis and who would remain on assistance even if growth resumed. 28. Nutrition study. It was agreed at negotiations that a study was needed to recommend improvements in the monitoring of food and nutrition programs. The study, which was accepted by the Bank in May, 1989, made recommendations about: (i) bettering the capacity of the institutions involved; (ii) improving inter-institutional coordination; (iii) better targeting of assistance to populations at risk; and (iv) a food and nutrition monitoring program. The study also provided basic data for the fulfillment of the conditionality related to food assistance programs (para. 26). This condition was met without major problems. Reducing Government Intervention in Establishing Producer and Consumer Prices 29. A major objective of the loan was to move away from the guarantee price system to a freer market price system with no domestic controls and liberalized foreign trade. Though this was an appropriate objective, full agreement was impossible. The major disagreement was on including maize and beans among the crops to be liberalized. The Government's position was that the international markets for maize and beans were unreliable and that food security concerns justified continued domestic price controls. The world market for maize was thought inappropriate because Mexico consumes white maize and the world market supplies mainly yellow maize. The world bean market is very thin. Quantities and therefore prices are unusually variable, making international prices a poor policy standard. Because the two crops are major shares of national output and consumption--maize is more than one third of cropped area and beans are another tenth, and both are major consumer items among the poor--the Government considered the risks of liberalization to be too great at a critical period of its economic adjustment, especially as the cuts in food subsidies were already known to have affected the poor most severely. The GOM's persistent resistance to adjusting maize prices is shown in the outcome of the North American Free Trade Agreement (NAFTA) negotiations, which specify a 15 year period to move maize prices down toward international levels, so it is unlikely that the Bank could have obtained more on this issue at the time of AGSAL I negotiations. 30. Other major commodities were excluded from actions under the loan. These crops-- chiefly, exportable fruits and vegetables--had never been subject to onerous price and trade controls and hence it was considered that they were governed by a market pricing system. The Bank accepted the continuing CONASUPO monopoly on milk powder imports because the Government argued that it had "' A subsequent effect of fixing the tortilla prices under the PACTO was to make them much cheaper in real terms and to increase the fiscal costs of the subsidies.  - 8 - to preserve the national dairy industry at a time when world milk prices were severely depressed, and because CONASUPO's profits on milk powder imports paid for milk subsidies targeted to the poor''. Despite the significant absences of maize, beans, and milk powder the loan supported three conditions, which were major steps in the intended direction: (a) Guarantee Prices Maintained at their Average Real Level of 1987 31. The GOM had pledged, as part of the PACTO to maintain producer prices at their average real level of 1987. Beginning on March 1, 1988, the GOM would adjust producer prices on a monthly basis. The policy sought to protect producers' incomes from inflation in the short-term, while preventing the government from reintroducing protection in the medium and long-terms. The condition was not maintained because the Government introduced the PACTO in December 1987 (see para. 5) freezing all prices and the nominal exchange rate in its effort to cut inflation. The Bank considered that general price stabilization was the first priority of Mexican economic policy."' In view of that consideration and progress with other reforms (see para. 32), the condition was considered to be non- essential though it was never formally waived. (b) Guarantee Prices Maintained within a Band of 90-125 Percent of International Prices. 32. The second condition required that guarantee prices of 10 commodities be within a band of 90-125 percent of international prices. The intent of this condition was to cut most protection to domestic production, to make residual protection more neutral in the affected crops, and to eliminate rents from quantitative trade restrictions. Soon after AGSAL I became effective the Govermnent replaced the guarantee prices of the 10 commodities by either a system of precios de concertaci6n (agreed prices), under which producers and industrial consumers were to agree on prices, or market prices. CONASUPO was limited to purchasing only those quantities required for its own distribution system, as against the wide-spread marketing activities of the past, so that its purchases would not interfere with the move toward market pricing. With that reform in CONASUPO's activities the essence of the conditionality was initially satisfied--that trade policy be the main determinant of domestic prices in relation to international prices. 33. The implementation experience with the price conditions was mixed. After 1989 the relation of domestic to international price varied by commodity according to the import restrictions present and to the structure of the industry. a. In some products for which import permits were eliminated--sorghum, copra, sunflower, sesame, and cotton seed--producer prices moved close to international prices. With import tariffs of 20 percent or less and, with only the consultative mechanism of precios de concertaci6n, there was no other means to separate domestic prices from world prices. Because sorghum is internationally traded and the others (all oil crops or derivatives) can also be obtained on world markets, elimination of import restrictions was a sufficient condition for market pricing; 12 Under AGSAL 11 the GOM agreed to replace CONASUPO's milk powder import monopoly with transparently allocated import permits. 1'3 Furtherrnore, if the Government had adjusted guarantee prices in line with this condition some of the producer prices would have moved out of the 90-125% band (see second condition described in the text) because of the freeze in the rate of exchange during that period.  - 9 - b. Soybean import permits were not eliminated immediately, and prices had risen about 60 percent above the international price by early 1990. With the elimination of import permits for soybeans and their derivatives in mid-1990, imports paid a tariff of 20 percent or less, and the price of soybeans then fell within the 90-125 percent band; c. Wheat prices were within the band during 1988, 1989 and the first quarter of 1990 despite import licenses because world wheat prices were stable. Declining international prices during the rest of 1990, and the continued use of import licenses, led to increasing protection. A year after the second tranche release, by early 1991 the nominal rate of protection was more than 40 percent. Hence, while the result--the domestic price of wheat--was acceptable at the time of second tranche, the import licensing and tariff mechanism appeared unchanged and the domestic price later rose out of the band. The protection afforded wheat was treated in AGSAL II, under which the GOM agreed to maintain the nominal rate of protection for wheat at around 40 percent; d. Barley producer prices were within the agreed band during 1988-1989 and early 1990. By the end of 1990, however, they had risen enough to give a nominal rate of protection of more than 90 percent, again as a result of import licensing. The failure to maintain this condition after compliance may have been partly due to the unwillingness of the brewing industry (which established the precios de concertaci6n with the barley growers) to import, even at cheaper prices. Under AGSAL II, the GOM agreed to increase guarantee price for barley at a rate less than that of international inflation, thereby reducing the nominal rate of protection to within the band; e. The Bank wrote the Guarantor in February, 1989 that rice producer prices were only 60 percent of international prices. The agreed price for the 1990 crop, as noted in a letter from the government to the Bank of February, 1990, was 90 percent of the import price and this was accepted as being in compliance. (c) Study of Guarantee Prices 34. The purpose of the study was to encourage a debate about the price system and the related trade regime. There were delays occasioned by disaccord about the terms of reference, and once a first draft of the study was finished, the Bank rejected it for not satisfying the terms of reference and for its poor quality. After close consultations between the Bank and the Government in the second half of 1989 and the first quarter of 1990, and the Bank's rejection of a second draft, the Bank accepted the Government's reforms--elimination of guarantee prices and lifting of many quantitative trade restrictions- in lieu of the study itself as having met the objectives of the condition, which were then considered to have been met. Benefits of work on the study were the acceptance of international prices as a standard for analyzing price and trade policies, the elimination of guarantee prices for all crops but maize and beans, and significant trade liberalization. Reducing the Role of Parastatals 35. In an attempt to lessen the misallocation of resources arising from CONASUPO's operations, reduce the fiscal deficit, and cut the parastatal sector, the following agreements were reached under the loan:  - 10 - a. Fiscal transrers to CONASUPO: (i) transfers for operating losses to CONASUPO in 1988 would not exceed US$85 million; and (ii) the 1989 budget submitted to Congress would fix real transfers for CONASUPO's operating losses less than or equal to those for 1988; and b. Closure of parastatals: (i) liquidation of CONASUPO's wheat processing affiliate TRICONSA, (ii) closing or moving to poor neighborhoods 500 DICONSA retail food outlets, (iii) sale or closure of 15 agricultural parastatals; and (iv) sale or closure of 6 sugar mills. 36. The conditions noted in paras. 35.a and 35.b were met. The 1988 transfers to CONASUPO were US$13.8 million. Budgeted transfers to CONASUPO in 1989 were US$64 million, compared to the US$85 million target."4d TRICONSA was liquidated and 500 DICONSA retail outlets were closed or relocated. The Government closed 6 sugar mills and 15 agricultural parastatals. The Government also sold nine sugar mills in 1989 and the remaining sugar mills since. It has restructured CONASUPO, privatized ICONSA, and closed or privatized all DICONSA retail outlets in high income neighborhoods. 37. Sugar Study. The GOM had many costly interventions in sugar production and consumption. A public company (AZUCAR) processed much of Mexican sugar and marketed all of it. Because the Government fixed (low) producer prices above (even lower) consumer prices, it had to absorb the resulting loss on AZUCAR's operations. Sugar policy appeared, by 1980, to have destroyed nearly all of the country's export potential in the commodity. A 1985 sugar policy agreement among the Government, AZUCAR, and the public sugar financing agency (FINASA) had not removed the strong policy-induced distortions in the industry at the time of preparation of AGSAL I.'5' 38. It was agreed at AGSAL I negotiations that the Government would produce a sugar policy study which was to derive recommendations on: (i) a definition of world reference price and its mill equivalent, noting the size of assistance to producers during periods of low world prices; (ii) a consumer price consistent with no fiscal transfers; (iii) targeted subsidies for sugar consumption; and (iv) sugar purchases based on cane quality. The Bank accepted a second draft of the study in October, 1989. Reforms, in addition to the closure and privatization of AZUCAR's mills (see para. 36) included: (a) lifting non-tariff import barriers; (b) breaking AZUCAR's monopoly on purchases from mills; (c) abolishing import licenses; (d) introducing a 10 percent ad-valorem tariff; (e) raising the domestic price to approximately the prevailing world price; and (f) abolishing the requirement that mills pay a 50 percent tax to market sugar outside the AZUCAR distribution system. The objectives of the condition have been met. Agricultural Trade Liberalization 39. Mexican agricultural trade was heavily restricted before the mid-1980s and only some of the restrictions were lifted as part of the general reform of the economy. Limited reforms were agreed in agricultural trade as part of AGSAL I (see para. 40) and further studies were agreed to review the form of protection for some major commodities (see para. 42). Ultimately, reforms went well beyond )Iv It is not clear if the spirit of the operation was not violated by allowing CONASUPO to borrow in the domestic market to finance operational losses. The Government has agreed to provide additional information on CONASUPO's indebtedness when it writes Part 11 of this report. 5s Sugar policy is comprehensively reviewed in World Bank, Mexico - Agriculture Sector Review, Backeround Paper - The Sugar Sector, May 1988.  - l1l - the agreed measures under AGSAL I as the GOM: (i) eliminated export permits for beef and live cattle in addition to those on high quality cuts of beef; (ii) reduced cattle export taxes; (iii) abandoned coffee and cocoa export permits; and (iv) liberalized sugar price and trade policy. Reduction of QRs on Imports of Agricultural and Agroindustrial Products by 5 Percent of Total National Production from the Level of such Production Existing on November 30, 1986. 40. It was understood that quantitative restrictions were an inefficient method of protection because they created rents and associated real costs to capture them. Therefore, a major thrust of policy was to reduce the coverage of quantitative restrictions and, where it was impossible to eliminate protection fully, to replace QRs with variable import levies. It was agreed at negotiations that 5 percent of domestic production would be freed from the system of quantitative restrictions. The percentage of agricultural and agroindustrial output covered by quantitative import restrictions fell from 18.3 percent in 1986 to 13.2 percent (i.e., 5.1 percent) of total domestic production in 1988, thus fulfilling this condition. At the end of 1988, only 7.3 percent of agricultural commodities were subject to import licenses and only 5.9 percent of agroindustrial production. The percentage of all national output covered by import permits declined from 46 percent of total tradeables production in June 1986 to 20 percent at the end of 1989. Removal of Export Controls on High Quality Rice and Cuts of Beef and No Imposition of Export Controls or QRs on Fruits and Vegetables, except for Hygienic Reasons. 41. The same arguments against quantitative restrictions on imports applied to those on exports. The export controls on high quality rice and high quality cuts of beef affected only a small share of national production and were lifted in mid-1988. Export controls on seed maize, and on many fruits and vegetables were removed in 1988 and no new export controls were imposed on fruits or vegetables. These conditions were fully met. Variable Import Tariff Study 42. During the implementation of AGSAL I it was understood that some basic grains, beans, and oilseeds would remain subject to import licenses. A condition of second tranche release was that a study would be done of the administrative feasibility of replacing import licenses with variable tariffs for these commodities. At the time of second tranche release, the Bank decided that progress with trade reforms was sufficient that this condition had become non-essential and could be waived. Reducing Subsidies on Agricultural Inputs 43. The one issue dealt with under this loan was charges for irrigation water. Issues of fertilizer pricing were dealt with under the Fertilizer Sector Loan (Loan 2919-ME). The GOM had previously made significant changes in interest rates under the General Interest Rate Agreement (GIRA) negotiated with the Bank in 1984. 44. Irrigation was the motor of growth of Mexican agriculture after World War II. There was both an expansion of irrigation and a dramatic advance in crop yields on irrigated land. Much of the irrigated land was public and, though producers paid water charges to cover the costs of operation and maintaining the works, their share in O&M costs had fallen to less than 40 percent by the middle of the 1980s. The low farmer contribution, and the fiscal crisis of the state, resulted in poor maintenance and consequent deterioration of many irrigation works.  - 12 - 45. It was agreed at negotiations that the government would produce a study of producers' share of O&M costs of irrigated areas and a corresponding action plan to raise the share. The action plan would indicate the steps required to achieve the government's goal of having water charges cover 60 percent of O&M costs in marginal irrigated areas and 100 percent in commercial and export-oriented irrigated areas. After some delay, the scope of the study was reduced to the two major irrigated states, Sonora and Sinaloa. The action plan, which was accepted by the Bank before second tranche, intended to: (i) transfer management of the public irrigation districts to their users; and (ii) charge for irrigation water an amount adequate to ensure the financial viability of the transferred districts. The action plan is now being implemented in the Irrigation and Drainage Sector Project (Loan 3419-ME). Increased Investment Budget for Agriculture 46. A second tranche condition was that the Government submit to Congress a 1989 agricultural budget exceeding that for 1988 by US$200 million in real terms. This condition was only met in part. The proposed investment budget for Mexican FY89 (submitted to Congress in December 1988) was US$585 million (Mex$1,315,820 million at Mex$2250 per dollar). The 1988 investment budget was US$496 million (Mex$1,115,061 million at Mex$2250 per dollar); actual 1988 expenditure was US$503 million. The submitted 1989 investment budget was only US$82 million greater than the actual 1988 budget, not US$200 million in real terms as agreed. The Mexican authorities explained they could not comply with this condition in 1989 because of the PACTO's limits on public spending. 47. The Government did comply in 1990. The 1990 investment budget was US$864 million (Mex$2,418,294 million at Mex$2800 per dollar), or a real US$315 million increase over the actual 1988 budget."i Bank management considered that the objective of the condition was fulfilled. No formal waiver by the Board of Directors was sought by Bank management though the lack of compliance was clearly described in the second-tranche release documentation. 48. Significant shortcomings remain with public agricultural spending despite the late compliance with this condition. There are serious operational problems with budget preparation and allocation. The shares of investment and operating costs have not increased consistently. Many sectoral expenses, notably the costs of CONASUPO, are outside the control of the budget of the agricultural ministry. The operational issues, and those of investment and operating expenditures, are now dealt with in individual projects. The uncontrolled spending has not been handled at all (see para. 65.h).'7 AGSAL II has the condition that the 1992 agricultural investment budget will be satisfactory to the Bank and this has been met. Disbursement Procedures 49. Establishment of procedures to encourage and facilitate the disbursement of loans in support of agricultural investments from international agencies. The Government agreed to establish procedures to speed the disbursement of agricultural investment loans, and to help coordinate disbursements from simultaneous policy loans. Several modifications adopted in these procedures in 1989 now provide satisfactory incentives for the use of external funds for public sector investments, including agriculture. The procedures govern the identification of eligible imports, their assignment to specific adjustment loans, verification that the same imports are not billed to different loans, registration of audit Ia Allowing for a nine percent dollar inflation rate. 17' For example, there was a suggestion that the National Water Commission (CNA) would allocate the revenue from increased irrigation water charges to investment, in order to help fulflll the incremental budget condition (see para. 46). This was never done and seems to have been only a stalling tactic on the part of the guarantor.  - 13 - information (origin, supplier, Standard International Trade Classification (SITC) code, value, import waybill number, description, date of entry, and date of payment). These reforms should facilitate disbursement of adjustment loans and, therefore, this condition has been met. E. Overall Evaluation of the Loan 50. The main problems of Mexican agriculture at the beginning of the 1980s were government intervention via price, trade, and regulatory instruments and the decline in productive public investment. In the early 1980s the Government began a serious attempt to reform the entire economy. It extended reforms to agriculture after 1985 and began to end many interventions which had hampered growth. Against this background of strong Government commitment to overall economic and sectoral reform, AGSAL I supported a productive sectoral policy dialogue between the Bank and the Government which helped to identify the main costs of public intervention in agriculture. The comprehensive design of the loan was a positive feature as it covered trade and price policy, nutrition issues, budget priorities, and administrative reform. 51. It is too soon to estimate quantitatively the impact of reforms on long-term agricultural growth and income distribution. The chief reason is that they occurred at a time of fiscal and monetary restriction when stabilization took priority over growth. A pernicious effect of stabilization on agriculture, and hence on the benefits of the reforms, was the appreciation of the real exchange rate. A second is that the 1986/87 crop year was particularly bad because of a sharp contraction in product prices related to the fiscal crisis of the state; the expected rebound from that trough cannot be easily distinguished from an increase in the long-term growth path of agriculture. A third is that bad weather was largely responsible for declines in real agricultural GDP of 3.9 percent in 1988 and 4.3 percent in 1989. The 1990 rebound of 6.1 percent resulted from several factors, not least the weather, and cannot be attributed fully to the novel reforms, especially since the rate fell to 0.5 percent in 1991. 52. It is similarly early to attempt to judge the effects on agricultural exports, given the short- term changes induced by variability in the weather, movements in domestic demand, international price changes, etc. The value of agricultural exports have, however, declined. The value of gross agricultural exports (in US$ 1988) was US$1.53 billion in 1988; in 1989, it was US$1.41 billion, in 1990, US$1.45 billion, and in 1991, US$1.31 billion. An exception to the indifferent general trend was exports of live cattle, which benefitted from elimination of an export tax in 1989. That policy change, and favorable weather in 1990, caused the value of live cattle exports to grow from approximately US$200 million in 1988-89 to about US$350 million in 1990-91. 53. Some qualitative indication of the operation's benefits is possible. The Government has gained fiscal savings from reduced subsidies, more efficient public investment, and less costly parastatals. Producers of some commodities have gained from elimination of quantitative restrictions on exports and, less frequently, from lifting guarantee prices which taxed domestic output with respect to world prices. Detailed policy analysis was done on commodity pricing, efficient targeting of food and nutrition interventions, and irrigation cost-recovery. Those analyses established standards for evaluating proposed policies using world prices which are already used in AGSAL II and in other operations. Though consumers bore most of the cost of reforms, an expansion of targeted food subsidies softened the impact on the poorest.  - 14 - Project Sustainability 54. The President's Report identified two major risks to the sustainability of reform: first, political resistance; and, second, macroeconomic policy. The first referred to opposition within and outside Government, combined with the possibility of a new administration, which might have taken office and reversed some of the reforms. The President's Report noted that this risk was mitigated by the substantial steps that the Government had already taken and the strong commitment of the Government to economic liberalization and to sound macroeconomic management. Opposition to reform within Government did delay meeting some of the conditionalities but on the whole the strong commitment to reform, particularly of the Salinas Administration, prevailed. The AGSAL II has further strengthened reforms begun under AGSAL I and the risk of a political reversal of the reform process is now almost non-existent. 55. The second risk was a return to expansionist fiscal and monetary policies. Expansion might then have caused inflation, and a less stable macroenvironment which would have jeopardized the prosperity of agriculture and weakened the impact of the reforms. According to the President's Report this risk was to be mitigated by the Government's efforts to master inflation by controlling its budget. In the budget area Government performance has been exemplary and, after the implementation of the PACTO-PECE stabilization program, inflation has been brought under control. The 1989 debt reduction, the subsequent flows of external assistance, as well as private foreign capital inflows, and the consequent fall in real domestic interest rates have assured adequate financing for the macroeconomic program. The exchange rate has, however, been harmful as the real exchange rate has appreciated since 1987. Bank Performance 56. The Bank started, soon after Mexico's economic crisis in 1982, to develop a policy dialogue with the Government and to support adjustment in economic policies. This dialogue led to a change in the Bank's work with much greater emphasis on policy-based lending and economic and sector work linked to structural adjustment. This resulted in sector adjustment loans for trade, steel, fertilizer, roads and telecommunications between 1987 and 1990. 57. The Government was already engaged in structural reforms in trade and industry but, given the political sensitivity of the issues, reforms in agriculture lagged. The role of the Bank was to accelerate the debate within the Government about agricultural reforms. The Bank's Policy Notes"' on Mexico's agriculture, food and rural development summarized the main issues affecting the sector's performance and gave specific recommendations on them. Within the Government, the main policy reforms were discussed around this document and it strengthened the reformist groups. Given the complexity of the issues involved, this has to be considered a successful performance. 58. The Bank contributed in exposing the cost of agricultural protection and the inefficiency of global food subsidies to help the poor through supervision of the various studies done under AGSAL I. This was particularly the case of the sugar and nutrition studies. The study of water charges met the conditions of the loan and the resulting action plan is now being implemented under the Irrigation and Drainage Sector Operation. 59. Heavier supervision and a more intense policy dialogue on the pricing issue could have shortened the delays in the preparation of the study and in the implementation of some of the I' W.B., Mexico: Policy Notes on Agriculture, Food and Rural Development, Yellow Cover (February 1990); the first version was issued in 1987.  - 15 - conditionalities. Overall supervision was acceptable, but the policy dialogue during the program's execution and continuity of supervision suffered during the Bank's 1987 reorganization. The reorganization left the Agriculture Operations Division without an economist for some time and transferred one of the two managers of the AGSAL I elsewhere in the Bank. This was overcome to some extent by bringing the staff that had originally participated in the preparation of AGSAL I back to LA2AG for short assignments and by allowing the new task manager (an economist) time to become acquainted with the operation and the Mexican economy. 60. The Bank was sufficiently flexible in defining the tranche conditionality to be consistent with the overall speed of adjustment in Mexico. The Bank was firm in insisting on adequate fulfillment of specific conditions for second tranche, with the notable exceptions of the agricultural investment budget (see para. 47) and the linking of tortilla and tortibono prices (see para. 26). These were waived in substance in light of the Government's overall macroeconomic objectives. The study of variable tariffs (see para. 42) was waived given the Government's progress on trade liberalization. 61. The preparation of the AGSAL I was in close coordination with the Trade Policy Loans (TPLs) and, while there were no cross-conditionalities, the operations reinforced each other. Both operations supported the reduction of non-tariff barriers; but AGSAL I specified the goods to be liberalized, while the TPLs were general on the goods liberalized. Actions taken under agriculture were credited to both operations. Borrower's Performance 62. The commitment of the Government to reform was strong and sustained throughout implementation, thereby explaining the success of the operation in reinforcing the reform of Government policies. On price policy, trade restrictions, and sugar reforms the Government went beyond what was agreed in the loan. The long process of preparation helped create a commitment to reform based on an intellectual conviction of the benefits rather than on the pressure that macro-economic circumstances (i.e., balance of payments difficulties) or the Bank might have exerted. Conclusions and Lessons Learned 63. Mexico has dramatically reformed its agricultural policy since 1987. Despite the disappearance of many major distortions, reform has to be deepened to exploit the full growth potential of Mexican agriculture. The AGSAL II operation aims at that. Building on AGSAL I, AGSAL II goes beyond the actions taken so far and promotes further reforms to raise agricultural growth and productivity, through the improved functioning of output and input markets, while alleviating the poverty of the most vulnerable population groups through targeted food and nutrition programs. 64. The lessons from this operation are described in terms of broader issues and in terms of the specific objectives of the operation. The broader issues are: a. Linkage between stabilization and liberalization. Conventional wisdom indicates that under conditions of relatively high inflation, stabilization should take priority over structural adjustment (i.e., trade and price policy reforms). Although the Bank recognized this during AGSAL I, it had not been taken fully into account during preparation and negotiations. As a result, some of the conditionality was superseded by price stabilization considerations during implementation. This was true of the conditions to maintain real producer prices at their 1988 level (para. 31) and to increase public investment in agriculture  - 16 - (para. 46). The Government's stabilization program was announced during negotiations, but the Bank's view at the time seems to have been that the unorthodox anti-inflationary program would not affect the AGSAL I reforms. AGSAL I would have benefitted from a closer coordination with the Government's stabilization program in terms of public expenditure goals; b. Sector strategy. The period of the reform process might have been shortened if the Bank had better elaborated and explained up-front a long-term strategy for Mexican agriculture, especially regarding assistance to small farmers and marginal areas during structural adjustment. Poverty alleviation measures, notably steps to improve nutrition among the rural poor, were included in AGSAL I, but other actions to distribute benefits of reforms were not elucidated until after the loan had been signed.'9' Dialogue between the Bank and borrowers about structural adjustment operations should not be limited to policy reforms, but should be expanded to explain complementary actions that would ensure related sectors will benefit from the new incentives; c. Poverty alleviation. This was the first Bank sectoral operation to take explicit steps to reduce the cost of the reforms to the poor. AGSAL I not only reduced the burden of adjustment on the poor by promoting targeted food subsidies, thus making the package politically more acceptable, but also set the basis for the Government's National Food Security Program for 1990-1994. Two appropriate features of the design were the restriction of additional subsidies to an existing institution (the National Basic Food Company--CONASUPO), so as to be able to monitor their cost, and the linking of savings on general subsidies to the additional transfers to the poor. 65. More specific lessons of the operation are: a. Design of the loan. AGSAL I was the first step in a long process of agricultural reform. With that perspective its conditions were to affect most aspects of sectoral policy; the main exceptions were agricultural credit (which was to be dealt with in a separate operation because of its size and complexity) and policies for maize and beans. This largely comprehensive design ensured that issues could be discussed within a unified policy framework and was a notable strength of the design; b. Timing of the loan. One could argue that the Government failed to change its policies when agriculture was stronger. This was the case during the 1986-87 real depreciation of the peso when the sector's terms of trade were much better than in 1988. The Government could not have changed its policies at the earlier moment, however, because it was not unanimous about the need for, and scope of, reform. With the benefit of hindsight, it was better to spend two years discussing the reforms and bettering Government commitment to them than to rush reforms that might have been reversed later. The lengthy discussion within the Government about the loan conditions consolidated the reform strategy and facilitated the subsequent policy dialogue with the Bank; 19' These formed part of subsequent investment operations such as PROCATI (Project for Organization, Training, Technical Assistance and Research-Loan 2859-ME).  - 17 - c. Linkage to other Bank operations. The agricultural reforms supported under the AGSAL I were part of a wider program to restructure the economy. They were promoted in close connection with other sector loans, such as the two Trade Policy Loans of 1987 and 1988 (Loans 2745-ME and 2882-ME) and the Fertilizer Sector Adjustment Loan (Loan 2919-ME); d. Targeting food subsidies. Though general food subsidies were cut and remaining subsidies have been better targeted to the poor, further analysis will be necessary to estimate the income distribution and public finance effects of those policy changes. The condition that new subsidies could only be given by CONASUPO was an effective one as it made the fiscal cost of subsidies easier to monitor and, hence, more transparent; e. Reducing government intervention in markets. The operation initially succeeded in liberalizing prices of 10 major crops, though there was some backsliding in wheat and barley after release of the second tranche (para. 33c and d). A related lesson was the importance of developing an intellectual consensus within the government about the shift from controlled pricing to market pricing; while it is too early to measure gains in producer or consumer welfare from the relative price changes caused by this policy shift, the principle of the reform is now solidly established because the Mexican Government is convinced that it is a good idea--not because the loan imposed conditions. A second lesson is the need to link realistic targets for consumer price liberalization to the government's macroeconomic objectives, in this case lower inflation; f. Abolishing parastatals. The most inimediately successful action under the project was the abolition or curtailment, of parastatals in agricultural production and marketing. The lessons were: (i) public enterprise reforms have to be supported by an intellectual consensus within the Government, just as with market liberalization; and (ii) generating that consensus was greatly facilitated by the immediate benefits of abolishing parastatals in terms of the fiscal deficit. Any efficiency gains of substituting private for public enterprises are likely to require a longer time period to become evident; g. Cutting input subsidies. The one action in this area was an action plan to raise charges for irrigation water.t' The action plan is now being implemented under the Irrigation and Drainage Sector Project (Loan 3419-ME). The lesson is that it is best to include highly technical and subsector specific conditions in investment loans managed by qualified technical agencies, not in sectoral operations; h. Making public investment more efficient. The agricultural public investment objective was not consistently implemented because it conflicted with the government's macroeconomic objectives of controlling public sector expenditures. Before AGSAL I, the Government had cut staff and decentralized the agricultural ministry. No further actions were proposed under AGSAL I in these areas. One expected effect of the personnel cuts was an increase in 2D Changes in fertilizer subsidies were supported under the complementary Fertilizer Sector Adjustment Loan (Loan 2919-ME).  - 18 - investment and operating expenditures per staff member. That increase has not been achieved, because it was not possible to reallocate personnel cost savings into investment and operating cost outlays. A lesson of this operation, and related investment loans in Mexico, is the need for a comprehensive overview of all public expenditures in agriculture, not just those made by the Ministry of Agriculture and its dependencies. A further lesson, which has also been noted in PRODERITH II (Loan 2658-ME) and PROCATI (Loan 2859-ME), is that unusually close supervision of budget conditions is required.  - 19 - PART II. Project Review from the Borrower's Point of View A. Background 1. The agricultural and forestry sector has been dominant in Mexico's economic development. Between 1940 and 1965, its evolution has satisfied the needs of the growing population as well as industrial demand for raw materials. During this period, the growth of its productive capacity contributed to the creation of employment opportunities and the generation of foreign currency through a positive trade balance. 2. However, in the last twenty-five years, the agricultural and forestry sector has not presented the dynamics which characterized it in the past. While in the 1960s agriculture, livestock, and forest production grew at average annual rate of 3.8 percent, in the 1970s it diminished to 3.3 percent. 3. As a result of the decreased growth in the sector, the gross domestic product per capita (PIB) of the agricultural and forestry sector in 1988 was less than in 1960. The growth rate of the agricultural and forestry sector has been lower in the last few years than the rest of the economy. 4. As a consequence of the diminishing production, the supply of food to the population and of raw materials for industry has been met increasingly by importation. This, added to the decrease in relative exports of agricultural and forestry products during the first part of the 1980s, provoked a deficit agricultural commercial balance. 5. Between 1979 and 1983, and as a result of the agricultural policies, about 2.5 million hectares of marginal lands were annexed to activities whose production quickly decreased. At the same time, the erosion problem increased. However, it will not be possible in the future for the necessary production, among other actions, to promote productivity on existing lands through the application of technology packages, the extension of irrigation and drainage infrastructure, and land- leveling. 6. With the aim of guaranteeing a minimum price to the agricultural producer, the Mexican government used guaranteed prices for maize, beans, wheat, barley, rice, sorghum, soy, safflower, cottonseed, copra, sunflower, and sesame. The guaranteed prices, being panterritorial, punish the production around nearby consumption centers and subsidize the cost of production in distant zones. At the same time, guaranteed prices distorted production decisions as they reflected a price range which was very different from that which existed on the open market. 7. On the basis of the foregoing, the Government of Mexico instituted a series of structural changes throughout the economy. The changes which were carried out in the agricultural sector included liberalization of commercial policies and redefinition of prices which was done with the support of the World Bank through the Agricultural Sector Loan.  - 20 - B. Structural Change Stage 8. The Agricultural Sector Loan assumed that the guaranteed prices should be adjusted monthly during 1988 in order to maintain them in real terms at the same 1988 level. At the same time, beginning December 31, 1988, the price of wheat, rice, sorghum, soy, copra, sunflower seed, cottonseed, and sesame seed could move within a margin of 10 percent below and 25 percent above international prices. However, the Economic Solidarity Pact, introduced in December 1987, stated that nominal prices would not be modified in order to curtail inflation. 9. As part of the structural measures which were being carried out, in mid-1988 a process was initiated to eliminate the guaranteed price mechanism of all oilseeds and almost all grains, and soon thereafter, the permit to import oilseeds. However, due to the economic and social importance of maize and beans in Mexico, these products continued under the price guarantees. 10. Eliminating guaranteed prices allowed industrial producers and consumers to fix prices, called concerted prices. In this way the Government of Mexico went beyond the AGSAL I Loan Agreement with the Bank to implement these structural change measures. It is important to point out that during these years, the evolution of the internal prices of these products was very similar to that registered in international prices. C. Commercial Liberalization 11. In 1985 a process for structural change was begun and, as part of this change, in 1986 Mexico joined the General Agreement on Trade and Tariffs (GAIT). 12. In 1985, twelve percent of the economy's import categories were found to be subject to preliminary importation permits, these categories represented 35 percent of the value of the country's total imports. In 1989, the participation of controlled categories in the total had decreased to three percent and represented 21 percent of the value of total imports. At the same time, between 1985 and 1989, the maximum applicable import tax for all the categories under the Tariff of the General Import Tax decreased from 50 to 20 percent. 13. It is important to point out that the agricultural sector also participated in this commercial liberalization process. It was stipulated in the AGSAL I that agricultural and industrial sector import quotas should be reduced by five percent of the total national production in existence on November 30, 1986. Mexico fulfilled this condition completely. 14. Finally, under the loan export permits for high quality rice and cuts of meat were eliminated. With the objective of promoting agricultural sector exports, the export permits for meat, cattle, and rice were eliminated, and the export taxes for livestock on the hoof were reduced. 15. As a part of the structural change process which took place in the economy, the Government undertook the liquidation, sale, and transfer of parastatal enterprises. In the agricultural sector this process was carried out mainly in CONASUPO and the sugar subsector. 16. In CONASUPO the wheat processor TRICONSA was liquidated and ICONSA was privatized. At the same time, the distributing agencies (DICONSA) located in high income areas were closed.  - 21 - 17. With the aim of defining the policy to be followed in the sugar subsector, a study was carried out of the policy to be followed in this subsector. This study was issued to the Bank as part of the loan conditionalities, and as a result of the recommendations and as part of Government policy, liquidation of six sugar mills was carried out and the rest of the sugar mills were privatized. In this way, the commitments to the World Bank were fulfilled completely in the parastatal industry.   - 23 - PART III: Statistical Information Loan Data (amounts US$ million) Original Disbursed Canceled Repaid Outstanding (as of 31.7.91) Loan 2918-ME 300.0 298X0 - - 298.0 /lIncludes funds reallocated for "set-aside" in support of debt reduction program. Original Loan/Dates Actual or Re-estimated Initiating Memorandum 23 March 1987 23 March 1987 Letter of Development Policy 26 February 1988 Negotiations 14-18 December 1987 14-18 December 1987 16-19 February 1988 Board Approval 22 February 1988 22 February 1988 Loan Agreement 15 March 1988 15 March 1988 Effectiveness 16 March 1988 16 March 1988 Loan Closing 30 June 1989 15 November 1990 Actual Completion 15 November 1990 15 November 1990 CUMULATIVE LOAN DISBURSEMENT FY 88 FY 89 FY 90 FY 91 (i) Planned 100 200 - - (ii) Actual 10.7 98.1 176.9 25 (iii) (ii) as % of (i) 10.7 49.1 Follow-on Adjustment Operation Loan 3357-ME (AGSAL II), approved on June 1991 in the amount of US$ 400 million.  - 24 - Annex 1 Page 1 of 3 MENICO AGRICULTURAL SECTOR LOAN PROJECT (Loan 2918-ME) Compliance with Loan Conditions Guarante - eport -f in i i o f no -n Agreement Rt- eferption o Cond regrde as ost CoxnPiiari e _____ _____ _ j _____ _____ ____ _____ _____ ____ _____ _____ ____ o r n o nen fo c a l LA Sch. 2 Para. 41 To make a study of nutritional programs Yes to buffer the impact on low-income population of macroeconomic adjustment program. LA Sch. 2 Para. 55 To make a study on sugar pricing. Yes _ _ LA Sch. 2 Para. 76 To make a study on price stabilization and No Actions taken by variable tariffs, authorities go beyond requirements for products under guarantee price system. Objectives of the study met and completion therefore non- essential. GA Sch. (a-i) Pam. 41 Implementation of a satisfactory targeted Yes food subsidy program reaching approximately US$250 million. GA Sch. (a-ii) Para. 41 Revising eligibility criteria to ensure that Yes food assistance is received by low-income population. GA Sch. (a-iil) Para. 41 Presentation of a plan of action for Yes expansion of nutrition monitoring program to rural and urban areas. GA Sch. (a-iv) Para. 41 Linking price of "tortibonos" to prices of Yes "tortillas' in order to maintain in real terms the subsidy received per recipient at levels not higher than those existing as of effective date. GA Sch. (b-i) Para. 66 Transfers to CONASUPO in 1988 were Yes not to exceed the equivalent of US$85 million. GA Sch. (b-ii) Para. 66 Government transfers to CONASUPO in Yes 1989 are not to exceed the equivalent of US$85 million.  -25 - Annex 1 Page 2 of 3 LoanlProject Appraisal Compliance (yes or no). Action Proposed Guarantee ' Report If no, is covenant now' If not int Agreement Reference Description of Condition regarded as nonessential Compliai''ic or nonenforceable, GA Sch. (b-iui) Para. 66 No introduction of new global food Yes subsidy programs through institutions other than CONASUPO. GA Sch. (b- Paras. 66, Selling or closing of 15 parastatals in Yes iv)-(b-viii) 67, 68 agricultural sector. Closing or relocation of 500 DICONSA outlets. Liquidation of TRICONSA. Closure of 6 sugar mills. GA Sch. 1 (e) Paras. 41, Guarantor has completed and discussed Yes 55, 68, 81 with Bank results of studies on sugar pricing, nutrition and water charges. GA Sch. 1 (c) Para. 76 Guarantor has completed and discussed No Bank has had with Bank results on guarantee prices and intensive variable levy study. discussions on guarantee price system with Government. Objectives of the study have been met. GA Sch. 1 (d) Para. 76 No imposition of export controls, nor Yes QRs, on fruits and vegetables, except for l_____________ ____________ hygienic or health reasons. GA Sch. (e) Para. 76 Reduction of QR coverage of import Yes licensing on agricultural and agroindustrial products by 5 percent of national l___________ production coverage. GA Sch. (e-v) Parm. 41 Introducing a pilot program of food Yes assistance to low-income population in rural areas. GA Sch. (f-i) Parm. 54 Guarantee producer prices maintained at No Non-essential. least at real March 1, 1988 levels in 1988. Price stabilization Monthly adjustment on these prices under PACTO required. recognized as more important objective. Under this new scenario, compliance of this condition is considered non- essential.  - 26 - Annex 1 Page 3 of 3 Loa*~~~/Project Appraisal Compl~~~... IT ce yesr forl)-. Acttio Ptopoe 190~~~~~P iln: - ;--00;;0 00ini : Guarantee ~~~~~~~Repr If no, scvnn nw Ifnti I Agreement' ''-;leftrencilg Description of-Condition regarded as nonessential Compliance - or nonenforceable GA Sch. (f-ii) Para. 68 Guarantee prices for 1989 would be No The guarantee within a band of 90-125 percent of price system has intemational prices, except for beans and been replaced by maize. the "precios de concertaci6n' mechanism, a market determined price system. For barley "precio de concertaci6n" is around twice the intemational __________ price. LA Sch. 2/ Para. 81 To carry out studies of charges for water Yes GA Sch. (g) with the purpose of producing a plan of action to implement a system of irrigation charges to achieve recovery of O&M costs. GA Sch. (h) Para. 86 Establish procedures to encourage and Yes facilitate the disbursement of loans in support of agricultural investments from international agencies. GA Sch. (i) Para. 86 Increase SARH's investment budget in No Because of 1989 by US$200 million in real terms stabilization (US$210 million in nominal terms). program, conditions could not be met. However, in 1990 budget has been increased by US$315 million in real terms. .__"_E_REC ONDITIONFOR FIRSTR CHERE E LA Sch. 1 | Para. 76 Removal of export controls on high Yes para. 3 a i quality rice and cuts of beef. LA = Loan Agreement GA = Guarantee Agreement Sch. = Schedule January 12, 1989  - 27 - Annex 2 Page 1 of 2 MEXICO AGRICULTURAL SECTOR LOAN PROJECT (Loan 2918-ME) Mission Data Actual Staff Weeks for 6MXCPA147 - AGR SCTR I (FY88L) Task Manager: GARCIA-GARCIA TRS Managing Staff Staff Staff Staff EX Task Division Division TYpe Number Last Name TRS Month Weeks BANK/IFC - Regular Budget (BB) 86 LENP LA2AG LA2AG H 05413 BABELON 86/06 .3 13355 BERGER 86/06 .4 16447 OLIVER 86/06 .0 16963 LIEBERMAN 86/06 .4 Subtotal LENP 1.1 Total 86 1.1 87 LENA LA2AG LA2AG H 09920 KNUDSEN 87/06 7.7 10683 NASH 87/06 10.6 16447 OLIVER 87/06 3.1 PRESV H 01475 BERG 87/06 3.1 Subtotal LENA 24.6 LENP LA2AG LA2AG C A01230 FOX 87/06 1.0 H 05785 MILFORD 87/06 4.2 05883 WILSON 87/06 1.0 09920 KNUDSEN 87/06 10.0 10683 NASH 87/06 18.3 16447 OLIVER 87/06 16.8 01475 BERG 87/06 2.0 Subtotal LENP 53.3 LOP LA2C1 LA2C1 H 06102 NERCISSIANTZ 87/06 6.9 08571 VASILIADES 87/06 .2 11591 VOLJC 87/06 1.3 12017 JOHNSON 87/06 .0 13355 BERGER 87/06 1.7 Subtotal LOP 10.1 Total 87 88.0 88 LENA LA2AG CECTP H 10683 NASH 88/06 18.5 LATEN H 09421 PLAZA 88/06 .3 LA2AG H 06102 NERCISSIANTZ 88/06 2.6 12440 BINSWANGER 88/06 1.3 LA2C1 H 02994 VARALLYAY 88/06 .1 12017 JOHNSON 88/06 .0 LA2MX H 11591 VOLJC 88/06 .8 LA4AG H 16447 OLIVER 88/06 .4 Subtotal LENA 24.1 LENN LA2AG AGRAP H 09920 KNUDSEN 88/06 .4 IDIRSOI OFCEXEC - Rundate 06/26/91; Actual data as of 6/26/91 Type of Staff: H = Higher Level C = Consultant  - 28 - Annex 2 Page 2 of 2 Mission Data Actual Staff Weeks for 6MXCPA147 - AGR SCTR I (FY88L) Task Manager: GARCIA-GARCIA TRS Managing Staff Staff Staff Staff FY Task Division Division TI Number Last Name TRS Month Weeks 88 LENN LA2AG CECTP H 10683 NASH 88/06 5.4 LATEN H 17593 DAVIS 88/06 .1 LA2AG H 06102 NERCISSIANTZ 88/06 4.3 LA2C1 H 12017 JOHNSON 88/06 .4 LA2MX H 11591 VOLJC 88/06 .9 Subtotal LENN 11.5 SPN LA2AG IECCM H 14657 TAN 88/06 2.0 LA2AG H 06102 NERCISSIANTZ 88/06 2.9 LA2C1 H 12017 JOHNSON 88/06 .1 Subtotal SPN 5.0 Total 88 40.5 89 LENP LA2AG CECTP H 10683 NASH 89/06 .2 SPN LA2AG CECTP H 10683 NASH 89/06 1.0 LATEN H 10370 GOODLAND 89/06 .3 LA2AG H 06102 NERCISSIANTZ 89/06 1.3 07672 VON POGRELL 89/06 .1 12440 BINSWANGER 89/06 .6 19456 GARCIA-GARCIA 89/06 14.9 LA2C1 H 12017 JOHNSON 89/06 .5 LA2HR H 15047 FRIEDMANN 89/06 1.5 LA2MX H 11591 VOLJC 89/06 .3 Subtotal SPN 20.6 Total 89 20.8 90 SPN LA2AG LA2AG H 06102 NERCISSIANTZ 90/06 .2 19456 GARCIA-GARCIA 90/06 10.0 Subtotal SPN 10.1 Total 90 10.1 91 SPN LA2AG LA2AG H 19456 GARCIA-GARCIA 90/07 .5 LA2C1 H 00263 SQUIRE 91/01 .1 Subtotal SPN .6 Total 91 .6 TOTAL BB 161.1 TOTAL 6MXCPA147 161.1 IDIRSOI OFCEXEC - Rundate 06/26/91; Actual data as of 6/26/91 Type of Staff: H = Higher Level C = Consultant