Statement by Andrei Bugrov at the Board meeting of March 26, 1998

International Bank for ReconstrJction and Development International Development Association 87132 International Finance Corportation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS98-130 March 25, 1998 Board Meeting of March 26, 1998 Statement by Andrei Bugrov Mexico - CAS Progress Report I would like to thank the Management for this useful update on the Mexico CAS implementation. It left me with a feeling of optimism mixed with some anxiety, which perhaps is exactly the feeling which the authors intended to convey. Still, I feel a little puzzled by the apparent contradiction between the strongly positive opening paragraphs about the country's recent economic performance, and the main text revealing the persistence - and even some deterioration - of serious structural problems. This ambivalence the authors must have felt is accentuated by their style. To give just one example of the source of my confusion, the very first paragraph cheerfully informs us that "[f]ormal sector employment has increased significantly since 1995", yet only a few pages later, in para 9, we learn that in fact "[n]otwithstanding the recovery in output and significant improvements since July 1997 ... formal sector employment is lagging considerably". I am sure there is a rational explanation of this seeming discrepancy, but I would like to know which of these statements I should believe. Ofthe matters of substance, I would like to mention three. No doubt we shall have a better opportunity to discuss them next year when the new Country Assistance Strategy comes to the Board, so at this point I will simply touch upon the subjects I see as particularly important. The first such subject is the issue of poverty and inequality. By all accounts this remains an extremely serious problem for the country, something that may in fact jeopardize its long term economic development regardless of advances in macroeconomic management. Indeed, it puts into question the very viability of economic growth: what is the social and ethical value of the increase in aggregate wealth if all of it accrues to the top end of the distribution while numbers of people in poverty continue to grow? Clearly, we do not know enough about the magnitude and structure of poverty in Mexico, and I am glad to see that we are trying to learn more. In a recent report on Argentina for example, we discovered that there is a strong link between poverty and unemployment, the fact which has clear policy implications for poverty alleviation. I am sure that similar work needs to be done for Mexico. In addition, the alarmingly high incidence of poverty in certain communities - up to 80% according to the paper - should prompt a study into the ways of breaking through he barrier of social and economic exclusion. I would like to know whether any such work is being planned. 1.:-~f}:;r~ document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed \vithout : \licrld B1d;: authorization. """·--·--·- -----------  2 Given the special significance of poverty alleviation for this institution, as well as the urgent nature of the problem for the country, I would like to know what proportion of our portfolio in Mexico can be attributed directly to poverty reduction. I noticed that the main change in our program since last year has been a sharper focus on regions and sectors. Am I right in assuming that greater attention to the support of productive activities in Chiapas, Guerrero and Oaxaca would address the question of poverty in these regions - and therefore increase the overall poverty focus of the Bank's portfolio in Mexico? If so, my only regret is that this sharpening of the focus occurred by default rather than by design. My second comment relates to the progress in the financial sector. Again, I find the report sending a mixed message by saying, on the one hand, that the recent crisis has been largely overcome, and on the other, that most of the structural causes of the troubles are still in place. I strongly support the need to address the weakness of the financial system, build up its institutional capacity and remain vigilant regardless of the recent recovery of investor confidence. Finally, let me say a few words about the challenge of decentralization. I fully share the two key observations of the paper on the subject, namely, that this process is likely to continue in Mexico with or without the conscious strategic effort from the center, and that the challenge is to balance the growing spending authority of the regions with the need to maintain the overall fiscal discipline. To that I may also add that decentralization may exacerbate the problem of inequality, something which, as we discussed above, must be avoided at all costs. Therefore I see it as an important role of the Bank to engage actively in developing a working strategy with respect to decentralization, a scheme which would explicitly address these challenges and help to reap the benefits of delegated authority without jeopardizing national priorities. I can see a great scope for direct work with the regions, and perhaps for the new lending instruments, provided they take into account the concerns I have just outlined. I am also sure that the experience of Mexico in this respect will be of great interest to many other federative countries, and I hope that our new role as the knowledge bank will facilitate to spread of this experience.