World Bank relations with Mexico

NUMBER 71 * EDPrecis H Operations Evaluation Department June 1994 World Bank Relations with Mexico Mexico, w4ith mlore thana 80 million irection. In panrallel the Bank hias ex- comfortable. The role Mexico people, is one of the Bank's largest panded the range of its analytical ser- wanted the Bank to play, and the borrowvers, accolntingifor $21 billion vices, and become mloreflexible in its mission envisaged by the Bank, of lending, or 10 percent of the Bank's financing and mlore responsive to became more consistent for three total conmmitnments since 1948. Mexico'sfelt needs in its economic main reasons. B,id \1, i i, .. relationzs, wvlile alztays and sector wrk. generally good, have becomle closer Mexicani strategy: Mexico shifted and mimore stable over the last decade. From 1948 to 1970 Mexico en- its economic focus toward the pri- A newt, OED study* examinies the joyed remarkably high growth, low vate sector in the early 1980s after Bank's economiiic and sector work, inflation, and moderate debt accu- an expansionist, public sector-ori- policy dialogue, and lendintig tle mulation. Growth after 1970 was ented strategy and a reversal in oil thiree principal vchiclesfor coluntry uneven, with dynamic bursts fol- prices left it with a massive foreign assistance-in relation to Mexico, as lowed by sharp downturns and debt, a weak fiscal position, and uwell as evolving objectives and expec- then recovery. The 1980s saw large strong inflationary tendencies. tations. Itfinds that converging strat- public sector deficits, double digit egies, and the CconIomllic progressfa- inflation, balance of payments cri- At all times Mexico has had a ba- cilitated by the Bank's assistanceef- ses, and rapid growth in the exter- sic idea of the role it wanted the forts, played a key role in slapinig and nal debt. Since 1989 inflation has Bank to play in its development. strengthleniingthe relationslhip. been brought under control, the When stabilization was the main balance of payments has been goal, Mexico looked to the IMF Increasinigly over thle last decade, strengthened, and growth has re- rather than the Bank for assistance. tlhere hias beeii agreemiient on) policy sumed. Problems of poverty and The priorities assigned by succes- directions between Mexico and the uneven distribution of income have sive administrations to (1) growth Bank, altlholuglh not without extenided recently been assigned high priority versus equity; (2) public versus dialoglue. The Bank Ias provided eco- on the policy agenda. private as the leading sector; and niomtiic and sector wvork, and expantded (3) protectionism versus liberalism its lending programi in support of While it is difficult to gauge in trade affected the role Mexico Mexico's economiiic adjutstmenit and the precise extent of the Bank's wished the Bank to play in its devel- debt strategy. The Bank lhas also influence on Mexico's economic opment as well as the overall qual- lhelped to mnobilize tlhe interniationzal progress, it is clear that the Bank's ity of relations. In general, Mexico finanzcial coniili)lity in siupport of assistance efforts have become saw a role for Bank financing and Mexico's debt restructuringand re- increasingly accepted and effec- advice in pursuing growth objec- duiction efforts. Better arranlgenments tive. Several factors account for tives. When private sector develop- for collaborationand coordination this change. ment, open trade relations, and have increased the ability to avoid or I withstandfrictions, and external Strategies Study of BaiiklAIex,co lOED events and clhanges in attitludes lhaveit increased the acceptability of Bank Bank/Mexican perceptions of Relations;. Rep'oit No. 1292'3. advice andfitiaiiciiigin Mcxico. Tlzc the Bank's role in Mexico were .Ardl 1994. OlED ieports are a,7a1l- grou7ing attentiomi paid by tIme initer- never far apart, but in the 1980s a and11 to Ban'k he lutle nirec tor. national bankimig commimnumm)ity to Banlk confluence of circumstances and InCtfLs It iit andIrn, ReD-,,onal ron assessniients of columitry creditzvorthi- new actors with new approaches n it nScm' tei s. Cro niess has also zoorked in thle samle di- made relations closer and more  ------ - -- ---------- ---------- ------ ----- Country assistance Performance of Projects Approved 1964-87: Mlexico, Selected Countries, and World Economic and sector work (ESW) --- --- IOU - ---- - ---- ---- --- ESW by the Bank on Mexico con- sists mainly of economic reports, pre- pared at frequent intervals since 1948, 80 but also includes seminars, work- shops, and informal papers analyzing current policy issues and initiatives. 60 Some ESW is planned and imple- I: * mented N N l with Mexico. Some W ! Ejointly is in the form of technical assistance, 40 e q izM 0 g |provided by international experts CL ~~~~~~~~~~~~~~~~~~and Bank staff, as well as Bank support for research programs car- ried out by Mexican and other ex- perts in Mexico. Nke%ico Brazil Colombia World Early reports, seeing the need for a well-coordinated national develop- ment program supported by sound fiscal policies, concentrated on verify- equity emerged as Mexico's priority ing Mexico's debt restructuring and ing debt service capability and credit- objectives, Bank relations improved reduction efforts, providing large worthiness. After 1975, when the oil substantially. interest support loans as well as boom had allayed concerns over participating in the design of the ne- creditworthiness, Bank economic re- Bank strategyl: The Bank shifted its gotiating strategy. views turned to issues of poverty, assistance strategy from one based population growth, and regional im- on financial support for public sector Present Bank strategy reflects the balances. Economic work in the early investment and the use of leverage view that now that fundamental re- 1980s questioned the viability of the (to encourage Mexico to follow appro- structuring has been done or is un- Mexican development strategy based priate fiscal policies) toward one derway, remaining issues can be ad- on massive public sector investment based on responsive support for dressed through increasing support and protectionism. After the 1982 Mexico's program for dealing with its for investment in economic and so- change in Mexico's leadership and problems of debt, weak balance of cial infrastructure. the consequent policy shift toward payments, and a slowdown in liberalism in trade and encourage- growth, as well as with national emer- Changing players: In 1982, politi- ment of the private sector, Bank ESW gencies such as the 1985 earthquake cal change in Mexico brought the focused on providing analytical sup- and the 1992 gas explosion. core of the country's intellectual/ port for trade reform, for structural technocratic elite to the fore, and adjustment of the financial, indus- The Bank's strategy in Mexico with them new ideas and strategies. trial, and agricultural sectors, and for evolved much as in many other coun- The appearance of new economic reform of the public enterprise sector. tries-moving from an early concen- management teams on both sides tration on infrastructure to a concern was also conducive to fresh ap- In general, Mexican opinion of with direct interventions for poverty proaches. In 1985 the US Treasury, Bank ESW has been very positive. alleviation, and then to assistance for in its initiative to assist Mexico with There is evidence that at times Bank structural adjustment in the 1980s to its debt, recognized the importance ESW influenced directly or indirectly deal with exogenous shocks and dys- of the dialogue between Mexico the course of Mexican policymaking, functional policy frameworks and to and the Bank, and provided the especially in the 1980s. The likelihood cope with massive debts. opportunity for more formal Bank and degree of influence was deter- involvement in the macroeconomic mined mainly by the relevance of In the 1980s in Mexico the Bank fo- policy dialogue. Structural adjust- Bank advice, which in turn depended cused on trade liberalization; then, ment, as a result, became an integral on the focus, analytical depth, and without pushing for a comprehensive part of the long-term debt strategy. timeliness of ESW, the quality of structural adjustment loan as such, it As a consequence of these changes, Bank staff, and the continuity of their provided quick-disbursing support of Mexico has become more willing assignment to work on Mexico. Pa- adjustment in several sectors. The to allow dialogue on a wider range pers on trade liberalization, the debt, Bank gave highest priority to support- of issues. and more recent work on poverty is- Jiune 1994 sues, are outstanding examples of egy. Meanwhile, Mexican leaders re- and long-standing social problems. Bank ESW. alized that the financial crisis was a Changes in the composition of Bank long-term debt problem requiring lending have responded in part to Bank ESW has experienced occa- fundamental structural adjustment changes within the Bank and also sional difficulties, resulting from lack of the economy as well as stabiliza- to the preferences of the Mexican of access to data, and a lack of coop- tion and financing. During the late government. eration by Mexican authorities on top- 1980s the dialogue centered on ad- ics such as population, land distribu- justments in the policy and institu- Three-quarters of Bank lending to tion, and the national petroleum com- tional framework of many sectors. Mexico has been for projects and the pany. A general weakness was the remainder for support of policy re- lack of attention by Bank staff to the In the 1990s the focus has been on forms. Almost all Bank projects in political milieu in which development the reduced role of government in Mexico have contained technical as- policy was being framed. This occa- keeping with the private sector ori- sistance components for training, con- sionally made for ineffective Bank ad- entation of the economy. Some other sultant services, and studies, account- vice and lending, especially in rural topics-for example, environment, ing for more than 7 percent of fund- development. The overly restricted human development, and the social ing approved. As well as providing fi- circulation of Bank ESW within aspects of development-have been nancial resources directly the Bank Mexico caused additional problems. added to the agenda. has helped to mobilize resources from Though-within the Bank, ESW on the international banking commu- Mexico usually benefited from a vig- A significant achievement of the nity-first in 1985, through partial orous dialogue, there were occasions Bank/Mexico dialogue was the 1984 guarantees on Mexico's behalf of up when opinions not conforming to the General Interest Rate Agreement, to half of a $1 billion commercial bank dominant view were not given a fair whereby the individual interest ad- loan, and then in 1990 when, at hearing. justment clauses under 15 ongoing Mexico's request, it waived negative previous loans in several sectors pledge restrictions in existing loan Policy dialoggue were replaced by an umbrella ar- and guarantee agreements to clear the rangement for all. way for a pledge of up to $7.5 billion The scope and content of dialogue as collateral for principal and interest expanded over time as the Bank's ap- One objective-to regularize and payments on commercial loans. proach changed-from attempting to reduce interest subsidies-has not influence policy decisions directly to been fully achieved although there Conditionality on loans, pur- contributing to an advisory process has been a substantial reduction in chasing of domestically produced led by Mexican technocrats. Along- subsidies, and dialogue continues on goods, and complexity of procedures side the formal dialogue that takes outstanding issues. Among areas have been the main lending issues place through twice-yearly country where dialogue was inadequate, for Mexico: program (or strategy) implementation the case of oil and the national petro- reviews is an informal dialogue in leum company was most noticeable. * Before 1980 the Bank resorted to which Bank experts work with Mexi- Here the lack of dialogue impeded formal conditionality to encourage can technocrats on urgent policy is- Bank understanding of an important Mexico to act on revenues and sues. At the same time, the Bank has sector and especially of its impact on pricing of public sector services, been carrying on an expanded dia- the debt. This may have been the rea- but these efforts were resented and logue with other financial institutions son the Bank failed to foresee the achieved little. Since then explicit to achieve more effective coordination 1982 financial/debt crisis. conditionality has been replaced by with their Mexico programs. informal agreements and understand- The len1ding prq,nn1n ings. The Mexicans have generally After the beginning of the oil boom met or exceeded commitments made in 1976 and for the next five years nei- From 1948 to March 1993, the in these circumstances. ther side made much attempt to dis- Bank made 163 loans amounting to * Bank limitations on the use of its cuss macroeconomic or project issues. $21.2 billion to Mexico. funds to purchase locally manufac- But the drying up of other sources of tured goods have been regarded as international financing, the beginning Early Bank lending was almost inconsiderate of Mexico's import sub- of a new administration, and the exclusively for investment projects in stitution strategy, but this concern has emergence of a new group of leaders power, transport, and utilities. Lend- subsided with trade liberalization. in 1982 set the stage for a new phase ing shifted toward agriculture and * Complex Bank procedures-pro- in the Bank/Mexico dialogue. For the industry in the 1960s, poverty alle- curement rules and competitive bid- next three years discussions centered viation in the 1970s, and then policy ding requirements-are seen as hav- on trade liberalization, considered es- and adjustment in the 1980s. Current ing slowed drawdown and made sential to Mexico's shift to an export lending practices lean toward ad- Bank financing impractical for urgent expansion and diversification strat- dressing infrastructure bottlenecks social investments. OED Precis  through regular reviews with the cli- lMleihodology ent and including all relevant sec- fions of the Bank can result in im- A blend of ho analihcal ap- nature of the relationship, the es- proved performance of the portfolio. proaches-the ev ents-driven" sence ot w-hich is a transaction in- * Miiiinrialexplicit conditionality in and the 'strateg> -dcnven'--com- volving a mix ot serv ices (fLnancing the context of agreement on the prised the stid> s methodological and adv,icei provided by the Bank, in development strategy can be more framewvork exchange for a consideration (inter- effective than formal conditionality est and other charges) trom the client and leverage. Bank responsiveness The events-drix en approach country . The quantityif and mix o0 to the client's important needs and identifies the main ev ents that may ser% ices offered ma% ditier from emergencies goes a long way to have affected relations. and at- w%-hat the borrowing country regards 'I enhance the relevance of Bank tenpts to judge the nature andi di- as optimal. the difterence being the assistance and the tone of Bank/ rection of effects oni the relationi- maiin source of triction in relations s-hip This approach uses events to The tone of relationsl v-ill be deter- dehne stages in the relationship, mined by the direction and extent ot anid tries to identify tactors that de- this difterence and the adjustments Institutional response: termine the evoz.lution trom one on both sides to friction The strat- stage to the next. Events, direct or egy-driv-en approach tocu-es on the In its response to the OED study, indirect, are seen as hav ing the po- w%ay attitudes and ev ents itliiuence a Bank inanage1nent generallyendorsed tential to raise or decrease tension. country's demand for the Bank's ser- the recotinirenidatiotistsiade. Oni tire int- dependiing on hoi% wvell the inter- vices, and on the wiay in w hich the porttance of imintaininaigIhigli quality ests of both partie; are serxved Bank's interpretation of its mission stanidards, it noted that the regioni is and asesement o?t countrN pert0r- creatiirg tlhematic teams to work oni Complementing the e% ents- mance aftect its wvillingness to sup- cross-cutting issu es, and that t ffi be- driv-eni approach is the strategy- p1% a service. Together the,e deter- ing irradc to sti-eam11liuie loanl processing driven approach This method takes mine the likelihoodi ot friction and procedures will allow staff aiid im1anage- tuller conisiderationii of the econkmic the etfork. to reduce it unicuit tofocils conlsistenltly Oil thle policy conrtent of operatioirs. The region will conitinuie strengtihenlinlg tIre luirk betweeii Bank concerns about the lend- and economic management must project design antd econiomiiic aiid sector ing program have centered on have adequate access to information Wzork,focusing gieater attenltion oii les- slow disbursement, faulty pro- as an input in its ESW. sonsfiroi project imiplemizentation. curement procedures, and inad- * Policy analysis aird dialoguic: Cli- equate domestic cost financing. ent participation in planning and JAC response: Slow disbursement was due to implementing ESW helps ensure failure to provide counterpart that recommendations are relevant The 1994 Subcommittee on OED funds, lack of compliance with in- and acceptable. Staff and client Reports of tire JointAudit Commit- terest rate covenants, and admin- participation in a healthy technical tee carried out an intensive review of istrative impediments. The Bank debate, scheduled at regular inter- tIre OED study oii Mexico arid cndoi-sed responded in the 1980s with a vals, can help assure that even un- tIre gcneral thiru 1st of its conclulsiols, Special Action Program in which popular views are considered and niotinig thlat tlie quality of tire dialogute it made advance payment into a therefore makes for innovative and between tire Banik and Mexico appeared revolving fund, increased cost high quality ESW. Policy dialogue to be an inidispenisableinigredientfor tire sharing, and provided working must be low profile, and appropri- Batik's overall iriipactin Mexico. Tire capital to lines of credit schemes ately timed in the political cycle slrbcornnr,itteeenicon raged OED to coni- and more intensive monitoring of and decisionmaking process. tinrue to uniidertake counltryfocuised implementation. In addition the * Staffing: The Bank must field in- stuidies arid to look at tire qluality of tire Bank has supported procurement tellectually strong, mature interlocu- dialogue between tire Banirk arid te bor- training in Mexico. tors, who are not subject to frequent rozwinig couittries; it agreed zoitli OED staff turnover and are entrusted to thlat thlere zwould be i11eCrit in coricenitrat- Lessons make commitments on behalf of the shiorter time periods ig slclic stiudies on1 Bank if the need arises. aiid on1tire overall devZelopulerital arid * Access to information: The Bank in * Programn 111011itor-irig: Planning and ecorionnic iilpact of tire Bank's strategy its role of advisor on development coordination of the lending program in tire country. OED Pr&is is produced by the Operations Evaluation Department of the World Bank to help disseminate recent evaluation findings to development professionals within and outside the World Bank. The views here are those of the Operations Evaluation staff and should not be attributed to the World Bank or its affiliated organizations. Please address comments and enquiries to the managing editor, Rachel Weaving, G-7137, World Bank, telephone 473-1719. ji ire 1994