OED study of Bank / Mexico relations, 1948-1992

Report No. 12923 OED Studyof Bank/Mexico Relations,1948-1992 April 1, 1994 Operations Evaluation Department FOR OFFICIAL USE ONLY 'Dna_u of th World lank Thliodocumenthas a restricted andmay distribution only byrecipients beused Ii theporlbrmance maynotodwwisebe itscontents of theirofficialduties. 'dsclosed WorldBank without authorization L '-  ABBREVIATIONS ARPP - AnnualReview of Portfolio Performance CFE - CorporacionFomentode Electricidad CPIR - Country Program Implementation Review CPP - CountryProgram Paper CSIR - Country StrategyImplementation Review CSP - Country StrategyPaper DDSR - Debt and Debt ServiceReduction ESW - Economicand Sector Work FONATUR - the tourism promotionand developmentagency GATr - GeneralAgreementon Tariffs and Trade GIRA - GeneralInterest Rates Agreement GOM - Governmentof Mexico GDP - Gross DomesticProduct ICB - InternationalCompetitiveBidding LAC - Latin America and the Caribbean NAFTA - North AmericanFree Trade Agreement OED - OperationsEvaluationDepartment PEMEX - PetroleosMexicanos- the state petroleumcorporation PIDER - IntegratedRural DevelopmentProgram SAL - StructuralAdjustmentLoan SAP - Special ActionProgram SAHR - Secretariatof Agricultureand Water Resources SHCP - Secretariatof Finance and Public Credit SEDUE - Secretariatof Urban Developmentand Ecology TA - technicalassistance  OED STUDY OF BANK/MEXICO RELATIONS. 1948-1992 CONTENTS Page No. PREFACE ............................................... SUMMARY AND CONCLUSIONS .................................. iii 1. OVERVIEW OF BANK/MEXICO RELATIONS ...................... 1 INTRODUCTORYOVERVIEW& METHODOLOGY.................... 1 METHODOLOGY........................................... 1 The "Events Driven" Approach ............................... 1 The "Strategy Driven" Complement ............................ 2 APPLICATIONTO BANK/MEXICORELATIONS ...................... 5 Application of the Events Driven Approach ....................... 5 Application of the Strategy Driven Complement .................... 7 The Combined Events and Strategy Approach ..................... 11 FUTURE RELATIONS ........................................ 11 IMPLICATIONS............................................ 12 2. MEXICAN ECONOMIC PERFORMANCE AND DEVELOPMENT STRATEGY 13 INTRODUCTION ........................................... 13 THE FIRST PERIOD ......................................... 13 Import Substitution ...................................... 13 THE SECONDPERIOD ....................................... 14 Public Sector Led Growth, 1970-76 ............................ 14 Crisis of the Mid-Seventies ................................. 15 Oil Boom - Debt Explosion, 1976-1982 .......................... 15 Thisstudywas preparedby Gladstone Bonnick of AlainBarbu, Jan de (taskmanager)and a teamcomprised Weille(both OED staff, and SulaimanWasty, Ahmad Ahsan, Bernard Decaux, Tova Solo, John Kalbermatten, Anitra Thorhaug, Eric Shearer and Kenneth Clare (Consultants), and Thais Franco, Research Assistant. Geri Wise and Alejandra Sarmiento provided word processing assistance. CONTENTS(cont'd.) Page No. Economic Crisis - 1982 .................................... 16 Stabilization Attempt, 1983-85 ............................... 17 Some Destabilizing Events .................................. 18 Foreign Debt Negotiations & Trde Uberalizatin .................. 18 Inflation & Heterodox Stabilization ............................ 19 A National DevelopmentPlan ............................... 19 Debt Restructuring and Debt Reduction ......................... 20 NAFTA . ............................................. 21 Employment, Income Distribution and Poverty .................... 21 The Environment ........................................ 22 3. MAIN ISSUESIN MEXICANDEVELOPMENT STRATEGY .... .......... 23 INTRODUCTION ........................................... 23 Growth, Stability and Equity ................................ 23 Growth .......................................... 23 Stability .......................................... 24 Equity ........................................... 24 Priority Objectiveand MexicanAttitude toward the Bank .... ....... 24 Public versus Private Sector ................................. 26 Protectionism versus Liberalism .............................. 27 OPPORTUNITIES AND CHALLENGESIN MEXICANDEVELOPMENT ....... 28 Oil . ..............................................28 A Short Review ..................................... 29 Mexico's Oil Policy................................... 30 The Impact of Oil .................................... 32 The Problemof Oil Price Fluctuations ....................... 33 The Role of the Bank in Relationto Oil ...................... 34 Debt . .............................................. 34 Reviewof Debt Build-up ............................... 34 Debt Strategy ....................................... 36 Ihe Role of the Bank .................................. 37 CONTENTS(cont'd.) Page No. Urbanization ........................................... 37 Introductionand Descriptionof Urban Situationand Isues. 37 (a) Populationand GrowthTrends ........................ 37 (b) Basic Needs ................................... 38 (c) InstitutionalFramework ............................ 38 Evolution of Mexico's Urban Strategy ....................... 38 (a) GovernmentDirectedDevelopment,MassiveProjects .... ..... 38 (b) Birth of an Urban StrategyUnder PresidentsEcheverrfa and Ldpez Portillo ............................... 38 (c) Urban Sector Under Crisis .......................... 39 (d) Deregulation ................................... 40 (e) Role of the Bank ................................ 40 The Environment ........................................ 41 Mexican GovernmentPolicy ............................. 42 Implementation ...................................... 43 Role of the Bank ..................................... 43 MEXICO'S VIEW OF THE ROLE OF THE BANK ...................... 44 4. BANKSTRATEGYFOR MEXICO ............................... 47 The Bank's Role in Development ............................. 47 Country Considerations .................................... 48 Future Strategy ......................................... 52 Concluding Remarks ..................................... 53 5. ECONOMIC AND SECTOR WORK .............................. 55 HISTORICALBACKGROUND .................................. 55 OBJECTIVES.............................................. 56 OUTPUTS ............................................... 57 ADMINISTRATION ......................................... 58 Planning and Coordination of ESW ............................ 58 Resource Inputs ......................................... 59 Joint Inplementation of ESW ............................... 60 CONTENTS(cont'd.) Page No. FOCUS ............................................... 61 Review of Macroeconomic Work .............................. 63 Stabilization ........................................... 64 Adjustment ............................................ 65 SectorWork ........................................... 66 The Bank's ESW in Agriculture ........................... 66 Electricity& Power ................................... 67 ESW on the Transport Sector ............................. 68 ESW on Water & SanitationSector ......................... 69 ESW on Industry .................................... 69 ESW on the Urban Sector ............................... 71 Social Concerns ......................................... 71 Other Studies .......................................... 73 EVALUATION............................................. 73 Criteria .............................................. 73 The MexicanPerception ................................ 73 Influence on MexicanPolicymaking......................... 74 Bank Views on its ESW ................................ 76 Linkagesto the Dialogueand to Lending ...................... 77 Some Outstanding Cases of ESW .......................... 78 (a) TradeLiberalization .............................. 78 (b) Debt and Debt Restructuring ......................... 81 PROBLEMSFACED BY ESW ................................... 85 STRENGTHSAND WEAKNESSES................................ 86 The InternalDialogue ..... ................................. 86 Missing- The PoliticalDimension ............................. 87 LESSONS ............................................... 88 6. THE POLICY DIALOGUE .................................... 91 INTRODUCTION ........................................... 91 CONTENTS(cont'd.) Page No. A SHORTREVIEWOF THE DIALOGUE ........................... 91 Clarification of Bank's Role ................................. 91 Learning Together ....................................... 92 A Period of Criticism ..................................... 93 Brief Convergence ....................................... 94 The Rich Know Best How to Manage Wealth? ..................... 95 A New Beginning ........................................ 96 CASE STUDIES ............................................ 99 A Case of Successful Dialogue - The Gener Interest Rate Agrement (GIRA) .................. 99 A Case of UnsuccessfulDialogue - The Maintenance of Value .... ....... 101 Areas of Inadequateor Lacking Dialogue ......................... 101 3il/PEMEX ........... ............................ 101 Some Other Topics ....................................... 105 Poverty ....... 106 Ejido ....... 106 Population........ 107 SECTORDIALOGUE ................ 107 Electrcity & Power ............ 107 Transport Sector ............. 107 Water & Sewerage ............ 108 Agriculture ............. 108 Industry ............. 109 Urban ............ 109 EVALUATON OF THE DIALOGUE ............................ 109 Usefulness ........................ 110 Effectiveness ......................... 110 Conduct of the Dialogue ......................... 112 Form of Dialogue ................... 112 Planningand Coordination ................... 112 Level or Rank of Interlocutors ....... ............ 113 CONTENTS(cont'd.) Page No. Appropriatenessof Topic and Level......................... 114 NegotiatingStrategy .114 Dialoguewith other FinancialInstitutions.115 CONCLUSIONSAND LESSONS.115 Lessons .116 7. THE LENDINGPROGRAM.119 INTRODUCTION.119 OBJECTIVES.119 THE LENDINGPROGRAM .120 Size .120 Bank Exposure .122 Composition .123 Sectoral Distributionof Project Lending .123 Policy-BasedLending.124 Technical Assistance Component .125 Cofinancing and Bank Guarantees .125 Planning & Coordination of Lending .127 Staffweeksin Support of Lending .129 LENDINGISSUES .129 The Mexican Viewpoint.129 Conditionality.129 Purchasingof DomesticallyProducedGoods .130 Complexityof Procedures.131 The Bank's Viewpoint.132 Slow Disbursement.132 ProcurementProcedures .133 DomesticCost Financing .134 Auditingof Bank-FinancedProjects.134 CONTENTS(cont'd.) Page No. LENDING- TWO SPECIALCASES ............................... 134 Earthquake Rehabilitation and Reconstruction .................... 135 Interest Support Loan . ..................................... 136 EVALUATIONOF LENDING ........... ........................ 137 Overall Evaluation - OED's Evaluation and ARPP Ratings .... ........ 137 Cancellations........................................ 138 Time Overrun . ..................................... 139 Cost Overrun........................................ 139 ComparativeEvaluation ................................ 139 Sustainability ........................................... 140 Evaluation Based on Project Performance ........................ 141 Agriculture/Rural ............ ........................ 141 Electricity & Power ........... ........................ 141 Water & Sewerage ........... ........................ 143 The Transport Sector ........... ....................... 145 CONCLUSIONS& LESSONS ........... ........................ 146 Appendix: Comments from Borrower . ........................................ 153 Appendix of Tables ............................................. 159 I  i OED STUDY OF WORLD BANK/MEXICORELATIONS, 1948-1992 PREFACE This study is the fifth in a series of countrystudies initiated in 1985. The first two reviewedthe World Bank's relationshipwith Pakistan(ReportNo. 6048) and with Sri Lanka (Report No. 6074), and were issuedto the ExecutiveDirectorsin 1986.The third, reviewedthe relationshipwith Senegal(Report No. 8041) and was presented to the ExecutiveDirectors and the President in 1989; and the fourth on Bank/Tanzania relations (Report No. 8329) was presented in 1990. The purpose of this series of reviews is to look at the interactionbetweenthe Bank and selected borrowers over an extended period of time to identify the lessons which could serve to make the Bank/Countryrelationshipin each casemore fruitful in the future; and to provide a basis for comparative analysisto identifyneeded improvementsin the way the Bank provides developmentassistance. The study of the Bank/Mexicorelationshipcovers the period 1948to 1992.The report contains an overview of the relationshipbased on an analysis of the events that have shaped it and on an examinationof the changingattitudesthat have influencedthe strategieswhich Mexicoand the Bankhave adoptedfor dealingwith each other. It focussesin detail on the three main componentsof Bank strategy - economicand sector work, the policy dialogueand the lendingprogram and tries to distill the lessons for the future. These are set out in conclusionand recommendations. The study is based on a review of Bank files and audit reports, academic writings, and on discussionswith Bank staff. Mexican officials, representativesof the academic community and the privatesector were interviewedduring a missionin September1992. The kind cooperationand valuable assistanceof all who cooperatedin these interviewsare gratefullyacknowledged. -- -)  iii OED STUDY OF BANK/MEXICO COUNTRY RELATIONS, 1948-1992 AND CONCLUSIONS SUJMIMARY OVERVIEW 1. Bank/Mexicorelations, while always generallygood, have become closer and more stable over the last decade. Improvedarrangementsfor collaborationand coordination have increasedthe abilityof the relations to avoid or withstandfrictions, and externaleventsand changesin attitudeshave increasedthe acceptabilityof Bank adviceand financingby Mexico. The increasingattentionpaid by the international banking community to Bank assessmentsof country creditworthinesshas also worked in the same direction. Bank response has been to expand the range of its services, to be more flexible in its financing, and to be more responsiveto Mexico's needs in its economicand sector work. The outlook is for continuedgood relations. METHODOLOGY 2. A blend of two approaches- the "events driven" and "the strategy driven" - has been employed in this study. The first focusseson how discrete events affectedrelations. The second emphasizesthe subtle influenceson each party's strategy for dealing with the other. The combined approach tries to analyzehow this strategyhas evolved. The underlyingassumptionis that the tone of relations depended on the extent to which each party performedin accordancewith the perceptionof the other party. MEXICO'SECONOMICPERFORMANCE 3. During the quarter century ending in 1970, Mexicoenjoyedremarkablyhigh growth, low inflation and moderatedebt accumulation.Real GDP growth averagedover 6% and inflationwas mostly in single digits. This was an era of fiscal conservatism,and the absenceof significantexternalturbulence. The period after 1970, was marked by a rapid expansionin the role of governmentin the economy,several dramaticchangesin the internationaleconomicenvironment,two major balanceof payments crises, and an overhanging external debt that required much ingenuity and internationalcooperationto manage. During this period growth has been uneven, with bursts of dynamismfollowedby sharp downturnsand then recovery. Double digit inflationhas not been uncommon, and inflationarypressures have been difficult to contain. This has been a period of stabilizationand adjustmentdemanding the continual attentionof skilled economicmanagement. MEXICO'SDEVELOPMENTSTRATEGY& THE ROLE DESIREDOF THE BANK 4. Mexico's developmentstrategy can be seen in the choicesit made in the following:  - iv - a) relativeemphasison growth, stability, and equity; b) public sector versus private sector emphasis; c) protectionismversus liberalismin trade. In addition, Mexico's developmentstrategyrespondedto the opportunitiespresented by the discoveryof large reserves of oil and the challengesin urban development,preservingthe environment,and managing its externaldebt. Relative Emphasis on Growth, Stability, and Equity 5. Growth in GDP was the priority objectiveup to 1970 when Mexico's three decade long era of sustainedhigh growth ended, during the 1977-1981oil driven investmentboom, and again after 1988 whenthe administration of PresidentSalinasshiftedthe emphasisback from inflationreductionto growth. Bank/Mexicanrelations have been affected by the relative priority of these objectives. Mexicolooked to the Bank as a source of financing for infrastructurewhen growth was of highest priority, but its attitudeto Bank advicewas less positiveduring 1977-1981 when Mexicowasless dependenton the Bank as a source of financingand whenthe dominanttechnocratsdid not share the Bank's cautiousview about the exploitationof oil. 6. Althoughthere was some concernover stabilization as early as 1951/52, it becamethe numberone priority in 1976 when inflationand losses in reserves approachedcrisis proportions. In 1976 and again in 1981Mexicoturned to the IMF when the situationdeterioratedinto a crisis. During the period 1983 to 1988stabilizationwas again the number one priority, and the last two years of this period saw the economic directorate almost totally occupied in the design and implementationof the heterodox stabilizationpackage. 7. Mexicohas not usuallyseenthe Bank as havingan importantrole in stabilizationmatters, regarding this as the area of dominanceof the IMF. But during the eighties the attitudeto dialogue with the Bank on stabilizationissues softened, particularly after 1985 when the Baker Debt initiative provided an opportunityfor more formal involvementof the Bank in the stabilization/adjustment dialogue. 8. Equity seemed to have been the priority objectiveduring the first four years of the administration of PresidentEcheverriain the early seventies, at the time when Bank PresidentMcNamarawas trying to give Bank operationsa distinctanti-povertyfocus. There was a wideningof the Bank/Mexicopolicy dialogue and a rush to lend in support of projects to address the problem of rural poverty. Toward the end of the eighties,Bank concernsaboutincomedistributionand developments in the socialsectors found again a readyaudienceamongMexicanofficials. Since 1991social concerns,as reflected in investment in health, educationand training, havebeen givenrelativelyhigherpriority, althoughindicationsare that growth remainsthe priority objective. Public Sector versusPrivate Sector Emphasis 9. Mexico has always followed a mixed economy model of development, with the private sector accountingfor the major share of GDP. During 1970-82it placed relatively greater emphasison the public sector, the state increasingpublic investmentsto reducepovertyby creatingjobs and later making massiveinvestmentsin heavy industriessuch as steel, fertilizers, and petroleumin an effort to convert  v the economyinto a modem industrialone. Afterthe crisisof 1982Mexicoreturned to a distinctlyprivate sector led strategy. Mexico's attitude to the Bank tended to vary with the prevailing public/private emphasis. Although there was a Bank loan for steel and another for fertilizer development, Mexico generallysought financingfor its productivesector investmentsfrom commercialsources and looked to the Bank for financing and advice for programs (e.g. agricultureand industrialcredit) in support of the private sector. With the return to the private sector emphasisMexicocontinued to look to the Bank to finance credit programs to the private sector and later to support adjustmentsin the policy environment for private investment. Protectionism versusLiberalismin Trade 10. BetweenWorld War II and the middle of the eighties Mexicofolloweda strategy of protectionism with varying degree of intensitydependingon the strengthof its balanceof payments. The strategy was successfulin bringingMexicoalmost a quarter-of-a-century of high GDP growth. The shift to liberalism, largelythe result of the dominanceof new theoreticiansin the Mexicanbureaucracy, officiallytook place in 1985 when the administration of President de la Madrid announced that Mexico would seek membership in the GATT and that it would liberalize trade policy. It was continued under the administrationof PresidentSalinaswith intensifiedvigor by openingup the economymorefully to capital investmentfrom overseas. 11. The shift to liberalismresulted in greater coincidenceof economicdevelopmentphilosophybetween Bank staff and Mexican officials and a greater willingnessto engage in a freer and more informal and academicdialogueduring the policy design process. The shift has also made adjustmenttype lending more acceptableto Mexicorelative to project lendingfor infrastructureand for industrial investments. OPPORTUNITIESAND CHALLENGESIN MEXICO'S DEVELOPMENT 12. The major opportunity in Mexico's developmenthas been the discoveryof enormous oil reserves vastly expandingits resource base. The managementof the external debt in the face of unstable oil revenues and rising internationalinterest rates has been the major challenge to Mexico's economic directorate since 1982. Other importantchallengesto Mexicandevelopmentinclude the concentration of populationsettlementand economicactivityin MexicoCity, and preservationof the environmentfrom degradationdue to development. This opportunityand these challengesaffected Mexico's development strategy and the role that it expectedthe Bank to play in that development. Oil 13. Since nationalization,and until the oil discoveriesof the early 1970s, the petroleum industry was oriented toward Mexico's fuel needs and not to the export of crude oil, which previously had been emphasized by the foreignoil companies. Oil discoveriesin the early 1970sresulted in a major change in Mexicanpetroleumpolicy. AlthoughMexicostartedto exportcrude oil in 1974, the policy remained that of meeting domestic needs. After massivenew reserves were announced,petroleum exportation became an important factor in Mexico's 1978-81 investment driven economic expansion. The Government, anticipatingever-rising future oil revenues, embarked on a policy of aggressive loan- financed investmentsin the public sector, particularlyin PEMEX.  - vi - 14. After the 1982 crisis, the authoritiestook steps to ensure more effective review and control over public sector investmentplans and externalborrowing, especiallythose of PEMEX. Investment in the oil sector was slowed down, beginningwith a reductionof 45% during 1983. The policy since then, reinforcedby the sharp declines in earningsfrom oil exports in the mid-eighties,has been to diversify exports and to reduce the economy's dependenceon oil. 15. The dependence on oil was clearlyvisiblein its balanceof paymentand fiscal impacts. Net exports of petroleumand derivativeshad risen from US$169millionin 1975to more than US$16billion in 1985. Gross exports represented77.5% of total merchandiseexports in 1982comparedto 1.5% in 1975. The contributionof oil to Federal fiscalrevenuesrose from 6% in 1974to about49% in 1983. Subsequently, the stagnationin export sales and the slowingdown in domesticsales drasticallyreduced the contribution of oil revenuesto a low of 23.9% in 1991- still, almost three times bigger than in 1976. 16. The Bank has not played a significantrole in the developmentof the oil sector and in its impacton Mexico's developmentstrategy, in which PEMEX was influential. On at least two occasionsMexico indicatedits interest in discussingBank supportfor investmentsin the oil sector. In the fifties, the Bank declinedto support a sector thoughtmore appropriatefor developmentby private investment. Attempts by Mexico to get Bank support for its investmentprogram in oil in the mid-seventiesreceived no encouragement. Debt 17. The enormousgrowth in Mexico's externaldebt in the last two decades(reachinga peakof US$ 104 billion in 1987)has been a considerableproblem in the country's macroeconomic managementand in the formulationof its developmentstrategy. After an improvementin the maturityprofile and cost of the country's debt in 1978the situationdeterioratedsharplyby the end of 1981. The stock of the publicdebt increasedfrom US$21 billion to US$58 billion between 1976and 1981. 18. Immediately,there was a sharp deteriorationin lending conditionsto Mexico. In a span of only two years, Mexican external debt almost doubledto approximately$90 billion; gold and dollar reserves plunged, leading to the Mexican Government's announcementin August 1982 that it could no longer service its debt. Higher internationalinterest rates, lower earnings from oil exports due to a fall in oil price, the bunchingof short-termdebt service obligations,prepaymentby the private sector and a sharp increasein capital flight exacerbatedthe shortageof foreign exchange. 19. Initially,Mexicoregardedthe debt crisis as a temporaryproblem, and lookedto the IMF for support in efforts to refinance and reschedulethe debt. Later, Mexico accepteda growing role for the Bank in developingthe analyticalbasesfor negotiationsto restructureand to reduce the debt, as well as providing loan support and helpingto mobilizethe interest and cooperationof the creditor banks. Urbanization 20. For thirty years beginningin the mid-1940sMexico's urban developmentstrategywas seen in terms of highlyvisible constructionprojects - new towns, cities or settlements. Massiveinvestmentswithout any spatial strategy led to the mushroomingof Mexico City. The year 1976 marked the formal beginningsof planningin Mexico;a constitutionalreform promotingnotions of regional and municipal  - vii - planning. Later under PresidentLopezPortillo a new ministrywas established- Secretariatfor Human Settlementsand Public Works - charged with preparing urban developmentplans for the country's municipalities. The National Urban DevelopmentPlan of 1978 set forth the objective of restraining populationsettlementand industrial expansionwithin, as also decentralizationout of, the Mexico City region. 21. By the end of 1982, after a decade of long-termplans and programs, Mexicandecisionmakers had grownimpatientwith studiesand analyses,and were tendingtowardsa new emphasison actionplans and sector projects. This impatiencewas partly due to the need to pull the economy out of the severe recession. Housing figured as a key point in the government's recovery strategy despite recurrent cutbacksin public expenditures,first becauseof the importanceof revivingthe constructionindustry - almost two million construction workers had been laid off since 1981-, and second, because of its importance as a social palliative when times were difficult and other social programs (PIDER, COPLAMA)had come to an end. 22. Mexico welcomed the Bank's involvementin studies which formed the basis for urban policy development and its financial support for programs in the urban sector. A 1970s Bank study recommendation to set up the nationalagency (FONATUR) to coordinatethe developmentof the tourist industrywas accepted. In addition, a series of locationaldevelopmentstudies forrmed the thrust of the Bank/Mexicosector strategyduring the latter half of the seventiesand, in the mid eighties, four studies orientedto the developmentof fast track loans were undertaken. Urban issueswere discussedin selected policy papers requested of the Bank by the de la Madrid administrationon the subjects of environment, water and poverty. Mexicocontinuedto look to the Bank for financialsupport in the urban sector after the focusshiftedto housing,and receivedsizableloans for low incomehousing, earthquakerehabilitation, and housing finance during 1986-88. Ongoing loans in housing, municipal strengtheningand urban transport,as well as in the proposedpipelineattestto continuingMexicaninterest in Bank support in this area. Environment 23. The principle of conservationof the national patrimony and natural resources is enshrinedin the constitution. Environmentalpolicies to give effect to this constitutionalconcern have been reflected in laws, policies, agreements,decrees, standardsand directionswithinvarious ministries,in comprehensive legislationfor environmentalprotection, and in Mexico being a signatory to internationalagreements which have environmentalcomponents. Since 1986the emphasisof policy has been on the prevention and controlof air pollution,regulationof ecology,the conservationof natural resources and ecosystems, and the promotionof communityparticipationin environmentalprograms. 24. Mexicosees the Bank as a source of advice and financingfor training in environmentalmatters. Bank funds have chiefly gone to SEDUE, though presently some are available for state environmental agencies. The advice is more in the nature of an exchangeof ideas, since both the countryand the Bank have been developingtheir environmentalawarenessand expertise over the sameperiod. 25. The dialogue on environmentalissueshas intensifiedand become well establishedin the nineties, and the Governmenthas requestedBank assistancefor both free-standingenvironmentalprojectsand for sectoral projectsthat include environmentalcomponents. The TransportAir Quality Managementloan  ... of 1992, to strengthenthe institutionaland policy frameworkto addressMexicoCity MetropolitanArea's mobile sources of air pollution, is the significantfirst step in the new era of shared concernbetween the Bank and Mexicoon environmentalmatters. 26. The Mexicansexpectthat the Bank will assess at project appraisalthe likely environmentalimpact of projects it finances; and that design, implementationand supervisionwill be sensitive to the need to avoid and/or minimizeenvironmentaldegradation. In order to meet this expectationmost Bank projects in Mexico require environmentalimpact or risk assessments, include an institutional strengthening component,and require the direct involvementof SEDUEor its state delegations. This approachmakes it much more likely that Bank projects will be environmentally sustainable. MEXICANVIEW OF ROLE OF THE BANK 27. From the preceding review of Mexico's developmentstrategy and from interviews with Mexican officials, it is possible to discernMexico's view of the role of the Bank in its development process. Two facts stand out. First, Mexicohas had at all times a basic idea of the role it wantedthe Bank to play in its development. Obvious and high profile Bank involvementin policy decisions has always been regarded by Mexicanofficials as politicallyunacceptable. This is reflected in a preference not to have Bank advicelinked to policy action, especially'advice' in the form of conditionalityattachedto loans; and in a preference to limit carefully the areas where advice will be acceptable. Generally, Bank financinghas been welcome,though recentlythere has been concern amongMexicanofficials that it has becomehigh cost. 28. Second, over time Mexicohas becomemore willing to allow dialogue on a wider range of issues; the most dramaticchangehaving taken place during the decade of the eighties. This changehas largely been the outcome of a comingto power of a group of Mexicanpoliticianswho formed the core of the intellectual/technocraticelite of the government. This grouphas been more libertarianin approachto the trade in goods as well as in ideas. Thus, whilefor long there was no dialogueon socialpolicy, including topicslike populationgrowth and education;recentlythis has changed. The prevailingsentimentamong Mexicanofficials is that a dialoguewith the Bank will be desired even after Mexicoceasesto seek or be eligiblefor Bank financing. BANKSTRATEGY 29. The Bank's perceptionof its role in developmenthas changedover time. Initially, it thoughtits role was to finance infrastructuredevelopment;then it was to eliminatepoverty; in the eightiesit was to assist economiesto adjust the structure of their economiesto deal with exogenousshocks and dysfunctional policy frameworks. 30. By the late eighties, after much experience with structural adjustment, attention shifted to the problem of the large debt, mainly of the public sector, which many clients had accumulatedin dealing with the shocks of the last decade or more. The Bank extended its role by respondingpositively to clients' need for assistancein negotiatingthe restructuringof their debt; and in the nineties by helping clients to address social (includingpoverty and gender) and environmentalissues.  - Lx - 31. Bank strategy for Mexicofollowedthe generalpattern outlinedabove, but was modified in light of circumstances peculiarto the country. Bank staff were early in recognizingthat the Mexicanswere well able to manage their economy, and that the Bank accountingfor a small share of required external financingcouldhave little influenceon policy. Advicewas mainly limitedto the needto increasepublic savings to finance domestic costs of an increasing investmentprogram. Officially, Bank strategy eschewed the use of leverage; but the reality was somewhat different. Although not formally documented,the Bank was prepared to increase or reduce its loan support in 'graduated response' to Mexico's attentionto the macroeconomic issuesraised in the policy dialogue. 32. This strategy of disguisedleveragegave way reluctantlyunder Bank PresidentMcNamara'sattempt to redefine the Bank's main mission as poverty alleviation,and his clear instruction to expand the operationsprogram in rural investment. Thus in the early seventies,the official strategywas to aim for lending of $200 millionper year but to be prepared to do substantiallymore if the Mexicansproved willingand ableto absorbfundsmore rapidly(thanthen seemedprobable)in projectsbenefittingthe rural poor. 33. The strategyof "graduatedresponse"re-emergedbriefly as the macroeconomic situationdeteriorated between 1974and 1976. The 1975annualmeetingbrief, based on the mid-termreview of the Mexican economy, concluded that lending at the level set in the CPP seemed unwarranted on performance grounds. However, it also cautionedthat in order to avoid adverse impact on creditworthiness,the Bank's profile in Mexicoshould not be loweredprecipitately. This providedthe rationale for lending to continue withoutany apparent effect of a graduatedresponse. 34. Country considerationschangeddramaticallywith the announcement and subsequentexploitationof newly discoveredoil reserves. The Bank tried to get Mexicoto agree to limit oil exports in order to avoidoverheatingthe economy,but Mexicosuddenlyhad renewedand expandedaccessto financingfrom commercialsourceson attractiveterms; and was able to shift to a high growth/ high investmentstrategy based on massiveborrowing. Subsequently, Bank lendingdepartedfrom the earlier counselof ESW; the Bank proceeded to lend more than seemed consistentwith absorptivecapacity or warranted by policy initiatives. In 1981 alone, the Bank approved8 loans for a total of over US$1.1 billion compared with $253 millionin 1980 and $527 millionin 1979. 35. Country specific considerationschangeddramaticallyas a result of Bank ESW which by 1981had becomehighly critical of the Mexicanstrategyof development,and which seemedto be validatedby the financialcrisis in 1982. A new management team for the Bank's Mexicoprogram immediately attempted to shift the strategy in the direction of structural adjustment - a more sophisticatedversion of the "graduatedresponse" approachin which accessto balanceof payment supportis conditionedon country implementationof a previouslyagreedpackage of policy measuresand institutionalmodifications. 36. Initially, the Bank's paper proposingthe strategyto Mexicowas rejectedas encroachingon the role of the IMF. Its eventual acceptance was a diplomatic face-savingfor the Bank; and the dialogue on structuraladjustmentwas put on the backburner, the Bank choosinginsteadto discusshow it couldassist in the immediatefinancial crisis. The Bank agreed to serve as a catalyst and facilitator for private internationalfinancialflows, which was considereda natural extensionof its work as the main repository of objectiveassessmentof countrycreditworthiness.Later it agreedto providea quickdisbursingexport developmentloan, and what was to have been support for the start of a structural adjustmentprogram in effect becamea transfer to help bridge the foreign exchangegap. 37. As Mexico's commitmentto a broad program of economicreform was made credibleby timely implementationof announced measures in the exchange rate, fiscal and trade policy areas, the Bank settled into the task of supporting by ESW and lending a program of reform that while designedby Mexican technocrats and owned by Mexico, broadly coincided with the conclusionsof recent Bank reports. By 1988, without attempting to push a comprehensiveSAL, Bank strategy became one of providingloan support (totallingalmostUS$9.5 billion) for adjustmentin sub-sectorafter sub-sectorand in individualindustries. Overall, this strategy was probably as comprehensiveas would have been achievedunder a SAL. 38. Present Bank strategy is built on the view that "the Government'sachievementsin stabilizingthe economy,managingits externaldebt, and completingmost of the required economicrestructuring,opens the way for a new emphasisin economicpolicy and in the Bank's role". Sectoral adjustmentissuesare being systematicallyaddressedthrough loans in support of economicand socialinfrastructure- the key constraintson private sectorexpansionand socialstability. The strategy also aimsat a gradual reduction in the Bank's already high exposurein Mexico. THE EVOLUTIONOF BANK/MEXICORELATIONS 39. The review of Mexican and Bank strategies clearly shows that over time the difference in the perceptionsregarding the role of the Bank in Mexico's developmenthas narrowed considerably. To begin with, they were never very far apart; but a confluenceof circumstancesand new actors with new approacheson both sides in the eightieshas served to make relations closer and more comfortable. The role of the U.S. Treasury in engenderingamongMexicanofficialsan acceptanceof a greater role for the Bank in the macroeconomic policy dialogueand of the legitimacyof structural adjustmentas an integral part of the long term debt strategy has been important. Institutionalarrangementsfor greater collaborationand coordinationhave also been helpful. ECONOMICAND SECTORWORK 40. The Bank's first economic report on Mexico appeared in August 1948. In 1951 at GOM's suggestiona Bank/Mexicoworking party did a study of the Mexican economy.The report, completed in the latter half of 1952 and well-receivedin Mexico, emphasizedthe need for a well-coordinated national developmentprogram, supported by sound fiscal policies, to serve as a basis for Mexico's externalborrowing. From the mid-1950sonwardsBank economicmissionsvisited Mexicoevery year or two and prepared reports on the current situationof the economy,periodicallyundertakingfull-scale reviewsof the publicfinances,investment program and the balanceof payments,with a view to verifying debt service capabilityand creditworthiness. Shorterupdatingreports on the current economicsituation continuedto be producedthrough the end of the 1960s. 41. The report of 1973 raised serious questionsabout the short/mediumterm financial and economic outlook, and identifiedneeded actions in fiscal, wage, interest rate, and exchange rate policy areas. However, after 1975, when an oil boom allayedthe concerns over creditworthiness,Bank economic reviews turned to look at the social situation, - poverty, populationgrowth, and regional imbalances; and at the impactof oil on specificregional economies. 42. In the 1980s the emphasis of general economic reports shifted to the evaluation of Mexican developmentstrategy and to issues of structural adjustment, e.g., the crisis due to the collapse of oil prices in 1986,trade policyreform and economicadjustment,and tax reformfor efficient international growth. 43. More recently, Bank ESW has been focusingon the transition to a new role for the public sector, the environment,continuing social problems includingpoverty, and on analyzingthe implicationsof NAFTAfor the Mexican economyand developmentstrategy. 44. Special studies and sector reports have been done from time to time dealing with a wide range of topics and sectors, e.g., the Mexicancapital market (1961/62), land reform system (1966), agriculture, industryand manufacturing,urban and transport, and more recentlyon debt strategy and NAFTA. 45. ESW also includedinformal papers, seminars,and workshops.An exampleof the informalpapers are "work-outpapers" analyzingcurrent policy issues and initiatives, which have been shared with Mexicanofficialsto serve as a basis for the policy dialogue. Some ESW has been technical assistance, the servicesof internationalexpertsand Bank staff providedat short noticeto work on urgent specifically and frequentlysensitivepolicy issues. 46. Staff time allocated to ESW on Mexico doubled between the seventies and the eighties, and has continuedto increase. Staff time required for the FY89 program was estimatedat 542. These figures do not includemanagement overhead. The ESW was mostlymanagedby the Regionand was evenlysplit between economicand sector work. Planning and Coordination of ESW 47. Planningand coordination of ESW betweenthe Bank and Mexicowas initially informal,responding to requests arising on either side. Late in the 1970s, at Mexico's request, regular consultationson the ESW were introduced. The Bank agreed; and CountryProgram Implementation Reviews, coveringboth ESW and lending were instituted on a twice yearly basis. The CPIR process has become more sophisticated,with a formal agenda and discussionpapers covering ESW, lending, and policy dialogue issues. Joint Implementation of ESW 48. Beginningwith the work of the Joint Bank/MexicoWorkingParty in the early fifties, the Bank and Mexico have collaborated from time to time in joint economic and sector work. The Bank has collaboratedwith the GOM in undertakingseveralmajor studies- e.g., a NationalWater Plan in 1974, a Public Sector InvestmentReview in 1985-1986,and studies on the Financial and Agriculturesectors. A numberof other studies, includingwork on householddemand and saving, have been carried out in Mexicounder the Bank's research program. There have been instancesof joint sector work. In 1984 the Bank and the Ministry of Agriculture (SARH) agreed to perform a detailedjoint analysis of the  - xii - problemsof agriculturalextensionin Mexico. Anotherexampleis the MexicoUrban Water Supplyand SewerageSector Study. Evaluation of ESW The MexicanPerception 49. In general, the opinion of Bank ESW has been and still is very positive. Many intervieweesand memos/letterspraisedBank ESW for its quality, scope and relevance; and said they found it useful. This does not mean that Mexican officials were indiscrimate in their praise of Bank ESW, they were sometimescritical. The generallypositiveview of Bank ESW by officialswas shared by an interviewee in the academiccommunity. Influenceon MexicanPolicymaking 50. The view shared by several and perhaps the majorityof the officials interviewedwas that the Bank, primarily its ESW, was used by Mexicantechniciansto push for policy changeswhich they saw to be in the country's best interest. There is further evidencethat ESW influenceddirectly or indirectlythe course of Mexican policy making. Examples are trade liberalization, and pricing of public sector services. A draft Paper on Mexico's MediumTerm EconomicProspectswas discussedwith the Mexican Governmentin 1983. After reviewingthis paper and a joint review of the Bank's ESW program, the Governmentof Mexico invited the Bank to send a Trade Policy Mission in Novemberof 1984. This resulted in a proposal of a multi-year,gradual reductionof QRs and tariff rationalization. A follow-up mission in April 1985assisted in a Bank financedtrade policy seminar in Mexico in July of that year. 51. The main factor determiningthe likelihoodand degree of influencewas the relevanceof ESW. The Bank seemedaware of the need to ground its ESW on knowledgeof the Mexican situationand to time its ESW in responseto Mexicanneeds. This was reflectedin the ESW innovationof the mid-1980s- the "work-out"paper, giving Bank reactionto and analysisof current policy initiatives. 52. The influenceof ESW partlydependedon the qualityof Bank staff and the degree of continuity in their assignmentto work on Mexico. "Regularpresenceof Bank staff in Mexicoin 1983-84paid off as people on both sides got to know each other" was a commentby a former high official. A major factor determiningthe potential influenceof Bank ESW has been the quality of the interlocutorson the Mexican side. During the decade of the eighties and into the present the Mexican team has been outstandingby any standard, a factor making for easier communicationof the findingsof Bank ESW. 53. Bank ESW was not always influential. There were periods when the Mexicansdid not attachmuch credence to Bank views. SometimesBank ESW was acceptedby groups of technocratswho were not dominantin decision-makingat the time, but not by others who were more influential. 54. The attitudeof technocratsto Bank ESW was also affectedby the realizationthat Bank and Mexican ESW were frequentlysubstitutesand that " Mexicohas equally capable people so we design our own solutions". It is especiallydifficultto judge the influenceof Bank ESW in the last decade or so because the predominantMexicanviews on economicpolicy mattershave been very similar to those of the Bank; technocratson both sides havingsimilar intellectualand academicbackgrounds.  - Xiii - Bank Views 55. Bank opinionof its ESW has been recorded in two studies - one by DevelopmentPolicy Staff in 1978and another by ERS in 1986. In addition, the files reveal that individualstaff voiced their opinion on Bank ESW from time to time. The evidencesuggeststhat Bank staff have been aware of the need to improvethe quality of ESW, and have been quiterealisticin their assessmentof its influenceon Mexican policymaking. Linkageto the Dialogueand to Lending 56. The linkagebetweenESW and the economicdialoguehas been achievedby the practiceof following up economicmissions with an end of mission meetingwith Mexicanofficials, sometimesinvolvingthe preparation of an aide memoire, and the sending of a mission to discuss the findings of the ensuing report. In the case of lending, linkage was sought initially through discussionof the country program in an economiccommitteeincludingrepresentatives of programsand projects,and later throughthe more formalCountry Programmingprocess involvingthe preparationof a CountryProgram Paper (CPP) and later throughthe Country StrategyPaper. 57. However, some staff do not agree that the linkage between Bank lending conditionalityand its economicwork was alwaysadequate. Especiallyduring the late seventiesstaff felt that conditionalitywas too soft, given the conclusionsof ESW. In the eighties, conditionalitywas not always explicit in loan agreementsand loan documentation,but was the subject of understandingsand side letters kept from public view to enhance acceptabilityin an atmosphereof political sensitivity. Currently conditionality tends to reflect what the Government's intentions, consistent with the conclusions of the ESW; its inclusionin loan agreementsserving to strengthenthe hands of bureaucrats in dealing with others in Mexico. Some Outstanding Cases of ESW Trade Liberalization 58. Bank concernwith trade liberalizationhad its origin in the rethinkingof the viabilityof the Mexican strategy of import substitution. In 1984, the Bank told the Governmentthat it would be willing to considersupport for a program of general import and trade policy reform. A Trade Policy Mission in November/December 1984proposeda multi-yearstrategyof gradualreductionof quantitative restrictions and tariff rationalization. ESW during 1984 on this topic eventuallyformed the basis for two Trade PolicyLoans. A 1985EconomicMemorandum focussedalmostexclusivelyon Trade Liberalization,and a follow-uptrade policy missionto Mexico in April 1985assisted in the planning and organizationof a majorBank- financedseminar on trade reform in July of that year. Shortlyafterwards,the Government announcedits first major trade reform package. 59. In responseto the July 1985reform package,the Bank decidedto invite Mexicoto negotiateTPL I. In the courseof negotiatingthis loanthe Bank devisedan innovativeapproachto the monitoringof trade liberalization that couldbe applicableelsewhere. This involvedthe use of productionweights,permitting the formulationof conditionality in quantitativeterms and allowinga single indicatorto reflectreduction in coverageof licensingand reduction in tariffs. This was consideredsuperiorto importweights, which  - xlv - are affectedby import restrictions. ESW associatedwith the preparationof TPL II (approvedin 1987) made an importantcontribution by morefully taking accountof the socialimpactsof trade liberalization. 60. A subsequentreview of trade policy reform and economicadjustment,found that the economic policy reform program was not balanced - trade liberalizationbeing considerably ahead of domestic economicliberalization. This was an important finding relating to the speed and timing of trade liberalizationand domestic deregulation,which possibly affected the priority of the latter on Mexico's reform agenda. It was also a veiled self-criticismof the Bank's almost exclusive emphasis on trade liberalizationin the economicdialogueof the mid eighties. 61. ESW identifiedseveral lessons from Mexico's trade liberalization. It identifiedthe importanceof formalannouncement of the trade reformprogramby the Governmentand the calendarization of the tariff reductionas crucial to the credibilityof the process. Also, it saw that the use of officialreferenceprices which, whilejustifiable on anti-dumping grounds, can be used to expandand/or continue protectionto domestic industries. 62. Bank staff assessmentof the ESW on trade liberalizationis generallypositive. However, there is unanimityin the view that Bank ESW did not start the process; it simplyhelpedit alongintellectuallyand by providingthe basis for the loans that made it easier for Mexicoto take the necessarymeasures. 63. The Mexicansview Bank ESW on trade liberalizationas useful, althoughat timesdoctrinaire. They give high praise to the qualityof Bank staff. The main criticismswere that the Bank may have over-sold trade liberalizationas an instrumentto resuscitategrowth and restrain inflationthrough efficiencygains from exposure to foreign competition; and that the Bank did not give enough attention to other instrumentsof policy - fiscal, monetary,etc. Besides,the emphasison opennesswas too narrow; it did not adequatelyaddress trade in services. Debt 64. As early as 1965Bank ESW determinedthat "the amountsand terms of foreign officialborrowing will be an extremely importantelement of Mexico's economicmanagementfor the next few years". Main concernthen was with maturitystructurerather than size of the foreign debt; it was too short term. An April 1970memo on the externaldebt concludedthat the Mexico's debt situation was beginningto deterioratebadly, and there was no longer reason for complacency. 65. In 1972the Bank estimateda debt service ratio of 19.3%. Revisedprojections in 1975 suggested that the ratio would rise to 22% in 1980, but the debt profile was expectedto improvesignificantlyby 1982. The outlookfor Mexicobecominga net oil exporterhad becomemuchmore positive; and Mexico had been making arrangementsfor more effectivecontrol over borrowing by the public sector. 66. The Bank was caughtoff-guardby the debt crisis in 1982. Some reasons for this were that the Bank did not have data on PEMEX (whichaccount for a large part of new borrowings),had not foreseenthe fall in oil prices nor the rise in internationalinterest rates, and was unaware of the increasinglyshort term nature of recent borrowings. Some internalBank memosand correspondence with the Government indicatethat the inadequacyof Mexico's debt reporting, the earlier excess supply of financing, and the  - xv - offer by Mexicoto prepay debt to the Bank, contributedto the Bank's unawarenessof the impending problem. 67. Partly in response to this lapse, the Bank made a special effort after 1982 to keep abreast of the GOM's debt restructuring. This effort is partly reflected in the paper "Mexico - Possible World Bank Role in High-Debt Countries", which used Mexico to illustrate the implications of different debt restructuring alternatives. One alternative was to reappear as a component in the Mexican debt restructuringstrategy some six years after the paper was written. The MexicanGovernmenttook note of the Bank's ESW and asked the Bank to evaluate operational experience elsewhere and to make recommendationsfor its debt strategy. The paper entitled "A frameworkfor Evaluating Debt/Equity Swaps" was prepared in the Bank and sent to the GOM in June 1988. 68. The Bank also played an advisory role to the Mexicangovernmenton the design and formulation of the options in the Debt and Debt Service Reduction (DDSR)plan. In particular, Bank staff helped Mexicanauthoritiesto evaluate debt-servicerelief impliedby the different options in the menu offered to commercialbanks includingthe pricing of the oil recapture clause. Bank projections of Mexico's external financing needs played an important role in validating Mexico's request for debt and debt- service relief during negotiationswith the CommercialBank AdvisoryCommittee. 69. Muchof BankESW was done by a staff lead economistworkingalongsideMexicanofficialsmostly in Mexico. This approachallowedBank ESW to be made availableearly and unobtrusivelyin the chain of decision-making,when confidentiality was crucial and "time was of the essence". In a meetingwith the Bank's Vice President for LAC in Mexico City in May 1989 President Salinas expressed his appreciationfor the intellectualdialogue with the Bank on possibleapproachesto the debt issue. 70. This effort successfullycompleted,concern in the Bank turned to the effect of the debt-reduction exercise on Bank exposure, and to learning from the experience. 71. As in the case of trade liberalization,Bank ESW may not have initiated concern with the debt but it seized the opportunity to be useful to a client's efforts and produced output worthy of the client's appreciation. Social Concerns in ESW 72. "PovertyIssues in Mexico"- policy papernumber8 in the SelectedPolicyPapersof 1989has been the outstandingBank work on social concerns in Mexico. The paper presented a thorough profile of poverty before and after the 1982crisis and analyzedthe effects of the crisis on the poor. It examined in depth the impactof structural adjustmenton the rural poor and the differential impactof agricultural price policies, taxes, and changesin the terms of trade betweenagricultureand the rest of the economy. The impactof adjustmenton the urban poor was also treated. The paper also investigatedthe support arrangementsin the social sector. This paper is significantfor its attempt to suggestremedial actions, and for its findings and suggestionsregarding structural adjustmentwhich reflected a sensitivity to political realitiesnot commonin Bank ESW. 73. More recently the Bank has started a study of the adjustmentof the rural sector to free trade, specificallythe potential impact of NAFTA on the rural sector in order to identify the investment  - xvi - programs required to reducethe possible negativeeffectson low-incomefarmers and landlesslaborers. Some ESW with implicationsfor the social sector has been undertaken within the context of work on other sectors. Problems with ESW 74. Problems faced by Bank ESW include: a) access to data - sometimes legal impedimentsand sometimeslack of cooperationby Mexicans;b) sensitivityof the GOM or factions within it regarding particular topics; c) lack of sharing - Bank sometimes financed studies but got little access to data; d) distributionof reports withinMexicowas frequentlytoo restrictedto foster adequatedialogueon some policies. A more general problemconcernsthe audiencefor which Bank reports were written. For long ESW was directedmainly at the internalBankaudiencerather than at the government,but over time this changedas more and more reports were prepared at the request of the client. 75. It is well-knownin the Bankand concededby Mexicansthat for many years BankESW and dialogue on certain topics were unwelcomeand the Governmentdid not cooperatewith the Bank's efforts. This was the case with a range of topics including: populationand family planning, the ejido (land tenure) system, PEMEX, education,and poverty. In the 1970sthere was a thaw in some cases and the Bank started to do work in the areas of population and income distribution and poverty. Following the nationalization of commercialBanksin 1982the financialsector was includedamongproscribedtopics. It is indicativeof the growing opennessof Mexicoto Bank ESW that by the end of the eighties most topics had become eligiblefor study; and in the nineties there are hardly any proscribedtopics which come to mind. Recently,the Bank has done ESW on the ejido system, and on family planning; and PEMEX cooperatedfully with the 1992field mission for this study. 76. Two potential strengths of Bank ESW derive from: (a) the wide experiencethe Bank gains from dealingwith over a hundred economies,and (b) an internaldialogueamongthe large numberof highly trained people it has availableas staff and consultants,having a wide range of opinion and expertise for analyzingproblemsand prescribingsolutionsfor individualcountries. 77. The evidencesuggeststhat ESW on Mexicohas benefittedfrom a vigorous internaldialogue, but there were sometimeslapses from a healthy intellectualinterchangewhen opinionsthat did not conform to the dominantview were not given a fair hearing. The fact that the Mexico program has been large enoughto require aboutthree fulltime economistsin the Programsdivisionas well as part-timeattention from departmentalsenior economists,the regionalchief economistas well as Projectsstaff and staff from centralpolicy departmentshas tendedto ensure a wide spectrumof views and expertisehas been trained on ESW. 78. One weakness of the Bank's ESW has been its lack of attention to the need to understandthe political milieuin which developmenthas to take place. For example,in the agriculture/ruralsector a better appreciationof the influenceof politics could have made for more effectiveBank support. The absence of backgroundpolitical analysis for internal decision-making did not help the formulationof accuratejudgementswithinthe Bank regardinggovernment'spolicy intentions. Recentlythere has been a moveto remedythe situationby lookingto the ResidentRepresentativefor impressionson the political situation,which are in turn reflected in the Country StrategyPaper and other relevantdocuments.  - xvii - POLICY DIALOGUE 79. The dialoguebetweenthe Bank and Mexicoessentiallystarted in an effort to define what influence the Bank was supposedto exert over Mexico's developmentdecisionsand what informationthe Bank should have a right to expect from Mexico. A visit by Bank President Black to Mexicoearly in 1950 did not result in a clear understanding;and the Bank formally complainedabout Mexico's failure to consultit prior to arrangingcredit overseas. The settingup of a CombinedWorkingParty to study "the limits of Mexico's debt burden" and eventualMexicanagreementwith the Bank's interpretationof the consultationclause did not mark the end of the rather difficultearly period. 80. The report of the CombinedWorkingParty made a great impressionin Mexico; and in its aftermath the focus of the dialogue shifted to the issues of economicdevelopmentand stability. Suddenlythe dialogue became a vehicle for advice. A recommendation that an Investment Committeebe set up to draft a public sector investmentplan for 1955-58was favorablyreceivedand acted upon; with the result that a draft investmentprogram was prepared and sent to the Bank for comment. 81. After two years of general satisfaction with the management of the economy under Mexican PresidentCortines,during whichthe dialoguewascongratulatory of Mexicancreditworthiness, the Bank's attitudebegan to change. The Bank expressed strongly the view that the petroleum industry, national railroads, and the electricitycompany(CFE) should be run on soundbusinessbases. In 1958 in the face of rising public sector expenditures,the Bank warned of rising public sector deficitsunless tax revenues were raised and subsidiesto state enterprisesreduced or removedby realistic pricing of public services - petroleumprices, railroad tariffs, electricityrates, etc. 82. The dialogue reached a low point in an August 1959 meetingwith President Mateos when Bank PresidentBlackraisedthe issueof electricityrate increases. The MexicanPresident, whounderstoodthat the Bank's policy would be to make no further loans to Mexicofor any purpose until the rate issue was resolved, resented what he saw as an attempt to bring undue pressure on Mexico for the purpose of advancing the interests of a private company. The situation was pacified to some extent by the clarificationthat the lendingrestrictionwas limitedto the power sector, but the issueremainedthe central topic in the dialogueuntil September1961, when the increaseswere approvedby the Tariff Commission and confirmedby PresidentMateos. 83. For most of the decade of the sixties the Bank/Mexicodialogue focussed on the need for public sector savingsto support the growing investmentprogram, as expendituregrowthwas not matchedwith new revenues. Two factors were to enliventhe dialogue after 1969- the switch toward an anti-poverty thrust in the Bank under incomingPresidentMcNamaraand the electionof populistPresidentEcheverria in Mexico. At a meeting between Bank President McNamara and economists in Mexico City in December 1969 three new issues were put on the table - the need to help the 20 million rural poor, populationpolicy and income distribution. 84. During the next two years the Bank repeatedly tried to engage the Mexican Government in a dialogueon rural poverty and the need for strengtheningagriculturalcredit and extensionservices, and for investmentsin educationand training. As the rural developmentprogramran intoorganizationaland  - xvili - problemsthe Bank tried to steer the dialoguein supportof the 'integrated rural development' institutional strategy. 85. Beforethe end of 1973the public financesdeterioratedas expendituressoared, and, facedwith rising inflation,the GOM announceda 16 point programto bring inflationunder control while protectingthe poor. This meant increasesin wages and prices of corn and beans. Price increases for public sector serviceswere allowedto lag; an issue which along with the need for fiscal reform becamethe focus of discussionswith a Mexicandelegationto Washingtonin March 1974and indeedfor the remainderof the year. 86. Once againtwo factorsoccurred which influencedthe course of the dialogue betweenthe Bank and Mexicofor the remainderof the decade. These were: the first oil crisis causinga manifoldincrease in the price of crude; and Mexico's discoveryof large reservesof petroleum. The delay in the effect of oil discoverieson the balanceof paymentscoupledwith the deterioratingpublic finance during 1974-76led to a dialogue in which both sides agreed that continuedBank lending was crucial, although investment programsincludingBank financedprojects wouldhave to be revised. There was, however, no agreement regardingthe macroeconomic performanceand outlook. While the Bank found the deficits in the budget and the BoPlarger than couldbe maintainedfor a periodof years, the Mexicansarguedthat the problems were essentiallyshort-term in nature and that in the medium term the prospects, particularly for export growth, were excellent. 87. Thus the Bank left the mid-1975discussionssatisfiedthat the GOM would set up a mechanismto maintaina continuingreview and controlof the public financesand the BoP. By the time of the Bank's annual meeting it was clear that there had been slippage in the Mexican economicperformanceon all counts. Discussion centered on Bank projects stalled by the inadequacyof Governmentcounterpart resourcesand on the winding down of Bank lending. 88. With the beginningof the oil boom in 1976 and for the next four years there was little attempt on both sides to indulgein a dialogueon macroeconomic issues. Significantly,there was no Bank approved and agreed attemptto questionthe viabilityof the Mexicanstrategy. This may have been due in part to the differenceamongeconomistsin the Bank as to analysisof the situation. It may have been partly due to the fact that in Mexicothere was a cleavageamongofficials between those questioningthe viability of the expansioniststrategy with its rising inflationand over-valuedcurrency and those who supported it, the latter becomingincreasinglydominant. In this situationboth the Bank's positionand the Mexican positionon most issues were ill-defined,a situation clearlyunhelpfulto dialogue. 89. It was not until after the financial crisis of 1982 that there was again opportunityfor a meaningful dialoguebetweenthe Bank and Mexico. Several factors coincidedto make this possible. Amongthese the suddendrying up of international financing, the weaknessin the current accountof the BoP revealed by the declinein oil prices uncompensated by growth of non-oil exports, the dominanceof technocrats in the new de la Madrid administration,the fact that a new sexeniowas beginning,and the strong wish in the Bank to get back to the policy discussiontable all seem to have been important. 90. 'rhe Bank's approach was not to try to butt in on a dialogue which the Mexicans saw as more appropriate for the IMF, but to help by sending a signal to the internationalcommercialbanking communityand by acting as a catalystto inducenew lendingby them, if Mexicowould commititselfto  - xix - a dialogue with the Bank on longer term reforms. The Bank's offer of cooperationin this form was acceptedby the Mexicans. 91. There was agreementbetweenMexicanofficialsand Bank staff that a fundamentalshift to an export expansionand diversificationstrategy was necessary to reduce the dependenceon oil exports and the vulnerabilityof the Mexicaneconomyto instabilityin the international oil market. The ESW which had already been done by a Bank economicmission in 1981, updated by another mission in late 1982, lay the groundworkfor a quickdisbursingExport DevelopmentLoan of US$350 millionin 1983. 92. Bank staff were awarethat Mexicanofficialswere not inclinedto a dialogueon structuraladjustment (or on a SAL as such), and soughtto identify areas of concernwhich wouldbe of interest to both sides. Two items - slow disbursementof Bank loans and the rate of interest applied in the onlendingof Bank funds - were identified and put on the agenda for CPIR reviews. One thread of the Bank/Mexico dialogueculminatedin the GeneralInterestRate Agreementof 1984. Anotherthread dealingwith trade liberalizationissuesled to loans in support of trade policy adjustments. 93. The Baker proposal of 1985 envisaged a wider and more profound Bank/Mexico dialogue by identifying structural adjustment among the indispensable components of a viable debt strategy. However, opportunityfor further extensionof the policy dialogueto other areas of concernbesidestrade policy and interest rates was delayed by the shift of Mexicanpriorities back to stabilizationas a result of the sharp resurgenceof inflationin 1986and the weakeningof the current accountof the BoP due to lower oil prices. The Bank had no input of any significancein the heterodox stabilizationstrategy introducedby the MexicanGovernmenttoward the end of 1987. 94. Then, the Bank, as it had done before, soughtout opportunitiesfor dialoguein familiarareas where, based on the speechesof the leadingpresidentialcandidate,the Mexicanswere likely to be interested, e.g., adjustmentsin industrial, agricultural and financial sector policies and institutions. The dialogue on sector adjustmentswas timely, resultingin a series of sector adjustmentloans aimed at consolidating an upward trend in GDP growth over the longer haul. 95. Meanwhile,internationalopinion on the debt problem had shiftedto favor debt reduction as one ingredientof debt restructuring. Mexicanattentionwas fully focussedon this opportunity. The Brady Plan in 1989providedfor significantBank financialinvolvement;and with the Mexicansbeingaware of Banktheoreticalwork in the topic, the Bank's technicaladvisoryinputwas welcomedin Mexicanstrategy formulation. For obvious reasons, however, the dialogue, involving as it did frequently secret preparationsfor negotiationswith internationalcreditors,has not left much of a paper trail in the Bank. 96. By the end of the eighties the CPIR was changed to Country Strategy ImplementationReview (CSIR);and the agendawas broadenedto the point where hardlyany issue was ineligiblefor discussion. Thepracticeof circulatingdiscussionpapers beforethe meetingswas established. Socialissues, including populationand poverty were once more on the agenda after an absenceof nearly two decades. Since then, new topics like the environmenthave not only been put on the agendabut in some casesfull blown consultationseminars have been devoted to them. The new role of government in keeping with the announcedprivate sector orientationof the economyhas been the subject of study and discussion. The public sector investmentprogram continuesto be part of the central core of topicsfor discussion.  - xx - A Case of SuccessfulDialogue - The GeneralInterest Rate Agreenent (GIRA) 97. Prior to GIRA the formula for the adjustmentof onlendingrates on financialsector loans had been specified on an ad hoc basis in each loan agreement. There were no unified overall criteria for adjustments. The non-uniformityof covenantsmade it difficult for the Bank to enforce complianceon individualloans; and the policy dialogueon interest rate and credit issuestended to be diffusedand low- level on both sides. 98. The agreementsigned in August1984, replacedthe individualinterest rate adjustmentclausesunder 15 of 29 ongoing loans in several sectorswith an umbrellaarrangementfor adjustmentagreedin periodic consultations.The agreementprovidedfor a system of variable interestrates to be adjustedfrom time to time in accordancewiththe variationsof a referencerate, cross conditionality affectingall financialsector operations, shift from fixed to variable interest rates, the establishmentof a high-levelframeworkfor regular reviewof interestrate and creditpolicies, and the implementation of studiesto enhancethe policy dialogueevolvingout of GIRA. 99. The GIRA remainedrobust for a long time; the AverageCost of Funds proving to be a suitableand practical referencefor rate adjustment. A review at the end of 1986 found that in general interest rates had becomepositive in real terms, althoughthis had not been pushed by the Bank as a formal objective of GIRA. One major objective,the establishment of a formal systemof Governmentbudgeting,control and accountingof credit subsidies,howeverhad not been fullyachieved;and interestrates on agricultural credit financedby the Bank (under FIRA) remainedwell below the rate of inflation. 100. Toward the end of 1987 attention shifted to the developmentof methodology to measure financialsubsidies, and to design refinementsin the reference rate; both with a view to a continuing dialogueon financialsector policy. Subsequently,adjustmentlending for financialsector reforms has supported, among other things, substantialreductionof interest rate subsidies on most official credits. Thus, while the objectivesof the GIRA may not have been fully realized, the agreementhas served to facilitatea continuingdialogue on the unsettled issues. A Case of UnsuccessfulDialogue - The Maintenanceof Value 101. To date the Bank and Mexico have failed to settle a long standing disagreementover the maintenanceof the value in dollar terms of Mexico's contribution in pesos to the Bank's capital. Mexico's position is that it does not accept responsibility for maintaining the values of the peso contributionsonce they have been drawn down by the Bank and lent to clients who get Mexican goods at prices then prevailing.The Bank's positionis that the rules require membersto maintainthe value in dollars of their capital contributionsin their national currencies, and it is not discriminatingagainst Mexico by requiring maintenance. A mutually satisfactory solution is being sought, but the issue continuesas a minor irritant in the relations.  - xxi - Areas of InadequateDialogue Oil/PEMEX 102. The position of the Bank against state interventionin fields suited to private enterprise - outstandinglythe case in the petroleumindustry - from the start made for a difficultdialogue aboutoil and PEMEX. During the administrationof Pres. Ruiz Cortinesthe GOM's attitude to IBRD financing of PEMEXwas decidedlynegative. When the questionof Bank financing for PEMEX was raised by Mexicoin 1964 and again in the mid-seventies the Bank indicatedit had no interest in providingit. 103. In the absenceof any Bank lendingto the oil industry there was no dialogue with PEMEX. The dialogueon the implicationsof the oil boom for the economyas a whole was carried on with the Central Government. The Bank took comfort in the statementsof policy received from the latter, but was unawareof the relative lack of dialoguebetweenPEMEXand Central Government. 104. The Bank was also unaware of the scale of borrowing for investmentsin and out of the oil sectorthat were triggeredby the new oil resources, and the crucial role than PEMEXwould play in it. In the absence of a dialogue with PEMEX it is easy to see why the Bank, especiallybecause of the tardinessand incompleteness of Mexicandebt reporting and the focus on long term debt, was unaware of the impendingcash flow crisis. This does not mean either that PEMEX was the cause of the crisis or that the Bank with better informationwould have been able to do anythingto avert it, but the content and timing of Bank advice might have been different. 105. A dialogueon oil and PEMEXcouldhavebeen of help in recent years. However,this dialogue has not developed becausethe GOM has not wished to open PEMEX to scrutiny by the Bank and the Bankhas beenreluctantto spendtime seekinga dialoguein an area with little likelihoodof Bank lending. It has been suggestedthat until recently the GOM itself has not had an effective handle on PEMEX affairs. Recent changes in the corporate structure and managementof PEMEX made by the Salinas administrationare expectedto remedy this situation. 106. The central lesson from this review would seem to be that the Bank in its role of advisor on developmentand economicmanagementcannot be fully effective withoutadequateinformationon key sectors (in Mexico the impact of oil on the exchange rate cannot be ignored), even where it is not involvedin lending operations in those sectors. So importantis this point, that it may sometimesbe worthwhileto provide limited support to a sector if only to get a foot in the door that gives access to information. Other Topics in the Dialogue 107. In a numberof areas an effectivedialoguewas late in starting. In some the issueswere raised early on but were put aside. Three such topics were poverty, population, and the ejido system of land tenure.  - xxii - 108. Bank President McNamara raised issues in relation to rural poverty during his 1969 visit. Sensing from its rhetoric that the Echeverria administrationmight have been interested in pursuing poverty alleviationprogramsthe topic was kept in the forefrontof Bank/Mexicodiscussionsfor the next three years, leading to agreement by the Governmenton an integrated rural developmentprogram (PIDER). The dialogue was re-started in 1989 from the wider background of human resource development,coveringsuch topicsas education,health, nutrition,womenin development,and the linkage betweenthe issuesof povertyand environment. This dialogueis being supportedby recent ESW which is benefittingfrom enthusiasticMexicancollaboration. 109. In 1966a Bank mission's report dealt with the ejido Oandtenure) system, and its report may have served to sensitizethe next (Echeverria)administrationto the need to focus on poverty issues and rural development,but ejido was not part of the dialogue on rural development. Under the Salinas administrationthe constitution has been amendedto permit new ejido legislation,and Bank adviceon land reformhas been requested. This requestwas in recognitionof the Bank's internationalexperiencein this matter, and signalled that at least certain aspectsof this politicallysensitivesubject were now open for discussion. Population 110. Populationwas a taboo subjectuntil Bank Pres. McNamaramentionedit during his 1969visit. There was a low key program during this period which enjoyed carefully disguised Government sponsorship. Whilepopulationgrowthhas beenmentionedfrom time to time in Bank/Mexicoexchanges, it has not been a topic accorded special emphasis,but has been mentionedwithinthe wider discussion about people - their health, their education, their housing and their employment. Bank staff have expressedrespectfor demographicwork done in Mexico's academiccommunityand collaboratewith the researchersdoing it. Evaluation of the Dialogue 111. The scope and contentof the Bank/Mexico dialoguehave been expandedover time in response to the changesin the accepted role of the Bank. Mexico was not at first inclinedto welcome outside to the policy debate. Greaterintellectualself-confidence institutions amongMexicanofficials and greater respect by the Bank of the ability of Mexican officials and of the need for client ownership of policy reforms have led to a situationin which dialogueon a wide range of issueshas become possible. Where the Bankhas been able to field expertscapableof winning the respect of Mexicansa useful dialoguehas been quickto develop. 112. Over time the approachof the Bankto thepolicy dialoguehas tendedto shift from final product to input. This has madethe Bank's advicemore acceptable,as indicatedby the larger numberof topics and issues on the agenda, and the decliningnumber of issues that are no longer too sensitive for discussion. While it is impossibleto gauge effectivenesson the basis of the degree of agreement of  - xxiii - to seek Bank inputin the policydiscussionprocess seems to decisionswith Bank advice, the willingness have increased. Conduct of the Dialogue Form of Dialogue 113. Bank/Borrower dialoguehas takenmany forms. Forms differ in terms of cost to the Bank and to the client. While rigid rules are undesirable, and much must be left to judicious and sensitive managementon both sides, it is possible to set down guidelinesfor effectiveand efficientdialogue. In general, the followingseem desirable: * Topicswhich cut across Ministriesor agenciesare best discussedin interagencygroups and at priorities and views. level high enough to resolve conflictsamongministries/agencies * Topics of interest to several groups in the Bank should be discussed jointly rather than separatelywith the clientin order to avoidone Bank mission after another discussingthe same issues with the same agency, using up their time and goodwill unnecessarily and risking conflictingadvice to the client. * Form of communicationshould be selected to convey informationaccurately and sensitively with minimumuse of the client's time. Planningand Coordination 114. WithinBank planningand coordinationof the policy dialoguehas not alwaysbeen good. The dialogueduring the early seventiestended to reflecttwo competingviews withinthe Bank regardingthe best poverty alleviationstrategyfor Mexico. Toward the end of the seventiesthe dialogue was muddled by conflictingattitudesby staff over the expansionof Bank lending and the over-expansionof public expenditurein Mexico. This led to a situationin which staff felt exposed, in that they couldbe singled out by Mexicanofficialsfor complaints to Bank managementabouttheir individualpositionon particular issues. Somestaff interviewed for this studyrecallthat they were frequentlyundercutby top management in dealingwith Mexico. 115. The eightiessaw considerableimprovementin the arrangements for conductinga dialoguewith Mexico. The twice yearly CPIR, the CSP every few years, and the CSIR, involvingthe preparationof papers setting out Bank positions and opinions required greater and more regular consultationamong divisions. An importantfactor in improvingthe arrangementsfor dialoguewas the 1987reorganization of the Bank which made Country Departmentsexclusivelyresponsiblefor all policy discussionswith clients. 116. On the Mexicanside the Ministry of Financehas been the principalpoint of contactfor Bank lendingand dialogue, but the Bank has maintaineda dialogueon macroeconomic policy issues with the Bank of Mexico, the Ministry of the Presidency,and the Ministry of Foreign Commerce. In addition, there has been dialogue with sectoral ministries on sector policies and project issues. Coordinationof  - xxiv - the dialogue within Mexicohas not always been good, as the several institutionsdealing with different aspectsof macropolicyhave tended not to be open with each other in sharing informationand analysis. Level or Rank of Interlocutors 117. The Bank has tended to the view that the formalitiesof internationaldiplomacyare of little relevance in Bank/countryrelations. Mexicansappear to be more sensitiveabout these formalities. In this, Mexicomay be difficultto interpret, havingexhibitedtendenciesto formalityin officialhigh profile dialogue/negotiation and toward informality in low profile intellectual interchange. In general, Bank attitude to level of staff sent to represent it should be sensitive to the style and degree of formality preferred by the client. It should also be informed by whetherthe dialogue is an informal intellectual interchangeto provide advice (as an input in a policy determination process), in which case the technical expertiseof the Bank representativewouldbe the main consideration;or whetherit is negotiatinga policy change, in which case appropriatelevel of authorityto committhe Bank wouldbe the main consideration. Bank staff see it as better to have a higher level representationthan to have staff over-ruled by senior management. Dialoguewith other EinancialInstitutions 118. An importantdevelopmenthas been the Bank's increasingparticipationin discussionsbetween Mexicoand the internationalcommercialbankingcommunity. This dialoguehas been carried on at high level, with the President of the Bank, the Senior Vice President of Finance and the Regional Vice Presidenthaving been involved. At the same time the Bank has on many occasionsfielded its highest quality technicalexperts when the issuesunder discussionwarranted input of this kind. In addition, the Bank has been involvedin dialoguewith the InterAmericanDevelopmentBank in order to achievemore effectivecoordinationwith their Mexicoprograms, especiallyin agriculture. Conclusions from the Review of the Policy Dialogue 119. The main conclusionof this reviewis that significantchangesin the acceptabilityof Bank advice by Mexico and in the philosophy underlying Bank attitudes have transformed the economic policy dialogue from an almost resented intrusionon nationalsovereigntyto a welcomeand frank intellectual interchangefrom which scarcely any topic is now excluded. Mexicanshave concededthat the dialogue with the Bank over the years has had some influence,albeit indirect, on policy decisions. THE LENDINGPROGRAM 120. By the end of March 1993 the Bank had made a total of 163 loans amountingto a total of US$21.2 billion to Mexicosince 1948. This is equivalentto approximately10% of total Bank lending to all countriessince its inception. Of the total, US$1.2 billion had been cancelledand US$3.8 billion was undisbursed.  - xxv - 121. The Bank's main lendingobjectivesin Mexicohavebeen to transfer externalresources and, to a lesser extent, to influencethe formulationof economicand social policy. Until the mid-seventiesthe transfer was primarily to finance the foreign exchangecontent of public investmentsin infrastructure. During 1977-81,lendingseemedto have beendrivenby the Bank's needto lend rather than by Mexico's need for Bank resources. In the six or seven years after the 1982 financial crisis the emphasiswas to assist financialstabilizationby helpingto balancefinancing requirements,but lendingfor infrastructure and for agriculturaland industrialdevelopment continuedto be important. Toward the end of the decade of the eightiesthe objectiveshiftedto supportMexico's structuraladjustmentefforts. The ninetiesbegan with an emphasison supportto Mexico's debt reschedulingand reductionstrategyreflectedprimarily in the massiveInterest SupportLoan. This has been followedby a lower level of lending consistentwith the Government'sstrategyof reducingthe role of the public sector and with the Bank's concernover its level of exposure. The new lending program is designedto support sectoral infrastructureand social sector development. Bank Exposure 122. Bank exposure in Mexico, while the subjectof continuousmonitoring,has not usually been a causefor concernby Bank staff. A rise in the projectedpercentagefrom 6.6% in 1963to between 12% and 14% as far back as 1965 was not regarded as excessiveconcentrationof the Bank's investments. There was no significantconcern partly because anothergauge of exposure - the Bank's share in total country indebtedness- had been movingin the oppositedirectionuntil the crisis of the early eighties. After the 1982crisis and into the beginningof the ninetiesboth indicatorsmoved in the same direction provokingtemporary concern over Bank exposure. Gross disbursementsreached over US$2 billion in FY89 and FY90; and the Bank's exposure in Mexico, as a percentageof the Bank's total disbursed and outstandingrose from 8.1% at the end of FY89, to over 11% at the end of FY90 and FY91. Sincethen Bank lending has been reduced. 123. The Bank has not associatedhigh exposurein Mexicowithhigh portfoliorisk, initiallybecause of the growth record of the Mexicaneconomy,then becauseof the oil bonanza, and later the profound structuraladjustmentsto improvethe international competitiveness of Mexicanexports. More recently, Mexico's debt and debt reductionstrategyhas further reducedthe risk of default. However,the reduction in risk has come at the expenseof greater exposureof the Bank; and the waiver of the negativepledge clause in respect of part of Mexico's debt to the Bank, granted as a means of allowingMexicoto reach agreementwith the commercialbanks, does increasethe risk associatedwith the high exposure. 124. The outlookis that Mexicowill make increasinguse of commercialfinancingto which it now has access, especially since many officials regard Bank financing as relatively high cost. In these circumstances the share of Mexico in Bank loans outstandingshould fall in the future and Bank lending should account for a decliningshare of Mexico's financingrequirements. Composition 125. Three-quartersof Bank lendingto Mexicohas been project based. This has been aboutevenly split between the productive sectors (agriculture, industry and tourism) and infrastructure (roads, railways,ports, power, urban, water and irrigation),with a very smallpercentagegoing to socialsectors. Within project lendingthere was a distinct move away from infrastructureto productivesectorfinancing  - xxvi - during the seventies. In general, the compositionof lendingand its evolutionover time were not peculiar to Mexico. 126. One-quarterof Bank lendingto Mexicohas been in the form of policy-basedloans, reflecting the strong shift away from project lending in the eighties. Recent loans in support of Mexico's debt restructuringand debt reduction effort have also helped to enlarge this policy-basedcategory. In spite of the fact that there has been no structural adjustmentloan as such, much of this lending has been in support of Mexico's stabilizationand structural adjustmentefforts. TechnicalAssistanceComponent 127. Almostall Bankprojectsin Mexicocontained technicalassistance(TA)components for training, consultant services, and studies. A review of technical assistance components in 29 loans under implementationas of October 1987 showed that TA accountedfor 7.4% of approved loan amount. Mexicanofficials contendthat TA is usuallyunder-estimatedat project preparation,and that Bank staff and project executorsshould determinemore accuratelythe exact requirements. Bank staff tend to the view that TA is often overestimated and that studies and training of dubious value is frequently undertaken. From both it may be concludedthat more effort should be directedat proper identification of technicalassistancecomponentsof loans. Cofinancingand Bank Guarantees 128. The Bank has been instrumental in mobilizing resources from the international banking communityin support of Mexico's investmentprogram through cofinancingand guarantees. Although cofinancingwas initially rejected by Mexico as unlikely to bring additional resources, the situation changedafter the 1982crisis, when Mexicoacceptedthat cofinancingwith the World Bank in the form of a guarantee of a portion of the new commercialbank money would be necessary to procure an agreementwith commercialsources. In 1985, the Bank providedpartial guarantees of up to US$500 millionof a US$1 billion commercial bank loan, and a guaranteeof up to US$250 millionof a US$500 millionequivalentcommercial bank growthcontingency loan (GrowthFacility). In 1990,the Bank again acted to facilitate mobilizationof commercialbank support, when at Mexico's request it waived the negativepledge restrictionsin existingloanand guaranteeagreementsto permit a pledge of up to US$7.5 billion equivalentby the United Mexican Statesas collateralfor the principaland interest paymentsof discountand par bonds to be issued for reducing the stock of commercialbank debt and debt-service payments. Planning& Coordinationof Lending 129. As with ESW the coordinationof lending within the Bank was initially done within an Economic Committee, later a Staff Loan Committee, and then about 1970 within a formal process involvingthe preparationof a Country Program Paper with inputs from both Programs and Projects divisions to be discussed within a group with wider representation of central departments and management. In the early 1980s the process was further developed around a twice-yearlyCountry Programmingand ImplementationReviewand a Country Strategy Paper producedevery two or three years.  - xxvu - 130. Bank staff agree that the formalizationof planningof lendinghas been accompaniedby a close and formal linkage between ESW and lending. This general perception of linkage is also shared by Mexicanofficials. Bank/Mexican studies on manysectors, e.g., housing, financial,water supply, urban transport, solid waste disposal, the Mexico City Metropolitanarea, were the basis of many lending operations. However,the degreeof linkagewas not uniformover all sectors;linkagebetweenthe lending program and the transport sector reports has been uneven. Staffweeksin Support of Lending 131. Data for projects approvedby the Board from FY87 to FY92 indicate that a total of 1,890 staffweeks were used in the preappraisal, appraisal, negotiation, supervision of adjustment lending amountingto US$4,905million, at an average cost of 1 staffweekper US$2.6 millionof lending. For project lending, 6,126 staffweekswere used to support US$6,787 million of approvals, implying an average cost of 1 staffweekper US$1.1 million of lending. Within project lending, social projects - basichealth, initialeducation,women in development- forestry and agriculturalmarketingwere more costlythan average in terms of staff inputs. All this would seem to suggestthat as the importanceof adjustmentlending in the lendingprogram declines and that of social projects increases, the staffweek requirementper millionof lendingwill increase. Lending Issues The MexicanViewpoint (a) Conditionality 132. From the Mexican viewpoint the main issues in lending were conditionality,purchasing of domesticallyproduced goods, and complexityof procedures. During the first three decades of the relationshipthe Bank resortedto formalconditionality to get the MexicanGovernmentto act on revenues and pricing of public services in order to strengthenthe financialposition of the public sector. Bank efforts, generallyresentedby the Mexicans,were of limitedsuccess,as the GOMpreferredto set its own targets and timetablefor policy actions. 133. Conditionalityhas not been an issue sincethe mid eighties. The approachhas been to discuss and reach agreementon general policy directions. Lendingto Mexicohas been with minimumexplicit conditionality,showing sensitivity to the political difficulty the Government faces in appearing to implement policies which are perceived as required by the Bank. However, understandingswere embodied in informal agreementsor reflectedin prior measures or announcements. In some instances these understandingshave been set down in policy letters which were not part of the formal legal loan documentation. This raises the issues of how fully informed the Bank's Board was regarding the operationsunder consideration,and of how completethe paper record is and its adequacy for lesson- learning. Some Bank staff have not been comfortablewith the relaxationof formal conditionality, seeing this as makingverificationof compliancedifficultand subjective. (b) Purchasingof Local Manufactures 134. At intervals over many years Mexico raised the issue of limitationof Bank financingfor the purchasingof locally manufacturedgoods. One concern was that it did not assist import substitution  - xxviii - industries,and anotherwas that the limitationon local cost financingin face of low public sector saving constrainedthe investmentprogram. To some extent Bank staff shared the latter concern, focussingon the fact that limitationof lendingto the cost of foreign componentsresulted in smaller loans than were otherwisedesirable. (c) Complexityof Procedures 135. From the Mexicanviewpointcomplexityof Bank proceduresslowed drawdownof resources and made use of Bank financing impractical in the case of urgent social investments. Usually, procurementrules and competitivebidding requirements are cited as examples of such procedures. Another complaintwas that the Bank generallytried to be too comprehensive at the beginningof project identificationand to cover every little detailup front, before tryingto see what was necessary in practice as implementation unfolds. The Bank's Viewpoint (a) Disbursement 136. The major problem with disbursementwas its slow pace, which assumedcritical importance in the early eighties. A 1983review of disbursementperformancefound that the undisbursedbalance under 29 ongoing operationsamountedto US$2.5 billion, and had been growing steadily with the rapid build up of commitmentsafter 1977. Slow disbursementwas due to lack of counterpart funds and disincentives to implementation of Bank-financed projects, administrativefactors delayingthe drawdown of Bank funds, lack of compliancewith interestrate covenants,and Mexico's reluctanceto complywith Bank procurementguidelines. 137. Bank response to the problem was to design in collaborationwith the GOM a Special Action Program (SAP)providingfor working capitalfinancingunder various lines of credit, advancepayment by the Bank into a de facto revolving fund, increased cost sharing, and intensive review of project implementation. It was estimated that, as a result of the SAP, disbursementsin FY84 were $207.3 millionhigher than they otherwisewould have been. (b) Procurement 138. Bank concern has been that procurement practice in Mexico, while generally acceptable, deviatedfrom Bank guidelinesand policiesin certainimportantrespects. Specifically,contractswere not always awardedto the lowest bidder; time allowed between advertisementand closure of the list of eligiblebidders wastoo short; time for prequalifiedcontractorsto acquire and submitbiddingdocuments was too short; purchasesof domesticgoodswere allocatedamongsuppliersat the low bidders price; and preference was given to suppliers which are governmentagenciesor cooperatives. 139. Bank/Mexicoconsultationson procurementproved useful. Talks in 1987resulted in the Bank placingin loandocumentsexplicitstatementscoveringthesepractices, and providingtechnicalassistance for seminarsorganized in Mexicoto familiarizeofficialswith the Bank's requirements. The issue was revisited in the 1991CPIRmeeting,when it was agreed that the Bank woulddelegatesome procurement supervisionto financial intermediaries,implementprocurementtraining for task managers, and provide  - xxix - trainingto borrowersand implementingagencies. In early 1993, there was furtherdiscussionon sample biddingdocumentsfor ICB for goods and worksto be used for all Bank investmentlendingprocurement in Mexico; agreementon which is expectedshortly. (c) DomesticCost Financing 140. Inadequate domesticcost financinghas beenan issueof perennialpreoccupationin Bank/Mexico relations. The problemarose mainlydue to tightbudgetceilingsand the absenceof a multiyearallocation system, so that counterpartfunds for ongoing projects were not automaticallyprovided. It also arose when stabilization objectivesrequired restrictionin the use of borrowedfunds to meet fiscaldeficits. The Bank tried to relievethe problem in the eightiesthrough cost-sharing,which providedBank financingin excess of that warranted by import content; and the shift to policy based lending made domestic cost financingalmost irrelevantfor a while. For the nineties, growth of public savingswill still be required to ensure adequatedomestic cost financing, especiallyas social projects with minimal import content becomemore important. Evaluation of Lending verview 141. OED has done project performanceauditson 68 operations(of the 163total), and has rated 46 (or 68%) of these operationssatisfactoryand 22 (or 32%) unsatisfactory. The total lending for the 68 projects amountedto US$8,351million equivalent,and for the projectsrated unsatisfactoryto US$2,788 million equivalent (33.4%), indicatingthat on average project size does not seem to have been an importantfactor in project performance. 142. Another overall evaluationof projects audited by OED has been derived from the average of supervisionratingsin the final year of implementation of those projects. If projects assignedto categories 1 and 2 are regarded as satisfactoryand those assignedto 3 and 4 are regarded as unsatisfactory,then these ARPP ratings indicatethat 11.3% of the portfolio was unsatisfactoryduring the year preceding project completion. 143. Assessmentof the projects by regionalstaff tended to be more optimisticthan that by OED. The OED focusseson developmentimpact and sustainabilityof benefits, based on an assessmentsome time afterphysicalproject completion. ARPP ratingshavetendedto concentratemostlyon the timeliness and adequacyof the provisionof project inputs (management,funds, etc.) and achievement of immediate outputs (e.g., roads built, hectares irrigated, schoolhouses constructed). Cancellations 144. About one billion dollars of loans approvedby the Bank for Mexico have been subject to cancellation. Of the operations audited by OED total cancellationsamounted to US$697.8 million. Irrigationprojects accountedfor 40% of cancellations; rainfed agriculturefor 28%; pollution controland womenin development10%; watersupply9%; and integratedrural development3%. Auditedoperations  -xxx- classifiedas unsatisfactoryaccountedfor 33% of the total approvedloan amount,but they accountedfor 57% of the amountof loans cancelled. Four loans approvedbetween January 1981 and August 1982 accountedfor 77% of the amountcancelledwhich was associatedwith loans classifiedas unsatisfactory. Time Overrun 145. Of the operations audited by OED, informationon time overrun is available for 50. The averageoverrun for this group is 1.68 years. Of the operationsclassifiedas unsatisfactorythe equivalent average overrun is 1.41 years. Thus delay was not a major factor affectingclassification. This may be explainedby the fact that someoperationsclassifiedas unsuccessfulwere abandonedor cancelledwithin the planned implementation period so that there was no time overrun. Cost Overrun 146. The operationsauditedby OED fall into two groups so far as cost overrun is concerned;those approvedbefore 1980and those approvedduring the 1980s. The before 1980group had an average cost overrun of +87% of total cost of the projects in this group; while the post-1980group had an average overrunof -51% (i.e. an underrun). This is probablydue in part to the tendencyto abandonprojectsthat were not movingahead and to cancelloans during the post 1982financialcrisis. Several loans approved after 1980were cancelledresulting in underruns. Comarative Evaluation 147. OED rated as satisfactory74% of 3,159 projectsworldwide. The satisfactoryrating fell from 80% for projects before 1978to 68% for those during 1978-82recovering to 71% for those approved after 1982. For Mexico, satisfactory projects declined from 82% to 48% recovering to 79% for correspondingperiods. The deteriorationin the Mexicanportfolio exceededthat of Latin America and Caribbean during 1978-82, which at 56% satisfactory was well below that of the world. Thus, the relativelypoor performanceof the Mexicanportfolioduring 1978-82was due partly to bankwidefactors, partly to regionwidefactors, and partly to factors specific to the Mexicoprogram. 148. A recent comparativeevaluation of projectperformancebased on the OEDdatabaseof evaluated projectsamongthose approvedin the period 1964-1987showsthat time overrun in Mexicoat 1.7 years was less than the averageof 2 years for the 1015projects worldwidein the auditedgroupsfor the period. Cost overrunfor Mexicanprojects averaged15%of estimatedcost at appraisal, wellbelowthe worldwide average but significantlyabovethe comparablefigures for Colombianand Brazilianprojects. Sustainability 149. Of the audited projects in the OED databasesustainabilityratings were done for 31; of which 11 had sustainabilityrated as likely, 12 as uncertain,and 8 as unlikely. All those with a rating of likely were also rated as satisfactory, 5 of those rated uncertain were satisfactory, while none rated as of unlikely sustainabilitywere also regarded as satisfactory. The general outlookon the sustainabilityof benefitfrom Bank-financed investments,basedon the factorsaffectingsustainability, seems positive. The politicalsituationhas been and is expectedto continueto be stableand the economicsettinghas benefitted and is likely to continueto benefit from judiciousmanagement.  - xxxi - Lending Program - Conclusions 150. Did the Bank lend too muchto Mexico? The answer insofar as it refers to total lendingis no. Mexicowas able to absorb Bank financingeffectively, and the Bank has been and is comfortablewith the degree of exposure that has resulted. The performance of lending operations as assessed by the percentageof satisfactoryprojectsin the group of auditedprojects is not significantlydifferent from the Bankwideaverage. 151. Lending during 1977-81 may be regarded as having been excessive on absorptive capacity grounds, given the abundance of investmentsfinanced from other sources; the high percentage of unsatisfactoryprojectsapprovedby the Bank duringthis periodsupportsthis view. It may also be argued that Bank lending exacerbated rather than counteractedthe over-expansionof investmentduring this period. Lending may have been too little during the early period when the Bank attempted to use curtailmentof the lendingprogram as a lever to increase its influenceover policy. LESSONS 152. These lessonsreflectnot only conclusionsfrom analysis,but also what Bank staff and Mexican officials who have been involvedin the relationshiphave related to the study team. Most are not new, but bear repeatingto remindBank staff of what appearto be practicesthat are likely or unlikelyto make the Bank more effective in its mission. 153. The principallessonsfrom the review of ESW are the following: * lack of informationon PEMEXborrowingsadverselyaffected Bank analysisof the Mexican economy during 1979-81. The Bank in its role of advisor on development and economic managementmust have adequateinformationon sectors which are likely to be key influences on the economy,even where it is not involvedin lendingoperations in those sectors. Access to informationnecessaryfor the analyticalwork whichunderpins advice and lendingshouldbe a basic condition for Bank support of any client's investmentprogram; (See Chap. 5 - Economicand SectorWork, paras.- 32, 98, 108); * joint planningof ESW and its review at frequent intervals with the client through CPIRs and CSIRs worked well in the Mexican case, and should be practicedBankwide. Joint planning helps to ensure that Bank ESW complementsrather than competeswith the client's efforts, to facilitate the optimal allocation of ESW between Bank and country, to allow a blending of international and domestic experience, and to upgrade the information base and client capabilities;(see Chap. 5 paras.13-16); * the Bank/Mexicoexperiencewith joint implementationof ESW has been that reports tend to be restricted for too long, thereby inhibiting disseminationof lessons. The Bank should participatein joint studies on the clear understandingthat ESW results will be made available to the Bank promptly and completely;(Chap.5 paras. 19-23);  - XXXii- * the Bank recognized the research capability of Mexican entities within the academic and intellectualcommunity,and providedfunding to specificresearch projects, thereby permitting the community'sincreasingparticipation in countryESW and broadeningthe economicdialogue within the country. Continuinginterest of those entitiesdepends on greater feedbackfrom the Bank and greater access to Bank ESW;(seeChap.5 para. 121); * lessonlearningrequiresthat an adequateofficialpaper trail be left by ESW includingwhat may not have been formally issued as Bank documents. Confidentialitycan be served by keeping the record closed for an appropriateperiod; (see Chap.5 paras. 91, 107); * the quality of ESW is helped by a healthy technical debate, both within the Bank and in the clientcountry.The Bank should avoidstiflingdissentingviews amongits staff. The process of arriving at and definingBank positionon issuesshould be as transparent as possible; (Chap.5 sectionon Strengthsand Weaknesses); * the Bank avoidedESW on subjects about which Mexicowas sensitive, with the result that it did not sufficientlydevelop,or seek to include in the dialogue, an alternativepoint of view on impendingdemographicand socialproblems.The Bank should encourageESW on all relevant subjects,while being careful that in its dialogue and publicationsclient sensitivitiesto public disclosureof confidentialdata and resultant analysisare respected; (Chap.5 paras. 109, 115, 116). 154. The main lessonsfrom the reviewof the policy dialogue are the following: * the review showsthat the qualityof the dialogueand its influenceon Mexicanpolicy depended on whetherthe subjectsthe Bank wished to put on the agenda were of current interest to the country. During the late seventies the policy dialogue was unjoined. The dialogue was considerablyimprovedby having a a regularly scheduledBank/Mexicoforum (the CPIR and later the CSIR) in which an agenda of issues for discussion could be mutually agreed; (see Chap. 6 paras. 21-25, 62); * Bank advice given as a low profile intellectual input in a process, which the national counterpartsfeel they control, is more acceptableand usuallymuchmore effectivethan advice in the form of conditionality; (see Chap. 6 paras.65-68 on "effectiveness"); * timing of dialogueis critical. It should be early in the decisionprocess, before firm positions begin to emerge. The political cycle is importantas major decisions (especiallyinvolving curtailingof public expenditures)are unlikelyto be taken just before an election; * competing views withinthe Bankregardingthe best strategyfor the countryshouldbe resolved through dialoguewithinthe Bank, so as not to confusethe dialoguewith the client. The twice yearly CPIR, the CSP every few years, and the CSIR, all involvingpapers setting out Bank positionsrequire regular consultationsand the resolutionof conflictingviews amongdivisions; (Chap.6 paras. 71, 72);  - xxxiii - * the Bank/Mexico policy dialogue was particulary successful when intellectually strong interlocutorsexperiencedin Mexicoand elsewhereparticipatedover extendedperiods in debates of a highly intellectualnature with equally capableMexican technocrats. One lesson for the Bank is that it should avoid too frequent turnover of key interlocutors; * staff training in basic diplomatic skills is desirable, since not all dialogue is at the informal level;(Chap.6paras. 75, 76); * Mexicanshave complainedaboutshiftsin Bankpositionsin negotiations. Bank representatives should be of a level appropriateto the issues to be discussed and empoweredto committhe Bank, so as to make unnecessarychangeswhich give the impressionthat the Bank is not frank in discussionswith its clients. Staff complainthat they have been undercut by management tendencyto over-rulethem on appeal by the Mexicans;(Chap.6 para.79); 155. The principallessonssuggestedby the reviewof lendingare the following: * during the late seventiesand early eightiesthe Bank lent more to Mexico than was consistent with its absorptivecapacity. The result was that a large number of projects were ranked as unsatisfactoryand/or subject to cancellationamong those approved during this period. The lessons from this experienceare a) that the Bank should determine the size of its lending program with due regard to the country's ability to absorb the total public sector investment program; and b) should determine the composition to make it consistent with the policy environmentand the availabilityof domesticfinancing;(Chap.7 paras.9, 58, 65); * inadequacyof the project pipelinehas been a perennialconstrainton the amountand quality of Bank lendingto Mexico. This reflected institutionalweaknessesin Mexico as well as a bias toward emphasison engineering aspectsat the expenseof sector economicworkboth in Mexico and in the Bank. Financing "time slice" of investmentprograms as a way of dealing with a scantproject pipelinehas had mixed results. It workedwell in the power sectorbut investment programs are difficultto put together. The lesson is that greater attention should be given to helping clients developprogram and project planning capability;(see Chap.7 paras. 67, 69); * improvementin planning and coordinationthrough regular countryprogram implementation reviews involvingall relevantsectionsof the Bank as well as clientofficialshas been the single most importantfactor in improvingperformanceof the Bank's lendingprogramin Mexico.This has been reflected in the reduced incidenceof cancellationsof loans to Mexicoapprovedsince 1984; * Bank projects in Mexicohave usually included a significanttechnical assistancecomponent. Both sides agree technical assistanceis importantbut that it is not as effectiveas it shouldbe. More careful identificationof needs and better arrangements for effective deploymentof technicalsupport are requiredif the TA componentof futureprojects is to be more satisfactory than that of past projects;(Chap.7paras.19, 20); * lendingto Mexico during the eighties was with minimal explicit conditionalitybut within the context of agreementsreached in the policy dialogue. This avoidedgiving the impressionthat  - xxxiv - the GOM was acting accordingto the dictatesof the Bank, althoughit did bring with it the risk of making verificationof compliancedifficultand subjective. The Bank should use caution in departing from formal conditionality,and put emphasison reaching agreement regarding general policy directions and required measuresthrough dialoguebased on appropriateESW. The Bank should abide by the agreementsreached and not attemptto raise the conditionality withoutdiscussionand justifying it to the client (Chap 7. paras. 32-34, 87(i)); * the Special ActionProgram designedin collaborationwith the GOM was useful in mitigating disbursementbottlenecksthat derived from identifiablecauses. Many problems could have been avoided through advance planning of monitoring and project supervision for smooth disbursement. Special accounts and revolving funds, intensive review of implementation arrangements, attention to counterpart funding requirements and incentives, and the establishment of a central project monitoring system proved effective in expediting disbursementssignificantly;(Chap.7 paras. 39, 40); * Bank experience in Mexico demonstrates how useful and important technical assistance especially training can be in improving compliance with Bank standards in matters of procurementand documentation. The Bank needs to study and monitor arrangementsin the client country in order to see how best to phase in Bank procedures,and have them accepted with minimumresistance;(Chap.7 para. 43); 156. Bank/Mexicorelationshave been a strong positiveinfluencefor Mexican economicprogress, especiallyduring the last decade. Three factorsstand out amongcontributors. First, Mexico's economic strategy shifted toward a liberal private sector driven market model early in the eighties. Second, the Bank's assistancestrategy shifted from financial support for public sector investmentprograms and leverageto inducethe clientto follow appropriatefiscal policiesto responsivesupportfor Mexico's own programfor dealingwith its problemsof debt, weak balanceof paymentsand a slowdownin growth, as well as with nationalemergenciessuch as the earthquakeand gas explosion. Third, the appearanceof new economicmanagementteams on both sides has been conduciveto fresh approachesto each other. 157. The result has been that the role Mexicowished the Bank to play in its developmentand the missionenvisagedby the Bank have becomemore consistentwith each other. There has been general agreementon policy directions, although at times not without extended dialogue; and the Bank has provided ESW and an expanded lending program in support of the economic adjustment and debt strategy, and has helped to mobilizethe internationalfinancialcommunityin support of Mexico's debt restructuringand reductionefforts. Althoughwith renewedaccessto other sources Mexicowill depend less on the Bank for finance, it continuesto value the technical assistanceembodiedin project loans to infrastructureand the social sectors and the dialogueon a wideningrange of topics. 158. Future Bank/Mexicorelationsare likely to be good. AlthoughNAFTAmay increaseMexico's access to North Americansourcesof capital and advice makingMexicoincreasinglyindependentof the Bank for these inputs, Bank assistancenow being provided in easingthe transition can preserve good relationsinto the non-borrowingphase. 159. Bank relations with other countries may also be influencedby the course of Bank/Mexico relationsover the last decade. Innovativedevelopmentsin planning, managingand monitoringrelations  - xxxv - as reflected in the CPIR and CSIR can be applied in relations with other countries. The international approachto such problemsas "debt reschedulingand reduction' in which the Bank operated in a wider forum than the narrow Bank/Countryrelationship is an important precedent for dealing with such problemsin other countries. Finally, there have been modificationsin some of the operatingprinciples of the Bank, e.g. the waiver of the negativepledge clause, which has already influencedrelations with other countries. Indeed, Mexicohas been a bellwethercase in Bank/countryrelations.  1. OVERVIEW OF BANK/MEXICO RELATIONS INTRODUCTORYOVERVIEW& METHODOLOGY 1. Bank/Mexicorelations, while always generallygood, have become closer and more stable over the last decade.Firstly, eventsaffectingthe relationshipdirectlyand indirectlyhavetended to be unifying rather than divisivein their impact. Secondly,improvedarrangements for collaborationand coordination have increased the ability of Bank/Mexicorelations to avoidor withstandthe frictions arising from the inconsistenciesbetween the role of the Bank as viewed from the Mexican and Bank perspectives. Thirdly, over time events and changes in attitudes have tended to increase the acceptabilityof Bank intellectualservices and financingby Mexico, thereby reducingpotential friction. This has resulted in expansionin the rangeof Bank services,greater flexibilityin the use of funds, and greater responsiveness of economicand sector workto Mexico's needs. The increasingcomplexityof the international financial environmentand the greater importanceof the Bank in determiningaccessto externalfinance have had a similar effect. The outlook is for continuedgood relations. METHODOLOGY 2. There is no agreed methodology for the study of Bank/Countryrelations. A blend of two approaches- the "eventsdriven' and "the strategydriven'-have been employedin this study to provide a framework. The first focusses on how discrete events affected relations, and draws on the basic methodsof historical analysis.The second emphasizesthe subtle influenceson each party's strategyfor dealingwith the other. Drawing on the methodsof history and economicsthe combinedapproachtries to analyzehow this strategy has evolved. As will be seen relations are complex and the framework provided by each disciplinewill at times appear simplistic. It is impossibleto sort out with certainty causes and effects, and the conclusionsreached through the analysisremains a collectionof judgements as to probablecauses and effects. Reasonableness of conclusionsrather than eleganceof the underlying methodologymust therefore be the basis for evaluationof the work. The "Events Driven" Approach 3. The "events driven" approachidentifiesthe main eventswhich may have affected Bank/Mexico relationsand tries to makejudgementsregardingthe nature and directionof effectson the relationship. This approachattemptsto be analyticalby using the events to define stages in the relationshipand tries to identifythe factors determiningthe evolutionfrom one stageto the next; [as if by understandinghow and why these change, and possibly when, it may be able to predict the course of the relations or to design intelligentinterventionsto push them toward some optimalpath]. Phasesare periods of stability in the relations, bounded on each side by events which tend to change the direction of the relations. Phasesmay includeeventswhich do not changethe directionof relations and whichtend to reinforcethe existingtone of relations. They are periods of relative stabilityduring which the effects of past events are played out and the gestationof future ones may be occurring. 4. The process starts by recognizingthat parties in a relationshiphave their "personal" or unique interestsand also some shared interests. Interestsare not alwayseasy to identify,and suitableindicators of the extent to which they are being served in a relationshipare difficultto design becauseparties tend not to react to enhancementof their interestsbut only to their impairment. Hence, it may be useful not  2 or symptomswhich the relationship to attemptto specifythe interestsbut to look at certain characteristics will exhibit when the interests of one or both parties are not being served or the extent to which they were being served has been eroded. The symptom of relevance in this approach is 'tension' - a qualitativeconcept,which carriesthe negativeflavorof the words "uneasy","uncomfortable","insecure", "untrusting",etc. Recognitionof this symptomis a matterof judgement. 5. Events,which are the basicbuildingblocks of the analysis,are discrete happeningsin time which affect the parties perceptionof their total interests and which have the potentialfor raising or lowering the level of tension between them. Events are classified as direct when they are actions or words addressed specificallyto the relationshipby either party; and as indirect when they are not addressed specificallyto the relationshipor are initiatedby third parties. Direct events are classified as anabolic (to borrow a phrase from the biologicalsciences)if they are tension reducing; and catabolic if they are tensioncreating. Thus anabolicevents are assumedto either enhance or protect the individualinterests of both parties, the oppositebeing assumedfor catabolicevents. Indirect events affect the environment of the relationshipand may either be unifyingor divisive, as they reinforceor weakenthe area of shared interests. In general, indirectevents which tend to increase a country's dependenceon the Bank as a source of financingor advice are regarded as unifying,and as divisiveif they tend to reducethe degree of dependence. 6. The events driven approachto the analysis of Bank/Countryrelations, while potentiallyuseful for a rough first cut at understandingwhat have been the major factors that have affected relationsfrom time to time, needs to be complementedwith an approach which takes fuller considerationof the economicnature of the relationshipbetween Bank and Country, initial conditionsand attitudeswhich shaped expectations of the parties, and the evolution of factors which influence relations without presentingthe temporaldiscontinuitycharacteristicof events. The "Strategy Driven" Complement 7. The approachto complementthe event drivenanalysisfocusseson the factorsusually subsumed under the general rubric of strategyof each party for dealingwith the other, particularly as this reflects the role which each perceivesas appropriatefor the other. The underlyingassumptionis that the tone of relationswill dependon the extent to which each party performs in accordancewith the perceptionof the role consideredappropriateby the other party. In a dynamic world these perceptions change in response to discrete events and the continuousevolutionof factors which impinge on the interests of either party. As in the caseof the eventsdrivenapproach, it maynot be possibleto establishmeasurable gauges to determine the extent to which relations are improving, but it may be feasible to identify symptomsto indicatethat they maybe deterioratingand that adjustmentsare needed. The symptomthat comesto mind is friction, a conceptthat carries the dynamicflavor of things rubbing againsteach other as they move in oppositeor inconsistentdirections. The approachfocusseson what causes friction and on adjustmentsto reduce it. 8. This approach is necessarily more detailed. At the same time it must allow aggregationof minutiae into larger concepts, and these concepts must be related through an acceptable theoretical structure. The theoreticalapparatusfor unifyingand simplifyingthe analysisof Bank/Countryrelations is based on the recognitionthat the essenceof the relation is a transactioninvolvingthe provisionof a mix of services- financing, and intellectualOetus call it advice)- by the Bank for a consideration- the paymentof interest and other charges. The ratio of the two categoriesof servicesin the mix is not rigidly fixed but can be varied. It is expectedthat the Bank will try to vary the mix of financingand  3 adviceto pursuethe objectiveof 'fulfillment of its institutionalmission"; and it is assumedthat generally it will want to provide more advice when it is asked to providemore financing. 9. It is assumedthat the country will determineits requirementof Bank financingand advice with the objectiveof maximizingits "nationalwell-being";and that there are limits beyond whichthe country does not regard additionalBankfinancingand adviceas enhancingits senseof nationalwell-being. These limits will change as circumstanceschange. The limit for country absorption of Bank financing is expectedto dependon its overall absorptivecapacityfor financingas well as the amount and terms of financingavailablefrom other sources. Similarly, the limitof countryacceptanceof Bank advice likely dependson the overall need for outside advice and the availabilityand conditionsof advice from other sources. The significanceof these limits for Bank/Countryrelations is that they definefour possibilities for country attitude to a particular combinationof lending and advice which the Bank may wish to provide: More lending and more advice desirable; More lending desirable, less advice desirable; Less lendingdesirable, more advice desirable; Less lendingdesirable, less advice desirable. The intersectionof these limits will be at the optimalcombinationin that lendingand advice are both at the maximumconsistentwith countrywell-being. 10. The link betweenthe theoreticalapparatusabove and Bank/Countryrelations is as follows: * If the combinationthe Bank wishesto provideis that whichthe country regards as optimalthere will be no pressuresfor changeand the relationwill tend to be without friction and hence good and stable. * If the combinationthe Bank wishesto provide is amongthose for which more of both lending and advice is desirable, relations are apt to involveminimalfriction and therefore good, since at least one party (the Bank) is doing what it wants to do and the other wants the first to do more withinthe transaction. * Since the country will try to resist having to accept advice it regards as "excessive";and Bank effortto lend beyondthe willingnessof the countryto absorbsuch financingis most likely to run into difficultiesin negotiationand or result in poor project implementation,combinationsof lending and advice outside one or both limits are apt to be characterizedby friction and not to be associatedwith good and stable relations. 11. If the limits couldbe knownwith certaintyand did not shift then the Bank couldmanagethe level of lending and advice to achievegood and stable relations at all times. Under assumptionof perfect knowledgeand if the Bank did not face constraints on the supply of financial and human resources availableto it, the Bank couldapproachoptimalityin its total operationsby providingthe optimallending and advice to all countries. But the reality is different. The resources availableto the Bank at any point in time may be greater or less than the sum of the optimalrequirementsof its borrowingmembers;which would mean that even if the allocationamongcountrieswere proportionalto their optimalrequirements, the Bank could be trying to lend and/or advise too much or too little. Given the possibilitythat the allocation of Bank financing and advice among countries is influencedby considerationsother than  4 optimal country requirements, the combinationwhich the Bank may wish to provide to a particular country couldbe other than those consistentwith good and stable relations. 12. In applying this simple frameworkto the study of relations, one looks at the country's initial conditionsand attitudes as these affect the above limits, and therefore the likelihoodthat combinations of lending and advice will fall withinthose consistentwith good and stable relations. Then, eventsand trends are examinedin terms of their potentialfor shifting the limits of acceptable lendingand advice. These determine the country's strategy for dealing with the Bank and the way it changes over time. Similarly, initial conditionsand attitudesof the Bank, and changes in its perception of its mission in assistingthe developmentof its clients and in the availabilityof resources availablefor supporting any particularclient will be reflected in the Bank's country strategy. 13. Events, factors and trends are assumedto affect relations by increasingor reducingthe limits of acceptabilityof Bank lendingand advice to the country, and by affectingthe Bank's desire to lend to or advise the country. This occurs when, inter alia, the availabilityof substitutesand substitutesources is increasedor decreased, the total requirementfor outsideadvice and financing changes, and there is a change in the country perceptionof the complementarity/substitutability between the Bank and other sources changes. It also occurs when, inter alia, there is a changein the total resources availableto the Bank, in the attractivenessof other borrowers,and in Bank leveragedue to the decisionof other financial and advisory sourcesto follow the lead of the Bank. Together the influenceson country limits and on the Bank's country program will determine the tone of relations by determining whether the Bank's programmedcombinationof lending and advice is within the limits of acceptabilityor outside one or both, as well as the extentto whichthe combination differs from the optimalcombinationfor the country. The rationale for concluding that certain events, factors and trends contribute to good relations or otherwisethus becomesmore transparent. 14. An underlying assumptionof the approach is that of the independenceof the Country and the Bank in formulatingtheir strategy for dealing with each other. Two considerationsjustify treatingthe Bank as having an independentexistenceand exhibitingattitudes,preferencesand needs independentof the client's. First, the Countryis only one of over 150membersand accountsfor a relativelysmall share of the capitaland hence the votes, which makesit reasonableto assumethat Mexicodoes not wield such an influenceover the Bank's as to make the assumptionof independenceinvalid. Second, the Bank is an institutionand like most institutionsof long standingwith an establishedand entrenchedbureaucracy has an ethos of its own. It is therefore appropriateto think in terms of Bank attitudes, perceptions, preferencesand needs. As these evolvefrom different initialstatesand differentpaths from those of the client, the likelihoodis that relations will first need to be adjusted in the direction of some optimum condition, and that they will tend to go out of adjustmentover time; hence the need for corrective accommodations. 15. Two caveats regarding the assumptionof independenceshould be entered in the interest of realism. Firstly, although country preferences and the Bank's initial program are assumed to be independent of each other, the processof negotiatingthe transactionshould lead to a compromiseresult in whichthe positionsof both parties are brought closer together. It is possiblethat the compromisemay be outsidethe limits of acceptablelendingand advice, but unlessthese limits changequicldythe country can be expectedto continueto adjust its absorptionof Bank servicesto bring them to theselimits. Thus a temporary compromisedoes not necessarilyresult in stable relations. Secondly,althoughthe country may haveonly vague notionsregardingthe combination of Bank financingand advicethat is optimal, (for this optimal combinationmay indeed change in response to circumstances)the adjustment of the  5 transaction to make it more satisfactory to both sides can be facilitated through collaboration in formulatingthe Bank's programfor the country, by keepingthe Bank up to date regarding shifts in the client's willingnessto absorb financingand to engage in the policy dialogue. APPLICATIONTO BANK/MEXICORELATIONS Application of the Events Driven Approach 16. The major events along with their classification (direct/indirect) and their likely effect or unifying/divisive) (anabolic/catabolic on Bank/Mexicorelationsare the following: Mexico's refusal to discussthe capitalbudget with the Bank in 1950; [direct, catabolic] The settingup of the Bank/MexicoJoint Workingparty in 1951; [direct, anabolic) DisagreementbetweenMexicanPresidentLopez Mateosand Bank PresidentBlack in 1958over electricitytariffs; [direct, catabolic] Bank refusal to finance power and oil in 1968; [direct, catabolic] Appointmentof Antonio Ortiz Mena as SHCP 1958; [indirect, unifying] Appointmentof McNamaraas Bank Presidentin 1968; [indirect,unifying] The electionof PresidentEcheverriain 1970; [indirect,unifying] McNamara/Echeverria meetingin 1971; [direct, anabolic] Oil Price Crisis of 1974; [indirect,unifying] Balanceof Payment& Financial Crisis of 1976; [indirect,unifying] Bank refusal to finance PEMEX in 1977; [direct, catabolic] The expansionof oil exports in 1978; [indirect,divisive] Oil price increase in 1978/79;[indirect, divisive] Internationalfinancial marketsin 1978/79;[indirect,divisive] World recessionand oil price collapsein 1981; [indirect,unifying] Financialcrisis of 1982 August; [indirect,unifying] New Mexican EconomicManagementTeam; [indirect,unifying] Visit of Bank SVOP to Mexico in 1982; [direct, anabolic]  6 New Bank Team 1983, beginningof CPIRs; [indirect, unifying] Export DevelopmentLoan 1983; [direct, anabolic] Policy shift by de la Madrid 1985; [indirect,unifying] The Baker Initiative 1985; [indirect,unifying] Bank Responseto Earthquake1985; [direct, anabolic] Oil Price fall in 1986; [indirect,unifying] SalinasNationalPlan 1989; [indirect,unifying] Brady Initiative 1990, Interest SupportLoan; [direct, anabolic] NAFTA announcement1991; [indirect,unifying] 17. These events seem to define some distinct phases in Bank/Mexicorelations. A sequenceof eventshaving the same directionis assumednot to change the directionof the relations but to intensify or continueit. Eight phases are identifiable;but may be reducedto six if the rule is that each phase must involvea changein directionfrom the one immediately precedingit; which would require treating 1958- 76 as one phase and 1977-82also as one phase. The phases are as follows: a) the introductoryphase - 1948-51,a period markedby one direct, catabolicevent whenBank and Mexicowere trying to define their roles and the boundariesof their authority and obligations; b) a phase of cooperation and understanding- 1951-57, one direct, anabolic event the Joint WorkingParty study providedthe basis for a period of cooperation; c) a temporary setback - 1958, two direct, catabolic events arising from a disagreementover conditionality; d) a phase of mutual respect - 1958-70, three indirect, unifying events when a technocratic approachto relations prevailed; e) a phase of charismatic relations - 1970-76, one direct, anabolic event - the meeting of PresidentsEcheverriaand McNamaraset the tone for relationsbased on coincidence of views on social aspects of development;two indirect, unifying events continued the period of warm relations; f) a periodof distancingand reverse dependence- 1977-81,startedwith one direct/anabolicevent and continuedunder the influenceof three indirect/divisiveevents; g) a transitionalphase - 1981-82,two indirect, unifying events marked the reversal of a trend toward disharmony;  7 h) a phase of adjustment, consolidationand maturity - 1982-92, begun with a direct, anabolic event - the visit of SVOP to Mexicoat the time of the financialcrisis, and continuedthrough three other direct, anabolicevents and five indirect,unifyingevents. 18. There are certain observationsthat can be made aboutthe relations on the basis of these phases. First, it seems that over time phases have tended to become longer, indicatinggreater stabilityin the relations irrespectiveof whetherthey tend to be close or distant. Second, in the early years - up until 1958 - direct events were predominant, while since then indirect events have become increasingly important. This conclusionflows not simplyfrom lookingat turningpoints but from an appreciationof the nature of the indirectevents and their influenceon the independence of the parties in the sense of not needing each other. Third, the duration of phases seems to depend on the occurrence of reinforcing events, i.e. which occur in a sequenceand affect the relations in the same direction. This tendencyhas been independentof whetherthe event was direct or indirect. The further subclassificationof indirect eventsinto internal (occurringwithin either the Bank or Mexico)and externaldoes not seem to matter. There are no phases in which there have been conflictinginfluencesnecessitatingweighingor trade-off, thus positiveinternalinfluencesseemto haveoccurredduring the samephase with positiveexternalones. Application of the Strategy Driven Complement 19. The extensionof the analysisby applyinga strategydrivencomplement starts by identifyinginitial conditionsand attitudesto see how they affected the basic preferences of both parties and, in turn, the major thrust of strategy on both sides. Then it attemptsto assess the potential for friction, and the accommodating adjustmentswhich were made. In summarythe principalinitial conditionsand attitudes on the Mexicanside were the following: a) Mexicohas long been politicallyindependent,and has been managingits affairs long before the Bank was established. b) Mexico has had one of the longest periods of political stability of any developing country. Governmenthas been based on establishedprocedures, that have worked over a long time. c) for the use of its resourcesand for the designof policies Mexicois mature in takingresponsibility to guide its economyand society. Mexicodoes not look to outsiders to solve its problems.' d) Mexicansregard their culture and society as unique and accept that uniqueness. They prefer to devise indigenoussolutions to problems rather than readily copy solutions adopted in other countries. e) Mexico is a large economy compared with other Bank clients during much of the Bank's existence. It has been a bellwethereconomyin experiencingearly some of the problemswhich would later beset others, e.g. debt. 20. These initial conditionsand attitudeshave been and continue to be reflected in Mexico's views on the role of the Bank in its developmentand its strategyfor dealing with the institution. At all times These sentencesare in fact quotes from interviewswith Mexican officialsconductedby the study team in to theteamduringthismission. expressed generally of sentiments 1992whichare representative September  8 Mexico has had definite ideas regardingthe role of the Bank, and the Bank has not been allowed to exploita lack of definitionof the role preferredby the host and certainlynot left to decide what it wished to do. In general, Mexicohas preferredto limit the use of Bank financingto certain sectors, to restrict the involvementof the Bank in policy formulationand to cooperate with Bank ESW only in selected aspectsof the economyand society. InitiallyMexico saw no role for the Bank in policy advice, only a role as a source of finance. It has preferred to avoid using Bank financing in politically sensitive investmentsand for long these includedthose in the social sectors. 21. Bank strategyfor dealingwith Mexicoalso reflects initialconditions,and attitudes. In summary the main relevantconditionsand attitudesmay be set out as follows: a) As a new, cautiousfinancialinstitutionthe Bank felt it needed a handle on the creditworthiness of its clientsby havingaccessto financialdata and influenceon policiesdeterminingthe incurring of new debt. b) Bank attitude to clients has generally reflected a leaning toward the use of leverage over persuasion as a means of gaining influenceover policy formulation. Where the Bank has had little leverageit has beenslowto developalternativewaysof influencingdevelopmentdecisions. c) The Bank has tended to see its performance in lending rather than developmentimpact as the measureof its success. d) Bank views on developmenthavebeen mainly condensedfrom its cross country experience,and there is a certain impatience and insensitivityto the uniqueness of country circumstances. However,Mexicobeinga bellwethereconomy,the Bank has had to be innovativein its thinking and dealingswith this client. e) The Bank's Board has been dominatedby a few large powerswhose relations with Mexicohave tendedto influencethe Bank in its dealingswith Mexico. 22. Juxtapositionof the initialconditionsand attitudesfor Mexicoand the Bank immediately suggests several potentialareas of friction. The extent of Bank influenceover policy that may be justifiableon the groundsof concernover the securityof its loans has been an area of friction, starting from outright refusalof the Mexicansto cooperateand persistingin the form of incompleteand selectivereporting of externaldebt. Bankcross countryexperiencehas not commanded respectfor its ESW as much as specific work on Mexicanproblemsin collaborationwith Mexicantechnocratshas done. Attemptsby the Bank to use leverageto procurepolicy changeswere a source of friction early in the relationship. The Bank's need to lend in face of Mexico's wish to diversify sources of external finance in order to minimize external influencehas tended to make the Bank the weaker partner in the relationship. This has been exacerbatedby Mexico's closerelations with some dominantmembersof the institution. 23. Attitudeson both sides have changedovertime. On the Mexican side two changeshave had a profoundeffect on Bank/Mexicorelations. The first occurredafter 1958when Don AntonioOrtiz Mena becameSHCP. He saw the potentialfor using the Bank to complementhis efforts at policy reform and rationalization of publicsector investment programming,therebygivingBank views a role in the internal policydialoguewhich persistedafter his tour of duty as Ministerof Finance. This role was a source of frictionafter the mid-seventies whenBank views paralleledthose of groupswhich were not dominantin decisionprocesses, (during the period of the high-growthapproachof PresidentLopez Portillo around  9 1979-81). The second occurred after 1982when new technocratsrose to a positionof dominancein the Government. Indeed, over time technocratstrained in the market orientedcompetitiveeconomicmodel in NorthAmericanuniversitieshad been returningto Mexico,and had been movingup in the bureaucracy to occupyposts of influencein policy formulation. Their positionson most issuesof developmentand to engage economicmanagementwere not far from those of Bank staff; and they had the self-confidence Bank staff in an increasinglyintellectualdialogue. 24. Some changesin Mexico's developmentstrategyand the role desiredof the Bank have been due to modificationsin its underlying developmentphilosophy as reflected in the relative priority among objectives,sectors and degree of openness. Generally, thesehave not given rise to friction becausethey have been in line with the Bank's views and/or have paralleled changes in those of the Bank. Thus althoughthe role of the public sector becamerelatively more importantduring the seventiesthe basic private sector orientation,preferred by the Bank, has neverreally changed;and the priority assignedto the public sector in the early seventies in order to address distribution issues more directly through investmentsin the social sectors was in line with the Bank's anti-povertyfocus at the time. Similarly, althoughMexico's liberalizingprogramdid not exactlycoincidewith the shift in Bank thinking,the Bank supportedunquestionlythe strategyof protectionismand import substitution for many years, so there was no long lastingfriction arisingfrom differencesin this area. AlsoMexico's relative emphasison growth amongits developmentobjectiveswas compatiblewith the Bank's approach. The shift toward equity by Mexicocoincidedwith the Banks concern aboutpoverty; and episodeswhen stabilizationwas the main priority for which Mexicolookedto the Fund rather than the Bank for assistancewere few. 25. The changesin Mexico's developmentstrategy in responseto evolvingopportunities(associated with the "event" of oil) and challenges (associated with the "event" of the debt crisis) facing its developmentwere the main causes of redefinitionand modificationin the role Mexicodesired for the Bank. The discovery of oil and its exploitationto expand its foreign exchange earning capacity so improvedthe popularperceptionof Mexico's creditworthiness that alteniativeinternationalcommercial sourcesof finance rushedto fill its requirements,thereby makingMexicoless dependenton the Bank for financing and less willing to engage in dialogue about its policies. The high priority to public sector investmentsof a commercialnature financedby the additionaldebt was inconsistentwith the Bank's long standingand stated preference for allowingthe private sector to lead in the productive sectors. These changestended to increase friction between the Bank and Mexico; the fact that this did not lead to a markeddegradationin relationswasdue to the Bank's decisionto increaselendingin spiteof the apparent irrelevanceof the policy dialogueto Mexicandecisions. 26. The evolutionof the debt crisis and the influenceof the US on attemptsto resolve it, made Bank intellectual and financial services complementaryto those of other lenders and increased Mexico's willingnessto accept Bank involvementin stabilization. The "debt" ranks as the single most important influenceon Bank/Mexicorelationsover the last decade. Several factors came together to make it so. Most significantmust include the fact that the Mexicandebt problem was seen as the tip of an iceberg or early warning of a larger worldwide problem, with potential for destabilizingthe world financial system if major internationalcommercialbanks were allowedto go bankrupt. This galvanizeda number of powerful interests - major governments, multilateral financial institutions, and international commercialbanks - into action. The search for a solutioncameunder controlof this larger group with the U.S. takingthe lead. The multilateralinstitutions- the IMF and the Bank - were assigneddefined roles, and Mexicanaccess to the support the group would provide becamedependenton assessmentof Mexico's policies and performance by the multilaterals. The practical effect was that structural  10 adjustmentbecameacceptedas part of the solution,formerlysought only through stabilizationmeasures and the Bank gained a seat at the macropolicydiscussiontable. 27. Bank strategy toward Mexicohas changedas the perceptionof the Bank's role changedfrom a provider of finance toward that of a provider of policy advice, reflected in the rise in importanceof policy-based lendingin the eighties. This couldhavebeen a source of increasedfriction. IndeedMexico was not amongrecipientsof structural adjustment(policy-based) loans as such. Changesin Bank views on development,givinggreater importance to providingsupportto the socialsectors and the need to slow populationgrowth, could also have been sources of friction, but parallel changes in Mexican attitudes were occurringat the same time. 28. Externalfactors influencedMexico's developmentstrategy and the role it expectedthe Bank to play in it. Externalfactorshave also influencedthe Bank's perceptionof its role in developmentand its strategy for dealing with Mexico. The external factors include the performance of the international economy, the evolution of the internationalpolitical situation, and the advances in thinking about developmentand nationaleconomicmanagementwithin the internationalacademiccommunity. Thus trends toward a scarcity of internationalfinance tended to help the Bank/Mexicorelations, while the recyclingof oil revenuesin the late seventiesdid not help Bank/Mexicorelations, and in fact reversed the normal dependencewith the Bank proclivityto gauge its performanceby the volume of its lending resultingin the loweringof conditionalityand in overlending. The result in cancelledand unsatisfactory operationsapprovedin this period is a matter of record. The impactof external factorswas very likely friction increasingwhere they tended to provide alternativesto Bank services or were inconsistentwith Bank positionson relevantdevelopmentissuesand friction reducingwhere they reduced the availability of substitutesfor Bank servicesor tendedto closethe gap betweenBank and Mexicanviews on Mexico's development. 29. How all these factors - initial conditions,attitudes, and external environment- ultimately affectedstrategiesand impingedon relationsin the final analysisdependedon the extentand effectiveness of adjustmentsto relieveor avoid friction. From the review of initial conditionsand attitudes it would seem that there was significantpotentialfor friction given the former but that in general there were not manychangesin strategy which was friction increasing. It is therefore not surprisingthat the periodof relatively unstable relations were early and shortlived, and except for the latter half of the seventies relationshave improved. Early in the relationsaccommodating adjustmentswere soughtthrough the use of leverage, confrontation and sometimes compromise, but always ad hoc, ex post, unilateral and uncoordinated with the oppositeparty's adjustments. After 1982, the CountryProgram Implementation Reviewand later the Country StrategyImplementation Reviewprovideda dedicated, regular, frequent, and mutuallyacceptedprocedurefor determiningthe need for and the design of adjustmentsto avoid or to reduce frictions. It is largely through the collaborativeapproachto the handlingof the mechanismof adjustmentthat fruitful dialogue on trade liberalizationand fiscal policy was achieved and mutually beneficialagreementssuch as the GIRA were reached. 30. Adjustments of relationsover on the part of the Bankplayed a significantpart in the improvement time. Bank perceptionof the nature of the intellectualservice has also been changingaway from being a final good toward being an input in a domesticproductiveprocess in which it complementsand does not substitutefor domesticinputs. The Bank has changedits product mix by addinganother dimension in the mobilizationof additionalexternal resources. This to its services - that of catalyst/intermediary is a service for which there are not many substitutesources with credibilitymatchingthat of the Bank, and will therefore tend to strengthenrelations as well as to extend them in time.  11 The Combined Events and Strategy Approach 31. The combinedapproachtaking into accountthe effectsof discrete eventson the level of tension and the effectsof inconsistentstrategiesin reducingor increasingthe potentialfriction betweenthe Bank and Mexicocan contributemuchto the understandingof the way in whichrelationshave developed. The integrationof the two is achieved by seeing the events as an overlay on the longer term influences affectingthe general trend of strategy. 32. In summarythe combinedapproachwould suggestthe following: a) initial conditionsand attitudeshad potentialfor friction betweenthe Bank and Mexico; b) this was reflected in three catabolicevents compared with only one anabolicevent in the first decade of the Bank's existenceand Mexico's membershipin it, making for a relativelyunstable period of somewhatstrained relations; c) during the next decadethe prevailingattitudesin Mexicoand the Banksoftenedas the formersaw how the latter could be useful and the latter realizedthat the attempteduse of leveragewas ill- advised. Three indirect, unifyingeventsreinforcedthe effect of the gradual change in attitudes in creatinga period of improvingrelationsup to 1970; d) one anabolicevent took relationsto a peak of comfortand two indirect,unifyingeventsextended to the mid-seventiesthe period of lowered friction associatedwith a high degree of agreement on developmentobjectives; e) the period after 1976,starting with one catabolicevent reflectinga reversionin Bank attitude in the direction of disguised use of leverage, was marked by a change in Mexico's attitude accompaniedand probably under influenceof three indirect, divisive events. The potential deteriorationin relationswas mitigatedby a softeningof Bank attitudedue to the persistenceof its pro-lendingethos. The period endedwith an indirectunifyingevent in 1981 - the collapse of oil prices and world recession, f) after 1981new attitudesassociatedwith new actors, the debt crisis and the internationalapproach to its solution,accommodating adjustmentsin strategyon both sides, reflectedin part three direct anabolicevents, and several indirect, unifyingevents combinedto create a period of warm and stable relationsthat has lasted until the present. FUTURERELATIONS 33. Future Bank/Mexicorelations are likely to be good. Relations have reached such a level of maturity that by now both sides are unlikely to initiate actions constitutingdirect catabolic events. It wouldseem that much will turn on whetheror not, and on the extent to which, the North AmericanFree Trade Agreementis unifyingor divisive. If NAFTAturns out to be a potentforce for integrationof the North American economies, there will be freer movementof investible capital and a move toward harmonizationof economic policies and economic management within the group, making Mexico increasinglyindependentof Bank financingand advice. This independenceneed not be immediately divisivesinceBank assistancein easingthe transitioncan be a positivefactor for continuedgood relations  12 in the non-borrowingphase. Bank assistancenow underwayto supportprojects that could help diffuse oppositionto NAFTA and continuingBank ESW on NAFTA are examplesof such assistance. IMPLICATIONS 34. Bank relations with other countries may also be influencedby the course of Bank/Mexico relationsespeciallyover the lastdecade. Innovativedevelopments in planning,managingand monitoring relations as reflected in the CPIR and CSIR can be applied in relations with other countries. The internationalapproachto such problems as the 'debt" in which the role of the Bank is negotiatedin a wider forum than the narrow Bank/Country one is an importantprecedentfor dealingwith such problems in other countries. Finally, there have been modificationsin some of the very basic operatingprinciples of the Bank, e.g. the waiver of the negativepledge clause, and the guaranteeingof commercialdebt, which have been approved on a special case basis for Mexico but which will nonethelessconstitute precedentsfor relationswith other countries. Some couldreturnto hauntthe Bank. Thus it seems fitting to point out that in managingrelationswith individualcountriesthe Bank must be carefulnot to lose sight of relations with all countries and not to believe it can unilaterally restrict which actions will be precedentsand which will not.  13 2. MEXICAN ECONOMIC PERFORMANCE & DEVELOPMENT STRATEGY INTRODUCTION 1. The last fifty years of Mexico's economicperformancecan be dividedroughly into two distinct periods. During the first which ended in 1970Mexicoenjoyed remarkablyhigh growth, low inflation and moderatedebt accumulation.Real GDP growthaveragedover 6% and inflationwas mostlyin single digits. This was an era of fiscal conservatismand the economywas not besetwith significantturbulence. The second period, begun with a rapid expansionin the role of governmentin the economy,was marked by several dramatic changesin the internationaleconomicenvironment,two major balanceof payments crises, and an overhangingexternaldebt that required much ingenuityand internationalcooperationto manage. Since 1970,growthhas beenunevenwith burstsof dynamismfollowedby sharp downturnsand then recovery. Inflationarypressureshavebeen difficultto containand doubledigit inflationhas not been uncommon. This has been a period of stabilizationand adjustmentdemandingthe continualattentionof skilled economicmanagement. THE FIRST PERIOD ImportSubstitution 2. Duringthe 1940sMexico,faced with the interruptionof suppliesfrom its major tradingpartners who were nearly all involvedin the war, had to try to replaceimportswith goodsproduceddomestically. which PresidentAlemanin 1948 This was the start of the process of importsubstitutionindustrialization, sought to extend and deepen through an alliance between state and private capital, both national and foreign. Alongwith openingthe doorsto foreignenterprisehe soughtto strengthenMexico's competitive positionin its own market through a variety of protectionistmeasures, includingtariffs and quotas, and by abandoningthe parity of 4.85 pesos to the US Dollar establishedin 1940and fixingthe officialparity with the US Dollar at 8.65 pesos. 3. In an effort to push back the market limits to import substitutionand to protect the country's falling dollar reserves, a presidential decree was issued in 1949 prohibiting imports of men's and women's clothingand accessories,householdlinen, perfumery and cosmetics,toys, fruits and fish, and firearms. These and otherprotectionistpolicieshelpedlocal industryto displaceforeigncompetition from the consumergoodsmarket, and by the end of 1950only 7% of the final value of non-durableconsumer goods was imported. Mexico's balanceof foreign trade in goods and in tourism improved, and dollar reserves increased. There was some headwayin replacingimportsof intermediategoods, but less so in the capital goods sector which continuedto dependheavily on imports. 4. In 1951 Mexico, wishingto lessen the inflationaryeffect on the economyof a 40% increase in dollar reserves resulting from a favorable trade balance with the US and an influx of refugee capital, lifted the ban on the import of numerousluxury items while increasingthe ad valorem duties ranging from 2 to 20 percent to as muchas 300% in some cases. Prices of some home and industrialgoodswere frozen for a year, and the Presidentwas empoweredto establishwholesaleand retail price ceilings and was granted complete control over the production and distribution of food, clothing and basic raw materials. President Ruiz Cortines who succeeded to the presidency in 1952 continued the counter- inflationarystance of his predecessor and lowered the retail price of corn and beans. Businessleaders  14 refrained at the outset from opposingthe pro-consumermeasures, but as time went by they expressed serious misgivingsabout the interventionsdistorting the marketplaceand altering the basic thrust of nationaleconomicmanagement. 5. During the next two years the businesssector reduced investment,and there was an increase in capital leaving Mexico, resulting in a slow-down in economicgrowth threatening the viability of the importsubstitutionstrategy. Also,there was a serious reversalin the reservessituation- a loss of about 20% during the last half of 1953. The Cortinesadministration respondedin 1954with special incentives including tax relief for the business sector and increased availability of credit and resources for production. In addition, it devaluedthe peso from 8.65 to the US Dollar to 12.5 (where it would remain for years). The idea was to provideacross the board protectionfor industrialistsand enticethem to re- invest in Mexico. By the end of the year productionpicked up and growth resumed, helped in some degree by recovery of the US economy. The economycontinuedto grow through an alliancebetween state and private capital, domestic as well as foreign. The record of growth plus a 1955 stabilization agreementwith the US, providingfor the USA to use up to US$75 million in financial operationsto stabilizethe dollar/pesorate if needed, helpedMexicoto begin raising capitalin bond markets overseas. 6. From 1958to 1970, during the administrationsof Presidents Lopez Mateos and Diaz Ordaz, Mexicodoubledpower outputas major hydro-electricplantswere completed;establishedindustriessuch as automobiles,zinc, and steel; and made significantimprovementsin transport, airports and ports. Except for a short burst of high-growthinflationin 1964and a surge in the trade deficit in 1965,this was a period of what has cometo be knownas one of stable economicdevelopment. Inflation averagedonly 3.8% annually and never exceeded 6%, while real growth of GDP averaged 6.7% annually. The exchange rate remained fixed at 12.5 pesos to the US Dollar.Y' In 1965/66the Ordaz administration introducedtax reform to shift more of the burden of the revenueonto labor income, and increasedtariffs and the numberof import categoriescoveredby quotas in the hope of stimulatinginvestmentin further importsubstitution.But the easy optionsfor importsubstitution had alreadybeen exhausted,and by 1969 the economystarted to lose the dynamismof the previous fifteen years. THE SECONDPERIOD Public Sector Led Growth, 1970-76 7. The economicdownturnat the end of the decade of the sixtiesposed an immediatechallengeto incomingPresidentEcheverria,whoseinitialreactionwasto adjustand modifyearlierpolicies ratherthan to undertake any major innovations. Taking a cautious approachhe chose to hold down government spending, including investment, rather than increase taxes in the face of private sector opposition. Growth rates fell to under 4% in 1971-72; job creation slackened; and people started to voice dissatisfactionat the inequity in the distributionof income. The administrationbecamepersuadedthat the needs of the lower income groups could not be met without new measures, and new public expendituresand investments. New laws were passed to regulatebut not eliminateforeign enterprise; and the role of the state was expandedsharply. 8. The increasedpublic expendituremeant that more resourceshad to be mobilizedfor the public sector; and, in 1974, through a number of measuresincluding increasesin electricity rates and in the prices of petroleumproducts the revenues were increasedby about one percent of GDP compared to ''See EXIM REVIEW - Special Issue Fall 1991; - 'Mexico - Economic Reform and DevelopmentStrategy'; Research Institute of Overseas Investment,The Export-ImportBank of Japan.  15 1973. By then there had been increased resort to money creation to finance the expenditures; and inflation,part of it imported, had reappeared. Only the strongest domestic firms were able to survive the Government'sreluctanceto allow timelyprice increases;the Governmentbought many of the weak ones to prevent a precipitous decline in employment, and the number of state-ownedcorporations increasedalmost ten-foldwithin a span of five years. Capacityof major industriesin the public sector - electricity,iron and steel was expanded,in some casesdoubled;and so did the explorationfor oil, which proved successful in identifyingnew reserves and in increasingoutput. Meanwhile, public spending poured into housing, schoolingand other social developmentprograms, and credit to agriculture was increased. The public sector deficitrose sharply, and so did the level of borrowing;but not by enough to preventthe drain on foreignreservesfrom reachingintolerablelevelsgiventhe large scale capitalflight that had resumed earlier in 1976. Crisis of the Mid-Seventies 9. In September1976the Echeverriaadministrationreactingto the deterioratingeconomicsituation devaluedthe peso from the previous 12.5 to the US Dollar set in 1954and attemptedto peg it at 19.9, but the attempt was unsuccessfuland it was effectively devalued to 26.5 pesos to the US Dollar in October. To encourageexports, a 7.5% tax on exports of manufacturedand semi-manufactured goods was lifted and exporttaxes on raw materialswere reduced from 18 to 9 percent. But many of Mexico's international trading partnerswere themselvesexperiencing a recessionin the wake of the oil price crisis in 1974 and had reduced their demand for imports, with disastrous effect on the prices of some key Mexicanexports. Thus these measuresby Mexicowere too late to forestallthe need for suspensionof foreignexchangedealingsbefore the end of November 1976and for resort to assistancefrom the IMF. At the end of 1976, when the administrationof PresidentLopez Portillo assumedoffice, Mexicowas in the throes of a serious economicand financialcrisis. Inflationreached 21 percent, the current deficit on the balance-of-payments increasedto 4.3 percent of GDP, the public sectordeficitto 7.4 percentof GDP, and GDP growth slowedto 2.1 percent.Y Oil Boom - Debt Explosion, 1976-1982 10. WhenLopezPortilloassumedthepresidencyin December 1976manyMexicanswere anticipating difficult times ahead, but the country had struck oil and was about to take advantageof its enlarged resource base. Successiveoil discoveriesin the previous three years had raised Mexico's proven oil reserves to approximately6.3 billionbarrels, sufficientto allowPEMEXto satisfydomesticrequirements for the foreseeablefuture and providefor an exportablesurplus, but requiringsizable investmentsin the petroleumsector. Initially, the administrationsought to satisfy domesticneeds and to export only 1.25 million barrels per day in order to pay for importsto promote growth and create jobs, without causing inflationor excessivedependenceon oil sales. Soon, however,the daily exportceilingwas increasedto 1.5 millionbarrels per day to meet the need for foreign exchangeto stimulategrowth and service the growingnationaldebt overseas. The attemptto restrict the exportof oil did not dampenthe expansionary impactof oil on public expenditure,for as early as March 1977plans were announcedto issue 2 billion pesos worth of petroleumbonds; which was but one of several measuresaimed at mobilizingdomestic funds for investment. Later that year, Mexico entered into a syndicatedseven-year loan of US$1.2 billion from 74 internationalbanks, raising net borrowingsabove the $3 billion limit agreed with the IMF. 2/ See World Bank - 'Special Study of the Mexican Economy: Major Policy Issues and Prospects"; Report No. 2307-ME, May 30, 1979.  16 11. The GDP growth rate for 1977was less than 3% for the second consecutive year, and belowthe populationgrowth rate of 3.7%. Althoughthe inflationrate had fallen to under half of the 4% per monthaverageof the year before, and the trade deficithad fallen by 81%, the relief was temporary. In the followingyear, despitea dramaticincreasein the value of exports, the quantityof importsgrew even morevigorously, with the result that there was a staggeringincrease in the commercialdeficit in 1978. 12. Insteadof the returningto more conservativedemandmanagementwarranted by the out-turnof 1978, the administration becameevenmore optimisticregardingMexico's abilityto afford a high growth strategy. Several eventsprovidedthe basis for greater optimism. In January 1979,PEMEX announced that the proven petroleumreserves had doubledfrom 20 to 40 billion barrels, giving Mexicothe sixth largest reserves in the world. In September,Mexicosigned an agreementwith the USA for the sale of 300 billion cubic feet per day of Mexicannatural gas at US$3.625per 1,000 cubic feet. The following monthPEMEX announcedthe increasein the price of Mexicanoil by US$2 per barrel from US$22.60, and by successivesteps the price was up to US$34.50by July 1980. The Governmentwent into debt to implementits high-growth approach. The Portillo administrationundertookhigh-cost initiativesthat increasedthe economicparticipationof the state in the national economy as well as its share of the nationaldebt to overseas. The public sector deficit went from 7% of GDP in the seventies to 14% in 1981 and to 18% in 1982; the nationaldebt rose to about $90 billion in 1982, about three-quarters of which was owed by the public sector. 13. By 1981the weaknessof a high-growthstrategybased on oil becameevident. In face of a world recessionaffectingthe demandfor oil, PEMEXhad to reducethe price of oil hoping to hold it at $30.60 per barrel; but evenat that price international purchaserssuspendedcontractsamountingto over 300,000 barrels per day. The reduction in earningsfrom oil were not offset by increased earningsfrom non-oil exports, the latter havingstagnatedin face of a peso that had become grosslyovervaluedwith the rising domestic inflation. Formerly, deficits were partly off-set by surpluses of the tourist trade and border transactions with the US, mainly maquiladora exports; but by 1981 tourism was in deficit as the overvaluedpeso made foreign travel cheap for Mexicans,and border industriessuffered as a result of recessionin the US.3' In the face of rising demandfor intermediateand capitalgoods importsand rising world interestrates, there was considerabledeteriorationin the current account;the effect on the overall balanceof paymentsexacerbatedby a sharp rise in capital flight. EconomicCrisis - 1982 14. The situation changed dramatically in 1982. The refusal of external creditors to roll over Mexico's short term debt left no optionbut fiscal retrenchment. But despiteattemptsto cut government spendingand adjust the exchangerate early in the year, by August a run on the peso and exhaustionof reserves forced a float of the currency and temporary suspensionof debt service. The gap betweenthe real interest rate on the externaldebt and the rate of growth of GDP was wideningand had become positivewith the result that the debt burden would tend to increaseand/or the economywould tend to becomede-capitalized,evenin the absenceof any new net borrowings. Inflation, which had been in the rangeof 25 to 30 percentpreviously,rose to nearly 100percent, and GDP growth collapsedfrom almost 9 percent to a negative0.6 percent. 15. The reaction of the Portillo administrationin late 1982 was to nationalizethe domesticbanking system,ostensiblyin an effortto stop capitalflight and the accumulationof assetsoverseasby the system "'See - The Cambridge History of Latin America; Editor: Leslie Bethell; - Published by: Cambridge University Press, New York 1984.  17 in anticipationof further devaluation in the exchange rate. IMF assistance was sought. However, negotiationswith the IMF were prolongeddue to the administration'sapparent reluctance to accept an austerity program, the IMF's intentionto make the granting of an arrangement conditional upon the cooperationof Mexico's foreign creditor banks, and to the uncertaintiescausedby the change in policy of the banks and by other measuresof a controlnature. Negotiationswith signalledby the nationalization the IMF for a three-year extendedarrangementwere finalizedalmost on the eve of the handingover to the incomingadministrationof Presidentde la Madrid. Stabilization Attempt, 1983485 16. At his inaugurationin December 1982, Presidentde la Madrid announcedhis economicpolicy as one of 'realism' rather than 'populism", and immediatelyintroduceda program aimed at reversing the trends of the last few months. The new program called for the following:(i) reduction in spending on public services to an essentialminimum; (ii) continuationof investmentonly on priority productive projects; (iii) expansionof revenuesthrough fiscal reform and increasesin the prices of public services; (iv) preventionof the use of credit for non-productivepurposesor for speculation;(v) abolitionof non- essentialsubsidies;(vi) maintenance of controlsover foreignexchangetransactionsand imports;and (vii) introduction of job creationand protectionof programsbringingbasicfoodstuffsto the poor. In addition, there was to be a constitutionalreform to clarify the functioningof the mixed economyand the role of the state in it; and efforts were to be made to significantly improve efficiency in federal public administration. 17. The administration introducedfiscal measuresincluding:(i) increasedincomestaxationand a 10% surcharge; (ii) an increasein value addedtax from 10%to 15%; (iii) an increasein the tax on dividends from 21% to 55%; and (iv) a doublingof domesticpetrol prices. A new three-tier exchangerate for the peso was introduced,with two rates for debt service and essentialimports - 70 pesosto the US Dollar and 95.1 pesos to the US Dollar, - and a floating rate for other transactions. Later, a bill was put through Congressproviding for the return to private ownershipof up to 34% of the shares of banks nationalizedin September 1982. Price controlson 2,500 items were abolishedand a further 2,200 were relaxed, leaving strict controlson only 300 items. 18. The de la MadridGovernmentpaid immediateattentionto the debtproblem. A US$5 billionloan was raisedfrom creditor banks in March 1983, and in May 1983internationalcreditor commercialbanks accepteda governmentplan for the reschedulingof US$15billion in private-sectordebt contractedprior to December1982. In subsequentagreementsreached in 1983anotherUS$2 billionof private sectordebt and US$19.7 billion of public sector debt were rescheduled. Negotiationson reschedulingscontinued throughthe followingyear. Especiallysignificantwasthe agreementin principlereached in August 1984 with a thirteen member bank advisory committeerepresenting the major creditor banks, covering the reschedulingof US$48.7 billion in public sector debt. This was a precedent-setting agreement with internationalbanks,providingfor multi-yeardebt rescheduling,lower interestrate spreadsaboveLIBOR, longermaturities, and new money.- Agreementwas finally reached early in the followingyear. 19. In the meantime,the fiscal and monetarypolicy measuresintroducedat the start of 1983were effectivein dropping the inflationrate to 80% in 1983and to 59% in 1984. In 1984 a current account surplusof over US$5 billionwas achieved,comparedto deficitsof nearlyUS$13billion and US$5billion in 1981and 1982respectively,as exports remainedconstantbut importsfell by 46%. The budgetdeficit was cut by a half from nearly 18%of GDP in 1982. However, real GDP growth showeda record fall of 5.3% in 1983, before turning around and achievinga positive 3% in 1984. Then, toward the end of 4'Op. Cit.; EXIM REVIEW.  18 1984and during the first half of 1985there was some fiscal expansionand monetaryrelaxation; and by the end of 1985the public sector deficitreached 9.9% an increaseof 15% abovethe 8.7% at the end of 1984. Gold and currency reserves fell by over one-quarter in 1985, partly reflecting the fall in the balanceof payment surplus by over 80%. There was a slight increase in the rate of inflation;but, on balance, some stabilizationand a turn around in economicperformancewas in the making when some destabilizingeventsintervened. Some Destabilizing Events 20. In September1985MexicoCityand its environswere hit by a disastrousearthquakewhichcaused the loss of nearly 10,000 lives and property damageestimatedat US$3.5 billion, equivalentto about 2 percent of GDP in 1984. A sharp rise in Federal Governmentinterest paymentscontributedto a surge in public sector expendituresfrom 38.6% of GDP to 43.7% in 1986. Also, in 1986there was a major terms of trade deteriorationdue to falling oil prices. Again Mexicosoughtthe help of the IMF; this time for a novelstandbyarrangementin which someprogramtargets and the requiredexternalfinancingwere linkedto internationaloil price developments. 21. In responseto these adversecircumstances,the authoritiesadopteda deeper and growth-oriented stabilizationpackage. They included a tighter fiscal policy, further devaluationof the peso, and a comprehensive tourismpromotionpackage. Also includedwere exportpromotion incentivesin form of credit to non-oil exporters and the reduction or removal of duties affecting the competitivenessof Mexicanexports. In addition, Mexicoaccededto the GATTand embarkedon a program of general trade liberalizationincludingimports. These measureswere to have their effect over the longerterm; but for 1986GDP growth was a negative3.3% and inflationrose to over 100%. Foreign Debt Negotiations & Trade Liberalization 22. After ten months of negotiationsMexico and the IMF reached agreement in July 1986 on the terms of an 18-month US$1.6 billion standbyloan, markingthe initial stageof a US$12 billion medium term loanpackageto include$1.9 billion from the WorldBank, $41.3 millionfrom the IDB, $2.7 billion in loans and credits from a variety of other internationalinstitutionsand the remaining$6 billion from commercial banks. This was the first agreementreachedunder the Baker Debt Initiativeproposedby the US Treasury Secretary in October 1985. The new package linked for the first time debt repaymentto the price of a major commodity- oil; and accepteda minimumgrowth target for GDP, the failure to achievewhich wouldtrigger new fundsto be providedby the World Bank. 23. At the end of September 1986 Mexico reached agreementin principle with the bank advisory committeerepresentingits major commercialbank creditors;the agreementwith all banks was finalized in April 1987. By the end of the followingmonthMexicohad signed agreementsfor the refinancingof its foreigndebtwith 10of the 14 'Paris Club' creditorcountries. On August14, 1987Mexicocompleted renegotiationof its $103billion foreigndebt, with the signatureof an agreementto reschedule, over 20 years with 7 years of grace, $9 billion of private-sectordebt. 24. The IMF and World Bank loans were conditionalon Mexico's willingnessto restructure its economyand on the commercialbanks' willingnessto extend their portion of the loan package. The agreementcommittedthe MexicanGovernmentto reduce its budget deficit, then at 13.2% of GDP, to 9.2% by the end of 1987. Mexicoalso agreedto make further cuts in subsidies,continueto streamline the public sector, encourage foreign investment,check capital flight by maintaininga tight monetary policy with interest rates kept higher than inflation, and to accelerate its stated policy of trade liberalizationby implementing tariff reductions. In July 1987, the governmentremoved import license  19 requirementsfrom 72 items leaving only 400 on the list, and eliminatedthe use of official reference prices on hundredsof imports. Innlation& HeterodoxStabilization 25. Despitethe Government'sattempt to limit inflationto 70-80% during 1987, inflationcontinued to accelerate,reaching 143%by the end of November. On December 15th the Governmentannounced details of its Economic Solidarity P ct (Pacto de Solidaridad Economica), a wide ranging economic austerity accord with unionsand the private sector aimed at combattingthe soaring inflation. The Pacto providedfor budgetcuts, the liquidationor sale of publicsector companiesand the laying off of 200,000 public employees. There were increases in the prices of public sector goods and services which were thereafterfrozen, but an across the board increaseof 20% in wages and indexationto inflationwas also introduced. Earlier in the month, a 50% reductionin tariffs and a 22% devaluationof the peso had been announced. By the end of 1988, when the new president took office, the inflationrate was down from over 150%to around 50%, but GDP growthcontinuedto be sluggishat just over 1.3% -- still wellbelow the populationgrowth rate. 26. Immediatelyafter his inaugurationin December 1988, PresidentSalinas announceda new anti- inflationary pact for economic stability and growth (PECE), which had been agreed between the government,unions and employers,and peasantorganizations. It allowedfor a downwardcrawl of the peso againstthe dollar by one peso per day to enhanceexportcompetitiveness; and it increasedthe prices for most public-sectorservicesbut kept the prices of basic foods, gas and electricityat existing levels. Subsequently,the PECE was extended to March 1990, with a 6% increase in the minimum wage, continueddevaluationof the peso, and no change in public-sectorprices. The stabilizationprogram in place, the attentionof the new administrationturnedto longerterm economicand socio/political problems and the reschedulingof the externaldebt. A National DevelopmentPlan 27. At the end of May 1989 President Salinas presented his national developmentplan, the main objectivesof which were economicrecoveryaccompaniedby price stability,and the improvementin the standard of living. The method of achievingthese was to be a comprehensiverestructuring of the economy,pushingwell beyondbut continuingfrom the beginningsunder the de la Madrid administration. Specificaspectsof the restructuringwere: (a) privatization,(b) direct foreignprivate investmentreform, (c) financialsector reform, includingthe liberalizationof financialmarkets, (d) deregulation,(e) public sector reform, and (f) reductionin role for the public sector in the economy. 28. While the previous administrationstarted privatizationin order to improvethe fiscal situation by eliminating lossesand reducingsubsidies,the Salinasadministration'sobjectivewas to reducethe size of the public sector and re-focus its attentionon necessaryinfrastructuredevelopmentand maintenance. The main airline, Aeromexico,had been privatizedthe year before, but importantdivestituressince the beginning of 1989 have included a large hotel firm, the second airline, the telephone company, the country's largest coppermine, a closeddown steel mill in Monterrey,and over forty sugar mills. Other steel millswere also slatedfor privatization. One significantaspectof the approachwas that the expected proceedswere earmarkedto go intoreserves in the first instance,but were ultimatelyto be used to retire the domesticand externaldebt. 29. Alsoin 1989,legislationwas approvedpermittingforeigninvestorsto hold 100percent ownership in unrestrictedsectors, which account for about two-thirds of the economy. Of the five restricted categories, one is reserved for state activities, but of the remaining four only one bars foreign  20 participation, the others allowing participationon a graded scale up to 49 percent. The approval processesfor investment projects has been simplified,with almostautomaticapprovalfor those less than $100 million and not expectedto have a net foreign exchangeoutflow in three years. Participationby foreigninvestors in the ownershipof state-ownedcommercialbanks through non-votingshares was also permitted. Importantly,the attitudeof the governmentshiftedfrom mere toleranceto active promotion of foreign investmentinflow;the responsewas a near doublingof such inflowswithin the next year or two. 30. In May 1990there was a constitutional amendmentpermittingthe private sector to participatein banking and other major reforms in the financial system. These involvedeasing or lifting regulations governinginterestrates and the allocationof credit, and easingthe burden of reserve requirementson the use of certain instruments. Since then significantprivatizationof commercialbanks has occurred. The Government also restructured its own financial instruments and then added to the range by the introductionof indexedbonds. 31. Deregulationhas been a major aspect of recent reforms in the policy environmentfor private activity. The outstandingexamplehas been the deregulationof the road transport industry, where the liberalizationof licensingnow allows firms previouslydebarredfrom transportingtheir own merchandise to do so. Domestic air transport has been liberalized. The customs clearance process has also been deregulatedallowingnew brokersto competewith a networkof brokers formerlyhavinga near monopoly of the field. The liberalizationprocess has also been extended to the stevedoringat ports and freight handlingat the border. 32. Public sector reform aimed at improvingthe efficiencyof remainingstate firms has also been a priority objectiveunder the plan. This has taken the form of pricing policy designedto eliminatethe need for subsidies and eliminate losses. A special office has been set up to preside over the "disincorporation of state firms that are neither strategic nor of priority". Resources freed from these activitieswill be directed to meet the public welfare requirementsin education,health and sanitation, housingand employmentcreation. The programcalls for performanceagreementsbetweenthe state and state owned enterpriseswith clear undertakingsby the managers. 33. The principal objectiveof the underlyingstrategyinformingthese changesis to shift the burden and impetus for economicdevelopmentfrom the public sector to the private one. Consonantwith this shift is the moveaway from the use of an activeindustrialpolicypursued through regulationto a greater relianceon market forces to guide the allocationof resourcesin the economy. Having set the stage for developmentalong these new directions in the modern sector, the Government has recently turned attentionto the rural economyand to the relativelystagnantagriculture,beset by problemsin pricing and land tenure. There decade old land owning and occupancy arrangementshave been re-examinedand modifiedto mitigatedistortionsarisingtherefrom. A recent changein the constitution to bring this about was made in 1992. Debt Restructuringand Debt Reduction 34. Although at the beginning of 1989 the total external debt had fallen to $96 billion due to prepayment of the private sectordebt, publicsector debt obligationsaccountingfor over 80% of the total required about 60% of the budget to be allocated for service of that debt. The Governmentand the principal multilateralfinancialorganizationsbegan to see the need for a permanentreduction in the net transferof resourcesabroadfor debt service. Under a plan put forward by US Secretaryof the Treasury Brady, the IMF and the WorldBank assistedMexicoby arrangingfinancialsupportfor debt rescheduling and debt reduction, under which existingdebt of commercialbanks wouldbe swappedfor bonds to be  21 issuedby the Governmentof Mexico. These bonds would be securedby an investmentin zero coupon paper of equal maturityto be issuedby the US Treasury or other suitable government. Mexicowas the first to take advantageof the general idea and developwith assistancefrom the WorldBank and the IMF the first workablearrangement. 35. Under agreementreached with the IMF in May 1989for an extendedfund facilityto support its DRDR programand an agreementwith the Bank in June to providethree adjustmentloans, both allowing part of resourcesto be used for supportof debt reductionoperations,Mexicowasable with somebilateral assistanceto show ability to buy the necessarycollateral. After hard negotiations,Mexicoconcludeda debtreductionagreementwith 450 foreigncommercial banks in February 1990. The debt accordreduced the total foreign debt by $8 billion in 1990, but consequentreduction in the debt service burden was substantial,externaldebt service paymentsfalling by over 1% of GDP from the previous 3.8%. NAFTrA 36. Economicconfidencehas been positivelyaffected by trade deregulationand liberalization,low interestrates and by the negotiationsto establisha free trade agreement(NAFTA)with the United States and Canada. Mexicanauthoritiessee a free trade agreementas an opportunityto makethe open economy model irreversibleand to stimulatethe inflow of private foreign capital. NAFTA is now assured; the U.S. Congressapprovedit in Novemberof 1993. However, there is wide differenceof opinionover its likely impact. In the US there has been substantialCongressionaland organized labor oppositionto it for fear of the potentialloss of jobs to Mexicoand the potentialunderminingof the wage level in the US. On the other hand low wage jobs may be lost to the Far East if not to Mexico. Since most Mexican importsare of US origin, the stimulusto Mexicangrowth could redound to the benefit of exporters in the US, with salutary impact on the economy. Some analysts think that NAFTA will have minimal impacton the US and Mexicaneconomies. One reason for this conclusionis that NAFTA is not, after all, really a free trade agreementsince "sensitive"sectors, with potentialfor significantgainbut involving importantadjustmentcosts, are to be givenspecialtreatment. Anotherreason is that manyof the changes likely to be attributedto NAFTA will happen anyway.Y Employment, IncomeDistribution and Poverty 37. The weaknessin Mexicandevelopmentso far has been the inabilityto provide enoughjobs for its growing labor force and the failure to provide an adequatesocial safety net for those who are ill- equippedto win a livelihoodin the modernsector or are otherwisedisadvantaged. The adjustmentover the last ten years has been accompanied by an increasein employmentnot exceeding10 percent, much of it in agriculture and the service sectors. Meanwhile,the economicallyactive populationhas grown by about 18percent. The growing relativeweightof employmentin the lower paid informalsectors and the decliningweightof the higherpaid formalsectors has not helpedto make the already skewedincome distributionmore equitable. 38. At least two aspectsof governmentpolicy have not favoredan equitablesharing of the benefits of economicgrowth. These are the underprovisionby governmentfor social expenditureson education, housing, and health care; and the development with the tendencytoward policy favoringindustrialization concentrationin urban areas and the use of capitalintensivemethods. In 1979less than 20% of a public sector budget of US$55 billion was spent on education, health and housing. Even though most administrationsbuilt hospitalsand schools, only some sectorsof the workingclass benefitted. It has been andFobertZ. Lawrence -See NoraLustig,BarryP. Bosworth, Free Trade;TheBrookings (Editors)- NorthAmerican Washington, Institution, D.C., USA, 1992.  22 estimatedby the World Bank that the poorest 40 percent of the populationreceivedless than 10 percent of total income, the exact reverse of the most affluent who constitute10 percent of the populationbut receive40 percent of total income.Y 39. It has been estimatedthat about20 percent of the Mexicanpopulationlive in poverty, defined as having insufficientincometo afford adequatecaloric intake even by spending80 percent of income on food. One third of the poor live in rural areas. In an effort to amelioratethe situation the present administrationhas increased social spending sharply and is attempting to target the benefits more effectivelyto the poor through the NationalSolidarityProgram (PRONASOL)and by concentratingon direct food support, basic education,basic health services, and improvedtransport, irrigationand other support servicesto rural peasantagriculture. Some housingprogramshave been targetedto urban poor, and food subsidiesfor milk and tortillashave been providedthrough social workers. The Environment 40. Another acute problem in Mexican developmenthas been rising pollution of the environment. The problemis reflectedin soil erosion, contaminationof aquiferswith chemicalpollutantsand industrial waste, pollutionof potable waterand high incidenceof waterborne diseases, the degradationof wetlands and wild lands, and most obvious, the atmosphericpollution of the Mexico City MetropolitanArea. Carbon monoxideand ozonelevels exceedby manytimes the WHO safetystandards. The administration has attackedthe problem by giving incentivesfor the use of lead free gasoline, by requiring new cars to be equippedwith emissioncontrol systems, and by reducingthe number of cars in use at any time. !'See World Bank Report No.7813-ME - Mexico: Selected Policy Papers; LAC II, dated June 20, 1981. See Also; Santiago Levy, - 'Poverty Alleviationin Mexico,' (Boston: Boston University, mimeographed; 1991).  23 3. MAIN ISSUES IN MEXICAN DEVELOPMENT STRATEGY INTRODUCTION 1. In Chapter 2 a chronologicalreviewof MexicanDevelopmentwas presented. In this chapteran issues oriented approach is used in analyzingthe strategicchoices or relative shifts in policy emphasis that were made. The objectiveof the analysisis to see to what extent Mexico's view of the appropriate role of the Bank in its developmentwas affectedby these choices. The main choicesthat willbe analyzed are the following: a) relative emphasison growth, stability,and equity; b) public sector versus private sector emphasis; c) protectionismversus liberalismin trade. 2. In additionto the above, this reviewof strategywill examinethe opportunitiesof which advantage couldbe taken and the challenges(problems,obstaclesand constraints)which the country had to face, in order to see how these affected the role Mexicowantedthe Bank to play in its development. Growth, Stability, and Equity Growth 3. The relativeemphasisamonggrowth, stabilityand equityvaried over time. The period from the end of WorldWar II to 1970was one in which growth in domesticproductionwas the priority objective. There were some occasionsduring this period when in response to an increase in inflationarypressure or deteriorationin the balanceof paymentsthe priority shiftedtemporarilytoward the stabilityobjective. Generally, equity in the distributionof income and wealth was not of prime concernduring this period, for the strategy of growth through importsubstitutionwas expectedto generateincome and employment and the benefits were expectedto percolate down to the poorer groups in the society. Public sector investmentswere not particularlytargetedto thesegroups, althoughin the pricingof publicservicesthere was reluctance to set charges at levels where user/beneficiariesessentiallypaid for the services they receivedfrom the state. The objectiveof rapid growth was achievedas Mexico had one of the highest rates of GDP growth sustainedover a long period of almostthree decades. 4. During 1977to 1981the emphasiswas again on high growth, especiallyin industry where there was a drivetoward modernization.The high growthobjectivepursuedthroughand drivenby hugepublic sector investments, with the private sector not far behind, was largely successful in stimulatingthe recoveryof GDP growth from the low of 3.2 percent in 1977to a peak of over 9 percent in 1979 and sustainedat over 8 percent for the two years following. 5. The period beginning 1989 to 1991 was again one in which the priority seemed to have been growth. After 1985 there had been a severe slippage in growth to a negative 3.9 percent in 1986 provoking concern about growth, but it was not until the beginning of the administrationof President Salinasthat the emphasisshifted back from price stabilizationto the resumptionof growth. This was reflectedin the emphasison structuraladjustmentin the productivesectors includingagriculture,industry  24 and finance and the attentiongiven to improvementin the policy environmentfor private productive activityby domesticand foreign entrepreneurs. Stability 6. There was a slight shift in focus toward stabilizationin 1951/52when price pressuresbegan to build up in the economy. Initially,the responsewas to liberalizesome importsby replacingembargoes with tariffs and direct controlson the prices of a few basic necessities. The Governmentbacked off in face of the private sector's threat to curtail investmentand undermine growth. Inflationarypressures accompaniedby losses in reserves approachedcrisis proportionsin 1976. This was followedby a short periodof just over a year when stabilizationappearedto be the numberone priority. After the crisis of 1982, when inflationreached almost 100%, and until 1985there was a period when stabilization seems to have been the priority. It was a periodof severe cutbackin public spending(resultingin the reduction of the nominalpublic sector deficitby abouta half) and the impositionof controlson credit and imports to contain aggregatedemand and the growthof imports. The effort was partially successfulin reducing the rate of price increasebut at considerablesacrificein growth. 7. After 1985 there was again a sharp rise in inflation and a severe fall in the value of exports makingnecessarythe intensification of stabilizationefforts. Nevertheless,attentionwas also givento the need for the recovery of growth, and to the restructuringof the economyto achievethis objective. Still, during 1987 and 1988 the economic directorate was almost totally occupied in the design and implementation of the heterodoxstabilizationpackage. Stabilization periods sincethe mid-seventieshave been accompaniedby arrangementsbetween Mexico and the IMF of a standby or extended nature for accessto Fund resources if necessary;and the Bank was not consideredthe primary source of assistance for solvingstabilizationproblems. EgQm1 8. There was only one period during which equityseemedto have been the priority objective. This of PresidentEcheverriain the early seventies. wasduring the first four or five years of the administration Since 1991social concernshave againbeen given relativelyhigher priority as reflectedin investmentin health, education and training. However, the renewed investment in basic infrastructure and the continuingimportanceof privatizationwould suggestthat growth is retainingthe honors as top priority objectiveat least for the first half of the nineties. Priority Objectiveand MexicanAttitudetoward the Bank 9. Bank/Mexican relationshavebeen affectedby the fact that Mexicohas not usuallyseen the Bank as havingan importantrole in stabilization matters, but rather has regardedthis as the area of dominance of the IMF. The lead up to the stabilizationepisodeof the mid-seventieswas marked by an active dialogue between the Bank and Mexicolimited to fiscal policy. It seemed clear that the entry to this dialogue was provided by the fact that Mexico accepted the legitimacy of Bank interest in the Government'sabilityto assure adequatefinancingto coverthe domesticcost componentof Bank projects. A mission by the Chief Economistfor LAC in November 1973 made it clear that the level of lending wouldbe adjusteddownwardif targets for public sectorsaving were not met. But, whenthe targetswere not met and the situationdeterioratedinto a crisis, Mexicodid not discussthe stabilizationstrategywith the Bank but with the IMF. The situationwas then rescuedby the oil boom, and Bank attemptto warn aboutthe inflationaryconsequences of too rapid expansionin oil exports were essentiallyparried by the  25 statementby PresidentLopez Portillothat the rate of expansionwouldbe dictatedby balanceof payment and not conservationconsiderations,and for the next five years Bank analysisof the macroeconomic situationwas essentially,if not officially, unwelcome. 10. After the crisis of 1982the attitudeto Bank dialogue on stabilizationissues softened, but the periodup until 1985was not markedby a highly developeddialoguein this area. In fact such dialogue tended to be developed along the areas of interface between growth and stabilization, e.g., trade liberalization/inflation,exports/exchangerate/inflation. The Baker Debt initiative recognized the importanceof this interface and providedan opportunityfor more formal involvementof the Bank in what had by then become the stabilization/adjustment dialogue. 11. The linkage between Mexicanuse of Bank financingand stabilizationepisodes showsup not in the requestfor new loans, althoughthere was a rapid build-up in Bank lendings in the four year period precedingboth the 1976and the 1982crises, but in the rate of drawdownand in the rate of cancellation of loans in response to the crisis. Both the mid-seventiesand the 1982-85period were characterizedby a considerableslowdownin disbursement,and a high rate of cancellationof projectsapprovedjust before and during these periods.1 ' Over 40 percent of the value of loans approved in 1975was cancelled;and about 24 percent of the value of loans approvedduring 1980-82was cancelled. This figure declinedto about 10 percent during 1983-85 because of the switch to policy-based lending with minimal conditionalityand becauseof the Special ActionProgram under which Bank share of project financing was increasedwell beyond the import contentof the projects. 12. One could be temptedto expectthat in contrastto the stabilityobjectivethe Mexican attitudeto dialogue with and borrowing from the Bank tended to be more positive when growth was clearly the priority, but the actual experiencesuggeststhat the relationshipwas a complex one. During the first growth period the Bank was essentiallyun-criticalof the strategy of import substitutionwhich Mexico was followingat the time. There was some dialogue on sectoral investmentand project issues in the infrastructuresectors where the Bank washeavily involved,and graduallyMexicoacceptedthat the Bank had a useful role to play in the discussionand design of the public sector investmentprogram. After 1970, whenMexicofolloweda growth with equity approach,there was a wideningof the dialoguesince there was a kinship at least in rhetoric between Presidents Echeverria and McNamarawhich made it naturalfor Mexicoto welcomeBank dialogueon both objectives. In additionthe shift of investmentand Bank financing toward support for sectors and industriesrather than just infrastructurealso tended to makea wider dialogueacceptableto Mexico. However, the high growthperiod after 1977and up to the end of 1981, was different in that the Mexicohad accessto other financingfor its priority investments, which were mainly not areas in which the Bank had an obvious advantagein experience. This plus the fact that Bank analysisgrew more critical of the Mexican strategyon stability and on equity grounds made for a dialogueof the deaf. 13. Mexican and Bank perceptionof how to approachthe growth objectivegrew closer during the latter part of the eighties in recognizingthe need for radical structural adjustmentsand for reduction in the role of the public sector in the Mexicansituation. This plus the limitedavailabilityof development financing from other sources made Mexico look more to the Bank for both financing and advice to support its return to growth. As the chapters on the Policy Dialogue and Lending will detail the I1See Table on Bank Lending in the Chapter on the Lending Program of this study. Also see sections on Cancellations and Slow Disbursement.  26 relationshipbetween the growth objective and the desired role of the Bank has been complicatedby changingviews on developmentwithin the Bank, especiallyin the direction of more balancebetween economicand social initiativesand the issue of whetherthe primacy of the mission of the Bank is the reduction in povertyor the promotionof economicgrowth. Public Versus Private Sector 14. Mexicohas always followeda mixedeconomymodelof development,in which the privatesector has accountedfor the major share of GDP. Thus what is at issue is the change in relative importance of the public sector versus the private sector over time. One can identifytwo main periods in which the prevailingphilosophyguidingpolicy was that the private sector would play the dominantrole within a collaborativeframeworkinvolvingthe state and domestic and foreign entrepreneurs. The first of these periods started during World War II and ended in 1970. The policies of Presidents Aleman, Cortines, Lopez Mateos, and Diaz were consistentin pursuing this strategy. 15. The secondperiodbegan in 1985with the announcement of growth orientedstabilizationpolicies includingincentivesto producersand exportersby the de la Madrid administration. It was continuedand intensifiedunder the Governmentof PresidentSalinaswith the special emphasison privatizationof state- ownedenterprisesand the deregulationof manysectors. The motivationfor the return to a private sector strategyseemedto havebeen partly a reactionto the high public sectordeficits associatedwith inefficient SOEsand partly reflectiveof the new technocraticleadership's belief in the superiorityof a more private enterprise model or development. 16. The distinctperiod of relativepublicsector emphasiswas between 1970and 1982. It beganwith the Echeverria administrationwith its populistbent leadingto steppedup public investmentto generate jobs and to providegreater accesson the part of the rural peasantryto the social benefitswhich a rapidly growing economycould afford. The state made massiveinvestmentsin the directlyproductive sectors such as fertilizer and steel, as well as increased investmentin oil explorationpartly in response to the higher cost of oil importsat the oil crisis of early 1974. This public sector expansionled to growing public sector deficits which were financedpartly by moneycreation, and eventuallyled to inflationand a balanceof paymentscrisis. It might not have been continuedby the Lopez Portillo administrationbut the discoveryof massivepetroleumreserves and with high oil prices, the balanceof payment constraint was relaxed and a high growth strategysupportedby increasingoil revenuesand borrowings(basedon expectationof continuallyrising oil revenues)became possible. When this strategy ran into crisis in 1982, the policy response of the outgoing administrationincluded the nationalizationof commercial banks, therebyfurther enlargingthe publicsector. It maybe an oversimplification, but nonethelesstrue, to say that the motivationto public sector expansionunder both administrationsseemed to have been dissatisfactionwith the failure of the benefitsof private sector led growth to adequatelytrickle down to the poor. 17. On a cursoryglanceat the historicalrecord, Mexico's attitudeto the Bankmay havebeen affected by the relative dominanceof the private or the public sector approach. Thus when a distinctlyprivate sector approachwas beingfollowedthere was little need for Bank advice in economicmanagement. The policy environment for private activitywas defined withinthe contextof a protectionisttrade philosophy which the Bank at the time shared; and therefore the Bank would not have been looked to for a second opinionevenif Mexicohad been disposedto seek one. In the 1950swhen the Governmentsought to use price controls and more regulation it was resisted successfullyby the private sector without Bank  27 involvementin the dialogue. Consistentwith the private sector approach, the public sector investment program was mainly limitedto providing infrastructurein support of the private sector. 18. In 1970 the dialogue with the Bank was extended to poverty and social matters and Bank involvementin dialogue on public finances including pricing of services coincided with the rapid expansionof the public sector. Bank lending also increased rapidly as the public sector investment programgrew; the Bank by nature being a lender to the publicsector. As the compositionof the public investmentprogram shiftedtoward directly productive investmentprojects in industry the composition of Bank lending also moved in that direction. The situation changed after 1977 when Mexico with increasingaccess to alternativesources of financingfor its public investmentprogram no longerheeded Bank advice, which was counsellinggreater conservatismthan was attractiveto a clientwith a windfall and with a backlog of problems it wished to solve. Bank lending accelerated to take advantageof Mexico's enhanced creditworthiness,but the Bank's share in financing declined until the alternative sources grew cautiousin 1981. 19. It is a matter of record that as Mexico shiftedback toward a private sector led approach, the dialoguewith the Bank picked up considerably. Bank advice on sectoral adjustmentswas soughtwithin the contextof a free and open dialogue. Mexico's public sectorinvestmentprogramhas tendedto decline under this approach partly because of adjustments required for stabilization and debt burden considerations.Althoughthe Bank's lendingprogramcontinuedto grow absolutelyand as a share of total financing because of the reluctance of alternativesources, the compositionhas once again shifted to providedsupportiveinfrastructurefor the private sector as well as to induce the return to a supportive policy environment. Protectionism versus Liberalism 20. Mexicofolloweda strategyof protectionismwith varyingdegreesof intensity dependingon the strengthof its balanceof paymentsbetweenWorld War II and the middle of the eighties. Initially, this was accompaniedby a private sector orientationand after 1970by a public sector orientation. This approach was consistent with the dominant thinking on development, especially in Latin America. Mexicowith indigenousentrepreneurial talentcould with some importedtechnologyand capital develop a productive structure to take advantageof its large market and rich resource base and in the process Mexicanentrepreneurs generatejobs and a better standardof livingfor its people. There were indigenous and there were foreign ones willing to invest in Mexico. Given the entrepreneurialtalent in its private sector and the relative absenceof foreign competitionin the forties, it was easy to get the process of import substitutionstarted. It was successfulin bringing Mexicoalmost a quarter of a century of high GDP growth. 21. Theoreticiansat the time were not fully appreciativeof how critical the earning of adequate foreignexchangeis to the continuation of the process wherethe economycannotbe totallyself-sufficient. both There wasalso insufficientappreciationof the factthat public sectoroutputtends to be un-exportable by dint of its compositionand its competitiveness and that as the public sector becomesmore dominant there is increased risk of a foreign exchangegap becomingproblematic. In retrospect, the pursuit of protectionismunder a publicsector led high growth strategywas bound to lead to crises as it did. The switch to an outward looking strategy by Mexico is largely the result of the dominance of new theoreticiansin the Mexicanbureaucracy.  28 22. The shift to liberalismofficiallytook place in 1985during the administrationof Presidentde la Madrid, when it was announcedthat Mexico would seek membershipin the GATT and that it would liberalizetrade policy. It was continuedunder the administrationof President Salinaswith intensified vigor. There had beenshort periods of relaxationof restrictionsand temporaryloweringof tariffsduring the seventiesand even earlier. But there was no change in fundamentalphilosophyof developmentand liberalizationwasusuallydone to moderateprices by providingsome competitionto domesticproducers; the expectationwas that the arrangementswere reversible wheneversigns of imminentweaknessin the balanceof paymentsappeared. Althoughin fact, the moderationof inflationwas part of the rationalefor the post 1985shift to liberalism,the shift was due to a more profoundembracingof the free market/free trade philosophy. Privatizationof publicproductiveenterpriseand the reductionin governmentregulation has been an integralpart of the strategy. 23. It is generallyacceptedthat the shift to liberalismhas been accompaniedby greater willingness of Mexican officials to engage in a freer and more informal dialogue with Bank staff. The greater coincidenceof philosophyprobablyhas favored a more academicdialoguebefore and during the policy design process. The impacton the mix of loans sought from the Bank may have been affected in the sensethat adjustment type lendinghas tendedto be muchmoreimportantin Mexico'sborrowingprogram with the Bank relative to project lendingfor infrastructureand for industrial investments. OPPORTUNlllES AND CHALLENGESIN MEXICANDEVELOPMENT 24. Mexicohas been presented with one major opportunityand has had to face a number of major challengesin its developmenteffort. The major opportunityhas been the discoveryof oil which vastly expandedits resourcebase. Any observerof the Mexicansceneover the last decade wouldreadily agree that the debt has been a major challengeto Mexican economicmanagement. Not so well known to outsidersbut of long standingconcernto Mexicanadministrations has been the challengeto development presentedby the tendency for settlementand economicactivity to concentrate in the MexicoCity area, makingit one of the world's largest urban concentrations,and implyingmassive challengesto housing, servicesand infrastructure. Of more recent concernhas beenthe challengeof preservingthe environment from degradationdue to development. The ultimatechallengein this connectionis to makedevelopment sustainable. The remainderof this chapter will review this opportunityand these challengesin order to trace how they affected Mexico's developmentstrategy and the role that the Bank was expectedto play in that development. Oil 25. The discoveryof large reserves of petroleumand their exploitation,just when the world was in the throes of a crisis arising out of the decisionof major producers to form a cartel to control quantity suppliedand thereforeprices in the international market, significantlyenhancedMexico's opportunityto deepen, broaden and accelerate its developmentprocess. The opportunityderived initially from the relaxationof the foreign exchangeconstrainton the strategyof industrialization by import substitution. A short review of the petroleum industry will serve to show how this opportunity affected the developmentstrategy.  29 A Short Review 26. From 1945-1973,the petroleumindustrywent intoa reorientationand modificationphase, which lasted until 1958, and then into an integrationand expansionphase with the overall Mexican economy. The industrywas reorientedaway from exportingcrudeoil and toward satisfyingdomesticrequirements. It was expandedand integratedwith the rest of the economythrough the large utilizationof natural gas and the establishment of a petrochemicalbase. Oil productionincreasedfrom 44 millionbarrels in 1945 to 191millionin 1973; meanwhilenatural gas outputrose from 0.75 billion cubic meters to 19.2 billion. During the same period, refining capacity(distillation)surged from 153,000barrels per day to 760,000 - a five fold increase. In 1973, productionof ammonia reached 530,000 and ethylene 166,000tons. Total outputof petrochemicalsamountedto 2.65 milliontons. 27. However, PEMEX(the state monopolyin charge of petroleumsincethe sector was nationalized in 1938)found it increasinglydifficultto finance both exploratoryand downstreamactivities. PEMEX was unable to generate adequateprofits because of low internationaland domestic prices. Its largely debt-financedinvestmentprogram concentratedon downstreamoperationsin the 1960s,particularlyon basic petrochemicals. Investment in exploration lagged and production growth fell behind that of consumption to the point where Mexicobecamea net importerof petroleumand its products in the early 1970s. 28. The period from 1973-1982 was marked by two major events. First, the oil price increasesby OPEC which put a strain on the financesof PEMEX, importing crude oil in 1971 and more refined petroleum products and petrochemicalsthan it exported. Domestic prices of refined products were readjustedto give PEMEX the financesit neededfor its development,but over the next few years price adjustmentsdid not keep pace with costs.Y Second, major oil discoveries in 1972, followedby many others later, confirmed the existenceof vast reserves of petroleumin Mexico and the adjacent coastal waters. Productionfrom these new fields alone amountedto 323,000 barrels per day in 1975, nearly 60% of Mexico's total oil production. Total reserves grew from 5.4 billionbarrels in 1972to 11 billion in 1976 and 72 billion in 1982. In addition, natural gas was discovered in the north east. These discoverieshelped Mexicoexport crude oil, a new source of foreign exchange. 29. These events were to have direct repercussionson Mexico's petroleumpolicy and development strategygenerally. In 1977, after the combinationof a very high public sector deficit and a high current deficitin the balanceof paymentshad led to devaluation the previousyear, the Governmentbelievedthat petroleumresourcescould relax the foreignexchangeconstraint,thereby enablingthe countryto finance the import componentof a massiveinvestmentprogram which in turn would restore the growth rates of the economyto former trends. It also assumedthat an oil-led growth process would lead to social and economicdevelopment. 30. The Government's decision to maximize petroleumproduction and exports led to intensified explorationand massive investmentprograms. PEMEX investmentsrose from 15% of public sector investmentsand 1.2% of GDP in 1973to 30% and 3% respectivelyin 1982. Dependenceon oil revenues steadily increased. By 1982oil and gas exports accountedfor 75% of total exports of goods, compared Y/ In 1975,consumer and fuel oil surpassed pricesfor gasoline thosein the UnitedStateswherecontrolswere in force. Yet as inflation rate was depreciated pickedup and the exchange in 1976,domesticpriceincreases startedto lag. By 1980181 Mexicanproductpriceswere amongthe lowestin the world.  30 to 1.6% only in 1973. PEMEX's contributionto fiscal revenuesrose from 6% in 1975to 38% in 1982. Crudeoil productionincreasedfrom 165millionbarrels in 1973to 1 billion barrels in 1982,led by rising oil exports. Refining capacitydoubledwhile petrochemicalproductionrose fourfold. 31. The period 1982-1992was one of consolidationand restructuring, in which was started the correctionof the distortionsresulting from the extremelyrapid developmentof 1976-82- dependence on oil exports and dominanceof PEMEX in public sector investment. Even before the sharp oil price reversal of 1986 ir. the world oil markets, PEMEX's annualaverage investmentwent down from 3% of GDP in 1977-82to 1.7% in 1983-85. In subsequentyears (1986-1991),it averaged 1% of GDP only. Despitethe slowingdown in petroleumproductionand investmentafter 1983, Mexicohas become the world's sixth largest producer of oil from the eighth largest reserve base. PEMEX is now the third largest crude oil companyin the world. 32. PEMEX exercises to this day almost complete monopoly over production, processing and distribution of petroleum and its products, including basic petrochemicals. For a number of years PEMEXwas grossly overstaffedand plaguedby corruption, which increasedcosts. In recent years, to supervisethe company,the governmentplaced PEMEX under tighter budgetarycontrols. To improve transparencyand efficiency, PEMEX has been restructured as a holding companywith four separate subsidiaries (explorationand production, refining, natural gas and basic petrochernicals, secondary petrochemicals) border prices. which are governedby transfer prices based on transport-cost-adjusted The subsidiaryfor secondarypetrochemicals may eventuallybe privatized. 33. Measures to enhance management autonomy and accountability and to improve internal organizationare importantparts of the restructuringeffort. Importantstaffingcuts are being made. The scope of the state's basic petrochemicalmonopolyis being dramaticallyreduced. Peripheral businesses of PEMEX are being prepared for privatization, e.g., staff shops, which for the exploration and productiondivisionsalone employclose to 15,000people. Private sector firms are beingallowedto bid for service contracts for PEMEX's drilling operations, albeit not on a cost-sharingbasis. Under the North AmericanFree Trade Agreement,performance-based contractsare also to be permitted. 34. When fiscal strengtheningbecame a policy priority in the wake of the debt crisis, PEMEX becamea prime target for increasingpublic sectorrevenue. Practicallyall the profits PEMEXmanaged to generateat least until the late 1980swere taken away by the government. Since 1990, PEMEXhas been, however, able to generatehigher net profits. Mexico's Oil Policy 35. The basic objectivesof the Mexicanpetroleumpolicy in the immediatepostwar period were as 2' follows: * contributionto the formationof capital; * integrationof the petroleumindustry with the overall economy; * impetusto regional and social development; * stimulationof domestic enterprise; * increasein oil productionwith a build-upof reserves; " As outlined by A.J. Berinudes, Director General of PEMEX in 1947-58.  31 * emphasison petrochemicalproduction;and * use of resources through planning. 36. Alongwith these broad objectives,five basic principleswere added: * petroleumresources should contributeto social development; * nationalizationshould help Mexicochange from a 'colonial' economyto a modem integrated economy; * the petroleumindustry must create a public interest in its affairs and a public image; * the petroleum industry must remain outside the vicissitudesof politics and free from political pressure; * the petroleumindustry must honor labor union rights and autonomy. 37. and until the oil discoveriesof the early 1970s,the petroleumindustry was Since nationalization, oriented toward Mexico's internal needs as opposed to exportationof crude oil, which previouslyhad been emphasizedby the foreign oil companies. Oil discoveriesin the early 1970s resulted in a major change in Mexicanpetroleumpolicy. In 1974, for example, Mexicostarted to export crude oil. The objectivesof the 1977budget of PEMEXspecifiedthat petroleumproducts were to be exportedonly if an adequate reserve level existed. However, petroleum exportationwas definitely a new element in Mexico's petroleumpolicy at least until 1982-83. As a resultthe Government,anticipatingfuture income from projectedever-risingoil revenues,embarkedon a policyof aggressivedeficitspendingin the public sector, includingin particularPEMEX. 38. One of the importantaspectsof policyhas been the pricing of petroleumproducts in the domestic market. After the first oil shock in 1973 Mexicoadjustedpetroleumproducts prices upwards more in line with internationalprices. However, despite increases, consumerprices remainedvery low and by 1980/81were amongstthe lowest in the world. Following the 1982 debt crisis the governmentagain adjustedprices upwards. In early 1992, retail gasolineprices exceededprices in Texas by about 30%. Consumerprices for fuel oil, jet fuel and natural gas were set equal to border prices. Prices for diesel and LPG are still lower than in the US but scheduledprices for these two fuels aim at abolishing subsidiesby 1993. 39. After the 1982crisis, the implementationof the stabilizationprogram led the authoritiesto take measures for a more effective review and control over investmentplans and external borrowing by PEMEX. During 1983, public investmentin petroleumwas reduced by some 45%. The government economicpolicies since 1982have heavily influencedpetroleumpolicy. The petroleumreform strategy comprisedfour elements: * tighter budgetarycontrol and maximizationof tax revenuesfrom PEMEX; * a production strategy focusing on assuring domestic self-sufficiency and maintenance of productionvolumefor crude oil; * increasesin domesticprices for petroleumproducts to internationallevels; * restructuringof PEMEX. 40. The Governmentdid not touchthe fundamental monopolypositionof PEMEXand promotedonly limited entry of private domestic and foreign parties into some of PEMEX's business areas (such as secondarypetrochemicals).  32 The Impact oLQil 41. Although less importanttoday, petroleumhas played and continuesto play a significantrole in Mexico's developmentas shown below: Table 3.1: Petroleum Industry - Key Factors 1960 1973 1976 1982 1991 Petroleumin GDP(%) 3.4 2.5 3.0 6.3 1.9 PEMEX investmentin GDP (%) 1.5* 1.2 1.6 3.0 1.0 PEMEX as % of PSIP 21.4 15.5 19.5 29.5 18.5" (%) Petroleum/exports 3.0* 1.6 13.1 75.3 28.9 PEMEX/T employment(9) 0.4 0.5 0.6 0.7 na PEMEX's share in FGRev. 6.0 6.0 9.1 37.8 23.9 * Estimated. " 1990 figure. h Includinggasolinetax and value added tax. 42. From 1967to 1982,PEMEX's generationof annualcapitalsurplusavailablefor its own financing or to other sectors of the economywas negative. Currentsavingswere consistentlyinferiorto PEMEX's direct investment. Since 1982, PEMEX's substantialreduction in capital expenditures enabled it to generatecurrent savingssufficientto financeits direct investmentwhilereducingits total debtparticularly in recent years. For the first time, PEMEX showeda positiveprofit margin on sales and investments in 1990-91. 43. Contribution of oil to the Federal Government fiscal revenues remained about constant percentage-wise from 1938to 1974,i.e., about5%. Theyincludedrevenuefrom PEMEXdomesticsales and a gasolinetax. With the substantialincrease in exports, oil revenuesbecame a very importantpart of total fiscal revenuesas shown below: Table 3.2: Oil Revenues and Federal Fiscal Revenues (in percent of total rLcl revenues) 1974 1976 1980 1982 1983 1985 1990 1991 PEMEX export sales - 2.2 14.0 24.7 25.4 19.5 - - PEMEX domestic sales 5.5 2.7 9.9 5.2 12.9 15.3 - - Total sales 5.5 4.9 23.9 29.9 38.3 34.8 22.5 17.6 Gasolinetax 0.5 4.2 2.5 7.6 8.9 8.6 4.5 3.8 Value addedtax - - 0.3 0.3 1.6 2.2 3.0 2.5 TOTAL 6.0 9.1 26.7 37.8 48.8 45.6 30.0 23.9 Source: Ministry of Pinance 44. In addition to revenue from export sales, domestic sales revenues also increased while the gasolinetax was considerablyraised to reach 11% in 1986. The introductionof a value addedtax also  33 generatedadditionalrevenuesfrom oil and products. All this combinedto bring the share of oil revenues from 6% in 1974to about 49% in 1983. After that the stagnationin export sales and the slowingdown in domesticsales drasticallyreducedoil revenuescontributionto a low of 23.9% in 1991; still, however, almost three times bigger than in 1976. 45. Petroleumhas had an immenseimpacton the externalaccount. In 1982crude outputwas almost four times higher than in 1975. Crude oil exports reached in volume 54% of crude output in 1982 as against 12% in 1975. Net petroleumand products exportshad risen from US$169millionin 1975to the enormousamountof US$16,305millionin 1985. Gross exportsrepresented77.5% of total merchandise exports in 1982 comparedto 1.5% in 1975. The current accountbalancewas heavily influencedby oil from the late seventies to 1985 (i.e., until the drastic fall in oil prices which occurred in 1986 and reducedoil export earningsby 60%). Table33: Impact of Petolem onCurrnt Account Balance (current USS billion) 1965 1970 1975 1976 1982 1985 1986 1989 1990 1991 ExpI Oil 0.04 0.04 0.44 0.46 16.45 14.58 6.12 7.73 9.71 7.90 Non-oil 1.12 1.31 2.57 3.02 4.78 7.08 9.91 15.03 17.13 19.21 Non-factor services 0.81 1.40 3.06 3.36 4.76 5.75 5.84 10.10 11.51 12.89 Total 1.97 2.75 6.07 6.84 25.99 27.41 21.87 32.86 38.35 40.00 hnR2or Oil 0.03 0.05 0.29 0.17 0.15 0.49 0.36 0.78 0.86 1.13 Non-oil 1.53 2.30 5.99 14.29 14.29 12.72 11.07 22.63 25.98 35.42 Non-factor sevices 0.51 1.07 2.19 5.71 5.71 5.17 4.U 7.69 9.94 1.05 Total 2.07 3.42 8.47 20.15 20.15 18.38 16.31 31.10 36.78 37.60 Resource Balance -0.10 -0.67 -2.40 5.84 5.84 9.03 5.56 1.76 1.57 2.40 Others (net) 40.27 -0.40 -1.64 -12.15 - -7.90 -7.24 -5.72 -8.69 -15.69 CurrentAccount Balance -0.37 -1.07 -4.04 -3.41 -6.31 1.13 -1.68 -3.96 -7.12 -13.29 Source: Ib{: International Fiancial Statistics - Yearbook, 1992 (weealso Annex Table 21). The Problem of Oil Price Fluctuations 46. Mexicois not an oil economy. The percentagecontributionof the oil sectorto GDP was always below 4% from 1930to 1978. It rose abovethat level in 1979-85with the rapid expansionof petroleum productionbut went down again in 1986-1992 and is now less than 2% of GDP. The oil sectorhas had oil a much lesser share than the 30-50%range share held by oil in the GDPs of other semi-industrialized exportingcountries. Despite this, serious problems of economicmanagementwere found in Mexico during the period of rapid oil expansion(1978-1982). 47. The economy's dependenceon oil had risen not simply in terms of its share in GDP, but in a more vital sense that the future economicgrowthbecameincreasinglysensitiveto the rise in oil income: the public sector investmentprogram, availability of foreign finance, and the ability to service the mountingexternaldebt, all dependedon the growth in oil earnings. Althoughthe oil markethad shown  34 considerable instability in the 1970s, no allowance appears to have been made for unforeseen contingencies.Withouta shift in the basicstrategy itself, the real appreciationof the peso was inevitable in view of the easily available foreign exchange. Thus, relative prices moved in favor of foreign producers and domestic non-tradeable sectors, and against the domestic tradeable sectors. The consequence of this wasthat non-oilexports stagnatedand the growth in manufacturing remainedmodest. The lesson for the future was that although oil may continue to provide substantial resources for investmentand consumption,policies must be directed towards reducingthe economy'sdependenceon oil. The Role of the Bank in Relationto Oil 48. The Bank has not played a significantrole in relation to the developmentof the oil sector, nor did it have much influenceon the way in which the oil bonanzaaffectedMexico's developmentstrategy. On several occasionsMexicodid put out feelers to determineBank interest in supportinginvestmentsin the oil sector during the fifties and seventies. In the fifties PresidentBlack of the Bank replied that he thoughtthat the sector was more appropriatefor development by the private sector and declinedto hold out any hope for Bank supportfor Mexico's industry, it being in the public sectorand a monopolyat that. Subsequentattempts by Mexico to get Bank support for its investmentprogram in oil in the early seventiesreceived no encouragement. Once enormous reserves were found and PEMEX had almost unlimited access to foreign financingon less stringent and inquisitiveterms than the Bank would have offered, and given that the enormoussums that were required would have been well beyond any likely Bank support, Mexicohad no further interest in Bank lendingor dialogue on this sector. 49. Part of the reason for lack of positive Bank responsewas that the Bank felt, not withoutreason, that it would have to do a thorough appraisalof the whole PEMEX operation before it was prudent to lend to any part of it and that it was unlikely that the Mexicanswould cooperatein this. In any event the Bankdid not havethe expertiseto do or supervisesuch an appraisalby consultants. Althoughseveral Bank economicreports treatedoil in short appendices,very few reportingmissionsincludedan oil expert; and there is no evidencethat the Mexicanspaid attentionto Bank analysis and opinion after the 1952 report of the Joint Bank/MexicoWorkingParty, the findings of which did not find favor with PEMEX management. Debt Reviewof Debt Build-up 50. The enormousgrowthin Mexico's externaldebt in the last two decades(reachinga peak of US$ 104 billion in 1987) has been a source of considerableproblems in the country's macroeconomic managementand in the formulationof its developmentstrategy. In the years preceding the recent restructuringof $49 billion of Mexicanexternal debt, its total debt service preemptednearly half of the earningsfrom the export of goods and services. This review, focuses on the genesis of the Mexican externaldebtburden and on the subsequentreformefforts, and assessesthe role Mexicoallowedthe Bank to play in assistingdebt management. 51. From the start of the MexicanRevolution(1910)to the signingof the Suarez-Lamont Agreement (1942), the country was unable to fulfil its old foreign debt obligationsand failed many times to reach a reschedulingagreementwith its creditors. It was only during the 1950sand the 1960sthat the country's  35 internationalcredit was reconstructed. Throughoutthis period, foreign financing came mainly from official sources, and its macroeconomicsignificancewas relativelymodest, if not negligible. 52. President Luis Echeverrfa (1971-76), decided to tackle the problem of inequality and the associatedpoverty through increased public expenditure,combined with subsidies but without higher taxes. The Mexican Government was eager to borrow to achieve faster economic growth, and internationalcommercialbanks were eager to lend. A turning point occurred in 1973: the net flow of the foreignpublic debt, which had averageda bit more than $200 milliona year throughoutthe previous two decades, increasedto more than $1.6 billion in that year alone, and from then on kept on growing rapidly. 53. The oil discoveries,togetherwith its promiseof an unprecedented debt-servicecapacity,procured a massive inflow of foreign loans during the tenure of PresidentLopez Portillo (1977-82). Thus, the stock of the foreign public debt, which was $6.8 billion at the end of 1972, reached almost $21 billion at the end of PresidentEcheverrfa's administration(1976)and soaredto $58 billion by the time President Portilloleft office (1982). The externalpublic debt rose rapidlyto reach the equivalentof 30% of GDP. The private sector, crowdedout as the governmentincreasedits demandfor loansfrom domesticsources, also came to rely heavilyon foreignfinancing. Private foreigndebt increasedfrom $5.4 billion in 1977 to $23 billion in 1982. 54. Nonetheless,the total externaldebt whenmeasuredagainstthe size of the economy,consistently decreasedthrough 1980. The ratio of total debt to GDP fell from 36% in 1977to 31% in 1980. In any case, the public foreign debt, which had been the bankers' headache in 1976, evolved very reasonably through 1980. Its net inflow, with respectto severalrelevantmacroeconomic aggregatesafter the initial adjustmentof 1977, was kept in rather modest proportions during two-thirds of President Portillo's administration. This fostered among international financial sources the perception of enhanced creditworthiness. 55. Needlessto say, Mexicannegotiatorstook full advantageof this to improvethe maturityprofile and cost of the country's debt. What had been a very expensivedebt in 1976, with maturitiesheavily concentratedin the medium term, became a nicely-scheduledone two years later, carrying very low spreads and comparableto those paid by prime customers in Western industrializedcountries. The nationaloil company(PetroleosMexicanos,PEMEX)was of paramountimportancein improvingthe cost and profile of its debt, and its strong financialsituationwas fully utilized for this purpose. PEMEX's participationin gross borrowingsby the Mexican public sector increasedfrom 15% in 1977 to almost 40% by 1979. 56. However, during 1980-82, a deterioration in Mexico's external terms of trade, higher internationalinterest rates, an overvaluedpeso, an oil price shift, the bunchingof short-term debt service obligations, all meant that the countryhad to borrow heavilyjust to support the balanceof payments. Clearly, the most significantadverseexternal shock was causedby the sharp rise in the interest rate on the external debtY Netting out the impact of all external shocks, the Mexican debt picture was not overwhelmingly complicated by foreignconditions. Internal shocksor factors-prepayment of overseas 4'Averageterms of new commitments increased from 11.3% in 1980 to 14.2% in 1982, and fell to 6.9% in 1989. In 1982interest as a percentage of exports of goods and services was 40.4%, but fell to 24.6% in 1989. (World Debt Tables, 1992-93).  36 obligation and substitutionof domestic borrowing-compounded the problem. The most impressive internalfactor competingwith debt servicefor foreign exchangewasthe sharp increase in capitalflight.Y 57. The whole foreigndebt scenariochangeddramaticallyin just one year. By the end of 1981, the country's total externaldebt (includingthat of commercialbanks and of private sector firms) stood at $84 billion when the debt crisis erupted. Not only had the level of the debt changedsignificantly,but also its maturityprofile and its cost. Immediately,there was a sharp deteriorationin lending conditionsto Mexico. To alleviatean impressivepiling up of short-termcredits inheritedfrom 1981,three important medium-termsyndications were arrangedduring the first semesterof 1982. In a span of only two years, Mexicanexternal debt almost doubledto approximately$90 billion; gold and dollar reserves plunged, leadingto the MexicanGovernment'sannouncementin August 1982that it could no longer service its debt. Debt Strategy 58. On August 20, Secretary of Finance, Jesus Silva-Herzogmet with representativesof a large numberof creditor banks and requesteda three-monthmoratoriumon paymentsof principal, as well as the formationof an advisorygroup of creditorsto negotiatethe restructuringof the foreignpublic debt. A few days earlier, the Mexican governmenthad obtained importantfinancial backing in the form of creditsfrom the US CommodityCredit Corporation (CCC) and the U.S. Treasury. Negotiationswith the Bank of InternationalSettlements(BIS)to obtain a dollar credit of $1.85 billion from several of its memberswere initiated in the last days of August. Early that month, formal talks had begun with an IMF mission abouta standby agreement. 59. In 1983, commercialbank creditors agreed to reschedule$23 billion due in 1982-84over eight years as well as provide $5 billion in new money. Another multi-yearreschedulingwas agreed in 1985 but the collapseof oil prices in 1986forced the Mexicanauthoritiesto the negotiatingtable. This time the packagewas complex, involvinga reschedulingof $44 billion of public sector debt contractedbefore 1983 and $9 billion borrowed in 1983-84. The commercialbanks also agreed to lend up to $8 billion in new money, with multinationalagenciesprovidinganother $6 billion. 60. From 1986until late-1987,the Mexicangovernmentalso soughtto reducethe debt serviceburden through a debt-equityswap scheme. It was suspendedbecause of fears about the inflationaryeffects of the monetaryexpansionit caused. Then in 1988, the governmentexperimentedwith a controversialdebt for bonds auction, by which it hoped to retire some $20 billion at an average discountof 50 percent. However, a little more than a quarter of Mexico's creditor banks offered their holdings of debt for exchangeand, of those that did, many were unwillingto discounttheir debt adequately, Consequently, bids of only $4 billion were acceptedat an average of 30% discount. 61. The governmentwas more successfulwith a debt reschedulingand relief arrangementhammered out in 1989with commercial bank creditors. In 1989,TreasurySecretaryNicholasBrady abandonedthe BakerPlan by shiftingthe focusof the officialdebt strategyto debt reduction. An agreementin principle gave the 500 or so bank creditors three options:(i) exchangetheir existingdebt for 30-yearbonds with a 35% lower face value but yielding 13/16 over LIBOR; (ii) take up 30-yearbonds with the same face ZYGurria,J., and R. Fadl, 'Estimacion de la Fuga de Capitales en Mexico, 1970-1990, serie de monografia, no. 4 (Washington:Banco Interamericano de Desarrollo, 1991). p. 6 .  37 value as their existing loans but bearing a fixed interest rate of 6.25%; and (iii) make new loans to Mexicoequivalentto 25% of existingexposure. 62. Eventually,it was decided that 47% of the $48.5 billion of outstandingcommercialbank debt wouldbe swappedfor fixed interest bonds and 42% for the principalreductionbonds, with $1.1 billion beingprovidedin new moneyover the next four years. However, whilereducingthe amountof interest payableon the commercialbank debt by about $1.6 billion a year on average, the deal did not greatly affect the stock of debt as loans totalling$5.8 billion came from the IMF, the World Bank, and Japan to help provide guaranteesfor the payment of principaland 18 months' interest on the new bonds. In fact, with the $598 million of the new money offered by the banks being disbursed and with other borrowingsthe public sectordebt remainedatjust over $78 billion in 1990,despitethe fact that a renewal of debt-equityswaps had also been part of the new deal. A total of $3.5 billion was swapped-the conversion rights only being granted for investments in infrastructure or debt-for-nature and debt-for-study swaps. The Role of the Bank 63. Although Mexicolooked initiallyto the IMF for support in the crisis of 1982, regarding it as a temporaryfinancialproblem, it soon realizedthat giventhe reductionin economicgrowth and the high rate of interestthe outlookwasfor a rapidly increasingdebt serviceburden and furtherdecline in growth. Given this outlook it respondedto Bank signals that it was willingto help. The period 1982-87was characterized by a considerable improvement in the policy dialogue on the debt issue, as the Bank-through enhancedanalyticalcontentof its ESW-earned the trust of the top Mexicanpolicymakers. In 1989the Bank also played an advisory role to Mexicoon the design and formulationof the options in the Debt and Debt Service Reduction (DDSR) plan. In particular, Bank staff helped Mexican authoritiesto evaluatedebt-debt service relief impliedby the different options in the menu offered to commercialbanks includingthe pricing of the oil recapture clause. This analysisplayed an important role in assessing how the DDSR plan could help to meet Mexico's medium-term external financing requirements. The Bank also advisedMexicoduring negotiationswith the CommercialBank Advisory Committee,and its projectionsof externalfinancingneedsplayedan importantrole in validatingMexico's request for debt-debtservice relief. 64. Subsequently,under the agreement signed with Mexico for the Interest Support Loan (Loan 3159-ME), the Bank helped Mexico through measures that explicitly support debt and debt service reduction. The new moneywas providedthrough a $1.26 billion loan for financingcollateralin respect to interest paymentson discountand par bonds to be issued by Mexico for reducing commercialbank debt and debt service. In addition,the Bank provided$750 millionof set asides from existing loans to be used for reducingthe stock of commercialbank debt of Mexico. Urbanization Introductionand Descriptionof Urban Situationand Issues (a) Populationand GrowthTrends 65. at the samerate, Mexicowent from a principallyrural country Like other countriesindustrializing to an urban one in the past generation. Despiteconcernsthat Mexico's urbanizationhas producedundue centralization and concentration recent figures show that Mexico City's growth (and that of the  38 metropolitanregion)has slowedconsiderably,and urbanizationhas become more evenlydistributedwith over one hundred cities of over 100,000inhabitantsthroughoutthe country and with the middle-sized cities registeringfastestgrowth rates. (b) BasicNeeds 66. It is difficultto estimatethe extent to which urban families lack basic urban servicesin Mexico, largely becauseneighborhoodswithout water, sanitation,paved roads and/or electricityare considered "irregular",by definition,and, consequently,do not figure in municipalstatistics. Recentsamplesurveys in ten cities show that the irregular settlementsare growing faster than their host cities and that the majorityof their familiesare withoutdomesticwater, sanitaryor electricalconnections. Notwithstanding the need for basic services, most governmentprogramshave focused on the housing deficit, calculated at six million, mostly among low-incomefamilies, despite the existenceof an elaborate governmental structuredesignedto meet all the population'shousing needs. (c) InstitutionalFramework 67. Urban infrastructurehas traditionallybeenthe responsibilityof nationalauthoritiesand agencies. Standards and projected needs for urban growth, transport, land use and development, housing, and environmental protectionhave all been set, projects financedand implementedby the nationalministries, although these have gone through various changes over the past twenty years. Despite efforts to decentralizeadministrativefunctions the municipalitiesdepend largely on central govermnent and on centralizedagencies for revenuesand for investmentfinancing, althoughthe states and state planning commissionsare beginningto play a larger role. In parallel, the commercialbanks are also openingup their role in financing housing and urban development, alongside the state and municipal housing agencies,payroll savings funds and the nationalhousingprograms. Evolutionof Mexico's Urban Strategy (a) GovernmentDirected Development,MassiveProjects 68. For thirty years beginningin the mid 1940's Mexico's urban developmentstrategy was seen in terms of highlyvisible constructionprojects, new towns, cities or settlements,remarked on by the next generationof plannersas the productof the "Aztec complex". Massiveinvestmentswithoutany spatial strategy led to the mushrooming of MexicoCity, not only as the site of major industrialinvestment,but also as headquartersfor state constructionactivities. The investmentsin developmentwere accompanied by nationwidesocialinterestprojects;the PIDERprogram carriedsocialbenefitsto rural areasunder Luis Echeverrfa's administration(1970-1976).They emphasizedimmediateneeds and visible investments withoutany particularstrategyfor targetingbeneficiariesor criteria for project selection. (b) Birth of an Urban StrategyUnder PresidentsEcheverrfaand Lopez Portillo 69. The year 1976 marked the formal beginningsof planning in Mexico. President Echeverrfa, stronglyinfluencedby the UnitedNations' "HABITAT" reform program,pushedthrougha constitutional promoting notions of regional and municipal planning, and created a new human settlementslaw. PresidentL6pez Portillo followedby establishinga new ministry: the SAHOP, Secretariatfor Human Settlementsand Public Works, which was charged with preparing urban developmentplans for the country's municipalitiesand also a single national plan for urban developmentwhile also managing  39 transport, road, water and sanitationand communicationswhich was formerly under the Ministry of PublicWorkLs. The NationalUrbanDevelopmentPlan of 1978set forth the objectiveof decentralization and directed growth in terms of 'restraining populationsettlement and new industrial activities in the MexicoCity region, re-directingfederal investmentand fiscal incentivestowards selectedgeographical regions and achievingmore orderly growth and land use at the local level." 70. In relation to housing, SAHOP's strategy emphasizedthe view that government's role included that of protectorof lower-income familiesfrom a hostileor indifferentprivate sector. Thus rent controls were upheld, along with legal limits on interest rates and on maximumterms allowablefor mortgages, and in the same vein introduceda new requirementon the commercialbanks - obligatorylending for housing. At the same time, SAHOP took the first serious look at the nation's housing production, identifyingand quantifyingthe familiesnot coveredby any of the various government-backed programs or by the formal private sector. For all its efforts, SAHOP never got beyond the planning stage, since it was to be eclipsed less than 6 years after its creation,but it did lay the groundworkfor later significant changes in Mexico's housing sector first with the developmentof a study and strategy for meeting the effectivedemand for housing in Mexico and second by establishingthe NationalLow-IncomeHousing Fund, or FONHAPO, as one of its final actions. (c) Urban Sector Under Crisis 71. By the end of 1982, after a decade of production of long-term plans and programs, Mexican decisionmakershavinggrown impatientwith studies and analyseswere tendingtowardsa new emphasis on action plans and sector projects. This impatiencewas partly due to the recognitionof the obvious need to pull the economy out of the severe recession associated with the financial and balance of paymentscrisis. PresidentDe La Madrid, who came to power in that year, took two significantsteps. The first was to transform SAHOP into a Ministry for Urban Developmentand Ecology (SEDUE), thereby elevatingenvironment to the same level as urban development,but at the same time reducingits overall powers significantly. Together with the second measure, the modificationof the constitutional responsibilitiesof municipalities,De La Madrid's actions raised hopes in the Bank that Mexicowould undertake a serious decentralization of municipaladministration. Despite certain lip service given to administrative decentralization, only the physical planning functions were taken over by local governments;urban lands and most revenues continuedunder state and federal control. The De La Madrid administrationproved far more interested in reforming the housing sector than in municipal development. 72. Housingfiguredas a key point in the government'srecoverystrategydespiterecurrent cutbacks in public expendituresfirst becauseof the importanceof revivingthe constructionindustry - almosttwo millionconstructionworkers had been laid off since 1981 - and secondbecause of its importanceas a socialpalliativewhen times were difficultand other socialprograms (PIDER, COPLAMA)had come to an end. Followingguidelinesestablishedunder SAHOP,the new administration completeda National HousingPlan which set clear goals for formal sectorproductionand programmeda one hundredpercent increase in output within a budgetraised by only eleven percent. To reduce housingcosts FONHAPO, by now the sector's leading agency, introducedmechanismsnew to Mexicoand to Latin America also; financing serviced lots, home improvementand self-help construction rather than finished housing, offering financingto beneficiariesrather than products, using private sector builders selectedthrough a system of open bids and allowingbuyers to choselocation, design and coststhrough loans to groupsand to individualsfor self help and self-directedconstruction.  40 73. Althoughhousingwas not coveredunder the 'General Interest Rate Agreement' (GIRA)of 1984 its cost recovery situationwas subjectto considerablescrutinyunder the De La Madrid administration, particularlyas inflationand interest rates continuedto rise. In 1986FONHAPOintroduceda mortgage instrumenttied to the minimumwage, and thus variablewith inflation. The systemwas copied, although with certainvariations, by the major payroll funds and by FOVI, a special fund of the Bank of Mexico which worked with the commercialbanks. The De La Madrid administration also reviewed and prolongedthe legal limit set on mortgages, a first step in undoing the policies of earlier governments whichrestrictedthe profitabilityin the housingmarkets. Whileneitherurban nor housingfigureddirectly amongthe issues which the De La Madrid administrationasked the Bank to review, in a set of policy papers issued in 1989the paper on poverty criticizedthe payroll taxes which financehousing programs for low-incomefamiliesthrough obligatorysavingsprograms. Government'ssubsequentactionsindicate that the housing sector was indeed being studiedthrough the FOVI and Bank of Mexicoprograms. (d) Deregulation 74. Under the Salinas administrationthe Mexican Governmenttook major steps to remove the regulatory limits on the banks, the constructionindustry and the urban land markets all of which have tended to increase the cost of housing. The Government's objectives have been to increase the participationof the private sector in low and middle income housing. It has sought to modernizethe payrollfundsand to integratetheir operationswith the rest of the financialmarkets. While Government's housingpolicies have placed the emphasison transparency,on accountabilityand on passing the risks, and the profits, to private sectordevelopers,banks, and beneficiaries,new urban and socialdevelopment policies have also been introduced which tend to rely on more traditional mechanisms. One such mechanismis "Solidarity". 'Solidarity' is a program of pure grants in aid to local communitiesor to local authoritieswhichpassesover state or municipalgovernmentsto reach directlyto poor communities and it makes outright gifts of infrastructure,housing or whateverthe "felt need" of the moment. 75. A new Ministry for Social Development(SEDESOL) has been established to manage the Solidarity Program. In addition, SEDESOL has taken over the old functions of SEDUE including directionof housing and urban development. The co-existenceof the hefty subsidiesand grants-in-aid under Solidarity with policies to liberalizeand deregulateurban developmentand housing markets may prove contradictoryat the local level. It is, however, consistentwith the Mexicantraditionof identifying eachpresidentwith a particularsocialinterestprogramwhichgenerallyoperatesapart from the long-term development policy. (e) Role of the Bank 76. Mexico clearly welcomedthe Bank's involvementin studies which formed the basis for urban policy developmentand in providingfinancialsupport for programs in the urban sector. Between 1972 and 1977the Bank financeda major studyof Mexico's touristpotential(1974) and two tourism projects (Ixtapa-Zihuatanejo and Baja California.) The studies made the first recommendations (albeittentative) for deregulatingthe sector and registered the first complaintabout the ejido system and the resultant distortionof the prices and availabilityof urban land, issueswhich were to come to the fore some twenty -years later. They also recommended the creationof a nationalagency to coordinatethe developmentof the tourist industry (FONATUR)as well as an internaldevelopmentbank to finance tourist projects. A series of locationaldevelopmentstudies formed the thrust of the agreed Bank/Mexicosectoral strategy during the last half of the 1970's. Beginningwith "The Isthmus (Tehuantepec) DevelopmentStudy"in 1976,followedby a studyon "UrbanDevelopment in Mexico"in 1977and one on "SpatialStructureand  41 Urban Development"the series wound up in 1980 with the study of "The Impact of Oil Income on TabascoRegionalDevelopment". The studiesdescribedthe historicdevelopmentof Mexico's cities and divided Mexicoaccordingto economicregions, identifyingthe most promisingones for investment. 77. In 1979a special studyof the Mexicaneconomydonejointly by the Bankand membersof S.P.P. attemptedto identifywhat was wrong and right with the Mexicaneconomy, and analyzedthe subsidies givento housingthroughthe NationalInstitutefor the Development of Workers' Housing(INFONAVIT). It also dealt with traditional concerns for regional equilibrium and balanced growth, recommending investmentsin secondarycities, mentioningthe attemptto slow down the growth of the Federal District and to influencethe population"to movefrom small rural centers into larger urban centers where basic needs could be better satisfied". The year 1984 saw the Bank carrying out four new studies, each one oriented to the fast track developmentof urban sector loans, even though the sectors weren't clearly definedand even though such loans were new for Mexicoand relativelynew for the Bank. Each study proposedprogressthrough reform (mostlyfinancial)rather than through physical investment. This was an adaptationof financialsupport to the structural adjustmentapproachwhich Mexicowas prepared to acceptat the sectoral level during the eighties. 78. In 1989 the Bank produceda set of selectedpolicy papers in responseto a direct request from the De La Madrid government. Urban issues appeared in papers on environment,water supply and sewerage,and on poverty. The recommendations which concernedthe urban sector (as apart from the environment,water supply and sanitation)came mostly from the paper on poverty and can be summed up as: i) eliminationof the payroll taxes - which would mean a radical change in the existingpayroll funded housing agencies...; ii) investmentin infrastructurewhich can help the development of the informal sector; iii) housing and services for migrants to the growing industrial zones; and iv) decentralizationof planning and project implementation. The papers also revived interest in municipal developmentthrough decentralizationof administrationand management, a theme the Bank was to developfurther during the followingyears. The Environment 79. Mexicopossessesa great richness of natural resources which provide economic,health, social, and recreationalbenefits to its citizens-extensive offshore fisheries and petroleum resources, many natural harbors and productive estuaries for fish nurseries, forests for lumber, firewood, and a high biodiversityof plants and animals, rich soil for agriculture, minerals of a large variety, rivers carrying an abundanceof water for domesticuse, abundantclean air coming from Pacific, Caribbeanand Gulf sources. Sustainabilityof these public, nationalresources for use of present and future generationshas been a goal stressedsince the 1970's by both the Bank and MexicanGovernment. 80. Developmentsin some sectors affectedthe environmentmore than that in others. Industry and infrastructurewere the most severe in their impacts on their environs; and large dollar amounts of investmentswere made in these sectors. The environmentalimpact of developmentsin agricultureand irrigation,althoughusuallynot as intensein their impactor pollutionof the environment as industryand infrastructure,was far more widespreadin a spatial sense, with repercussionsthroughoutthe country. Morewildlandswere takenby agriculturethan industryand infrastructurecombined. TheWater sectors's focus on only potable water for most of the periods made for a relatively benign impact on the environment,but the lack of total planning of water resources and the relative inattentionto sanitation gavethe developmentof this sector a lower evaluationgrade for environmentalsensitivitythan it would have receivedhad sanitationalso been a focus. Tourism, consideringthe smallbudgetand few projects,  42 has been severe in its environmentalimpact because of its disturbing and polluting of wildlands and endangeredspecies. 81. Environmentalsustainabilityhas not been the pattern over the period. In the 45 years of development activityin Mexicothere has been severenatural resourcesdepletion(forests, potablewater, soil, air quality, fish nurseries and wildlands). In contrastto petroleum and minerals which are non- renewable, much of the depletion has been of renewable resources. No serious attempt to put the renewableresources back into a nationallysustainablelevel for present and future generationshas been attemptedby any Bank project exceptthe pilot project for air quality. The closest attemptis by Poderith in agriculturein terms of soil science education. A water budgetis in process which is also a positive step forward. MitigationBanks - investmentsin resource enhancingprojects to offset the effects of resource depleting ones - for many projects could be more effective than the very recent trend of inventing mitigation on a project by project basis, many of which projects will have a rather bleak implementation future. 82. Attentionto holisticplanningincludingenvironmentwouldhave been of substantialbenefitto the environmental goal of sustainableresources (and of technologytransferof planningtechniquesto various governmentagencies). A nationalenergy plan (the best time would have been the 1970's); a national irrigation and sanitation water budget, a national soil and forestry conservation plan, a long term decentralizationplan includingthe environmentwouldhave helped sustain natural resources in the face of a rapidly growing population (3.5% during most of the 45 years) with rising expectations for technologyand standardsof living and a relativelyrapidly expandingindustrialbase. This is not to say that plans are the answer to environmental concerns; but they provide a vehicle for bringing environmental considerations into the decisionson investmentgenerally,and if implemented,couldserve to help avoid continuingenvironmentaldegradation. Mexican GovernmentPolicy 83. The principleof conservationof the nationalpatrimonyand natural resourcesis enshrinedin the Mexicanconstitution. From this beginning, pieces of environmentalpolicies have been put into place by three major mechanisms:i) laws, policies, agreements, decrees, standards and directions within various ministries, ii) by signing internationalagreementswhich have environmentalcomponents,and iii) comprehensivelegislationfor environmentalprotection- the first of which was the 1971 Federal Law for Preventionand Control of EnvironmentalPollution. During the early 1980's a large number of other laws were passed which had environmentalclauses, e.g., the Public Work law (1980), the PlanningLaw (1983),the FederalTourismLaw (1984),the HumanHabitationLaw (1984),the National Welfare Law (1982), the General Health Law (1984) and the Federal Meteorologicaland Normalizing (1988), the Regulationof the GeneralHealth in SanitationControl Law (1985). In February 1982,the Federal Law for EnvironmentalProtection, with complementary legislationunder the sanitary code of Mexico,supersededthe 1971law . The 1988 GeneralLaw of EcologicalBalanceand Protectionof the Environment,the National Research Plan for the Environment(1989-94)and the Decentralizationof EnvironmentalRegulatory Power (1983), redefined the regulations of SEDUE. Presently another profoundlegal readjustmentis occurring whichtightens the enforcementauthorityof the newly created SEDESOL. Meanwhile a number of important internationalenvironmentalconventionshave been enthusiastically signed by Mexico. 84. The 1982 Federal Law for EnvironmentalProtection provided non-compliancepenalties for enforcementand streamlineddivisionof responsibilities among ministriesbut preserved the essenceof  43 1971 law. The directives in 1982were to i) prevent and control environmentalair and water pollution; ii) to control environmentalimpactson ecosystems;iii) to protect parks, reserves and ecologicalareas; iv) to protect and restore flora, faunaof forests and other ecosystem. Since 1986the emphasishas been on the following:i) preventionand controlof air pollution;ii) regulationof ecology; iii) conservationof natural resources and ecosystem;iv) promotionof communityparticipationin environmentalprograms. Implementation 85. For comparisonwith the evolution of the legal framework the history of the environmental awarenessin developmentstrategycan be dividedinto four periods: a) Period I (1945 to 1965)was an era characterizedby almostno explicit environmentalpolicyby Mexico (or by the Bank for that matter). Very few presentlyrequired environmentalstandards were enforced anywhere in the world except for domestic water standards, soil and water conservationmeasures, and a budding consciousness of air emissions. b) Period II (1965 to 1972)is characterizedby no explicit standards for Mexicoor the Bank; but there was some awareness of a growing body of internationalstandards in Northern Europe, North America, and selected Asian nations. In 1972 the Stockholm Conference on the Environment and Human Settlement was a watershed for environmental policies and commitments. Mexicoparticipatedalongwith manyother nationsand UnitedNations Agencies, includingthe Bank. c) Period III (1972 to 1982)was one of rapidlyevolvingawarenessof the natural patrimonywhich each nation had to conserve, dependingon its own actions. The beginning of environmental policy and an environmental protectionethic in both Mexico and the Bank was evolvingduring this period. The first environmentalassessmentswere made. However, with the exceptionof a few projectssuch as Las TruchasSteel, Lazaro CardenasConurbation,SeventhRoads Project, on the whole, the period was "business as usual" without environmental assessments or environmental focus on siting, design, emission or any environmental supervision during implementation, monitoring,or evaluation. Mexicanstandardsduring this period were based on a mixture of internationalagreementsand a the ideasof various Mexicangovernmentagencies. d) The final period (1982 to 1992) showed a marked improvementin environmentalpolicy and results. In Mexico, SEDUE formulated regulations, policies, acquired a staff and pursued environmentalobjectives. In the second half of this period, environmentalpolicies, assessment on a far broader spectrum of projects, increased environmentalstaff in operations, and the training of operationstaff resultedin far better plannedprojects from an environmentalpoint of view. Since most of these projects have not been completed and almost no environmental evaluationsare available, it is not totally clear if implementationand monitoringhas improved proportionatelywith better environmentalassessment and design. However, it appears that implementation has lagged behindassessment. Role of the Bank 86. Mexicosaw the Bank as a source of adviceand financingfor training in environmentalmatters. But the advice was more in the natureof an exchangeof ideas, sinceboth the country and the Bank were developingenvironmental awarenessand expertiseduring the sameperiod. The dialogueon environment  44 throughoutthe 45 years sufferedbecause generallyit was not conductedat a high enoughlevel. Most of it occurredbetween technicalstaff on both sides OatelySEDUE in Mexico)and consultants. Period IH despite explicit environmental policies seems especially devoid of environmental dialogue. Few environmentalconditionsfor loans were set out even in the final period. Recentlythe urgent need for dialogue on sustainable environment has been recognized and begun in earnest; and this is being conductedat higher levels throughoutthe Ministriesin Mexico. 87. The Bank has provided funds for training in environmentalprotection and strengtheningof relevantinstitutions. These have gone chiefly to SEDUE, though presentlysome are availablefor state enviromnentalagencies. An attempt to create trained environmentalstaff within Ministries which regularly receivebank loans (for strengthenedtraining in assessments,implementation,supervision,and monitoring)is a critical futurestep; and this training should includenatural hazard risk-assessment.The environmental dialogueand trainingstrengthenedthe regulatorSEDUEbut did not sufficientlystrengthen Ministrieswho were ongoing loan recipientsso that they could be environmentallyskilled enough to implementand monitor the projects. 88. The role expectedof the Bank not only includestechnicalassistancethrough dialogue, training, and support for specific environmentprojects, but also the acceptanceby the Bank of the responsibility for ensuringthat the likely environmentalimpactof projectsit financeshas beenduly assessedat project appraisal, and that design, implementationand supervision are sensitive to the need to avoid and/or minimize environmental degradation. Attention to environmental assessment, during the project preparation has been part of Bank practice regularly since the mid 1980's. The Bank's 1993 CSP outlinedfurther support for GOM's comprehensive environmentstrategythrough the creation of a new section in the Country Department to augment the work on environment in divisions dealing with agriculture, infrastructureand human resources. The educationof operationalstaff will make it much more likely that a Bank project will be environmentally sustainableby design. MEXICO'S VIEW OF THE ROLE OF THE BANK 89. From the precedingreview of Mexico's developmentstrategyand from interviewswith Mexican officials, it is possible to discern what has been Mexico's view of the role of the Bank in its development process. Two facts are beyond question. First, Mexicohas had at all times a clear idea of the role it wants the Bank to play in its development. Second, Mexico's view of that role has changedover time, the most dramatic change having taken place during the decade of the eighties. Throughout the relationship, obvious and high profile Bank involvementin policy decisions has been regarded by Mexicanofficials as politicallyunacceptable. This has not changed and is unlikely to change in the foreseeablefuture. This is generally reflectedin a preference not to have Bank advice linked to policy action, especially"advice"in the form of conditionality attachedto loans; and the areas where advicewill be acceptablehas been carefullylimited. For long, there was no dialogueon social policy, including topics like populationgrowth and education;recentlythis has changed. 90. Two factorsappearto have figuredimportantlyin the changein Mexico's attitudeto Bankadvice. On one hand, the Mexicanleaders and high officials have includedsince the beginningof the eighties highlytechnicallytrained economistsand others who were educatedin the US and Europeanuniversities, sharing a common academicbackgroundwith most Bank staff and willing to engage each other in an intellectualinterchangeon developmentpolicy and economicmanagementissues. On the other hand, the recentproblemswhich havebesetthe Mexicaneconomyhavebeen sufficientlyuniquethat Bank staff can  45 have no more claim to superior expertise based on experiencethan their client, and have adopted a "learningtogether" attitudeto the dialoguewith the Mexicans. This has been especiallymarked since the mid eightieswhen the MexicanGovernmentannounceda shift in strategy in line with what the Bank wouldhave counselled,and have followedup with measurestaken at a pace beyondeven what the Bank would have expected. 91. In addition, Bank managementhave recognizedthat Bank advice or intellectualoutput can only be an input, and only one in competitionwith other sources domestic and foreign, into a process of producingadvice and policydecisionswhich the Mexicanswish to keep under their control. In this way the final adviceand policy decisionis not identifiedwith a particular,especiallyoutsidesource of advice, which therefore becomes more politicallyacceptable. Thus, while Bank staff in the sixties wrote that "Mexicans want Bank moneybut do not needBank advice", in interviewswith Mexicanofficialsin 1992 many voiced the opinion that the dialogue with the Bank is highly valued and will be desired even if lending is phased out. 92. In interviews Mexicanofficials have suggestedthat Bank ESW, dialogue and advice have been useful in getting other parts of the bureaucracyto acceptchange that they wanted to induce. This role of provider of a respectedsecond opinionwas frequentlywelcome. However,this canbe a doubleedge sword becausea group to which the Bank adviceis acceptable may not be decisive,and Bank advice may be ignoredby the decisive group simplybecause it is associatedwith the views of oppositiongroups. Also, a decisive group may prevent the percolationof Bank advice with which is not in agreement. 93. Mexico's attitude to the Bank in its role of financier, has varied inversely with its accessibility to alternativesources. Officialsconcedethat the use of Bank financinginvolvescertainprocedureswhich can be costlyin time, flexibilityand convenience,and that where possiblethey prefer to use commercial sources. The caveatis entered, however, that since Bank lendingdoes usuallycome with an elementof technical assistance, the use of Bank funds sometimes turns on the importance attached to the TA componentin the particular project or program. The attitudeto the Bank as lender is closely bound up with the factthat Bank financingis usuallyseen as a "married"to advice, henceborrowingfrom the Bank is avoidedin some sectors where adviceis not desired and vice versa. It is also avoidedwhere it would constitute a small part of the financing required but may result in Bank influence on policy out of proportionto its participationin financing. 94. Certain types of Bank lending, specificallypolicy-basedloans, were consideredundesirableand becameacceptableonly when Mexicohad little or no access to alternativesources and when the Bank toneddown the conditionality or limitedit to certain sectors. This explainswhy there was no structural adjustmentloan as such; why the first operation was in effect a transfer of resources without serious conditionality;and why eventuallyall adjustmentborrowing was sector specific and undertaken after Mexicohad announcedas policy what then was included as conditionalityonly to ensure officials pay attentionto what the Governmentwants them to do. 95. There is a certainpragmatismthat has becomemore evidentover time in Mexicanattitudetoward the role of the Bank. One importantdemonstrationof this in the eighties is that Mexicoaccepted and welcomed the extension of the role of the Bank to include that of catalyst in helping it to mobilize internationalcommercialbank financing, as well as serving as a co-interlocutorin what has become a multi-sided international forum for discussion of Mexican policies at least insofar as they affect creditworthiness. This pragmatismhas also showedforth in willingnessto have Bank staff at the policy discussiontable in many areas in which their expertise can complementMexican expertisein designing  46 novel solutionsto problems, and in the recognitionthat it makes good political sense to have the best policy withoutregard to the original ownershipof the key ideas. In short, Mexicanofficials seem now to have the self-confidence to adopt and adapt outside ideas when it suits them; the outward orientation of economic policy and the opennessin trade is apparentlybeing accompanied by an opennessin thinking.  47 4. BANK STRATEGY FOR MEXICO 1. Bank strategy for dealing with any client is determinedby the Bank's perceptionof its role in developmentand by its assessmentof the client's developmentobjectivesand policies, as well as of the managementand performance of the economy. The strategy is based very strongly on informationand analysisof the economicand sector work, and finds expressionin the level and content of the lending program and in the intensity, content and form of the policy dialogue. The Bank's Role in Development 2. The Bank's perceptionof its role in developmenthas changed over time. Initially, its role in developmentwas to finance infrastructureprojects, reflecting a natural extensionof the early post-war emphasison the financingof reconstruction of the infrastructure of war-torn economies. Analyticalwork on developmentwas largelylimitedto the identification of new infrastructureprojects and the assessment of the adequacyof local cost financingas well as the ability to service additionaldebt. After a while it becameobviousthat investmentin infrastructure was not stimulatinga take-off into sustainedgrowth, so the Bankextendedits lendingrole to include investment in buildingup capacityin the directlyproductive sectors, and in human resourcedevelopmentmainly for school buildings. 3. Toward the end of the sixties Mr. McNamarabecame Presidentof the Bank, bringing a new vision regardingthe role of the Bank - it was to eliminatepovertyperceivedas a predominantlyrural phenomenon. In this role the focus of Bank lendingshiftedtoward integratedrural developmentprojects and urban sites and services projects both targeted at the poorest of the poor. Correspondingly,ESW was directed at assessingthe degree of poverty and identificationof the poor by developingvarious indicatorsof poverty. 4. The decade of seventieswas marked by massiveshocksto the internationaleconomy- two oil price crises, internationalrecessionthen stagflationfollowedby sharp increasesin internationalinterest rates - which called in questionthe general postwar approachto developmentbased on cheap fuel and cheap financing without the need for particular attention to economic management and the policy environment. As developingcountriessought to respondto these shocks it becameclear that the shocks reflected permanentchanges in the opportunitiesand constraintson economicgrowth that could not be adequatelydealt with through short term balanceof paymentssupport. While compensatoryfinancing could temporarily postpone some of the immediateburdens, profound adjustments in policies were necessaryto accommodateeconomiesto the new realities, and some longer term financingwas needed to reorient production and to spread the burden over a longer period, thereby enabling a smoother transition to a new growth path. 5. In the absence of other institutions suited to provide support to countries in the new circumstances,the IMF providingonly short-term support for stabilizationinitiatives and commercial banks not providingadvice and technical assistancefor policy re-design,the World Bank expandedit's role to meet the need. This was reflected in a relative shift from project based investmentfinancingto policy-basedlending for structural adjustmentof economies. By the late eightiesafter much experience with structural adjustmentgenerallyinvolvinga reduction in the role of the public sector, attentionon the developmentscenewas directedto the problemof the large debts, mainly of the public sector, which many clients had accumulatedin dealing with the shocks of the last decade or more. Again, the Bank  48 respondedto clients' need for assistancein approachingtheir creditors in an effort to restructure their debt with a view to reducingthe associatedburden. 6. These changesin the role of the Bank were motivatedby the desire of the institutionto respond to the needs of its client communityand were therefore influencedby the problemswhich they faced as a group. It is not usuallyeasy to identify the extent to which the needs of a single client influencedthe Bank's decisionsregardingwhat new servicesit wouldrender or what wouldbe the relativeemphasisof its policy dialogue. But Mexico's special problem of its externaldebt may have influencedthe Bank's decision to play a larger role than previouslyin debt restructuringexercises. Apart from this it would seemthat Bank strategyfor Mexicofollowedthe generalpattern outlinedabove. We will see below how and to what extent country circumstancespeculiar to Mexico modified the importanceof the Bank's general approachin determiningits assistancestrategyfor that country. Country Considerations 7. Unlike the newly independentcountries of Africa, South and South-EastAsia which emerged fairly recently from their colonial past and were still in the process of establishingstable governments and appropriate public sectorinstitutionswhen theyjoinedthe Bank, Mexico,independentfor a very long time, already had a long period of political stability, and had established institutions and time-tested proceduresfor administeringthe affairsof state and managingits economy. Economicdevelopmentwas still a new notion, and lack of expertise in planning developmentwas not a deficiency impeding the practice of the art of state. Thus Mexicodid not need outside advice in economicmanagement;the economyhad been growingvigorouslywithoutsignificantimbalancesor instability. However, a second opinion on the selection of investmentprojects coming from a potential source of financing such investmentmade sense. 8. Initially, Bank strategywas essentiallythat of a lender. As such, the Bank sought a handle on policies affectingfinancialviabilityof the areas to be supportedby these loans as a means of controlling the risks involved in lending. Motivated as any lender would to ensure repayment,the Bank tried to influenceMexico's total borrowing. Until near the end of the sixties the Mexicaneconomy continued to grow vigorouslyin spite of intermittentinflationarypressures. This made Bank staff recognizethat the Mexicanswere well able to handle their own affairs. They acceptedthat the Bank accountingfor a small share of the externalfinancingrequiredfor the public investmentprogram couldhave little chance of influencing policy. In this situationthe Bank's product was biased toward finance relative to advice. Lendingwas restrictedto infrastructure-roads, power, and irrigation. Advicewas mainlylimited to the need to increase public savingsto financedomesticcosts of an increasinginvestmentprogram. 9. Officially,Bank strategyeschewedthe use of leverage. 'Mexico is the last countryin the world in which the overt exercise of leverage can be expected to pay off".'' The reality was somewhat different. At the level of the Region, managementsubscribedto an institutionalphilosophythat held that the Bank shouldplay a more active role in developmentpolicy and strategy formulation. Althoughnot formallydocumented,this led to an approachto lendingwhich made it clear that the Bank was prepared to increaseor reduceits loansupport in "graduatedresponse' to Mexico's attentionto the macroeconomic -'Briefing paper for the visit of Bank President McNamarato Mexico, prepared by the Western Hemisphere Department; Nov. 26, 1969.  49 issues raised in the policy dialogue.YThis was understoodby staff. Bank managementat the Regional level believed that the Minister of Finance understood the unwritten macroeconomic conditionality-adequategrowth in publicsectorsaving-behind the Bank's lendingprogrameven though there were no program loans as such. 10. This adherence to a strategy of disguisedleveragegave way reluctantlyunder Bank President McNamara's attempt to redefine the Bank's mission as that of poverty alleviation, and his clear instructionto expand the operationsprogram in rural investment. The Region understoodthe political attractivenessof the povertyfocus but were not sure what Bank involvementshould be. They believed that the fundamentalpreconditionfor attack on poverty was to have a vibrant growth process in place; then try to ensure some benefits accrue to the target population. But, given the coincidenceof the rhetoric of PresidentEcheverriawith the vision of Mr. McNamara,the Region's views did not prevail. 11. Thus in the early seventies, the officialstrategy was to aim for lending of $200 millionper year but to be preparedto do substantiallymore if the Mexicansproved willingand able to absorb fundsmore rapidly than then seemedprobablein projectsbenefittingthe rural poor. The slowdownof the economy in the late sixties at a time whenthe Bank was turning its attentionto the productivesectors worldwide, also made the Bank responsive to Mexican interest in support for improvements in industry and agriculture. Effectively,the Bank strategywas to expandlending with minimalpolicy conditionality. 12. The strategy of "graduatedresponse"did not rest in peace; it was to be raised up formally but briefly between 1974and 1976. The CPP of November1974notedthat "a disquietingfeature of recent Mexican economicperformance has been a steadily rising current account deficit" and 'that public external borrowing rose sharply in 1973". A memo to files on the discussion with the Mexican delegationto CEPCIES in November1974suggeststhat 'it was made clear that in the event 1975were to develop along lines which resembledthose of 1974, some readjustmentin new lending might well becomenecessary. It was pointed out howeverthat this would take the form of a "graduatedresponse" in the contextof a frank exchangeof views rather than the implementation of any automaticmechanism which related our lendingto their performance". The frank exchangeof views did occur in April 1975 when a missionled by the Chief Economistfor the LAC Regionvisited Mexicoto indicateinter alia the criteria the Bank would use to evaluateperformanceand which would trigger adjustmentsin the Bank's lending program. 13. The 1975annualmeetingbrief, repeatingthe conclusions of the mid-termreviewof the Mexican economy,reported "slippagein the Mexicaneconomicperformance on almost all counts". While the review concludedthat lendingat the level set in the CPP seemedunwarrantedon performancegrounds, it also cautionedthat, in order to avoid adverseimpacton creditworthiness,the Bank's profile in Mexico should not be lowered precipitately. This provided the rationale for lending to continue without any apparent effect of a graduated response. Later in 1975 when fiscal and external account imbalances reached crisis proportions, several of the Bank's ExecutiveDirectors, in discussingtwo loan proposals amountingto over $200 million put before them on the same day, cited IMF criticism of Mexican macroeconomic management and expressedconcernat the apparentlyunlimitedlendingto Mexico. These concernswere based on considerationsof equity among countries, Mexicanaccess to other sources of finance, and of creditworthiness-the last shared by staff and indicatedin the President's Report. with formerLACDirectorsGeraldAlter andEnriqueLerdau. a'Interviews  50 14. Country considerationschanged dramatically with the announcement,and expansion in the exploitationof, newly discoveredoil reserves. Aware of the inflationarytendenciesalready at work in the economyand mindfulof the record of mismanagement of some oil economies,the Bank tried to get the GOM to agree to a rate of exploitationand exportationthat would not generate so much foreign exchangeas to result in the overheatingof the economy. But the oil in the groundhad a significanteffect on the perceptionof creditworthiness and Mexicosuddenlyhad renewedand expandedaccessto financing from commercialsources on attractiveterms. Mexicoshiftedto a high growth strategy which required investmentexpansionoutstrippingthe growth of export earningsfrom oil, and financed the deficit by borrowing. Bank lendingdepartedfrom the earlier counselof its ESW;-"a programinvolvinga transfer of $6 per capita may not be justified for a high income country' and 'reduction in Bank lending consideredfeasible withouthurting Mexico's accessto financialmarketsand can be structuredto avoid hurting the poor"'. The Bank, behavinglike the commercialbanks, lent more than seemed necessary or was warrantedby policy initiatives. Bank strategy seemedto be aimed at strengtheningits portfolio by lendingheavily to a clientwith enhancedcreditworthiness. 15. Country specific considerationscontinued to dominate Bank strategy toward Mexico at the beginningof the eighties in spiteof the Bankwidethrust in the direction of structural adjustment. While some staff (mainly the economicteam) regarded the Mexican expansionaryhigh growth approach as essentiallyflawedby its inattentionto stabilization,by its dependenceon massiveborrowing and money creationand by the maintenance of an overvaluedexchangerate, there were others who were prepared to go along with it uncritically. The latter group, which includedthe Division Chief, tacitly supported by superiors who failed to resolve the conflictbetween these two opposing influences, and who were willing to permit the increase in lending to unprecedentedlevels. Unsurprisingly, the latter group prevailed;and in 1981alone the Bank approved8 loans for a total of over US$1.1 billion comparedwith $253 millionin 1980and $527 million in 1979. 16. Country considerationschangeddramaticallyas a result of the financialcrisis in 1982. A new managementteam for the Bank's Mexicoprogramwas put in place, and immediatelyattemptedto shift the strategy in the direction of structural adjustment- a more sophisticatedversion of the "graduated response' approach in which access to balance of payment support is conditioned on country implementation of a previouslyagreed packageof policy measuresand institutionalmodifications. The newDivision Chiefrecollectsthat the Bank "triedto conducta macroeconomic dialoguein October 1982 associatedwith a program of quick disbursingdevelopmentpolicy loans with macro-conditionality, but the paper proposingthe strategyto Mexicowasrejectedby NAFINSAwho sawthe Bank as adoptingthe role of the IMF. Hacienda over-ruledNAFINSAand accepted".-# This acceptancewas face-savingfor the Bank, which correctlyregarded it as an act of diplomacyby Hacienda. The dialogueon structural adjustmentwas put on the back burner; the Bank choosing instead to seek how it could assist in the immediate financial crisis. Country circumstanceswere again the predominant influence on Bank strategy. The first loan of what was to have been the start of a structural adjustmentprogram became nothingmore than a financialtransfer to the Mexicansto help bridge the foreign exchangegap. 17. WhenPresidentMiguelde la Madrid came to office at the end of 1982and prime attentionwas drawn to negotiationswith foreign creditors to refinance the public external debt, the Bank faced the lIMemo dated Nov.4, 1974 from staff, PRD to Director PRD; - Mexico CPP - RVP Meeting. -'Interview with Pieter Bottelier, Division Chief of the Mexico Division during 1982 - 1983.  51 prospect of being sidelined unless a role could be defined for it in support of what was essentiallya stabilizationand debt refinancingexercise. This was certainlynot one of the Bank's areas of strength, but as the main repository of "objective"assessmentof country creditworthinesswhich is intimately bound up with economicperformance over the medium and longer term, the Bank was in a positionto respond. It did so by addinganother dimensionto its services- that of catalystfor private international financialflows. 18. In the course of the sotto voc dialoguewith Mexicoduring the next three years, Bank attitude to relations (the essence of strategy) became more appreciativeof the intransigenceof stabilization problemsand the priority of stabilizationin the sequencingof adjustmentactions. It also becamemore tolerantof the postponementof structuraladjustment,more realisticin recognizingthat it can only play a supportingand not a leadershiprole in designinga country's structural adjustmentprogram, and more acceptingof the fact that adjustmentdoes not have to start with a comprehensiveprogrambut can start small and be expandedon a pragmaticbasis. The Mexicans,meanwhilegrew to acceptthat stabilization and adjustmentwere intimatelylinked, and especiallythat trade reform involvingimport liberalization couldbe a tool in the fight against inflation.5' 19. As Mexico's commitmentto a broad programof economicreformwas made credibleby timely implementation of announcedmeasuresin the exchangerate, fiscaland trade policyareas, the Bank found it easy to settle into the task of supportingby ESW and lending a program that was owned by Mexico but acceptableto the Bank. At first the Bank focussedon trade liberalization. Later, buttressedby the Baker initiativewhich calledfor an expandedrole for structural adjustmentin the eventual solutionof the debt crisis, and by its new relevanceas a catalyst,Bank strategyfor a while becamemore confident and assertive. This was reflectedpartly in its abilityto get Mexicoto agree to the GeneralInterest Rate Agreement(GIRA)and in its willingnessto suspenddisbursement on 14loans in order to secure Mexican compliance. It was also evident in the tendency to push trade liberalizationas the single-sticksolution to Mexico's complex problems. However, reforms in the public sector includingtaxation, domestic financialsector, and in pricingpolicy, exceedingBank expectations,as well as the shift by Mexicoto its domesticallydesignedheterodoxstabilizationpolicy, engenderedgreater respect for the Mexicanteam and its efforts to stabilizeand its strategyof gradualbut deliberateadjustment. 20. By 1988, without attempting to push a comprehensiveSAL, Bank strategy became one of providingloan support for adjustmentin sub-sectorafter sub-sectorand in individualindustries.In that year Mexicoasked for $1.5 billionsupportfor a comprehensive restructuringprogram. The Bank agreed to include three operations in its lending program - Financial Sector Adjustment, Industrial Sector Adjustment,and Public Enterprise Reform. It was agreed that a study should precede the adjustment operations, but Mexican's were reluctantto release the results to the Bank, and it was not until after PresidentSalinascameto office that the full informationwas releasedto the Bank and the operationswent ahead.YThe Bank strategy of vigorously supporting Mexico's economicadjustment program in the FY86-90 period is reflected in loans totaling almost US$9.5 billion, about half of which were quick disbursing sector adjustmentand interest support loans. During this period, there was only limited 5'For a general review of this period see World Bank Publication - 'Restructuring Economies in Distress"; edited by Vinod Thomas, Ajay Chhibber, Mansoor Dailami, & Jaime de Melo; particularly Chapter 22 - Mexico: Adjustment and Stabilization, by John Nash. -'Based on interview with former Division Chief.  52 lending for physical and social infrastructureand none directly addressingthe problemsof poverty and the environment.2' 21. Present Bank strategyis built on the view that "the Government'sachievementsin stabilizingthe economy,managingits externaldebt, and completingmost of the required economicrestructuring,opens the way for a new emphasisin economicpolicy and in the Bank's role". Bank support for structural adjustmentis beingphaseddown, whilethe Bank is gearingto provideincreasingsupportto investments in economic and social infrastructure - the key constraints on private sector expansion and social stability.The strategy also aims at a gradual reductionin the Bank's alreadyhigh exposure in Mexico. Vestiges of the 'graduated response" can be seen in the proposal "to link the lending program to maintenanceof the Government's economicprogram, to link lending by sector to implementationof sector-specificpolicies, and to link lendingby project to realizationof project-specificactions"Y Future Strategy 22. Bank strategycan be expectedto continueto change as its perceptionof its role in development evolvesfurther and as time alters countrycircumstances.In general, changesin its view of its role have been few and no dramatic change is likely. The third dimension of catalyst/facilitatorin debt restructuringis likely to continueto be part of the Bank's acceptedfunctionsfor the foreseeablefuture. This does not necessarilymean that the Mexican debt managementwill continue to require significant input from the Bank, but it will be available if needed. Changesin country circumstancesin response to external shocks are obviously impossibleto predict; but changes in response to mismanagementor erroneouspolicies canbe regardedas unlikelygiventhe Mexicanrecord over the last ten years. It would thus seem that Bank strategy will not be subject to dramatic modificationbut should evolve along the emergingtrend. 23. The emerging trend in the dialogue is from macroeconomicto microeconomicand social concerns; that in lending is from structuraladjustmentto infrastructureto humandevelopment;and in project preparationinvolvesa gradual shiftingfrom the Bank to a joint effort with ministries,parastatal agenciesand municipalities.' This last will mean that a larger share of the cost of project preparation would be shifted forward to the borrower, thereby reducingthe elementof subsidy in Bank lending to Mexico-a not inappropriatemove as the country gets richer. The emerging trend in the strategy will also have implicationsfor the mix of skills in the Bank and for its deployment. As more of the project preparationwork is shifted to Mexico, Bank staff may have to be increasinglydeployedin the field, possiblyworking out of an enlargedfield office. Finally, as the emphasisshifts toward social concerns it canbe expectedthat the interfacebetweenthe Bank and Non-Governmental Organizations(NGOs)will become more importantand more formal. Z'Gist of section on 'Bank Strategy and Operations" from Country Brief dated Nov. 21, 1991. FA Country Strategy for Mexico; Sept. 5, 1991. 2 9This view is that of the immediatepast Director of Mexico Country Operations.  53 Concluding Remarks 24. Bank strategyfound expressionin ESW, the policy dialogueand the lendingprogram, which are treated in detail and evaluated in the followingchapters. For this reason it would be superfluousto attempt a separate evaluationof the strategy as such. 25. Instead, attentionwill be drawn to what appearsto be the outstandingissue in the formulationof strategy. This is the question of the meaning of "graduatedresponse" which has been a key concept underlyingmuch of strategy over the last thirty years. On one hand the "graduatedresponse" can be interpretedas equivalentto the use of leverage,with all its negativeconnotations. Yet on the other hand if the Bank is to be responsiblefor the efficientallocationamongclientsof the resources entrustedto it, then the extent of support in each case shouldbe related to the degree to which the Bank is satisfiedthat its support will be effectivelyutilized. 26. Bank staff have posed as an issue for managementdecisionthe questionof whetherthe strategy of linking investmentlending to policy conditionalityand the consequencesof this for the size of the program are acceptable.1w Surely the experienceof the last decade provides the answer. The Bank shouldhave the right to expectthat conditionality for lendingagreed in frank and collaborativedialogue will be respected. It is assumed that conditionality thus agreed will be consistent with the country's strategy. The only questiontherefore must be, not whether the countryis free to changeits mind in the light of changing circumstances, but rather what arrangements for consultation ought to be required/followedin order to give the Bank time to understandthe reason for change and to adjust its support appropriately. The formal Country Strategy Implementation Reviewsseem to have served this purpose, and, within a spirit of cooperation,has made of the "graduatedresponse"a positive and viable and acceptablestrategy. The future of "graduatedresponse" dependson whether it is seen as a weapon or a tool. 1'A Country Strategy for Mexico; Sept.5, 1991.  55 5. ECONOMIC AND SECTOR WORK HISTORICAL BACKGROUND 1. The Bank's first economicreport on Mexicoappeared in August 1948. In Feb. 1951 at GOM's suggestiona Bank/Mexicoworkingparty was set up, with jointly agreed termsof reference, to assess the major long term trends in the Mexicaneconomywith particularreferenceto Mexico's capacityto absorb foreign investmentand to its capacityto service additionalforeign debt. The main thrust of the report of the workingparty, which wascompletedin the latterhalf of 1952,was that a well-coordinated national developmentprogram supported by sound fiscal policies was needed to serve as a basis for Mexico's external borrowing. The report was well receivedin Mexico; and President Cortines in his inaugural speechlaid stress on the main recommendations of the report. Following this, the Bank was asked to commenton the new draft Mexicaninvestmentprogram. PEMEX, which had not cooperatedwith the workingparty, was critical of the reports treatment of the petroleumsector. 2. From the mid-1950sonwards Bank economicmissionsvisited Mexico every year or two and prepared reports on the current situationof the economy,periodicallyundertakingfull-scalereviews of the public finances, includingthe public investmentprogram, and the balanceof paymentswith a view to verifyingdebt servicecapabilityand creditworthiness.The Reporton the 1957-58InvestmentProgram concludedthat Mexicoshouldreview its subsidypoliciesand increasepetroleumprices, and that it would have to reducethe investmentprogramunless it took steps to improve its financialsituation. Mexican authoritiesagreed with the conclusions. Shorter updating reports on the current economicsituation continuedto be produced through the end of the 1960s, with the principal concern continuingto be to provide assurancethat policies were consistentwith growth and that there was no undue deteriorationof the balanceof payments. 3. While the Bank's emphasison poverty alleviationduring the 1970's might have tended to push economicreports in the directionof giving more emphasisto distributionalconcerns,rising inflationin Mexico caused the bank to pay attention to macroeconomics,mainly to the relation between public savings, debt managementand creditworthiness.The report of 1973 raised serious questions about the short/mediumterm financialand economicoutlook,and identifiedneeded actionsin fiscal, wage, interest rate, and exchangerate policy areas. However, after 1975,when an oil boom allayedthe concernsover creditworthinessand the Mexicanswere reluctantto acceptBankmacroeconomic advice, Bank economic reviews turned to look at the social situation, specifically- poverty, population growth, and regional imbalances;and at the impactof oil on specific regional economies.1' 4. In the 1980's the emphasis of general economic reports shifted from trying to assess creditworthiness strategyand to issuesof structuraladjustment, to the evaluationof Mexicandevelopment e.g. trade policy and tax reform. A draft Paper on Mexico's MediumTerm EconomicProspects was 1 'A Bank ESW mission said in its back to office report in 1979 - 'Mexico has in common with most developing countriesproblemsof absolutepoverty, income distribution, high populationgrowth rates, regional and sector imbalances, concentratedand rapid urbanization, inflation and unemployment. Mexico differs from them in that its recently discovered oil reserves (sixth largest in the world) have practically eliminated the foreign exchange constraint to its growth process and thus enabled it to grow at annual rates of 8 percent and above by way of an import sustained investmentexpansion well beyond 15 percent in real terms".  56 discussed with the Mexican Government in 1983. The Division Chief (Programs) wrote 'It is an importantdocument as it presents a plausible medium term perspective (through 1990) on Mexico's economicrecovery and the resumptionof growth within a consistentmacro-economic framework. It is the first documentof its kind that has been prepared by the Bank since the Mexican financial crisis of last year. As such it has potentiallygreat economicand political significance.... We are requestingthe Mexicansto review it so that their reactionsand commentscan be taken into account in preparationof a more fully fleshedout EconomicReport which should be available(in draft) later this year." 5. After reviewingthis paper and a joint review of the Bank's ESW program, the Governmentof Mexico invited the Bank to send a Trade Policy Mission in November of 1984. This resulted in a proposal of a multi-year, gradual reduction of QRs and tariff rationalization. A follow-upmission in April 1985assisted in a Bank financedtrade policy seminar in Mexicoin July of that year. 6. Mexicohas mademajor stridestoward restructuringits economyduringthe fiveyears up to 1991, and there is a new private sector emphasisin economicpolicy. Recent and present Bank ESW has been focusingon the transitionto a new role for the publicsector, on the environmentand on continuingsocial problemsincludingpoverty. NAFTA is likely to be the most profound factor on the horizon affecting the course of Mexican economicdevelopment. Bank ESW is already analyzingthe relevance for the Mexicaneconomyand developmentstrategy. 7. Special studies and sector reports have been done from time to time dealing with a wide range of topics and sectors, e.g. the Mexican capital market (1962), land reform system (1966), several on agriculture,industryand manufacturing,urban and transport, over the years; and more recently on debt strategy. The Bank has assistedand! or collaboratedwith the GOM in undertakingseveralmajor studies - e.g. a National Water Plan in 1974, a Public Sector InvestmentReview in 1986, and studies on the Financial and Agriculturesectors.Y A number of other studies have been carried out in Mexicounder the Bank's researchprogram, includingwork on householddemand and saving. OBJECTIVES 8. The basic objective/purposeof Bank ESW is to meet the informationneeds of its two principal audiences - the Bank and the Governmentof Mexico. For the Bank ESW serves to: 1) provide the analyticalfoundationfor the Bank's countrystrategy and its portfoliomanagement;2) providethe basis for the policy dialogue; 3) strengthenthe project pipelinethrough in depth sector analysis, i.e. project identification;and 4) providethe Bank with data requiredfor its global analysis. This last is important in the case of Mexicobecause of the size of its economyand its increasing importancein world trade. For the client, Bank ESW serves to monitor economicperformance, as a source of policy analysisand advice, and of informationon developmentexperiences in other countries. In addition Bank ESW supplementsthe basic economicresearchon the country. I'Mr. Clausen agreed to help in such studies and encouraged the Governmentto continue its policy of decentralization of decision-makingand of economic activity.  57 OUTPUTS 9. Bank ESW on Mexico is varied in compositionand has changed significantlyover time. In additionto general economicmemoranda,increasingamountsof sector work has accompaniedchanges in lendingas emphasison sectors such as agriculture, industry, and urban has replacedearlier emphasis on transport, electricity,and irrigation,and as the Bank preparesto assist in social sectors. In addition, outputof ESWhas been responsiveto current issuesin Mexicandevelopmentand economicmanagement. 10. In addition to formal economicreports ESW includesinformal papers, e.g. "work-outpapers' analyzingcurrent policy issuesand initiatives,and these are shared with Mexicanofficialsto serve as a basis for the policy dialogue. For examplea coveringletter from a ProgramsDivision Chiefto a senior Mexicanofficialdescribedthe work-outpaper as follows "The paper presentsthe Bank's views on what appearsto be needed to put the economyback on a sustainablegrowth track and to restore full access to private capitalmarkets. Several of the actions and policies suggestedin the paper have already been undertakenby the Government,or are under preparation. Others remain to be worked out. The main point of the paper is that only concertedaction in all relevantareas of the macro and sectoral policies offers a plausible prospect for successfully resolving the severe and acute economic and financial problems facing Mexico."-' 11. Some ESW has been in the form of technical assistance. For instance in 1984ESW assistance was providedto a technicalunit now calledthe Commissionfor Public SectorPrices and Tariffs which was invitedto send a delegationto the Bank. An internalnote reveals the Bank's attitude "All in all, we considerthe aboverequestfor assistancefrom the Bank a rare opportunityfor inducingreforms in pricing policies and reduction of subsidiesin the public sector, and it fits rather well with our work program." Bank staff also visited Mexicoto assistthe Commission in preparationof its studyplan and program. The Bank also responded positively to a request from the Bank of Mexico for help in disaggregatingthe accountsof the public and financial sectors, and worked along with that institution in improving its projectionsmodel.# 12. By the end of the 1980sESW on Mexicohad becomevery comprehensive.A letter from a Bank Country OperationsDirector to a senior Mexicanofficialto update him on the ESW in progress and to proposediscussionson its future contentpresentedthis formidablelist of tasks underway:-' a) Monitoringand PolicyDialogue. Macroeconomic * Macroeconomic Monitoring. * Macroeconomic Framework- modelupgrading. * Macroeconomic Factors of the Primary Fiscal Deficit. * Food Subsidies- report on the incidenceof untargetedsubsidies. * Free Trade Study - the potential impactof free trade on sectors. * BackgroundPapers for CSIR. I'Letter from LAC Programs (Mexico) Division Chief to Suarez Davila, dated May 1986. 4'Memo dated 11/02/84. 4Letter Director LAI to Lic. Gurria, Under-Secretaryfor Intl. Affairs in SHCP re ESW; dated 3/26/92.  58 * FinancialSector Reform. b) Project Pipeline Strengthening. * Study for the Transport Air Quality Management Project. * Study of coverage and efficiencyof the private irrigationsector. * Free Trade Adjustmentin Rural Areas. * Training and Labor Market Study. * Initial Education. * AGSALII - Evaluationof impactof pilot health and nutritionprogram. * Urban Strategy. * Transport SectorStrategy. * Water Supply and Sanitationfor the Poor. * IndustrialPollution. * Health Sector Policies and Financing. * Food Securityand Nutrition. * EnvironmentalIssues and Strategy. * Rural SocialSafety Net. ADMINISTRATION Planning and Coordination of ESW 13. Planning and coordinationof ESW within the Bank was initially informal and ad hoc when lendingprogramswere limitedto a few sectors and loans were mainly in responseto direct requestsfrom Mexico. Sector work responded to gaps in the informationfor project identification,while economic work was dictated by the need for creditworthinessassessment. In the 1970s country programming papers (CPPs)becamethe formal vehiclefor setting out and coordinating the ESW and lendingplans of the Programs and Projectsdivisions. In the 1980's CountryStrategyPapers have replacedCPPs. CSPs have tended to base the Bank's program firmly on economic analysis of the country's development strategy and the role the Bank perceives as importantand appropriatefor itself. 14. Planningand coordination of ESWbetweenthe Bank and GOMwas initiallyinformal, responding to requests arising on either side. Late in the 1970s, at Mexico's request regular consultationson the ESW were introduced. In response to the 1979 Bank report Mexico requestedBank collaborationin economicstudiesto supportvarious aspectsof development. Bank responsewas -"We proposeto gear Bank ESW to issuesof priority to Mexicorather than spend time on another macroeconomic report". In additionthe Bank agreedthat periodically(onceor twice a year) it would review the ESW program with Mexican senior officials. Country Program Implementation Reviews, covering both ESW and lending '"Meetingof McNamara with the Mexican Delegation - Ibarra, SHCP summarized his request for Bank assistance: a) capital goods industry; b) TA for project prep. & eval. in priority areas to use oil revenues wisely; c) preparing long- term strategy on the pattern of the study undertaken jointly by the Mexico and the Bank in the early 1950s.  59 were institutedon a twice yearly basis.2' The CPIR process has become more sophisticated, with a formalagendaand discussionpapers coveringnot only ESW and lendingbut issueson the policy dialogue agendaalso. 15. Bank ESW has tried to be responsiveto indications of future need for economicanalysisboth in Mexicoand in the internationalfinancial community. A Bank memo - Mexico: Prospectsfor Future FinancialSector Work - shows responsivenessof Bank ESW to what is happeningin Mexico. "In his attachedspeech at the PRI's Instituto de Estudios Politicos, Economicosy Sociales (IEPES) sponsored Conferenceon FinancialModernization held in Guadalajaraon February 16, Mr. Salinasde Cortari put great emphasison and attachedhigh priority to, the need for financialsector reform. The initiatives proposedby Mr. Salinasdescribedbelowwouldseemto offer great potentialfor futureBank involvement 1 in Mexico's financial sector."' 16. Evaluationof ESW has been rare. Two economistsof the Bank's DevelopmentPolicy Staff in 1978reviewed ESW focussingmainly on the seventies.YAbout 1986 anothermore critical reviewwas undertaken. Relevant underlying ESW, especially sector reviews, informing the identificationand appraisal of specific operations have sometimesbeen referred to in the Project/ProgramCompletion Reports prepared by the Region and in Project/ProgramAudit Reports. While these would note when an operationhas been handicappedby inadequateESW, they would not constituteserious and thorough evaluationof it. Resource Inputs 17. Another aspect of administrationof ESW concernsthe allocationand mobilizationof expertise. Chernickand Wright estimatedthat during the 1970sjust over 200 staffweeksper year were devotedto ESW for Mexico, not includingoverheads. 12 TRS data for 1985-88indicates400-500staffweekswere devoted to ESW.A' A Bank Strategy Memorandumon Mexico in FY84 put the Total Staff Weeks required for ESW set at FY84 = 463; FY85 = 506; and FY86 = 495. The ESW Program for FY86 was set at 402 staffweeksin the indicativestatement,and revisedto 332 in July 85. Estimatedstaffweeks requiredfor the FY89 programwasset at 542. The MexicoCountryOperationsDepartmentdevoted505 staffweeks to ESW on Mexico in FY88. The 505 staffweeks was about 75% of the 668 originally 2 'Memo from Senior Loan Officer to Division Chief, LC1A; dated 2/02/84 - 'To improve the quality of our programming reviews with the Mexicans, the followingmodificationswould be necessary: (a) institutionalizethe reviews to be held semi-annually in January and July of every year... (b) broaden its scope to cover review of lending strategy and project mix over a 3-5 year period, and to include programmingand coordination of future economicand sector work, and discussion of pressing issues, and (c) broaden participation in reviews to include Projects Division Chiefs and Assistant Project Directors in the Bank's team and key agencies on the Mexican side (in addition to Hacienda)". - tMemo dated 3/01/88. 1' Office Memo dated July 14, 1978 from Sidney Chernick (PPR) and E. Peter Wright (VPD): Evaluation of Economic Work in Mexico; with attached paper of the same title. 1 -LO/ cit., Chernick and Wright. -'However, Bank Memo dated 11/22/89 Economist,LA2CO to Division Chief suggeststhat there are problems inherent in the TRS which make it unreliable as a basis for precise estimates of time use for various tasks in the Bank.  60 programmed. While thesefigures maybe useful to give a rough ideaof howmuchtime has been devoted to Mexican ESW, they are not suitable for precise estimates,and specificallydo not take into account managementoverhead. 18. The ESWtable attachedto a draft CPP provideda breakdownof ESW accordingto who managed it; thus there is a) Regionallymanaged; b) COPD managed.W Of the regionallymanaged the several categoriesare i) EconomicWork; ii) SectorWork; iii) CPP; and iv) Other economicand sector work. An indicationof the approximateallocationof staff weeks for a typicalyear can be seen in the figures for FY84: Regional economicwork - 135 sector work - 155 cpp - 25 other ESW - 105 Subtotal 420 COPD managed - 30 Research - 13 TQ _al463 Joint Implementation of ESW 19. Beginningwith the work of the Joint Bank/MexicoWorkingParty in the early fifties, the Bank and Mexicohave collaboratedfrom time to time in joint economicand sector work. A few instancesof such collaborationare discussedin the ensuingparagraphs.The arrangementsvaried from case to case, from one-waytechnical assistanceto two-waysearch for information. 20. In 1984the Bank of Mexicoasked for Bank help in disaggregating the accountsof the public and financialsectors. 'I believethat by helpingthe Bank of Mexicostaff in the areas they have indicated,we would also benefit." This assistancewas provided. " Not only would we be in a better position to maintaina more meaningfuldialogueby sharing with them similar informationand analyticaltools, but also our economicwork wouldbe made easier, amongother reasons, throughbetter accessto and a more standardizedpresentationof critical information." "In summary, I suggest we go ahead with the Bank of Mexico in a joint program to improve our projections model. If we decide to do so, it will be necessary to prepare a work program, with their agreement, and incorporatethe Bank's information systemsunit to help us with the neededprogramming."2 21. In early 1985, the Mexican authoritiesand the Bank agreed to carry out a joint public sector investmentreview; with the Mexicanteam coordinatedby the Director Generalof FinancialPlanningin SHCP and the Bank team led by a SeniorEconomistfrom LAC. The main objectiveof the reviewwas dated 11/07/83 - Mexico: Strategy Memorandum. 12"Memo il`Memo dated 11/02/84.  61 to formulatea consideredopinionon the investment programand its major components.Its approachwas to start out with the "unrestricted"sectoral investment programs proposedby relevantagencies, to point out areas of high priority, and to identify the projects to be cut or deferred if warranted by tight budgetaryceilings. One of the findings of the review was that, as a result of the high levels of public investmentprior to 1982and of the sharp reductionin growth, there was widespreadexcess capacityin many sectors. Thus there was potential to cut back investmentsfor a few years without creating excessive bottlenecks. Withthe aggregation of investment plans exceedingsubstantiallythe Government's financialcapabilities during the rest of the sexenio,and with scope for savingsand rationalizationin most sectors, the review was able to suggestan amendedprogram in line with the financial constraintsand consistentwith the country's more urgent developmentneeds.L' 22. A year later Mexico requested a joint GOM/Bank program of financial sector work to be undertakenunder directionof two senior officials,one from the Ministry of Finance(SHCP)and another from the Bank of Mexico, going so far as to specify by name the desired Bank staff representative. It is not clear from the records how extensivelyinvolvedthe Bank was in the work that followed,but it appearsthat the report prepared mainlyby a team of consultantsinfluencedMexico's attitudeduring the preparationof the financialsector componentof the subsequentFinancialSectorAdjustmentLoan, which was appraisedafter little preparatorywork in October/November1988.' 23. There havebeen instancesof joint sector work. In 1984the Bank and SARH agreed to perform a detailedjoint analysisof the problemsof agriculturalextensionin Mexico. A project based largely on the findingsof the report was approvedin 1987. Another exampleis the MexicoUrban Water Supply and SewerageSector Study: Institutionaland Financial Constraints.Report No. 7109, June 30, 1988. This report is of a 1986 sector study, which estimatedthat in order to maintain 1986 service levels, approximately US$0.7 billion wouldbe required; and in order to meet the year 2000 service level targets - 94% coveragefor water supply and 82% for sewerage - a total of US$17.2 billion (1986$)would be needed. Preparedby the Bank and Mexico,the study reportwas not releasedfor publicationand wide dissemination (it reached green cover in the Bank), but its principalconclusionswere incorporatedin the NationalProgram for Water and Seweragefor 1990-1994preparedby the ComisionNacionaldel Agua. FOCUS 24. The focus of BankESW on Mexicochangedover time mainly in responseto economicproblems and opportunitiesfacing the country and in responseto changesin Mexican attitudes to Bank advice. Bank economicwork changed in response to the slow down in growth after 1970 and after the 1982 crisis. As the nature of the problemsfaced by the economybecamemore complexand macroeconomic in nature, and as there was a paucity of readily availableacceptedeconomicrecipesto deal with the new challenges,Bank ESW with its base of vast cross country experiencewas seen increasinglyas a useful adjunctto ESW by Mexicantechnicians. Mexicanattitude to Bank ESW has softenedover the longer term, except during the mid-seventieswhen the oil boom fostereda sense of independenceof the Bank -'Mexico: Public Sector Investment Review - A Joint Report, August 5, 1986; Report no. 6371-ME. U'Memodated 9/26/86. 1 VProjectCompletionReport for the Mexico: Financial Sector Adjustment Loan (Loan 3085-ME) June 1992; para. 10.  62 and its analyticalwork. By the beginningof the nineties, focus of Bank ESW was no longer constrained by the existenceof tabu subjects, and Bank ESW has shifted to catch up with a backlog of work in formerly proscribedsubject areas. 25. The evolvingperceptionwithin the Bank regardingits role has affected what the Bank wanted to know about its clients; and, in the case of Mexico, has pardy affected the focus of ESW, especially as regards the relative emphasison general versus sector economicwork. Thus as the Bank saw its role in broaderterms as fosteringdevelopment through appropriatepolicy as well as through lending, and as this role changedwith the rising concern with structural adjustmentafter the oil crises of the seventies, Bank economicwork on Mexicoalso changed. However, Bank ESW with a structural adjustmentfocus was delayed by the 1982crisis and by the priority given to stabilizationconcerns by the Government. It was not until 1984, when it started to become clear that the stabilizationthrough demandcurtailment alone wouldfail, that Mexicoturnedto considera strategyof profoundstructural changein the economy, and Bank ESWon structuraladjustmentwhich had been simmeringon the backburners was able to come to a boil. 26. The change in economicwork from monitoring of economicperformance and assessment of creditworthiness to analysisof strategy and policieswas originallytriggered by the slowdownin Mexican economic growth in the early seventies. Sector work moved in the same direction from project identificationto sector policies. Chernickand Wright saw the main focus of economicwork during the seventiesas havingbeen on the composition of public investment,publicsector financingand the external balanceof payments. Althoughmacroeconomic work did not abandonconcern with public financesand public saving, main topics for the next three years after 1982 were inflationcontrol, export expansion and trade liberalization;which it saw as essentialto a viable external account over the long haul.2' 27. Although concern was expressed from time to time about the distribution of the benefits of growth, 1969and 1970economicmissionswere the first to highlightthe problemsof poverty,population growth and unemployment. By 1972 the Bank was strongly pressing the GOM both on the population issue and on the problemof rural poverty, themesdevelopedin the 1973basic report. This was during the period of the Echeverriapresidencyin Mexicoand of McNamara'swar on povertyfocus in the Bank. Recently,ESW on socialconcernshas becomeimportantagain as the turnaroundin the economyhas left unsolvedthe problemsof poverty,nutritionand health, regionalimbalancesand inadequateeducationand training. The 1989report on "A Strategyfor Poverty Alleviation"is one of the more importantpieces of ESW in this area which the Bank has producedin recent years. 28. The latter eighties saw a shift in the relative emphasisof ESW toward sector work. There was a sharp increase in the work on agriculture,industry and manufacturing,the financialsector and on the urban sector. This was justified to support sector adjustmentlendingto these areas. During FY88 the ESW programfocussedon i) assessingprogress in liberalizationof trade; ii) supportingthe dialogueon inflation; iii) studies to identify additionalareas of needed reform; iv) major health finance study; v) IL/Thepresentation delivered by Frederick E. Berger, on behalf of the World Bank, at the Meeting of the Steering Group of Banks for Mexico, New York City, July 17, 1984 noted five priority areas of Bank involvement: -Public expendituresand investment; -Financial Policy; -Pricing policy, subsidy reduction and cost recovery; -Employmentgeneration and poverty alleviation; -Trade policy and export development.  63 studies in areas directly supportingnew lending initiatives. ESW for FY89 focussedon (a) completing the Trade Impact Study; (b) completing studies on complementarystructural reforms, notably on industrial and transport deregulation and banking reform; (c) completing assessment of the main determinantsfor macroeconomicconsistency;(d) pressing for a consensusapproachwith the GOM on addressing key adjustment-relatedsocial sector needs in rural poverty, nutrition, health, and the environment,and the design of more effectivemeans for targeting. 29. Accordingto the FY90 Work Program & Budgetthe outlookfor ESW in the ninetiesanticipates a continuingtransitionin BankESW awayfrom issuesassociatedwith the now advancedprocessof trade policy liberalizationtoward emphasison complementary sectoral reforms needed to raise international efficiencyof productionand improvepublic sector management. Emphasisis now on preparing twice annually MacroeconomicMonitoring papers focussing on consistency issues central to longer-term stabilityand the successof on-goingstructuraladjustment loans in Trade, Finance,Industry,and Exports. As part of the dialoguewith the authorities,these papers are discussedat the bi-annualCountry Program Implementation Reviews (CPIRs). 30. In addition,the Bankhas been studyingthe changesin the Mexicaneconomichorizon associated with the North American Free Trade Area, and this has been reflected in recent ESW Programs and justified in the followingwords. "The free trade agreementwith the United States and Canada (FTA) is the most importantstructuralreform that Mexicois likely to implementin the foreseeablefuture... Our ESW will focus on the consequences of reforms whichthe FTA is likely to bring about in agricultureand services,the sectors currentlyleast open..." "A fourth area concernsenvironmental policies. Our efforts regardingthe environmentwill be linked to urban and transport work already in progress.... A major issue, beyond the importanttechnicalaspectsof pollution, is the economicassessmentof pollutioncosts, the current regulatory framework,and alternativeincentiveschemesfor reducingpollution.""' Work Review of Macroeconomic 31. Macroeconomicwork focussing on GDP growth, public sector saving and the balance of payments has always been part of Bank ESW, but became increasingly important after the high performancephase came to an end in the early seventies,and assumedthe main focus after the crisis of the early eighties. During the eighties, macroeconomicwork revolved around the elaboration of projectionsand the analysisof alternativescenariosto see the likely requirementfor policy adjustments to stabilizeprices, foster growth in output and employmentand strengthenthe externalaccount. 32. It must be concededthat the Bank's officialESW failed to predict the economiccrisis of 1982; partly becauseof the lack of ESW on the oil sector and the role of PEMEX in the explosionof Mexico's externaldebt at the beginningof the eighties, and the failureto heed a minority opinionamongBank staff which forecastthat the monetaryexpansionand fiscal imbalancehad in it the seedsof a runawayinflation which in the absence of exchangerate correctionwould underminethe balance of payments position. However, the Bank movedimmediatelyto correct this by sending a missionto assess the medium term prospectsfor the Mexicaneconomy. It foundthat in 1982there had been marked deteriorationin some economicindicatorscomparedwith 1981. Growth was down, inflationup, and the public sector deficit up, contrary to the expectationsof a 1981 mission. The mission saw correctlythat as a result of its current difficulties,Mexico's prospectsfor GDP growthand employment would be affectedby two main U'See Bank Memo with Attachment - Proposed ESW Program dated 12119/90.  64 constraints:1) the needto moderateaggregatedemandthroughcontractionarymonetaryand fiscalpolicy, and; 2) the ceilingon importsdictatedby the availabilityof foreign exchange. This perceptionset the tone for macroeconomicwork for the next few years - stabilization and structural adjustment, specificallytrade reform. Stabilization 33. Bank ESW in late 1982waspessimisticaboutthe appropriatenessand efficacyof Mexico's initial reactionto the crisis. "Unfortunately,no conceivablereductionin aggregate expendituresseems likely to bring inflationdownto the level of Mexico's trading partnersby the end of the year: hence, at the end of 1983the countrywill still face high inflation,but after at least one year of a severecontraction"."The foreignexchangecontrolsadoptedin September,and to a lesser degreethe nationalization of banks seem meant to providesome flexibilityto domesticpolicies,by insulatingtheir effectsfrom the externalworld. Somemeasurestaken after September 1 - decreasein interestrates, dual exchangerates- suggestthat the authoritiesare attemptinga 'supply-side" approachto reduce inflation".' The EconomicMission of 1984sensed the failure of this stabilizationstrategy. The leader's BTOR reveals the missionsmixed feelingsin the following: - "The MexicanEconomyno doubt continuesto show signs of improvement (GDPhas startedto grow, and the private sector is more confident),but economicstabilitystill appears to elude Mexico. ... We believe that the Mexicanpolicymakersare, or soon will be, at a crossroads. For reasons I elaborateon below, they will face some tough decisionswith respectto their policy on the exchangerate, interest rates, and wages....". 34. The sameBTORhighlightedthe inflationrisk, the probablecontinuedexchangerate appreciation, and the need for tight control over the fiscal deficit, but warned of the risk of rising unemployment. "The prospects of economicrecovery and successful conclusionof the economicstabilizationprogram essentiallyturn on the control of inflation. That provides, as I see it, the context in which the success of fiscal, price, and trade policies willbe and shouldbe judged." "If the Governmentwishesto continue with the present exchangerate/interestrate policy, inflationhas to declinesharply in the comingmonths, perhaps not to exceed 30% during 1985. Most people doubt that it can be achieved." Causes of the persistent inflationwere easy to identify; some candidateswere: i) raising of public sector controlled prices; ii) monetaryexpansion- far greater that foreseenin stabilization program,due partly to a public sector deficitfar higher than budgeted, and a large increase in foreign exchangereserves ($3+ bn.'84) uunatched by domesticsaving. 35. Mexicodid not wishthe Bankto become involvedin the stabilization work which it saw as being the role of the IMF; and for some time after the report of the 1984mission Bank work avoided further concernwith stabilization.The exceptionwas the joint work on the PublicInvestmentBudgetrequested by the MexicanGovernmentin 1985. Instead, Bank ESW soughtto tie its concernwith stabilization to longerdevelopmental concerns,especiallythe growthand diversificationof exports. 'It is usefulto point out why the option of reflatingthe economywhile it remains protectedfrom outside influences is not feasible". The more prominent role of the Bank in the Baker Initiativeof the mid-eightiesshifted the 121 Back to Office Memo of the leader of the Mission dated November 2, 1982. LMemo dated 11/16/84; Senior Economist to Division Chief, LCIMX -"Mexico: Updating Economic Mission, October 17-27, 1984; - Back-to-Office Report".  65 focus of ESW toward laying the groundwork for quick disbursing structural adjustmenttype lending althoughthere has never been a structural adjustmentloan as such. Adjustment 36. 'In late 1987, the de La Madrid Governmentasked the Bank to prepare a set of brief policy papers which could serve as inputs to a planned Governmentalreview of the past six years for the purpose of identifying key outstanding issues as well as bringing to bear relevant international experience."U' After further discussionsin early 1988narrowed down the list of possiblethemes, the papers were completedand submittedto the outgoingGovernmentin the fall of 1988 and subsequently shared with a high leveltransitionteam of the incomingGovernment. These papers essentiallypresented an assessmentof the fundamentalissues for future structural change, continuedshort term stabilization requirements,and externalfmancialsupport. The focus was on reconcilingshort-termstabilizationwith a sustainedrecoveryof economicgrowthand, significantly,standardsof living. This collectionof papers was to set the tone for the major concernstreated in subsequentESW in that while attentionwas given to macroeconomicstability and sustainedgrowth, trade policy and regional development,significant attentionwas given to poverty issues, health and nutrition, and the environment. 37. With the Governmentof incomingPresidentSalinasde Gortari giving clear signals of a change in strategytoward a relatively larger role for the private sector compared with the public sector, Bank ESW plannersrecognizedthe need for reforms to make the relativelysmaller future public sector more efficient. The study - Fiscal Reform for Efficient Growth in Mexico - is an example of recent economicwork in this area whichthe Bank did in 1989to supportthe latest phase of Mexico's economic adjustment. Mexicoin Transition:Towards a new role for the public sector - a report done in 1991 continuedin this vein, but is more a tome on future strategythan on macroeconomics. Startingfrom the view that micro reforms will fall short if there is no macroeconomic stability, it goes on to analyzethe relationshipof public policy and macroeconomic stability. The report devotesmuch space and analysis to the topic 'Public Policy For Where Private Markets Fail"; its principal conclusionsrelating to 1) Poverty Alleviation; and 2) EnvironmentalPolicy. Additionally,the report deals with the issue of "MaintainingPublic Sector Infrastructure" and reaches important conclusionsregarding the rate of growth and compositionof public investmentrequirements. Finally, the report warns that the recent dramatic increase in investmentdepends in part on returned flight capital which is a volatile source of financing;and unless private savingsrecover strongly in Mexico, findingmore stable sources of foreign financingwill remain a high priority. 38. Macroeconomicmonitoring missions have continued into the nineties, the main output being briefingpapers for the twice yearly Program Coordinationand Implementation Reviews.The missionof mid-1991reported on the slowdownin economicgrowth in the first quarter of that year as well as the slowdownin exports;and notedthe continuationof large private capital inflows as well as the growing public sector primary surplus accompaniedby an increasedfinancialdeficit. Given the principaltasks currentlyin the ESW program,macroeconomic work will continueto be an importantpart of BankESW althoughthe relative share of resources devotedto it is likely to diminish. Selected Policy Papers; Report No. 7813-ME, June 1989 - page i of Executive Summary. L'Mexico:  66 Sector Work 39. The primary meansby which the Bank assessesMexico's needs for both sectoral development and policy reform is its sector work; the Bank's analysisof the sector together with its recommendations for developmentand policy change are embodiedin sector reports and in sector chapters of economic reports and memoranda,which are updatedand revisedfrom time to time. In principle,these documents should consider the near term, medium term and long term needs of the sector. As a comprehensive document on the sector, the sector report should be regarded as the foundation for the entire Bank/Borrowerrelationship insofar as the sector is concerned. The following review of ESW in representative sectors will provide the basis for evaluating the extent to which sector reports have generallymet these requirements. The Bank's ESW in Agriculture 40. Having made its first two agriculturalloans withoutthe framework of an explicit strategy, the Bank mounted its first full-scale economicand program mission to Mexico in 1963; it included two agriculturespecialists. The findingof this mission,that irrigationand credit were the two top priorities for Bank investmentin agriculture,obviouslyinfluencedBank lending for quite a few years (see World Bank 1964). On the other hand, the concernexpressedby the report about the numericaland budgetary inadequaciesof the farm technology extension systemz' (para. 241) were apparently not taken very seriously;these weaknesseswere to plague many of the Bank-fundedprojects for years to come. The report did not deal at all with structuralaspectsof Mexico's agriculturesector, includingland tenure and the problemsof the rainfed regions of rural poverty, or with the impact on the sector of certain macro and micro-economic policies. 41. The first Bank-commissioned, in-depth agriculturalsector study (World Bank 1966) was done when Mexico's food productiongrowthrate had begun to decline. The agriculturesector annexof this first full-scaleeconomicsurvey of Mexicowas preparedby two prestigiousconsultants'. They defined actual governmentpolicy at the time as being based on the assumptionthat ultimatelythe countrymust get people out of agricultureand that it should proceed with all due speed in the developmentof other sectors. The report concludedthat in a very real sense, public policy had been to create a new and commercialagriculturealmost from virgin regions;while attemptsto modernizeand reform established and traditionalagriculturehad been ratherweak. The resulthad been to concentratethe benefitsof public investment and modernizationamonga limitednumberof farmers. The team's most positivefindingwas the surprisingly advanced state of technologicalknowledge in the sectorVf (including "prodigious increases in rainfed maize yields"). The report then noted that among the areas for which research 2It is not known how seriously the Bank considered the report's statement that, outside of irrigation, the quantitatively most important programs consist of the expansion of storage facilities of the government-owned National Storage Company" as well as the SAG's bunding program for water storagein dry areas and the intensificationof the cattle tick eradication program. WProfessorof agriculturaleconomics(now emeritus)Dan Freebairn of Cornell University, a specialist on Mexico, and the late Wolf Ladejinsky, one of the Western world's top experts on agrarian affairs (though specialized in Asia). W"Mexicohas reached a degree of distinction in scientific progress in agriculture unmatched by other countries in comparable levels of economicdevelopment.Its agricultural scientistsare respected members of international associations of agronomists ... (p.29).  67 neededto be emphasized,were those in the central plateau regions and the high valleys which have at least minimalrainfall for effectiveagriculture(700mmor more) and which are also the high population centersof the country. The agriculturalprice policiesalso came in for some early criticism, with respect to their socio-economic and fiscal impact,> and an alternativepolicy was suggested. 42. Aside from confidentialor limitedcirculationdocumentscriticalof Mexicanfarm policies, it was not until near the end of the Lopez Portilloadministration,and a full sevenyears since the last (and first) major sector analysiseffort, that the Bank did anothermajor agriculturalsectorpolicy review. The final report (World Bank 1983a)judged that "economicefficiencyhas not been observed in the past' and it indicatedthe directionin which pricingpoliciesshould be changedwere economicefficiencyto be given more importancein the developmentof a new strategy. The domestic maize price in 1981 was about twice the Bank-forecastinternational price, whileproducerprices for wheatwere below the border price, so that wheat had to be imported in all years during the preceding decade except 1976. 43. Accordingto a former staff member, the Bank's original agriculture sector mission in 1982, headedby a senior economist,was declared"unacceptable" by the GOM. On the other hand, the report of a successormission, while well-received by the Bank's regional projectsdivision,was rejectedby the regional chief economist and the vice president2yand a conflict ensued between the country program and agricultureprojects divisions. The staff member who was subsequentlyrecruited to rewrite that report and the responsibledivisionchief, in turn, were also received coldly in Mexicoand were unable to see policy level personnel. Not surprisingly,the report failed to make any discerniblepolicy impact at the time, even though, it was finally "issued"by the Bank in January 1983. The report, however, may wellhave been the foundationfor the timid beginningof the policy dialoguein 1986and for its open and earnest sequel beginningafter 1988. 44. Largely based on an internalpolicy analysispaper two sector adjustmentprogramloans and five non-projectloans ... were approvedbetween 1987and 1991. This paper was precededby an Agri Sector Report (World Bank 1989c)based on a ten-member1988mission. The report was not completeduntil after the approvalof AGSAL1,which, however, incorporatedmuchof the mission's findings. This was followed by an AgriculturalFinancial Subsector Study which was conducted under the Ninth FIRA Project and receivedin the Bank in 1988. Electricity& Power 45. There is no trace of any formal sector work carried out by the Bank during the early period of Bank involvement(throughthe mid-1970's),be it on the power sector itself or on broader energy-related issues. The Bank's objectivesand overall strategy for the power sector were never made very explicit 2'"Price programs which have had difficultiesin the past are not likely to be more successful in the future unloe they are geared more nearly to the basic national policy for agriculture... and the opportunity cost of transfers is high in terms of productivepublic sector expenditures and investments... Poor farmers, with their stagnant low levels of production, just don't produce enough tons of product entering commercial channels to materially benefit from [price support] subsidies.' (p.33). 2-WReportedly, that the farm sample on which sensitive domestic resource cost at a review meeting with the explanation and protection estimate for cortain commoditieswere based 'was too small". One of the principal authors of the rejected report was a prestigious agricultural economist who a few years later became agriculture minister of his country and is currently a high official of the IDB.  68 in reports producedthroughoutits initialperiod of involvement,i.e. from 1949to 1972. A fresh look at the sector was made possible in the context of the Bank's 1985 Public Sector InvestmentReview in which sector specialistsparticipatedand contributeda chapter to the final report (issuedin 1987), with sectionson both the power and petroleum subsectors. It is noteworthy,however, that the renewal of Bank lending in 1989 was not preceded by any broad ESW work on the power subsector itself or the energysector as a whole; the two energy-relatedESW tasks on record are a study of Industrial Energy Rationalizationcarried out by the Industry Department in 1985 and a Study of Sectoral Electricity Demandcarried out by the LAC Regionin 1990. ESW on the Transport Sector 46. Major reports on Mexico's transport sector were issued in 1964, 1971, 1975, 1987and 1989. In 1986, the Bank undertooka sizeabletransportsector missionwhich led to a widely-distributed sector report or "StrategyPaper' in the followingyear. In mid 1988, the findingsof a study conductedby the Bankamongindustrialusers, showedgeneralizedconcernwith the poor quality of truckingservices. The updated transport strategy report issued by the Bank in 1989 focussed on the quality of investment planningin SCT, which was said to be improvedbut the planningeffortwas criticizedas lackingrigorous economicanalysis. 47. Transport sector reports have presented the Bank's position on numerous issues relating to transport developmentneeds and possible policy reforms. As noted above, the reports contain many recommendationsconcerningthe utilizationof existing economicresources, mobilizationof additional resourcesand allocationof availableresources. Revisedand updatedreports have been issuedfrom time to time to reflect changedcircumstances. The reports have provideda useful basis for dialogue between the Bank and the Governmentas they have sought to resolve their differences and work toward the commongoal of optimum sectoral development. 48. These reports couldhave been even more effectiveas a foundationfor dialoguehad they been of greater depth and scope, been issuedwith greater frequency,and been more attentiveto continuityin systematicallypursuingimportantissues. There waslittle involvement of Governmentin choiceof topics, approachto be followedand timing of the sector work; the 1975 report is a case in point. A major criticismof the 1987report, both in the Bank and in Mexico,was the lack of a comprehensive long term view of the sector. Bank staff's priority attentionwas intentionallygiven to short term problems. This limitedscope wasparticularlyunfortunatesince theBank had not issueda comprehensive transportsector report in 12 years. The 1989 report was not based on a sector mission and therefore afforded no opportunityfor the Governmentto participate. The principalreason for the deficienciesof the transport sectorreports is that their preparationwas not accordeda high enoughpriority in the Bank and therefore sector work was not adequatelyplanned and funded. Positive results of the Bank/Borrowerdialogue during the period under reviewwere limitedby the inadequaciesof the transportsector reports prepared by the Bank. 49. The Mexican perceptionof transport sector work is more positive than that of Bank staff. A MexicanGovernmentofficialwho had been involvedin Governmenttransport planningduring the late 1960sand early 1970sstated in September1992 that, "Cooperationwas excellentbetweenBank staff and Governmentstaff in conductingthe study that led to the Bank's 1971 Transport Sector Report; Government personnelbasicallyprovidedinputsto the WorldBank team. A numberof projectswith the WorldBank had their origins in that report." With regard to later Bank sector reports, he commented, 'Many parts of the Bank's 1987 and 1989 reports were very useful." It thus appearsthat at least one  69 official with long experiencein the field consideredone of the earliest sector reports and the two latest sector reports to have been influential. Another commentof interest from this Governmentofficialwas that Bank transport sector reports had been used to good advantageby SCT as support for their own recommendations for which approvalwas needed from other agenciesof Government. ESW on Water & SanitationSector 50. The Bank's involvementin the water and sanitationsector in Mexico dates back to 1971when financingwas requestedfor a project, which in the Bank's opiniondid not reflect priority needs. As a result of problems during project developmenta sector study was undertaken by the WHO/IBRD CooperativeProgram with the participationof Mexican authorities, to assist in policy and strategy development for the sector. The report was published in 1976, and recommended a number of improvements with respectto organizationalarrangements and planningand administrative practices; and proposeda numberof studies, includinga tariff study. In 1984the Bank and Mexicoundertooka joint sector review to address the problem issues associatedwith the failure of the Medium Cities Projects, approved in 1976,1980 and 1983, to achieve their institutional and financial objectives. In 1988, issues wasprepared stimulatedby a continuinglack of progress, a specificsector study on the very samne by the Bank and Mexico. 51. Althoughthe report of the 1988study was not released for publicationand wide dissemination (it reached 'Green Cover" in the Bank), its principal conclusionswere incorporated in the National Programfor Water and Seweragefor 1990-1994 preparedby CNA. The reorganizationof the sectorhas been done more or less along the lines suggested in the 1988 report. Financing of the sector also generallyfollowsthe suggestionsof the report. The Bank in 1990approveda SectorLoan based on the experienceduring theprecedingdecadeand a half and on the recommendations jointly developedby Bank and Mexicanparticipants in the preparationof the 1988 sector report. The loan supports the National Programfor Water Supplyand Seweragefor 1990-1994, which also incorporatesthose recommendations. ESW on Industay 52. Early World Bank analysis in industry in the 1950s and 1960sdisplayed general agreement, probably justified in that period, with the basic thrust of the then prevailing strategy of import substitution. A Bank report in 1966stated that past industrialpolicieshave served Mexicowell in many ways; for, althougha large inefficientsegmentexists in the manufacturing sector, a modernand dynamic sector has also developed.2' 53. The first major report on manufacturing,in the 1970s,was issued in 1977. Beforethat date, the industrialsector had been dealt with in the 1973BasicEconomicReport but in a rather descriptive, general manner3A' In 1983, the second report on industry was released under the title of "Future 2'The World Bank, Current Economic Position and Prosvects of Mexico, Vol I, The Western HemisphereDepartment, October 26, 1966. pp. 14. Sector - Situation, Prospects and Policies," Report No. 1671-ME, May 1, 1977. Yi"Manufacturing ;'In 1964, a Public Sector Investment Program Review mission has briefly analyzed issues in government-owned industries.  70 Directions of Industrial Strategy".2w A sector report, "Country Industrial Sector Strategy Paper - Mexico'"3' was issued in 1985. After that, two reports (in 1986 and 1988) were mainly devoted to trade policies and economicadjustmentsand dealt with industrialperformanceto the extent industrywas affectedby trade and adjustmentpolicies. The last industrialsector report came out in August 1990and was devoted to industrial policy and regulationissues.-' In addition to these broad sector reports a Public Sector Investment Review mission visited Mexico in May 1985.3 It analyzed the necessary efficiency improvementsand restructuring needs of the parastatal industrial sector, particularly basic industriessuch as steel, fertilizers,chemicalsand mining. Findingson steel and fertilizerseventuallyled to in-depth subsectorwork and financingtwo sector adjustmentloans for steel and fertilizers, followed by restructuringand privatizationof Sidermexand Fertimex. 54. The 1977report expressedthe view that the average efficiencyof the sector comparedwell with other large import-substituting developingcountries,where protectionhad been considerablyhigherthan in Mexico, but not so well with the more open, export oriented, economies.The 1983Report reviewed the main elementsof sectoral policy in 1971-81(i.e., until the 1982 economiccrisis). It analyzedthe results of the import-substitution strategy during that period and studied particularly the subsidiesand protection systems, the industrial performance and structure and problems in the labor market. It emphasized that the adequatemacro-economic framework was fundamentalfor achievingthe objectives of sectoral policy. In this context, it recommendeda) the maintenanceof a real exchangerate which would favor domestic productionof tradeablesand b) achievinga structure of factor prices reflecting resources availabilities. The 1986 Report-' provided analytical support to two trade policy based operations in Mexico, the first Trade Policy Loan3' and the Second Export DevelopmentProject. 36 It was executedas a collaborativeeffort between a Bank team and counterparts in Mexico, and was structured to provide a series of intermediateoutputs, relevantto the policy dialogue surroundingthe Bank's operationalwork. Manyof the preliminaryempiricalfindingsand policy conclusions of the work were incorporated intothe designand documentation of thetwo trade-relatedoperationsmentionedabove. 55. The 1990report moved away from trade policy considerationsto a review of industrial issues includinggovernmentparticipationin priority industries,subsidizedcredit, tax policiesand labor market regulations. The report in its preparatory stages was an important input into the preparation of the IndustrialSector Policy Loan (June 1989), followingthe earlier practice of "linking"sector work and lending. It assistedthe governmentin formulatinga program for industrialregulatoryreform and served as a basis for policy dialoguebetweenthe Bank and the Government. It noted that trade liberalization 321IBRDReport No. 4313-ME dated May 31, 1983. "iWorld Bank Report No. 5686. 3'In addition to this some importantanalysison the manufacturingsector had also appeared in a general report, Selected Policy Papers -- Mexico. Report No. 7813; June 1989. "'Public Sector InvestmentReview - A Joint Report, August 5, 1986. 3'Trade Policy, Industrial Performance and Adjustment, Report No. 6125-ME, dated June 24, 1986. L"Approvedon July 29, 1986 (US$500 million). LI'Approvedon January 20, 1987 (US$250 million).  71 brought conceres about excessive or inconsistent regulations to the forefront. Subsequently, the Governmentreduced tax credits, increased prices on energy, reduced many of the subsidiesto state enterprises,and embarkedon a major privatizationeffort of banks and of the manufacturingsector. ESW on the Urban Sector 56. In early 1976 an urban sector expert did a paper for the Bank - "Low-IncomeHousing in Mexico". His conclusions,familiar to the urban sector in general, were that central governmentoffers the least efficientway to provide housing; people are far more effectiveat locating and building their housing than government, and; governmentshould do somethingto control land costs and to regularize land tenure. While both the Bank and Mexicoignoredthese recommendations for anotherten years and beyond, they both appeared to accept the expert's definitionof housing as a combinationof "shelter, tenure and location",to the unfortunateexclusionof infrastructurefrom the basic concernsof housing. 7t' 57. The activities of the urban projects division and the Bank's urban strategy for Mexico were influencedstrongly by a Bank economist,whose interest in spatial matters led to a series of studies on locationalaspectsof Mexicandevelopmentduring the 1970s. The Bank producedfour locationalstudies on Mexico: The Isthmus DevelopmentStudy, 1976; Urban Developmentin Mexico, 1977; Spatial Structureand Urban Development,1977; Impactof Oil on TabascoRegionalDevelopmentin 1980. The studiesdescribedthe historicdevelopment of Mexico's cities in termsof economically determinedregions and attempted to identify the up and coming regions for investment. Their final recommendations followed the concepts of contemporaryplanning: set target populations for urban areas and assign strategies so that growth does not exceed the limits, (mostlyby making alternativesattractive); locate industrialparks in key areas; emphasizean Atlantic-Pacific link; rationalizephysicalplanning, (meaning higherdensitiesin residentialareas and reduceddensitiesin centralbusinessdistricts). The Bank studies, in particular Ian Scott's "Spacial Structure and Urban Development", published as a book, are rememberedtoday with great respect by the SAHOP's former directors and by SEDESO's current technicians. 58. In 1984 the Bank carried out four new studies, each one oriented to the fast track development of sector loans and each presuminga new outlook - progressthrough reform (mostlyfinancial)rather than through physicalinvestment. The study of the MexicoCity Region, 1984...The "Housing Market SectorReport" and its final chapter, a stand-alonereport "Public Sector Housing"... TheBank's 1984 study "RegionalDevelopment and FiscalDevolution' whichtogetherwith the constitutional reformpassed early on by De La Madrid's govermnentto redefine municipalpowers, paved the way for municipal developmentproject along the lines the Bank had promotedin India. In 1989the Bank produced a set of selectedpolicy papers on Mexicoin responseto a direct request from the government. Urban issues appearedin papers on environment,water supply and sewerage, and on poverty. Social Concerns 59. "Poverty Issues in Mexico" - policy paper number 8 in the above-mentionedSelectedPolicy Papers is the outstandingwork on social concerns in Mexico. Followingthe 1982 crisis huge budget LVThe Mexicans never heard of this study. Bank strategy in urban did not often include sharing results and studieswith the Mexicans.  72 deficitsforced reductionsin publicwelfareprograms, threateninggains madeby the Mexicanpoor in the previoustwo decades. Prolongedreform and stabilization after 1983put considerablestrainon the poor. The paper presented a thorough profile of poverty before and after the 1982 crisis and analyzed the effectsof the crisis on the poor. It examinedin the depththe impactof structuraladjustmenton the rural poor and the differential impact of agriculturalprice policies, taxes and changesin the terms of trade betweenagricultureand the rest of the economy. The impactof adjustmenton the urban poor was also treated. Finally, the paper investigatedthe support arrangementsin the social sector. In all cases this paper attemptedto suggest some remedialactions. 60. In its povertyprofile up to the crisis the paper painted the followingpicture. In 1977, 40% of the Mexican householdswere earning less than half the minimumwage and their share in total income was about 10%. Between 1977and 1982householdsearning less than half the minimumwage declined to 6.6% of total households. Sectoraldistributionof the poor showedheavyconcentrationin agriculture- 52%; followedby 20% in commerce,servicesand transport. Although, as a result of economicgrowth and the manywelfareprograms, absolutepovertyhas declinedand many socialindicators, e.g. nutrition, life expectancy, health, education registered steady improvement, regional income disparities are significant- the poorest five stateshaving income per capita 52% of the nationalaverage and 28% of the richest five states. Most of the poorest states are concentratedin the center and south. The average consumption of caloriesand protein in severalstates is below the daily requirementof 2000 calories and 50 grams or protein. Serious rural-urbandisparitiesin income and poverty exist, and are confirmed in nutritionsurveys. 61. Its findings and suggestionsregarding structural adjustmentreflected a sensitivity to political realitiesnot common in Bank ESW at the time. The followingare illustrative: a) Food Subsidies:Eliminationof inefficientgeneralizedfood subsidieswere removedas part of the structural adjustmentand because they were benefittinga large number of non-poor, but their removal causeda sharp decline in the purchasingpower of the poor. b) StructuralAdjustmentand the Rural Poor: Policyreform may have improvedthe internalterms of trade in favor of agriculture/ruralsector, but the subsistencefarmers have little marketable surplus. The landlessworker in agriculturehas suffered as a result of a decline in wage income in the early stages of reform. Direct welfare supportis needed for those in abjectpoverty. c) Price Policy: The maizesubsidyhas contributedto budgetdeficits withouthelpingthe very poor who have no marketablesurplus. Taxationof cash crops has probablyreduced employmenton commercialfarms. d) The Impact of Adjustmenton the Urban Poor: While the commercialopeningof the economy is expectedto create employment,in the short run, the urban poor are bearing a heavy cost of adjustment.Growthin total employmentin manufacturingsince 1983has not kept pace with the labor force, hence unemploymenthas increased. e) Strengtheningthe Informal Sector: The urban poor's burden of structural adjustmenthas been lightenedby the informal sector. f) Social SectorSupport: Public investmentin the poor's human capital, through better nutrition, health care, educationand vocationaltraining will raise labor productivity.  73 62. The paper on Poverty Issues in Mexicowas not the only work in this area. The Bank also had a consultantstudy the effects of Mexico's manpowerretraining program. More recently the Bank has started a study of the adjustmentof the rural sector to free trade, specificallythe potential impact of NAFTAon the rural sector in order to identifythe investmentprograms required to reducethe possible negativeeffects on low-incomefarmers and landlesslaborers. 63. SomeESW with implicationsfor the socialsectorhas been undertakenwithinthe contextof work on other sectors. The Water Supplyand SanitationSectorStudy. ReportNo. 1278-ME,Volume 1: Main Report.August16, 1976.WHO/IBRDCooperativeProgram, LAC Region,World Bank, wasundertaken as a result of problems during project developmentin responseto a Mexicanrequest for financingin 1971. The objectivewas to assistin policy and strategydevelopmentfor the sector. The studypublished in 1976 recommendeda number of improvementswith respect to organizationalarrangementsand planning and administrative practices, and proposeda numberof studies, includinga tariff study. The current Mexico - Economic and Sector Work Program includes the launching of a study of income distributionand of the effect of public sector finance on incomedistribution. Other Studies 64. The TechnicalDepartmentfor Latin Americaand the Caribbean conductscross-countrystudies on issuesof broad interest in the Bank. The studies do not form a part of the country dialogue and are not intended to lead to lending operations. Rather, the purpose of the program is to deepen the understandingof Bank staff about specificissues and trends in the region. One exampleof this type of study is the Technical Department's region-wideStudy on Strategiesof Decentralization. The study explored the circumstances, constraints, developmental possibilities, and policy implications of decentralizedurban developmentin Mexico and singled out the CUDs and COPLADESarrangements as positive features in Mexico's decentralization. In this case, the objective was to understand the purposes of and experiencewith decentralization in the region. EVALUATION Criteria 65. The criteria for evaluationof Bank ESW include: a) relevance to Mexico and the Bank; b) adequacy - depth, correctness and realism in analysis of priority issues; c) usefulness - provides operationallyfeasible recommendations. The approach here is not to attempt to apply these criteria directlyto each piece of work, but to assume that these underlie the perceptionsof the clients and Bank staff as reflected in recent interviewsand in the written record over the years and to assume that these factors have determined at least partly the extent to which Mexican policy has coincided with the suggestionsof Bank ESW. The MexicanPerception 66. Boththe writtenrecord and the reactionsin interviewsconductedby this studyteam on a mission to Mexico confirm that in general the opinion of Bank ESW has been and still is very positive. The written record in Bank files is replete with memos and letters indicatingMexican agreementwith the essential findings of Bank ESW and appreciationfor its high quality. In a letter to Bank President Clausena former Ministerof Finance expressedappreciationfor the high quality economicwork done  74 by the Bank and went on to single out the macro-economicsection of a report. 2 v A Bank memo records that 'the senior officialsagreedwith the Bank's assessmentthat the progressachievedsince 1976 has been tempered by several shortcomingsrequiring priority attention: excessive deficits in public finance and in the balance of payments, leading to unprecedentedborrowings, inflation, low prices of publicgoods and services,proliferationof subsidiesand bad exchangerate and subsidypolicies".-' This does not mean that Mexicanofficials were indiscriminatein their praise of Bank ESW as the following commenton the draft 1981EconomicReport shows - "(a) The report illustrates,through the alternative scenarios, the serious implications of a continuation of present policies, but offers insufficient presentationof the "correct policies" required to avoid the crisis. Thus it gives the impressionthat the crisis is inevitable."Mexicansalso made the point that " whilepublic goodsand servicespricingpolicies are critical for the short-term financialequilibria,..., price adjustmentshave a high political and social cost"; implyinga veiled criticismof Bank ESW for insensitivity to the realities of government.1' 67. In interviewswith present and former Mexicanofficials conductedby the study team in Mexico in 1992 many praised Bank ESW for its quality, scope and relevance. These included many former ministers including of Finance. One former Minister said that the Government had benefitted significantly,especially in the area of project planning; and conceded that on occasion World Bank financingwas sought in order to get the benefit of the Bank's analyticalwork.M' He also intimatedthat the Bank, primarilyits ESW, was used by Mexican techniciansto push for policy changeswhich they sawto be in the country's best interest. This view was shared by several and perhaps the majorityof the officials interviewed. A former senior officialin the Bank of Mexicoand advisor to a former president and now a leading consultantin Mexico said that the image of the Bank as a source of good academic work on growth and national economic management is one of its most important assets. Yet he consideredthat the Bank had not demonstratedunderstanding of the nuancesof the Mexicanpublic sector enough to pretend expertiseon administrativereform. A former Presidentof Bancomextand Executive Director in the IMF commented that Bank economic analysis on Mexico was generally good, but sometimesrepetitive and too theoretical, giving as an examplethe Bank's work on the bidding system suggested for housing loans. The generallypositive view of Bank ESW by officials was shared by a intervieweein the academiccommunity,whosaid he found Bankreports useful and the quality good, and that there was general acceptanceof Bank ESW. Influenceon MexicanPolicymaking 68. There is evidencethat the Bank ESW influenceddirectly or indirectlythe course of Mexican policymaking. Examplesare: trade liberalization,and pricingof publicsectorservices. The mainfactor determiningthe likelihoodand degreeof influencewas the relevanceof ESW. The factors which would determine relevance include: a) joint planning of ESW; b) joint studies e.g. Report on Trade Policy, IndustrialPerformanceand Adjustment;c) the timingof ESW to address extant high priority problems; and d) the countryspecificityof ESW. -'Letter fromDavidIbarrato BankPresidentClausen,datedOct. 1981. 9tMemodated12/28/81. l°'Comments on the draft 1981reportas recordeda letter of 6/10/81. 4"Interview with Don AntonioOrtiz Mena, Secretariode Hacienda y CreditoPublicobetween 1968and 1970given in MexicoCity in September,1992.  75 69. On timing, one high Mexicanofficialhad this to say - "Sometimes it is not a problem of issues; Mexico did not open up to the World Bank because it was late in the sexenio".V Bank awarenessof the need to ground its ESW on knowledgeof the Mexicansituation is reflectedin the followingexcerpt: "The point that needs to be strengthenedis that we are not preaching on theoreticalgrounds alone but on the strengthof Mexico-specific analysesof reality.'"L'The importanceof relevancewas also reflected in the ESW innovationof the mid-1980s- the "work-out' paper, giving Bank reactionand analysisof 1 current policy initiatives." 70. The influenceof ESW partly dependedon the qualityof Bank staff and the degree of continuity in their assignmentto workon Mexico. "Personalrelationshipwith individualBank staff very important. Regularpresenceof Bank in Mexicoin 1983-84 paid off as people on both sidesgot to know each other" was a commentby former high officialinterviewedin September 1992. 71. It is not easy to judge how influentialBank ESW was. The followingquote from a letter written by a Bank Programs Director on behalf of the Presidentof the World Bank to a top official later to becomePresidentof Mexicoillustratesthis point. "Manyof the themesof your speech, such as the need for promotion of non-oil exports, real interest rates, adjustmentof public prices, productivity of investment,debt restructuring,etc. have also been highlightedin our EconomicReport of May 1984, and we hope we can broadenour economicdialoguewith the Mexicans. "4' The official, yet, had done graduate work at a top universityin the U.S.A. and apparentlyconcurredin their analyses. Bank staff recall that a few years earlier he had been critical of a Bank report that suggested that the public expenditure expansionfinancedby debt and moneycreationwould lead to inflation,which if unmatched by adjustmentin the nominal exchangerate wouldunderminethe growth of non-oil exports. 72. Bank ESW was not always influential. There were periods when the Mexicansdid not attach much credenceto Bank views. SometimesBank ESW was acceptedby groupsof technocratswho were not decisive(in the Arrow sense) at the time, but not by others who were more influential. The attitude of technocratsto Bank ESW was also affected by the realization that Bank and Mexican ESW were frequentlysubstitutes. n Mexicohas equallycapablepeople so we design our own solutions. Still the exposureto internationalexperienceis useful".4' "However,the Bank did produce limited circulation documents critical of Mexican policies; and did fruitlessly try to jawbone Mexican policymakers"- commenton usefulnessof agriculturalsector work by in Agriculturechapter of this study. 42 1 Vnterviewgiven in Mexico City in September 1992. 43 'Memo dated 6/23/86 LAC Chief Economist to Programs Division Chief for Mexico. "'Letter referred to earlier at footnote 3. 4 5'Letterfrom Director LC1 to Dr. Salinasde Gortari, dated 7/12/84, referring to the latter's presentationat the Wilson Center of the SmithsonianInstitution, copy of which Dr. Salinas had sent to Bank President Clausen. The Director was replying on behalf of Clausen. by a Mexican senior official during interviews with the study team in September 1992. 46'Comment  76 Bank Views on its ESW 73. Bank perceptionof its ESWhas beenrecorded in two studies - one by DevelopmentPolicyStaff in 1978and another by ERS in 1986. (See below.) The 1978study was not critical of the Bank ESW. In essenceit foundthat ESW had made a significantcontributionto the identificationand design of Bank projects, and that the general economicwork was highly appreciatedby top Mexicanofficials in the key ministriesand agencies with which the Bank mainly deals. 74. Referring to the ERS study "Mexico - Review of Economic and Sector Work", a Programs Division Chief wrote - "ERS has reviewed the main output of a limited sample of ESW for approximatelythe last 10 years. ... In the case of Mexico, the variationin quality over time was found to be particularlystriking."... "The ESW for Mexicountil 1977had significantshortcomings,particularly in that it lacked a soundmacroeconomic frameworkfor analysis,and was narrowly focused. The quality was improving,however, and reached a peak in 1979. The 1979report-singled out for its very high quality-was very good in identifyingthe key developmentissuesand exploringalternativedevelopment strategies. By 1981, the quality of the reports appearsto have declined; while the analysisunderlying the projections in the 1981report was good, the text was bland and at points incorrect. The last report that was reviewed, prepared in 1984, was better than the previous report, but it was not equal to the qualityof the 1979 report. A likely centralfactor underlyingthese differencesover time is the absence of a consistentanalyticalframeworkto guidethe ESW effort". 75. In addition, the files reveal that individualstaff voiced their opinion on various pieces of Bank ESW from tirne to time. "The draft economicreport is unusual in one purely negativeway; it predicts serious internal and externaldifficulties,suggeststhe type and order of magnitudeof needed remedial actions,but does not proposea detailedactionprogramthat wouldcope with the difficultiesand in which a role for the Bank can be defined". 4" Another in a commenton the yellow cover draft of Economic Report dated March 12,1984 said "it is rather disturbing that the report does not deal with the tremendousrural-urbanmigration,which has been takingplace in Mexicoduring the last 20 years or so. Any developmentstrategyhas to be directedat the fact that 75% of populationis urban." Staff were not always negativein their comments. For instancea back-to-officememo after a 1984mission recorded the staffer's feelings - "I have returned encouragedthat the Mexican officials do view our work as impartial, rigorous, and serious." 76. Notwithstanding the tone of the last memo,the evidencesuggeststhat Bank staff havebeen aware of the need to improve the quality of ESW, and have been quite realistic in their assessmentof its influenceon Mexicanpolicymaking. "Twopolicyareasthat cameup in virtuallyall our discussionswere the interestrate policyand trade liberalization. It appearsthat there is a trilateralstrugglegoing on with respectto thesepolicies." ..."I have returnedwith the convictionthat the Governmentwill movein these two policy areas at a pace determined by the dynamics of internal politics and strictly short-term exigencies. We certainlyshouldmakeour own analysisand policypositionmore rigorous,but we should recognizethat our policy advice in these matters will probably not yield impressiveresults." Events validatedthis view expressedin 1983.4v 2'MemodatedMay 16, 1966. 3'MemodatedDecember 8, 1983.  77 Linkagesto the Dialogue and to Lending 77. The linkage betweenESW and the economicdialogue and lendinghas been achievedin the case of the policy dialogueby the practiceof followingup economicmissionswith an end of missionmeeting with Mexicanofficials, sometimesinvolvingthe preparationof an aide memoire, and the sending of a mission to discuss the findings of the ensuing report. In the case of lending, linkage has been assured initiallythrough discussionof the countryprogram in an economiccommitteeincludingrepresentatives of programs and projects, and later through the more formal Country Programmingprocess involving the preparationof a Country Program Paper (CPP) and later through the Country StrategyPaper. 78. There is ample evidenceof Bank management'sappreciationof the need for such linkage. A memo from the Programs Director noted - " If properly done the kind of analysisemergingfrom this CEM shouldhave lasting impacton our policy dialogue and the shape of our lendingprogram." Years earlier the Division Chief had written - "The failure to achieveimplementation of adequatepolicies is the result of the complexityof the decisionmakingprocess in Mexico,... To this we couldperhaps add the inadequatelinkagebetween our lending conditionality and the outcome of our economicwork." 4' 79. The main link between ESW and lendingderives from the fact that conditionsto be attachedto loans are rooted in economic analyses revealing needed changes in policies and institutions. Conditionality attachedto lendingto Mexicohas been muchdiscussedwithinthe Bank. ' "...macro-conditionality matters... If Mexico continuesto be unable to reduce its public deficit much below 8% (thebest they havemanagedwith IMF support),demandpressuresare bound to spill over into imports. This will necessitateone of two defensivereactions:either accelerateddevaluation(which could fuel inflationand augmentgovernmentinterestobligationsexpressedin pesos)or a massivereturn to trade and capital controls. The first is unlikely to happen. The second would be in clear conflictwith the objectiveof instillingfaith in liberalization." There has been concern that the linkage be effective and that conditionality should be attached to operational tools not to theoretical concepts; - "again, w effectiveprotection... is not an operationaltool any more than the real exchangerate is. By including effectiveprotection as well as tariffs in the program we are assuming(same point as above) constant input-outputrelations (and good informationon these). Patterns of effectiveprotectionare an outcome, not a part of a program, and the samenominaltariff reductioncan be reflected in manydifferentpatterns of effectiveprotectiontrends." 80. At the same time the Bank has shown flexibility in regard to the linkage between ESW and lending. 'As you know, and as recorded in the Summary of Negotiations,we chose to conclude negotiationsin the absenceof full agreementon the macro-policyprogramn of the Government,in view of renewedefforts by the Govermnentto negotiatea program with the IMF'. 2' 4'Memo dated Nov. 7, 1983. -2he LAC Chief Economist argued that macro conditionalitymatters. See Memo to the RVP; dated Sept 13, 1985. L"See note from Chief Economist, LAC to Director LAC1; Feb 27, 1986. 'Memo from Division Chief, LAC1 to LAC RVP July 2, 1986.  78 Some OutstandingCases of ESW (a) Trade Liberalization 81. Bank concern with trade liberalizationhad its origin in the rethinking of the viability of the Mexicanstrategyof importsubstitutionthat occurred after the slowdown of growth at the beginningof the decade of the seventies. The economicmission of October 1972 included 'protection' among the outstandingissuesin the manufacturing sector. It opinedthat protectionin Mexicowas, by international standards,not excessive;but suggestedthat certainadvantagesmightderive from a reductionin effective protection. It noted that the Governmentappeared to be strongly interested in reducing incentive differentialsbetweendomesticsales and exports of manufacturedgoods by means of export incentives, 53 ' but consideredthat it was too early to evaluatethese policies giventhe recency of their introduction. 82. This concern grew after the crisis of 1976 when import licensing was intensifiedto stem the deteriorationin the trade balance. The May 1979reportmentionedthe conversionof importlicensesinto relativelyhigh tariffs within the contextof the discussionof the interrelationbetween the exchangerate and inflation;and suggestedthat it maybecomenecessaryto adjustthe nominalexchangerate. However, in its treatmentof the choiceof industrialization path it highlightedthe need to make Mexican industry internationallycompetitiveand the need to make the proper trade-off between imports and domestic productionas sources of supply of the domesticmarket. It was this second choice and the concern with control of inflation that made the opening up of the Mexican market to imports attractive to the Governmentas part of its stabilizationprogram of the mid-eighties. But the Bank did not push trade liberalizationin this report, in fact the maintenanceof a strong anti-importprotectivestructure was one of the assumptionsinherentin the policy scenariospresentedin the report. The missionsaw the dilemma facingthe Government in havingto choosebetweenbeing unpopulareither with producersor consumers, and concludedthat a mix of policiesmay be the best solution. Thus Bank ESW groped its way toward only mild trade liberalization. 83. The report of August 1981 observedthat Mexicohad made an importanteffort during the last three years to liberalizeimports, and that importshad grownrapidly in responseto the release of pent-up demand and the favorable nominal exchange rate. While expressing concern over the effect on employmentopportunitiesfor the growing labor force, it saw as appropriatea strategy of encouraging "newexportsto pay for new imports". By then it wouldhave been obviousto the Bank that Mexicowas already well into rethinking its import substitution strategy and was no longer leaning toward protectionism. Indeed it should have been clear that protectionagainst imports was only resorted to in defenseof the balanceof paymentswhen a crisis in the externalaccountwas imminent. 84. In 1983, the Bank approvedthe first ExportDevelopmentloan, in supportof a liberalizedimport regime for exporters. Beginningin mid-1984,the Bank indicatedto the Governmentthat it would be willing to considersupport for an action program of general import and trade policy reform through additionallendingin the form of one or more fast-disbursingloans. The Governmentinvitedthe Bank to send a Trade Policy Mission in November/December1984. The mission proposed a multi-year strategy of gradual reduction of quantitativerestrictions and tariff rationalization. Bank staff recall a flurry of ESW activityduring 1984 involvingthe preparationof papers for internaldiscussionand for discussionwith the Government,and that these eventuallyformedthe basis for two Trade PolicyLoans. '3See "The Economy of Mexico - A Basic Report", Vol. I, Summary and Conclusions;June 1973.  79 These papers were not brought to the stage of recognitionas formal Bank documents. The Mexicans recall that the late Senior Country EconomistFred Berger was the main Bank interlocutor in these discussions.5 They also recall that whereasthe Bank suggesteda reductionof 20% from existingtariffs would meet conditions for the loans, when Mexico announced a program of tariff reductions approximating 60% the Bank delayedthe loans for over a year on the ground that exchangerate policies were not appropriate;a theme the Governmentconsideredas falling withinthe ambitof their discussions with the IMF and not the Bank. 85. Within the Bank it was proposed that a 1985 Current Economic Memorandumfocus almost exclusivelyon Trade Liberalization. "The conclusionof the paper is that if Mexico fails to undertake deep and sustainedtrade liberalization,nothingelse that is done will matter. In particular, sole reliance on restrictivedemandmanagementwill lead to prolongedstagnation, and ultimatelypolitical unrest."' A follow-up trade policy mission went to Mexico in April 1985, and assisted in the planning and organizationof a major Bank-financed seminaron trade reform in July of that year. Shortlyafterwards, the Governmentannouncedits first major trade reform package. 86. In response to the July 1985 reform package, the Bank decided to invite Mexico to negotiate TPL I on conditionthat: a) Mexicodesign and announcea three year calendarfor trade liberalization; b) liberalizationbe placed in a sound macroeconomic framework; and c) there is a realistic financing plan. In the course of negotiatingthis loan Bank ESW devisedan innovativeapproachto the monitoring of trade liberalizationthat couldbe applicableelsewhere. This involvedthe use of productionweights, an approachwhich would permit formulationof conditionalityin quantitativeternms and allow a single indicatorto be used to reflect reduction in coverage of licensing and reduction in tariffs. This was considered superior to import weights, which are affected by import restrictions.- "The advantages of the quantitativetargets are apparent. They are clear and transparentand measurableboth by the Bank and the Governmentin the same way, and hence they are unambiguous. "5' 87. The Bank missionof late 1986 and the updating missionof April/May 1987 whosefindings are reported in "Mexico After the Oil Boom: Refashioninga DevelopmentStrategy"', strongly favored acceleratingtrade liberalization,going so far as to suggestthat "1987 could be the year to completethis process". This wasjustified on the groundsthat disparitiesin average implicitprotectionremainedwide and continuedto significantly distort resourceallocation,that the balanceof paymentpositionwas highly favorable,and that the negativeeffectson employment wouldlikely be small and wouldbecomepositive as exports picked up. The report also said that althoughthe three year liberalizationprogram which the 54'Indeedsome high Mexican officials thought so highly of Berger's contribution that they have contributed papers on trade liberalizationto a volume to be dedicated to his memory. 1FMemoby Fred Berger - Mexico: Trade Focus for the 1985 CEM dated 6/25/85. "The analysis of alternative approaches and the estimation of Domestic OutputWeighting Factors, included as Annex V to the President's Report on the Proposed Second Trade Policy Loan in July 1986, is entitled 'MEMORANDUM ON METHODOLOGY- MEASUREMENTOF TRADE POLICY TARGETS AND OBJECTIVES". S'See - "Mexico Trade Policy Reform, World Bank's Support for Trade Liberalization Program" by Yalcin M. Baran, Sept 15, 1989 (unpublished). aFReportNo. 6659-ME, June 23, 1987.  80 Governmentannouncedin July 1986had beenproperlyviewedas a structuralreform to improvethe long term efficiencyof resource allocation,a faster reductionof importbarriers would help to curb inflation, - an additional short-term benefit. 88. ESW associatedwiththe preparationof TPL II whichwas approvedtowardthe end of 1987made an importantcontributionbymore fullytakingaccountof the social impactsof trade liberalization. While suggesting that income distribution and employmentgeneration were adversely affected by import substitution,and that trade liberalizationwill favor labor intensiveactivitieswhere Mexico's competitive advantagewas strongest, it recognizedthat "the transitionalcosts of adjustmentsare real and significant". This was importantagainstthe backgroundof a situation in which real per capita GDP had declinedby 10% between 1980 and 1986, and the share of wages in national income had declined by about 20 percentagepoints. Its observationthat public socialsectorspendinghad declinedas a proportionof GDP since 1982and that there is urgentneedto improvethe efficiencyof socialprograms musthave impressed the client as an attempt to put a humanface on trade liberalization. 89. The next major ESW was a full blown interim review of trade policy reform and economic adjustment.-WThe review included an evaluationof the effects of trade reform on incentives, and analyzeddevelopmentsin trade, labor markets, production, efficiencyand competitiveness. Particular attention was paid to the relationship between the opening of the economy and the Government's macroeconomic stabilizationpolicies. The review was based in part on a detailed analysisof a survey of Mexican enterprises; from which it was concludedthat the speed and strength of reaction to trade reform dependedon (a) perceptionsand expectationsor the credibilityof the reform, (b) the availability of resources to permit response to new incentives, and (c) the constraints faced by enterprises in implementingadjustments. The mission found that althoughthe Mexican reform measures had been implemented with alacritythe reform sufferedfrom deficiencieson all three counts. This explainedwhy evenafter policy adjustment there remaineda strongbias toward importsubstitution- the rise in non-oil exports being attributableto other policies and earlier investments. In sum, the report found that the economicpolicy reform program was not balancedand that trade liberalizationwas considerablyahead of domestic economicliberalization. This was an importantfinding relatingto the speed and timing of trade liberalizationand domestic deregulation, which may have affected the priority of the latter on Mexico's reform agenda. 90. Satisfied with the pace of trade liberalizationin Mexico which outstrippedthe Bank's most optimistic expectations,Bank ESW turned to review the experience. This review has identifiedthe importance of formal announcement of the trade reform program by the Government and the calendarizationof the tariff reduction as crucial to the credibility of the process, by sending an unambiguous signalon the future directionof commercialpoliciesand by givingthe private sector time to prepare itselffor the announcedmeasures. On the negativeside, it saw as an unfavorabledevelopment during the reform process the use of official reference prices, which while being defended on anti- dumpinggroundscan be used to expandand/or continueprotectionto domesticindustries. In addition, the reviewidentifiedseveralunresolvedissues,including:the differentialpaceof liberalizationin industry versus agriculture,the consistencybetween liberalizationand the need to protect against dumping,and the coordinationof trade reform with stabilizationand with exchangerate policy.0 22Mexico: Trade Policy Reform and Economic Adjustment, Report No. 7314-ME, dated August 23, 1988. f2'Oo.Cit,, Baran.  81 91. The impressions of Bank staff of the ESW on trade liberalization are generally positive. However, there is unanimity in the view that Bank ESW did not start the process; it simply helped it along both intellecally and by providingthe basis for the loans that induced Mexicoto pay attentionto the longer term view even in a period of short-term financial crisis.-W Success has been attributed mainlyto the fact that the World Bankdid not press for reformsthat were at odds with the government's own program.2 Some expressed regret at the inadequacyof the paper trail left by much of the ESW which was embodiedin informalnotes and confidentialpapers prepared for discussionsin Mexico. This was the result of the intenselypersonal and oral approachto the delivery of ESW, which increased the vulnerabilityof the record to the untimely death of the main interlocutor. Yet, the same staff also concede that althoughthe lesson learning by the Bank may have been impaired by that approach, the acceptabilityof Bank ESW was very likely helped by keeping it informal and low profile. 92. The Mexicanview of Bank ESW on trade liberalizationwas that it was useful, althoughat times doctrinaire. They give high praise to the quality of Bank staff and especially the commitmentand intellectualcontributionof the late Fred Berger. One former ministerthoughtthe Bank may have over- sold trade liberalization,if not as a panacea, then as a powerful instrumentto get the economyback on a sustainable growth path and to keep inflation low by improving efficiency by exposing domestic producersto foreigncompetition. The Bank pushedfor openingup the economybut did not give enough attentionto other instrumentsof policy - fiscal, monetaryetc. Besides, the emphasison opennesswas too narrow; it did not addresstrade in services. (b) Debt and Debt Restructuring 93. Concern with Mexico's debt in Bank economicwork has a long history. Initially, the concern when the debt was still quite small and predominantlyprivate sector was with the ability of the public sector to take on additionaldebt. Throughoutthe 1950s and the 1960s, Mexico's steady economic performanceprovidedlittle basis for anguishregardingthe country's debt-servicing capacity. According to an internal briefing paper: 'So long as Mexico is successful in maintaininga high rate of growth withoutexcessiverelianceon externalborrowing, it is difficultto find serious fault with its development policies, and the Bank is certainly not in positionto exercise much leverage on these policies".' In June 1964a staff loancommitteedocumentreportedthat at the end of 1963Mexico's total externalpublic debt amountedto about$1.6 billion, includingsome $400 millionstill undisbursed. Serviceof this debt was estimatedat $300millionin 1964or just under 17%of currentaccountexchangereceipts. The same documentwent on to say: 'Devoting 16%-17%of exchangeearningsto externaldebt servicinghas not yet created any financialproblems for Mexico. With continuedprudent financial policies and a good 'Sseememo dated Feb. 2, 1979 setting out SHCP David Ibarra's outline of policy measures to deal with the Mexican situation specificallymentions trado liberalization. £'See John Nash - 'Mexico: Adjustment and Stabilization" in 'Restructuring Economies in Distres - Policy Reform and the World Bank" edited by Vinod Thomas et al. S'Comment by Dr. Luis Bravo Aguilera, former Minister of Trade, during interview in Mexico City in September 1992. iBriefing paper for Bank President's visit to Mexico, December 5-8, 1969.  82 investmentclimate, a debtburden of this magnitudeshouldbe sustainable,even in the face of temporary unexpectedfinancialadversity". 94. After more than a decade of little or no concernBankESW in 1965determinedthat "the amounts and terms of foreign official borrowingwill be an extremelyimportantelementof Mexico's economic managementfor the next few years". Main concernthen was with maturitystructurerather than size of the foreign debt; it was too shortterm. The Bank's EconomicCommitteesaid overall savingseffort was insufficientin light of short maturityof borrowingsabroad, and rising debt service ratio. By early 1967 a briefing paper reveals that 'the Minister is well aware of our concern about the size of Mexico's externaldebt"..."it is also one of the main themes of the last economicreport". Later in 1967 a Bank mission reported that the external debt managementwas hampered by tightness in the international financialmarkets; and warned against excessiverelianceon domesticand externalborrowingto finance the PSIP, given future debt serviceburdens and the likely fiscal effort. 95. The Feb. 1970CPP found that the debt service ratio at 22%, which it calledquite high, should still be manageableover the next 5 years, so long as relatively good borrowingterms were maintained and foreignexchangeearningsgrew by 50-60% during the period. However, an April 1970 memoon the externaldebt concluded- 'Mexico's debt situationis beginningto deterioratebadly, and there is no longer a case for the complacencywhich characterizedthe EconomicReport last year". This view was discussedwith the SHCP Ortiz Mena. A summaryof the meetingnotes 'In response to a reference to Mexico's heavy externaldebt burden, the Ministercommentedthat roughly 80% of this debt was owed by business[publicsector] enterprisessuch as CFE and PEMEX", ... "these enterpriseswere expanding productionand generatingthe capacityto service the externaldebt"; ... 'the Minister was not inclined to recognizethat Mexicofaced any significantexternaldebt problem". 96. In 1972Bank ESW estimateda debt service ratio of 19.3%, and a 1973forecast expectedit to rise to 24.5% by 1980 assuminga 6-7% GDP growth rate. Revisedprojections made in the Bank in 1975confirmedthat with the impendingborrowingrequirementthe debt service ratio would only rise to 22% in 1980, but the debt profile was expectedto improve significantlyby 1982. This was to come about as a result of the fact that the outlookfor Mexicobecominga net oil exporter had become much more positive, Mexicohad been malking arrangementsfor more effectivecontrol over borrowingby the publicsector, and international financialmarketconditionsfavoredprepayingsomedebt contractedearlier on less favorableterms.W2' 97. In responseto Mexicanconcernover the currencycompositionof its IBRDdebt and the attendant exchange risk exposure, Bank analysis showed that it would be better to consider cancellationof undisbursedloans rather than prepaymentsince future disbursementswould have a lower proportionof U.S. dollars thanthe outstandingdebt. Apparentlythe weakeningof the US$ vis-a-visthe DM and other currencieshad been a matterof concernto NAFINSAwho wrote the Bank indicatingtheir intentionto I'Preparations were under way for the Ley de la Deuda Publica presented to Congress on Dec 17,1976 and made effectiveJan 1, 1977. The law may be broken down into the followingsections: The Treasury's authority over, and responsibility for all debt related matters; A formal program for the public debt; Rules governing govermnentand entity borrowing; Informationand record-keeping; Vigilance and enforcement; Comision Assora de FinanciamientosExternos.  83 hedge against FE losses in relation to currencies the Bank planned to buy on their behalf. A memo entitled "Mexico:Currency Compositionof IBRDLoans" showedthat Mexicohad a higher proportion of its indebtednessin U.S. dollars than the Bank average. 98. For a number of reasons the Bank was caught off-guard by the debt crisis in 1982. Some of these: a) the Bank did not have data on PEMEX which was accountingfor a large part of new borrowings; b) the Bank had not foreseenthe fall in oil prices; c) the Bank had not foreseenthe rise in internationalinterestrates; and d) the Bank was not awareof the increasinglyshort term nature of recent borrowings. Althoughthe Mexicanpolicywas to avoidoverexploitation of oil in order to prevent a surge in export earningsfrom overheatingthe economy,the perceptionof enhanceddebt service capacityled to a loan financed expansionin public expenditure;but this perception was quickly reversed when oil prices fell. Some internal Bank memos and correspondencewith the Government indicate that the inadequacyof Mexico's debt reporting, and the earlier excess supply of financing, as also the offer by Mexicoto prepaydebt to the Bank, left the Bank initiallyunaware of the impendingproblem. 99. Partly in responseto this lapse, the Bankmade a special effortto keep abreastof the GOM's debt restructuringefforts, beginningwiththe arrangements for the emergencysupportwhich Mexicoarranged with the US Government and the Fund between 1983 and 1985. ESW contributionto this effort is reflectedin the paper "Mexico-Possible WorldBank Rolein High-DebtCountries", which used Mexico to illustrate the implicationsof different debt restructuring alternatives, focussing on "The Collateral Scheme". "Put very simply, the collateralscheme works basicallythrough the arithmeticof compound interest..If Mexico is to repay US$64 billion in 20 years time, the present value of that paymentworks out to US$4.7 billion at 14% interest, or US$6.6 billion at 12% interest, or US$9.5 billion at 10% interest. Under the scheme, the repaymentof the US $64 billion in 20 years time can be ensured by the World Bank if it were to make a loan of an appropriateamount that enables the Mexicansto purchase a "zero-coupon"bond maturing in 20 years." This alternativewas to reappear as a component in the Mexicandebt restructuringstrategy some six years after the paper was written. 100. Withthe BakerInitiativein 1985the Bank was givena muchmore prominentrole in the Mexican debt restructuringstrategy. Bank ESW providedthe backingfor numerouspresentationswhich the Bank made to bankers who sought its "objective"opinionof the Mexicanadjustmentprogram and stabilization strategy. The MexicanGovernmentalso took note of the Bank's ESW in formulatingits debt strategy. A Bank memorecords that "We have been asked by the MexicanMinistry of Finance (i) to carry out a quickevaluationof the macroeconomic impactand operationalexperiencewith the Mexicandebt/equity swapprogram; and to make recommendations for improvements in the scheme". The paper entitled"A frameworkfor EvaluatingDebt/EquitySwaps" was prepared in the Bank and sent to the GOM under coveringletter dated June 3, 1988. 101. Bank ESW continuedits concernwith Mexico's externaldebt as Mexico's strategy shiftedfrom restructuringto debt reductionleadingup to the agreementwith internationalcommercialbanks in 1989. Not much of the work is reflected in the paper trail left behind, since, as in the case of trade liberalization,muchof it was done by a staff lead economistworkingalongsideMexicanofficialsmostly in Mexico.This approach allowedBank ESW to be made availableearly and unobtrusivelyin the chain of decision-making,when confidentialitywas crucial and "time was of the essence" of the input. One piece of work on the structure of Mexico's external debt marked the beginningof this phase before it  84 ceased to leave a paper trail.W In addition to presenting data on the structure of the debt, the paper observedthat from the Mexicanpoint of view two considerationsare importantin judging any proposal - impact on cash flow and implied debt relief, i.e. reduction in the discounted value of payment obligations. Thepaper went on to analyzefinancingneedsand various financingoptionsin terms of these impacts. 102. The Bank also played an advisoryrole to the Mexicangovernmenton the design and formulation of the options in the Debt and Debt Service Reduction (DDSR)plan. In particular, Bank staff helped Mexican authoritiesto evaluate debt-debt service relief impliedby the different options in the menu offered to commercialbanks includingthe pricing of the oil recapture clause. This analysisplayed an important role in assessinghow the DDSR plan could help to meet Mexico's medium-termexternal financingrequirements. The Bank also advisedMexicoduring negotiationswith the commercialBank AdvisoryCommittee,initially favoringa more demandingposture vis a vis commercialbanks than the one Mexicofinally took.02 ' Specifically, Bank's projectionsof Mexico's externalfinancingneeds played an importantrole in validatingMexico's requestfor debt-debtservice relief during negotiationswith the CommercialBank AdvisoryCommittee. 103. In a meeting with Bank Vice PresidentHusain in Mexico City in May 1989 President Salinas expressed his appreciationto the Bank for being willing to set aside for debt relief 25% of three adjustmentoperationsbeingprepared (FinancialSector, IndustrialSector Policy, and Public Enterprises Restructuring)and also in relation to the intellectualdialogue with the Bank on possible approachesto the debt issue.gy 104. After a meetingof Mexicoand the Committeeof CommercialBanks in June 1989 the Bank's CountryDirector of Mexicoset up a task force withinthe Bankto reviewthe status and considerfuture actionsto be taken by the Bank in the contextof Mexico's debt reductionefforts and to guidethe Bank's contribution to the financial package through a very active and delicate period of contacts with commercialbanks and other interestedparties. 105. This effort successfullycompleted,concern in the Bank turned briefly to the effect of the debt reductionexercise on Bank exposure. A countryrisk assessmentmemo records that 'Mexico's recently concludeddebt package is a major boost to the country's economicprospects", but continued"in FY90 the thrust of our lending was directedat debt reduction. Gross disbursementsreached US$2.23 billion in FY89, and are expectedto amount to an all-time peak in FY90, which may be as high as US$3.8 11 Mexico's External Debt: A note on Structure and Financing Options - by S. van Wijnbergen and Sergio Pena - Structureof Mexico'sExternalDebt; 'Mexico's externaldebtstoodsat US$104billionat the end of 1988.Of this total 75 % ($74.8 bn) was owed to commercialbanks and of the remainder 25% was owed to official creditors. The Bank holds $8.5 bn., the IMF $5 bn. CCC of the USA, Japan EXIMBank hold about $3 bn each. Of the debt owed to commercial banks $66.1 bn. was owed by the public sector and $8.7 bn. was by the private sector.' F-"Mexico: Economic Reform and Development Strategy", EXIM Review, Research Institute of Overseas Investment, the Export-Import Bank of Japan, Special Issue, Fall 1991. L'Memo dated 5/01/89. re Husain/Salinas meeting in Mexico on April 26, 1989  85 billion. As a result, the Bank's exposure in Mexico, as a percentageof the Bank's total disbursed and outstanding,would rise from 8.1% at the end of FY89, to 11.6% at the end of FY90."'f' 106. Subsequent Bank ESW on the debt was directedat learning from the experience.Thus Bank staff participatedin a seminar on "The Brady Plan and the OverallDebt Issue" along with New York bankers and Mexicanofficials. Satisfactionwith the outcome of the Mexicandebt strategy was expressedin a July 1990 memo as follows - "the recent debt package has halved the short run sensitivity of debt serviceto interestrate variations". Continuingto monitor the Mexicandebtstrategy a 1991memonoted that "Since March 1990, the Governmentof Mexico public debt reduction strategy has focussed on domesticdebt, especiallyPEMEXacceptances." 107. This review shows that, as in the case of trade liberalization,Bank ESW may not have initiated concernwith the debt but it seized the opportunityto be useful to a client's efforts and producedoutput worthyof the client's appreciation. Similarly,the issue of appropriatemodeof productionand delivery of ESW also raises concern. Having Bank staff work closely alongside a client's officials proved effectivein making Bank input acceptable,timely, and useful; but confidentialityrequirementsresulted in minimalinvolvementof other than the lead expert from the Bank and the paper trail has been scant. This clearly, does not facilitate lesson learning within the Bank and the applicationof the experience elsewhere. PROBLEMSFACED BY ESW 108. Obstacles to BankESW include:a) accessto data - sometimeslegal impedimentsand sometimes lack of cooperationby Mexicans;b) sensitivityof the GOM or factions within it regarding particular topics; c) lack of sharing - Bank sometimesfinancedstudies but got little accessto data; d) distribution of reports within Mexico was frequently too restrictedto foster adequate dialogue on some policies. Some instancesof these obstaclesinclude the following: The Report on Trade Policy, IndustrialPerformanceand Adjustment,1986 was not clearedby Mexicoto go into grey, hence preventingits release to the Bank's Board. AgriculturalTechnologySector Reviewcompletedin 1991 (Report #9297) has not been made available in translationto non-EnglishspeakingMexicanpersonnel. In late 1982the Bank fielded a seven-member missionto report on "ImprovementsOf Operating Efficienciesin Existing Irrigation Systems".Its findings are still classified as "confidential"ten years later.m' "We have not had accessto PEMEXand should therefore be cautiousin what we tell the Board (and what we tell the Mexicansin the report). In fact I would mention explicitlythat the Bank -'Memo Mexico: Country Risk Assessment; dated 4/30/90. 7'See BackgroundPaper on Agriculture for this study.  86 has not had access to Pemex and that the section is based on secondary sources of information. "7' 109. It is well-knownin the Bank and concededby Mexicansthat for many years Bank ESW and dialogueon certaintopicswere unwelcomeand the Government did not cooperatewith the Bank's efforts. This was the case with a range of topics including:populationand familyplanning, the ejido land tenure system, PEMEX, education, and poverty. In the 1970sthere was a thaw in some cases and the Bank started to do work in the area of populationand income distributionand poverty. It is indicativeof the growingopennessof Mexicoto BankESW that by the end of the eightiesmost topicshad becomeeligible for study; and in the ninetiesthere are hardly any proscribedtopics which come to mind. Recently,the Bankhas done ESW on the ejidosystem, on familyplanning, and PEMEXcooperatedfullywith the 1992 field mission for this study.z' STRENGTHSAND WEAKNESSES 110. Two potentialstrengthsof Bank ESW derive from: (a) the wide experiencethe Bank gains from dealingwith over a hundred economies,and (b) the large numberof highlytrained people it has available as staff and consultants,and the ability to tap through an internal dialogue amongthem a wide canvas of opinionand expertisefor analyzingproblemsand prescribingsolutionsfor individualcountries. The Internal Dialogue 111. The evidencesuggeststhat in generalthe ESWon Mexicohas benefittedfrom a vigorous internal dialogue, but there were sometimeslapses from a healthy intellectualinterchangewhen opinionsthat did not conformto the dominantview were not given a fair hearing. The fact that the Mexicoprogram has been large enoughto require aboutthree full time economistsin the Programs divisionas well as part- time attentionfrom departmentalsenior economists,the regionalchief economistas well as Projectsstaff and staff from centralpolicy departmentshas tended to ensure a wide spectrumof inputs and opinions. The next two paragraphsattest to a vigorous internaldialogue. The first suggeststhat there are risks to the dissenter,but it may come out well in the end; and the second suggeststhat at high level in the Bank a broader view is not unwelcome. 112. One economist participating in the 1979 economic mission wrote that "if the high rate of monetaryexpansionis not reducedsubstantially,this may becomea source of future problems: inflation will not go down, but may increase instead". He went on to suggestthat the inflationdifferentialwith Mexico's tradingpartners wouldin the face of the fixed exchangerate causedeteriorationin the real rate of exchange, stagnation in non-oil exports and greater dependenceon oil. "The existing slack in oil markets may help authoritiesto moderatepublic expendituresby making it painfully clear that in spite of the oil resources, the publicsector does face financialconstraints. A crisis may developbefore 1983, 2 '"Note from LAC Chief Economistto Programs Division Chief, dated 6/23/86. n'See for example - Mexico: Enhancing the Contribution of the Land Reform Sector to Mexican Agricultural Development, March 1990, Report No. 8310-ME (confidential); and - Basic Education in Mexico: Trends, Issues and Policy Recommendations, August 1990, Report No. 8930-ME (confidential). Also - Mexico: Nutrition Sector Memorandum, July 1990, Report No. 8929-ME (draft, confidential).  87 but there is still time to avoid it." The impliedsuggestionthat Mexico control monetary expansionor devalue and the forecast of economiccrisis was not agreed by the Bank and some Mexicans,and led to his ouster from the Division. Shortly after, opinionin Mexicomoved in the direction of agreeing with his position,but he remainedostracizedfor some time thereafter. In 1981he wrote "Nonetheless,there is a growingconcernand agreementamongMexicanGovernmentofficialsthat these achievements (record GDP growth, reduced unemployment) are being endangeredby an increasingfinancialdisequilibrium." "The principalsource of trouble (though by no means the only one) seems to have been the expansive public expenditurepolicy. This diagnosis, providedby us some time ago, is now almost unanimously shared in Mexico at the technical level."22'A new Chief of the Division in reviewing the files and realizingthat events had vindicatedthe economistinvitedhim to join a mission to prepare mediumand long term projections;an event welcomedby divisionalstaff. 113. Commentingon a recent Bank CEM in 1988 a former Division Chief after examiningthe Mexicanheterodoxapproachto inflationhad this to say in his report. "There are understandable doubts among Mexican officials about which policy tool would yield the best results in combattinginflation. In our recent CEM, we stressed the importanceof combiningspeedier trade liberalization,more fiscal contraction,and continuedstructural adjustment,particularly in the financesof the state enterprises,to stabilize prices. But, realistically, there are competinghypotheses about the primary causes of the accelerationin inflation- overshootingin the depreciationof the real exchangerate, "inertial" effects from continuedcycles of wage and price adjustments,too large a PSBR, not enough competitionfrom imports, and so forth. To raise the calibre of our economicdialogue, we believe we must develop a rigorous analyticalframeworkfor testing these competinghypothesesand to assignin quantitativeterms some order of importanceto these differentexplanations." 114. One lead economisthad this to say about appreciationof the real exchangerate - "This seems to reflectthe standardBank view that any appreciationof the real exchangerate is always a bad thing. But it is clear that it is in line with market developments.".' He was objecting to downgradingof Mexico's macro performance because of the appreciationin the real exchange rate and the risk this impliedfor expansionof non-oilexports. This recent episodeis indicativeof a continuinginternaldebate over economicwork. It was not the first time the matter of Mexicanexchange rate was a subject of internaldebate within the Bank. In the mid-seventieswhen the Bank was heavily criticizingMexico's importsubstitutionstrategyone chief economistwrote this memo "the questionof the exchangerate will haveto be dealt with:there is, presumably,an exchangerate at which Mexicocouldexpandexports even with highly inefficientindustries, provided real wages (i.e. the real exchangerate) could be devalued enough. The reader wondersat times why such a real devaluationwouldnot provide an easy out"A. Missing - The Political Dimension 115. One weaknessof the Bank's ESW has been its lack of attentionto the need to understandthe political milieuin which developmenthas to take place. After all, politiciansmake economicand social policy. This weaknesshas long been recognized in the Bank, but only recently under concern with !'Memo dated 7/20/79 and memo on Mexico: Present Economic Situation - Problems and Policies; 8/14/81 . 71 " Memodated 7/04/91. 2Memo dated 5/27/86.  88 "governance"in African countrieshas some attentionbeen devotedto the political dimension. A senior economistwrote in 1973 that "A good deal of fairly high-gradeeconomicwork on Mexicohas been producedin the last ten years, both by Bank staff and others... Nevertheless,there is a certain threshhold of understandingbeyond which we seem not to have been able to go."' He was referring to the difficultyof understandingthe part politics was playing in developmentpolicy in those times. 116. That gap in Bank understandingis graduallybeing reduced. Recentlythe Resident Missionhas been helping the Bank to develop and demonstrategreater understanding of the politicalprocess through which developmentdecisions are made. This has been reflected in the inclusion in conditionalityof studies to form the basis for future action, thereby givingthe administrationtime to build consensusand to prepare the politicalground beforerevealingits plans. While the outstandingstabilityof the Mexican political situation has prevented this gap from being a source of irrelevance in Bank ESW, internal decisionsaffectingthe Bank's portfolio in Mexico could benefit from regular analysis of the political situationas it affects the developmentassistanceprogram overall and in particularsectors. LESSONS 117. The principal lesson from this review is that a client will appreciatehigh quality, timely and relevanteconomicwork, especiallywhenofferedearly in the decisionprocess as a low profile intellectual inputand not as part of conditionality.The eightiessaw a changein the relative emphasison cooperative versus arms length approachto ESW on Mexico. Trade liberalizationand debt restructuringbenefitted from Bank/Mexicocollaboration in the preparatory economicwork. Present arrangementsfor joint planning of ESW and its review at frequent intervals seem to work well and should be continued. However, the experiencewith joint implementation of ESW especiallysector work is that reports tend to be restrictedfor too long, thereby inhibitingthe lesson learning withinthe Bank and the application of solutionsto other countries. 118. Personalities are important. Frequently, top officials are well trained economists. Bank economistsand other technicalstaff and the work they producemust be of a qualityto commandrespect in the client country. By and large this has been the case in Mexico. The Bank staff assignedto work on a country as sophisticatedas Mexicomust be assignedfor long enoughto become familiar with the economy and the principal interlocutors. The Mexicanswho have occupied senior posts during the eighties, mention the contributionsBerger, Corbo and van Wijnbergenas having made a difference in their regard for Bank macroeconomic work, partly becauseof the qualityto analysistheybrought to bear on Mexicanproblemsand partly because they had enough time to developa deep understandingof the situation. 119. Bank ESW has a relative advantageover GOM's in-houseESW in terms of the greater research componentthe Bank work can include. This is becauseof the larger ongoing work in the Bank and the range and depth of expertise which the Bank can tap. This research component is important in determiningquality of ESW. 120. Bank ESW should be supportiveof client efforts rather than be a substitutefor it. In addition, it shouldaim at improvingthe informationbase for clientESW where possible.It shouldhelp to upgrade Z'Memo dated 2/16/73.  89 120. Bank ESW should be supportiveof client efforts rather than be a substitutefor it. In addition, it shouldaim at improvingthe information base for clientESW where possible.It shouldhelp to upgrade client capabilities. As in many countries Mexico has very capable economists at senior levels of government,but the quality falls off rapidly at lower levels. This requiresgreater attentionto training. 121. The Bank should continueto provide, and expand,support for economicand social research by the Mexican intellectualcommunity,to permit its members increasingparticipationin country ESW. "Colegiode Mexicohas a vast reservoirof talent. The Bank economists,and I, meet their academicians from time to time. They have much to contribute to studies on demographic change (etc). This cooperationshould continueand be intensified". Z' -'Memo dated 1982 - Mexico: Local Capabilities and their Interaction with Bank.  91 6. THE POLICY DIALOGUE INTRODUCTION 1. The policydialogue is the main vehiclethrough which the Bank providesadvice and information to assist clients in making decisionsconduciveto the setting and achievemnent of realistic development goals and to the effectivemanagementof their economies. It is also a mediumthrough which the Bank learns first-handof the problemsfaced by clients and the solutionsthey attempt, thereby enrichingthe base for cross-countryanalysesand improvingknowledgeof the developmentprocess. This advice and informationcommunicatedthrough face to face discussion and written communicationin the form of letters, cables and reports is one of the two basic serviceswhich make up the Bank product. 2. A review of the policy dialogue has to face two difficulties. First, the paper trail left by the dialogue is sketchyand incomplete,becausemeetingstend to be informal and except for the occasional aide memoirethere are no minutesof the proceedings. Usually, a memberof staff in attendanceprepares a short note to files after the meeting,and this note may or may not wind up in the general files left in the archives. Not infrequentlythe note winds up in the "personalpapers" of the staffer and as he moves on it eventuallydisappearsfrom the record. This is complicatedby the variety of meetingsin which the dialoguetakes place, e.g., meetings in the clientcountrybetween officialsand Bank missions, meetings with the delegationto the annual meetings, meetingsat appraisal, negotiationand supervision, regular program/strategyimplementation review meetings. Second, is the obviousoverlapbetweendialogueand ESW. Obviously, a significant amount of dialogue takes place during the discussion of reports of economicand sector missions. From the review of the ESW one can infer much about the dialogue. 3. The reviewof the policy dialoguein this chapter will attemptto trace the course of the dialogue over time and to highlight some importantissues that were the focus of discussion. Where these were reflected in the ESW they will not be treated in detail. Then there were some issues that have been importantin the Mexicandevelopmentcontext, yet were kept outside the dialogue;and regardingthese we will try to see why this was so, and what have been the implicationsfor the effectivenessof Bank support. The final objective is to see how the approachto the dialogue may have been or could have been changedto widen the dialogueto embraceall relevanttopics. For this the perceptionsof Mexican officials and Bank staff who have been involved must be the main source of insights regarding what hindsightsuggestscould have been done differently. A SHORTREVIEWOF THE DIALOGUE Clarification of Bank's Role 4. In 1949 the Bank was a new internationalinstitutionand the exact parametersof the interface betweenBank and clientwere not clearlydefined. The dialoguebetweenthe Bank and Mexicoessentially started in an effort to define what was the role of the Bank and what was expectedof Mexico in order for the Bank to carry out that role; specificallywhat influencewas the Bank supposedto exert over Mexico's developmentdecisions and what informationshould the Bank have a right to expect from Mexico. Almost immediately,an impassedevelopedover the Bank's requestto reviewthe PublicWorks  92 and DevelopmentBudget; the GOM objecting to "review by any outside interest of any part of the NationalBudget', but concedingthat it would give informationand explanationsregardingitems in the budget gflEit had been acted upon by Congress. The suggestionby the Bank that it would send a mission in response to Mexico's request for financial support of the domestic of cost of some projects was rebuffed by GOM, which preferred to withdraw the request rather than accept a mission. The attitudein the Bank was reflectedin the words of one senior staffer "weought not to acceptthe Mexican position that no more funds would be provided from budgetary sources without further inquiry and pressure".!' 5. Apparently,a visit by Bank PresidentBlack to Mexico early in 1950 did not result in a clear understanding;and later in the year a draft paper on "Mexico- SuggestedBank Policy' submittedto Loan Committeefor discussionindicatedthat the Bankhad "legitimatecomplaintsabout Mexico's failure to consultthe Bank prior to arrangingcredit overseas" and suggestedthat "the Bank shouldbe prepared to state to Mexicothat it wouldperiodicallyexamineMexico's abilityto incur further indebtedness".The letter from the Bank's Presidentto the Director Generalof NationalFinancieraat the beginningof 1951 was unambiguous"These provisionsrequire that the Bank should be informedof proposals on the part of the Guarantoror its subdivisions,or agenciesof either, to incur or to guaranteefurther externaldebt", and added that "These consultationprovisions are a standard feature of the Loan and Guarantee Agreementsentered intobetweenthe Bank and its membergovernments". An earlierletter from a lower level Bank official had conveyed the message that any further Bank financing in Mexico would be dependenton agreementbeing reachedregardingMexico's implementation of the consultationprovisions of the GuaranteeAgreement.' Learning Together 6. Mexico's responsewas to suggestthat the Bank and Mexicoset up a CombinedWorkingParty to discuss "the limits of Mexico's debt burden", and went on to express agreement with the Bank's interpretationof the consultationclause as containedin Bank Pres. Black's letter.> The Bank saw the avowed "purpose of this proposal was to raise the relationshipbetween the Bank and Mexico from its present low estate". Althoughthe Bank took the opportunityto suggesta more comprehensive study of major long term trends in the Mexicaneconomyand its ability to absorb foreigninvestment,and this set the stage for the beginning of greater willingnessto dialogue, it did not mark the end of the rather difficultearly period when the Bank and Mexicowere in a sense measuringeach others resolve. Later that year when Mexicoopened a line of credit with US EXIMBANKwithout consultingthe Bank, the latter delayedthe effectivenessof the ConsortiumLoanuntil NationalFinancieraexpressedlyrecognized the validityof the negativepledgecovenantof the corresponding guaranteeagreementand agreedto have the MexicanCongressprovide expressedrecognitionof the negativepledge covenant.This dialogueon lendingissues turned to focus on the financialviabilityof the power company, especiallythe adequacy 1t Memosto files, dated Nov. 29, 1949. Cable dated Nov. 30, 1949. Memo dated Dec. 2, 1949 re Telegram from the Secretary of Finance and Public Credit. ZLetter dated Jan. 18, 1951 from Bank President to Director General, National Financiera. 'Memo dated Feb. 9, 1951, - Telephone Call from Flores of National Financiera to Pres. Black. Memo dated Feb. 20, 1951, - The Mexican Proposal for a Combined Working Party.  93 of rate increasesand of equitycontribution. This theme extendedto other publicenterpriseswas to recur frequentlyover the next twenty years. 7. The report of the CombinedWorking Party made a great impression in Mexico, and in its aftermaththe mainfocus of the dialogueshiftedto the wider issueof economicdevelopmentand stability. A Bank member of the WorkingParty wrote "I outlined at their request, what was needed to be done immediatelyif devaluationwas to be avoided, and the growthof real income maintained. At that time I urged them to reduce unnecessary investment, prepare a developmentprogram along the lines recommendedin the Report, increase taxes on luxury imports, real estate and incomes, and borrow investmentcapital abroad to supplement domestic savings"A. Suddenly the dialogue had become a vehiclefor advice. A recommendation that an InvestmentCommitteebe set up to draft a public sector investmentplan for 1955-58 was favorably received and acted upon; with the result that a draft investmentprogramwas prepared and sent to the Bank for comment. However the Committee, set up as an advisorybodyto the Ministryof Financeand Economy,was lookedon with suspicion;and the draft was not used to formulatepolicies and to give the differentministriesand agenciesdirectionin preparing their investmentplans.5 But by fall of 1954 a Bank memo suggested that, in view of the excellent relationsexistingat present with Mexicoand havingparticularregardto the satisfactoryinitialoperations of the InvestmentCommittee,Bank Pres. Blackmightwishto take a fairly positiveattitudein his meeting with the Mexicandelegation. A Period of Criticism 8. After two years of general Banksatisfactionwith the managementof the economyunder Mexican President Cortines, during which the dialogue was congratulatoryof Mexican creditworthiness,the situationbeganto change toward the end of that administration.The Bank expressed strongly the view that the petroleumindustry,nationalrailroads,and the electricitycompany(CFE)should be run on sound businessbases. In responseto applicationfor a loan to electricityit indicatedits unwillingnessto study it until the matterof rate increaseshad been settledand until the Bankhad satisfactoryevidencethe GOM wouldtake stepsto implementthe recommendations of the recent Power Study. In mid 1957these issues and especiallythe electricityrate were discussedat the level Bank Presidentto MexicanPresidentElect. In 1958in the face of rising public sector expenditures,the Bank warned of rising public sector deficits unlesstax revenueswere raised and subsidiesto state enterprisesreducedor removed. This brought the discussion once more to the issue of pricing of public services - petroleumprices, railroad tariffs, electricityrates, etc. 9. As the macroeconomicsituation deteriorated the tone of Bank presentations in the dialogue becamemore strident. The situation reached a low point in an August 1959 meeting when Mexican PresidentLopez Mateos resentedBank PresidentBlack's representationsre rate increasesfor Mexlight (the electricitydistributioncompany)whichhe saw as bringingunduepressure on Mexicofor the purpose of advancingthe interestsof the companysince he understoodthat the Bank's policy would be to make no further loans to Mexicofor any purpose until the rate issue was resolved. Thesituationwas pacified to some extent by the clarificationthat the lending restrictionwas limited to the power sector, but the issue remainedthe central topic in the dialogueuntil September 1961, when Ministerof Finance Ortiz dated March 5, 1953. !NMemo -'Memo to files dated Dec. 30, 1953.  94 Mena whose views were closer to the Bank's managedto get general agreementof GOM that there was need for rate increases, and the increaseswere approvedby the Tariff Commissionand confirmedby PresidentMateos. 10. For most of the decade of the sixties the economycontinuedto grow vigorously but the public finances continued to be weak as expenditure growth was not matched with new revenues. The Bank/Mexicodialoguefocussedon the need for public sector savingsto supportthe growing investment program, and on the growth and maturitystructureof the public debt, the service of which the Bank was already consideringto be too high in 1963. There was continuingconcern about the finances of the SOEs, but the approach was broadened beyond rates and tariffs to other means of achieving greater efficiency,e.g., in the case of power - frequencyunification, and in the case of the railways - the elimination of unprofitableservicesand routes, and the impositionof Federal Districtleviesfor water and drainage. Some of these were part of the GOMs actions to increase public sector savings in 1967, although the Bank while accepting the agreement in principle regarding unification expressed disappointment at the lack of action. There was markedimprovementin the public financesin 1968,and by 1969with the sexeniocomingto an end the dialogueabated. One Bank memo commented"there is or influenceover policy; ... little more that we can expect to achieve in the way of institution-building the Mexicansnaturallyprefer the Bank's moneyto its advice; ... they can reasonablyclaimto have made a pretty good job of economicdevelopment".@ Brief Convergence 11. Two factors were to enliven the dialogueafter 1969 - the switch toward an anti-povertythrust in the Bank under incoming PresidentMcNamnara and the election of populistPresident Echeverria in Mexico. At a meetingbetweenBank PresidentMcNamaraand economistsin MexicoCity in December 1969three new issues were put on the table - the need to help the 20 million rural poor, population policy and income distribution. The reflection of these concerns in the CPP in 1970 was striking; concernover the debt wastoned downand concernwasprimarilywith how to help the rural poor. There was renewedoptimismin the Bank that with the changein leadershipMexicowas entering a new phase of developmentand the Bank might find itself in a positionto exert more influenceon sector and macro policies.!' During the next two years the Bank repeatedlytried to engage the Mexican Governmentin a dialogueon rural poverty and the needfor strengtheningagriculturalcredit and extensionservices, and for investmentsin educationand training. Initially, the debate was unjoined as Mexicaninterests were directedat housing, irrigationand rural roads. However,the Bank statedthat it would considerassisting a rural road program and an irrigation program only as part of a coordinated program of rural development. Bank views were not ignored; President Echeverria in his 1972 "State of the Union Message"reiterated the intention to pursue the objectiveof a more equal income distributionand of specific help for the rural poor and a "ResponsibleParenthood" program was announcedto begin in 1973. As the rural development programran into organizational and institutionalproblemsthe Bank tried to steer the dialogue in supportof the 'integrated rural development"strategy. 12. Within the Bank there was beginningto develop amongsome staff a feeling of uneasinessover the increasinginvolvementin the "grey area betweeneconomicsand politics" and the inabilityto assess -'Briefing paper for visit to Mexico, Western Hemisphere Department; Nov. 27, 1969. "1Note dated March 5, 1970 on Economic Committee Meeting on Mexico on Feb. 26, 1970.  95 the true orientationof the Government;and they cautionedthat 'we should not base all our judgement and decisionsin Mexico on their performance in the area of rural poverty' ... for the growth of the modern sector will have to continuein any event. The ensuing CPP reflects the dichotomyin attitudes withinthe Bank by identifyingthe main issues to be a) commitmentof GOM to improvethe lot of the rural poor, and b) the need to buttress public finances, especially of the Electricity Development Corporation (CFE) and PEMEX. Before the end of 1973 the public finances had deteriorated as expendituressoared, and faced with rising inflationthe GOM announceda 16 point program to bring inflationunder control whileprotectingthe poor. This meant increaes in wages and prices of corn and beans. Price increasesfor publicsector serviceswere allowedto lag; an issue which alongwith the need for fiscal reform becamethe foci of discussionswith a Mexicandelegationto Washingtonin March 1974 and indeed for the remainderof the year. The Rich Know Best How to Manage Wealth? 13. Once again two factorsoccurred which influencedthe course of the dialoguebetween the Bank and Mexicofor the remainderof the decade. There was the first oil crisis causinga manifoldincrease in the price of crude; and Mexicodiscoveredlarge reserves of petroleum. In the 1974 CPP meetingat RVP level it was concededthat 'Bank leverageto negotiate macroeconomic policy conditionsis quite small, thus the Bank cannot go beyond a dialogue with the Governmenton the desirabilityof adopting new fiscal measures,export promotionand achievingbetter incomedistribution". Noting that proposed Bank lending would represent only 13% of the projected inflow of medium and long-term external capital, it seemedto Bank staff that a programinvolvingthe transferof $6 per capitamay not be justified for a high incomecountry.Y 14. But the delay in the effect of oil discoveries on the balance of payments coupled with the deterioratingpublic financeduring the last two years of the sexenioled to a dialoguein which both sides agreed that continuedBank lendingwas crucial, althoughinvestmentprograms includingBank financed projects would have to be revised. There was, however, no agreementregarding the macroeconomic performanceand outlook. While the Bank found the deficitsin the budget and the BoP larger than could be maintainedfor a period of years, the Mexicansargued that the problemswere essentiallyshort-term in nature and that in the medium term the prospects, particularly for export growth, were excellent. President-ElectLopez Portillo himself described the long-term fiscal objectivessuggested in an aide memoireon Pres. McNamara'sinstructionas quiterealistic,but counteredthat petroleumresourceswould be exploitedto meet BoP requirementsrather than conservationist criteria. Thus the Bank left the mid- 1975 discussions satisfied that the GOM would set up a mechanismto enable them to maintain a continuingreview and control of the public financesand the BoP. By the time of the Bank's annual meetingit was clear that there had been slippage in the Mexican economicperformanceon all counts. Discussioncenteredon Bank projectsstalledby the inadequacy of Governmentcounterpartresourcesand the windingdown of Bank lending. IMemo datedNov. 4, 1974to DirectorPRD; MexicoCPP - RVPMeeting. on Economic !'Memoto filesdatedApril 11, 1975;Mexico:Discusions with Authorities Performance. MemodatedApril 14, 1975.  96 15. With the beginningof the oil boom in 1976and for the next four years there was little attempt on both sides to indulge in a dialogueon macroeconomic issues. A Bank report noted that 'its recently discoveredoil reserves (sixth in the world) have practicallyeliminatedthe foreign exchangeconstraint to its growth process and thus enabled it to grow at annual rates of 8 percent and above by way of an importsustainedinvestmentexpansionwell beyond 15percent in real terms". Bank attentionwas drawn to the cause of those left behind in the Mexican expansion - the rural poor, and to social issues. Significantly,there was no Bank approved and agreed attemptto questionthe viabilityof the Mexican strategy. This may have been due in part to the differenceamong economistsin the Bank as to analysis of the situation, and the concernon the operationsside to expand lendingto a client that the rest of the world clearlyperceivedas having become much more creditworthyin recent years. It may have been partly due to the fact that in Mexicothere was a cleavageamongofficialsbetweenthose questioningthe viability of the expansioniststrategy with its rising inflationand over-valued currency and those who supportedit, with the latter becomingincreasinglydominant. In this situation both the Bank's position and the Mexicanpositionon any issue were ill-defined;perhaps influencedby concernon both sides with the issue of "graduation";- Mexico's oil wealthand accessto commercialfinancingon favorableterms makingit more and more difficultto justify continuedBank lending. A New Beginning 16. It was not until after the financial crisis of 1982 that there was opportunity for a meaningful dialoguebetweenthe Bank and Mexicoagain. Severalfactors coincidedto make this possible. Among these the sudden drying up of internationalfinancing, the weakness in the current account of the BoP revealed by the decline in oil prices uncompensatedby growth of non-oil exports, the dominanceof technocratsin the new de la Madrid administration,the fact that a new sexeniowas beginning, and the strong wish in the Bank to get back to the policydiscussiontable, seemto have been important. On the Mexicanside, prime preoccupationwas with managingwhat they perceivedinitially to be a short-term financial crisis. Hence they looked primarily to the IMF for advice on short-term stabilizationand financingrequirements. The Bank's approachwas not to try to butt in on a dialoguewhichthe Mexicans saw as more appropriatefor the IMF, but to seek other ways in which it couldbe helpful. It was agreed withinthe Bank that it wouldhelpby sendinga signalto the internationalcommercial bankingcommunity and actingas a catalystto inducenew lendingby them, if Mexicowouldcommititselfto a dialoguewith the Bank on longer term reforms. The Bank's offer of cooperationwas conveyedby a Senior Vice Presidentof the Bank. The merit of the suggestionand the seriousnessof the Bank was not lost on the Mexicans. What remainedto be decided was the proper vehiclethrough which the signal couldbe sent. 17. This vehiclewas not hard to identify. There was agreementbetween Mexicanofficialsand Bank staff that a fundamentalshift to an exportexpansionand diversificationstrategywas necessaryto reduce the dependence on oil exports and the vulnerability of the Mexican economy to instability in the international oil market. The necessaryESW had already been done by a Bank economicmissionwhich visited Mexicoin 1981. This was updatedby another mission in late 1982to lay the groundworkfor a quick disbursingExport DevelopmentLoan of US$350 million in 1983. Staff agree that the principal objectiveof that operationwas to provideimmediatefinancialsupport to Mexico;but it turned out to be also the thin edge of a wedge which was to open the door to an important dialogue first on export promotionand policy and, later, on trade liberalizationgenerally. 18. It may have turnedout differently. Had the Mexicanattempt at stabilizationbeen successfulat adjustmentsin strategy. But as events the time, they might havebeen less prone to considerfundamental unfoldedinflationarypressuresproved stubborn and there was no rush of financiersto lend to Mexico.  97 The Bank was seen as a potentiallyimportantsource of finance which had demonstratedwillingnessto help Mexico in a difficult time. In the financial climate of the eighties the Bank was not under any pressureto lend to Mexico, for many other clients had embarkedon structural adjustmentprograms and neededBank support. But recentESW showedthe needfor structural adjustmentand giventhat this was one of the Bank's most importantclients, the institutionfelt obligedto raise the issue. In the belief that the crisis was a temporary financialimbalanceMexicodeclinedto discussstructural adjustment. 19. The importantfactor makingfor a dialogueon policy changewas the realizationin Mexicothat the initialreactionto the crisis by the previous regime, involvingpoliciesfor greater governmentcontrol of the economyand its financialinstitutionsand the closingof the economy, had to be reversed. The decisionby the de la Madrid administrationto move toward freer trade and membershipin the GATT and the request for Bank support of the program brought to the forefront a vigorous dialogueon trade liberalization. The dialoguewas conductedon the Bank's side by economistFred Berger, nowdeceased, whom the Mexicans remember as being initially offensive, then persistent, later convincing, and eventuallytrusted and respected. Trade liberalizationis treated in detail in the chapter on ESW. 20. As the failureof the stabilizationcum financingapproachto the 1982crisis becameapparent, and as the crisis came to be re-interpretedas a debt crisis, new approacheswere suggestedfor its solution; the Baker initiativeof 1985beingthe most significantat the time. The Baker proposal, which reasoned that structural adjustment wouldhave to be an importantingredientof the debt strategy,envisageda more importantrole for the Bank. Mexican officials, being fully aware of the extent to which Bank/IMF supported stabilization/structuraladjustmentprograms encroached on national sovereignty, were not inclinedto a dialogueon structural adjustmentor to a SAL as such. They knew that many policies had to be radicallymodifiedbut the SAL wasnot a politicallyacceptablevehicle. It becameclear to the Bank that the usual SAL approachused in other countrieswouldnot be appropriate. 21. Instead, the Bank soughtto identify areas of concernwhich would be of interest to both sides. This was facilitated by a recently agreed consultative arrangement - the Country Program Implementation Review;a twiceyearly meetingof Bankstaff and Mexicanofficialsto reviewthe progress of the lendingprogramand to decidemeasuresfor expeditingsmoothdisbursementof funds. Naturally, disbursementhavingbeen slowedby fiscal constraintson counterpartfinancingwas one item usually on the agendafor discussion. Anotheritem was the onlendinginterest rate clause in the manyBankfinanced credit programs. Both sides had recognizedsincethe late seventiesthat inflationhad erodedreal interest rates and the financialintegrityof manyimplementinginstitutionsfor these credits, necessitatingsizable government subsidieswhich could not be accommodatedif public sector finances were to be brought under control. One thread of the Bank/Mexicodialoguedevelopedaround these issues, and culminated in the GeneralInterest Rate Agreementof 1984. This dialoguewill be examinedin greater detailbelow. 22. Opportunityfor further extensionof the policy dialogueto other areas of concernbesides trade policy and interest rates was delayed by the shift of Mexican priorities back to stabilizationas a result of the sharp resurgenceof inflationin 1986and the weakeningof the current accountof the BoP due to lower oil prices. The heterodoxstabilization strategyintroducedby the MexicanGovernmenttoward the end of 1987 was not born out of discussionswith the Bank and except for the demand management aspectsdid not reflect much IMF influencein its design. One Bank economistwas invited to come to Mexicoto interchangeviews on macro-stabilization during the design stage, but the invitationgrew out  98 of Mexican awareness of his academic contributions while in Argentina.' In fact, the Bank was essentiallycaught unpreparedfor the comprehensive Mexicanhomemadeheterodoxapproachby dint of having focussed too narrowly on trade liberalization as the essential solution to the wider range of challengesin nationaleconomicmanagementfacingthe Mexicans. At first, Bank reactionto the novelty of the Mexican approach was slightly skepticaldue mainly to unfamiliaritywith aspects like incomes policy, which are outsideof the Bank's free market theoreticalframework. Acceptanceof the merit of the Mexicanapproachby the Bank was due mainly to the explanatorynotes by this economist. 23. Then, the Bank, as it had done before, sought out opportunitiesfor dialogue in familiar areas where, based on the speechesof the likely next Presidentof Mexico, the Mexicanswould be interested, e.g. adjustments in industrial, agricultural and financial sector policies and institutionsgl'u With some further modificationat the end of 1988, the Mexicanstabilizationapproachproved effectivein its primary objectiveof reducinginflation,restoring confidenceand inducinga reverse flow of capitalthat had flown overseas. The dialogue on sector adjustmentswas timely, resulting in a series of sector adjustmentloans aimed at consolidatingan upward trend in GDP growth over the longer haul. 24. had not resulted in a definitive However, it was not forgottenthat the earlierdebt renegotiations solutionand the stabilizationstrategyhad involvedfurther increasesin the debt. Net interest remained high at over 20% of export earnings in 1989; new direct investmentinflow reached a three-year low; problemswere on the horizon. Meanwhile,international opinionon the debt problemhad shiftedto favor an element of debt reduction as one ingredientof debt restructuring. Mexican attention was fully focussedon this opportunity. In the Bank ESW on debt and debt restructuringand reduction strategies had been going on. The Brady Plan providedfor significantBank financial involvement;and with the Mexicansbeing aware of Bank theoreticalwork in the topic, the Bank' technical advisory input was welcomedin Mexicanstrategyformulation. One Bank economist,who had done most of the theoretical work, was on call to the MexicanGovernment;and his contributionshavebeen commended by Mexican officials interviewedfor this study. However, for obvious reasons the dialogue, involving as it did frequentlysecret preparationsfor negotiationswith internationalcreditors, has not left much of a paper trail in the Bank. See discussionsof Bank work on debt in the chapter on ESW. 25. Over time the CPIR had been broadenedto cover policy issuesnot strictly linked to the lending program, and indeedthe name was changedto Country StrategyImplementation Review(CSIR). This was accompaniedby broadening of the agenda to the point where there are scarcely any issues which cannotbe raised for discussion. However,to retain focus and keep discussionsdisciplinedand facilitate recording, the practice of circulatingdiscussionpapers before the meetingsbecameestablished. A wide "'Memo dated December 28, 1987. L'Memo dated September 8, 1986 from Bank SVOP Stern to SHCP Petriciolli of GOM mentions Reforming the Financial Sector among those areas of structural change in which the Bank shared the views of the Government. Compare with Memo dated January 24, 1986 in which Under Secretary of Finance Suarez Davilla's reaction to Discussion Notes on the Financial Sector is summarizedas follows: 'the financialsector was politically sensitive, especially with reference to the nationalizedbanks and that they did not consider it opportune to discuss it now'. 13 Memo dated March 1, 1988 - Mexico: Prospects for Future Financial Sector Work; shows responsivenes of Bank to speech by Pres. Salinas putting great emphasis on financialsector reform. See also Memo dated April 15, 1988 which noted that Mr. Suarez congratulatedthe Bank for the very quick response in sending recently a high level financial sector team to Mexico.  99 range of papers have been prepared as the discussionof strategy for the post stabilizationperiod has developedinto a frank and interestinginterchange. Social issues, includingpopulation and poverty are once more on the agendaafter an absenceof nearly two decades. And new topics like the environment have beenput on the agenda, in some caseswith full blown consultation seminarsdevotedto them. The new role of governmentin keepingwith the announcedprivatesector orientationof the economyhas been the subject of study and discussion. ESW on the North America Free Trade Area agreementhas also been ongoing for some time, and the implicationsfor Mexico's public investmentprogram have been a topic of discussions. Of course the public sector investmentprogramcontinuesto be part of the central core of topics for discussion. CASE STUDIES A Case of SuccessfulDialogue - The General Interest Rate Agreement (GIRA) 26. Prior to GIRA formulasfor the setting and /or adjustmentof onlendingrates on financialsector loans had been specifiedon an ad hoc basis under each separateloan. This was sometimesdone without reference to the general financial conditionsin the economy, such as prevailing market interest rates, inflation,or movementsin the exchangerate. Sometimescovenantslinked adjustmentsto interest rate averagesin the previous periodof x years, with the result that there were serious lags in real adjustment in the prevailingclimateof inflation. This was compoundedby delaysby the Governmentin makingthe adjustments,and greatly aggravatedand extendedthe severityof distortionsin the level and dispersion of rates. Many rates turned sharply negative. The non-uniformity of covenantsmade it difficultfor the Bank to enforce complianceon individualloans. Governmentinterlocutors, for these projects were themselvesoftenremovedfrom the locusof decision-making on interestrates, and were operatingwithout benefit of unifiedoverall criteria for adjustments. The policy dialogueon interest rate and credit issues thus tended to be diffused and low-levelon both sides.2 27. Some Bank staff regard the GIRA as the greatest achievementof the policy dialogue between Mexico and the Bank. The agreement signed in August 1984, replaced the individual interest rate adjustmentclausesunder 15 of 29 ongoing previous loans in a wide range of sectors with an umbrella arrangementfor adjustmentagreed in light of economicconditionsanalyzedin the context of periodic consultations.The agreementnot only covered previous loans but future ones as well. In addition, it appliedto subloansby a wide spectrumof parastatalfinancialintermediaries followingdisparate interest rate policies which defied effectivemonitoring or guidance both by the Mexican bureaucracy and the Bank. Equally important,the agreementprovidedfor a system of variable interest rates to be adjusted from time to time in accordancewith the variationsof a reference rate; cross conditionalityaffectingall financial sector operations; shift from fixed to variable interest rates; the establishmentof a high-level frameworkfor regular review of interest rate and credit policies; and the implementationof studies to enhancethe policy dialogue evolvingout of GIRA. 28. Variation in rates was necessary to avoid distortions, to prevent the decapitalizationof the intermediaryinstitutions, and to make the inherent subsidy transparent. The Bank foresaw that there would be strong Governmentoppositionto the complete eliminationof credit subsidies. GIRA was L31Appendix to MemodatedNov.3,1986;- Mexico: Reviewof General InterestRateAgreement andespecially (GIRA); Appendix - ProgressReportand Reviewof Is6ues. - Mexico:GeneralInterestRate Agreement  100 designedto addresshead-onthe issueof credit subsidies,and the GIRAmissionpresentedthe caseagainst subsidies,particularlyin the form of distortionaryinputand factorpricing subsidies,and advocatedmore neutral lump-sumsubsidy transfers. The GOM argued that such and approach while theoretically desirable, was not politicallyor administrativelyfeasible. 29. The agreementprovidedfor Mexiconotto requestreimbursement under the relevantloans as long as adjustmentsrequired under the reference rate formula remained outstandingand in the absenceof consultationsleading to Bank agreementon a waiver or postponementof the adjustment. There were many instancesof such consultationsas Mexico sought to balancethe need to minimize the burden of inflationon the poor beneficiariesof such credit programs with the need to maintainthe integrityof the intermediaryinstitutions. The Bank was generallynot unsympathetic of the difficultiesfaced by Mexico in managingthe macrolevelcrisis. This partly explainswhy the Bank was able to detect 'a markedly favorableshift in Government attitudestoward possibleBank involvement in a broadlyconceivedfinancial sector operation,includingESWon issuesin the post-nationalization of the bankingsystem". Continuing, the memo revealed "Followingon our mid-Julyprogram review, we have been informallyapproached on the possibilityof some form of Development Policy Loan in supportof financial system reform".1v 30. The GIRA remainedrobust for a long time, the AverageCost of Funds finally proving to be a suitable and practical reference for rate adjustment. A review at the end of 1986found that in general interest rates had become positive in real terms, althoughthis had not been pushed by the Bank as a formal objectiveof GIRA. One major objective, the establishmentof a formal system of Government budgeting,controland accountingof credit subsidies,howeverhad not been fully achieved. Toward the end of 1987 attentionshiftedto the developmentof methodologyto measure financialsubsidies, and to design refinementsin the reference rate; both with a view to a continuingdialogue on financial sector policy. Subsequently,as the rate of inflationcame down and work on financialsector reform pickedup, GIRA becamejust another item on the agendaof the CSIR. A note on GIRA tabled at the 1990 CSIR recordedthat during 1989the Governmentadopteda new referencerate, the CETESor treasurybill rate, for establishingthe marginalcost of borrowing,and abolishedall credit subsidiesexceptfor low income 1 5/ agriculturalists. 31. The 1991 CPIR noted that "considerablereforms have been implementedin the rural financial system of Mexico. They include ... better targetingof subsidiesthat were formerly channelledvia the credit system. However a number of actions remaining to be taken will be supported by a Rural FinancialSectorLoan. They will lead to a system without interest subsidiesand with full recovery of loans")A' Referring to the trade and industry sector the same CPIR noted that adjustmentlending for financialsectorreformshas supported,amongother things, substantialreductionof interest rate subsidies on most officialcredits. Thus, the pursuit of the objectivessought but not fullyrealizedunder the GIRA are beingpursued in other ways, and the dialogueon the issues continues. datedOct.3, 1984,from Director, LC1 to RVP - Mexico:InterestRate Adjustments -L'Memo RequiredOctober1, 1984. IaAttachment to Memo dated February 2, 1990. l'However, it should be pointed out that this loan was never made because the Bank and Mexico could not reach agreement on important aspects of future reform.  101 A Case of UnsuccessfulDialogue - The Maintenance of Value 32. Despitecontinuousdialogueover manyyears the Bank and Mexicohave failed up to the present to reach agreementon the maintenanceof value of Mexico's contributionin pesos to the capital of the Bank. This has been a source of noise in the relationshipbetween them. Accordingto the Mexican account, the World Bank drew down the pesos in its account in the Central Bank of Mexico before August 1976and transferredsaid pesosto accountsin dollars abroadin order to utilize them in granting credits denominatedin Mexicanpesos. As the peso was devaluedseveraltimes beforethese creditswere fully repaid the World Bank stood to suffer a considerableloss. The Bank considers that Mexico is obligatedto maintainthe value in dollarsof said pesos. 33. Mexicoargues that at the time the Bank drew downthe pesos it got from Mexicoreal resources based on the purchasingpower of the pesos at the time or U.S. dollarsbased on the exchangerate at the time of drawdown, dependingon whetherit lent the pesosdirectlyor convertedthem into dollars. These real resources were lent to other membersthrough credits which did not provide for the exchangerisk to be coveredby the borrowingcountry, with the result that the borrowingcountriesrepaid far less than they had borrowed. Mexico argues that it should not be obligatedto maintain the value in dollars of these credits; and that it is unable to be responsiblefor maintainingthe value of the nominalpesos once these have been handed over to the World for its use in granting loans. UY 34. The Bank acceptsthat the Mexico's positionhas merit, but considers itselfboundby rules which applyto all its membersand whichdo not discriminateagainstMexico. It wouldprefer to keep the rules intactand treat the Mexicanas a special case. The Bankhas been seekinga devicewhereby both the rule as it stands and the Mexicancontentioncan be satisfiedsimultaneously.This device can only be found by defining somethingas having value in pesos to the Bank without imposinga present or contingent liabilityon Mexico. The feasibilityof such a device is not obvious, althoughin a climate of flexibility and trust it may be possibleto create one. 35. Meanwhilethe issue continuesto be raised in correspondenceand in meetings. By now it has become to some Mexican officials a symbol of inflexibilityof Bank bureaucracy which no review of Bank/Mexicorelationsshould ignore. Bank staff are less prone to attach significanceto the issue in the broader canvasof relationswhere operationalmatters predominate. Areas of Inadequate or Lacking Dialogue Oil/PEMEX 36. Relationsbetweenthe Bank and PEMEXgot off to an inauspiciousstart when, after refusing to provide data requested by the Bank/Mexico Working Party in 1952, PEMEX registered strong disagreement with the Party's report, particularlythe conclusionthat it had neglectedexplorationand that over-exploitation of known fieldswas exhaustingreserves..!' The philosophicalpositionof the Bank on the strategy of state interventionin fields suited to private enterprise - outstandinglythe case in the 7 L- Interviewwith Dr. Ariel Buira, Banco de Mexico, September 1992; and letter dated Feb. 9, 1994. lYLetterdated July 7, 1953 from Sr. AntonioBermudez, Managing Director of PEMEX to Mr. Eugene Black, Pres. of IBRD.  102 petroleumindustry - also made for a difficultdialogue with Mexico about oil and PEMEX.LfNoting that PEMEXhad refused to cooperatewith the InvestmentCommittee,set up on the recommendation of the Bank to coordinatethe public sector investmentbudget, the Presidentof the Bank made it clear that if the Bank would contemplatelending for the petroleum industry the Bank would have to make a searchinginquiry intothe organizationand businesspracticesof PEMEX, which he expresseddoubt that the Mexican Governmentwould want the Bank to do.z' The reaction of MexicanPres. Ruiz Cortines was to confirm the GOM's negative attitude to IBRD financing of PEMEX. The question of Bank financingfor PEMEXwas raised by Mexico again in 1964but the Bank indicatedit had no interest in providingit.3' 37. In the early seventiesthere was a resurgenceof Bank interest in PEMEX, growingout of general concern for the public financesand the repercussionson it of the failure of SOEs to generate adequate savings. Additionally,Bank attentionwas drawn to PEMEX by the fact that its physical performance determinedthe level of net oil importswhichwas a factor in the weakeningbalanceof paymentssituation. In responseto a threefoldincrease in hydrocarbonimportsbetween 1971and 1973special attentionwas paid to the oil sector in an appendixto the report by a 1974economicmission. PEMEXwas forecasting outputgrowth of 8% per year and the eliminationof importsof crude by 1975. However, the mission's petroleumconsultantconcludedthat further explorationwouldbe necessarybeforeMexicancrude export capabilitycould be evaluated.w'Apparently,the consultanthad interviewedsome PEMEX staff, which prompted the leader of the mission to write that "On the basis of these discussionsand my earlier analysis,I believewe nowhave a reasonablyclear pictureof recent eventsand likelyfuture developments in the petroleumsector and how they relate to the rest of the economy".;' The note to files analyzed the implicationsfor the public financesas well as the BoP. This marked the end of the first phase of Bankconcernwith PEMEXand oil, during whichemphasiswas on the adequacyof domesticproduction and on the impactof the rising oil importbill on the externalaccount. 38. The next phase beganwith probingsby GOM of the possibilityof Bank finance for investments in the sector to exploit newly discoveredreserves, and to take advantageof the Bank's program in the energy field. After some examinationwithin the Bank of the possibilityof assistingPEMEX for some selectedinvestments(gas pipeline,crackingunits, desulphurization plants, etc.) the discussionconcluded againstencouragingthe Mexicanson the prospectsof such assistance,on the groundsthat a full-fledged appraisalof PEMEX would be beyond Bank capabilityand that the Bank's program in the energy field was to assist poor oil importingcountries.>2 But the Bank remainedintenselyinterestedin the potential effectsof rapid expansionin oil exploitationon the Mexicaneconomy. An aide memoireto clarify Bank concernsafter discussionswith Mexican officials noted that "there was agreement on principles, but importantdifferences and doubts remain. Most importantamong these -exchange rates, timing of 2t Memo dated Nov.17, 1954; - Mexico: Mr. Black's Meeting Yesterday with Senator Bermudez (Pres. of PEMEX). )'Memodated Nov. 29, 1954; - Mexico: Meeting with SHCP Camilo Flores. L'Memodated April 15, 1964; - Mr. Knapp's Discussionsin Mexico. to Office Report dated April 17, 1974. Memo dated Oct. 23, 1974. WHBack W'Memoto files dated March 1, 1975; - Mexico: Petroleum Sector. dated July 20, 1977 and Feb. 6, 1978. L4'Memos  103 exploitationof hydrocarbonresources, capacityof the Mexicaneconomyto absorband use efficientlythe foreign exchange from oil exports".> In a CPP meeting in 1978 Bank Pres. McNamara openly worried that 'he knewof no oil producingcountrywhich had managedits resources acceptably,avoiding economicdualism";N' reflecting Bank concern that the exchange rate may be allowed to appreciate thereby adversely affectingthe growth of the non-oileconomy, slowingjob creation and worseningthe inequalityin income distribution. The Bank also feared that the foreign exchange earnings from oil would not be absorbed by Mexico without exacerbatinginflationarypressures and/or without a large growthof unnecessaryconsumerimports. From thepoint of view of the Bankthis justified slowingdown the expansionof exports of petroleumand its products. 39. Bank concernswere not lost on the Mexicans. There were some high officialswho agreed that major changeswere necessaryin the Mexicaneconomyto reducepovertyand inflationand that oil dollars wouldmake adjustmentsmoredifficultto agree and to implement. They also agreedthat it wasdesirable to avoidexcessiveconcentrationof investmentin few sectors, a tendencylikely with the oil bonanza.2Y' A 1979Bank economicmission noted (apparentlywith some satisfaction)that there was great concern at all levelsin Mexicoabout the danger of misusingoil resources, and that they had decided to establish an oil productionceilingfor the mediumterm and generateforeign exchangeresources more or less in line with the absorptive capacity of the country.w While Bank concern about oil was assuaged, mention of "An implicationof this oil policy is that Mexico will continue to borrow against its oil reserves to fill a resourcegap which is mainlythe result of ... the current large investmenteffort' proved prophetic. What the Bank failed to foresee was the scale of such borrowing and the crucial role than PEMEXwould play in it. 40. It should be observedfrom the abovethat in the absenceof any Bank lendingto the oil industry there was no dialoguewith PEMEXduring the period after the 1977. The dialogueon the implications of the oil boom for the economyas a wholewas carried on with the Central Government. The Banktook comfort in the statementsof policy receivedfrom the latter, but was unable to judge whether actions within the industry validated what was being told by people outside it. In retrospect the Bank was unaware of the relative lack of dialoguebetween PEMEX and Central Government. The relative lack of dialoguebetweenPEMEXand the governmentresultedin major economicpolicy choices(such as the 1978decisionto go ahead with a largely oil based economicgrowth) made withoutfull PEMEX senior executivesinvolvementin the process. In such as case, as in many others, politicalconsiderationswere the main basis for investmentdecisions. Although PEMEX president (Mr. Serrano) was an ardent supporter of such a strategy, a number of PEMEXsenior executiveswere strongly opposed since they felt that oil resources would be wasted in a too rapid expansion program that PEMEX could not effectivelyimplementin a balancedway. In fact, PEMEXstaff's main concernprobably was to obtain sufficientfinancial resourcesto implementsuccessivesix year companyplans withoutmuchgovernment control. L'Aide-Memoire dated March 8, 1978. 2FNoteson CPP meeting dated Sept. 20, 1978. Z!Memo dated Feb. 2, 1979 outline SHCP Ibarra's views. L"Backto Office Report dated April 2, 1980.  104 41. The relative lack of dialogue along two sides of the triangle is reflected in the unrealistic assumptionsunderlyingthe strategy and the erroneousforecasts on which plans were based.w One of the objectivesof the Mexicandevelopmentstrategyunder the LopezPortillo regime was to foster non-oil exports in order to reducedependenceon oil revenues. Exportingcrude oil wasnot to be a first priority. Yet the strategy assumed that PEMEX would generate sufficientsavings to finance not only its own investmentbut a substantialpart (about 30% in 1977-82)of all other public sector investments. But to come closeto this performancePEMEXoutputand exportswouldhave to grow by leapsand boundsand this in turn required a massiveincrease in PEMEXinvestments. As it turned out Pemexsavingshardly increasedand covered less than half of direct investmentsduring 1977-82;the most difficultyear being 1981when direct investmentreached MexPesos230 billion compared to savings of only MexPesos 16 billion. PEMEX had to rely extensivelyon external and domestic borrowing to pay for its massive investmentprogram; its debt, half of which was short-term,tripled between 1976 and 1979. Its deficit during 1980 and 1981 suggest that Pemex debt very likely doubledbetween 1979 and 1981.3 At the sametime the contributionof oil revenuesto Federal Government fiscal revenuesrose from 9.1% in 1976 to 27.6% in 1981 and 37.8% in 1982.2' In addition to this, PEMEX became the largest source of public sector subsidies,about 6% of GDP in 1980. 42. In the absenceof a dialoguewith PEMEX it is easy to see why the Bank, especiallybecauseof the tardinessand incompleteness of Mexicandebt reportingand the focus on long term debt, wasunaware of the impendingcash flow crisis facing foreignexchangemanagementby the Mexican Government. It was also unawareof the extentto which the high importcontentof PEMEXinvestmentswhich in addition to a generallyliberal import policy and the expansionarydemand managementwould be associatedwith deteriorationin the current account. The Governmentalso seemed to have been unaware of the short term exposure of PEMEX and the sensitivityof the financialpositionto oil price changes, while it was clearlypre-empting PEMEXsavingsto financeFederalGovernmentexpenditures therebyforcingPEMEX to borrow. This does not mean either that PEMEX was the cause of the crisis or that the Bank with better information wouldhave been able to do anythingto avert it, but the balanceand timelinessof Bank advicemight have been different. 43. For five years after the crisis contributionof oil to Federal Fiscal Revenuesremainedabove the level reached in 1982; and for the next three years after 1982PEMEX savings were double its direct investmentrequirements, allowing a significantnet contributionto financing of other public sector investment. In short, the dependenceon oil did not decline. It has been seen that a dialogueon oil and PEMEX could have been of help in the generally more open and frank economicpolicy discussion 2 'Bank staff interviewed overwhelminglyagroe that the lack of information on PEMEX did compromise the Bank's understanding and appreciationof the economic situation. 3'PEMEX external debtat the time of the crisis in 1982 has been estimated at US$20 billion or about one-quarter the Mexican total. The largest chunk was a Bank of America Facility of $4 billion - 180 day line of credit against receipts from oil transactions. (Source: Joseph Kraft; - The Mexican Rescue; publishedby the Group of Thirty, New York, June 1984) 11 'See the Chap. on the Oil Sector of this report for further detai.  105 betweenthe Bank and Mexico that has been graduallydevelopingin the since the crisis.;W However, this dialoguehas not developed. The ultimate reason is the GOM has not wished to open PEMEX to scrutinyby the Bank, but it has been suggestedthat the GOM itself, certainlyat the official level in the Ministry of Finance, until recentlyhas not had an effectivehandleon PEMEX affairs. Recent changes in the corporate structure and managementof PEMEX made by the Salinasadministrationare expected to remedy this situation. 44. In the decade of the nineties, the Bank may therefore have an opportunityfor dialogue with PEMEX which it never had before. Although the importanceof oil has declinedsince 1987 and the growth of non-oilexports makesthe economymore able to withstandoil price shocks, oil continuesto be importantto revenuesand to public sector savings,and energypolicy issuescontinueto be very much on the developmentagenda.3' The Bank must decide soon whether to seek and to grasp any such opportunityfor dialogue. This decisioncould well involverevisitingthe issue of whetheror not to lend to the sector. For the central lesson from this review would seem to be that the Bank in its role of advisoron developmentand economicmanagementcannotbe effectivewithoutadequateinformationon sectors which are likely to be key influences on the economy, (in Mexico the impact of oil on the exchangerate cannot be ignored), even where it is not involvedin lending operations in those sectors. So importantis this point, that it may sometimesbe worthwhileto provide limited supportto a sector if only to get a foot in the door that gives accessto information. Indeed, in the reviewof the Water Sector the observationhas been that the Bank has had significantinfluenceon sector policies and development whileprovidingless than 10% of its financingrequirements. Some Other Topics 45. In a number of areas an effectivedialogue was late in starting. In some the issues were raised early on but were put aside. Three such topics are poverty, population, and the ejido system of land tenure. As will be seen below these topics were initially raised more than twenty years ago. Shortly after, the economywas in a fiscal and balanceof paymentcrisis and attentionof the economicmanagers was divertedto stabilization. Discoveryand exploitationof oil promisedto remove these concerns,and for a while it seemedthe attentionof the Governmentand the focus of dialoguewith the Bank wouldhave shiftedbackto these essentiallysocial concerns. Indeedpronouncements by the PresidentLopez Portillo suggestedthis wouldbe the ultimateobjectiveof the fast growth strategyduring his administration. Bank ESW in 1978/79dealt with the issuesof povertyand populationgrowth, stressingthe need for adequate expansionof employmentexpansionwhich would require rapid expansionof the non-oil sectors of the economy. The rapid increasein inflationdrivenby excessiveborrowingand monetaryexpansion leading to the crisis in 1981 diverted the dialogue away from these issues. The debt problem, inflation,trade liberalization, stabilization, and concern with structural adjustmentin key sectors - finance, state enterprise,industryand agricultureeffectivekept socialissuesoff the agendauntil about 1989whenESW on post stabilization policy issuesreturnedto them. This pavedthe way for the re-start of the dialogue. '21MemodatedJune 23, 1986from Chief Economistto DivisionChief LACMexicoPrograms-We have not had accessto PEMEXand shouldthereforebe cautiousin what we tell the Board (and what we tell the Mexicansin the report).' "'Mexico: CountryStrategyPaper- Update;July 6, 1990.  106 Povert 46. Bank President McNamara raised issues in relation to rural poverty during his 1969 visit. Mexicanreactionwas that administrative mechanismsfor programsto address rural povertywere not yet developed.3' Sensing from its rhetoric that the Echeverria administrationmight have been interested in pursuingpoverty alleviationprograms the topic was kept in the forefrontof Bank/Mexicodiscussions for the next three years, leading to agreementby the Governmenton an integratedrural development program (PIDER). (See chapter on Agriculturefor further details). PIDER required closer cooperation and coordination than was forthcoming from a system suffering from chronic isolationism and jurisdictionaljealousies among agencies,and therefore was a failure. The dialogue started in 1989has come at the issue of poverty from the wider backgroundof human resource development,coveringsuch topics as education,health, nutrition, women in development,and sensitiveto the linkage betweenthe issuesof povertyand environment. This dialogueis beingsupportedby recent ESW which is benefitting from enthusiastic Mexicancollaboration. As in manyother areasof developmentthe Bank's attitudehas shifted from the simplistic "can do' approach of the early seventiesto the "lets learn together' more pragmaticapproach. Unsurprisingly,the first operationfor poverty alleviationis a pilot project. 47. The 1966Reportby missionled by an economistlater to become a LAC Programs Director was the first to deal with the Ejido system. Agriculturalannexto the report treated in detail the two main subsectors - commercialagriculture and ejido. Mexican development strategy was trickle down, focussingon commercialagriculture; and the Bank supported it. The report on ejido did not evoke a discussionon what some Bank staff say was a tabu topic, but it may have served to sensitize the next (Echeverria)administrationto focus more thanothers beforeon poverty issuesincludingrural and ejido. A dialogue over ejido did not take place within the context of dialogue on rural development,because the latter did not get beyond strictly project concerns. This is so because Bank President McNamara sensing that his interest in rural developmentwas not shared by the Regional Vice Presidencyset up a special rural development division with the Central Projects Department for dealing with it. The ProgramsDivision remainedthe main interlocutorin the policy dialoguewith Mexico, and that division saw the thrust for economicgrowth and the continuedrapid expansionof the modem sector as having greater merit on economicviability and even on poverty alleviationgrounds. The drift of the policy dialogue increasingshiftedto macroeconomicconsiderations with the oil crisis and with the weakening fiscal situation. Severalrural development projects were attemptedin quicksuccessionbut there was no recorded attempt by the task managers in the Bank to extend their interest to a critical examinationof ejido. 48. The administrationof President Salinas signalled a new approach to the restructuring of agriculturewhen it soughtto amendthe constitutionto open the way for changesin the legal basis for ejido.35' Subsequently,the administrationmade it clear that even ejido was open for discussion by seekinginformationand papers reflectingthe Bank's experiencein land reform. Apparentlyit believed 'lnterview with former Bank staff. -'Note to files dated 11/08/91 on the State of the Union Report - Ejido and Education: *Pres. Salinas in his Nov. 1991 suggested changes in the ejidatario system, which he said divided the land worked by the campesinos into economically inefficient units."  107 that from the Bank's worldwide experience in agriculture and the legal arrangementsgoverning land holding there may be some lessons in the land reform area that may be of relevance to the Mexican situation. There is no record of Bank follow-up,and the topic does not appear in a 1992list of tasks in the ESW program.3' Population 49. McNamaramentionedthe matter of Mexico's rapid populationgrowth during his 1969 trip to Mexico, but he did not press the discussion. Populationup to then was a taboo subject. There was a low key programduringthis periodwhich enjoyedcarefullydisguisedGovernmentsponsorship. Opinion was split as to whetherthe mentionhelped or set back the program. While populationgrowth has been mentionedfrom time to time in Bank/Mexicodiscussion it has not been a topic accorded special emphasis. However, the dialoguehas continuedwithinthe wider discussionaboutpeople,- their health, their education,their housing and their employment. Bank staff have expressedrespect for demographic work done in Mexico's academiccommunityand collaborateswith the researchersdoing it. SECTORDIALOGUE Electricity & Power 50. In the electricityand power sector traditionalBank practice during the first two decadeswas to channel its policy dialoguethrough specific lendingoperations. No meaningfuldialogue on the energy sectortook place between1975and 1985,followingthe completionof Loan 834-MEand the interruption of Bank lending, as fundamentaldisagreements persistedon tariff and procurementissues. There is also no indication that electric power or other energy-related issues were addressed in the context of macroeconomicadjustmentlending when the latter becamethe predominantlending instrument in the early 1980's. 51. It can be argued,however,that the Bankshouldhavebeen more forceful, whenrenewinglending to the Power sector, in emphasizing the distortionsbrought about in systemplanningby the introduction of financialconstraints. The Bank's attemptsat formallydiscussinga new regulatoryframeworkfor the sector have so far been met by resistancefrom the authoritiesand the follow-upto the Bank-financed study on CFE's organizationis yet to be defined. In spite of such a lack of formal dialogue on these issues,which most likely reflectstheir politicalsensitivity,the Bank's very insistenceon their importance mayhave contributedin part to the Governmentacknowledging the needfor legal changesand ultimately to the very recent enactment of a new Electricity Law which opens up the sector to independent generators. TransportSector 52. There have been a number of transport sector policy issues on which the Bank and the Governmentof Mexicohave had significantdialogueover the past few decades. While other transport issueshave also engagedthem in lively debate, the dialogueon these more importantissueshas defined the relations betweenthe Bank and the Governmentwith regard to the transport sector. 36 'Letter dated March 26, 1992 from Director LACI to Gurria updating him on ESW in progress.  108 53. The effectiveness of the Bank/Borrower dialogueregardingthe transportsector has varied widely over the years. During the years 1969-1971,the dialogue was apparently reasonably good mainly because the President of the Republic took a special interest in the Bank' transport sector study undertakenat that time. During 1972to 1982the changingstate of the economyinfluencedthe dialogue. The other major factoraffectingthe dialogue,evenmoreprofoundly,wasthe economic policy established by the nationalpresident. Clearly, the nature of the economicpolicy of PresidentSalinas (1988-1994) and the close working relations his governmentestablished with the World Bank on basic economic issues, has a substantial influenceon the character of the dialogue on transport sector issues and the decisionsmade. 54. The transportsector report, whileuseful in the past, has not been a fullyeffectivefoundationfor the dialogue;the principal reason for this deficiencyis that insufficientresources have been allocated withinthe Bank for sector work. Probably no other action wouldlead to greater improvementin fruitful dialogue than the strengthening of transport sector reports based on increased allocations of Bank resources to the production of such reports. In the future, there is reason for optimism concerning positive results of the Bank/Mexico dialogue on transport issues, assuming the present Mexican receptivityto policy reform continuesand the Bank's transport sector work is well done. Water & Sewerage 55. Not surprisingly,there does existtodaya feelingof mutualrespect and trust betweenthe Mexican and Bank sector staff which permits a frank and open exchangeof ideas and experience. Although the dialogue is intensive and apparently successful, it will eventuallyhave to be judged by the payoff achieved. For this reason, some cautionarywords are in order. The unanimityin sector and project objectivestends to ignore the fact that the two partnersin the dialogue do not have the same perception about the urgency of the actions needed to achieve these objectives. It is quite possible that a streamliningof the procedureshas resulted in the significantaccelerationof disbursement,but that the lackof adequatepre-feasibilityand feasibilitywork, particularlyeconomicand least-costanalysis,which had been of concernthroughoutthe FIFAPA Program, persists. There seems to be a similar divergence of opinion(as expressed in action - or, more accurately,inaction)about the urgencyof training as a meansto ensure to better projectpreparationand institutionaldevelopment. The dialogueis satisfactory, but the actionsresulting from it are not necessarilyadequate. Agriculture 56. Untilthe mid-1980s,the Bank's approachto the agriculturalsector (in Mexicoas well as in many other borrowingcountries)was by necessitynarrowlyproject-oriented. Macro-economic issuesand key micro-economic policies affectingproject outcome were frequently discussedwith Mexicanauthorities and flaggedconsistentlyin publishedand restrictedeconomicreports, but to little avail. The turnaroundbegan in 1986, when the Bank team was successfulin openingdiscussionson a limited rangeof issues. This was in the midst of Mexico's enormousexternal economicshocks which, among other things, led to the cancellationof aboutUS$400millionof the Bank's agricultureloan authorizations between 1982and 1987. The nationalists,protectionistsand 'agraristas" in the Mexicanadministration were being replacedby pragmaticanalysts. Many of them later rose to policy-making positions under PresidentSalinas. In late 1989and early 1990President Salinaselevatedagricultureto top priority and caused a real policy dialogue to be openedwith Bank staff who were eagerly awaitingthe opportunity to establisha more productiverelationship.  109 57. A significantinnovationin the Bank's new approachto the agriculturesector (as well as in other sectors) in Mexico is the close collaborationachievedwith the IDB in project preparationand policy dialogue, on both the formal and informallevels. The new collaborationis designed,on the one hand, to help the GOM escape from the burden of having to deal with two separate bureaucracieson similar issuesand programs and, on the otherhand, to effect economiesof scale for both banks as well as assure, for the first time, that they speak with one voice on delicatepolicy issues. The Bank itself should speak to the borrower with one voice rather than as individuals,divisionsor departments. This has not always been the case, though present arrangementsreflect a considerableimprovementover earlier times. Industry 58. Besides the regular economic missions which touched on industrial sector issues, the Bank mounted special missions to review in greater depth developmentsin this sector. These missions commentedon the government's industrialization and trade policies and identifiedmajor and persistent shortcomingsin the areas of protection, incentives,export promotion, employmentand localizationof industries. They also dealt with problems such as restructuring of enterprises, small and medium industries and technology improvements. Bank missions have made specific and detailed recommendations for remedialaction. 59. Sectormissionsdid reportobjectivelyon persistentissues,and did draw attentionto the inefficient way policies were implemented as well as to their potential consequences. The findings and recommendations of sector missions (the coverage of industry in regular economicreports was rather limited, usually of an updating nature and drawing on earlier conclusions of sector missions) were discussedat the hierarchicallyappropriatelevels of the policy-makingbodies. In particular, the 1986 Trade PolicyDraft Reportwas discussedat senior levels and althoughthe final publicationin grey cover was vetoed by the Ministry of Industry, had a major impacton trade policy discussions. Urban 60. The Bank's dialoguewith Mexicohas improvedconsiderablysince the 1970's in all areas of the urban sectors in terms both of increasedmutual respect and confidenceand of more collaborativeand quicker project preparation. Dialogue surrounding the first generation of urban projects tended to producetensionson both sides. Duringthe 1970's projectswere mainlyproposedby the Bankand, while never exactlyrejected were never brought to happy conclusions. In contrast, the late 1980's have seen the majorityof projectsproposedby the Mexicans,prepared quicklyand successfully. Whilenot without occasionalmisunderstandings and stumblesthe presentdialoguehas clearly improvedin terms of mutual respect and franknessas indicatedby the very fact that both sides can discusstheir problemsopenly. EVALUATIONOF THE DIALOGUE 61. If there is agreementthat policy dialoguecan be evaluated,which is not sure, there is no agreed methodologyfor doing so. This evaluationwill use an approach applying three concepts - potential usefulness,effectiveness,and conduct, to the analysisof the dialogue.  110 Usefulness 62. The potentialusefulnessof the dialoguedependson its scope and contentwhich in turn is relates to the view which the Bank and client share regardingthe role of the Bank; whetherit should be just a financialsource or a source of developmentassistanceproviding as well advisory, technical assistance and other services. On one side, if the role is mainly financing then there is need only for a narrow dialogue focussingon creditworthiness,and the public sector investmentand project financing issues. On the other side, if the role encompasseswider developmental assistance,then a wider dialoguenot just on economicbut on social and internationalissues is appropriate. The wider dialoguecan potentiallybe more useful than the more limited if the capacityto interfaceand absorb informationand ideas is not a constrainingfactor. 63. The scope and contentof Bank/Mexicodialoguehas been expandedover time in responseto the changesin the acceptedrole of the Bank, thereby making it potentiallymore useful. Understandably, the Mexicanswere not at first inclined to welcome outside institutions to the policy debate and any attemptby the Bank to imposeitself wouldhave been an affrontto nationalsovereignty. Althoughthe work of the Joint WorkingParty gave both sides a glimpseof the usefulnessof the broader dialogueon development,the limited role assignedthe Bank made for a dialogue of limited usefulnessfor the next fifteen or so years. Partly to blame was that the Bank was not initiallyin the forefrontof the still young field of developmenteconomicsand therefore did not seem a natural source of insights. By 1970 the Bank had developed a reputationfor analyticalwork in this field, but the narrow focus on economic growth and its simplistic general case approach limited its offering of ideas and insights and their applicability to Mexico - a clearlyuniquecase. Aroundthat time it becameclear that economicgrowth, even in a case where it was successfullybrought about, did not automaticallysolve the problems of poverty and inequity in distributionof the benefits of growth. This provided an opportunity for the wideningof the dialogue,but the Bank did not havethe capacityto provideintellectualinsightsand ideas and the informationand analyticalbase that would have been required was inadequate. Instead, the approachwas to address these problemsas if they couldbe solved by expandingBank financing- i.e. by throwingdollars at them. 64. The most profoundchange in the view of the role of the Bank has taken place during the decade of the eightieswith the generaltightnessin the supplyof developmentfinance, the dominatingimportance of concernwith stabilizationand debtmanagement,the need for correctivepolicy adjustments to deal with erroneouspast policies and new shocks, and the recognitionof the multi-disciplinary dimensionsof the development problem. These factorshavetended to increaseclientawarenessof the futilityof a strategy of self-sufficiencyin policyadvice in the faceof problemsof growingcomplexityand international scope. On the side of the Bank there has been increasingawarenessof the changesdemandedof it arisingfrom the increasingcomplexityof problemsfaced by the client and the need for a multi-disciplinary approach to policy decisions. Effectiveness 65. It would seem that the evaluationof any activityshould logically aim to make a judgementon the basis of the extent to which objectivesare satisfiedby the outputof the activity. This dependson the amountof output and its suitabilityto the way it is utilized. The service which the Bank renders through the policy dialoguecan be viewedas a final good (advice)to be offeredto the decision-maker or it may be viewedas an inputinto an activitywhich providesadviceto the decision-maker. Under the final good view effectivenessof the dialogue has to be gauged on the basis of the likelihoodthat Bank advice,  III offered in competitionwith outputfrom other advisors, is accepted;and if accepted,the degree to which it influencespolicy. Under the input view, the effectiveness of Bank service cannot be assessedapart from the effectivenessof the domesticadvisory process in which it is used. Effectivenessof the Bank service must be gauged according to the test of the marketplace. What does the client think of the service? Does the client continueto look to the Bank as a source for the input it needs? 66. If the Bank adoptsthe final good approachto advice, the producttakesthe form of policyrecipes purporting to be founded on infallible expertise and in the extreme case the client is coerced into acceptingit by marryingthe service with its other product- loan financing. This practice referred to as leverageor at its highestlevel of development- the strategy of 'measured response' never wasreally effectivein Mexico;perhaps becausethe Bank was only one of many and by far not the most important source of finance. The likelihoodof voluntaryselectionof the Bank as source tends to be undermined by the existenceof domesticsourcesand the preferenceat decision-making level to use domesticsources. Any elementof compulsion to ensure considerationof Bank adviceis boundto be offensiveto the client's sense of nationalsovereignty,and is likely to be inconsistentwith democracy. Becauseit tends to give the Bank authoritywithoutresponsibility,the process does not imposeon the Bankthe need for adequate qualitycontrol;- witnessthe all too frequentuse of relatively inexperiencerecent youngprofessionalto advise seasonedbureaucratsand the politicaldirectorate in some countries. These negativeattributesof the final good approacherode the likelihoodof acceptance. At the same time they mayalso enhancethe likelihoodthat the client may seek to minimizethe apparent influenceof Bank advice on final decisions, where the advice has been accepted. 67. By contrastthe input approachtends to be free of the negativeattributesof the final product one. The process tends to be collaborativerather than competitive with domesticsources. The appearanceof pressure for the decision to conformto externaladvice is reduced; there is no elementof compulsion; the wishes of citizenry is not frustratedby arrangementswith outsiders; hence the affront to national sovereigntyis removedand the likelihoodof acceptanceis enhanced. This approachto dialogue is likely to contributeto learningon both sides as both sides are likely to listento each other more and appreciate what each contributoris thinking. The demandfor Bank inputs is likely to be greater since the Bank in effect will have a seat at the table irrespectiveof who gets the credit for the advice. Domesticadvisors will seek Bank inputs in order providea better product, and may evenbe willingto stand aside for direct provisionof advice by the Bank when they do not have the expertise. 68. Over time the approachof the Bank to the policydialoguehas tendedto shift from final product to input. This has increased the likelihoodof acceptanceof the Bank at the table, as indicatedby the larger number of topics and issues which have been recently and are now being discussed, and the number of issues that are no longer too sensitive for discussion. While it is impossible to gauge effectiveness on the basis of the degree of agreementof decisionswith Bank advice, the willingnessto seek Bank input in the policy discussionprocess seems to have increased. In interviewswith officials the importanceof Bank inputshas been repeated frequently. As the Mexicanand Bank views on policy have come closer, the Bank has been asked to contributeof its experiencein implementing policies that have alreadybeen decidedwith or withoutobviousBank input. This has becomepossibleby the fact that in the contextof a non-confrontational dialogue, conductedin low voice, the linkage and timing of input and decisionbecome quite indirectand indistinct,hence neither side need lose face when a decisiongoes in one directionor the other. Apart from these considerationsthe participatoryand exploratorynature of the process avoidsthe formalization and hardeningof positionson either side and probablyresults in better quality advice than it otherwisewouldbe.  112 Conductof the Dialogue ErmofDialoQue 69. It is evidentthat the Bank/Borrowerdialoguehas taken manyforms. Loan conditionshave been negotiated concerning many policy issues. Various types of Bank missions (sector, preappraisal, appraisal, supervision, special missions) have provided opportunities for discussions in Mexico. Likewise, Mexicanshave visited the Bank on many occasionsto discussproblemsof commoninterest. Actionplans for certain necessaryimplementation actionshave often been preparedjointly by Bank and Government officials. The Bank has followed a practice of leaving an Aide Memoire with the Governmentat the conclusionof each mission. The EconomicDevelopment Institute has providedstill other opportunitiesfor Bank staff and Mexicansto discussmany transport policy issues. Letters and telephonecommunications havebeenused extensively,of course, to carry on the dialogue. At times, the Governmenthas sent to the Bank for review and commentparticular reports preparedby either its staff or its consultants. The Bank's economicand sector reports are the most fundamentalmeansby which the Bank articulatesits own views on policy issuesand communicates these views to the Governmentby providingcopiesof this report. 70. Are there criteria for judging the appropriatenessof various forms, or for judging the mix of forms which the dialoguetakes? Are these amenableto designand planning? Should these be designed or plannedor shouldthey be allowedto evolve? Forms differ in terms of cost to the Bank and in terms of absorptivecapacityand ease on the side of the clients. The time of interlocutorsin the client country is not unlimited; they have other things to do besidestalk with the Bank. Thus certain principles may be identified. Topicswhich cut acrossMinistriesor agenciesmaybest be discussedin interagency groups and at level high enough to resolve conflictsamongministries/agencies priorities and views. Topics of interest to several groups in the Bank should be discussedjointly rather than separatelywith client in order to avoidone Bankmissionafter anothergoing to talk aboutthe samething with the relevant agency therebyusing up their time and goodwillun-necessarily. Form of communication should be selectedto conveyinformationaccuratelyand sensitivelywith minimumuse of the client's time. This means that the form should also facilitate coordinationwithin the client; coordinatingagencies should be kept informedand should be allowedto plan client participationin dialogue in light of the fact that the Bank is only one of many institutionswith which the countryis involvedin dialogue. Clearly, rigid rules are undesirable;much must be left to judicious and sensitivemanagementon both sides. Planningand Coordination 71. Within Bankplanningand coordinationof the policydialoguehas not alwaysbeen good. At first whenthe Bankwas small and primaryfocuswas on creditworthiness and investment project relatedissues the arrangements for coordination though informalwere effective. Under McNamarathere were strains in the arrangementsfor dialogue with the developmentof two threads - one through LAC operations and the other throughthe RuralDevelopment Divisionof CentralProjectsDepartment. The CPP process did not adequatelybridge the two. Thus the dialogue during the early seventiestended to be bifocal reflectingtwo competingviews withinthe Bank regardingwhat was the best poverty alleviationstrategy for Mexico. Toward the end of the seventiesthe inadequacyof coordinationwas reflectedin conflicting attitudesby staff who felt that they were to lend no matterwhat Mexicodid and those whofelt that Bank lending was contributingto the public expenditureover-expansionthat was destabilizingthe economy. This led to a situationin which staff felt exposedfor they couldbe singledout by Mexicanofficialsfor complaintsto the Bank management about their individualposition on particular issues. Some staff  113 interviewedfor this study recall that they were frequentlyundercutby top managementin dealing with Mexico. 'Mexicans frequentlyresorted to pulling rank rather than debate issues; this was reflected in their going over heads of Bank staff directly to McNamaraand Burke-Knapp"is one comment that suggested that the Mexicans may have exploitedthe wealness in arrangementswithin the Bank for conductingthe dialogue. 72. The eightiessaw considerableimprovementin the arrangementsfor conductinga dialogue with Mexico. The twice yearly CPIR, the CSP everyfew years, and the CSIR, involvingthe preparationof papers settingout Bankpositionsand opinionshaverequiredgreater and more regular consultation among divisions. The reorganizationof the Bank in 1987along countryoperationslines also helpedthe internal arrangementsfor dialogue. In addition, the changein the outlookon the dialogueaway from advice as a final good toward advice as an input into Mexican ESW and policy formulationmakingthe dialogue more of an intellectualbrainstormingactivityhas meant that coordinationwithinBank to present a Bank positionhas become less important. In this atmosphereBank interlocutorscan feel less constrainedby the accepteddogma within the Bank and can feel free to engage in an honest searching and learning together for relevant client centeredsolutionsfrom which the Bank can also benefit. 73. On the Mexicanside the Ministryof Financehas beenthe principalpoint of contactfor the Bank for lending and for dialogue, but the Bank of Mexico, SECOFI, and at an earlier stage NAFINSAhave also been importantinterlocutors. This proved adequateand effectivewhen the Bank was seen mainly as a source of finance. Under administrations in the which the Presidencyhas taken the lead in guiding development policyand especiallyin the seventieswhenthe problemsfacingMexicowere not principally financialin nature, Bank staff viewedthe interfacewith the Secretariatof the Presidenciaas inadequate. One staffer recalls that "A problem in the conduct of the dialogue was that the Presidency was so powerful especiallyunder Lopez Portillo that a lot of decision-makingwas concentratedthere, = there was not much contact and discussionbetween the Bank and Presidencia'. This probably explainsthe Bank's relative lack of influencein macroeconomic managementat the time. 74. To a large extent Bank had to speak through the Ministry of Finance on macroeconomicand broader development issues, with the risk that its ideas would get through only if and when they coincidedwith those of that ministry. That this has not been a formidableobstacle is due to the fact that from the mid-seventiesMexicanPresidentshavecomefrom positionsin the bureaucracywherepreviously they have been participantsin the Bank/Mexicodialogue. Compartmentalization of Governmentalso impeded dialogue, in that dialogue with Ministrieswas very narrow and there was a disinclinationto share informationin meetingsat which were present representativesfrom several ministries. Level or Rank of Interlocutors 75. The Bank has tended to ignore the formalitiesof internationaldiplomacy,especiallythe notion of equivalence of rank. Outside the Bank people do have certain notions, irrational or rational, concerningwhat levels in the Bankequate to what levels in the governmentbureaucracy, whichthe Bank ignores at a cost. This matter of equivalenceis more importantwhere the Bank seeks to deliver "final good" advice through the dialogue, and less so where the intent is to deliver an input. In the latter case the technical expertise of the interlocutor is likely to be of greater concern than his level in the organization. Clearly, in some types of dialogue, in which the client wants the Bank's commitmentto further support, level will be important. The fact that Mexicanofficialson occasionwent over the heads of Bank staff to raise at higher levels withinthe Bank issuesunder discussionwith staff, partly indicates that sometimes they did not consider that the level of Bank staff selected to carry the dialogue was  114 appropriate for the issues they wished to raise. Staff think that the Mexicans hoped to get softer conditionsfrom senior management. Bankstaff see it as better to have a higher level representationthan to have staff over-ruledby senior management. 76. The general rule should be to have the Bank represented by staff equivalent in rank and or intellectualstature to their Mexicancounterpartsin dialogue. Departure from this general rule should be informedby sensitivityto the style and degreeof formalitypreferred by the client. In this Mexico's preference may not be difficult to interpret. Mexico tends toward formality in official high profile dialogue/negotiation and toward informalityin low profile intellectualinterchange. This meansthat the Bankshouldensurethat in formaldialoguethe institutionis representedwith staff of adequaterank, while in informal dialogue the main considerationwould be intellectual and technical competence. In the absenceof exact measuresof equivalence,the Bank must rely on the sensitivityof managementto these concernsof some clients and on the feedbackfrom its ResidentRepresentativeto guide its decisionsin these matters. of Topic and Level Appropriateness 77. It is probably unnecessaryat this stage of the relationshipto suggestthat there are appropriate levels of the bureaucracy at which certain topics should be raised. This works in two directions. Obviously, it is useless to raise issues of national policy at low levels in the government;not equally obvious is that high level Bank staff should not get into discussionof details and minor issues. In one Presidentto Presidentencounterearly in the relationshipthe matterof adequacyand timing of electricity rate adjustmentwas raisedby the Bank. The ensuing impasseproved difficultto resolvein a face saving way. Had the discussion been about the broader principle of financial soundness of utilities, an agreementin principle couldhave been reached and the details of pricing adjustmentscould have been resolvedat a lower level. The Mexicanscouldhave agreedthe principleand slowedadjustmentto meet their politicalconcerns;and the Bank couldhave continuedto raise the issueof amountand timingof rate increases,withoutthe leaders losingface. Once the impassehad been reached at highestlevel the matter was elevated to formal conditionalityand resulted in the suspensionof lending in this area for a long time. 78. There are some topics on which the Bank should not attempt to initiate discussion. These are those on which the Bank has not had an adequatebackgroundin research, experienceor understanding, or where the issue is so country specific that its internationalexperience is not likely to be relevant. Were there instances? The Mexicansthink there was. One former high official of the SHCP cites 'Public Sector Reform' in this connection. He said it was childish to think the World Bank could understand the nuancesof the Mexicanpublic sector enoughto pretendexpertisein administrative reform in Mexico. In the absenceof expertisethe Bank approachwas authoritarian,and the result was that the dialogue broke down. Given that the Bank can learn by participatingin dialogue, it should respond positivelyto invitationsto share its experienceselsewhereand/orjust to listen whichmay be made in the new climateof an open and informal dialogue. NegotiatingStrategy 79. Sometimesthe form of the dialogueis that of a negotiationrather than that of a conversationto transfer information,opinion,or render advice. Basically,there are two approaches- one in which the Bank starts out seekinga broad general agreementand then movesto particularissues, and one in which the Bank starts with minor issues and then tries to use the "thin edge of the wedge" to get the other side  115 to agree to broad general matters. Whilethe first maybe preferable especiallyif matters of principlecan be agreed at higher levels, for staff on both sides have a frameworkof agreementfrom which to work, Mexican officials have complained that the Bank has frequently tried to start by seeking a broad agreement in terms of as comprehensivea range of issues as possible and not necessarily on broad principles. Since some of these issuesmay extendbeyond the authority of the Mexicanrepresentatives at the table, and they are not prepared to deal with them, the process is invariablyand unnecessarily drawn out. When the second approach is adopted by the Bank, the Mexicans complain with some justification that the Bank tends to "up the ante", by introducing new issues at advanced stages of negotiations. Several officials complainedof experiencewith the Bank "springingsurprises" on them. This is mentionedhere in the chapter on dialogue,because it influencesperceptionthat the Bank is not "up front" and frank with its client in discussionsaround the table. Dialoguewith other FinancialInstitutions 80. An importantdevelopmentin the Bank dialogueon Mexicohas been its increasingparticipation in discussionsbetween Mexico and the internationalcommercialbanking community. This has come aboutbecauseof traditionalBankconcernwith creditworthiness, whichthe lessonsof the past haveshown that other lenders can ignore only at their peril. Bank participationhas been the result of high level consultationsaboutthe role the Bank could play at the time of the 1982financialcrisis. Sincethen the catalyticrole of the Bank in bringingaboutcommercialbank supportfor Mexico's debt restructuringand reschedulingefforts has become well established. This dialoguehas been carried on at high level, the Presidentof the Bank and its Senior VicePresidentof Financeand the RegionalVicePresidentbeing the involved. At the sametime Bank has on manyoccasionsfielded its highestqualitytechnicalexpertswhen the issuesunder discussionwarranted inputof this kind. Mexicanofficials have expressed appreciation for and applaudedthe performanceof the Bank in its new role. AND LESSONS CONCLUSIONS 81. The main conclusionof this reviewis that significantchangesin the acceptabilityof Bank advice by Mexico and in the philosophy underlying Bank attitudes have transformed the economic policy dialogue from a almost resented intrusionon national sovereigntyto a welcome and frank intellectual interchangefrom which scarcely any topic is now excluded. Mexicanshave concededthat the dialogue with the Bank over the years has very likelyhad some influence,albeit indirect,on policy decisions. As new technocrats, who shared similar educational backgroundswith many Bank staff, have risen to positions of prominencein the Governmentthe dialogue has shifted in the direction of a collaborative intellectualprocessdirectedat exploringpolicyoptions.The situationhas changedfrom one in which "the Mexicansdo not want Bank advice" to one in which "Mexicowould like to continueto have accessto Bank advice even after it no longer needs Bank financing". This can be interpretedto mean they have found the dialogue with Bank useful and effective. 82. Possibilitiesfor consolidatingthe dialogueand for strengtheningmust now be sought. The search must begin by seeing what lessons may be learned from the past. These lessons may be relevant in relations with other countriesas they approachthe levels of developmentMexico has achieved,and as their technical/intellectualcapability makes it feasible for them to do more of their policy design themselves.  116 Lessons 83. The main lessonssuggestedby this review and from interviewswith Mexicanofficialsand Bank staff, as well as from review of the paper trail left behind in files and reports are listed below. It is not a list of what the countryoperationsdepartmentought to be doing since many of the lessons are based on observationof what theyhave been doing, but merit recommendation to the wider audiencethis report may reach. The main lessonsare the following: - low key preferable, "Goodadvicedoes not haveto be shouted, it is just as effectivewhen whispered"; - intellectualinterchangeis preferable to conditionality; - timing is critical, Bank planners must pay attentionto the sexeniocycle; - in the dialoguethe Bank should not lead, but respond; the Bank can prompt or sponsor a debate withoutappearingto lead it; - the Bank must be willingto be flexibleand to acceptmodificationin its own positionin light of debate; and debate shouldbe an interchangenot a lecture; - Bank input shouldbe based on research and experiencerather than dogma; - Bank inputshould be informaland early before policy positions are formalized; - only mature and intellectuallystrong interlocutorsshould be deployed to conduct the dialogue especiallyin sophisticatedcountries; brilliance is not enough, they must be willing to listen and not be dogmatic. The effective participants who were largely responsiblefor the improvementin the policy dialogueduring the eighties shared these qualities; - avoidfrequentturnoverof staff so as to developsensitivityto the nuancesof the domestic decision processes and to win trust and confidenceof the main representativesof the other side; - invite high level officials to participatein the dialogue within the Bank, for exampleat seminars; - allow adequategestationperiod betweendelivery of Bank ESW input and the discussion process; - prepare for dialoguehavingdiscussionpapers prepared and circulatedbeforemeetings; - althoughthere is much to be said for informality,it is desirableto have some recording of discussionsto avoidmisunderstandings and to permit reviews such as this to proceed on a hard basis and not depend so much on fuzzy recollections;  117 frequent, regular Bank/countryreviews, such as the CSIR, can do much to keep the dialogue on various issueson track; both Bank and client should accept that developmentis not limited to the economic dimensionalone and a multi-disciplinaryapproach to the dialogue is likely to be more effectiveand useful to the client; staff shouldbe given at least basictrainingto developsomediplomaticskills beforebeing cast in the role of interlocutors; finally, the Mexicanexperienceunderscoresthe fact that the Bank has no monopolyon development expertise, and should therefore approach its advisory role with some humility and try to take advantageof any opportunityto learn from practitionersin the field.  119 7. THE LENDING PROGRAM INTRODUCTION 1. At the end of March 1993the Bank had made a total of 163 loans amountingto a total original principalof US$21.2 billion to Mexicosince the Bank was establishedin 1945. This is equivalentto approximately 10% of total Bank lending to all countries since its inception. Of the total original principalUS$1.2billionhas been cancelledand US$3.8billionremainsundisbursed. Total disbursements amounted to US$15.7 billion and the amount owed to the Bank amounted to US$10.4 billion, the differencereflecting repaymentsand sales of Mexicandebt to third parties.' 2. The review of the lending program in this chapter seeks to throw light on the considerations which influenced the amountand sectoraldistributionof Banklendingto Mexico,and the principalissues which arose in its implementationas seen from the Mexicanand Bank viewpointsrespectively. Then the program will be evaluatedto see what were its strengths and weaknessesand what are the lessons for future lendingto Mexicoand to other clients. OBJECTIVES 3. The Bank's main lending objectivesin Mexicohave been to transfer external resources to that country and to influence the formulationof economic and social policy. Over time the transfer of resourceshas been motivatedby differentconsiderations. Untilthe mid-1970sthe transferwas primarily to supportdevelopment by financingthe foreignexchangecontentof public investmentsin infrastructure. From the mid-1970sto the mid-1980sBank financingin support of private sector developmentthrough credit lines to agricultureand industrybecamean increasinglyimportantcomponentin project lending. In the six or seven years after the 1982financialcrisis the emphasisof the transfer was to assistfinancial stabilization by helpingto balancefinancingrequirements. 2 Toward the end of the decadeof the eighties the objectiveof the transfershiftedto emphasizesupportfor Mexico's structuraladjustmentefforts. The ninetiesbeganwith an emphasison supportto Mexico's debtreschedulingand reductionstrategyreflected primarily in the massive Interest Support Loan. This has been followedby a return to support for sectoral infrastructureand social sector development. 4. The objectiveof influencingthe formulationof economicand socialpolicy was importantin the first three decades during which the Bank thought it necessaryto influencethrough inducementsand incentivesthe setting up of rational public sector investment planning, the establishmentof sound financingplans, and the encouragement of positivepublic sector saving. Sincethe crisis of 1982policy- making in Mexico has been dominatedby technocrats who essentiallyshare the Bank's vision of the general direction of policies, and the objectivehas been more to assist the policy formulationprocess 'Statementof Loans and CreditsQuery System, (All-In-One)4/26/93 2Memodated August 22, 1986; from ActingRVP, LCN to SVPOP : Mexico - Disbursements under Existing Loans: SummaryAssessment. - Implementation of the financial package for Mexico, as submitted to the financialcommunityin July, 1986,calls for net disbursementsfrom the WorldBank of US$2.3 billion international over CY1986-87'.  120 rather than to seek to use lendingas a lever to influenceits outcome. Partly, this has come aboutbecause of the recognitionearlier on that the Bank's share in total externalfinancialflows to Mexicohad become so small that lendingcould not be used for leverage. 5. Another objectiveof Bank lending to Mexicomay be put under the heading of Bank Portfolio considerations.(Seealso para.12 below) Throughoutthe decade of the fifties and most of the sixties Mexicowas regarded as creditworthyfor lending and, althoughthere was no overt mentionof it, there was a flavor of concern in Staff Loan Committeedocumentsof the need for an adequateshare of lending to creditworthyclients. This may partly explainthe tendencyat the time to select projectsfor inclusion in the lending program on the basis of the importanceof the foreign exchange content in order to maximizeBank lending. This also may explainin part the sharp increasein number of loans and in Bank lendingduring the late seventieswhennewly foundMexicanoil reservesprovideda basis for exaggerated expectations of enhancedcreditworthiness,and when as a result Mexicohad access to massivefinancing from other sources and did not need Bank resources. THE LENDINGPROGRAM Size 6. From an average of US$100 millionin the fifties the size of the lendingprogram doubledwith each succeedingdecade, and in the three year period 1989-92the program averaged over US$2 billion in accordancewith commitmentsmade in the contextof the agreementon the restructuringof Mexico's debt reached with internationalcommercialbanks. In the fifties Bank lending was mainly for projects and waslimitedto the foreignexchangecosts. A memoof 1957shows that the Bank was concernedthat if loans to highwayand irrigation/floodcontrolprojectswere limitedto foreignexchangecosts, the loans and the lending program would be too small. 3 Foreign exchange content continued to be regarded as a constrainton total lending into 1963 - a memo indicating"if the normal rule is applied it is unlikely that total lendingin 1964-65could exceed US$150 million".' (See Tables 4 & 5) 7. After 1963the concern in the Bank was that public saving was inadequateto assure financingof non-foreignexchangecosts of the public investmentprogram. The 1964-65program (US$460over a two-yearperiod) was conditionedon the agreement betweenthe Bank and Mexico on the investment program and the financingplan - "If such an understandingis not reached, we should be prepared to continuelending to Mexico but on a lower scale than contemplatedabove". Thus began the period of the "graduatedresponse" during which the size of the Bank lending program was conditionedon the increase in public savings and, in particular, on substantialincreases in the prices charged by public enterprises. The Bank's justificationfor this posture was that pressuresto carry out the recommended programwithoutappropriatedomesticfinancingmeasureswouldjeopardizefinancialstability,crowdout private investment, and lead to excessive borrowing on inappropriateterms. In response, the GOM requestedthat a 50-50 financingformula be applied to all Bank-financed projects rather than the lower 3Memodated 6/25157. 'Memo dated11/21/63.  121 5 The percentageimpliedby the importcontent approach. The Bank rejectedthis coUtsharing approach. GOM failed to meet the conditions;and the followingyear the programwas reducedto US$200 million for 1965. 8. In 1968an economicmissionreporteda markedimprovement in public sectorsavings,attributing it to effectiveeconomicmanagement. 6 This probably affectedthe dispositionof the Bank to lend. The Bank's Economic Committee in 1970 said regarding the lending program that Mexico was probably movingtowards greater reliance on Bank assistanceand that the Bank shouldbe ready to respondto any invitationto enter new sectors of activity.' The operations program was expanded from an annual average of US$232 million to US$355 million; and Bank lending increased to a peak in FY75.' However,the Bank was mindfulof the tendencyfor Mexicoto be unwillingto curtailpublic expenditures during the second half of the sexenio, and tried to put continued pressure for the maintenanceof a positive level of public sector savings. During this period the Bank was willing to expand the lending program, if the Mexicansproved willing and able to absorb funds in projectsbenefittingthe rural poor and in the field of education. However, for political reasons it was not possible to obtain Mexican agreement for any educationproject, and the Bank could not quickly gear up to meet the staffing implicationsof the rural developmentprogram. 9. After a two year slippagein the growth of the Bank lending,there was a sharp rise during FY77- 81 with the approvalof 24 projectsamountingto US$2,565millionresultingin a doublingof the Bank's Mexicanloan portfolio. 9 In FY78 the Bank approved 6 loans totallingUS$469.5 million - an increase of over 30% over the previous highest level in FY75.'° In 1979the Vice President for LAC indicated to the SVPOP that 'for the present the main impedimentto lending is inadequateproject preparation rather than any financialceiling imposedby you or me"."' Later that year Bank President McNamara mentionedthat 'right now the Bank is ready to lend Mexicoa higher volumethan seems likely if one looksto the status of project processingin the existingpipeline". Meanwhilethe Bank adopteda strategy for dealingwith the persistentproblemof shortageof domesticresources for the supportof the investment program. This is reflectedin the followingexcerpt from a memofrom the ProgramsDivision Chief - "As you are aware Mexico is currentlypassing through a difficultadjustmentprocess, and the Bank's lendingshouldgive priority to: (a) projectsrequiring a minimumof counterpartfunds; and (b) projects in designatedpriority areas where budgetsupport would be assured".' 2 5Memo from Dept. of Operations,Western Hemisphereto Staff Loan Committee,dated6/19/64. 6Memodated 3/08/68. 7 Noteon Committeemeetingdated 3/05/70. t Memoto files dated 2/16/73; by DivisionChief, LAC 1 - Mexico: Lending Strategy. 'Memo dated 6/08/81, Vice PresidentLAC to Pres. McNamara. "'Memodated 6/14/78. "Memo dated 7/27/79. '2Memodated 6/01/77.  122 10. The project pipelineconstrainton the growthof Bank lendingwas later made irrelevantafter the 1982crisis by the shift from project lendingto program lendingand structural adjustmenttype lending. This shift was alreadyforeseenat the time of the 1981visit of the ProgramsDirector to Mexicoin which he stressed the need for "a new partnershipwith the Bank, diverting from the traditional approach of narrowlydefinedproject lending ... (toward)selectivesupportof the Bank in criticalmacroeconomic and 3 sectorissues".' The Export Development Loans and Trade PolicyLoans marked the changeaway from the traditional lending. The differencewas that these loans were designedto be quickdisbursing. The emphasisof the lendingprogramfor most of the decade was on rapid transfer of resources in support of Mexican stabilizationefforts. This was to be achievedthrough disbursementsunder the existing loan portfolio and under an expanded lending program for CY 1986 and 1987, helped by increased cost sharing and a SpecialActionProgram includingan arrangementfor initial deposits in SpecialAccounts. 11. At the end of the decade the lending program was significantlyincreased in response to the involvement of the Bank in the restructuringand reductionof Mexico's externaldebt. The SpecialInterest SupportLoan amountingto US$1.26 billion, the largest loan the Bank has made to this client, served to raise the programto a level consistentwith disbursements averaging$2 billion over the three year period 1989-1991to which the Bank had been committed under the debt agreement. This large a lending programis unlikelyto be maintainedin the present decade as the compositionof the program shiftsback toward traditionallending for infrastructureprojects with their longer preparationtime and as the size and role of the public sector are adjusteddownwardto suit a more private sector oriented development strategy. Also, Mexico's renewedaccessto international financingon favorableterms is likely to reduce the demandfor Bank lending. Bank Exposure 12. Bank exposure in Mexico has been the subject of continuousmonitoring by Bank staff. A memorandumon the Lending Program for 1964-65put before the Staff Loan Committee in 1964 was careful to point out 'Such a volume of lendingto Mexicowouldnot result in an excessiveconcentration of the Bank's investments. ... The proposed lending program for Mexico would raise Mexico's percentageof all effectiveloans from 6.6% in mid-1963to between 12% and 14% in mid-1965". The same memo added - 'Increasing the proportion of the Bank's holdings of securities of high credit-worthiness countries like Mexico are (sic) not likely to reduce the attractivenessof the Bank's bonds to investors". There was no significantconcern in the Bank over the rising share of Mexicoin total Bank loans outstanding,partly becauseanothergauge of exposure - the share of the Bank in total countryindebtedness had been movingin the oppositedirectionuntil the crisis of the early eighties. This was especiallytrue after the mid-seventieswhen the oil boom provided the incentive for a manifold expansion in commercial bank lending to Mexico. (See Table 1: Mexico - Data on Debt and Disbursements) 13. In the face of curtailedflows from privateinternationalsourcesand increasedBank support after the 1982crisis both indicatorsmovedin the samedirectionin the eightiesprovokingconcernover Bank exposure. "Banklendingin FY89 lent massivesupportto adjustmentand reforms, whereas in FY90 the thrust of our lending was directed at debt reduction. Gross disbursementsreached US$2.23 billion in FY89, and are expectedto amountto an all-timepeak in FY90, whichmay be as high as US$3.8 billion. As a result, the Bank's exposure in Mexico, as a percentage of the Bank's total disbursed and "Memodated3/30/81.  123 outstanding,would rise from 8.1% at the end of FY89, to 11.6% at the end of FY90. For annual Bank lending sustainedat US$2 billion the Bank's exposure is estimatedto reach a peak of 11.8% at end of FY91, which - despitethe proposedcutbackin adjustmentlending- wouldnot drop backbelow 10.5% in the remainderof the decade. Other debt indicators, such as the Bank's share in the stock and debt serviceof Mexico's medium-to-long-term publicdebt are estimatedto rise continually,reaching 13%and 20%, respectively. This points to the importanceof monitoringthe burden sharing among Mexico's external creditorsover the mediumterm." In an attemptto allay the concernsraised over exposure the same note went on to point out - 'However, Mexico's debt service to the Bank as a share of exports 14 would significantlyremain below 5%, reachinga peak of 4.5% in 1991 and declinethereafter." 14. High exposure in Mexicohas not been associatedin the mind of the Bank with high portfolio risk; initiallybecauseof the growth recordof the Mexicaneconomy,later becauseof the oil bonanzaand of the profoundstructural adjustmentsto improvethe internationalcompetitiveness of Mexican exports and of Mexico as a locationfor entrepreneurs. More recently the successof Mexico's debt and debt reductionstrategyhas further reduced the risk of default in meetingits obligationsto the Bank. At the same time the waiver of the negativepledge clause in respect to a part of Mexico's debt to the Bank, grantedas a meansof allowingMexicoto reach agreementwith the commercialbanks, does increasethe risk associatedwith the high exposure. In the final analysis, the questionmust be whether or not the overall Bank portfolio risk would be greater or lesser if the Bank had lent less to Mexico and more to other clients. So far, the managementof the Mexican economyin the late 1980sand early 1990shas been such that there is no basis for questioningthe Bank's judgementon the creditworthinessof Mexico relative to that of other clients. Composition 15. The composition of Bank lending was almost entirely on investment projects in power, transportationand utilities in the early years. Then there was a gradual shift toward projects in the productivesectors - agricultureand industryin the sixties, a poverty focus was attemptedin the early seventies, and a policy-based/adjustment emphasisin the decade of the eighties. The compositionof lendingchangedpartly in responseto changingemphasisin lending generallyin the Bank, and partly in responseto the changingpreferencesof the Governmentof Mexico. The decade of the ninetieshas seen a start toward the phasingdownof adjustmenttypelendingand greater emphasison addressingemerging infrastructurebottlenecksand long standingsocial problems. SectoralDistributionof Project Lending 16. Three-quartersof Bank lendingto Mexicohas beenproject based in the sense that it has provided support to an investment program; even though at times it has supporteda slice of a programrather than particular projects in it, and therefore was more in the nature of program rather than project lending. This lending has been about evenly split between the productive sectors (agriculture, industry and tourism)and infrastructure(roads, railways,ports, power, urban, water and irrigation),with a very small percentagegoing to socialsectors. The composition of this lendinghas changedover time from an early emphasisin the 1950sand 1960son infrastructuretoward supportfor the productivesectors in the 1970s and 1980s. In general the compositionof lendingand the shift over time was not peculiar to Mexico. The tendencyof the Bank in most countrieshas been to attend to main infrastructuredeficienciesearlier 4A note on - Bank Exposureand Risk ManagementConcerns; dated 3/22/91.  124 and only later after there is a fuller understandingof the economy has the Bank ventured into the productivesectors. 17. Within the category of project-basedlendingthe distributionby sector has changedsignificantly since 1969, when a Bank memo recorded that "We have not been successfulso far in diversifyingour lending", concentrationup to that point in time havingbeen on infrastructure. Overall lending to the productivesectors has accountedfor almost half the approvalsin this category, approximatelyequal to lendingto infrastructureand considerablyaheadof lendingto the social sectorswhich accountedfor only 2.4% of loans approvedup to 1991. The explanationfor this low level of social sector lendingprobably resides in the attitude underlying this statement - 'it is the consensusof the Mexico Division that sector/policylending in the social sectors is not likely to be acceptable to the Governmentover the foreseeablefuture"." 5 Sectoral allocation of lending approvals up to 1991 are given in the following table. Table 7.1 SectoralAllocationof Bank Lendingto Mexico Sector Amount Share % Agriculture 4,123.9 19.4 Industry 2,931.3 13.8 Transport 2,019.1 9.5 Power 1,624.8 7.7 Urban 2,249.7 10.6 Water 675.3 3.2 Irrigation 1,225.5 5.8 Social 1,087.0 5.1 Tourism 114.0 0.5 Miscellaneous 500.0 2.4 Policy-Based 4,660.0 22.0 TOTAL 21,210.6 100.0 Policy-basedLending 18. Almost one-quarter of Bank lending to Mexico has been in the form of policy-basedloans, reflectingthe strong shift away from traditionalproject lendingin the eighties. Recent loans in support of Mexico's debt restructuringand debt reductioneffort included in this category have also helped to enlargeit. In spiteof the fact that there has been no structural adjustment loan as such, all of this lending has been in supportof Mexico's stabilizationand structural adjustmentefforts. "The challengeas we see it, is to bring to bear the special positionand resources of the Bank to assist Mexico in its program of structural adjustment".' 6 These loans were quick disbursing loans in order to assist Mexico's finances both by direct transfer of foreign exchange and by acting as a catalyst in mobilizingfinancing from 5Memo form Senior " Loan Officer to Division Chief, LC1A dated 3/04/87. '6Letter from Director of CountryOperationsto Lic. Davilla, high officialin the GOM, dated 6/08/84.  125 private internationalsources. Policy content varied with the urgency of the transfer. The first policy based loan - Export Developmentapproved shortly after the financial crisis of the early 1980s had minimal policy objectives,but subsequentloans were given in support of far-reaching policy measures Mexicohad indicatedit was willing to take; frequentlyafter joint study and discussionwith the Bank. TechnicalAssistanceComponent 19. "Almost all Bank projects in Mexico contain technical assistance components for training, consultant services, studies, and supervisionlimplementation/ engineering"."7 In an interview in September 1992 a former Ministerof Finance gave the availabilityof technical assistanceas one of the reasons for using Bank financing,and cited financingfor the railroad as the prime exampleof this. He concededthat his intentionto use World Bank to finance an integratedpower system designedto limit concentrationof industryin MexicoCity for the same reason - getBank TA - was thwartedat the time by the Government. 18 A review of the technical assistancecomponentin loans under implementation as of October 1987showedthat there were 29 operationswith technicalassistancecomponents. The total of these loans amountedto US$4,224.1 millionwith the TA componentto US$313.8 million, or 7.4% of approvedloan amount.(See Table 7.2 containingdata from loan documents). 20. Both Mexicoand the Bank agree that technical assistanceis important,and both agree that there is room for improvementin its effectiveness. Howeverthey differ on the reasons why TA components have not been as effectiveas they couldhave been. The view expressedrecendy by a Mexicanofficial was that TA is usuallyunder-estimatedat project preparationand that Bank staff and project executors should determinemore accuratelythe exact requirements. He went on to suggest that this was to be followedup in Mexico by a group of officials in SHCP and SPP.'9 Bank staff, while agreeing that identificationcould be improved,think that the TA requirementis often overestimatedand that studies and training of dubiousvalue are requested and eventuallyundertaken. Clearly, whatever may be the reasons for less than desirableperformance, the TA componentin loans needs to be studied to see how it may be improved. Cofinandngand Bank Guarantees 21. In additionto its own resourcesBank lendinghas been instrumentalin mobilizingresourcesfrom the international bankingcommunityin supportof Mexico's investment programthrough cofinancingand guarantees. Cofinancingwas discussedwith the Mexicanofficialsin 1981, but was rejectedby them on the ground that it would neither result in additionalfinancingnor in better terms of foreign borrowing. They pointed out that Mexicowas already doing considerableco-financingof Bank- supportedprojects by borrowingdirectlyfrom private sources to meet the counterpartfinancingrequired. They feared that 'Project-tied foreign borrowingswould interfere with Mexico's capacityto raise all the externalcapital '7Memo: Technical in Loans- dated10/22/87. Component Assistance "Interviewwith DonAntonioOrtizMena, formerlySHCPbetween1958-1970; 1992in givenSeptember Mexico City. 19Letter of Relations of OfficeforCoordination fromDirector Financial withInternational to Senior Institutions in the Country LoanOfficer Operations dated6/25/90. Division;  126 Table 7.2. TechnicalAssistanceComponentsin Loans (In Loans under implementation as of October 1987) TA Loan No. Project Loan Amount Component 1706 Rios Fuerte/Sinaloa 92.0 7.50 1858 ApatzinganIrrigation 70.0 6.20 1913 MediumSize CitiesW&S 125.0 125.0 1990 Second Urban Regional 164.0 4.70 2043 IntegratedRural Development 175.0 41.40 2142 CapitalGoods Industry 152.3 2.00 2154 PollutionControl 25.0 4.40 2194 Deconcent.MexicoCity 9.2 7.14 2262 AgriculturalMarketing 115.0 2.60 2281 Med. Cities and Sin. Wat. 100.3 2.40 2325 S&M Scale IndustryIII 175.0 1.96 2331 Export Development 350.0 3.13 2428 SecondHighway Sector 200.0 1.00 2450 Lazaro CardenasPorts 76.3 2.60 2525 ChiapasRural Roads 22.0 1.79 2526 ChiapasAgri. Devel. 90.0 11.62 2546 SecondS/M Scale Mining 105.0 1.50 2559 SecondTech. Training 81.0 1.79 2575 RailwaySector 300.0 2.50 2612 Low Income Housing 150.0 21.0 2658 Second Trop. Agric. Dev. 109.0 8.0 2665 EarthquakeRehabilitation 400.00 12.00 2666 MunicipalStrengthening 40.0 5.30 2669 Solid Waste Management Pilot 25.0 12.00 2745 Trade PolicyLoan 500.0 11.00 2746 IndustrialRecovery 150.0 1.50 2747 IndustrialTech. Dev. 48.0 1.30 2777 Export Development II 250.0 0.50 2824 Urban Transport 125.0 10.00 TOTAL 4224.1 313.8 it needed".' Later that year a Mexicandelegationin a meeting with the RVP for LAC stated that the 'Memo containing noteson discussions between Bank Pres. Clausen and Lic. AngelGuma of SHCP; dated 8/04/81.  127 GOM was seekingways to increasecofinancingof Bank assistedprojects, and that a general borrowing 21 to cofinancea number of projects was underway. 22. The situation changed after the 1982 crisis when banks became reluctant to increase their exposurein Mexico, and in the 1986negotiationsbetweenMexicoand the commercialbanks it became "clear that cofinancing with the World Bank in the form of a guarantee of a portion of the new commercialbank money would be necessaryto completethe package".22After a difficult meetingthe ExecutiveDirectorsof the Bank authorizedthe Bank to participatein negotiationsfor partial guarantees by the Bank of up to a maximumof US$500 millionof the final maturityof a US$1 billion commercial bank loan, or 50 percent of the total amountdrawn downunder the loan, whicheverwas lower; and for a guarantee of up to US$250 million of a US$500 million equivalent commercial bank growth contingency loan (GrowthFacility)which couldbe triggeredby a reviewof economicactivity in Mexico at the end of the first quarter of 1987. The first loan mentioned would cofinance two previously approvedloans to Mexico, the Second HighwaySector Project signed in August 1984 and the Railway SectorProject signed in July 1985. 23. In 1990the Bank again acted to facilitatemobilizationof commercialbank support. At Mexico's request it waivedthe negativepledge restrictionsin existingloan and guaranteeagreementsto permit a pledge of up to US$7.5 billion equivalentby the United MexicanStatesas collateralfor the principalor interest paymentson discountand par bondsto be issuedfor reducingthe stockof commercialbank debt and debt service payments. Planning & Coordination of Lending 24. The important intermediateobjective of planning as applied to the lending program is the developmentof an adequatepipelineof potentialoperations. The inadequacyof the project pipelinehas been a perenniallimitationon lendingto Mexico. This was the situation at the end of 1965 when most projects in the pipeline had already been appraised. It was mentionedabove as a factor restraining lendingto Mexicoduring the high lendingperiod of the late seventies.(Seepara. 9 above). As recently as 1990the CSIR meetings recognizedthat with the gradual shift from adjustmentoperationsto sector investmentlending, "preparations must now begin for establishing a pipeline of suitably designed investmentoperations that would allow high disbursementlevels to continue".2 At the time it was suggestedthat "time-slice' type operationssupportingpart of the total public investmentprogram for a sector or sub-sector could be consideredas a way around the paucity of projects in the pipeline and as a way to faster disbursementof Bank support. However,this was not seen as a solutionsinceinadequate planningof projects in sector investmentprogramshas been a causeof slow project implementation. 25. Part of the problem of developinga suitable pipeline of projects has been associated with the continuingconstraint on the availabilityof sufficient and timely counterpartfunds; which meant that 2 "Memo dated 10/16/81. 'Memo entitled: Summaryof Discussionat the Meeting of the ExecutiveDirectors of the Bank and IDA, October 3, 1986. (This summaryconsistsof notes of the discussion,and is not an approvedrecord). ' 3Letterdated March 8, 1990 from Director of CountryOperationsfor Mexico in the Bank to SHCP Pedro Aspe.  128 candidatesfor inclusionin the pipelinehad to require minimalMexicancounterpartfunds. For years the tendency in the Bank to be guided by the import content of projects and the increasingavailabilityin Mexicoof project componentscontributedto the difficultyof developingand maintaininga large enough pipeline. More recently the shift toward the social sectors, on which the basis of suitable ESW is just being developed and for which the foreign content of investmenttends to be low, has been facing the problemof a thin project pipeline. But such a pipelinehas to be developedjointly by both sides and will require multi-disciplinaryteams in the Bank and in Mexico. This willnot only take time but will require continuedattentionto arrangementsfor coordinatingthe effortto develop a pipelineof social projects. 26. As with ESW the coordinationof Lendingwithinthe Bank was initially done withina Economic Committee,later a Staff Loan Committee, and then about 1970 withina formal process involvingthe preparationand agreementof a Country Program Paper with inputs from both Programs and Projects divisions and later discussed within a group with wider representation of central departments and management. In the early 1980s the process was further developed around a twice-yearly Country Programmingand Implementation Review and a Country StrategyPaper produced every two or three years. Coordinationwas not always satisfactorynotwithstanding the existenceof formal arrangements within the Bank. (See below EvaluationBased on Project Performance- Agriculture/Rural:"Credit projects were no more coordinatedwithin the Bank than they were in Mexico".) 27. Coordinationbetween the Bank and Mexico was initially informal. However, in the 1950s Mexicosent the Bank its public investmentplans for the Bank's informationon an informalbasis. In the 1960sthese plans were sent for review and commentby the Bank. It was not until the introductionof the twice yearly reviews that a highly integrated and formal process was put in place involving the Mexicansearly in the planning and coordinationof lending and ESW. A 1984 memo on the Mexico CPIR suggestedthat the scope of the review be broadened to cover a review of lending strategy and project mix over a 3-5 year period.' Before this there were frequent complaintsby the Mexicans regarding the difficultiesof coordinationwhen Bank project and identificationmissions would work directly with the executingagencieswithoutproper liaison with the SHCP. 28. Linkage of lending to ESW has been fairly close and formal. A confidentialmemo of 1963in discussinga possiblelendingprogramfor 1964-65revealsthat 'Lending and financingrecommendations noted below derive from the conclusionsof the Bank mission which appraised Mexico's 3 year developmentprogram early this year and which are set forth in the August 23, 1963 draft mission report".' The mission report referred to above was distributed along with the final Bank lending programto the Staff Loan Committeefor its meetingin June 1964. The minutes of other Staff Loan Committeemeetingssuggestthat it was usual for the proposedlendingprogram to be based on a recent report reviewingMexico's public investmentplans. Bank concern with the financingof the investment programmade it necessaryto do macroeconomic analysisin order to project public sector savings, and to project the availabilityof foreign exchangewhich in turn would have a bearing on creditworthiness. This linkage was continuedand formalizedin the CPP process of the seventiesand when the CSP and CPIR were introducedin the eighties. 'Memo from SeniorLoan Officer to DivisionChief, dated 2/02/84. 'Memo - A PossibleBank Lending Programto Mexico during 1964-65;dated November21, 1963.  129 29. This general perception of linkage is also shared by Mexican officials. One intervieweein September 1992 recalled that Bank/Mexicanstudies on many sectors, e.g. housing, financial, water supply, urban transport, solid waste disposal, the Mexico City Metropolitanarea, were the basis of lending operations.' However, the degree of linkage was not uniform over all sectors. Some Bank staff recallthat the linkagebetweenthe lendingprogram andthe transportsector reports has beenuneven. Some project features, particularlyaspectsrelated to policy issues, are well linked to sector reports but generallyproject componentsare linked only vaguelyto recommendations in transport sector reports. Staffweeksin Supportof Lending 30. The time and expertise of Bank staff and consultants is the main resource input in the development and carryingout of the lendingprogram. One objectiveof planning is to ensure the proper level of staffing and appropriate mix of skills for the level and composition of lending. Data on staffweeksused providesthe basisfor suchplans. Whileavailabledata from the managementinformation system does not permit the estimationof the total cost of administeringthe lending program, the time recordingsystem, notwithstandingits limitations, can provide some rough estimateof staffweeksused for each operation. Data for projectsapprovedby the Board in the FYs 1987to 1992(inclusive)provide the basis for the followinginsights. A total of 1,890 staffweekswere used in the preappraisal,appraisal, negotiation,supervisionof adjustmentlendingamountingto USS4,905million,implyingan average cost of 1 staffweekper US$2.6 millionof lending.The distributionof staffweeksover the project cycle was as follows:preappraisal35%, appraisal21%, negotiation15%, supervision25%, and other 4%. In the case of project lending6,126 staffweekswere used to supportUS$6,787 millionof approvals,implying an average cost of 1 staffweekper US$1.1 millionof lending. The distributionof staffweeksover the project cycle was as follows: preappraisal43%, appraisal 17%, negotiation7%, supervision30%, and other 2%. Within project lending, social projects - basic health, initial education, women in development- and forestry, agriculturalmarketingwere relativelymore costlythan average in terms of staff inputs. All this wouldseemto suggestthat as the importanceof adjustmentlendingin the lending program declines and that of social projects increasesthe staffweekrequirementper millionof lending will increase. LENDINGISSUES The Mexican Viewpoint 31. The review of files and the informationgathered in interviews suggest that from the Mexican purchasingof domestically viewpointthe main issuesin lendingwere conditionality, producedgoods, and complexityof procedures. Conditionality 32. to get During the first three decadesof the relationshipthe Bankresortedto formal conditionality the Mexican Governmentto act on revenues and pricing of public services in order to strengthenthe financialpositionof the public sector. Bank efforts, generallyresentedby the Mexicans,were of limited success. In 1961Bank PresidentBlackspecificallymade authorizationof increasein power rates by the in Mexico City, September3, 1993 'Interview with senior officialof BANOBRAS,  130 President of Mexico a conditionfor further lending to the electricitysector.' Two years earlier when PresidentBlack had raised the issue with Mexico's President Mateos, the latter is reported to have felt that the Bank was bringingundue pressure on Mexicofor the purpose of advancingthe interest of the power company. In 1965 Bank staff went so far as to propose disbursementin tranches; the second tranche to be cancelledif actionsto fulfill conditionswere not taken by a certaindate. 33. As the importanceof the Bank as a source of financingdeclinedduring the oil based boom of the late seventiesthe Bank clearlysoftenedits use of conditionality,' but apparentlyvestigesof the practice continued to bother Mexican officials. A 1983 memo records that the Mexican delegation to programmingdiscussionsproposed that project issues of broader, multisectoralor national economic significance,shouldhence be dealt with outside the contextof project conditionality;e.g. interest rates, fuel pricing.' One complaintabout conditionality frequentlymentionedin the interviewswith Mexican officials, was that whenBank conditionality turnedout to be less than what Mexicowas doing the Bank wouldrespondby "jackingup' the terms in subsequentnegotiations of follow-onoperations. As recently as 1991a high Mexicanofficial in a letter to the RVP complainedof substantialchangesin the concept of the project during negotiations.' 34. From the point of view of the Bank the approachduring the eightieshas beento discussand reach agreementon general policy directions. Once this agreementhas been reached, conditionalityhas not been an issue; lending to Mexico has been with minimum explicit conditionality,the Bank showing sensitivityto the political difficultythe Governmentfaces in appearing to implementpolicies which are perceivedas required by the Bank. However, there have been understandings which were embodiedin informal agreements. Frequentlythe conditionsreflectedactions the Governmenthad already taken or announcedits intentionto take. Mentionof these in loan documentswas mainly to strengthenthe hands of officials in carrying out the GOM's policies acceptableto or desired by the Bank. The fact that in some instancesthese understandingshave been set down in policy letters which were not part of the formal legal loan documentationraises the issuesof how fullythe Bank's Board was informedregarding the operationsunder consideration,and of how completethe paper record is and its adequacyfor lesson- learning. SomeBank staff have not been comfortablewith the relaxationof formal conditionality,seeing it as havingmade verificationof compliancedifficultand subjective. Purchasingof DomesticallyProduced Goods 35. Mexican officials have often complainedthat restrictionon the use of Bank financing to the foreign exchangecomponentof projects was not consistentwith Mexico's industrializationstrategy of import substitution. There is evidence in Bank files that as early as 1957 Mexican officials were concerned about the limitationof Bank financing to the import content of projects. The Minister of 2'MemodatedJuly29, 1957. ' OneseniorMexican said duringinterview official of 1992'World Bankwas an accomplice September in Mexicanerrors during 1970-82;and played a gamewining at conditionality in order to stay involved". 'Memo on Programming with MexicanDelegation- ModifiedApproachto ProjectConditionality; Discussions dated 12/28/83. 'Letter dated January 18, 1991 from Gurria, SHCP to RVP for LAC.  131 Finance in discussingthe Bank's Reporton the 1957-58InvestmentProgram expresseddisappointment at the absenceof any recommendation for Bank financingof the local cost componentof the projects it 3 finances." The issue was raised at intervals over many years, the expressionvarying between concern over the limitedpossibilitiesof Bankfinancingof purchasesof locallymanufacturedequipmentand Bank financingof local costs to ease the restraint associatedwith persistently low public sector savings. To some extent Bank staff shared this concern,focussingon the fact that limitationof lending to the cost of foreigncomponentsmade for small loans. As early as 1958the Directorof the Departmentof Operations - Western Hemisphere in a statement to the Executive Directors recommendedBank financing to purchaselocally manufacturedgoods.' In the review of the 1962-64investmentprogram the issue of Bank financingof locally manufacturedequipmentwas again raised. Toward the end of 1963the Bank was preparedto make some concessionsin this direction,and the discussionturnedto the questionof an acceptabledifferentialto be allowedMexicanproducts on infant industry grounds. 36. Later, Mexico proposed that Bank financingbe provided on a cost-sharingbasis - a 50-50 formula to replace the lower percentage applicable under the usual import content approach. Bank managementwould not recommendcost-sharingwithoutbeing satisfiedwith GOM's implementation of measuresto increaserevenues. Bank files indicatethat as late as 1971Mexicowas expectedto raise the issue of local cost financing, but they did not. The reason may have been the small contribution additionallocal cost financingwould have madeto meetingtheir financingrequirements,and the paucity of projects in the pipeline for which Bank financing was consideredsuitable. Beyond this last date, Mexicowould turn increasinglyto other sourcesof financefor its investmentprogram, and at the same time Bank lending would shift graduallytoward program type lendingand later to policy-basedlending; therebymaking any limitationon local cost financingirrelevant. Complexityof Procedures 37. Many officials interviewedduring the visit of the study team in September 1992complainedof the complexityof Bank procedures. Usually reference was made to procurementrules and especially competitive bidding requirements;which were seen as havingbeen designedto serve the interest of the Bank's major shareholdersrather than those of the clients. In addition,it was said that "the structureand channellingof Bank resourceswas inflexibleand sub-optimal,and hence expensive". Reference in this case was to the use of a basket of currencies in disbursementinstead of the US dollar to which the Mexicanpeso is tied. From the Mexicanviewpoint complexityof Bank proceduresslowed drawdown of resources and made use of Bank financing impracticalin the case of urgent social investments. In relation to complex matters the essenceof the Mexicancomplaintwas that the Bank has not only been too demandingbut has been too rigid and this inflexibilityhas slowed resource transfer to Mexico. Specifically,they complainthat the Bank's project by project monitoringand supervisioncause delays in authorization and consequentlyin disbursement. They suggest that the Bank accept as valid the monitoringdone by the implementingagencyas this wouldspeed up the project and in turn enhancethe effectiveness of the loan. Another importantaspectof their complaintwas that the Bank generallytries to be too comprehensive at the beginningand to try to cover every little detail up front, beforetrying to see what is necessaryin practice as implementation unfolds. 3 "Memo dated July 26, 1957. 3Memo on Meeting of ExecutiveDirectors, Sept. 16, 1958.  132 The Bank's Viewpoint 38. Bank concernswith the lendingprogramto Mexicocenteredon slowdisbursement,procurement procedures,domesticcost financing,and auditingof Bank-financed operadons.Thesewere not necessarily different from Mexicanconcerns, but were seen from a different point of view. SlowDisbursement 39. The major problemwith disbursementhas been its slowpace. Althoughattentionwas drawn to this problem in relation to power sector loans as early as 1964, the problem did not assume critical importanceuntiljust after the financialcrisis of 1982. A reviewof disbursementperformanceover the period 1979-83undertakenin 1983found that (a) the undisbursedbalanceunder 29 ongoing operations amountedto US$2.5 billion; (b) the undisbursedbalancehad been growingsteadily with the rapidbuild- up of commitments to reach a level 4 times that in 1979. The review foundthat althoughthe undisbursed balances varied in absolute amount among sectors, in agriculture, industry, infrastructureand urban sectorsthey were roughlyproportionalto the Bank's outstandingportfolio. Slowdisbursementwasfound to be due to long-term problems affecting project implementation- lack of counterpart funds and disincentives to implementation of Bank-financed projects, administrativefactors delayingthe drawdown of Bank funds, and Mexico's reluctanceto comply with Bank procurementguidelines. 3 In the case of line of credit operationsthe implementation of these projects was affectedby the severe contractionof the economycausinga scarcity of workingcapital and in turn a drop in the demandfor credits. Also, becauseof the frequent lag in interestrate adjustments,the Governmentwas at times in non-compliance with interest rate covenantsunder various loans and could not draw on Bank funds. 40. Bank response to the slow disbursementproblem was to design in collaborationwith the GOM a SpecialActionProgram (SAP). One componentof the SAP providedworkingcapital financingunder of SpecialAccountsunder 15 loans various linesof credit. The SAP also providedfor the establishment which allowed advance payment by the Bank into a de facto revolving fund. It also provided for increased cost sharing. Projects included under the SAP were subject to intensive review of implementationarrangementswith a view to identifyingand removing bottlenecks. The SAP also includedone new operation- the ExportDevelopment Loan for US$350million. It was estimatedthat, as a result of the SAP, disbursementsin FY84 were $207.3 millionhigher than they otherwise would have been; but $106.8 million was accountedfor by initial deposits in the newly established Special Accounts.' In addition to setting up the SAP the Bank recommendedto the GOM that it establish a centralmonitoringsystemto enable SHCP and SPP to determinethe current status of projects. This the Bank undertookto activelysupport and to facilitateGovernmentaccess to disbursementdata.3 33 Memo 1984. - Mexico: DisbursementMission Terms of Reference, dated March 9, under ExistingLoans - SummaryAssessment,dated August22, 1986. Memo - Mexico: Disbursements Review (PIR), Fall 1984, dated Sept. 21, 1984. 3'Memo- Mexico: Project Implementation 3'Seebelow paragraphon ComparativeEvaluationin which it is suggestedthat the percentageof undisbursed balancesfor Mexico was higher than for LAC as a whole.  133 ProcurementProcedures 41. Bank concern over Mexicanprocurementprocedureshas been of long standing. A 1984memo sums up the Banks primary concerns as follows: "Current procurementpractice in Mexico, while generallyacceptable,deviates from Bank guidelinesand policies in certain importantrespects". It went on to summarizethe ways in which local competitive biddingproceduresdeviatedfrom Bank guidelines and policy. Specifically,contracts are not always awardedto the lowest bidder; time allowedbetween advertisementand closure of the list of eligible bidders is too short; time for prequalifiedcontractorsto acquireand submitbiddingdocumentsis too short; purchasesof domesticgoodsmay be allocatedamong suppliers at the low bidders price; and preference is given to suppliers which are government agencies or cooperatives. 42. A July 1985memorecords that the Mexicansexpressedwillingnessto bring their proceduresin line with Bankpolicies. Howeverat the end of the sameyear anothermemoentitled "ProcurementIssues projectsin Mexico in Mexico"listedthe principalissuesfacingongoingand possiblefuture Bank-financed as falling within the followingareas: i. GOM's unwillingnessto pay contractorsin foreign exchange; ii. packagingof contractstoo small to attract foreigners; iii. defectiveprequalificationprocess; iv. inadequateadvertisingprocedures; v. inadequatetime for the biddingprocesses; vi. openingup procurementto ICB, goods manufacturedin Mexico. In June 1987there were Bank/Mexicoconsultationson procurementwhich proved useful. A seminar to disseminate objectivesand requirementsof the Bank's guidelinesamongpublicsectorofficialswas agreed at these consultations. SubsequentBank responsewas to place in loan documentsexplicit statements coveringthesepractices, and to providetechnicalassistancefor seminarsorganizedby the Bank and held in Mexico. 43. The records suggestthat Mexicotook severalinitiativesin the matterof procurementand bidding in order to make its proceduresmore compatiblewith the Bank's. A memo of May 1990 showedthat that Bank welcomedthese initiatives. The procurementissue was revisited as recently as 1991, when a paper by Mexicanofficialsfor the CSIRmeetingmentionedthe sourcesof recent problems-tendering, disbursements,communications,and delegationof powers.' In response the Bank prepared a paper outlining a ProcurementEnhancementPlan, under which the Bank would assign a procurementexpert in the ResidentMission, delegatesome procurementsupervisionto financialintermediaries,implement procurementtraining for task managers, and providetraining to borrowersand implementing agencies. On its part, Mexico would develop and implement a training plan, update bidding documents, and upgrade staff and equip procurementoffices.' A memo dated March 1993 informedthat "agreement was fmnally reached with the Mexican authoritieson sample bidding documentsfor ICB for goods and works to be used for all Bank investment lending procurement in Mexico from now on". This 'Paper 'Problemas Operativosen ProyectosFinanciadospor el Banco Mundial"dated 11/15/91. 'Memo dated 12/05/91.  134 announcement seemsto havebeenprematureand undulyoptimisticfor the procurementenhancement plan was not fully implemented(specificallythe assignmentof a procurementexpert in the Resident Mission has not occurred), and at November 1993the Region was still hoping that agreement would soon be reached. DomesticCost Financing 44. Inadequatedomesticcost financinghas been an issueof perennialpreoccupationin Bank/Mexico relations. From the Bank's viewpointthis was a factor limitingthe size of the lendingprogram it could have in Mexicofor manyyears. For the first twenty-fiveyears of the relationship the Bank tried to make growthof public sector savingsa conditionof lending, as also higher prices of public sector servicesin order to ensure adequatefinancingfor the domesticcost of investmentprograms. These efforts did not prove permanentlyfruitful, the tendencybeing for public sector saving to decline in the second half of the sexenio as there was reluctance to raise new revenues while at the same time expendituregrew unchecked. Eventuallythe Bank tried to relieve the problem in the eighties through cost-sharingwhich providedBank financingin excessof that warrantedby importcontent. Furthermore, the shift to policy based lendingmadedomesticcost financingalmost irrelevantfor a while. Now that Mexicohas decided to changefrom a publicsector led strategythe publicinvestment program maybecome relativelysmaller, but growthof public savingswill still be requiredto ensure adequatedomesticcost financing, especially as social projects with minimalimport contentbecome more important. Projects Auditingof Bank-Financed 45. A reviewof Governmentaccountingand auditing for Bank-financed projects conductedin 1981 found that the system for recording expenditures used to support SOEs, and project expenditures generally,did not provideadequateguaranteesthat fundshad been spent accordingto provisionsof loan documents, or were accurately recorded. It found that new payment procedures for Government expenditures, introduced during 1980, had eliminated some of the internal checks and reviews of documentation before payment is effected. It concludedthat althoughsignificantchanges were taking placein Governmentbudgeting,accounting and auditingpractices,aimedat strengtheningtheseactivities, there was still no consistentor satisfactoryauditingor verificationof expenditures,includingSOEs, of Bank-financed projects.3?Important advanceswere made in the auditing function in Mexico after the settingup of the Ministryof the Controller Generalof the Federationand the conclusionof a numberof agreementsbetweenthe Ministry and the Bank resulting in independentaudits for all projects. A Bank memo of July 1985reveals that the Bank prepared a report and recommendations on auditingof public sector agenciesand the special accountsto be presentedto the Governmentof Mexicofor reviewand as a basis for high level discussions. Further discussionshave occurred at intermittentintervals into the present decade as new forms of lendinghave required new approaches.Currently, the Bank and GOM are nearingagreementon amendedarrangements. LENDING - TWO SPECIAL CASES 46. The Bank does not often haveto act in fulfillmentof that part of its mandatereflectedin the word in its title. It is fitting to examinehow the organizationwhich ordinarily focusseson "Reconstruction" Accounting 3'Memoon - Reviewof Govermment Projects; dated 3/11/81. and Auditingfor Bank-Financed I., I  135 its 'development" mandateperforms when calledupon to do the unusual. During the last decade the Bank was called upon to assist in the physicaland in the financial reconstructionof Mexico. The two operations- EarthquakeRehabilitationand Reconstruction Project(Loan2665-ME)and InterestSupport Loan (Loan 3159-ME)- in responseto this call are reviewedbriefly below. EarthquakeRehabilitationand Reconstruction' 47. The principal objectives of the project was to (a) assist the Governmentin the swift repair, constructionand/or replacementof low-and medium-income housing, and communityand social sector facilitiesdamaged or destroyedby the earthquakeof September 19, 1985; and (b) to mitigatethe risks of loss of life and damageto property and infrastructurefrom future earthquakes. Includedto address (b) was a technicalassistancecomponentinvolvingstudiesto pave the way for improvements in disaster preparedness,urban planning and geologicalaspects of zoning. These objectives were immediately proposedby a Bank economicmissionvisitingthe countryat the time of the earthquakeand which stayed on to work with the Governmentin identifyinghow the Bank would help. The loan was approvedby the Bank in March 1986,becameeffective in August 1986and was fully disbursedby April 1991. 48. Implementation of the project went smoothly,thanks to the flexibilitythat both the Government and the Bank showed in adjustingthe project to the evolvingneeds of the post-disasterrecovery, given the perfunctory and incomplete assessment of needs possible at short notice. Slight delays in implementation of some componentsoccurred as a result of the difficulteconomicsituationMexicowas facing. A large numberof Governmententitieswere involvedin implementation, and the successof the project dependedon efficient inter- and intra-institutional coordination. The project resulted in the repair, reconstructionor replacementof about72,000 housingunits, or around 55% of all the dwellings affected by the earthquake, thus helping to mitigate and overcome social hardship. Structural reinforcementwas carried out on about 2,400 school buildings,or 60% of the facilities in need of such work in areas of high seismic risk. On the technical assistanceside, the project provided significant support for a new buildingcode for MexicoCity which went into effect in 1987. 49. Mexicanevaluationof Bankperformanceas reflectedin its contributionto the Project Completion Report is reflectedin the followingquotes: "Even if, evidently,the size of Loan 2665-MEwas relatively small given the magnitudeof the damages, it is undeniablethat it substantiallycontributedto the reconstructionof the city and rebuildingof the urban environment. Indirectly,the loan instillednew conceptsinto the normal implementation of public works and housing programs as well as into the activities of planning and administrationof resources." "The World Bank's insistenceto give priority to the aspectsof studies, technicalassistanceand construction standards, prompted the preparation of new building regulations which aim at guaranteeinga reduction in the risks of damageto new constructionbuilt after 1985". 'The Mexican Governmentappreciatesthe ability shown by the staff of the World Bank to of the understandthe need for changesthat emerged during the negotiationand implementation 34ProjectCompletion and Reconstruction Report - Mexico: EarthquakeRehabilitation Project(Loan 2665-ME), dated March 3, 1992.  136 project, and the flexibility demonstratedby agreeing to the followingamendments:(a) partial reallocation of unutilized resources of other loans and, concurrently, change of the IBRD disbursementshare to 83%; (b) reductionof the proportionto be financedby domesticresources from 30% to 17%; (c) simplificationof the disbursementprocess ...(d) exemptionfrom the obligationto InternationalCompetitiveBiddingfor civil works, ... (e) agreementto reimburse ... expendituretraditionallynot eligible for Bank financing ... temporary housing,... cost of demolitions'. Interest SupportLoan' 50. The Bank's support for the Debt and Debt Service Reduction (DDSR)plan of the Government of Mexicoin the form of the Interest SupportLoan (Loan 3159-ME)providedfundsfor enhancementof interestof the new bonds issued in exchangefor old commercialdebt. Support for the plan came from severalsources: IBRD- $2,010million;IMF - $1,688.5 million;Japan - $1,900million' 1 ; and from Mexico'sown reserves. Under the plan the Governmentsoughtto (a) reducethe net transferof resources abroad, (b) reduce the value of the accumulateddebt, and (c) obtain fresh funds. The reduction in required net transfers to creditors was expectedto have a direct beneficial impact on Mexico's fiscal situation and, thus, on investmentand output growth. Renewed private sector confidenceleading to growth was an expectedsecondarybenefit. 51. On February 4, 1990the MexicanFederal Government and its commercialbank creditorsreached an agreementrestructuringUS$45.3billion of foreign commercial debt ($48.2billion includingMexican creditors)on March 28, 1990. The agreementprovidedfor three optionsor combinations thereof under whichbank creditors would accept a) replacementof the original debt by bonds at par (in US$) bearing interestat a fixed rate of 6.25% and with the principalsecuredby zero-couponU.S. Treasury Bonds(or other equivalent) pledgedas collateraland held in the FederalReserveBankof New York; b) replacement of original debt by discountbonds bearing interest at LIBOR + 13/16% and also secured as are par bonds; c) to provide fresh money. The securityfor thesebondsrequired the establishment of guarantees by the Governmentof Mexicoamountingto US$7.1 billion. 52. Of the Bank loan to Mexico $1.26 billion was to help to cover the cost of providing these guarantees. The Bank also restructured $750 million of guarantees under the 1987 Multi-Facility Agreement. In addition, the Bank consentedto waivethe negativepledge restriction up to an amount equivalentto $7.5 billion for the principaland interestpaymentson the discountand par bonds; such a 'Project CompletionReport - Mexico: Interest SupportLoan(Loan3159-ME), draft dated June23, 1992 4'Lotterfrom Director General, EconomicPolicy AnalysisDepartment,The Export-ImportBank of Japan to ActingChief, Mexico Country OporationsDivision, dated June 12, 1992- re: Commentson PCR of the Interest S=rt Loan clarifiedJapan's supportas foilows: 'Strictly speakingJEXIM was not a cofimnaci to the Interest SupportLoAn,although it oofinancedwith three World Bank sector adjustment loans.' [Funds were set aside from these loans in part supportof the debtdeal] . .. 'Tho total contributionfrom the Governmentof Japan to credit enhancement wasnot US$2.05 bilion but US$ .9 billi consistingof JEXIM's parallellendingwith the IMP's EFF amountingto US$1 billionand JEXIM's cofinancing with three WorldBanksector adjustment loans totalingUSS900million."  137 waiver being necessaryto implementthe credit enhancementscheme.' 2 The Bank also played a key advisory role on the design, formulationand evaluationof the options in the DDSR plan, includingthe pricing of the oil recapture clause and fixed interest options. The Interest SupportLoan was the first of its kind, being an advance rather than a reimbursementfor imports/expenses;and its implementation required innovationsin internalproceduresand documentation. In order to expeditethe processingno conditionsfor effectivenesswere imposed, nor was there any upfront policy conditionalityattached to disbursement. 53. The DDSR exercisebrought relief to Mexicoby reducingtheannual cost of interestby between $1 billion and $1.5 billion over 1990-95,bringing a cash-flowrelief of about $1 billion per year. Debt relief in terms of reduction in the presentdiscountedvalue of expectedpaymentsas a percentageof the face value of outstandingdebt has been estimatedat 29.5%. An alternativeview on evaluationof the debt package focussingon pre- and post-dealmarketvalue of the commercialdebt suggeststhat Mexico retainedmost of the value of the enhancement,i.e., the market value of debt inclusiveof enhancements went up by only a small fraction of the cost of the enhancements. Giventhe performanceof the Mexican economysince 1990the expectedindirectbenefitsto the economyhave materialized. The reducedfiscal burden in conjunctionwith the successof other deep structural reformsthat have been implemented, has helpedto lower domesticinterestrates and buttressedinvestorconfidenceleadingto increased investment and growth. 54. The lessonsfrom this operationneed to be carefullygarnered in light of the possibilitythat the Bank may be asked to support a similar exerciseelsewhere. One conclusionreached in the PCR is that successfulDDSR is predicatedon appropriateburden sharing. Burden share is difficult to evaluate in practice; and one source of commenton the PCR has challengedthe conclusionon the ground that the evidenceis ambiguous. The Bank should heed the suggestionthat 'these results indicatethe need of further researchon analyticalframeworkfor the overall assessmentof the burden sharing amongdifferent creditorswhich could contributeto developing[a] more equitableDDSR package". EVALUATIONOF LENDING Overall Evaluation - OED's Evaluationand ARPP Ratings 55. Of the 163lendingoperationswhichthe Bankhas had in Mexicobetweenthe inceptionof lending and the end of March 1993, OED has PAR/PCRratings for 68 projects.' 3 OED rated 68% (i.e. 46 out of 68) of these operationsas satisfactoryand 32% (ie. 22 of 68) as unsatisfactory. Performancevaried over time. Only 48% of projectsin the OED group approvedduring 1978-82were rated as satisfactory, 4'rhe waiver ofthe negativepledge clause was given without re-examinationof the policy at the time. This drew unfavorablecommentfrom someEDs. Management at the time insistedMexicowould not be a precedentfor the future.Subsequently, Argentinaand the RussianFederationand Uzbelistansoughtwaivers.On March30, 1993, the ExecutiveDirectors approveda policy (R92-214/2)permittingwaivers of the Bank's negative pledge clause, on a country-by-country basis, for a limited time for countries meeting specified eligibilitycriteria, including progress on macroeconomic stabilization and on privatization. Since thenthe EBRD has alsoset out its own waiver policy in many respects differentfrom that of the Bank. 431ncludes one cancelledloan (L-3101)- Water, Women& Development.  138 comparedwith 79% of those approvedduring 1983-89and with 82% of those approvedbefore 1978. The total loan amountfor the 68 projects amountedto US$8,351millionequivalent,and for the projects rated unsatisfactoryto US$2,788millionequivalent(33.4%). These figures indicatethat on the average project size does not seem to have been an importantfactor in project performance. OED defines performanceof Bank financed operationswithin two broad categories: satisfactoryand unsatisfactory. A project is judged satisfactorywhen it has achievedall or most of its objectivesand achievedsubstantial or adequateresults withoutany major shortcomings. It isjudged unsatisfactorywhen it failed to achieve many of its objectivesand had major shortcomings or had no foreseeableworthwhileresults. 56. Another overallevaluationof the sameprojects whichhave been rated by OED has been derived from the average of supervisionratings in the finalyear of implementation. The data are based on Form 590s supervisionratings using the followingordinal scale: 1 is assignedto projects with no significant problems;2 to projects with moderateproblems: 3 to those with major problems,but where appropriate actions are being taken to address them; and 4 to projects with major problems which are not being addressed satisfactorily.' If projects assigned to categories 1 and 2 are regarded as satisfactoryand those assignedto 3 and 4 are regardedas unsatisfactory,then these ARPP ratings indicatethat 11.3% of the portfolio was unsatisfactoryduring the year precedingproject completion. 57. Comparisonof these two ratings reveals a major divergencebetween the assessmentof projects by regional staff and by OED; the former tending to be more optimisticthan the latter.(SeeTable 2).4 The OED focusseson developmentimpact and sustainabilityof benefits, based on an assessmentsome time after physicalproject completion. ARPP ratingshavetendedto concentratemostlyon the timeliness and adequacyof the provisionof project inputs (management,funds,etc.) and achievement of immediate outputs (e.g., roads built, hectares irrigated, school houses constructed). Positive assessmentsof performance during implementationdo not necessarily lead to positive assessmentsof development effectivenessor impact at completion. Cancellations 58. About one billion dollars of loans approved by the Bank for Mexico have been subject to cancellation. Of the operations evaluatedby OED (para. 54 above) total cancellationsamounted to US$697.8million. Irrigation projectsaccountedfor 40% of cancellations;rainfed agriculturefor 28%; pollutioncontrol and women in development10%; water supply 9%; and integratedrural development 3%. While of the evaluatedoperationsthose classifiedas unsatisfactoryaccountedfor 33% of the total approvedloan amount, they accountedfor 57% of the amountof loans cancelled. Four loans approved betweenJanuary 1981and August 1982accountedfor 77% of the amountcancelledwhich was associated with loans classified as unsatisfactory. This suggests that the financial crisis of 1982 and the years immediately followingwas likely a factor in the non-performance and eventualcancellation,probablydue to the lack of domestic cost financing. It also points to the possibilitythat during appraisalof these operationsinadequateattention was paid to the availabilityof counterpartfinancing and/or there was misjudgment of the gravity of the underlyingmacroeconomic situation. During the next few years the Report 'See - Annual Performance, of Portfolio IDA/R93-23), FiscalYear1992(R93-20; 11, 1993. February 'Statisticalexercises,usingChi-Squares of no association tests for the nullhypothesis between the column variableand the rowvariable, do not yielda significantcorrelation between the OEDand ARPPratings.Thisis in contrast positive to the significant correlation between theseratings whenappliedto worldwidedata.  139 Bank and Mexico reviewed slow disbursing loans within the context of the Special Action Plan and agreementwas reached to cancelthose whosedisbursementrate could not be improvedby immediately availablemeasures. Time Overrun 59. The average overrun is 1.64 years for the completedMexicanoperations includedin the OED database. Of the operations classifiedas unsatisfactorythe equivalentaverage overrun is 1.41 years. Thus delay was not a major factor affectingclassification. This may be explainedby the fact that some operationsclassified as unsuccessfulwere abandonedor cancelledwithin the planned implementation period so that there was no or negativetime overrun. At the sametime some operationswith significant time overrun were classified as successful. There were some notable differences among types of operations. Credit projects tended to be disbursed more quickly than expected so that time overrun tended to be negative;policy based loans being quickdisbursingby design tendedto have zero overrun; and infrastructureprojects tended to have positive time overrun. Airports, highways, tourism, and a fertilizer project suffered overruns in excess of 5 years; water supply and irrigationprojects tended to be in the 4-5 year range; and other projectsgenerallybelow 3.5 years. (See Table 2 in the Appendixof Tables). Cost Overrun 60. The interpretationof cost overrunmust be approachedwith care. Overrunrefers to the difference betweencosts estimated/anticipated at appraisaland actualtotal project cost, of which Bank financingis just a part. The operations evaluatedby OED fall into two groups so far as cost overrun is concerned - those approved before 1980 and those approved during the 1980s. The before 1980group had an averagecost overrun of + 87% of total cost of the projects in this group; whilethe post-1980group had an average overrun of -51% (i.e. an underrun). Another interesting observation is that of the unsuccessfulprojects 13 of the 19 for which overrun data are available had negative overrun (i.e. underrun)and 6 had overrun. The explanationfor this seemspartly to be that unsuccessfulprojectswere more prone to discontinuationor cancellationbefore all the projected costs were incurred, hence the greater likelihoodof negativeoverrun. (See Table 2 in the Appendixof Tables).) ComparativeEvaluation 61. OED performanceratings for 3,159 projects worldwideshow that 74% were satisfactory.4'As in the case of Mexicothe worldwidepercentageof satisfactoryprojectsalso tendedto be lower for those approvedduring 1978-82but the declinein performanceis nowhereas dramatic; fallingfrom 80% before 1978to only 68% during 1978-82and recoveringto 71% for those approvedafter 1982, comparedwith the decline in Mexican satisfactoryprojectsfrom 82% all the way downto 48% and recoveringto 79% for the correspondingperiods. The deteriorationin the Mexicanportfolio would seem not to have been just part of a Bankwidephenomenon. Sincethe averagerating for Latin Americaand Caribbeanprojects during 1978-82at 56% satisfactoryis well below that of the world (and is not due solelyto the inclusion of Mexicowhich accountedfor about 11% of the operations)only part of Mexicanproject performance during that period seems to have been a Regionalphenomenon. Stated differently,the relativelypoor 'rhese projectswere approvedbetween 1961and 1990.  140 performance of the Mexico portfolio during 1978-82 was due partly to Bankwidefactors, pardy to Regionwidefactors, and partly to factors specificto the Mexicoprogram. 62. A recent study of project performancebased on the OED database of evaluatedprojects among those approved in the period 1964-1987permits a comparisonof project performance in Mexico and selected other countries - Brazil, Colombia, and in some cases Latin America and the World. 47 Mexico's percentageof satisfactoryprojects at 71 was a shade below Brazil's at 72, slightlybelow that of Latin America at 74 and the World at 76, and significantlybelow Colombia's at 83.(See Table 3 in Appendixof Tables) Time overrun in Mexicoat an average of 1.7 years was less than 2 - the average for the 1015projects worldwidein the auditedgroups for the period, and substantiallyless than the 2.5 and 2.9 for Brazil and Colombia respectively. Cost overrun for Mexican projects averaged 15% of estimatedcost at appraisal, well below the worldwide average but significantlyabove the comparable figures for Colombian and Brazilian projects. Unfortunately, the database did not allow analysis of disbursementperformance of these loans. Current loan portfolio data furnished by the region to the Colombia study indicated that in FY91 the percentageof opening undisbursedbalance was 25% for Mexicocomparedwith 16% for Colombiaand 20% for the LAC region. Sustainability 63. Sustainabilityratings have been made for 31 of the 68 Mexicanprojects in the OED database; of which 11 (35%)were rated as likely, 12 (39%) as uncertainand 8 (26%) as unlikely. The comparable figures for worldwideprojects were 46% with a sustainabilityrating of likely, 35% uncertainand 19% unlikely. There seems to be a high degree of correlationbetweena satisfactoryproject rating and a likely sustainabilityrating; for Mexico 100% of the projects rated as of likely sustainabilitywere also in the group rated satisfactory,while worldwidethe correspondingfigure was 95%. Thus it is reasonableto concludethat as the gap between Mexicoand the World in percentageof projects rated satisfactoryhas narrowed in the eighties, so has the difference in sustainability. 64. There is a broad consensusregarding the factors affectingsustainability,the direction of their partial effects, and their relative importance; but the developmentand measurement of appropriate indicators of sustainability has lagged. These factors include government policies; institutional arrangements;management; financefor operations;maintenance;and technology. 'Experience suggests that, given a propitiouspolitical and economicsetting, governmentpolicies which express a long-term commitment to a programme and management and financial factors stand out as particularly important. "' In the case of Mexico the general outlook on the sustainabilityof benefit from Bank- financed investments,based on the factorsaffectingsustainability seems positive. Much will dependon the availabilityof finance; sustainabilityrequiresa flow of funds to cover operations, maintenance,and depreciationin order to continuethe benefits to be generatedby projects. Some Mexicanpublic sector institutionshave suffered from bouts of financialweakness from time to time. While there has been improvementin the last decade, any significantrelapse in the future could have an adverseeffect on the sustainablity of benefitsfrom investmentprojects. '7 A Review of Project Performancein Colombia;February, 1993. 'OECD, Development AssistanceCommittee- Sustainabilityin Development Programmes: A Compendium of EvaluationExperience,(A note by the Secretariat)1988.  141 Evaluation based on Project Performance Agriculture/Rural 65. Of 21 projects coveredby OED auditsor PCRs to date, i.e., 50% of the portfolio and all in the three traditional categories - irrigation, credit and area development,nine were rated unsatisfactory. Not surprisingly,in view of the economicand fiscal crisis of the 1980s,all seven of the reviewedprojects approvedfrom 1980 to 1985turned out to be "unsatisfactory",while amongthe 14 projects approved prior to 1980, only two were rated unsatisfactory:the PIDER I and II rural developmentprojects; one, the huge Rio Bravo irrigationproject, was canceled. While all irrigationand credit projects approved prior to 1980 received "satisfactory" ratings, the five approved subsequently were uniformly "unsatisfactory". 66. One importantoperationalissue is the dysfunctionalityof the agriculturalextensionservicein all except a handfulof the Bank's agriculturalprojects. Oddly, though commentsregardingthe inadequacy of technical assistanceto farmers appear frequentlyin PCRs and audits, it was not until 1987 that the Bankdecidedto attack the problemspecificallyon the basis of an analysisof the issuesdonejointly with SAHR in 1984. 67. Until the mid-80s, the Bank's approachto the agriculturalsector (in Mexicoas well as in many other borrowingcountries)was by necessitynarrowly project-oriented. Macroeconomic issues and key microeconomic policiesaffectingprojectoutcomewere frequentlydiscussedwith Mexicanauthoritiesand flagged consistentlyin published and restricted economicreports, but to little avail. The projects, moreover, had a strong bias towards large-scale engineering,in line with Mexican proclivities, with insufficient or no consideration of sustainability,economicissues(otherthanpro-formafarm budgetsand ERRs) and ecologicaland social issues.' 9 Also, the divisional projects staff was made up mostly of engineers,agronomistsand livestockexperts and there were, until 1985, no policy-orientedeconomists. Credit projectswere no more coordinatedwithinthe Bank than they were in Mexico, and the Bank had no success in moving the GOM away from the subsidizationof the interest rate, which became quite negativein real terms. Electricity& Power 68. A detailedassessmentof the Bank's effectivenessis made particularlydifficultin the case of the Mexicanpower sector for the followingreasons: (i) the majorityof Bank loans were made before OED was establishedand only two PARs have been prepared (for Loans 659-ME and 834-ME, only one of whichprovides a recalculatedERR); (ii) no key Mexicanstaff activelyinvolvedwith Bank operationsin the earlierphase of Bank lending couldbe interviewed;and (iii) the two recent Bank operationsare still on-going and it is still somewhatearly to assess their success or failure. The following analysisis thereforebasedprimarilyon the findingsof the two above-mentioned PARsand interviewswith Mexican officialsand Bank staff. I A word search of the OED's computerizedsurmaries of project PCRs and audits came up with the word .poverty' only once (for PIDER II); the words 'women' and "environment" were not found at all. The term "policy"appearedonly three times in all summariesconcerningcredit projects, and only one of them referred to credit-relatedpolicies.  142 69. The Bank's assistanceto the Mexicanenergysector has been primarilylimitedto electricpower. It can be divided in three distinct phases: the first phase, from 1949to 1972 correspondedto a period of heavy lending (11 loans totalling US$ 704.8 million) which made CFE one of the largest Bank borrowers at the time: between 1962 and 1972 alone, power lendingto Mexico accountedfor a major share (51%) of total lending to Mexicoand as much as 14% of total Bank lendingto the power sector. The last 5 of these 11 loans were what wouldbe callednow 'sector investmentloans", wherebythe Bank was financinga share of the sector's total program, a rare feature at the time. The second phase, from 1972to 1989, corresponded to an absenceof Bank lending to the sector. The third phase started in the late 1980's when resumptionof Bank lendingwith loans of US$ 460 and 450 million in 1989 and 1990 respectivelywas made possible by a shift in Governmentelectricitytariff and trade policies, and the implementation of a major financial restructuringof the sector. 70. The sheer size of the Bank's lendingto the Mexican power sector is worth highlighting:total lending, expressedin 1991prices, amountsto US$ 4.43 billion, i.e. an average of US$ 340 millionper operation. The five loans madebetween 1962and 1972alonetotalledUS$ 580 million(US$2.61billion in 1991prices) which represented51% of total Bank lending to Mexico and 14% of total Bank lending to the electric power sector during that period. Indeed, CFE is reported to have been the largest Bank borrower at the time, and Loans 316-ME and 659-MEwere, by 1970, the two single largest loans ever made by the Bank. 71. As a first step, the Bank's effectivenessneeds to be assessed against the explicit and implicit objectivesincludedin variousBank reports issuedover the years. The first objectivecommonto all Bank operationssincethe start was the achievement of physicalinvestmentsneededto meet a rapidlyexpanding demand. Given the size of its lending to the sector between 1949 and 1974 and the program lending approach followedfrom 1962 onwards, the Bank was closely associatedwith most of the major works carried out during that period; in that sense, it clearly shares in the spectacularexpansionof the sector and its ability to nearly doublethe country's electrification rate between 1960and 1970 (to reach 53% in that year), in spite of a rapidly expandingpopulation. The delays and overruns encounteredin the latter part of that period did not lead to significantpower shortages (except for a short period in 1975) as demand grew more slowly than expected as a result of an economic recession. The Bank also contributedto ensure the soundnessof individualprojects by insisting, inter alia, on the performing of acceptancetests by major suppliersof equipment,and the hiring by CFE of a Board of Expertsfor each large hydroelectricproject.' 72. A secondbasic objectiveof Bank involvementwasto furthersector integration,most particularly through frequencyunification,a goal activelypursued by the Bank in all loans approvedbetween 1965 and 1972. As mentioned earlier, this objective was partly achieved through the merger of most independentcompanies into CFE in the early 60's and the successful completionof the frequency unificationprogram, albeit with significantdelays. Full integration remains elusive as of this date, however, as the completionof the merger of CLFC into CFE has been thwarted by the Government's reluctance to antagonizeCLFC's powerful trade union. A related objectivewas the improvementin system planning; there are clear indicationsthat the Bank's contributionin that respect was particularly helpful during the 1960's as it fundedthe servicesof specializedconsultantsand as the Bank's technical staff appearedto have been reviewingcloselywith CFE the sector plans on a regular basis, as called for under the programlendingapproach. The Bank's renewedinvolvementin 1989contributedto promote: 50Indeed, the latter practicewas continued by CFE even after the interruptionof Bank lending.  143 (i) a diversification of the sector's generating mix (by allowing the undertaking of long-postponed hydroelectricprojectswith Loan 3083-ME);and (ii) an adequatebalancein the sector's overall investment program (by financingoft-neglectedtransmissionand distributioninvestmentsunder Loan 3189-ME). It can be argued, however, that the Bank shouldhave been more forceful, when renewinglending to the sector, in emphasizingthe distortionsbrought about in system planningby the introductionof financial constraints. One can hope that the Bank's ongoingdiscussionswith the authoritieson the adverse impact of budget restrictions on the two Bank-financed hydro-projectswill give it an opportunityto raise this broader issue. 73. The need for improvementsin the sector's operating efficiency and productivity is already referred to at length in the SARs for Loan 476-ME(1966) and subsequentloans made until 1972. Main indicatorsdid improveduring that period, and the Bank's assistancein setting up better control systems and procurementprocedureswas certainly a contributingfactor. This trend was reversed during most of the Bank's absence(1974-1989)and the discrepancybetweenCFE and CLFC's productivitywas even accentuated. Uponrenewalof its lendingin 1989,the Bankhelped the Governmentrefine the framework for future productivity improvementsprovided by the FRA and its contributionin that respect was fundamental. However, it chose not to address squarely, presumably due to the political sensitivities involved,the main obstacle to further improvementsin productivity,i.e. the staffingsituationin CLFC. Water & Sewerage 74. The Bank has made seven loans to Mexico in the water and waste sector, all but one for water supply and sanitation (the exceptionbeing a loan for a pilot project for solid wastes, to demonstrate environmentally-safemethodsof disposal). The projects are the following: L. MexicoCity Water SupplyProject (Loan909-ME), approvedin 1973, and closed in 1981, with a 4'h-year overrun. The loan, in the amountof US$90 million, was to help finance a project estimatedto cost US$ 155millionto build Bulk Water Supply Facilitiesproducing 15.5 n 3/sec. The project includedvarious studies. Due to the urgencyof increasingMexicoCity's inadequate water supply, the project was launchedwith more than the usual uncertainties,and the eventual bulk water productionwas only 13 m3 /sec. The actual cost (withoutstudies) of the project was US$ 138 million, and US$ 11.8 millionof the loan was cancelledfor various reasons, including non-compliancewith the procurementrules of the Bank. Performance:The technical work of the executingagency, the Comisionde Agua del Valle de Mexico,was adequate,but institutionaland financialperformancewasgenerallyless satisfactory, althoughimprovingover time. The borrowerwas NacionalFinancieraS.A., whoseperformance was satisfactory. ii. Medium Cities Water Supply and SewerageProject (Loan 1186-ME),approved in 1975, and closed in 1984, with a 4-year delay. The loan was in the amount of US$ 40 million; a minor amount, US$ 210,000, was cancelled. The total estimatedProject Cost was US$100 million, comparedto the actual cost of US$76.6 million. Performance: The project generally accomplished its physical objectives - serving the populationproposed in the feasibility reports - but did not accomplishthe ambitious financial and institutionaltargets.  144 iii. Second MediumCitiesWater Supplyand SewerageProject (Loan 1913-ME),approvedin 1980, and closed 2 years late in 1986. The loan of US$125 million was to help finance projects estimatedto cost US$318millionin cities of severalstates. The projectseventuallyimplemented under this loan cost US$116million,and almost40% of the loan amount,US$49.27million,was cancelled. Performance: Just as in the first Medium City loan, the construction of facilities was more successful than improvinginstitutionsand financialperformance. There was clearly a lack of Governmentfollow-through on understandings related to financing. iv. Third MediumCities Water Supplyand SewerageProject (Loan2281-ME), approvedin 1983, and closed with only a 4-month delay in 1991. The loan of US$100.3 million was to help finance projects with a total value of US$193 million. When completed,the total value of the projects was US$128.5 million,and US$5.03 millionof the loan was cancelled. Performance:The third project performed at least marginallybetter, possibly as a result of the previous project's loan cancellation,possiblybecausethe Bank, the borrower and the executing agency agreed on a plan of action. Nevertheless, the lack of adequate cooperationbetween BANOBRASand SEDUEpersisted and the performance, though marginallybetter, in general remainedunsatisfactoryexceptfor constructionactivities. v. Women, Water and DevelopmentProject (Loan 3101-ME), approvedin 1989. At the request of the borrower, the date of effectiveness(April 26, 1991) was allowed to lapse, and the loan never becameeffective.The loan of US$20 millionwas intendedto support water and sanitation improvements,and to provide productiveopportunitiesfor women. Performance: Although everyone still praises the project concept, the loan eventually was cancelled because the Government created a new concessionary funding arrangement, 'SOLIDARIDAD",to provide free funds (grants) for the same activities. 75. The major problem of all three projects, which were financed through a Fund (FIFAPA) administeredby BANOBRAS,was the fact that the sector as a whole, contrary to what the Bank had hoped to achieve, did not follow the FIFAPA financialpolicies. Projects were being financed by a variety of mechanisms,basicallyon a grant basis, and financialdisciplinewas therefore lacking. 76. Pilot Project and the Water Two loans are stillbeing implemented:the SolidWasteManagement Supplyand SanitationSectorLoan: i. Solid Waste ManagementPilot Project (Loan 2669-ME), approvedin 1986, with an expected closing date of June 30, 1994. The project is expectedto cost US$60.4 million (up from an original estimate at appraisal of US$50 million), and the loan is US$25 million. The project objectivesare to assist Governmentto define sub-sectorobjectivesand policies and to improve local institutionalcapacity,to undertakepilot projectsto improveenvironmentalhealth conditions and demonstrateapproachesfor full-scaleprojects, and to evaluatealternativesfor cost savings, capacity-building and sector financing. Performance:Disbursementlags behind original estimates(56.4%) and performance is generally unsatisfactory. The project suffers from: lack of coordinationand implementation  145 capacity, due to changing agencies and lack of staff in the unit responsible for project implementation. ii. Water Supplyand SanitationSectorProject (Loan3271-ME),approvedin 1990,with a proposed closingdate of June 30, 1996. The project's estimatedcost is US$650.9 million, and the Bank loan amounts to US$300 million. The project objectives are to assist the Government to implement the National Program for Water and Sewerage and to implement the sector reorganization, to improve water and sanitation services (the beneficiaries are estimated to number about 3.2 million, mostly from lower-incomegroups), and to promote pricing policies which progressivelyreduce the sector's need for Governmentsubsidies. Performance:The Governmenthas carried out a comprehensivesector reorganizationand has establishedclear sector financialpolicies which govern all invetments, regardless of executing agency. The process developedto implementthe new policies, to evaluateprojects and to help improveimplementingagencycompetenceappearsto be functioningwell. While it is too early to judge overall impact,one measureof successclearly is very positive: by the end of 1992,3½h years ahead of schedule, disbursementwill be completed. This is the first such successfor the sector in Mexico. The Transport Sector 77. During the period 1954to 1992, the Bank made 22 loans for the sector totallingabout US$ 2.0 billion. Of the total loan amount, about56% was directedto the highwaysubsector, 34% to the railways, 8% to ports and 1% to airports. The loan amountsrose sharply with each succeedingdecadeuntil 1990; in the 1980s, USS 947 million was made available, mostly for railway and highway purposes but also for ports. It should be recognizedthat inflationhas had an influenceon the loan amounts: the growth in lending is less dramaticwhen the loan amountsare deflated. 78. The Bank financed12 highwayprojectsrepresentingUSS 1.1 billion in loans. In general, project objectiveswere to provideaccessto increasingnumbersof the population,reduce transportdistancesand vehicleoperating costs, and enablevehicles to operate at increasedspeeds and with heavier loads. The Bank financed5 railwayprojectsrepresentingUS$ 686 millionin loans. The objectivesof theseprojects were to increase the capacity of the railways, raise operating efficiency, and improve the financial strengthof the system. There were four ports projects in Mexicowith loans totalling USS 160 million. The objectivesof these projects were varied but generally were to augment port capacity, improve operating efficiencyand strengthen the financial condition of the ports. The one Airport Project in Mexicowas approvedin 1974for a Bank loan of US$ 25 million. The principalobjectiveof the project was to extend the network of air services in Mexico; a particular objective was to assist in the decentralizationof populationwhich has tended to concentratein the MexicoCity area. Originally,the main component of the project was the constructionof seven airports in widely scattered locations. During the course of implementation,two of these proposed airportswere dropped. 79. The early projects in Mexicowere relatively simple in their basic composition;in the course of time, however,projectsbecamemore complex. One Mexicanofficialrecentlylookedbackuponhis early experiencesworkingwith the Bank on project matters and noted with some nostalgiahow effectivelythe Bank staff and the Mexicansworkedtogether on the relativelysimple projects that were then designed. He contrastedthis harmoniousprocess with that of more recent times: 'In later years, particularlyafter 1985, projects were much more complex, involvinga number of Mexican organizations.As a result,  146 Bank/borrowerrelations became less clear and more complicated. Coordination among the various Mexicanagenciesbecamean especially difficultproblem." He was mainlyfrustratedby recent ineffective coordinationof policy and programs among Mexican agencies but felt that this difficultyaffected the relationsbetweenthe Bank and Governmentstaff. 80. Overall,the impactof the lendingprogramhas beensubstantialand favorable,particularlyin road development. Major investmentsin the railway subsectorhave been disappointingalthoughthere are indications that lessonslearned in this subsectormaylead to a new project with pre-conditionsthat should givesome assuranceof futuresuccess. In the port subsector,significantachievements havebeen realized in institutionalchangeand facility improvementalong with some enhancementof operating efficiency. 81. Highwayprojects havehad a major impacton the Mexicanhighwaynetworkdespitethe fact that most of the projects involvedserious implementation delays and resulted in lesser achievementsthan anticipated. The first sevenhighwayprojectsresultedin substantialimprovement of the primary highway system;out of a total lengthof about44,000 km of Federal and toll highwaysin 1979, the seven projects resulted in the improvementor constructionof about 14,300 km, approximatelyone third of the total network at that time. All of the foregoingprojects were concernedwith the Federal highwaysor toll roads, the primary road network. In the mid 1980s,a significantattemptwas made at buildingfeeder roads, in this case in ChiapasState; 443 km of such rural roads were constructedand about 1,000 km were reconstructedor rehabilitated,abouthalf the appraisaltargets. In general, the Chiapasproject was a failurebecauseof ineffectiveinstitutionsfor project implementation and most of the loanwas cancelled. The impact of the Road Transport and Telecommunications Project, approved in 1990, is difficult to assess. The implementationof deregulation announced in 1989 has been monitored and no major problemshave been encountered. 82. The economic impact of the highway projects is principally found in the savings in vehicle operating costs of road users; these savings in turn translate, to a large extent, into reduced costs of productionand marketing, lower prices of products and improvedincomes. For the highway projects undertaken, the economicrates of return, which reflect these savings, have generallybeen satisfactory; the rates have often been relativelyhigh for road rehabilitationprojects and works designedto remove bottleneckson main roads. 83. The First Port Project, approvedin 1972,was implemented successfullyin general and the impact of the project has been significant. The Port DevelopmentPreparation Loan, approved in 1981, was successfullycompletedand the preparationprovidedthe basis for the port project that followed. The Lazaro CardenasIndustrialPort Project, approvedin 1984, was implemented with reasonablesuccess. The Ports RehabilitationProject, approvedin 1988and still under implementation in late 1992, resulted in major improvementsat four ports: Veracruz, Tampico-Altamira,Manzanilloand Guaymas. In the aviationsubsector, the project resulted in the constructionof seven airports; they are located at Villa Hermosa, Tuxtla Gutierrez, Mintitlan,Poza Rica, Los Mochis, Tapachulaand Guaymas.The economic rates of return indicatethat despite delays and overruns, the project was economically viable. CONCLUSIONS& LESSONS 84. Perhapsthe basic questionon whichone would expecta reviewof the lendingoperationsto shed light is that of whetherthe Bank lent too muchto Mexico. While this cannotbe answeredconclusively, a crudejudgementcould be arrived at on the basis of how effectivelyMexicowas able to absorb Bank  147 financingand on the basis of how comfortableor otherwisethe Bankhas been and is with the degreeof exposure that has resulted. The performance of lending operations as assessed by the percentage of satisfactoryprojects in the group of audited projects is not significantlydifferent from the Bankwide average, hence there is no a priori basis for concludingthat absorptivecapacitywas a greater problem in Mexicothan elsewhere. Althoughthere were times whenthe availabilityof public sector savingsmay have been a constrainton the abilityto meet domesticcosts and therefore absorbcomplementaryexternal resources, Mexico did not otherwise lack the ability to implement and manage investmentprojects. Indeedthe major constraintwas the abilityto identify investmentprojects, a fact which was reflectedin repeatedconcernabout the paucity of new proposals in the project pipelineespeciallyin the sixties and early seventies. With the emphasison adjustmentlendingin the eightiesthis was no longer a problem. At the same time the Bank has been comfortablewith its exposure in Mexico; and indeed it has been more exposed in other countries which were not obviouslymore creditworthy. 85. While total Bank lending may not havebeen excessive,lendingduring a certainperiod might be so considered. For instance,duringthe period 1977-81when the oil boomgave a boostto the perception of Mexico's creditworthiness,the Bank like other financingsources was willingto increase its exposure but given the high percentageof unsatisfactoryprojects approvedduring this period there is reason to questionwhetherthe absorptivecapacitywas adequateand whetherprojects were properly identifiedand appraised. This is especiallypertinentsinceborrowingfrom other sources was also increasedto support an overly ambitiousinvestmentprogram. At the sametime, there have been periods when the Bank may have lent more, had it been preparedto lend to sectors which it consideredmore appropriatefor private sector developmentbut which were then part of the Mexican public sector. The case of oil during the fifties and sixties comesto mind. MexicosoughtBank supportin this sector but the Bank preferred not to get involved in it. In retrospect, an importantopportunitywas missed. As a result the Bank never was able to have a "handle"on the industrythat has played and continuesto play an importantpart in Mexicandevelopment strategy. It must also be said that lendingmayhave been too little during the early period when the Bank attemptedto use curtailmentof the lending program as a lever to increase its influenceover policy. 86. The impact of Bank lendingon Mexico's developmenthas been significantand positive. This has been particularly so in infrastructure,especiallyin transport - highways, seaports and airports - power and water. In highways, Bank projectsresulted in the constructionor improvementof one third of the network; and in addition supported the building and improvementof feeder roads. One major seaport was the result of a Bank project, and another project resulted in major improvementsat four ports. The constructionof seven airports was also supportedby Bank lending. Meanwhile,significant achievements improvements in institutional withinthe port sectorwere also supportedby Bankoperations. In the power sector the Bank was associated with most of the major works during the spectacular expansionwhich doubledthe country's electrification rate in the 1960s. Water projectshave contributed significantlyto the increase in supply of potable water to many metropolitanareas. Bank lending to provide credit to the private sectoragricultureand industryhas played an importantpart in encouraging the developmentof small and medium enterprises in the private sector, by reducing the crowding out effect of public sector use of nationalsavings. AlthoughBank support is replaceableby financingfrom other sources, Mexicanofficials regard as ill-advisedthe discontinuation of such lending by the Bank. 87. The principallessonssuggestedby this reviewof lending are the following: a) The Bank should determine the size and structure of its lending program to minimize the likelihood of unsatisfactory projects. Excessive lending to take advantage of improved  148 creditworthinessand lending motivatedby the need to transfer financial resources can lead to inclusionof unsatisfactoryprojects, especiallyif absorptivecapacityfor Bank projects is limited by dint of the size of the country's investmentprogram in relation to its overall absorptive capacity. The lesson is that Bank lending should be demanddriven and the Bank should be the lender of last resort. This meansthat the Bank should assess whetherthe demandis effectivein the sense that all the complementary resourcesfor effectiveabsorptionof its input are or will be available. b) A perennialproblem in the Mexicancase was the inadequatepipelineof identifiedprojects. This was due to institutionalweaknessesin Mexicoas well as a bias toward emphasison engineering aspectsat the expenseof sector economicwork both in Mexicoand in the Bank. The problem was particularlyacuteas they attemptedto shift project lendingfrom infrastructure to productive sector support. The experiencewas that Bank assistanceto Mexican institutions,e.g. in urban and housing, helpedthe development of project identificationwith positive effecton the pipeline, but more couldhave been done. The lesson is that the Bank should assist the clientto develop and maintain an adequatepipelineof projects. From time to time it has been thought that one way around the pipeline constraint is the financing of a time-slice of ongoing investment programs; this has had mixed results. It worked well in the power sector. Feedback from Mexicanofficials has been that investmentprograms are difficultto put together especiallyfor social and other sectors outsidethe traditional infrastructureones. c) Improvementsin planning and coordinationof the lending program through regular country program implementationreviews involving all relevant sections of the Bank as well as client officialshave paid off in improvedperformanceof the Bank's Mexicanportfolio, and shouldbe extendedto other countries. d) Technicalassistancehas been an importantcomponentof Bank lending to Mexico. Both sides thinkthis assistancecan be more efficientlyused, but differon whethertoo much or too little has beenprovided.There is agreementthat TA componentsneedto be better identifiedand appraised and that greater attentionneeds to be paid to implementationespeciallyas regards its deployment and support of TA personnel. e) The Bank plays an importantcatalyticrole in the mobilizationof financingfrom other sources. This role impingeson its lending program both as regards content and terms, specificallyand may have importantimplicationsfor the Bank's portfolio where guarantees and waivers of the negativepledge clausein loan agreementshave to be given. The need for quick responsehas so far tended to lead to an ad hoc approach, e.g. to documentationfor the Board. Since it now seems thatthis type of Bank supportto clients maybecomeincreasinglyimportantthoughtshould be given to the preparationof contingencyplans, policies and procedures. f) While it may be true that the Bank has to be involvedin financinga sector in order to get a seat at the policy table, the Bank shouldnot use lendingfor leverage in policydecision-making. The experienceis that clients will avoidBank financingif the Bank tries to use lending for leverage where there is sensitivityconcerningBank involvement in policymaking. Lendingmatchedwith supportiveESW and low key advicegivenearly in the decisionprocess in the contextof informal interchangesare to be preferred to resortingto conditionality.  149 g) The Special Action Program was designed in collaboration with the GOM to mitigate disbursementbottlenecks,after findingthat the problem derived from identifiablecauses which could have been avoided through advance planning of monitoring and project supervisionfor smoothdisbursement. Specialaccountsand revolvingfunds, intensivereview of implementation arrangements,attentionto counterpartfundingrequirements and incentives,and the establishment of a centralproject monitoringsystemproved effectivein expeditingdisbursementssignificantly; More attention and careful planning at project design and appraisal should be directed at preparingthe way for smoothdisbursement,and monitoringand project supervisionshould seek to identifyearly problemsand devise timely correctives. h) Disbursementis sometimesdelayedby the inadequacyof resourcesfor financingdomesticcosts. These resourcesare sometimesconstrainedby the need for consistencybetween investmentand stabilizationobjectives. The questionhere is whetherthe Bank should expect its projects to be free of the general constraint on spending or accept slower disbursement as a necessary concomitantof stabilizationefforts. The experiencein Mexicosuggeststhat the Bank wantedits program go forward without regard to the general economicsituation. Its response was to finance a larger share of domestic costs. While this served Mexican interest in trying to strengthenits balanceof paymentand Bank interest in rapid disbursementit did not assist in the general restraintof total expenditurewhich was the essenceof the stabilizationpolicy at the time. Consistencywith stabilizationpolicy would seem to require flexibility to vary this element of supportover the disbursementcycle, so as to encouragedelay of those projects and components which can be postponedwithoutsignificantimpairmentof project benefits. i) Bank procurement rules and other procedures may differ significantlyfrom the practices in a clientcountry, and hence may be unfamiliarto officialsof the level likely to have responsibility for these aspects of operations. Bank experience in Mexico demonstrates how useful and importanttechnical assistance especiallytraining can be in improving compliance with Bank standards. The Bank needs to study and monitor arrangementsin the client countryin order to see how best to phase in Bank procedures, and have them acceptedwith minimumresistance. At the sametime the Bankcan introducesome flexibilitywithoutsacrificingits essentialinterests. j) The Bank recognizedfairly early that it would have minimal leverage in Mexicoand adopted gradually a more collaborativeapproachto the design of conditionality. This approach was to educateofficialsto the desirabilityof an appropriatepolicy environmentfor project investments, to assist in the design and to make negotiationa confirmationof what the Governmentwas willingto do. This approachtook advantageof the existenceof factions holdingdifferentviews on what to do and providingthe intellectualammunitionsupportiveof the views more aligned to those of the Bank. It worked quickly in those sectors where the Bank assisted the decisive group; it also worked in others but much more slowly. In some cases the Bank's reactionto the lack of leveragewas to shift toward programinsteadof project lending. This choice should not be on the basis of clientreluctanceto acceptconditionality. k) One issue raised in Mexico has been the consistencyof Bank lending essentiallyrestrictedto importcontent and Mexicanindustrialization strategy. While the shift of strategy in Mexicohas gone far in resolving conflicts there remains the need for practical guidelines regarding the componentsof prices which ought to be taken into account in comparison of domestic and internationalsources, specificallyhow border prices should be defined.  150 I) Mexicansensitivityto the raising of new issueslate in the loan negotiationprocessand Bankstaff view that this only arises with fast track operationsin which negotiationgets underway before senior managementinput can be securedon all points suggest that a fast track decision process is require for these operations. m) Perhaps the most important lesson concerns responsivenessto clients important needs and concerns. The Bank was responsiveand supportiveof Mexico's changein development strategy in the eighties, as well as to emergencyreconstructionrequirementsdue to the 1985earthquake and to the debt restructuring and reduction effort of 1990. This responsivenesshas enhanced Mexican appreciationfor Bank flexibilityin managingits lending program. I~~~~~~~~~~  153 94E0434 March 30, 1994 Spanish (Mexico) OEDD2 JRT:uh UNITED MEXICAN STATES SECRETARIAT OF FINANCE AND PUBLIC CREDIT DIRECTORATE OF PUBLIC CREDIT INTERNATIONAL FINANCIAL INSTITUTIONS DEPARTMENT POLICIES AND STUDIES DIVISION Ref. No.: 393.111.2.106 Mexico City, February 23, 1994 Mr. Eugene D. McCarthy Representative, World Bank Av. Insurgentes Sur 1971 Dear Sir: I am writing in reply to your letter of January 4, 1994 and its attachments of several copies of the "OED Study of Bank/Mexico Relations" that were to be distributed to a number of public entities for review and comment. In this connection, I am sending the comments prepared on that study by the Secretariat of Social Development, Nacional Financiera,Bank of Mexico and National Bank for Foreign Trade. Yours truly, lsl Moises Alberto Pineda Padr6n Director, International Financial Agencies cc: Directorate of Public Credit, Mexico City International Financial Institutions Department, Mexico City Policies and Studies Division, Mexico City  154 OFSOCIAL SECRETARIAT DEVELOPMENT DIRECTORATEOF HOUSINGFINANCING Ref. No. 411.031 MexicoCity, February 18, 1994 In response to the request contained in your letter No. 393.III.2.042 of February 1, 1994, I enclosethe commentsof this Secretariaton the draft study entitled "OED Study of Bank/Mexico Relations." The study erroneouslyarrives at the conclusionthat Mexico's economicmodernizationis largely a product of the implicit and explicitconditionsimposedby the World Bank in connectionwith its loans and policy recommendations. Likewise,its assessmentof the country's economic performanceimplies that when the World Bank's recommendations were implemented,the economic targets were successfullyachieved. Nevertheless,althoughthe benefitsof World Bank advisory assistanceare undeniable, it should be made clear that the relations betweenthat institutionand Mexico have evolvedin response to the needs, guidelines and policy strategies of both parties and not vice versa, as suggestedby the study. In point of fact, differencesbetweenMexico's positions and the doctrinairepolicies mandated by the World Bank have had an adverseeffect on Bank/Mexicorelations. Nevertheless,the World Bank's new strategyfor complementing the efforts of the client rather than standingin for it is a positive change. As indicatedin the study, "the World Bank has a great advantagein terms of internationalexperienceand research,which ought to be taken into account. However, the institutionshould also take into accountthe needs and specificconcerns indicatedby the client countries." It should be clarified that the Bank's new strategy has fosteredan open dialog and rapprochementwith Mexico, and not, as indicatedin the study, that "the advisory assistanceof the World Bank is no longer perceivedas an affrontto nationalsovereignty." Although it is importantfor Mexicoto continueto be receptiveto an open dialogue with the World Bank, equally vital is a critical analysisof its recommendations, which if necessary,must be tailored to the specific needs of the country. For its part, the World Bank must reflect those needs in its strategies, so that both parties obtain greater benefit from their relationship. Yours truly, /s/ Antonio GonzalezKarg Director General  155 NACIONAL FINANCIERA COMMENTSON THE "OEDSTUDYOF BANK/MEXICORELATIONS" OF DECEMBER 15,1993 1. In general, the study gives a balanced and broad overview of the relations between Mexico and the World Bank. The main conclusion is that they have had a positive impact on Mexico's economic development, particularly in the last decade. 2. The methodology, consisting of a combination of an event-driven and a strategy-driven approach, is an interesting framework for the analysis. However, the relative importance of certain events indicated as critical could have been discussed, as could have others not mentioned. For example, there is no explicit reference to the issue of "graduation," which was an important part of the dialogue with the Bank from 1979 to 1981. 3. The chapter on the lending program seems particularly weak, especially in contrast to the preceding two chapters on economic and sectoral work and the policy dialog. There should also be an evaluation of the impact of Bank loans on the various sectors targeted. The use of comparative figures with other countries with regard to cancellations, project implementation periods and cost overruns does not provide any information on whether the loans achieved their objectives. In particular, there should be some analysis of the sectors that received the greatest assistance from the Bank. For example, according to Table 7.1 on page 119, approximately 25% of Bank loans were made to agriculture and irrigation. However, no assessment is made as to whether this large share of funds had an impact on the sector. 4. The section on competitive bidding (pp. 128 and 129) does not adequately reflect experience in this regard. The progress made with the "Cuernavaca documents" is not mentioned, nor are the efforts to conclude specific agreements with the Bank in order to bring Mexico's legislation and practices into line with the Bank's guidelines. 5. Likewise, the section on auditing (p. 129) ignores the substantial progress made in this area since 1981, as illustrated by the establishment of the Secretariat of the Controller of the Federation and the agreements entered into by that Secretariat with the Bank, which have resulted in independent audits for all projects. 6. An important oversight in the study is the lack of a specific analysis on the impact of the Bank's relations with Mexico with regard to institution building. A significant result of the World Bank's relations with Mexico, beyond economic and sectoral research, policy dialogue and loans made, may well be the development of strong executing agencies (competent technical staff, project evaluation methodologies, etc.), such as the Secretariat of Agriculture and Water (National Water Commission), Secretariat of Communications and Transport, Federal Electricity Commission, FIRA, FONETUR and FOGAIN, FONEI and FONEP (providing the basis for what are now the NAFIN support programs to micro, small and medium industry), that received loans from the World Bank throughout the more than 40 years of relations with Mexico. 7. Lastly, the document needs to be thoroughly edited (it contains numerous typographical errors) prior to publication.  156 BANKOF MEXICO MexicoCity, February 9, 1994 Ref. No.: ABS/94C-109 With regard to your letter of February I referringto the OED Study of Bank/Mexico Relations, I would makethe followingcomments. The World Bank has played an importantrole in the analysisof Mexico's economicdifficulties, such that on various occasionsit has been allowedto influencethe Government'spositions on certain problemsand its decisionmaking. Likewise, the loans madeby the Bank have been very important,in providingsupport to structural reform and the restructuringof the externaldebt, as well as in project financing. The role of the Bank in recent decadeshas thus been an extremelypositive one. A complete overviewof the relationshipshould also take into accountthose incidents that have causedfriction betweenthe two parties. Only in that way can the relationsbe strengthened. In this respect, there are two problemsin which Bank of Mexicowas directly involved,which despite having been mentionedto Mr. GladstoneBonnickin his visit to Mexico,do not appear to have been reflected in the study. The first refers to Mexicantrade liberalization. At the end of 1984 and in April 1985 discussionswere held between the Bank of Mexicoand the World Bank mission led by Mr. Berger on the conditionsthat the Bank would require of Mexicofor a trade policy loan to support a reduction in customstariffs. On that occasion,the World Bank indicatedthat it would require a 20% reduction in existing tariffs. The MexicanGovernment,with the involvementof senior officials of the Bank of Mexico,worked on a program of trade liberalization,which was announcedin July of that year. The program included tariff reductionsof some 60%, which was much higher than that required by the World Bank for the granting of its financialsupport to Mexico. Nevertheless,Mr. Berger and other World Bank officialsfelt that Mexico's exchangerate policy was not appropriateand the Bank therefore did not make the financingavailableto Mexico. They even maintainedthat their point of view was shared by the IMF. It was indicatedat that time that the exchangerate issue had been discussedthoroughlywith the IMF mission and that its report expressed its agreementwith Mexico's policies; in accordance with the IMF's Articles of Agreement,this issue falls within its area of jurisdiction. The World Bank neverthelessproposedthe trade policy loans, submittingthe first of them, Loan No. 2745, on behalf of BANCOMEXT,to the Board on July 29, 1986. The Loan becameeffectiveon November18 of that year, i.e. 16 months after Mexico implemented a liberalizationprogram several times more ambitiousthan that required by the World Bank mission. Another problembrought to the attentionof Mr. Bonnickrelates to the "maintenanceof value." This issue has not yet been resolvedand should thereforebe includedin an analysisof Bank/Mexicorelations. In essence,this boils down to the fact that the contributionsmade by Mexico in Mexicanpesos to the Bank's capital are used by the World Bank to make loans to other countries, while Mexicois obliged to maintainthe value in dollars of those funds at the time of their repayment. Prior to August 1976,the World Bank withdrewfrom accountsin Bank of Mexicoall funds deposited in the nationalcurrency to that date, transferringthose funds to accountsin dollars abroad, for use in the granting of loans denominatedin Mexicanpesos. Followingsuccessivedevaluationsof the  157 Mexican peso in the 1970s and 1980s, the value in dollars of those loans fell substantially, and the World Bank suffered a considerable loss. The World Bank has requested Bank of Mexico to absorb the exchange losses on loan funds. Our point of view has been that Bank of Mexico cannot be responsible for maintaining the value of the funds once they have been paid to the World Bank for its use in lending program. Although the inequity of the World Bank's position is patently clear and has been recognized by its own President, Mr. Preston, by the Bank's Treasurer, Mr. Johannes Linn, and by numerous other officials of that institution, the problem persists. Although these two matters are only of relative importance in the big picture and in Mexico's fruitful relationship with the World Bank, which has contributed substantially to an understanding of the problems and the financing of a multitude of programs and projects put forward by the Mexican Government, it seems that the historical record should show not only the many positive elements, but also the problems that have emerged in this long-standing and productive relationship. Yours truly, Ariel Buira  158 With regard to the OED Study of Bank/Mexico Relations, I would like to make the following comments that I consider to be of particular interest. * The conditionality of World Bank loans at times undermines the objectives of the project, which in some cases impedes fund utilization. It is therefore important to determine whether priority lies in the terms of conditionality or in the project itself. In this regard, the World Bank could be flexible without having to sacrifice its own interests. * At this time, the World Bank reviews each project on a case-by-case basis, causing delays in authorizations and consequently in disbursements. It is therefore suggested that the Bank accept the assessment made by the individual responsible for the project, as this would facilitate disbursements under certain loans. This is important because timely and effective disbursements can be considered a hallmark of success. * From BANCOMEXT's standpoint, although at the time World Bank loans represented the best long-term financing option owing to their availability and the lesser volatility of interest rates in comparison to other instruments, the international financial markets now offer attractive alternatives. As such, the international financial institutions should eliminate the risk involved in the currency pool system to support development projects on competitive terms. Yours truly, Abel Jacinto Intriago, Actuary Executive Director, International Finance National Bank for Foreign Trade (BANCOMEXT)  Table 1: MEXICO - Data on Debt and Disbursewents M70 971 397n 973 1974 1975 1976 1977 1978 1979 3930 1933 1932 1933 1934 1935 19S6 1937 1933 3939 1990 1991 1992 Debt 1. IBRD'sShare in Mexico'sTol publicandPubliclvy-uaranteed Lona-arm DebtOutindin. andDibumrd (Smillioa) P&PO 3,196 3,482 3,907 5,554 8,175 11.414 35,06 20.703 25,513 29,014 33,915 43.032 51,55366.767 69,726 72.703 75,333 34,34930,590 76,090 76,752 78,456 76,453 IBRD 582 660 724 309 973 1,123 1,223 1,374 1,431 1,731 2,063 2,437 2,692 2,170 2,352 4,034 5,566 7,347 7,427 7,321 33,030 11,923 31,966 s dia 18.2 19.0 13.5 14.6 31.9 9.3 7.7 6.6 5.3 6.0 6.1 5.6 5.2 4.3 4.1 5.5 7.3 3.7 9.2 30.3 14.4 15.2 15.7 UndisbunedDebt(S nuilion) P&PO 555 686 137 1,796 2,130 2,255 2,324 4,364 5,364 6,323 4,317 5,373 6,348 6,523 6,384 6,671 3,308 32,639 3,202 30,724 11,637 33,352 10,746 EBRD 193 169 354 507 599 720 s91 754 1,081 1,282 1,435 2,022 2,346 2,522 2,135 2,233 2,433 2,928 2,573 3,531 2,799 3,651 3,539 5 shra 35.6 24.7 42.4 23.2 27.5 31.9 42.5 17.3 20.1 13.3 30.3 37.6 33.3 38.7 33.7 33.5 29.1 23.2 31.4 33.4 24.1 27.3 33.4 Total LAn4enn DebtOut"din. Undisbured includinc (S rmikionl P&PO 3,751 4,163 4,744 7,350 10,355 13,669 33,129 25.067 30,377 35,337 33,732 43,405 S7,89973,290 76,610 79,374 33,926 96,93913,792 16,334 33,389 93,303 37,199 U IBRD 7S0 329 1,078 1,315 1,572 1,344 2,211 2,123 2,562 3,013 3,549 4,439 4,337 5,392 5,037 6,267 7,979 10,27410,005 11,402 13,329 15,579 35,555 s Shan 20.3 19.9 22.7 17.9 35.2 13.5 12.2 .5 3.3 3.4 9.2 9.2 3.4 7.4 6.6 7.9 9.5 10.6 11.3 13.1 15.6 37.0 17.3 in Total IBRD 11.Mexico'sShare andIDADisburuemen.g BRD 694 37 990 1.026 3,436 2,009 2,225 2.567 2,996 3,921 4,545 5,614 6,625 7,320 8,537 3,434 10,204 11,33332,196 10,367 13,655 12,080 4,361 4,542 na. n.a. IDA 173 279 330 700 370 3,116 1,322 3,305 3,035 1,336 1,536 3,990 2,564 2,377 2,566 2,383 3,1S9 3,913 3,839 3,570 Total 367 1,116 1,370 1,726 2,306 3,125 3,547 3,672 4,030 5,307 6,131 7,604 9,190 10,397 31,352 33,297 13,393 15,256 16,035 14,437 33,023 16.622 .s. MxIco 93 102 92 I13 196 i13 142 202 167 326 422 460 403 360 683 340 1,036 933 1,347 3,297 3,326 1,531 3,352 S of 3RD 14.2 12.2 9.3 11.5 13.7 9.4 6.4 7.9 5.6 3.3 9.3 3.2 6.2 4.6 7.9 30.0 10.0 3.7 33.0 31.9 24.4 13.1 na.. % of otl 11.3 9.1 6.7 6.3 3.5 6.0 4.0 5.5 4.2 6.3 6.9 6.0 4.4 3.5 6.1 7.4 7.6 6.4 8.4 9.0 33.5 9.5 a. SAM_:Woel Bank MC databs.  andARPPRatings Table 2: MEXICO: World Bank Evaluted Projects- OED's Evatluation Lfnan LOAn Tune Cost Credi Appffa amount Cancel ovetun ovenun OED(PAR/PCR) A3.P No. Dae Sector ProjectDesription (S muil) (Smil.) (years) (Snil.) Ratings Ratings Rat Sua Inst L0450 28-Apr-66 Agriculture Third irrigationproject 19.0 0.6 2.0 22.1 S |L0527 25-Jan-68Ariculture Rio Colordo irrigation project 25 0 0.0 n1. 167.0 S |L0528 25-Ja-61 Ttranport 7bird roadpiqect 27 5 0.0 2.3 6.4 S 1.0659 24-Feb-70 Povwet Third powersector project 125.0 0.0 1.0 564.6 U -_ L0695 16-Jun-70Tranaport Fourthroadproject 21.8 0.0 2.1 36.7 S |L0747 1s-May-71 Agnkulture Third livestock andagricultural development project 75.0 0.0 0.0 17.0 S L0793 21-Dec-71 Tourism Zibuatanejo tourismn project 22.0 0.0 5.0 17.0 S - 1,0120 02-May-72 Transport Ports project 20.0 0.3 1.0 13.0 S |LO024 23-May-72 Fnance Industrialequipment fund(FONEI)project 35.0 0.0 n. 80.3 S |.LO25 23-May-72 Trasport Second railwayproject 75.0 0.0 1.0 24.5 S 1,0834 20-Jun-72 Power Fourthpower ectorprogram project 125.0 0.0 n.c -28.0 S 1.0909 12-Jun-73 Wateth Sanitation Mexicocity water upplyproject 90.0 11.S 4.5 4.1 S 2 L0910 12-Jun-73 Agriculture Fourthlivestock ndagricultwral development project 110.0 0.0 -2.7 30.7 S L0934 04-Sep-73 Industry Las Tuchas steel project 70.0 0.0 0.8 327.2 5 L0968 12-Feb-74 Transport Seventh highwayproject 90.0 0.0 5.5 85.5 S 2 L0969 19-Feb-74 Agriculture Rio Panuco inigationproject 102.0 0.0 4.5 249.3 5 2 | L0970 19-Feb-74 Agriculure RioSinaloa irrigationproject 47.0 0.0 2.5 112.4 S I CD L1022 06-Jun-74 Trarspost Airportsdevelopment project 25.0 0.0 5.4 55.S S I L1053 29-Oct-74 Agriculture Integrated ruraldevelopment project 50.0 24.0 3.5 -68.5 5 3 LI110 01-May-75 Agrieulture Integrated ruraldevelopment (PIDER)project 110.0 0.0 1.5 -38.0 U 2 Ll111 01-May-75 Agriculture Seventh irrigationproject 150.0 106.6 1.3 43.6 S I LI 112 22-May-75 Industry Fertilizerproject 50.0 0.0 3.1 168.6 S 2 LI 186 1-Dec-75 WaterA Sanitation WaterSupply& Sewerage 40.0 0.2 3.5 -13.4 U UNC PAR 2 L1205 03-Feb-76 Finane Second industrial equipment fund (FONED projct 500 0.0 n.a 0.0 S L1217 09-Mar-76 Agrieulture Fifth agriculuralandlivestock creditproject 1250 0.0 -0.1 64.3 U UNL PAR 2 L1232 30-Mar-76 Transport Third railwayproject 100.0 0.0 n.a 259.4 S I L1420 10-May-77 Touritm BajaCalifornia tourisn project 42 0 0.0 n.a 38.2 S I LI462 16-Jun-77 Agriculture Second integtmted rural development (PIDER 11)project 120.0 0.0 1.7 0.0 U 2 L1524 28-Feb-73 Tourism Tourism development project 50.0 0.0 1.0 n.1 S L1552 27-Apt-73 Ftnance Snull andmedium scale industry development project 47.0 0.0 0.2 0.0 S I L1553 27-Apt-78 Agricultur Tropicalagricultural development ptoject 56 0 0.0 1.3 -14.1 S I L1554 27-Apr-78 Urbon LAzto Cardenas conurbation development project 165 0.0 1.0 32.3 U 2 '0 -3 Ll1560 02-May-78 Finance Third industrial equipment fund (FONEI)project 100.0 0na 0.0 S MAR SUB 8& L1569 16-May-78 Arcultur SixthagricultualcrcditprOject 200.0 0.0 -1.0 -309 U UNL PAR I 151643 21-D72 Agriculture Smtall-aeal ag4ricultural nafraatture project 2.5 2S.7 S - -0  Loan rume Cost Crdit Appoval amount Cancel overrun ovemlai OED (PARJPCR) ARPP No. Dm Stctr Project Detcription (S mil.) (S tni.) (years) (S mil.) Ratings Rating Rat Suit Ibt L1671 2r Highwayseo proect _20.0 0.0 0.4 20.5 U I L16S6 12-Apr-79 ildustry FertilizerU project S0.0 0.0 5.1 206.5 U UNC NEG 3 L1712 31-May-79 Finance Founh induatrial equipmentfund (FONEI)project 175.0 12.5 n.1 0.0 S MAR SUB I LIS820 25-Mar-40 Fnance Smill- and medium-scae mining developmentproject 40.0 1.6 u.s -33.7 S UNC NEG 2 LISSI 24-Jun40 Ftuatc Secondsmal aWnd medium-scaleindustrydevelopmtet project 100.0 0.5 0.5 -272.6 S 2 LIS191 01-Jul40 Agricultu Seventbagriculturalcredit prject 325.0 0.0 n.e -371.9 U UNL PAR I L190S 14-Ot-SO Ag4icutue Ocoroti irrigationprject 23.0 0.0 *.e 26.8 U UNC NONE 2 L1913 04-Nov40 Water & Sanitation Mid-SizeCities Water Supply 2 125.0 49.3 2.4 -180.1 U UNC PAR 3 L1929 16-Dec40 Tranpoet Railway4 150.0 0.1 2.0 -302.0 S LIK PAR 2 L1945 22-Jan41 Agriculture Rainfedagricultura developmentproject 280.0 82.9 u.s -231.3 U UNL NEG I L1964 26-Mar41 Transpon Pan development prepartion project 14.0 9.5 2.1 -17.6 S - 2 12042 21-Jul-11 Hunan Regource Technicratrratng project 90.0 0.0 1.0 -26.1 1 12043 21-Jul-41 Agriculture- Itegrated mral developmentproject - PIDER I 175.0 0.0 4.0 -244.4 U UNC PAR 2 U2100 16-Mar-82 Agriculture Second BajoRio Bravoa/Bajo Rio SanJuan irrigation m 180.0 171.1 -1.4 -496.0 U 1 12142 13-May42 Fuinnce Capitl goods industricedevelopmentproject 152.3 0.0 n.a 0.0 U UNC NWG 2 12154 25-May42 Fuwnce Polluti control project 60.0 51.3 u.A -173.5 U UNL NEG 3 U2191 01-Jul42 Agriculture San Fernandoramnfed agriculturil developmentproject 138.4 115.8 2.0 -215.2 S UNC PAR I U2194 03-Aug42 Urban Preparationof a deconcentration program for the Mexico 9.2 4.8 3.2 -8.5 U UNL NEW 3 12262 19-Apr-43 Agriculture AgriculturalMarketing 115.0 0.0 2.9 -50.3 S LIK SUB 2 L2231 17-May43 Water & Sanitation Third mediumcities andSinalon saite water project 100.3 5.0 1.0 -64.2 S LIK SUB 2 12325 23-Jun43 Funae Smaill and MediumScale Industrial Development 3 175.0 0.0 2.0 0.0 S UNC PAR 2 L2331 23-Jun-43 Program & Policy Exportdevelopmentproject 350.0 0.7 u.e 0.0 S LWK SUB 2 U2454 27-Jun-14 Agriculture Eighthagriculturalcredit project 300.0 0.0 -2.2 -18.6 U UNL PAR I 12525 30-Apr-45 Tmanspot Chiapasrural roads project 22.0 20.9 n.a -34.5 U UNC NEG 4 U559 28-May45 Human Reource Secondtechnicaltrining pro*ect 81.0 0.0 1.5 2.2 S LEK SUB 1 L2610 23-Ju145 Agricutur Agriculturalcrdit pojiect 180.0 0.0 1.3 -30.6 U UNL PAR I 12612 27-Aug435 Urbakn LoWincomehousingproject 150.0 0.0 -2.0 0.0 S LWK SUB I U2665 25-Mar46 Urban EatFhquake Rehab. & Recon. 400.0 0.0 0.8 -30.7 S LIK NEG 12745 29-Jul46 Program & Policy Trade PolicyLoma 500.0 1.4 0.0 -5.3 S LIK PAR I 12777 20-Jan47 Program & Policy Secondexport developmentproject 250.0 0.0 n.e n.a S LIK NAVL 2 12182 12-Nov-17 Pwogram & Policy Trade Policy2 500.0 0.0 0.0 0.0 S LIK M PAR L30S6 13-Jun-19 Indust y Public Enterprie Reform 500.0 0.0 1.0 0.0 S LIK PA 3101 22-JUn49 Water & Sanitation Water. Womenand Development 20.0 20.0 *.e n.C U NAPL NAPL Tod OED Evalaed Projec: 68; % of (umstiaetoayp Pne: 32.4. Totl AIP Rotd Pmec: 53; U problsm pcojecs: 11.3. DI Neam- OED RaRqa 8-ds_l& wy U- Unestnrlacsy. t) ARM ImwP Pufebm Proecs (ras S at 4). haUg: CUDAmialRsvsDataase DU Dbsetuqto*rap Dat abseeCUD 3vmlb toT_~s Wouil 30* PIzanlal Database  162 Tablk 3: Overall Project Performance Ratngs Sector Colombia Brazil Mexico Latin America World Total projects 71 103 S8 591 2,863 Projects Satisfactory 83 72 71 74 76 % of Satisfactory Projects in: LAgriculture 77 50 59 62 65 | Industry 0 91 75 68 69 Development Fmance Corporation 100 S0 86 79 79 Transport 67 77 82 76 83 Tourism n.a. n.a. 100 100 63 Telecommunications 100 n.a. n.a. 93 90 Energy 100 0 n.a. 70 90 Power 90 88 50 87 87 Water Supply & Sanitation 88 67 S0 70 81 Urban Development 0 89 33 68 84 Education 100 75 100 84 81 Population, Health & Nutrition 100 50 n.a. 57 61 Technical Assistance n.a. n.a. n.a. 80 60 Program&Policy 100 0 100 68 79 Source: World Bank, Operations Evaluation Department, Annual Review Database.  163 Table 4 Page I of 4 MEXICO - Bank Lending Program (I million) Year Project Description Loan # Principal Cancelled Disbursed 1949 Electric Power Devel. L0012-0 24.1 24.1 1949 Electric Power Devel. L0013-0 10.0 10.0 0.0 1950 Power (Mexlight) L0024-0 26.0 26.0 1951 IndustrialDev. Line L0033-0 10.0 9.5 0.5 1952 Power L0056-0 29.7 29.7 1955 Pacific Railway L0103-0 61.0 61.0 1958 Second Power L0186-0 11.0 11.0 1958 Power-1958 L0194-0 34.0 34.0 1961 Roads L0268-0 25.0 0.1 24.9 1961 Irrigation L0275-0 15.0 0.1 14.9 1962 Power Program -62 L0316-0 130.0 130.0 1962 Transport,Roads & Bridges L0317-0 30.5 30.5 1963 SecondIrrigation L0336-0 12.5 1.2 11.4 1964 SecondRoad L0354-0 40.0 1.0 39.0 1965 SecondToll Transport L0401-0 32.0 32.0 1966 AgriculturalCredit L0430-0 25.0 25.0 1966 Power L0436-1 93.4 93.4 1966 Power L0436-2 16.6 16.6 1966 Third Irrigation L0450-0 19.0 0.6 18.4 1968 Rio Colo Irrigation L0527-0 25.0 25.0 1968 Third Road L0528-0 27.5 27.5 1968 SecondPower L0544-0 90.0 90.0 1969 Livestock& Agri. Devel. L0610-0 65.0 65.0 1970 Power SectorPrgm 70-71 L0659-0 125.0 125.0 1970 Fourth Road L0695-0 21.8 21.8 1971 Livestock& Agri. 3 L0747-0 75.0 75.0 1972 Tourism L0793-0 22.0 22.0 1972 Ports L0820-0 20.0 0.3 19.7 1972 IndustrialEquip. Fund L0824-0 35.0 35.0 1972 SecondRailway L0825-0 75.0 75.0 1972 Fourth Power L0834-0 125.0 125.0 1973 MexicoCity Water Supply L0909-0 90.0 11.8 78.2 1973 Fourth Livestoct& Agri. L0910-0 110.0 110.0 1974 Las Truchas Steel L0934-0 70.0 70.0 1974 SeventhHighway L0968-0 90.0 90.0 1974 Irrigation L0969-0 77.0 77.0 1979 Irrigation L0969-1 19.9 19.9 1979 Irrigation L0969-6 5.1 5.1 1974 Irrigation L0970-0 33.2 33.2 1974 Irrigation L0970-5 13.8 13.8 1974 Airports L1022-0 25.0 25.0 1975 Integr. Rural Dev. L1053-0 29.0 12.0 17.0 1975 Integr. Rural Dev. L1053-5 21.0 12.0 9.0  164 4 Table Page2 of 4 Year Project Description Loan # Principal Cancelled Disbursed 1975 Integr. Rural Dev. L1110-0 110.0 110.0 1975 Irrigation L1111-0 119.8 100.0 19.8 1976 SeventhIrrigation LI 111-5 30.2 6.6 23.6 1975 Fertilizer LI 112-0 50.0 50.0 1976 Water Supply & Sewerage L1186-0 40.0 0.2 39.8 1976 IndustrialEquip. Fund 2 L1205-0 50.0 50.0 1976 Fifth Agri. & Livestock L1217-0 125.0 125.0 1976 Third Railway L1232-0 100.0 0.0 100.0 1977 SecondSteel L1308-0 95.0 95.0 0.0 1977 TourismBaja Calif. L1420-0 21.0 21.0 1977 TourismBaja Calif. L1420-5 21.0 21.0 1977 IntegratedRural Dev. L1462-0 68.1 68.1 1975 Integr. Rural Dev. L1462-5 51.9 51.9 1978 Tourism L1524-0 45.7 45.7 1978 Tourism L1524-5 4.3 4.3 1978 S & M IndustryDev. L1552-0 45.4 45.4 1978 S & M Industry L1552-5 1.7 1.7 1978 TropicalAgri. Dev. L1553-0 12.0 12.0 1978 TropicalAgri. Dev. L1553-5 44.0 44.0 1978 Lazaro CardenasConurbation L1554-0 16.5 16.5 1978 Third IndustrialEquip. L1560-0 86.4 86.4 1978 Third IndustrialEquip. L1560-5 13.6 13.6 1978 Sixth Agri. Credit L1569-0 195.7 195.7 1978 Sixth Agri. Credit L1569-5 4.3 4.3 1979 Small Scale Agri. Infras. L1643-0 6.7 6.7 1979 S S Agri. Infrastructure L1643-5 53.3 53.3 1979 HighwaySector L1671-0 120.0 120.0 1979 Fertilizer L1686-0 40.8 40.8 1979 Second Fertilizer L1686-5 39.3 39.3 1979 Irrigation L1706-0 3.4 3.4 1979 Irrigation L1706-5 88.6 10.2 68.1 1979 IndustrialEquip. Fund L1712-0 49.8 49.8 1979 Fourth IndustrialFund L1712-5 125.2 12.5 112.8 1980 S & M MiningDev. L1820-5 40.0 8.6 31.4 1980 Irrigation L1858-5 160.0 95.6 55.0 1980 SecondS & M Industry L1881-0 53.2 53.2 1981 S & M Industry L1881-5 46.8 0.5 46.3 1981 SeventhAgri. Credit L1891-5 325.0 325.0 1981 Irrigation L1908.0 23.0 23.0 1981 SecondMediumCities Water L1913-0 125.0 49.3 75.7 1981 Fourth Railway L1929-0 150.0 0.1 149.9 1981 RainfedAgri. Dev. L1945-0 280.0 82.9 197.1 1981 Port Dev. Prep. L1964-0 14.0 9.5 4.5 1981 SecondUrban/RegionalDev. L1990-0 164.0 22.4 141.6 1982 Technical Training L2042-0 90.0 90.0  165 Table 4 Page 3 of 4 Year Project Description Loan # Principal Cancelled Disbursed 1982 Integ. Rural Dev. L2043-0 175.0 175.0 1982 IrrigationRehab. L2100-0 180.0 171.1 8.9 1982 Capital Goods Ind. Dev. L2142-0 152.3 152.3 1982 PollutionControl L2154-0 60.0 51.3 8.7 1983 Agri. Devel. L2191-0 138.4 115.8 22.6 1983 DeconcentrationProgram L2194-0 9.2 4.8 4.4 1983 Agri. Marketing L2262-0 115.0 115.0 1983 Third Medium Cities Water L2281-0 100.3 5.0 87.4 1983 Third S & M Industry L2325-0 175.0 0.0 175.0 1983 Export Devel. L2331-0 350.0 0.7 349.3 1984 HighwaySector L2428-0 200.0 147.1 1984 IndustrialPort L2450-0 78.3 38.1 19.5 1984 Eighth Agri. Credit L2454-0 300.0 300.0 1985 Rural Roads L2525-0 22.0 20.9 1.1 1985 Agri. Devel. L2526-0 90.0 32.0 22.8 1985 SecondS & M Scale Devel. L2546-0 105.0 105.0 1985 SecondTechnicalTraining L2559-0 81.0 75.2 1985 RailwaySector L2575-0 300.0 300.0 1986 Agri. Credit L2610-0 180.0 180.0 1986 Low Income Housing L2612-0 150.0 150.0 1986 Agri. Devel. ProderithII L2658-0 109.0 20.7 20.6 1986 EarthquakeRehab. & Recon. L2665-0 400.0 400.0 1986 MunicipalStrengthening L2666-0 40.0 4.0 1986 Solid Waste Mgmt. L2669-0 25.0 8.4 1987 Trade Policy I L2745-0 500.0 500.0 1987 IndustrialRecovery L2746-0 150.0 135.5 1987 IndustrialTechnology L2747-0 48.0 19.6 1987 Second Export Devel. L2777-0 250.0 242.2 1987 Urban Transport L2824-0 125.0 34.1 1987 Ninth Agri. Credit L2837-0 400.0 390.4 1987 Fourth S & M Industry L2858-0 185.0 85.0 38.9 1987 Agri. Extension L2859-0 20.0 20.0 1988 HighwayMaintenance L2875-0 135.0 14.1 1988 ManpowerTraining L2876-0 80.0 41.4 1988 SecondTrade Policy L2882-0 500.0 500.0 1988 Steel Ind. Restruct. L2916-0 400.0 153.2 1988 Agri. Sector Loan L2918-0 300.0 300.0 1988 FertilizerInd. Restruct. L2919-0 265.0 163.9 1988 Ports Rehab. L2946-0 50.0 6.0 1988 HousingFinance L2947-0 300.0 236.2 1989 Ind. Restruct. L3047-0 250.0 58.0 1989 Hydro-Elect. Dev. L3083-0 460.0 71.0 1989 Fin. SectorAdjust. L3085-0 500.0 485.1 1989 Public Entprse. Reform L3086-0 500.0 499.3 1989 Industry Sector Policy L3087-0 500.0 497.0  166 Table 4 Page 4 of 4 Year Project Description Loan # Principal Cancelled Disbursed 1989 Water, Women& Dev. L3101-0 20.0 0.0 1990 Forestry L3115-0 45.5 2.5 1990 SecondLow Income Housing L3140-0 350.0 70.2 1990 SecondAgri. Marktg. L3141-0 100.0 28.6 1990 InterestSupport L3159-0 1,260.0 1260.0 1990 Transmission& Distrib. L3189-0 450.0 0.0 1990 Road Transp. & Telecom. L3207-0 380.0 190.0 1990 Telecom. TA L3208-0 22.0 3.0 1991 Water Supply& Sani. L3271-0 300.0 0.0 1991 BasicHealth Care L3272-0 180.0 0.0 1991 Export SectorLoan L3309-0 300.0 0.0 1991 Decentral.& Regional Devp. L3310-0 350.0 0.0 1991 AgriculturalSector Adj. II L3357-0 400.0 0.0 1991 Third TechinicalTraining L3358-0 152.0 0.0 1991 Mining SectorRestructuring L3359-0 200.0 0.0 1991 PrimaryEducation L3407-0 250.0 0.0 1991 Irrigation& DrainageSector L3419-0 400.0 0.0 1992 Environmental L3461-0 50.0 0.0 1992 AgricultureTechnology L3465-0 150.0 0.0 1992 Science& TechnologyInfra. L3475-0 189.0 0.0 1992 HousingMarketDevelopment L3497-0 450.0 0.0 1992 InitialEducation L3518-0 80.0 0.0 1992 Labor Market and Productivity L3542-0 174.0 0.0 1992 TransportAir Quality Mgmt. L3543-0 220.0 0.0 GRANDTOTAL 21,210.6 1,097.2 13,505.5 Note:* 1988 FACILITY2 (COFIN. NEW MONEY) LB020-0 500.0 0.0 1988 FACILITY3 (GROWTHFINANCING) LB021-0 250.0 0.0 1987 URBANTRANSPORT LP097-0 1.0 1.0 0.0 1987 PUBLICSECTORBUDGETING LP100-0 1.0 1.0 0.0 1987 MANPOWER TRAINING LP103-0 1.0 1.0 0.0 *Annotation:Theseloans were found in the Financialdatabase, but are not includedin the above list because these were Bankguarantees and special action program advancedeposits.  167 Table 5 Pag I of 5 MEYJCO: Bank Lending Program, by Sector ($ million) %uhae Year Project Description Loan # Principal Cancel. Disburs. socbr SOCIAL 1982 Technical Training L2042-0 90.0 90.0 1985 Second Technical Training 2559-0 81.0 75.2 1988 Manpower Training L2876-0 80.0 41.4 1991 Basic Health Care L3272-0 180.0 0.0 1991 Third Technical Training L3358-0 152.0 0.0 1991 Primary Education L3407-0 250.0 0.0 1992 Initial Education L3518-0 80.0 0.0 1992 Labor Market & Productivity L3542-0 174.0 0.0 TOTAL 1,087.0 206.6 5.1 PORTS 1972 Ports L0820-0 20.0 0.3 19.7 1974 Airports L1022-0 25.0 25.0 1981 Port Dev. Prep. L1964-0 14.0 9.5 4.5 1984 Industrial Port L2450-0 78.3 38.1 19.5 1988 Ports Rehab. L2946-0 50.0 6.0 TOTAL 187.3 47.8 74.8 0.9 RLWLAYS 1955 Pacific Railway L0103-0 61.0 61.0 1972 Second Railway L0825-0 75.0 75.0 1976 Third Railway L1232-0 100.0 0.0 100.0 1981 Fourth Railway L1929-0 150.0 0.1 149.9 1985 Railway Sector L2575-0 300.0 300.0 TOTAL 686.0 0.2 685.9 3.2 WATER 1973 Mexico City Water Supply L0909-0 90.0 11.8 78.2 1976 Water Supply & Sewerage LI186-0 40.0 0.2 39.8 1981 Second Medium Cities Water L913-0 125.0 49.3 75.7 1983 Third Medium Cities Water L2281-0 100.3 5.0 87.4 1989 Water, Women & Dev. L3101-0 20.0 0.0 1991 Water Supply & Sani. L3271-0 300.0 0.0 TOTAL 675.3 66.3 281.1 3.2 POLICY BASED LOANS 1983 Export Devel. L2331-0 350.0 0.7 349.3 1987 Trade Policy I L2745-0 500.0 500.0 1987 Second Export Devel. L2777-0 250.0 242.2 1988 Second Trade Policy L2882-0 500.0 500.0 1989 Public Entprse. Reform L3086-0 500.0 499.3 1989 Industry Sector Policy L3087-0 500.0 497.0  168 Table S Pap 2 ofS Year ProjectDescription w Loan Principal cancel. Disbun. sor 1989 Fn. SectorAdjust. L3085-0 500.0 485.1 1990 InterestSupport L3159-0 1260.0 1260.0 1991 ExportSector L3309-0 300.0 0.0 TOTAL 4,660.0 0.7 4,332.9 2.0 URBAN 1978 Lazaro Cardena CODUrbOdon L1554-0 16.5 16.5 1981 Scoond Urban/Regiona Dv. L1990-0 164.0 22.4 141.6 1983 DoconcenuationProgrm L2194-0 9.2 4.8 4.4 1986 MunicipalStrengthening L2666-0 40.0 4.0 1986 Low IncomeHousing 12612-0 150.0 150.0 1986 Earthquake Rehab. & Recon. 12665-0 400.0 400.0 1986 SolidWasteMgmt. L2669-0 25.0 8.4 1987 UrbanTransport L2824-0 125.0 34.1 1988 HousingFnAnce L2947-0 300.0 236.2 1990 SecondLow IncomeHousing L3140-0 350.0 70.2 1992 HousingMarketDevelopment L3497-0 450.0 0.0 1992 TransportAir QualityMgmt. L3543-0 220.0 TOTAL 2,249.7 27.2 1,065.4 10Q TOURISM 1972 Tourism Lo793-0 22.0 22.0 1977 TourismBajaCalif. L1420-0 21.0 21.0 1977 TourismBajaCalif. L1420-5 21.0 21.0 1978 Tourism L1524-5 4.3 4.3 1978 Tourism L1524-0 45.7 45.7 TOTAL 114.0 114.0 03 AGRICULTUPRE 1966 AgriculturalCredit L0430-0 25.0 25.0 1969 Livestock& Agri. Devel. L0610-0 65.0 65.0 1971 Livestock& Agri. 3 L0747-0 75.0 75.0 1973 FourthLivestoct & Agri. L0910-0 110.0 110.0 1975 Integr.RuralDov. l1053-0 29.0 12.0 17.0 1975 Integr.RuralDev. Ll11O-0 110.0 110.0 1975 Integr.Runl Dev. L1462-5 51.9 51.9 1975 Integr.RuralDev. L1053-5 21.0 12.0 9.0 1976 Fift Agri. & Livestock L1217-0 125.0 125.0 1977 Integratd RuralDcv. L1462-0 68.1 68.1 1978 Sixth Agri. Credit 1569-0 195.7 195.7 1978 TropicalAgri. Dev. L1553-0 12.0 12.0 1978 TropicalAgri. Dov. LIS53-5 44.0 44.0 1978 Sixth Agri. Crdit L1569-5 4.3 4.3 1979 S S Agri. Ifrastutr L1643-5 53.3 53.3 1979 SmallScaleAgri. Ides. L1643-0 6.7 6.7 1981 Rainfd Agri. Dev. L1945-0 280.0 82.9 197.1  169 TableS Page 3 of 5 % sbarc Year Project Description Loan # Principal Cancel. Disburs. seflr 1981 Seventh Agri. Credit L1891-5 325.0 325.0 1982 Integ. Rural Dev. L2043-0 175.0 175.0 1983 Agri. Marketing L2262-0 115.0 115.0 1983 Agri. Devel. L2191-0 138.4 115.8 22.6 1984 Eighth Agri. Credit L2454-0 300.0 300.0 1985 Agri. Devel. L2526-0 90.0 32.0 22.8 1986 Agri. Devel. Proderith II L2658-0 109.0 20.7 20.6 1986 Agri. Credit L2610-0 180.0 180.0 1987 Ninth Agri. Credit L2837-0 400.0 390.4 1987 Agri. Extension L2859-0 20.0 20.0 1988 Agri. Sector Loan L2918-0 300.0 300.0 1990 Forestry L3115-0 45.5 2.5 1990 Second Agri. Marktg. L3141-0 100.0 28.6 1991 Agricultural Sector Adj. L3357-0 400.0 0.0 1992 Agriculture Technology L3465-0 150.0 0.0 TOTAL 4,123.9 275.4 3,071.6 19.4 ROADS 1985 Rural Roads L2525-0 22.0 20.9 1.1 1990 Telecom. TA L3208-0 22.0 3.0 1988 Highway Maintenance L2875-0 135.0 14.1 1970 Fourth Road Lo695-0 21.8 21.8 1961 Roads L0268-0 25.0 0.1 24.9 1968 Third Road L05284 27.5 27.5 1962 Transport, Roads & Bridges L0317-0 30.5 30.5 1965 Second Toll Transport L0401-0 32.0 32.0 1964 Second Road L0354-0 40.0 1.0 39.0 1974 Seventh Highway L0968-0 90.0 90.0 1979 Highway Sector L1671-0 120.0 120.0 1984 Highway Sector L2428-0 200.0 147.1 1990 Road Transp. & Telecom. L3207-0 380.0 190.0 TOTAL 1,145.8 22.0 741.0 5.4 INDUSTRY 1951 Industrial Dev. Line L0033-0 10.0 9.5 0.5 1972 Industrial Equip. Fund L0824-0 35.0 35.0 1974 Las Truchas Steel L0934-0 70.0 70.0 1975 Fertilizer L1112-0 50.0 50.0 1976 Industrial Equip. Fund 2 L1205-0 50.0 50.0 1977 Second Steel L1308-0 95.0 95.0 0.0 1978 Third Industrial Equip. L1560-5 13.6 13.6 1978 S & M Industry L1552-5 1.7 1.7 1978 Third Industrial Equip. L1560-0 86.4 86.4 1978 S & M Industry Dev. L1S52-0 45.4 45.4 1979 Fourth Industrial Fund L1712-5 125.2 12.5 112.8 1979 Ferdlizer L1686-0 40.8 40.8  170 Table 5 Page 4 of 5 %_ Year Project Description Loan # Principal Cancel. Disburs. sctor 1979 Industrial Equip. Fund L1712-0 49.8 49.8 1979 Second Fertilizer L1686-5 39.3 39.3 1980 Second S & M Industry L1881-0 53.2 53.2 1981 S & M Industry L1881-5 46.8 0.5 46.3 1982 Capital Goods Ind. Dev. L2142-0 152.3 152.3 1983 Third S & M Industry L2325-0 175.0 0.0 175.0 1985 Second S & M Scale Devel. L2546-0 105.0 105.0 1987 Fourth S & M Industry L2858-0 185.0 85.0 38.9 1987 Industrial Recovery L2746-0 150.0 135.5 1987 Industrial Technology L2747-0 48.0 19.6 1988 Steel Ind. Restruct. L2916-0 400.0 153.2 1988 Fertilizer Ind. Restruct. L2919-0 265.0 163.9 1989 Ind. Restruct. L3047-0 250.0 58.0 1991 Mining Sector Restructuring L3359-0 200.0 0.0 1992 Science & Tecb. Infrastr. L3475-0 189.0 0.0 TOTAL 2,931.3 202.4 1,696.0 13.1 POWER 1949 Electric Power Devel. L0013-0 10.0 10.0 0.0 1949 Electric Power Devel. L0012-0 24.1 24.1 1950 Power (Mexlight) L0024-0 26.0 26.0 1952 Power L0056-0 29.7 29.7 1958 Power-1958 L0194-0 34.0 34.0 1958 Second Power L0186-0 11.0 11.0 1962 Power Program -62 L0316-0 130.0 130.0 1966 Power L0436-2 16.6 16.6 1966 Power L0436-1 93.4 93.4 1968 Second Power L0544-0 90.0 90.0 1970 Power Sector Prgm 70-71 L0659-0 125.0 125.0 1972 Fourth Power L0834-0 125.0 125.0 1989 Hydro-Elect. Dev. L3083-0 460.0 71.0 1990 Transmission & Distrib. L3189-0 450.0 0.0 TOTAL 1,624.8 10.0 775.8 7.7 ERRGATION 1961 Irrigation L0275-0 15.0 0.1 14.9 1963 Second Irrigation L0336-0 12.5 1.2 11.4 1966 Third Irrigation L0450-0 19.0 0.6 18.4 1968 Rio Colo Irrigation L0527-0 25.0 25.0 1974 Irrigation L0969-0 77.0 77.0 1974 Irrigation L0970-0 33.2 33.2 1974 Irrigation L0970-5 13.8 13.8 1979 Irrigation L0969-1 19.9 19.9 1975 Irrigation L1114- 119.8 100.0 19.8 1976 Seventh Irrigation L1111-5 30.2 6.6 23.6 1979 Irrigation L1706-0 3.4 3.4  171 Table 5 Page 5 of 5 % sharm Year Project Description Loan # Principal Cancel. Disburs. sector 1979 Irrigation L0969-6 5.1 5.1 1979 Irrigation L1706-5 88.6 10.2 68.1 1980 Irrigation L1858-5 160.0 95.6 55.0 1981 Irrigation L1908.0 23.0 23.0 1982 Irrigation Rehab. L2100-0 180.0 171.1 8.9 1991 Irrigation & Drainage Sector L3419-0 400.0 TOTAL 1,225.5 385.3 420.5 5.8 MISCELLANEOUS 1980 S&M Mining L1820-5 40.0 8.6 31.4 1982 Pollution Control L2154-0 60.0 51.3 8.7 1991 Decentralization& Reg. Dev. L3310-0 350.0 0.0 1992 Environmental L3461-0 50.0 0.0 TOTAL 500.0 59.9 40.1 2.4 GRAND TOTAL 21,210.6 1,097.1 13,505.5 100.0  172 Table 6. MEXICO - OED EvaLwed Projects: Cost wad Thw Omuas 1. Cost Ove£mm Bank-wide Mexico No. of EHLCost AhUx % No. of PA. Cot Atual % Projeos (S milon) (S million) differncoo Projecu (S miion) (S milion) differce Underrun 1,143 149,700 117,329 (21.6) 2S 11,170 8,428 (24.5) Overrun 1,411 129,863 176,454 35.9 28 5,366 8,071 S0.4 No change 164 13,198 13,198 0.0 7 2,241 2,241 0.0 Overal 2,718 292,761 306,981 4.9 60 18,777 18,740 (0.2) H. Tuie Overruns Bank-wide Mexico No. of Delay No.of Dlahy % Project (I of days) diffornce Projecu (I of days) differenoe Underrun 101 -358 (19.9) 4 -759 (41.5) Overrun 2,666 881 6S.3 S5 78S 59.3 No change 392 - - a - - Overal 3,159 733 S4.5 67 S99 46.2 Scurc: World BankOED daabae.  173 MEXICO: TRS for Board Approvals During 1967-1992 PaN 1 - ---------- Staffiseka-----__.___ Pr_- operation Loan I USSh FYU FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 rY93* Total ADJUSTAENTLENDING 1987 Board Approvals 1) Trade Policy Ln. 11 2882-ME 500.0 Preappraisal 2.3 25.7 28.0 Appraisal 9.6 9.6 Negotiation 3.0 17.7 20.7 Supervision 8.1 13.8 3.9 25. Other 0.1 37.8 0.9 0.6 39.4 ..... ..... .... ..... .... ---- . ---- ---- ---- .... . .... .... . .... ... ....................__... Subtotal 500.0 0.0 0.0 0.0 2.4 76.1 26.7 14.4 3.9 0.0 0.0 0.0 123.5 1988 Board ApprovaLs 1) Agric. Sector I 2918-NE 300.0 Preappr isal 1.1 53.3 0.2 54.6 Appraisal 24.6 24.1 48.7 Negotiation 11.5 11.5 Supervision 5.0 20.6 10.1 4.2 6.4 0.5 46.8 other 10.1 0. ..... ~~~~~~~~~~~~~~~~~~~~ .... ... ........ .... .... ... ... ... .... .... ..... _ Subtotal 300.0 0.0 0.0 0.0 1.1 88.0 40.6 20.8 10.1 4.2 6.4 0.5 171.7 2) FertIliter Sector 2919-ME 265.0 Preappraeial 94.3 69.2 163.5 AppraisaL 31.1 14.1 45.2 Negotiation 15.9 15.9 Supervislaon 5.5 18.4 39.2 26.0 30.5 6.6 126.2 Other 1.1 7.1 3.0 11.2 Subtotal 0.0 0.0 0.0 95.4 107.4 35.5 18.4 39.2 29.0 30.5 6.6 362.0 Subtotal: 1988 Preappraisal 0 0 0 95.4 122.5 0 0.2 0 0 0 0 218.1 Appraisal 0 0 0 0 55.7 38.2 0 0 0 0 0 93.9 Negotiation 0 0 0 0 0 27.4 0 0 0 0 0 27.4 Supervision 0 0 0 0 0 10.5 39 49.3 30.2 36.9 7.1 173 Other 0 0 0 1.1 17.2 0 0 0 3 0 0 21.3 ..... ..... .... ..... .... .... . .... ----. .... .... . .... .... . .... .... ..... ......._... .... .. Total 565.0 0.0 0.0 0.0 96.5 195.4 76.1 39.2 49.3 33.2 36.9 7.1 533.7 1989 Board Approvals .. ..... ... .... 1) Financisl Sector 3085-NE 500.0 Preapprlseal 4.0 4.0 Appraisel 111.6 111.6 Negotfation 108.0 1.0 109.0 Supervision 4.0 64.8 1.5 12.7 83.0 Other 3.8 3.8 .... .... .... .... .... .... .... .... .... . .... . . .... .. . . . SubtotaL 0.0 0.0 0.0 0.0 0.0 0.0 231.4 65.8 1.5 12.7 0.0 311.4  174 MEXICO: TRS for Board Approvats During 1987-1992 Pe9 2 ------------------------------------- Staffweks--------------------------------------- Pr.- Operation Loan U USst FY84 FYJ4 FY85 FY86 FY87 FY88 F FY89 FY90 FY91 FY92 FY93* Tota 2) Pub. Enter. Reform I 3086-NE 500.0 PreappraisaL 2.5 2.5 Appraisas 89.3 89.3 Negotiation 39.6 39.6 Supervision 38.5 24.0 62.5 Other 0.0 SubtotaL 0.0 0.0 0.0 0.0 0.0 0.0 131.4 38.5 24.0 0.0 0.0 193.9 3) Indus. Sector PoLicy 3087-NE 500.0 PreappraisaL 6.3 6.3 Appraisal 23.0 23.0 Negotiation 32.2 32.2 Supervision 1.8 25.9 2.0 7.9 5.8 43.4 Other 0.0 SubtotaL 0.0 0.0 0.0 0.0 0.0 0.0 63.3 25.9 2.0 7.9 5.8 104.9 Subtotal: 1989 Preappraisal 0.0 0.0 0.0 0.0 0.0 0.0 12.6 0.0 0.0 0.0 0.0 12.8 Appraisat 0.0 0.0 0.0 0.0 0.0 0.0 223.9 0.0 0.0 0.0 0.0 223.9 Negotiation 0.0 0.0 0.0 0.0 0.0 0.0 179.8 1.0 0.0 0.0 0.0 180.8 Supervision 0.0 0.0 0.0 0.0 0.0 0.0 5.8 129.2 27.5 20.6 5.8 18.9 Other 0.0 0.0 0.0 0.0 0.0 0.0 3.8 0.0 0.0 0.0 0.0 3.8 ....... .... .... .... .... . .... ---- .---- ---- . ---- .... . ---- ---- .... .......... ... ..... ,,........_ Total 1,500.0 0.0 0.0 0.0 0.0 0.0 0.0 426.1 130.2 27.5 20.6 5.8 610.2 1990 Board ApprovaLs 1) Spec. Interest Supp. 3159-NE 1,260.0 PreappraisaL 0.0 AppraisaaL 0. Negotiation 15.1 15.1 Supervision 3.2 9.7 12.9 Other 0.0 Subtotat 0.0 0.0 0.0 0.0 0.0 0.0 0.0 18.3 0.0 9.7 0.0 28.0 2) Rd. Trans./Telecom 3207-NE 380.0 PreappraisaL 13.9 77.3 91.2 AppraisaL 22.8 22.8 Negotiation 5.4 5.4 Supervision 0.2 13.8 0.5 1.0 15.5 Other 0.6 SubtotaL 0.0 0.0 0.0 0.0 0.0 0.0 13.9 105.7 13.8 0.5 1.0 134.9  175 MEXICO: TRS for Board Approvals During 1987-1992 Pge 3 Staffwjeks---------------------------------__ -------------------------------------- Pre- Operation Loan U USSN FY8U FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 FY93 Total Subtotal: 1990 Preappralsal 0.0 0.0 0.0 0.0 0.0 0.0 13.9 77.3 0.0 0.0 0.0 91.2 Appraisat 0.0 0.0 0.0 0.0 0.0 0.0 0.0 22.8 0.0 0.0 0.0 22.8 Negotiation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 20.5 0.0 0.0 0.0 20.5 Supervision 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.4 13.8 10.2 1.0 28.4 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 ....... ---- .... ---- ---- .---- ---- .---- .... . .... ----. ---- ---- . -----....... ........,, Total 1t640.0 0.0 0.0 0.0 0.0 0.0 0.0 13.9 124.0 13.8 10.2 1.0 162.9 1991 Board Approvals 1) Export Sector 3309-NE 300.0 Preappraisal 9.7 65.0 85.7 160.4 Appraisai 8.3 15.0 23.3 Negotiation 12.8 12.8 Supervision 1.1 20.4 7.2 28.7 Other 0.0 Subtotal 0.0 0.0 0.0 0.0 0.0 9.7 65.0 94.0 28.9 20.4 7.2 225.2 2) Ag. Sector/Food Sec. 3357-ME 400.0 Preappraisal 0.1 2.9 100.0 57.7 160.7 Appraisal 21.1 21.1 Negotiation 16.3 16.3 Supervislon 23.9 12.9 36.8 Other 0.S Subtotal 0.0 0.0 0.0 0.0 0.0 0.1 2.9 100.0 95.1 23.9 12.9 234.9 Subtotal: 1991 Preappraisel 0.0 0.0 0.0 0.0 0.0 9.8 67.9 185.7 57.7 0.0 0.0 321.1 Appraisal 0.0 0.0 0.0 0.0 0.0 0.0 0.0 8.3 36.1 0.0 0.0 A.4 Negotiation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 29.1 0.0 0.0 29.1 Supervision 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.1 44.3 20.1 65.5 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 .... ......................... .... ..... .... ..... .... ........... ..... .... ----. .... ----. ---- ..... .. Total 700.0 0.0 0.0 0.0 0.0 0.0 9.8 67.9 194.0 124.0 4.3 20.1 460.1 1992 Board Approvals .................... MonM Subtotals: Preapprafsat 0 0 0 97.7 148.2 9.8 94.8 263.0 57.7 0.0 0.0 671.2 Appraisat 0 0 0 0 65.3 38.2 223.9 31.1 36.1 0.0 0.0 394.6 Negotiation 0 0 0 0 3.0 45.1 179.8 21.5 29.1 0.0 0.0 278.5 Supervision 0 0 0 0 0 18.6 58.6 185.8 72.6 112.0 34.0 481.6 Other 0 0 0 1.2 55.0 0.9 4.4 0 3.0 0.0 0.0 64.5 TOTAL: AdJustment Lending 4,905.0 0.0 0.0 0.0 98.9 271.5 112.6 561.5 501.4 198.5 112.0 34.0 1,890.4 US*in- 0 *0 S 0 SS -==- -w- *000 S.00 s.a _  176 MEXICO: TRS for Board Approvals During 1967-1992 Page 1 ------------------------------ Staffugeks --- Pro- Operation Lown USIN FY84 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 FY93- Total PROJECTLENDING 1987' ~~~~~~~~~~~~~~~~~~~~........ BoardApprovais ......... .. 1) EDP 11 2770-NE 250.0 PreappraiW at 6.8 28.9 35.7 Appraisal 20.8 1.9 22.7 Wegotiation 8.4 8.4 Supervision 7.0 28.3 12.6 2.2 0.5 1.6 52.2 Other 0.7 5.2 6.1 12.0 Subtotal 0.0 0.7 6.3 54.9 23.4 20.3 12.6 2.2 0.5 1.6 0.0 131.0 2) Urban Trwnsport 2824-NE 125.0 Preapprmisal 7.3 39.6 2.3 49.2 Appraisal 47.2 47.2 Megotiation 10.2 10.2 Supervision 0.4 18.7 21.1 23.5 25.3 13.3 10.6 112.9 Other 0.5 1.1 12.6 14.2 Subtotal 0.0 0.0 7.8 40.7 72.7 18.7 21.1 23.5 25.3 13.3 10.6 233.7 3) Agric. Credit/FIRA 2837-NE 400.0 Preappraisal 4.3 7.7 12.0 Appraisa 32.7 5.3 38.0 Negotiation 26.6 26.6 Supervision 1.4 20.6 20.4 6.7 0.8 15.6 2.9 68.4 Other 2.6 1.2 9.1 12.9 SubtotaL 0.0 0.0 6.9 41.6 42.4 20.6 20.4 6.7 0.8 15.6 2.9 157.9 4) Sm ll & Ned. Ind. IV 2858-NE 185.0 Preappraisal 3.8 4.6 38.1 46.5 Appraisal 24.6 24.6 Negotiation 3.9 3.9 Supervision 8.1 23.2 31.0 8.4 6.3 77.0 Other 7.4 10.9 18.3 Subtotal 0.0 0.0 3.8 12.0 77.5 8.1 23.2 31.0 8.4 6.3 0.0 170.3 5) Agric. Extenion 2859-NE 20.0 PreappraisaL 1.0 3.9 12.3 13.5 30.7 AppraIsal 34.7 34.7 Negotiation 4.1 4.1 Supervision 0.1 16.1 12.7 2.0 2.7 2.6 1.6 37.8 Other 1.4 11.3 12.7 Subtotal 0.0 1.0 5.3 12.3 63.7 16.1 12.7 2.0 2.7 2.6 1.6 120.0  177 MEXICO: TRS for Sord Approvals Owing 1J-tM 17 2 ~~~~~~~~~~~~~~~~~~~~~St------...................................... tffWm............ -.......... .................. ... Operation Loen * USU F0 FY84 "IS FY86 FTY8 F FYn9 Y90 Fn91 Fn2 rs3* Totat 6) HighwayMant. 2375-Uf 135.0 Pra ppr&sasl 9.3 9.1 18.4 Appraisal 40.8 40.' Negotfltion 9.3 2.9 12.2 Supervision 7.0 9.2 14.5 22.3 15.7 2.4 71.1 Other 0.1 4.1 0.4 4.6 Subtotat 0.0 0.0 0.0 9.4 63.3 10.3 9.2 14.5 22.3 15.7 2.4 147.1 7) anpowerTraining 2376-U U.0 Preappraisal 63.0 63.0 AppraIsal 11.1 1.8 12.9 Negotiation 20.0 20.0 supervlsion 5.9 25.5 18.3 18.6 11.2 1.5 31.0 Other 8.6 3.5 1.4 13.5 Subtotal 0.0 0.0 0.0 0.0 82.7 31.2 25.5 18.3 20.0 11.2 1.5 190.4 Subtotrtl: 198r Prappraisat 0.0 1.0 26.1 102.4 126.0 0.0 0.0 0.0 0.0 0.0 0.0 255.5 Appraisal 0.0 0.0 0.0 53.5 165.6 1.8 0.0 0.0 0.0 0.0 0.0 220.9 epotiation 0.0 0.0 0.0 0.0 62.5 22.9 0.0 0.0 0.0 0.0 0.0 85.4 Supervision 0.0 0.0 0.0 0.0 6.9 104.7 124.7 96.2 76.6 66.3 19.0 500.4 Other 0.0 0.7 4.5 15.0 62.7 3.9 0.0 0.0 1.4 0.0 0.0 68.2 ... ... .... ..... .... ..... .... ..... .... ..... .... ..... .... ..... ..... ..... ... . . ..... Total I 95.0 0.O 1.7 30.6 170.9 425.7 133.3 124.7 96.2 30.0 66.3 19.0 1,150.4 1988Board Approvals 1) Steel Restructurln 2916-NE 400.0 Pr spprsal 57.0 57.0 Appraisal 79.7 35.0 114.7 Negotiation 21.2 21.2 supervision 19.6 29.4 38.8 16.7 14.7 6.7 125.9 Other 18.3 0.1 18.4 .. ... .... .... ..... .... ..... .... ..... .... ..... .... ...... . ....... ..... Subtotal 0.0 0.0 0.0 0.0 155.0 75.9 29.4 38.8 16.7 14.7 6.7 337.2 2) Ports IV 2946-NE 50.0 Prea pprlsal 2.0 3.9 18.9 17.8 24.7 67.3 Apprasil 47.4 6.2 55.6 Ngotiation 12.3 12.3 Supervision 2.2 0.4 7.6 23.2 30.5 18.2 11.7 93.6 Other 7.9 0.6 8.5 . . . . . .... . ..... . .... . .... . . .... . .... .... .... ..... Subtotat 2.0 3.9 26.8 20.0 n2.r 20.9 r.6 23.2 30.5 18.2 11.r 23r.5  178 MEXICO: TRS for Board Apprvois During 1987-1992 Puue 3 .----------------------------------. Staffea ke--------------------------------------- Pre- Operation Loan U USSX FY84 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 FY930 Total 3) Housing Fin. 2967-UE 300.0 Preapprisat 11.8 64.3 56.1 Appraisat 8.2 22.1 30.3 Negotiation 7.2 7.2 Stpervisin 13.0 11.6 9.2 4.9 0.2 38.9 Other 2.5 6.5 r.0 SubtotaI 0.0 0.0 0.0 14.3 57.0 29.3 13.0 11.6 9.2 4.9 0.2 139.5 Subtotal: 1968 Preappraisat 2.0 3.9 18.9 29.6 126.0 0.0 0.0 0.0 0.0 0.0 0.0 180.4 Appraisal 0.0 0.0 0.0 0.0 135.3 65.3 0.0 0.0 0.0 0.0 0.0 200.6 oegotiation 0.0 0.0 0.0 0.0 0.0 40.7 0.0 0.0 0.0 0.0 0.0 40.7 Supervision 0.0 0.0 0.0 2.2 0.0 20.0 50.0 73.6 56.4 37.8 18.6 258.6 Other 0.0 0.0 7.9 2.5 23.4 0.1 0.0 0.0 0.0 0.0 0.0 33.9 Total 750.0 2.0 3.9 26.8 34.3 284.7 126.1 50.0 73.6 56.4 37.8 18.6 714.2 1959 Board Approvals .......... .............. 1) Indus. Restruct. 3067-U 250.0 Proepprassal 65.9 34.9 100.8 Appriasal 13.7 3.2 16.9 Nagotiation 0.2 16.3 16.5 Supervision 13.8 40.1 10.7 11.3 9.0 86.9 Other 5.4 5.4 ~ ~~~ ---- --- -- - --- . ._.. - - . . . . - - - - .... Subtotal 0.0 0.0 0.0 0.0 71.3 68.8 33.3 40.1 10.7 11.3 9.0 224.5 2) Hydroalac.Devt. 3083-UE 460.0 Preapprisal 28.8 26.9 2.2 55.9 ApprIsatl 43.9 7.4 51.3 Negotiation 35.4 35.6 Suparvision 17.5 18.5 16.1 5.6 57.7 Other 3.0 3.0 . . ... .. . . . . . . . .. .... .. . - -- - - .. . Subtotal 0.0 0.0 0.0 0.0 31.8 68.8 42.8 19.7 18.5 16.1 5.6 203.3 3) Water, Women & Dovt. 3101-UE 20.0 Preapprlasl 25.1 42.7 67.3 AppraIsmI 34.8 34.8 Negotiation 1.5 1.0 2.5 Supervision 4.0 15.8 6.6 0.2 26.6 Other 0.0 _0.... ..0...... . ... 0.0 25.1 830 ..... 8 66 0. . ... ..... Subtotal 0.0 0.0 0.0 0.0 0.0 25.1 83.0 16.8 6.6 0.2 0.0 131.7  179 MEXICO: TRS for Board Approvals During 1987-1992 Paw 4 ~~------------- Staffweksk-------------------------__-______ ---------------------- Pre- Operation Loan # USSI FY84 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 FY93' Total 4) Forestry Devt. 3115-NE 45.5 Preappraisal 33.6 47.5 96.6 177.7 Appraisal 22.6 22.6 Negotiation 10.3 4.1 14.4 Supervision 4"4. 58.5 42.7 30.3 176.3 Other 0.1 0.1 Subtotal 0.0 0.0 0.0 33.7 47.5 96.6 32.9 48.9 58.5 42.7 30.3 391.1 5) Low Inc. Housing 11 3140-lE 350.0 Preappraisal 7.5 22.3 29.8 Appraisal 20.2 9.3 29.5 Negotiation 4.5 4.5 Supervision 17.6 9.5 10.8 5.7 43.6 Other 0.0 Subtotal 0.0 0.0 0.0 0.0 0.0 7.5 42.5 31.4 9.5 10.8 5.7 107.4 6) Agric.Marketing 11 3141-NE 100.0 Preappraisal 12.4 1.2 24.1 30.0 67.7 Appraisal 0.9 27.9 28.8 Negotiation 24.9 24.9 Supervision 19.5 10.1 1.1 3.0 33.7 Other 0.0 Subtotal 12.4 0.0 0.0 0.0 1.2 24.1 30.9 72.3 10.1 1.1 3.0 155.1 SubtotaL: 1989 Preappraisal 12.4 0 0 33.6 143.4 213.1 95 2.2 0 0 0 499.7 AppraisaL 0 0 0 0 0 57.6 89.1 37.2 0 0 0 183.9 Negotiation 0 0 0 0 0 0.2 63.5 34.5 0 0 0 98.2 Supervision 0 0 0 0 0 0 17.8 155.3 113.9 82.2 53.6 422.8 Other 0 0 0 0.1 8.4 0 0 0 0 0 0 8.5 Total 1,225.5 12.4 0 0 33.7 151.8 270.9 265.4 229.2 113.9 82.2 53.6 1,213.1 1990 Board ApprovaLs 1) Transmiss./Distrib. 3189-NE 450.0 PreappraisaL 18.5 5.2 23.7 Appraisal 22.0 0.5 22.5 Negotiation 6.1 6.1 Supervision 3.3 16.2 11.9 2.? 34.1 Other 0.0 Subtotal 0.0 0.0 0.0 0.0 0.0 0.0 18.5 36.6 16.2 12.4 2.7 86.4  180 MEXICO: TRS for Board Approvals During 1987-1992 P*S S ---------- -- ----- - ----- Staffweks --- Pre- Operation Loan U USSA FY84 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 FY93 Ttalt 2) Telecom TA 3208-ltE 22.0 PreappraisaL O.* AppraisaL 7.2 7.2 Negotiation 2.2 2.2 Supervision 0.6 17.2 23.0 6.3 47.1 Other 0.0 subtotal 0.0 0.0 0.0 0.0 0.0 0.0 0.0 10.0 17.2 23.0 6.3 S.S 3) Water Supply/Sanit. 3271-ME 300.0 Preappraisal 1.8 5.9 42.9 50.6 Appraisal 3.0 11.5 14.5 Negotiation 6.3 6.3 Supervision 1.3 14.8 28.9 20.4 65.4 Other 0.0 Subtotal 0.0 0.0 0.0 0.0 0.0 3.1 5.9 45.9 32.6 28.9 20.4 136.8 4) Basic Health 3272-ME 180.0 Preapprai sal 43.3 27.7 28.5 90.2 8J9.7 Appraisal 0.1 20.9 21.0 Negotiation 25.4 2.4 Supervision 14.1 37.9 7.2 59.2 Other 0.4 3.2 4.7 8.3 ---- ~~. ---- --- ---- .... ...... .... . --- _ .... - - - - ..... _________ Subtotal 0.0 0.0 0.0 0.4 46.5 27.7 28.6 90.2 65.1 37.9 7.2 303.6 Subtotal: 1990 Preappraisal 0 0 0 0 43.3 29.5 52.9 138.3 0 0 0 264.0 Appraisal 0 0 0 0 0 0 0.1 32.2 32.4 0.5 0 65.2 Negotiation 0 0 0 0 0 0 0 8.3 31.7 0 0 40.0 Supervision 0 0 0 0 0 1.3 0 3.9 62.3 101.7 3L6 205.S Other 0 0 0 0.4 3.2 0 0 0 4.7 0 0 8.3 Total 952.0 0 0 0 0.4 46.5 30.8 53 182.7 131.1 102.2 36.6 53.3 1991 Board Approvals 1) Decent. & Reg. Devt. 3310-ME 350.0 Preapprai sal 17.1 153.2 170.3 Appraisal 22.9 22.2 45.1 Negotiation 59.1 59.1 Supervision 21.8 137.6 50.6 210.0 Other 0.0 0.0 S otal-.0 0.0. . .0. . .... 0 17 .... .... 10.1 137. ---- 4-._ Subtotal 0.0 0.0 0.0 0.0 0.0 0.0 17.1 176.1 103.1 137.6 50.6 48 .5  181 MEXICO: TRS for Board Approvals During 1967-I992 P 6 .................................... stfftl a... ------------------------ Pro- Operation Loan U UI FY34 F3 FY3 F FY37 "asY "F9 FM90 FM "F2 F TOW 2) Voc. Trainfng Sector 33S5-NE 152.0 Preappral L 5.4 32.4 37.8 Apprlasal 13.9 13.9 Negotiation 7.8 7.8 Supervision 2.6 48.1 16. ".311 Other 9.3 9.3 .... .... .... ..... .... ..... .... ..... .... ..... .... ........ .. ..... .......____ Subtotai 0.0 0.0 0.0 0.0 0.0 0.0 0.0 8.0 65.4 48.1 16.S 1.6 3) Mining Sector 3359-K 200.0 Preapprala 1.4 9.0 47.6 21.8 79.8 Appraisa 57.6 7.6 Negotiation 11.7 1t.7 Supervision 0.2 20.2 11.7 32.t Other e.0 .... .... .... .... . .... .... . .... .... . .... ---- .---- -----....... ..... .. ........... .. Subtotat 0.0 0.0 0.0 0.0 0.0 1.4 9.0 47.6 91.3 20.2 11.7 U1.2 4) Primry Edcction 3407-K 250.0 Preappaiet 48.5. 97.3 145.3 Appra els 17.1 3.2 20.3 Negotiation 20.0 20.0 Suervision 22.3 2J 4U.6 Other 2.5 2.5 .... .... .... ....... .... .......... .... . .......... .... ---- Be.. . - ... -----.. .. SitotaL 0.0 0.0 0.0 0.0 0.0 0.0 0.0 48.5 116.9 4.0 25A 237.2 5) Irrigation Sector 3419-K 400.0 Prepprisat 11.5 19.1 U5.5 47.3 167.4 Appraisal 41.5 10.1 11.6 Naegotiation 23.1 2.1 Suprviflon 16.0 Ut 3T.1 Other 0.0 ... .. ..... ....... .... ..... .... ..... .... ..... .... ..... ---- ----. ..... SibtotaL 0.0 0.0 0.0 0.0 0.0 15.! 19.1 U5.S 3.3 51.2 U.1 273.2 Subtotal: 1991 PreWeraisl 0 0 0 0 0 16.9 45.2 340.2 196.8 o S 601.1 Apprafsat 0 0 0 0 0 0 0 22.9 152.3 13.3 * 186.5 Negotiation 0 0 0 0 0 0 0 0 73.6 43.1 o 121.t Supervs1ion 0 0 0 0 0 0 0 2.6 22 2V.7 117.3 386.6 Other 0 0 0 0 0 0 0 0 11.8 ' ° 11.8 l.... . . . . . .... . . .... . .... .... .... 7 .... --- . . . . -. .... Totat 1 352.0 0.0 0.0 0.0 0.0 0.0 16.9 45.2 36s.r 46.5 30.1 m73 1m31.7  182 MEXICO: TRS for Doard Approvts Durinp 1967-1992 P_ Statfwek.----------.--------------- ---- Pre- Operation Loan 3 USSN F 84 FY85 "FY FYs8 FY39 FY F9 fY90 2 FVT9 Tots 1992 Board Approvals .. ............... 1) Envir./Mat. Resources 3461-NE 50.0 Preappralsat 21.4 39.9 61.3 Appraisat 15.7 4.0 19.7 Negotiation 10.3 10.3 Supervision 2.3 17.1 19. Other 33 03 .... .... ..... .. .... .... ... .... .... .. _ _ _ _ Subtotal 0.0 0.0 0.0 0.0 0.0 0.0 0.0 21.4 55.6 16.6 I7A 111.8 2) Agric. Technology 34d-ltE 150.0 PreWraisat 0.2 10.4 45.8 3.4 AppraIsat 15.3 15.3 Negotiation 6.5 6.5 Supervision 6.1 6.1 Other 0.0 .... .... .... ..... ._.... ._w .... .... ..... .... ..... .... ...... .... ......_.. SubtotaL 0.0 0.0 0.0 0.0 0.0 0.2 0.0 10.4 65.8 21.8 6.1 104.3 3) Scisnce/Technology 3475-NE 189.0 PreaWrast 7.1 32.9 62.7 54.2 156.9 Appraisat 5.4 14.2 19.6 Negotiation 6.1 6.1 Siervision 0.1 3.9 11.3 1'5. Other 0.8 .. ~~~~~~~~~~~~~~~~~~.. .... .... ... .... ... ... ... --- ... . Subtotat 0.0 0.0 0.0 0.0 0.0 0.0 7.1 33.0 60.1 73.4 11.t 194 4) Housing Markot Devt. 3497-WE 450.0 Preappraisl. 19.4 29.9 49.3 Appraisat 18.3 183 INegotiation 5.3 5.3 Supervision UIJ 10.4 Other 0.0 .... .... .... ........ .... ...... .... ---- .... ....... .... .. ...---. ---- ..... Subtotat 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 19.4 53.5 10.4 63.3 5) Initi't Education 3518-WE 60.0 Preappraisat 8.2 111.2 12.2 131.6 ApprWasa 17.2 4.6 21.8 Negotiation 9.2 9.2 Supervision 23 29.3 Other 0.0 .. .... . . .... .... ..... 0. ... .... .... 0 . .. .. ... ..... Sutbtotat 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.2 128.4 55.3 19t.9  183 MEXICO: TRS for Board Approvals During 1987-1992 Page a -------- - -------------------------- Staffweks- ---------------------- - Pr*- operation Loan N USSN FY84 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 PS3Y TotL 6) Labor Xkt. & Prod. 3542-lE 174.0 Preappraisal 1.5 68.8 0.1 70.4 AppraisaL 0.1 W.8 39.9 Negotiation 11.3 11.3 Supervision 1.8 1.3 Other 0.0 ... .. _.. ... .. .. .... ..... .... --- .... --- -- Subtotal 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.5 68.9 53.0 123.4 7) Tran. Air Polt. Ctrl 3543-NE 220.0 Prappraasat 8.7 122.9 78.3 74.6 234.5 Appraisal 32.2 32.2 Negotiation 23.5 23.5 Supervisionl t.O t.° Other 0.0 Subtotal 0.0 0.0 0.0 0.0 0.0 0.0 8.7 122.9 78.3 106.8 24.5 341.2 Subtotal: 1992 Prooppraiasl 0 0 0 0 0 0.2 15.8 187.6 275.8 338.7 12.3 30.4 Appraiaat 0 0 0 0 0 0 0 0 21.1 101.3 44.4 166.8 Negottiaton 0 0 0 0 0 0 0 0 0 28.2 44 7.2 Supervision 0 0 0 0 0 0 0 0.1 0 6.2 77.5 83.8 Other 0 0 0 0 0 0 0 0 0 0 0.3 0.3 ----- ---- ... . _... .... .... _.... .... . .. . ....... TotaL 1,313.0 0 0 0 0 0 0.2 15.8 187.7 296.9 474.4 173.5 1.153.5 SubtotaLs: Preappralaai 14.4 4.9 45 165.6 438.7 259.7 208.9 661.3 474.6 338.7 12.3 2,631.1 AppraifaL 0 0.0 0.0 53.5 300.9 124.7 89.2 92.3 205.8 115.1 44.4 1,025.9 N"otIation 0 0.0 0.0 0.0 62.5 63.8 63.5 42.8 110.3 71.3 4.9 4562 Supervision 0 0 0.0 2.2 8.9 126 192.5 333.7 333.2 540.9 3Z" 1,*19.0 Other 0 0.7 12.4 18 97.7 4.0 0.0 0.0 17.9 0.0 0.3 151.0 TOTAL: Project Landing 6,787.5 14.4 5.6 57.4 239.3 908.7 578.2 554.1 1,137.1 1,141.8 1,066.0 423.6 6,126.2 --------- - - u- u _-  184 MEXICO: TRS for Board Approvlrs During 1987-19M _ 1 ------ Staffuks…-----…--- _--------------------------- Pre- Operation Loan 0 USS FY84 FY64 FYa5 FY86 FY87 FY8 FY89 FY90 FY91 FY92 l93- Total & ADJUSTIENTLEIOIN PRIOJECT .. _.... .. ._. ._. .. .. _............._ SubtotsLs: Project/Adjustment Preaprisal 14.4 4.9 45 263.3 586.9 269.5 303.7 931.3 532.3 338.7 12.3 3,302.3 Appraisal 0 0 0 53.5 366.2 162.9 313.1 123.4 241.9 115.1 ".4 1,420.5 Negotiation 0 0 0 0 65.5 108.9 243.3 64.3 139.4 71.3 44 736.7 Supervision 0 0 0 2.2 8.9 144.6 251.1 519.5 405.8 652.9 356.6 2,341.6 Other 0 0.7 12.4 19.2 152.7 4.9 4.4 0 20.9 0 0.3 215.5 . ... _..... ..... .... ..... .. _.. .- _-.- ..... -----. .. ..... ....... ... ..... _.... --- ____-..... TOTAL: Project & Adjust. LendIng 11,692.5 14.4 5.6 57.4 338.2 1,180.2 690.8 1,115.6 1,638.5 1,340.3 1,178.0 457.6 8,016.6 *TRS thru Janury 1993. 4/22/93