Mexico - Second Agricultural Sector Adjustment Loan

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14552 PROJECT COMPLETION REPORT MEXICO SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN (LOAN 3357-ME) JUNE 1, 1995 Agriculture and Natural Resources Operations Division Country Department II Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit New Mexican Peso (N$) Currency Exchange Rates during Implementation Year N$/US$ 1991 2.95 1992 3.05 1993 3.10 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi) 1 hectare (ha) - 10,000 m2 = 2.47 acres 1 square kilometer (km2) = 0.38 square miles (mi2) = 100 ha 1 metric ton (m ton) = 2,205 pounds  FOR OFFICLAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation June 1, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Mexico Second Agricultural Sector Adjustment Loan (Loan 3357-ME) Attached is the Project Completion Report (PCR) on the Mexico Second Agricultural Sector Adjustment Loan (Loan 3357-ME) prepared by the Latin American and the Caribbean Regional Office. Part II was prepared by the Borrower. The adjustment operation complemented the earlier sector adjustment loan and was consistent with both Government policy aiJ Bank support strategy. As part of a wider program of Bank support for adjustment of the Mexican economy, the Loan aimed at supporting Government's objectives of increasing the rate of growth of agriculture, raising the sector's productivity and efficiency, and alleviating poverty for the most vulnerable rural popula ion groups through targeted food programs. The policy reform proposals were, on the whole, successfully implemented. Completion of the reform program was delayed by about 1.5 years by the negotiation of the North American Free Trade Agreement (NAFTA); the preparation of the National Program for the Modernization of Agriculture (PROCAMPO), which provides income support to farmers; the introduction of "agreed prices" for key grains that are essentially minimum prices for domestic producers; and the preparation of food and nutrition action plans. Although the reforms have yet to achieve their full impact, the project outcome is rated as satisfactory. The project redefined the roles of Government and the private sector in Mexican agriculture, contributing to substantial institutional development. In the light of Mexico's commitments under NAFTA, the policy changes are deemed sustainable anr.l sustainability is rated as likely. The PCR is complete and informative. An audit is underway. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  I  FOR OFFICIAL USE ONLY ABBREVIATIONS AND ACRONYMS USED AGSAL Agricultural Sector Adjustment Loan ANAGSA Aseguradora Nacional Agricola (National Agricultural Insurance Company) ASERCA Apoyos y Servicios a la Comercializacion Agricola (Services for Commercialization of Agriculture) BANRURAL Banco Nacional de Credito Rural (National Rural Bank) CONASUPO Compafnia Nacional de Subsistencias Populares (National Commission for Distribution of Basic Foods) CPI Consumer Price Index DICONSA Distribuidora CONASUPO (CONASUPO stores) DIF Programa de Desarrollo Integral de la Familia (Program for the Integral Development of the Family) DDR Distrito de Desarrollo Rural (Rural Developmeit District) FIRA Fideicomisos Instituidos en Relacion con la Agricultura (Trust Fund for Agriculture) FY Fiscal Year (GATT General Agreement on Trade and Tariffs (iDP Gross Domestic Product GOM Government of Mexico IDB Inter-American Development Bank IDS,' Irrigation and Drainage Sector Project IMF International Monetary Fund INEGI Insituto Nacional de Estadistica, Geografia, y Informatica (National Institute of Statistics, Geography, and Information) ISPL Industrial Sector Policy Loan LICONSA Leche Industrializada CONASUPO (CONASUPO's Industrialized Milk Subsidiary) NAFTA North American Free Trade Agreement NPC Nominal Protection Coefficient NTB Non-Tariff Barrier PCR Project Completion Report PECE Pacto para la Estabilizacion y el Crecimiento Economico (Economic Solidarity Pact) PROCAMPO Programa Nacional de Modemizacion del Campo (National Modernization Program of Agriculture) PRONASE Productora Nacional de Semillas (National Seed Production Company) PRONASOL Programa Nacional de Solidaridad (National Solidarity Program) QRs Quantitative Restrictions REER Real Effective Exchange Rate SAL Structural Adjustment Loan SARH Secretaria de Agricultura y Recursos Hidraulicos (Ministry of Agriculture and Hydraulic Resources) SDR Special Drawing Right SECOFI Secretaria de Comercio y Fomendo Industrial (Ministry of Trade and Industrial Development) SEDESOL Secretaria de Desarrollo Social (Ministry of Social Development) SHCP Secretaria de Hacienda y Credito Publico (Ministry of Finance and Public Credit) SPP Secretaria de Programacion y Presupuesto (Ministry of Budget and Planning) TABAMEX Tobaco Mexicanos (Mexican Tobaccos) TFP Total Factor Productivity TPL Trade Policy Loan VAT Value Added Tax This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   PROJECT COMPLETION REPORT MEXICO SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN (Loan 3357-ME) Table of Contents Page PREFACE ....................................................... i EVALUATION SUMMARY ........................................... ii PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE 1. PROJECT IDENTITY .... ........................................ 1 2. BACKGROUND .................................. 1 a. World Bank and IMF Roles in Mexico's Adjustment Process ................. b. Tuie Macroeconomic Enviromnent and Government's Economic Restructuring and Stabilization Programs ................................... 2 c. Results and Remaining Problems .................................. 3 d. The Agricultural Sector ........................................ 4 3. PROJECT OBJECTIVES AND DESCRIPTION ....................... 8 a. Project Rationale . ............................................ 8 b. Project Objectives . .......................................... 10 c. Project Description . .......................................... 10 d. Cofinancing . .............................................. 11 4. PROJECT IMPLEMENTATION . ...................................... 11 A. NAFTA AND PROCAMPO .................................... 11 a. NAFTA . ............................................ 11 b. PROCAMPO . ........................................ 12 B. AGRICULTURAL PRODUCTIVITY AND GROWTH .................. 15 a. Output Price Policy . ..................................... 15 b. Agricultural Trade Regime and Market Regulations .................. 16 c. SARH's Production Targets ......... ....................... 19 d. Credit and Input Subsidies ......... ........................ 19 C. FOOD CONSUMPTION AND NUTRITION . . 20 a. Pilot Nutrition and Health Project ............................. 22 b. Food Consumption Policy ................................. 23  D. MACROECONOMIC POLICY FRAMEWORK ...... ................ 24 6. OVERALL EVALUATION OF THE LOAN ............. ................... 25 a. Impact of Reforms . ................................... 25 b. Project Sustainability . ................................... 26 c. Bank's Performance . ................................... 26 d. Borrower's Performance .................................... 27 e. Conclusions and Lessons Learned .................................. 28 PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE 1. INTRODUCTION .................................. 30 2. SARH .................................. 31 A. BACKGROUND .......................... 31 a. The New Legal Framework ................................. 32 b. Trade Policy .......................................... 32 c. The New Role of the State ................................. 32 d. Guarantee Prices ....................................... 33 e. PROCAMPO ......................................... 34 B. SECOND AGRICULTURAL ADJUSTMENT LOAN ................... 35 3. SEDESOL ......................... ............................ 37 A. TORTILLA AND MILK PROGRAMS ............................. 37 B. PILOT NUTRITION, FOOD, AND HEALTH PROJECT ................ 38 4. SECOFI ...................................................... 39 A. COMMENTS ON THE MILK PROGRAM .......................... 39 B. COMMENTS ON THE TORTILLA PROGRAM ...................... 39 a. Backgroand .......................................... 39 b. Tortilla Subsidy Program .................................. 40 c. Program Operating System ................................. 40 d. Comments on the Shortcomings in the Tortilla Subsidy Program mentioned in part I of the PCR .................................... 41 e. Main Lessons Learned from the Tortilla Subsidy Program .............. 42 4. SHCP ........................................................ 43 PART III: STATISTICAL INFORMATION TABLE 1: Related Bank Loans  TABLE 2: Project Timetable TABLE 3: Studies TABLE 4: Status of Loan Covenants TABLE 5: Use of Bank Resources - Staff Weeks TABLE 6: Use of Bank Resources - Missions TABLE 7: Policy Matrix   PROJECT COMPLETION REPORT MEXICO SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN (Loan 3357-ME) PREFACE This is the Project Completion Report (PCR) for the Second Agricultural Adjustment Loan in Mexico (AGSAL II - Loan 3357-ME) in the amount of US$400 million. The loan was approved on June 25, 1991, and declared effective on December 20 1991. The loan was fully disbursed and the last disbursement was made on December 1, 1993. TI. loan was closed on December 31, 1993. The PCR was prepared by the Agriculture and Natural Resources Operations Division (LA2AG) of the Latin Ameri.a and the Caribbean Regional Office (Preface, Evaluation Summary, Parts I and III) and the Borrower (Part II). The preparation of the PCR was based on interv,iews of Bank staff and Government officials involved in the preparation, appraisal, and implementation of the project, and the review, inter alia, of the President's Report; the Loan, Guarantee, and Implementation Agreements; supervision reports; correspondence between the Bank and the Borrower; and internal Bank memoranda.   iii PROJECT COMPLETION REPORT MEXICO SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN (Loan 3357-ME) EVALUATION SUMMARY Loan Objectives 1. Tte Second Agricultural Sector Adjustment Loan (AGSAL II) was the second adjustment operation for Mexican agriculture. Approved on June 25, 1991, AGSAL II is part of a program of Bank support for the Government's objectives of increasing the rate of growth of agriculture, raising productivity and improving the efficiency of the agricultural sector th-ough better-functioning output and input maikets, and aileviating the poverty of the most vulnerable population groups through targeted food programs. In particular, this loan supported (paras 1.33 to 1.37): (a) trade and policy reforms that increased competition and reduced the government's role in the production, planning, marketing, storage, and processing of agricultural products and inputs, and allowed more competition from the private sector; (b) a revision in the allocation of Government expenditure in consumer programs by eliminating generalized food subsidies and increasing spending for improved targeted food assistance and nutrition programs; and (c) the institutional transition of the Ministry of Agriculture (SARH) to a smaller but more effective role in agriculture, emphasizing policy formulation and implementation and basic regulatory functions. Implementation 2. Implementation of the US$400 million loan was generally satisfactory. The first tranche of US$200 million was fully disbursed on January 22, 1992. The second tranche of another US$200 was expected to be disbursed in August 1992, but was delayed until late 1993 by negotiations of the North American Free Trade Agreement (NAFTA) and preparation of the new income support program (PROCAMPO) (see paras. 1.41 to 1.47). Other reasons for the delay were the Government's imposition of agreed prices (precios de concertacion) for sorghum, rice, and soybeans (see paras. 1.52-1.53) and delays in preparing action plans for its food and nutrition policy (see para. 1.86). Results 3. The main historical problem of Mexican agriculture was the detrimental effect of policy interventions on growth and income distribution. Price, trade, and regulatory policy instruments hampered the efficient working of product and input markets and distorted the size and nature of public investment. Reforms beginning in the mid-1980s, and later supported by both AGSAL I and 11, appropriately addressed these problems and bettered the policy framework for Mexican agriculture. 4. AGSAL II achieved its principal objective of improving efficiency by replacing government guided mechanisms with market ones. The project assisted reforms in prices, trade, public investment, poverty alleviation, fiscal transfers, and the role of parastatals. The Government has  iv realized fiscal savings and now has a more efficient public investment program in agriculture. The economy bears fewer costs of non-viable parastatals. Though the costs of reforms were borne mostly by consumers, the impact on the poor was softened through targeted food subsidies. The agricultural economy has moved closer to a market-pricing system. Arbitrary and costly trade restrictions have been abandoned. While the ultimate effects of the reforms will depend on the Government's long- term commitment, a better environment for private-sector led growth and for appropriate and cost- effective public interventions now exists. Project Sustainability 5. The President's Report identified three major risks to the sustainability of the reform program (para. 1.99). The risks are related to: (i) macroeconomic climate - fiscal discipline, monetary policy, and the exchange rate; (ii) resistance to changes in patterns of resource use from those who benefit from the status quo, causing the reform to lose its momentum; and (iii) an over-reliance on NAFTA to implement trade policy reform program in maize, wheat, and barley that would not necessarily guarantee price liberalization. 6. Macroeconomic stability (para. 1.99) was realized largely through the Economic Solidarity Pact (PECE) and through the elimination of public sector deficits. Lower public sector debt was made possible by the Brady Plan and the proceeds from the privatization of public enterprises. The Government has recently commnitted to making the exchange rate regime more flexible, thereby making the macroeconomic side of the project more sustainable. The rise in the real interest rates associated with stabilization, however, has penalized some farming activities, thus cutting some benefits of the reforms. The second risk was related to the resistance that the Government might face from the beneficiaries of the status quo (para. 1.100). However, the introduction of PROCAMPO, which will be implemented over the next 15 years, dramatically breaks the link between agricultural production and income support, and its implementation today has been satisfactory. Finally, PROCAMPO also addresses the concern that NAFTA alone might not have been sufficient to promote price liberalization for maize, wheat, and barley, because it goes beyond the Government's commitment under NAFTA (para. 1.101). Findings and Lessons Learned 7. The lessons learned from this operation in terms of broad issues are: (a) Linkage between stabilization and liberalization. Stabilization and budget restraint continued to take priority over growth in the period of AGSAL II as it had under AGSAL 1. The lesson is that a closer analysis of the Government's intentions regarding the stabilization program in terms of public expenditure goals should have taken place and that more explicit targets for productive investments should have been set. (b) Sector strategy. Poverty alleviation measures, notably steps to improve nutrition among the rural poor, were included in both AGSAL I and II, but other actions to distribute benefits of reforms were not elucidated until after the loan had been signed. The lesson learned is that dialogue between the Bank and the borrower about structural adjustment operations should not be limited to policy reforms, but should be  v expanded to include complementary actions that would ensure related sectors will benefit from new incentives. (c) Poverty alleviation. AGSAL I and 11 were the first sectoral operations to take explicit steps to reduce the cost of reforms to the poor. Not only did they attempt to reduce the burden of adjustment on the poor by promoting targeted food subsidies, thus making the package politically more acceptable, but they also set the basis for the Government's National Food Security Program for 1990-94. A notable feature of the desig'i was the restriction of additional subsidies to an existing institution- CONASUPO - so as to be able to monitor their cost. (d) Price policy conditions. The price policy conditions were complied with nominally, but did not have their full intended effect - of removing distorted incentives to growers' production decisions - because they were not linked to other forms of support for crop production. This was most true of wheat production which, for political reasons, received direct marketing support from SARH beginning in 1990 although t'e conditions of AGSAL 11 limited the support from trade/price policy. The lesson is that it would be necessary to include conditionality on budget allocations for direct subsidies, beyond the price policy liberalization conditions, to avoid such non- price support. 8. Morn specific lessons of the operation are: (a) Design of the loan. AGSAL 11, within the process of general reform, had a more comprehensive design than AGSAL I for ensuring that policy issues were managed within a unified framework; this was a notable strength of the design. (b) Linkage to other Bank operations. The chief linkages of AGSAL II have been to investment operations, including those to the Irrigation and Drainage Sector Loan and the Agricultural Technology Loan, which were designed to promote a supply response to the incentive policy changes. Although these were appropriate linkages, the investment projects suffered from inadequate budgetary resources which worked against AGSAL II's growth objective. (c) Pilot health and nutrition project. The pilot health and nutrition project within AGSAL 11 targeted low income families at risk of malnutrition, including pregnant and lactating women as well as children under the age of five. While the basic design of the evaluation was satisfactory, the follow-up on the analysis in the form of an action plan was slow because of institutional failures within the Government. The lesson is that similar evaluation efforts should be monitored by qualified official agencies. A second lesson is that in similar operations more time should be given before pilot activities are evaluated - the one year period for this component of the project was inadequate.   PROJECT COMPLETION REPORT MEXICO SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN (Loan 3357-ME) PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE 1. PROJECT IDENTITY Name: Second Agricultural Sector Adjustment Loan (AGSAL II) Loan Number: 3357-ME RVP Unit: Latin America & the Caribbeai. Region Country: Mexico Sector: Agrik ulture 2. !ACKGROUND a. World Bank and IMF Roles in Mexico's Adjustment Process 1.1 The Bank role in Mexico shifted during the mid-1980s as a result of recognition of the severity of the country's economic problems and the Government's increasing commitment to deep reform. The Bank first began to' work more closely with the Government on trade issues during 1984 and, by 1985, began to play a central role in the dialogue between the Government and international commercial creditors, and then to assist in developing a program of structural reform. 1.2 The Bank agreed to address long-term issues through a series of sector adjustment loans, which taken together, covered all major elements of a SAL program. Two Trade Policy Loans (FY87 and FY88 for US$500 million each) were the first such operations. They were followed by adjustment hybrid loans in the Fertilizer sector (FY88, US$265 million); Agricultural Sector I and II (FY88 and FY91, US$300 million and US$400 million, respectively); Stec I Sector (FY88, US$400 million); Financial Sector (FY89, US$500 million); Industrial Sector (FY89, US$500 million); Public Enterprise Reform (FY89, US$500 million); Road Transport and Teleconmnunications (FY90, US$380 million); and the Interest Support Loan (FY90, US$1.26 billion). These operations formed a policy package to build the framework for the increase in private investment necessary to spur growth. 1.3 Since 1982, the IMF has supported Mexico with an extended arrangement for SDR 3.4 billion, a special emergency drawing for SDR 291 million following the 1985 earthquake, a stand-by agreement for SDR 1.4 billion in 1986, a drawing of - DR 453 million in 1989 under the compensatory facility, and a further extended arrangen nt of SDR '2.8 biflion. The latter financing facility was completed successfully in May 1993. 1.4 During the program of restructuring, the Bank and the IMF were in close coordination to ensure policy compatibility. The Bank and IMF also worked closely with the Government in the  2 negotiation of the 1989 debt reduction agreement with international commercial banks. This agreement resulted in an immediate drop in nominal domestic interest rates, lengthening maturities for public debt and larger private capital inflows. b. The Macroeconomic Enviromnent and Government's Economic Restructuring and Stabilization Programs 1.5 Prior to the debt crisis of 1982, Mexico enjoyed a period of sustained high economic growth and price stability. Between 1940-80 the GDP grew at an annual rate of 6.2 percent. However, behind high growth lay a deterioration in fundamentals. Conservative fiscal policies were able to keep inflation in single digit levels until 1972; but when replaced by more expansionist ones, they led to double-digit inflation and eventually to the collapse of the exchange rate in 1976. Expanded public borrowing, high world interest rates and the sharp decline in the price of oil in 1982 led to the debt crisis. Economic performance after the debt crisis was poor. For example, average GDP growth during 1983-88 was 0.2 percent while the average inflation was 86.4 percent. 1.6 In the mid-1980s, Mexico began to reform its economic policies away from state intervention and toward a market basis. The reform consisted of three major aspects: (i) fiscal adjustment; (ii) trade liberalization; and (iii) deregulation and legal changes. 1.7 Fiscal adjustment has been remarkable, with the main changes coming from the expenditure side. Non-interest expenditures, which had been at almost 35 percent of GDP in 1981, were by 1992 reduced to 20.5 percent. Capital expenditures were cut in half over the same period. While the cuts brought about increased efficiency of Government operations by eliminating most of the dubious large projects of the late 1970s, expenditures on maintenance and the social sectors were also reduced sharply. Total interest payments had represented an important expenditure component, but were reduced sharply by 1990-91 with the reduction of the debt burden. From 1982-1990 interest payments ranged from 12 to 20 percent of GDP, while in December 1992 they were only 3.9 percent of GDP. Following the renewed confidence brought about by the continuity and growing success of structural reforms (which led to lower interest rates), plus as a consequence of the steadily falling debt to GDP ratio (due to strong fiscal accounts), domestic interest payments fell to 5.5 percent of GDP in 1991. 1.8 Tax Reforms. Although increased total government revenue contributed only 3 percentage points of GDP to fiscal adjustment, the efficiency of the tax system has been substantially improved. A major tax reform was initiated in 1987. The reform expanded the tax base, simplified the tax system, reduced rates, and modernized tax administration. Personal and corporate tax rates have been brought in line with international levels. The highest personal tax rate and the flat corporate tax rate are now 35 percent, compared to 60.5 percent and 42 percent in 1986. The Value Added Tax (VAT) had four rates, from zero percent to 20 percent, with a base rate of 25 percent, but in November 1991 a uniform rate of 10 percent was introduced for all sectors. In early 1990 the administration of the VAT, which until then had been assigned to the states, was taken over by the federal authorities. The excise tax on gasoline, as well as gasoline prices, were sharply increased in 1990-92. 1.9 Trade liberalization. In 1982, tariffs were high with a maximum of one hundred percent. Furthermore, quantitative import restrictions were used as the main vehicle of protection. In addition to the base tariffs, the Government used the option of applying surcharges of up to fifty percent of the base to provide temporary protection to industries whose non-tariff barriers (NTBs) were eliminated.  3 After the reforms introduced in December, 1987; tariffs were reduced to five levels, the maximum tariff was set at 20 percent, and official reference prices were aboli;,hed. Domestic production covered by import licenses settled at about 20 percent in 1988 and the production-weighted tariff was reduced to about 11 percent. An exception to the liberalization, as of 1989, was the retention of import licenses on about 40 percent of the value of agricultural products though this later fell. i 10 Deregulation and legal rFeforms. Although major steps towards deregulation and legal reforms have been taken for some time, the most important steps towards private sector participation in the economy were taken by the previous (Miguel de la Madrid, 1982-1988) and current (Carlos Salinas de Gortari, 1989-present) administrations.' Deregulation has been extended to industry and transportation. The national telephone system was privatized. A cumbersome transportation licensing system has been streamlined and the sector has been opened to competition. In December 1992, a law was passed that permits private ownership of electricity generating plants. A program to reform the public enterprises that will remain in public hands i;; being implemented. Enterprises targeted for major restructuring include rail services and food distr iution. Although oil production will continue to be a Government monopoly, foreign participation ii. he petrochemical sector is being extended as the list of petrochemicals resi:rNed for the public sector have been very significantly narrowed. 1. I I Other significant legal changes were ,nade in thn Foreign Investment Law (1993), the Intellectual Property Law (1991), and the See.d Law (1991). c. Results and Remaining Problems 1.12 As a result of the fiscal mieasures, the overall fiscal balance went from a deficit of 15.6 percent of GDP in 1982 to a surplus of 1.6 percent of GDP in 1992. The recovery of growth, however, was still modest. GDP was almost unchanged between 1982 and 1988, implying a decline in per capita terms of 11 percent over that period. During the period 1989-91, growth in total GDP recovered to 3.7 percent annually. .13 Despite the successful implementation of economic reforms, economic growth has slowed since mid-1991. In 1992, GDP grew only at an annual rate of i.8 percent. Estimated GDP growth for 1993 was only 0.4 percenit according to the initial estimates released by INEGI (Instituto Nacional de Estatistica, Geografia, y Informatica). According to the most recent esf.imates of INEGI, GDP growth was only 0.3 percent in the second quarter, a negative 0.8 percent in the third quarter, and a negative 0. 1 percent in the fourth quarter. Given that the average annual population growth is about 1.9 percent, no per capita real GDP growth is expected to be orserved in the near future. The trade accounts have worsened markedly, with a current account deficit of $22.8 billion in 1992 (i.e., 6.9 percent cf GDP). On the positive side, however, inflation in 1993 dropped to single digits (8.1 percent, based on the December 1992 to December 1993 change in the consumer price index). 1.14 Poverty. Official estimates indicate that about 20% of the population is still below the poverty line of $350/yeai. Income inequality is severe and may have gotten worse as a consequence of the economic crisis of the 1980s. The Governmew is attacking poverty through public expenditure 1. The official shift to liberalism took 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 policv.  4 programs targeted to the poor. PRONASOL (Programa Nacional de Solidaridad), which was initiated in 1988, targets health, education, nutrition, housing, infrastructure and other projects to the poor in disadvantaged areas.' 1.15 Productivity. Productivity growth in Mexico should have been fostered by the structural reforms, notably trade liberalization and deregulation. Productivity has indeed picked up recently, but remains low and has not offset the loss of competitiveness brought about by the real peso appreciation. Gross labor productivity in manufacturing increased at an estimated 3.9 percent cumulative annual rate over 1987-92. Similarly, total factor productivity (TFP) growth has responded positively to reform with big asymmetries across sectors. Estimates for TFP growth in manufacturing fall in the 3 to 5 percent range over 1985-90. However, trends of differential gross labor productivity growth in manufacturing over longer periods do not produce grounds for strong optimism. Over the 1980-92 period, Mexico's labor productivity growth has been less than developed countries like the U.S. and Japan, and far less than in some of Mexico's competitors in the U.S. market, e.g., Korea and Taiwan. 1.16 Exchange Rate. The nominal exchange rate remains an important ingredient of the PECE (Economic Solidarity Pact). Measured against U.S. wholesale prices, much of the increase in competitiveness that occurred during the 1986-87 depreciation has been lost. In October 1992, Mexico made the exchange rate more flexible by widening the existing band and raising the preannounced rate of devaluation of the band ceiling. The widening of the band will: (i) enable the market to determine in a more efficient manner the appropriate level of the exchange rate; (ii) reduce the volatility of capital flows, thus facilitating monetary policy; and (iii) reduce the risk of abrupt changes in the exchange rate regime. On the other hand, the fact that the rate is only partially flexible (a maximum 4.6% annual devaluation of the upper limit of the band), while limiting some of the above advantages, will reduce the fear that inflation might rise. The market reaction to the October 1992 exchange rate reform was favorable; following the announcement, peso-denominated interest rates declined and the exchange rate appreciated. Contractual wage revisions in the private sector, a better indicator of medium-term devaluation and inflation expectations, declined sharply from an average of 15.4 percent in the third quarter of 1992 to less than 10 percent in the last two months of 1993.3 d. The Agricultural Sector 1.17 Mexican agriculture expanded at over 4 percent annually after World War II until the mid- 1960s, in excess of the annual population growth rate of about 3 percent. Output growth resulted largely from the expansion of cultivated area: irrigated area increased by 4.5 percent annually from 1947 to 1965 and total harvested area grew at more than 6.3 percent annually. However, agricultural 2. PROCAMPO, which is going to replace the current subsidy scheme, may have some income redistribution effects as farmers who have produced a number of eligible crops in the past three years will be receiving a N$350 per hectare for the ten years starting 1994 (see Table 4 in text for informnation on the transition period). 3. This was, in part, due to a "guideline" ceiling on contractual wage revisions. The combination of exchange rate, wage, monetary, and fiscal policy has probably played a more important role.  5 GDP growth fell to around 3.0 percent between 1965 and 1980 and to less than 1.0 percent during 1980s. The slippage in growth resulted as limits were reached on suitable land for expansion, as the rate of growth of migration fell, and from the cumulative adverse effects of agricultural policies which had been in place for three decades. 1.18 The central theme of agricultural policy had long been to resolve the conflicting objectives of low prices for consu-ners and high prices of producers. On the consumer side, the Government provided untargeted food subsidies. On the producer side, there were major interventions in production, credit, tcchnology, inputs, storage, processing, and transportation. 1.19 The main agricultural policies were: (a) The state guaranteed prices of 12 major crops (maize, beans, wheat, barley, rice, sorghum, soybeans, safflower, cottonseed, copra, sunflower, and sesame). The National Commission for Distribution of Basic Foods, CONASUPO (Compania Nacional de Subsistencias Populares), maintained the guarantee prices by buying from 15 percent to 50 percent of the output in those crops. Guarantee prices were uniform througho-ut Mexico and were adjusted infrequently during the year thus distorting production decisions, making private storage unprofitable, and taxing producers heavily at times of high inflation. (b) Prices for products without guarantees were also subject to Government intervention. There were various import and export restrictions affecting internationally traded goods. Parastatals were involved in the production, processing and marketing of cotton, coffee, livestock feeds, tropical fruits, seeds, and cocoa. (c) In an effort to raise output while restricting producer prices, the Government attempted to increase the cultivated area through direct investments in land clearing and input subsidies to electricity, fertilizer, water, pesticides, credit, and machinery. The Government also regulated the types of crops that could be grown by setting production targets. (d) The consumer prices of key industrial inputs and basic foods were distorted by fixed price regulations, trade controls, and direct subsidies to private and parastatal processors. CONASUPO administered general food subsidies and targeted ones to the poor. Consumer price controls covered more than half of agricultural production in 1987, though this level was slightly lower than earlier. 1.20 Output Prices. Before 1990, producer prices were guaranteed for maize, beans, rice, wheat, barley, sorghum, soybean, cotton seed, safflower, sunflower, copra, and sesame throughout Mexico. This penalized production close to consumption centers and subsidized production farther away. For food crops, CONASUPO subsidized transportation, physical losses, and storage costs. Before 1987, prices were adjusted infrequently during the year, hence distorting production decisions during inflationary periods and making private storage unprofitable. Guarantee prices were eliminated for all crops (except maize and beans) in 1990.  6 TABLE 1 Prices Received by Producers in Constant 1992 US$ and Nominal Protection Coefficients: Maize, Wheat, Sorghum, Barley, Rice, Soybeans, Coffee, and Cocoa MAIZE WHEAT SORGHUM BARLEY Year Price] NPC Price | NPC Price | NPC Price I NPC 1983 238 1.11 165 0.97 143 0.74 201 0.95 1984 281 1.31 203 0.99 195 1.08 248 1.17 1985 267 1.53 189 1.04 173 1.11 245 1.28 1986 190 1.44 130 0.86 171 1.34 150 0.88 1987 209 1.87 125 0.91 137 1.30 123 0.83 983-87 |1.45 0.95 1.11 1988 204 1.41 164 0.96 173 1.29 183 1.01 1989 181 1.41 145 0.96 153 1.21 162 1.24 1990 233 1.70 194 1.27 130 1.02 215 1.39 1991 241 1.82 200 1.33 147 1.18 217 1.58 1992 246 1.93 199 1.19 141 1.19 225 1.62 I188-92 1221 1.65 22 1.42 1.18i1. RICE SOYBEANS COFFEE COCOA 1983 1l 246 0.46 385 0.97 1 1,772 0.40 1,553 0.60 1984 301 0.59 470 1.23 1,484 0.33 1,812 0.58 1985 298 0.60 437 1.49 3,201 0.75 2,098 0.77 1l 1986 1l 208 0.47 342 1.28 3,398 0.52 628 0.24 1987 1l 196 0.49 415 1.56 2,364 0.81 312 0.14 11983-871 _____ 1 0.32 _ ] 1.31 0.56 _ ] 0.47 1988 179 0.35 405 1.13 932 0.30 1,334 0.70 1989 134 0.29 359 1.15 883 0.36 1,258 0.90 1990 208 0.50 312 1.18 940 0.47 1,246 1.08 199/ 1l 208 0.48 433 1.75 312 0.19 1,113 1.03 1992 1l 183 0.45 330 1.40 330 0.15 921 0.9, [988-92 1l ] 0.41 _ 1.32 ] _ 0.30 I _ 0.93 (SOURCE: M:\MX\ASM\DATA\NPC.WBI{NPC}.I  7 1.21 The ratio of domestic prices to world prices varied over time and by crop, depending on the exchange rate, price objectives, and world prices. Because it became more difficult, for fiscal reasons, to maintain high guarantee prices and low consumer prices, adjustment in the guarantee prices have been modLrate and are lower than their peak in 1980-82, without necessarily implying that the level of protection has been lower. 1.22 To present an idea of the degree to which output prices were distorted, Table 1 which prices (expressed in constaiit 1992 US$/ton) and nominal protection coefficients, NPC, (i.e., ratio of domestic to the import parity price) for maize, wheat, sorghum, barley, rice, soybeans, rice, and cocoa for 1983-92.4 With the exception of cocoa, the average NPC increased when one compares the 1983-87 period to the 1988-92 period. For most crops, the 1992 prices received by producers were close to the 1983 prices implying that the increased NPCs were mainly the result of lower world prices. 1.23 The objective of low food prices forced the Government either to depress producer prices or to subsidize consumers while maintaining high farm prices. In the late 1970s and early 1980s, the Government did the latte-, i.e., it subsidized consumers and maintained producer prices generally higher than their world counterparts. The economic crisis of 1982 eliminated consumer subsidies. Government financial constraints resulted in a decline in untargeted food subsidies to less than US$90 million in 1987 (or 0.4 percent of GDP). The concomitant rise in controlled consumer prices affected the poor more than other classes. The budgetary crises also cut the Government's ability to support farmers and, in 1985/86, domestic producer prices dropped to historical lows relative to international prices. For example, the real (1992 terms) price of maize received by producers dropped from N$ 267 in 1985 to N$ 190 in 1986 in addition to the reduction in the NPC (Nominal Protection Coefficient) from 1.83 to 1.70. Similar reduction took place in other major crops (see Table 1).5 1.24 Public Expenditures. On the expenditure side, there has been a shift in the structure of rural public expenditures in the last few years. In 1992 the percentage of expenditures which went to administration costs was twice as much as it was in 1985 and 1986, while in market interventions it was almost half of its 1985-86 average Table 2). If one excludes 1990, there has been a gradual decline in the overall rural public expenditures since 1985 (measured as a percentage of agricultural GDP). 1.25 Agricultural policies had many negative effects on the sector. Economy-wide trade controls, leading to an overvalued exchange rate, discriminated against agricultural exports. For example, the REER (Real Effective Exchange Rate), measured as the ratio of Mexican to the US CPI (Consumer Price Index) times the nominal exchange rate, reached a peak of 1.30 and 1.31 in 1986 and 1987 compared to an average of 0.85 before the mid-1970s, indicating a 35 percent lower return to tradeables production than existed before the mid-1970s. As fiscal stabilization begun to take effect in 4. An NPC greater than unity implies subsidy while an NPC less than unity implies tax. Changes in NPC depend on domestic prices, world prices, and the exchange rate. Hence, an increase in the NPC does not necessarily imply that producers receive higher domestic prices as the increase may be due to lower world prices or to an overvalued exchange rate. 5. Table 1 reports world prices and NPCs for the eight major crops: maize, wheat, sorghum, barley, rice, soybeans, coffee, and cocoa.  8 the late 1980s, the consequent rise in real interest rates negatively affected the agricultural activities which were sensitive to interest rates (e.g., private storage, transportation). Table 2 Rural Public Expenditures l 1985 1986 1987 1 1988 1 1989 91990 1991 199 PANEL A: Expenditures by Program (in percentages) l Administration 8 8 9 9 7 4 10 16 Market Interventionsal 61 67 62 66 59 76 41 37 Public Goodsb/ 24 19 21 18 23 16 40 35 Other Agricultural Activities 3 3 4 4 9 2 5 5 Land Tenure/Titling I 1 2 2 1 1 2 6 |Other 3 2 3 1 1 1 2 2 [ PANEL B: Expenditures as Percentages of Federal Budget and Agricultural GDP| [ Percent of Federal Budget 9 10 7 6 7 ! 13 7 8 Percent of Agricultural GDP 39 43 35 33 32 | 48 T 24 j 23 NOTES: a/ Includes credit, FERTIMEX, and marketing; b/ They include research and technology, infrastructure, water development, education, extension, and plant and animal health [SOURCE: Agricultural Sector Memorandum, Tables 7.1 and 7.2.]. 1.26 Protection of the industrial sector harmed the domestic agricultural/non-agricultural terms of trade. Restrictions on imports and price controls reduced efficiency in the sector. While subsidies for credit, water, fertilizer, seed, and other inputs counterbalanced in part the lower prices for farm products, they induced other allocative efficiency costs in addition to putting a fiscal burden on the state. Subsidized parastatals in production, marketing, storage, and processing added to the fiscal deficit. The results of these policies were to hamper private investment, to slow growth and to ensure that rural areas remained poor relative to urban. Though intervention was intended to aid the rural poor and to compensate for an inadequate marketing infrastructure, it actually benefitted more richer farmers and suppressed development of private marketing, storage, processing and rural finance. 3. PROJECT OBJECTIVES AND DESCRIPTION a. Project Rationale 1.27 Bank strategy in 1990-91 recognized both short-run uncertainty over oil prices and the need to safeguard the Mexican economy from the effects of declines in the terms of trade. The macroeconomic justification for continued balance of payment support in 1991, albeit at smaller levels than previously planned, also reflected the short-run volatility in the oil market and the long-run  9 concern of insulating the economy from external shocks. Priorities in the Mexican adjustment program provided a clear rationale for focusing this flow on the agricultural sector because of its .emaining strong distortions and the effect of adjustment on the poor. 1.28 Continuation of agricultural price and ,rade policy reforms was key to further improving the incentives for the increased growth. Elimination of trade barriers was vital to permit the transmission of world prices. Dismantling of guarantee prices was needed to eliminate distortions in domestic producer prices. Reforms in food consumption policy were fundamental to: (i) improving the efficiency of government expenditure on anti-poverty programs; (ii) increasing the nutritional standards of the poor; and (iii) shifting away from producer price and trade intervention as an instrument of food consumption policy. 1.29 Other elements of Bank strategy for agricultuie and rural development included: (i) a Decentralization and Regional Development project that supported rural infrastructure in the four poorest states (FY91); (ii) an irrigation and drainage se, tor loan (IDSP, FY92) supporting rehabilitation of existing irrigation systems, completioi )f unfinished projects, and initiation of a few high-payoff additions to the irrig,ation system; and (iii) an agricultural technology operation to support research and extension (FY92). Agricultural environmental issues have been dealt with in several operations. For example, the agricultural technology operation was a major component in support of soil conservation, research and extension, and the Irrigtion and Drainage Sector Project addressed water use efficiency and salinity issues. 1.30 AGSAL I had already initiated a set of reforms in the agricultural sector. Its detailed policy objectives were to: (i) remove global consumer subsidies and target remaining subsidies to the needy; (ii) eliminate much of the public intervention in setting producer and consumer prices (except maize and beans, by far the most important crops in Mexico); (iii) reduce the role of parastatals in marketing, storage, and processing; (iv) liberalize agricultural trade; (v) reduce subsidies to agricultural inputs; (vi) achieve a larger and more efficient public investment program in agriculture; and (vii) decentralize and reduce the size of the Ministry of Agriculture and Water Resources (SARH). 1.31 In the area of food consumption and nutrition policy, AGSAL I supported the gradual shift from general to targeted food subsidies and sponsored an evaluation of food and nutrition policies and programs in Mexico. This evaluation led to selected but isolated reforms ' l food and nutrition programs and policies. The Bank continued the dialogue more broadly during the preparation of AGSAL II, aiming at the definition of a fully coherent food consumption and nutrition strategy which addressed nutrition problems, especially in rural areas. In this context, th,, Government carried out a pilot program to evaluate the feasibility and mechanisms of a health-based nutrition program that would combine health services and nutrition educatioh With food entitlement. The health and nutrition program required strengthening the basic health system, which the Bank supported through a Basic Health Care Project (FY91). 1.32 Before AGSAL II Board presentation, the Government had already exceeded AGSAL I conditions in price and trade reforms and in the reduction of agticultural parastatals. The strength of the ongoing programs and the record of past actions provided the rationale for continued Bank support of agricultural sector adjustment. AGSAL II was a natural follow-up of AGSAL 1, Trade Policy Loan (TPL) I and TPL II, and the Industrial Sk :,or Policy Loan supporting trade liberalization, elimination of regulations, and price liberalization and Iso had strong tie:. to the Fertilizer Adjustment Loan, and the Basic Health Care Project.  10 b. Project Objectives 1.33 The AGSAL II was part of a program of Bank support to the Government's continuing objectives of increasing the rate of growth of agriculture and of reducing poverty. These objectives were to be achieved through raising productivity and improving efficiency through better-functioning output and input markets, and through food programs targeted to poor consumers. 1.34 The specific objectives of this operation, as stated in [para. 137 of] the President's Report were to: (a) Implement trade and policy reforms that increase competition and reduce the Government's role in the production, planning, marketing, storage, and processing of agricultural products and inputs and by allowing more competition from the private sector. (b) Revision in the allocation of government expenditure in consumer programs by eliminating generalized food subsidies and increasing spending for improved targeted assistance and nutrition programs. (c) The institutional transition of SARH to a smaller but more effective role in agriculture, emphasizing policy formulation and implementation and basic regulatory functions. c. Project Description 1.35 The program included measures to reform the price and trade policy regime for agricultural products and their industrial derivatives, abolish the system of mandatory production planning for agricultural products, reduce and streamline market regulations and barriers to entry and competition, and make food consumption and nutrition programs more cost effective and successful by increasing coverage and improving targeting of the poorer population. 1.36 The loan's objectives [as stated in the policy matrix of President's report, also reported below in Part III, Table 7] were to be achieved through the following steps: (a) (i) Liberalizing consumer and producer prices of agricultural commodities and their industrial derivatives; (ii) reducing general food price subsidies; (iii) reducing regulation; (iv) eliminating regulations on feedstuffs, seed, machinery and pesticide markets; (v) designing and enforcing a regulatory system for pesticide, plant protection and animal health based strictly on quality control, health, phytosanitary, epidemiological and environmental protection grounds; and (vi) dismantling the parastatal apparatus for market intervention as the price and trade policy was rationalized. (b) (i) Improving effectiveness of nutrition and primary health programs by fully exploiting complementarity; and (ii) eliminating consumer price controls as the main food policy instrument.  11 (c) (i) Improving the allocative efficiency of public expenditure in agriculture; (ii) increasing investment in appropriate public road. (infrastructure, research, and extension); and (iii) dismantling SARH's production targets. d. Cofinancing 1.37 The Bank and the Inter-American Development Bank (IDB) collaborated closely in the preparation, implementation, and supervision of AGSAL II. The IDB cofinanced the program with a loan of US$200 million with identical conditions as the Bank loan. 4. PROJECT IMPLEMENTATION 1.38 Implementation of the US$400 million loan was initially satisfactory. The loan was approved on June 25, 1991, signed on June 26, 1991 and becamr. effective on December 20, 1991. The first tranche of US$200 million was filly disbursed on Jani ry 22, 1992. The second tranche of another US$200 was expected to be distursed in August 1992, lout was delayed by negotiation of the North American Free Trade Agreement (NAFTA) and prepar;tion of PROCAMPO. There was a long delay in compliance with some second tranche conditions. This was first occasioned by the Government's imposition of agreed prices (precios de concertacion) for sorghum, rice, and soybeans (see para. 1.52); by the preparation of PROCAMPO and NAFTA and, later, by the Government's delay in preparing action plans for its food and nutrition policy (see para. 1.84). 1.39 The negotiation of NAFTA among the U.S., Canada, and Mexico is a major event in the recent economic history of Mexico.6 Although NAFTA did not become effective until January 1, 1994, decisions taken by the Government in the last two years were contingent on the treaty's entry into force and affected implementation of agricultural policy, including measures related to AGSAL HI 1.40 On October 4, 1993, President Salinas announced a new domestic income support program. The Tiew program, named PROCAMPO (Programa Nacional de Modernizacion del Campo), is market oriented, does not to distort international trade, provides needed income support to subsistence farmers, and is consistent with the NAFTA and the Uruguay Round AgreLMent. Therefore, it is necessary to elaborate fitst on PROCAMPO and NAFTA even though the -vents took place at the end of AGSAL 11 implementation. A. NAFTA AND PROCAMPO a. INAFTA 1.41 NAFTA eliminates most trade barriers among the three treaty countries. Upon effectiveness of NAFTA, the U.S. and Canada immediately liberalized 79 and 84 percent of the tariff codes while 6. Negotiations on NAFTA started in 1990, the S reement was signed by the governments of Canada, Mexico, and the U.S. on November ., 1992; it was ratified by the U.S. congress in November 1993.  12 Mexico liberalized 42 percent of the codes. The remainder of merchandize trade will be liberalized in up to 5 years (e.g., car parts), 10 years (e.g., textiles), or 15 years (e.g., some agricultural products). 1.42 NAFTA will have major implications for the agricultural sector, as protection of basic grains, in particular maize, will be phased out and crops such as fruits and vegetables will receive greater access the U.S. markets. Table 3 gives a general classification of the pre-NAFTA QRs (quantitative restrictions) and tariffs as well as the NAFTA terms for 12 crops. With the exception of maize, beans, and barley, there is no quota under NAFTA. There is a ten-year gradual elimination of tariffs for most crops, while for maize and beans the elimination period is 15 years. Negotiation of NAFTA affected implementation of AGSAL 11 in several key conditions. (a) Food grains. Studies of NAFTA's expected effects showed that the United States would gain from Mexican market liberalization in maize, wheat, sorghum, and barley. Mexico sought to use its market power over imports of those commodities to its advantage in the NAFTA negotiations by bargaining over the rate of liberalization of those commodities. (b) Powdered milk. A second tranche condition was elimination of import permits on powdered milk. Mexico is a leading importer of this commodity and wanted to use its market power in the NAFTA negotiations. Accordingly, it delayed compliance with the second tranche condition until NAFTA negotiations were completed and NAFTA was ratified by the United States Congress (see para. 1.58). (c) Sugar. Mexico sought greater access to the (heavily protected) US sugar market. The uncertainty over the price terms of that access affected development of a sugar policy and delayed compliance with second tranche conditions (see para. 1.52) as US sugar producers in trying to exclude Mexican sugar, introduced major uncertainty in Mexican policy. b. PROCAMPO 1.43 PROCAMPO will replace Mexico's current farm price schemes, which fix prices for certain commodities and provide income delinked from output. Domestic prices will be aligned with world prices. Direct income support payments will be made to eligible producers independently of what they produce. Under PROCAMPO, Mexico's farm trade policies will be more liberal than those of most agricultural exporters. 1.44 PROCAMPO will grant direct income support payments to farmers who produce maize. soybeans, dry beans, sorghum, wheat, rice, cotton, barley, and safflower. Payment levels will be fixed in real terms for ten years and will be phased out in years II through 15. All these products benefit at present from government support programs. Farmers who did not plant those crops in the three years before December 1992 will not be eligible for PROCAMPO payments. Payments will be granted on a per hectare basis; the eligible area will be calculated as the average of the areas planted with eligible crops in the previous three years to December 1992.  13 TABLE 3 Pre- and Post-NAFTA Trade Policy for 12 Program Crops PRE-NAFTA STATUSa/ NAFTA TARIFF & QUOTA STATUSb l l____________ || QRs Tariff Duty Free Above Quota Tariff |Maire, grain |Pern lit 0% |2.5 million tons 215% tariff reduced by 24% over l___________ .11 High guarantee -3% annual the first 6 years, then gradually l price increase over 15 reaching zero by year 15 l g ~~~~~~~~~~~~years Beans Permit 0% 0.05 million tons 139% tariff reduced by 24% over High guarantee - 3% annual Xhe first 6 years, then gradually prices increase over 15 reaching zero by year 15 l ___l_____ years Sorghun | No permit 0-15% seasonal No quota Immediate elimination of tariff Soybeans No permit 0-15% seasonal No quota Immediate reduction of tariff to 10%, then phased out in 10 years - reduction of dutiable season Wheat, grain Permit 10% on durum No quota 15% common tariff to be phased wheat; out over 10 years substantial direct payments to wheat producers Wheat, flour No permit 15% No quota Tariff phased out over 10 years Rice No permit 20% on brown & No quota Current tariffs phased out over 10 kernel milled rice years & 10% on rough & broken rice Barley Permit 5% 0.12 million tons 128% tariff gradually reduced High domestic -5 % annual over the first 6 years, then agreed price increase over 15 reaching zero by year 10 years Oats"' No permit 10% No quota Tariff phased out over 10 years Cotton, raw No permit 10% No quota Tariff phased out over 10 years & fiber Cottonseed No permit 15% No quota Tariff phased out over 10 years Cake Safflover No permit 10% seasonal No quota NOTES: a/ Additional non-trade related support to crop production is listed in Table 4. b/ The above quota tariff reduction for maize, beans, and barley are in accordance to the Uruguay Round agreement. c/ The Table refers to one type of oats. For another type of oats, tariffs were completely eliminated by January 1, 1994.  14 1.45 Full implementation of PROCAMPO will take place beginning on April 1, 1995. From October 1, 1993 to April 1, 1995, a transition plan will make a list of eligible producers and prepare the administration of the payments. During the transition, a payment per hectare will given for maize, dry beans, wheat, soybeans, rice, cotton, and sorghum. The Autumn/Winter 1993-94 support will be N$330 per hectare; the Spring/Summer support will be N$350 per hectare; in Autumn/Winter 1994-95 and thereafter full payments will be granted while producer prices will be aligned to world prices. The per hectare support will be the same regardless of the type of crop that the producer grew in the past. Table 4 gives the 1992 status as well as the Fall/Winter 1993/94 and Spring/Summer 1994 cycles of the transition periods. TABLE 4 Guarantee Prices and Marketing Support During Transition Period to PROCAMPO (N$/ton) [ - 1993 Fall/Winter 1993/94 Sprin/Summer 1994 Crops having guarantee prices Maize, white 750 650 600 M.Haize, non-white 625 540 500 Beans, preferred varieties 2,100 1,800 1.600 Beans, non-preferred variety 1,860 1,595 1,415 _________________________ Crops receivin2 other sunport Wheat 250 600 600 Soybeans 113 856 856 Sorghum"1 60 50 50 Rice 80 74 74 Cotton"" 0 70 970 NOTES: a/ Marketing support tor sorghum applies only to Tamaulipas (approximately 37 percent of national output). b/ For pest control only. [SOURCE: SARH, "PROCAMPO: Vamos al grano para progresar", 1993.1 1.46 PROCAMPO meets the NAFTA goal of domestic support measures that have minimal or no distorting effects and are exempt from domestic support reduction commitments that may be negotiated under GATT. PROCAMPO's non trade distorting direct payments to producers are consistent with the Uruguay Round of GATT negotiations and the Blair House Agreement on agriculture which was reached between the United States and the European Community in 1993, ani in fact go beyond the NAFTA terms. Subsistence farmers, who consume most of their crop production, have not benefitted from guarantee prices for crops that are marketed. Under PROCAMPO, subsistence farmers will receive income support while at the same time they will consume maize, wheat, and beans at lower prices than they used to. Therefore, PROCAMPO has a positive income redistribution effect.  15 SARH staff were deeply involved in preparing PROCAMPO throughout the implementation of AGSAL II. While PROCAMPO goes beyond the terms of AGSAL II in terms of trade liberalization, it delayed resolution of issues affecting compliance with second tranche by concentrating the attention of the most knowledgeable government staff on PROCAMPO (see para. 1.106 on Borrower's performance). B. AGRICULTURAL PRODUCTIVITY AND GROWTH COMPONENT a. Output Price Policy 1.47 Much of the loan's conditionality was related to output price, . The preparation and negotiation of the maize price terms was especially complex because of maize's importance in total agricultural production-it is by far the most important single crop in terms of area, physical output, and value of output-ana because of the Government's insistence that it would not risk lowering producer prices of maize to world levels because of the effect on producer incomes and rural poverty. A similar agreement was made for beans, which is the second most important crop in area harvested. 1.48 Given the Bank's and Mexico's objective to align producer prices with world prices throughout the period of the operation, the loan was eventually negotiated with simple effectiveness conditions ard with stringent second tranche conditions. Effectiveness conditions were: (a) Elimination of import permits for green coffee by September 30, 1991. (b) Issuance of a decree modifying cane payment arrangements. (c) Elimination of export tax for raw cotton, cotton fiber, and swine for breeding. (d) Elimination of export permit for wheat, sorghum, feedstuffs, soybean, barley, copra, cartamo, cartamo oil, cottonseed, tobacco, and eggs. (e) Presentation of a study identifying processes, legislation, and regulations that give SARH and other Government entities the power to establish, coordinate, and enforce crop production targets. 1.49 The second tranche conditions regarding output prices (as described in the Guarantee Agreement) were as follows.7 1.50 The Government agreed not to increase, in real dollar terms, the guarantee price for maize above the level set for the 1990 Autumn/Winter crop cycle for 1990/91. The guarantee price of maize (in real 1992 US dollar terms) at second tranche release was US$190 while the equivalent real U.S. dollar value for the Autumn/Winter cycle of 1990/91 was US$231.8 7. Table 4 of Part III reports the compliance with loan conditions. 8. While this condition was met, the nominal protection to maize was high during the operation and induced a significant supply response into that crop, notably in the most productive irrigated areas of the north.  16 1.51 The Government agreed not to increase the nominal protection of wheat above the level existing at May 1, 1991. The nominal protection of wheat did not exceed its May 1, 1991 level of 1.44 throughout implementation and was 1. 19 at loan closing. However, ASERCA9 provided marketing support to wheat producers in the amount of N$250/mt for 1990 the agreed price mechanism (precios de concertacion, para 1.52). Taking into account this marketing' support, the 1992 NPC rises to 1.88.10 1.52 Agreed prices. The Government and the Bank agreed at negotiations to exclude governrrent intervention in commodity pricing. The Government subsequently implemented agreed prices with growers and millers of sorghum (of Tamaulipas state only), barley, and rice in which specific payments were per ton of output to support producer prices. 1.53 The Government would not increase, in real dollar terms, the domestic price of refined sugar above the level existing on January 1, 1991. The consumer price of refined sugar was US$0.59/kg in January 1991 and has since varied between a maximum of US$0.58 and a minimum of US$0.56. This condition was met, but has been superseded by the NAFTA terms which will eventually allow higher Mexican producer prices for sugar. 1.54 The Government agreed not to increase the nominal price of barley for the period June 1, 1991 to January 31, 1992 above the level of 680 pesos per ton; and to set the nominal price of barley for the period February 1, 1992 to January 31, 1993 at a level not to exceed 714 pesos per ton. This condition was met throughout implementation and the price of barley at loan closing was 685 pesos per ton. 1.55 The Government agreed to make flexible the consumer prices of cookies, pasta, edible oils, cigarettes, eggs, dairy products, and beef. These commodities have been completely liberalized, as stated in a communication from SECOFI to the Bank of December 14, 1992. The Government further agreed not to interfere in the prices of tobacco products. The tobacco parastatal, TABAMEX, was liquidated by Presidential decree on October 9, 1990, thereby ending government interference in tobacco prices. b. Agricultural Trade Regime and Market Regulations 1.56 Prior to effectiveness, the Government had agreed to [para 56, President's Report]: (a) issue a decree modifying cane payment arrangements; (b) eliminate export permits for wheat, sorghum, feedstuffs, barley, soybean, copra, safflower, cotton seed, tobacco, eggs, coffee, rice, sesame, sunflower, vegetable oil, beef, and live cattle; (c) eliminate export taxes for raw cotton, cotton fibre, and swine for breeding; and (d) present to the Bank a study identifying processes, legislation and regulations that give SARH and other government entities the power to establish, coordinate, and 9. ASERCA (Apoyos y Servicios a la Comercializacion Agricola), created in 1991, is a decentralized agency of SARH with the mandate to take the necessary measures to adopt agricultural marketing to the new economic environment of liberalized prices. 10. While this condition was successful in one sense it was not sufficiently broad to prevent the Government from providing other support to wheat production that had the same effect as raising the nominal rate of protection through a direct price support (see para. 1. 1 11(d)).  17 enforce crop production targets. Upon effectiveness, the Government had: (a) issued a decree that modified the cane payment arrangements; (b) eliminated export permits for the products; and (c) eliminated export taxes for the products. The crop production targets are mentioned in paras 1.66-1.68. 1.57 The second tranche conditions for the agricultural trade component were as follows. 1.58 Milk trade. The Government agreed to implement a system to eliminate CONASUPO's monopoly on imports of powdered milk and to allocate import permits for powdered milk on a transparent, competitive, and efficient basis. *rhe Government eventually met this condition by issuing a directive to eliminate it for the 1995 supplies. The powdered milk import system, as stated in a letter from SHCP of December 6, 1993 to the Bank (Oficio No. 393.11I.3-558) assigns import quantities through competitive auction to the private sector and eliminates CONASUPO's import monopoly. The long delay in complying with this condition was due to its implications for the NAFTA negotiations." The Government eliminated export peimits for fluid milk (Diario Oficial of July 15, 1992) and for powdered milk (Diario Oficio No. 13736 of October 22, 1993). 1.59 Sugar policy. The Gov -rnment agreed to app ve a new sugar policy. The Government's sugar policy now includes:'2 (ai a new Cane Decree aliowing flexible price determination between cane, growers and( mills and individual price determination beginning in the 1994/95 harvest season; (b) reforming the social security system of the cane sector to put it on a sounder and equitable basis; (c) cteating a spot market in sugar to allow more timely price information to producers; (d) closing unprofitable sugar mills; and (e) restructuring the debt of viable sugar mills. These changes were to have occurred after the privatization of all government mills in 1989, but have not yet been fully implemented. 1.60 The privatization of the sugar mills in 1989 and other reforms, eliminated much of the government interference and established the basis for an independent and financially viable sugar industry. However, substantial problems, however, with the sugar industry held up the implementation of this sub-component. One problem was that of the non-viable mills which, despite having been privatized, mainitained large Government commitments in the form of loan guarantees for the money used to buy some of the mills. There was also substantial opposition from labor to closing some of the unprofitable tiills. The Governnment, throughout the period of AGSAL II, was unwilling to close such mills as long as there was the cliance of saving them with hildier sugarcane prices resulting from better access to the US market under NAFTA. Therefore, (lhe AGSAL II condition to approve a new sugar policy, while it was a major impr( vement over the policy before 1989, was overtaken by NAFTA terms. 1.61 The Government passed the National Seed Law on July 15, 1991, thus removing all restrictions on private sector competition with PRONASE, eliminating PRONASE's monopoly of germplasm produced by INIFAP and also eliminating plant breeding restrictions by the private sector. The initial effects of the revised Seed Law have been to generate increased revenue to the national 11. Mexico was further committed, under the terms of its GATT membership, to import substantial quantities of powdered milk. This affected the feasibility of eliminating CONASUPO's monopoly by making it necessary to assume a minimum level of imports. 12. Communicated in a letter (Oficio No. 211.1.9.- )f February 1, 1993) from SARH to the Bank.  18 research system from sales of its materials to the private sector, to induce greater use of commercial plant cultivars, and to expand private sector development of improved cultivars. This condition was successfully linked to previous sector work and to the Agricultural Technology Project, which provided resources to INIFAP for foundation sector production.'3 1.62 Beans. The Government was to prepare an action plan for a new trade and price policy based upon a study of the edible beans market. The policy at the time of negotiations was a high guarantee price, CONASUPO purchasing beans and an import permit procedure that effectively excluded beans imports. A study showed that Mexican bean guarantee prices were well above both import parity prices and representative domestic costs of production.'4 It concluded that while not all Mexican bean producers would be competitive at world prices, and while imports would grow under free trade, there was nevertheless a margin for some growers to be competitive at world prices. 1.63 The Government will implement a bean policy based on Procampo that goes beyond what it was committed to do under AGSAL II and NAFTA. The new policy is a major advance toward greater efficiency because it will reduce the producer price to import parity levels. The new policy provides important benefits to poor consumers who rely on beans as a source of protein because the consumer price of beans will fall significantly. While the policy harms marginal bean producers who will not be competitive under free trade, the additional income transfers provided by Procampo will compensate them to some degree. 1.64 The policy dialogue with the Government on beans was difficult for two reasons. First, there was no clear official position on objectives for been producers. The first draft of the study was rejected by the Government; the Government did little to build an internal consensus about what the new policy should be, even when the final study was completed. Though the Government recognized the untenable nature of the high guarantee price, it could do nothing specific about reducing support to beans until the overall changes in PROCAMPO were completed. Second, the thin international market in beans made it difficult to estimate clear costs and benefits of policy as could be done for maize, wheat, rice, and coffee, for example, thereby permitting the Government to minimize the economic cost of its bean policy. 1.65 Pesticides. The Government was to prepare an action plan based upon studies of pesticides to: (i) diagnose current usage; (ii) assess the current legal and institutional framework; (iii) streamline procedures to promote competition between producers and distributors; and (iv) establish guidelines to reach minimum standards on health, environmental issues and quality control enforcement; and of the regulation, organization, and procedures of the system of plant protection and animal health and the elaboration of a proposal to modernize the system and streamline its procedures. An international consulting firm completed the study of plant and animal health protection.'5 The rules and regulations proposed in the action plan were based strictly on quality control, health, epidemiological, 13. LA2AG, Mexico Agricultural Technology Sector Review (Report 9297-ME), August 20, 1992. 14. SARH, "Diagnostico del Frijol en Mexico," November 1991. 15. Sparks International, Review of Agro-Chemical, Animal and Plant Health and Inspection Services in Mexico and Factors for Harmonization with the U.S. and Canada, October, 1992. The related action plan is SARH, Programa de Modernizacion de los Servicios Nacionales de Sanidad Animal y Vegetal, February 23, 1993.  19 phytosanitary, and environmental protection grounds. The Government's plans for its animal and plant health inspection services, which will he implemented over time as they are closely related to NAFTA, will develop a more efficient and decentralized service that will protect consumers' interests, while avoiding the risks of corruption and excessive bureaucracy. Implementation of this condition was severely hampered by lack of institutional coordination within SARH. c. SARH's Production Targets 1.66 SARH's production targets were for nriany years a cornerstone of Mexican agricultural policy. The targel:s were used to "guide" resource allocation at the farm level, especially toward maize, wheat, rice, and beans. Subsidized credit, fertilizers, and farm machinery encouraged farmers to produce the selected commodities as determined by the targets. Allocation and delivery of water for those crops was agreed upon between producers and government authorities. Extension efforts of SARH and BANRURAL (Banco Nacional de Credito Rural), and FIRA (Fideicomisos Instituidos en Relacion con la Agricultura) concentrated oh the targe :rops, which were not always the ones with the highest profitability. The Aw. ste inherent in this sy i.m was not clearly a constraint to production as long as irrigated land and oth.r resources vwere exp~. ding rapidly. Yet as resource growth declined, the constraints imposed by the system became more apparent. Therefore, elimination of the targets was a true step toward greater allocative efficiency and move to a market economy. 1.67 During preparation, the Bank considered that it would be possible to eliminate the production targets by a simple administrative action. The Government argued that this was not possible without knowing the legal basis of the production targets. Accordingly, an effectiveness condition was establislied to determine the legal basis of the targets. This was complied with on September 30, 1991. 1.68 As a condition of second tranche release, the Government was to eliminate the production targets. A letter (Oficio Circulair No. 212.92-763) from the Directorate General for Agricultural and Forestry Studies (DGESAF) of the SARH to the Rural Development Districts officially eliminating production targets was sent on September 29, 1992, thus meeting the second tranche release condition. Field visits to Rural Development Districts, as part of supervision of other projects, showed, in some instances, that local extension officers were unaware of th.e specific policy change though they did know of the general reduction of government involvement iii agricultural production and marketing. The specific lesson here is to have mace the action plan ft,r eliminating the targets more comprehensive. d. Credit and Input Subsidies 1.69 Credit. Total input and credit subsidies in 1988 amounted to US$2. 1 billion, four times the public investment budget in agriculture. Compressing these subsidies would allow higher public agricultural investment and lower overall public expenditures. With respect to credit, the Government had already taken major actions to restructure the rural financial subsector. Many of the reforms affected the National Bank for Agricultural Credit, BANRURAL (Banco Nacional de Credito Rural, S.N.C.). Its staff was cut by more than 50 percent, 60 percent of its branches were closed, and its portfolio was cleaned up of nonperforming loans. The Government's furzher subsidies on interest rates on loans through the development banks are generally aligned with market rates. The Government now lends funds to the development bank:, at a rate close to market rates, rather than  20 simply making capital contributions to them. In 1990 it liquidated the National Crop and Livestock Insurance Agency (ANAGSA). 1.70 Seed policy. The Mexican seed industry before 1989 was dominated by a parastatal, PRONASE, that held a partial monopoly over seed commnercialization and received substantial public subsidies and legal protection from competition. This reduced the quantity and quality of improved cultivars available to Mexican farmers.'6 The objective of the loan with regard to seed production was to make the industry more competitive and thereby to better the materials available in Mexico. Second tranche conditions affecting seed use were to eliminate: (a) all restrictions on private sector competition with PRONASE; (b) PRONASE's monopoly of germplasm produced by INIFAP; and (c) restrictions or limitations on plant breeding by the private sector. The Government complied with this condition in passing the revised National Seed Law on July 15, 1991 which eliminated the items listed above. 1.71 Other Inputs. Since 1991 fertilizer prices have been increasing much faster thati the timetable agreed under the Fertilizer Sector Adjustment Loan (Loan 2918-ME) and are nlow above world levels. For example, in 1992 domestic fertilizer prices were 15 percent higher than their international parity (Project Completion Report, Fertilizer Sector Adjustment Loan, November 16. 1993, p. 49). Low electricity tariffs charged to farmers for operating irrigation pumps was a major subsidy for agricultural production. The Federal Electricity Commission, CFE (Comision Federal de Electricidad) had estimated that in 1988 electricity for irrigation and for corn mills was sold at a ratio of price to long-run-marginal-cost of 0.26 and 0.21 respectively. Between the beginning of 1989 and the beginning of 1991, real electricity rates were increased by 72 percent. Other reforms in irrigation-transferring irrigation districts to users associations; greater cost-recovery for capital, operations, and maintenance; imposing stiffer economic and environmental criteria on public investments; creating a better legal and institutional basis for water markets-were supported by the Irrigation and Drainage Sector Project (IDSP), not in either of the sector adjustment loans, because of their closer linkages to investments financed under the IDSP. 1.72 Upon effectiveness, input licenses for new agricultural machinery was already abolished while tractor prices were freely determined by the market. Second tranche release conditions required that the Government maintain a policy of allowing prices of pesticides to be freely determined by the market. The Government has reaffirmed its commitment to allowing pesticide prices to be freely determined by the market. C. FOOD CONSUMPTION AND NUTRITION COMPONENT 1.73 Mexican food policy sought to keep producer prices high to stimulate domestic production and to keep consumer prices low to protect real consumer income. As a consequence, food consumption policy was not independent of price and trade policy and incurred large fiscal outlays that were not cost effective in fighting malnutrition. According to nutrition surveys in 1988, malnutrition among children under five years old ranged from a low of 13.9 to a high of 22.3 percent (deperding on the way malnutrition is measured). Studies by PRONASOL (Programa Nacional de Solidaridad) indicate that in 1988 approximately 41 million people lived under poverty conditions. 16. See World Bank, Mexico - Agricultural Technology Sector Review, Report No. 9297-ME, August 20, 1992.  21 1.74 Past consumer price policies did not effectively address food consumption and nutritional object.ves. The rural poor received only minimal benefits from the programs despite the extensive poverty and malnutrition in rural areas. Furthermore, targeted food consumption programs did not take advantage of the proven complementarity among primary health services, nutrition, and nutrition education. Programs were fragmented and used different targeting criteria. 1.75 There were fr,ur categories of targeted food and nutrition interventions in 1989, executed through 13 programs administered by seven institutions, covering urban and rural populations, high- risk groups, and consumer education. The most important were the Tortibono" program; the LICONSA social supply of milk (Abasto Social de Leche), the alimentary assistance program, DIF (Desarrollo Integral de la Familia), which covers several direct food transfer programs; and the DICONSA rural retail food sale program." 1.76 The main defects of the programs identified during project preparation were: (a) Program participation in rural areas, where most of the poor live, was very low (less than 2 percent of the population), except for the DICONSA rural retail program, which co wered almost all the rural population. Most of the program's beneficiaries were concentrated in urban centers, especially in Mexico City. (b) Although there are some state programs which provide high coverage, the coverage of the target population was low even in urban areas. The Government has since expanded to 2 million families the Tortivales program in the urban areas, covering approximately 6 million people. (c) The tortibonos and LICONSA programs were (i) insufficiently targeted as families above poverty line have been eligible and (ii) uncoordinated and based on different eligibility criteria. (d) Nutritionally, the programs were not efficient because they did not combine the provision of food with the provision of health services and nutrition education. (e) Milk and tortillas do not provide a nutritionally balanced or cost-effective diet. 1.77 The purpose of the food and nutrition component of AGSAL II was to make: (i) agricultural policy fully independent of food consumption policy and (ii) poverty alleviation programs more cost effective by increasing coverage in rural areas and improving targeting of the poorer population. 17. Tortibonos are coupons issued to consumers allowing them to purchase tortillas (maize cakes) at subsidized prices. In November 1990, the tortibonos program was replaced by the tortivales program [see Annex 6, President's Report]. 18. LICONSA is the milk producing and distributing affiliate of CONASUPO while DICONSA is the retail affiliate of CONASUPO. Since 1984 there had been a steady increase in targeted food subsidies, mainly for maize tortillas and milk. As world milk prices have increased and coverage of the programs has expanded in urban areas, the cost of these targeted subsidies reached about 0.175 percent of GDP in 1990.  22 a. Pilot Nutrition and Health Project 1.78 Although during preparation and negotiations, there were some differences between the Bank and the Government about the scope and location of the health and nutrition actions, it was finally agreed that the Government would implement a pilot health and nutrition program in the poorest states. 1.79 The pilot nutrition and health project followed the basic design of the nutrition and health programs implemented by the Health Ministry. The main objectives of the pilot project were: (i) to provide food assistance to around 45,000 rural families in the states of Nuevo Leon, Tamaulipas, San Louis Potosi (the Ixtlera zone), and Mexico (the Otomi-Mazahua zone); and (ii) to test different methods for operating a nutrition and health program. The program provided information on which to base a national nutrition and health program. The localities were selected on the basis of their extreme poverty, adverse climatic conditions, poor natural resource endowment, poor health infrastructure at household level and high degree of malnutrition among children under five years. For equity reasons, the pilot project was supposed to extend the benefits of poverty alleviation programs to those localities not covered by existing programs. 1.80 The main purpose of the pilot project was to test means for an expanded nutrition and health program. Its targetpopulation was the low-income families at risk of malnutrition; including pregnant and lactating mothers or children under the age of five (estimated at 3.6 million families). The pilot program sought to: (a) reduce maternal and child mortality, prevent and treat malnutrition, and promote a better growth and development of the target population; (b) determine and test the most adequate institutional arrangements and staffing to implement the nutrition and health program; (c) determine procedures for (i) selecting and identifying beneficiaries; (ii) providing entitlement to food baskets; (iii) redeeming entitlement; and (iv) transporting and storing food baskets; (d) test information, supervision, accounting, and auditing systems and performance of the responsible units; (e) evaluate the effectiveness of the various nutrition and income-support interventions; (f) analyze the technical, administrative, and financial feasibility of the project; and (g) prepare a detailed estimate of the cost of an expanded program for participating institutions. 1.81 Given the time needed to run the pilot program, implementation of this component of the loan had two phases. First, the Government was to implement the program in the pilot areas and, at the same time, contract for the evaluation. 1.82 A significant difficulty during implementation of this component was the disappearance of the Ministry of Budget and Planning (SPP) in 1992 which had been the executing agency of the pilot  23 program. Although SHCP was the successor of SPP, there were lengthy disputes among SHCP, SEDESOL, and the Ministry of Health about which would succeed SPP in implementation of the nutrition and health component of the project. 'The failure to resolve this disagreement slowed the evaluation of the pilot program and the preparation of the required action plans. 1.83 A condition of second tranche was a satisfactory evaluation of the pilot project. The evaluation of the pil(t project (ITAM/CONAL/SOLIDARIDAD, "Evaluacion del proyecto piloto de nutricion alimentacion y salud", January 30, 1993) was satisfactory. The study found that while significant increases in nutritional levels for children under the age of five were achieved in Otomi- Mazahua zone (state of Nuevo Leon), this was not the case in Ixtlera zone (state of Mexico). In Otomi-Mazahua the increase in the percentage classed as having normal weight for age was from 54 percent (beforc the project) to 72 percent (after the project); in Ixtlera the corresponding increase was from 62 percent (before the project) to 68 percent (after the project). In both zones the project seemed to have improved the nutrition of girls more than the boys. The impact on the nutrition of pregnant ncnd lactating women was very small. In terms of health impact, there was a marked reduction in diarrheal diseases among children under the age of two in Otomi-Mazahua. There were important positive effects on family planning and vaccination. 1.84 Although the specific results of the ITAM/CONAL/SOLIDARIDAD study had to be interpreted cautiously as no extensive statistical analysis was carried out, they were of good quality and consistent with the agreed terms of reference for the study. The evaluation showed, most importantly, that operations like the pilot project could establish a successful precedent in poor rural areas which had formerly been outside the Government's food and nutrition policy. Considering the short length of time of the pilot test, the results concerning the nutritional status of the target groups should be viewed as significantly positive. 1.85 A further condition of second tranche release was the preparation of action plans for food and nutrition for 1993 and 1994 based on the evaluations of the pilot program and of the tortilla and milk studies. The Government was very slow in following up on those evaluation. There were long delays in completing the studies, between December, 1992, when drafts were finished, and November, 1993 when they were officially presented to the Bank, necessitated by minor comments made by concerned Ministries. The preparation of the action plans were delayed, as a result, and the actions taken in 1993-94, while complying with the condition, have had less impact than they might have had in meeting the objective of the component. b. Food Consumption Policy 1.86 CONASUPO subsidized maize tortilla processors such that their prices were below both world and domestic price equivalents, therefore granting urban consumers untargeted maize subsidies. Producers of maize, about half of whom were principally net buyers of maize, received subsidies, but paid essentially the producer price. Since 1988, the objective of policy was to reduce the untargeted subsidies to urban consumers, and to replace them with targeted distribution of maize to poor consumers. In the urban areas the Tortivales program provided one kg of tortillas per day, free of charge, to 2.1 million poor families. In the rural areas the Government subsidized maize consumption through DICONSA stores. 1.87 The Government recently proceeded to deregulate the maize-tortilla chain, to simplify the complex structure of prices and subsidies stretching from the production of maize (see PROCAMPO,  24 para. 1.43) to the consumption of tortilla, and to reduce the budgetary cost of its maize policy. It therefore raised consumer prices of maize and tortillas to nearly the costs of CONASUPO of acquiring, handling and processing maize, thus raising consumer prices above their international equivalent. Only in Mexico City is the price of tortillas slightly below the international equivalent; elsewhere it is above. The new price policy therefore amounts to a regressive consumer tax which falls mainly onto rural consumers and urban consumers outside Mexico City, and which benefits producers. 1.88 Without maintaining the large and inefficient CONASUPO purchase and sales apparatus for maize, the only way that the consumer tax could be eliminated was by reforming producer price policy which is being done under PROCAMPO (paras 1.43 to 1.46). In the meantime it made little sense to greatly increase or further target the existing maize subsidy program through the DICONSA stores, but rather just maintain it in its present form as a temporary and imperfect palliative. Therefore, in rural areas, DICONSA used its maize programs to alleviate the impact on rural consumers of producer protection. 1.89 The tortilla evaluation study (Technomic Consultants International, "Evaluacion de la Situacion Alimentaria en Mexico: Tortilla Solidaridad", September 1993) found that the program reached a significant fraction of the nutritionally at-risk population at an acceptable fiscal cost. The Government has recently taken measures, based on the results of the study, to improve the targeting of the Tortivales program to the poor. Upon expansion of the nutrition and health program, the maize and maize flour programs could eventually be phased out in those rural areas covered by nutrition and health programs. 1.90 The powdered milk evaluation study (Technomic Consultants International, "Evaluacion de la situacion Alimentaria en Mexico: Programa de Abasto Social de Leche en Polvo", October 25, 1993) found malnutrition to be a serious problem, but noted no statistically significant effect of powdered milk distribution. The fluid milk evaluation study (Technomic Consultants International, "Evaluacion de la Situacion Alimentaria en Mexico: Programa de Abasto Social de Leche Fluida", October 22, 1993) found that the program had clearly positive effects on the protein consumption of children, of poor families. The evaluation recommended measures to target the program more closely to the poor, while complementing it with public nutrition education efforts. However, one has to take into consideration the fact that the milk study had serious shortcomings. D. MACROECONOMIC POLICY FRAMEWORK 1.91 With the exception of the exchange rate, macroeconomic policy was consistent with AGSAL 11. During implementation of AGSAL II, Mexico has reduced inflation, public debt, and the role of the public sector in general. The overall price stability associated with the reforms, and the decisive moves toward reducing public interference in the economy, have provided a consistent and supportive macroeconomic framework. The agricultural sector has received significant benefits from the fall in real domestic interest rates. 1.92 A major concern arising from the macroeconomic framework has been the real appreciation of the peso. Because a large share of agricultural production is tradeable, this peso appreciation harmed agriculture during the implementation of the Loan. The renewal of the PACTO in October 1992 included measures to allow for more flexibility in the exchange rate. The main measure was to widen  25 the band within which the peso moves. The measure to make the peso's adjustment more flexible is a major improvement in the overall macroeconomic framework for agriculture as shown recently. 5. OVERALL EVALUATION OF THE LOAN a. Impact of Reforms 1.93 The main problems of Mexican agriculture in the last two decades were government intervention through price, trade, and regulatory restrictions and the decline in productive public investment. In the mid-1980s the Government began a serious attempt to reform the entire economy. The reforms were extended to the agricultural sector and began to end interventions that had hampered sectoral growth. Against this background of strong government commitment to overall economic and sectoral reform, an important benefit of AGSAL 11 (as well as AGSAL I) was to support a productive sectoral policy dialogue between the Bank and the Govermnent which helped to identify the main costs of public intervention. 1.94 It is too soon to make q, fntitative as:.'.tssments f the impact of reforms on long-term growth and income distribution. The mi.in reason is that most f the reforms occurred at a time of fiscal and monetary restriction when stabilization took priority over growth. The appreciation of the real exchange rate adversely affected the growth of the agricultural sector. With the recent flexibilization of the exchange rate such adverse effects on growth are expected to decline. There has been revival of sectoral growth from 0.2 percent annually in 1977-82 to 2.0 percent in 1983-88, to 6.3 percent in 1989-92. The real value of agricultural exports was quite variable, growing at -1.5, 16.1, and -5.2 perceht respectively during the same periods. 1.95 Public investment in agriculture did not recover in the period of the operation. Real irrigation investments, the most important category, fell from an annual average of N$6,495 million equivalent in 1977-82 to an annual average of N$2,303 million equivalent in 1983-87 and to an annual average N$1,l067 equivalent in 1989-92, with corresponding annual rates of growth of irrigated areas of 2.3, 1.7, and -0.3 percent. Public spending on agricultural research was 0.46 percent of agricultural GDP in 1983-88 and 0.27 percent in 1989-92 (World Bank, Mexico - Agricultutal Sector Memo, Tables 2.1 and 4.1). Therefore, the two agricultural sector adjustment operations were not associated with rising public investment in irrigation and research, which have been import- nt sources of past growth. 1.96 AGSAL I and AGSAL 11 were implemented in a period of falling rofitability for commodities-maize, wheat, beans, and sorghum-that cover much of the planted area. An econometric study of the 1960-92 period revealed a structural decline in profitability of the agricultural sector over the 1985-92 period when compared to the 1960-84 period. Such decline in profitability may be attributed to the structural adjustment program. The result is expected as it takes time for producers to switch to more profitable crops and to learn about the new market environment. Because maize and beans are largely rainfed crops, the burden of adjustment and lower profits would have been heavy oni poorer rainfed producers. 1.97 Other qualitative indication of the operation's benefits is possible. The Government has gained fiscal savings from reduced subsidies, more efficient public investment, and reduced transfers to parastatals. Producers of some commodities have gained from elimination of quantitative restrictions on exports, and from lifting guarantee prices which, sometimes, taxed domestic output with respect to world prices. Detailed policy analysis was done on commodity pricing, efficient  26 targeting of food and nutrition interventions and the role of Government in plant and animal health regulations. Those analyses established standards for evaluating policies using world prices which were used not only in AGSAL I and II but also in other operations. Though consumers bore most of the cost of reforms, an expansion of targeted food subsidies softened the impact on the poorest. b. Project Sustainability 1.98 The President's Report identified three major risks concerned to the sustainability of the reform. The first risk concerned maintenance of a satisfactory macroeconomic climate-fiscal discipline, monetary policy, and the exchange rate. Second, it was expected that changes in patterns of resource use would be resisted from those who benefit from the status quo, causing the reform to lose its momentum. Third, relying on NAFTA to implement trade policy reform in maize, wheat, and barley would not necessarily guarantee trade and price liberalization. 1.99 Macroeconomic stability was realized largely through the PECE and through the elimination of public sector deficits. Lower public sector debt was made possible by the Brady Plan and the proceeds from the privatization of public enterprises. The Government has recently committed to making the exchange rate regime more flexible, thereby making the macroeconomic side of the project sustainable. The rise in the real interest rates associated with stabilization however, has penalized some farming activities, thus cutting some benefits of the reforms. 1. 100 The second risk was related to the resistance that the Government might face from the beneficiaries of the status quo. The commitment of the Government's change of the existing subsidy scheme to the income support scheme, PROCAMPO, has given the message that the price mechanism can no longer support inefficient production and that marginal cost should be the rule in determining prices. The specific timetable of PROCAMPO for the next 15 years indicates that changes will be sustainable as producers income, while lower in several instances, will be more certain. The structure of PROCAMPO establishes a more solid ground for long-term reform as it specifies the timing and incentives of the reform. 1. 101 Finally, with the ratification of NAFTA, the Government will follow the NAFTA timetable, which although less strong than the PROCAMPO one as far as phasing out of subsidies is concerned, makes the reforms more sustainable. c. Bank's Performance 1. 102 The Bank started, soon after Mexico's economic crisis in 1982, to develop a policy dialogue with the Government in order to support economic adjustment. This dialogue led to the change in the Bank's work with much greater emphasis on policy-based lending while economic and sector work were linked to structural adjustment. This resulted in sector adjustment loans for Trade Policy (FY87 and FY88 for US$500 million each); Fertilizer sector (Loan 2919-ME, FY88, US$265 million); Agricultural Sector I and II (FY88 and FY91, US$300 million and US$400 million, respectively); Steel Sector (FY88, US$400 million); Financial Sector (FY89, US$500 million); Industrial Sector (FY89, US$500 million); Public Enterprise Reform (FY89, US$500 million); Road Transport and Telecommunications (FY90, US$380 million); and the Interest Support (FY90, US$1.26 billion).  27 1. 103 The Government was already engaged in structural reforms in trade and industry but, given the political sensitivity of the issues, reforms in the agricultural sector lagged. AGSAL I contributed to that debate and established a framework in which to make agricultural policy more comprehensive, covering prices and trade, inputs, irrigation, and food consumption. Sector work on land tenure (World Bank, L.A2AG, Report No. 8310-ME, March 30. 1990) proposed broad options for improving productivity in ejido areas. An intensive dialogue on the rural financial subsector, though it did not lead to a project, assisted the Government in its efforts to make farm credit more readily avaiiable to smallholders and to improve the financial condition of its credit institutions. The Bank's role was to accelerate the debate within the Government about agricultural reforms. The Bank's Policy Notes on Agriculture and Rural Development summarized the main issues affecting the sector's performance up to the end of 1989 and gave specific recommendations on them.'9 Within the Government, the main policy reforms were discussed around this document and it strengthened the reformist groups. Given the complexity of the issues involved, this has to be considered a successful performance. 1. 104 The preparation of AGSAL II was a natural continuation of AGSAL I and was closely coordinated with the Trade Policy Loans and the Fertilizer Sector Adjustment Loan. While there were no cross-conditionalitiei,, ie operations reinforcel each other. Both AGSAL and TPL operations supported the reducti 'n of non-tariff barrie:; but AGSAL I and II specified the goods to be liberalized as well as ihe spei:ific timetable to be fo.. )wed. 1. 105 Another important element of Bank'; performance in this operation was the economic and sector work which was under way during AGSAL II, some of which is still being continued. The Policy Notes on Agriculture, Food and Rural Development (Febrdary 1, 1990) identified the prohlems of the agricultural sector (e.g., slow agricultural growth, little poverty alleviation, low levels of private investment, and inefficient resource allocation within agriculture) and gave specific recommendations. The Agricultural and Technology Sector Review (August 20, 1992) concentrated main-ly on the research programs, barriers to technology generation and technology transfer. The Agricultural Sector Memorandum (currently under way) examines the economic incentives issues, water markets, research and extension, and the land market, and it also gives specific policy recommendation on the related problems. It also discusses problems associated with soil conservation techniques as well as particular problems specifically found in the tropics. 1. 106 The legal agreements were satisfactory. d. Borrower's Performnance 1.107 The coimmitmeni of the Government to the general idea of reform, and to some of the specific actions supported under lie loan, was strong and sustained throughout implementation. In elaborating PROCAMPO, Cie Gove nrnent went beyond what was agreed in the loan. The long process of preparation and implementation helped create a commitment to reform based on an intellectual conviction of the benefits rather than on the pressure of macro-economic circumstances (i.e., balance of payments difficulties). 19. World Bank, "Mexico: Policy Notes on Agriculture and Rural Development," Report 8144- ME, LA2AG, February 1, 1990.  28 1. 108 In the growth and productivity component, the Government moved away from some quantitative restrictions, and held the line on additional protection, but did not reduce overall protection in wheat or sorghum because it raised the direct payments made under the agreed pricing scheme (see para. 1.52). The decision to give higher direct payments resulted, in part, from the squeeze on profits caused by the appreciation of the real exchange rate. 1. 109 The coordination of the health and nutrition component was poor after the disappearance of SPP in 1992. This was reflected in slow preparation of the action plans for the food and nutrition component (see para. 1.84). The objectives and mechanism of the food and nutrition conmponent were apparently poorly understood and managed by the agricultural and finance ministries. e. Conclusions and Lessons Learned I 110 Mexico has extensively reformed its agricultural policy since 1987 with support initially from AGSAL I and later from AGSAL II. Despite the disappearance of many major distortions under AGSAL I, reform had to be deepened to exploit the full growth potential of Mexican agriculture. Under AGSAL 11 the reforms were further promoted in order to raise agricultural growth and productivity, through the improved functioning of output and input markets, while alleviating the poverty of the most vulnerable population groups through targeted food and nutrition programs. I . Il The lessons from this operation are first described in terms of broader issues and then in terms of the specific objectives of the operation. The broader issues are: (a) Linkage between stabilization and liberalization. Stabilization and budget restraint continued to take priority over growth in the period of AGSAL II as it had under AGSAL I (para. 1.24). The lesson is that a closer analysis of the Government's intentions regarding the stabilization program in terms of public expenditure goals for agriculture should have taken place and that more explicit targets should have been set. (b) Sector strategy. Poverty alleviation measures, notably steps to improve nutrition among the rural poor, were included in both AGSAL I and 11, but other actions to distribute benefits of reforms were not elucidated until after the loan had been signed. The lesson learned is that dialogue between the Bank and the borrower about structural adjustment operations should not be limited to policy reforms, but should be expanded to include complementarity actions that would ensure related sectors will benefit from new incentives. (c) Poverty alleviation. AGSAL I and 11 were the first sector adjustment operations in Mexico to take explicit steps to reduce the cost of the reforms to the poor. Not only did they attempt to reduce the burden of adjustment on the poor by promoting targeted food subsidies, thus making the package politically more acceptable, but also set the basis for the Government's National Food Security Program for 1990-94. The most appropriate feature of the design was the restriction of additional subsidies to an existing institution - CONASUPO - so as to be able to mohitor their cost. (d) Price policy conditions. The price policy conditions were complied with nominally, but did not have their intended effect-of removing distorted incentives to growers'  29 production decisions - because they were not linked to other forms of support to crop production. This was most true of wheat production which, for political reasons, received direct marketing support from SARH beginning in 1990 while the conditions of AGSAL II limited the support from trade/price polizy. The lesson is that it would be necessary to include conditionality on budget allocations, beyond the price policy conditions, to avoid this non-price support. 1. 1 12 More specific lessons of the operation are: (a) Design of the loan. AGSAL 11, within the process of general reform, had a more comprehensive design than AGSAL I, thus ensuring that policy issues were managed within a unified framework; this was a notable strength of the design. (b) Linkage to other Bank Operations. The chief linkages of AGSAL II were to AGSAL I (which was its natural continuation); to the IDSP and the Agricultural Technology Project, which were designed to promote a supply response to the incentive policy changes; to the two fertilizer adjustment sector loans which attempted to liberal ze the fertilizer sector. These were appropriate linkages and, had they been supported with an adequate share of agricultural budget by SARH, should have helped AGSAL II's growth objective. (c) Pilot health and nutrition project. The pilot health and nutrition project within AGSAL II targeted low income families at risk of malnutrition including pregnant and lactating women as well as children under the age of five. While the basic design of the evaluation was satisfactory, the follow-up on the analysis in the form of an action plan was slow because of institutional failures within the Government. The lesson is that similar evaluation efforts should be monitored by qualified official agencies. A second lesson is that in similar operations, more time should be given before the pilot's achievements are evaluated - the one year period for this component of the project proved to be inadequate.  PROJECT COMPLETION REPORT MEXICO SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN (Loan 3357-ME) PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE' 1. INTRODUCTION 2.1 Two fast-disbursing loans (disbursed in two trapches) were negotiated in May 1991 with the World Bank and the Inter-American Development Bank for US$400 million and US$200 million, respectively, to finance the second agricultural sector adjustment loan (AGSAL 11), intended to support different structural adjustment measures introduced by the Mexican Government in the sector. 2.2 Several conditions had to be complied with before these operations could be submitted to the Banks' Boards of Executive Directors, which pertained to: (a) Trade policy (elimination of import and export permits for farm machinery and equipment, pesticides, and different agricultural products). (b) Price policy (free determination of or greater flexibility in the prices of tractors, pesticides, and different agricultural products, and methods for calculating and reducing the levels of protection on maize, sugar, and wheat). (c) Terms of reference for studies on import permits for milk, trade policy for beans, use of pesticides, animal and plant health, and production targets for the Ministry of Agriculture and Water Resources (SARH). (d) Food policy (terms of reference for the evaluation and monitoring of social programs for the provision of milk and tortillas, and implementation of a pilot nutrition and' health project (PNAyS). (e) Presentation of policy letters regarding nutrition and agricultural modernization. 2.3 These commitments were complied with on schedule, and the loans were signed on June 26. 1991, and declared effective in December of the same year (when a plan of action was agreed uponI based on the study of SARH's projection targets), making it possible to disburse the first tranche for US$200 million and US$100 million, respectively. 1. With the exception of Section 2 which was submitted in English, Part 11 is a direct translat.ion from the original Spanish. Because Part I was revised after receipt of Part II, some of the paragraph references made in this Part 11 to the earlier Part I may no longer correspond exactly (e.g. reference of para. 77 corresponds to para. 1.76).  31 2.4 A number of commitments were established in order to gain access to the second tranche of the loon. including: (a) Trade policy (elimination of import monopolies and export permits for fresh and powdcred milk). (b) Price policy (free determination of or greater flexibility in the prices of different farm products and pesticides, and a reduction in nominal protection for wheat, barley, maize, and refined sugar). (c) Implementation of action plans based on the results of the studies on the market for beans, pesticides, animal and plant health, and SARH's production targets. (d) Food policy (evaluation of social programs for the provision of milk, tortillas, and the PNAyS, and the presentation of plans of action to implement food and nutrition programs in Mexico). (e) Maintenance of the policies presented to the Boards of Executive Directors and submission to Congress of a draft agricultural budget for 1992, in line with macroeconomic policy. 2.5 Loan 3357-ME AGSAL 11 was fully disbursed on January 19, 1994, after the different undertakings had been fulfilled. 2.6 The Ministry of Finance and Public Credit (SHCP) acted as guarantor for the operation, and Nacional Financiera S.N.C. (NAFIN) was the borrower, in its capacity as the financial agent of the Federal Government. The executing agencies for this loan were the Ministry of Agriculture and Water Resources (SARH), the Ministry of Trade and Industrial Development (SECOFI), and the Ministry of Social Development (SEDESOL), whose comments are given below. 2. SARH A. BACKGROUND 2.7 Since the beginning of the present administration, a thorough revision of economic policies has taken place with the main purpose of reducing Government participation in the nation's economy and limiting public expenditures to social investments. As a result, a drastic reduction of the budget deficit has been achieved and a greater participation in social productive activities has been registered. 2.8 As part of these revisions, Mexican agriculture started a process of deep structural changes aimed primarily to increase the welfare of the rural population, promote higher output growth, and improve the agricultural trade balance. The main goal is the modernization of agriculture which in turn will increase and improve production, reduce imports, and allow greater participation in international markets. 2.9 Agriculture is a very important activity in the Mexican economy. It accounts for 9 percent of GDP and employs over 25 percent of the labor force. For these reasons, agriculture deserves priority attention from the Covernment, especially if one considers the fact that its performance has social and political implications in the country's stability.  32 2.10 The highly protective policy regime that prevailed in agriculture up to the beginning of the nineties had to be reviewed, and in most cases phased-out right away, to adjust to new conditions prevailing in Mexico and abroad. First, the need to keep public finances in equilibrium, while simultaneously increasing social expenditure (e.g. health, nutrition, education, and housing for the urban and rural poor), conditioned all sectoring policies including agricultural ones. Secondly, to recover the path of sustainable growth over the long term, it was necessary to continue the process of trade liberalization and economic and commercial integration which started in 1986 with the accession of Mexico to GATT. Third, the role of the state in promoting rural development had to be adjusted not only because of the new macroeconomic conditions already mentioned but also to allow the surge of entrepreneurship in the private and social sectors. 2.11 The last model of development was hindered as a consequence of strong public involvement in production, storage, and distribution of key agricultural inputs and goods. Moreover, despite the large fiscal transfers granted to agriculture, output and employment remained stagnant during the eighties. Therefore, the rationale to change the institutional environment was a political demand of the rural society. a. The New Legal Framework 2.12 The reforms to article 27 of the Mexican Constitution and the Agrarian Law, constitute a new legal framework with respect to land tenure and property rights. This new framework is both simple and clear, and eliminates obstacles and restrictions to private investment in agricultural, livestock, and forestry activities. The new norms will instill dynamism to the sector, increqse factor mobility, and provide certainty and security for the private sector to participate in highly rewarding projects with a long-term development perspective. b. Trade Policy 2.13 After Mexico joined the GATT, "official" import prices were abolished. Tariffs were reduced from over 100 percent in 1985 to a current of 20 percent. Until 1986, all agricultural products were subject to import licenses. In 1992, only a few products remain subjects to import licenses: maize, beans, milk powder, barley, poultry, animal fats, grapes, and a few other products such as: potatoes, eggs carnauba, whose relative importance in trade is insignificant. Imports as significant as bovine meat, pork and port products, animal offals, soybeans, sorghum, rice, vegetable oils, apples, and absolutely all processed foods and beverages face only tariff protection well below Mexico's tariff bindings with the GATT. In conclusion, strong steps to liberalize agricultural trade were taken after Mexico's accession to GATT, and in the context of NAFTA the process will be concluded. 2.14 The agricultural chapter of the NAFTA is not limited to setting time-frames for the removal of trade barriers. It includes provisions in the following areas: (a) Market access; (1) Domestic support; (c) Export subsidies; (d) Sanitary and phytosanitary measures. Disciplines in these areas are crucially important for the success of the NAFTA in promoting trade. c. The New Role of the State 2.15 According to the rope of the State within the development strategy pursued until last decade, it had to interfere directly in all activities related to the agricultural production. In the current economic environment, the role of the State has changed; a focal point of the new policy is No State  33 Intervention in areas in which conditions for private participation are adequate. The present administration has diminished Government intervention in several sectors by encouraging the participation of the private sector and by removing obstacles and rmarket distortions that prevent Mlexican agriculture from developing to its full potential. State-owned enterprises have withdrawn from production and distribution of agricultural products; most have been privatized, restructured, or liquidated. This is the case of INMECAFE, ANAGSA, TABAMEX, AZUCAR, PRONASE, BANRURAL, CONASUPO, among others. 2.16 As part of this action, state involvement in activities such as coffee production and marketing, handling and distribution of tobacco, seed industry have been discontinued by Government agencies and brought back to the private sector. It is important to mention [he role of PRONASE, that held a partial monopoly over seed commercialization and received subsidies and legal protection against comlpetition. A New National Seed Law eliminated the state monopoly and allowed private sector competition. 2.17 Within the new agricultural policy, the role of the Secretariat of Agriculture and Water Resources (SARH) has also been reviewed, being now mainly promotional and less regulatory. The main objective of SARH functicns is to create the nec..*;sary conditions to allow a healthy deveiopment of agricultural pro, luction within a marke: oriented framework. 2.18 The redefinition of the tole of the st ite is also allowed by rationalization in subsidies. Reorganization or privatization in the sector favors the :,urge of private infrastructure in the areas of marketing, transport, and storage. Savings generated by reducing subsidies are channeled towards priority programs such as hydroagricultural ihfrastructure development, technical assistance, agricultural research, sanity and phytosanity campaigns, dams, etc. 2. 19 Another line of action was the redefinition of the role of the public sector in the supply of farm inputs. The regulations that existed and the direct participation of the State in production inhibited the private supply of inputs. The public sector was directly involved in the distribution of seeds and fertilizers, financing and marketing. 2.20 Public intervention in the farm, that was a very important instrument of development, did not accomplished properly the objective of promoting production and justice anymore. Subsidies, hidden as loans, distorted the productive structure and reached only few producers. The case of BANRURAL is illustrative: in the last decades BANRURAL was more a s .bsidies scheme than a development bank. d. Guarantee Prices 2.21 Previously, all nmajor agricultural crops had a guarantee price operated through CONASUPO; by 1992, only n aize and beans have guarantee prices. Soybeans, wheat, sorghum and rice receive marketing assistance (in some cases limited to disadvantaged regions). This assistance is provided through ASERCA, and Is based on a system that allows buyers to acquire the harvest of the national producer at a price equivalent to the cost of the imported good. 2.22 Several problems are associated with guarantee prices. Buying at a higher uniform price than the sales prices completely crowds out the participation of the social and private sectors in trading. Moreover, guarantee prices distorted the prdduction decisions inducing an important increase in the harvested land of protected products in areas where other activities would be more profitable. A clear  34 example of this situation is the growth of the harvested area of maize in the North and North-West (it increased from 451,000 hectares in 1989 to 907,000 hectares in 1992). Maize and beans are the most heavily subsidized crops. The current imbalances in the relative protection of different crops have led to distortions in the structure of production,leading to an artificially high production of maize and beans, and a low production of substitutes. These distortions will be removed upon implementation of PROCAMPO. 2.23 Under a guarantee price scheme, the total subsidy is not only the difference between the guarantee price and the sale price (or international price), it is necessary to add marketing costs. The existence of a uniform price in time and space hides transportation and storage costs. e. PROCAMPO 2.24 PROCAMPO is a new support program for Mexican farmers who are currently devoted to the production of certain grains and oilseeds. The traditional support scheme to the agricultural sector, which PROCAMPO will replace, operated basically through high guarantee prices. This scheme led to an efficient allocation of resources in the rural sector, shifting resources towards those crops with the highest degree of relative protection. The poorest of all peasants, which devote their production to self-consumption, did not benefit from a scheme of support based on market price since they do not have any marketable production. 2.25 PROCAMPO does not support the production of specific commodities, but the farmers' income. The program grants payments to producers based on land ownership; it is completely decoupled from prices, production levels or any other requirement of performance, therefore, the effect will be neutral on production and trade. PROCAMPO supports proportionally more low income producers, and supports proportionally less high income producers. B. SECOND AGRICULTURAL ADJUSTMENT LOAN 2.26 The second agricultural sector adjustment loan supported the modernization process. In this context the elimination of trade barriers (export and import permits) was necessary to eliminate distortions in producers decisions and also to reduce government's role and increase participation of the private sector. 2.27 The AGSAL II was signed in June 1991. The first tranche of US$200 million was disbursed in January 1992. The second tranche of US$200 million was expected to be disbursed in August 1992. However, there was a delay caused by the use of agreed prices (precios de concertaci6n) for sorghum, rice and soybeans, created by article 27 modifications, and NAFTA negotiations. Both measures were briefly described above. 2.28 Because of Tamaulipas sorghum commercialization problems in the Autumn-Winter 91/92 agricultural cycle, the government of Mexico gave support to sorghum traders. The support was given only to Tamaulipas sorghum because this state has a lack of storehouses and a deficient transportation system; these problems are worst after the sorghum crop. The government helped in the dialogue between producers and traders, and ASERCA was present in the signature of 250 contracts between Tamaulipas producers and consumers. In these negotiations the average price was 285 new pesos/ton. in production area, and ASERCA gave support to the buyers equal to the difference between the concertation price and the indifference price. The imported sorghum price in consumption area minus financial cost, storehouse cost and transportation is the indifference price.  35 2.29 It is important to mention that in the other states the sorghum price is determined by the market, with a price between 420 and 500 new pesos/ton. These prices reflect a premium for being close to consumption areas. Finally the 15 percent seasonal tariff for sorghum imports protects Spring/Summer crops, not the ones of the Autumn/Winter cycle like Tamaulipas production. 2.30 The government of Mexico gave support to the rice producers in Spring/Summer 1991 cycle in an amount of 60 new pesos/ton. This support was independent of the free market price. When the crop is rice, it's price is lower than the one registered in the international market. However, at the third month the financial cropping costs increase the price above the international one. The 60 new pesos/ton. is required by the industrial consumers for being indifferent between buying rice in Mexico or import it. 2.31 In Spring/Summer 1991 the soybean crop market's price was 810 new pesos/ton. However, there were subsidized imports from U.S.A. that affected the commercialization of Mexican soybean. United States support its soybean exports through the Coap and Soap programs. The government of Mexico gave 70 new pesos/ton to the soybean producers and a support of 10 or 20 new pesos/ton to the soybean industrial buyers. 2.32 It is important to menti( n that the current gov, iiment interventions in concertation process differs from the old ones In th x old concertation proc ss, the government had an active role in price determination, currently it has passive role kind consuni.:rs and producers determine the price. Only in these 3 cases the government has a more active role, with a commercialization support. 2.33 In this modernization process, where the market determines the price and provides clear signals, several actions were taken in accordance with AGSAL II conditions: (a) Elimination of export tax for raw cotton, cotton fiber, and swine for breeding. (b) Elimination of export permit for wheat, sorghum, feedstuffs, soybean, barley, cartamo oil, cotton seed, tobacco, and eggs. (c) Eliminatiorn of SARH production targets. (d) The wheat nominal level of protection was lower than the .ne registered on May 1st 1991 (see Figure 1). (e) The real maize guarantee pric:e in dollars is lower than the one in the Autumn/Winter 1990-91 cycle (see Figure 2). (f) The real price of sugar (for consumption) in dollars is lower than the one registered on January 1st 1991 (see Figure 3). (g) The nominal price of barley was not increased for the period June 1, 1991 to January 31, 1992 above the level of 680 new pesos/ton and was set for the period February 1, 1992 to January 31, 1993 at a level which did not exceed 714 new pesos/ton. The barley price close at 685 new pesos/ton.  36 Figure 1: Wheat - Nominal Protection Level 40% 30% 20% 10% 0% - -10% May-91 Aug-91 Nov-91 Feb-92 May-92 Aug-92 Dec-92 Mar-93 Jun-93 Figure 2: White Maize Price 240 230 -. ........... ......... .. .. ..... ............ .................... ... ... .. .............. ..... ...... ... .......... ....... .. ... ....... ......... ........ .... ... ... ....... ..... . 210 2W 190 ISO 170- Jan93 Apr-91 Jul-91 Oct-91 Jan-92 Apr-92 Jul-92 Sep.92 Dec-92 Mar-93 May-93 Figure 3: Sugar Consumption Price 062 056 0.58 0.56 054 0.52 0.5 0.41 0.46 044 0.42 0A4 Jan-91 Apr.91 Jmi-91 Oct-93 Jan-92 Apr-92 Jul-92 Sep-92 Dec-92 Mar-93 May-93  37 2.34 A study and action plan was prepared in the areas of plant, animal health, and pesticides. The rules and regulations in this action plan were based strictly on quality control, health, epidemiological, phytosanitary and environmental protection grounds. 2.35 The Government designed a new sugar policy, which includes: a new Cane Decree, a reform in the social security system of cane sector, the creation of a sugar spot market (FORMA), closing of unprofitable mills an i debt restructuring of mills. 2.36 The Government of Mexico went beyond what was committed regarding beans. An import quota of 50,000 tons for the U.S. and of 1,500 tons for Canada was agreed under NAFTA. This quota is tariff free and will grow at 3 percent annually for the U.S. and 5 percent for Canada. 3. SEDESOL A. TORTILLA AND MILK PROGRAMS 2.37 One of the commitments was to perform evaluations of the social programs for the provision of tortillas ard milk. Using the established methodology, income anc spending surveys were conducted of households in probability samples of program beneficiaries and control groups living under similar socioeconomic conditions. In the case of the social program to supply milk, follow-up nutri.ion sur-eys were also conducted of the youngest weaned child under six in each household, and the child's measurements were taken to determine nutritional condition. The surveys were designed and conducted by INEGI, and the Salvador Zubiran National Nutrition Institute participated in counseling for the persons surveyed. The Banks prepared the terms of reference for the studies, approved the design of the questionnaires and the size of the proposed sample, and closely monitored the procedures for selecting the company hired to act as external consultant. 2.38 The results were analyzed by Technomic Consultants International and presented in the documents "Evaluaci6n de la Situaci6n Alimentaria en Mexico: Tortil!a-Solidaridad", "Evaluaci6n de la Situaci6n Alimentaria en Mexico: Abasto Social de Leche Fluida", and "Evaluaci6n de la Situaci6n Alimentaria en Mexico: Abasto Social de Leche en Polvo" (tortilla program, fluid milk program, and powdered milk program). 2.39 The evaluation criterion for the tortilla program was its efficiency in transferring income to the target population, which was defined as families earning less than two minimum wages. The study found that about 30 percent of the families in the sample earned more than that amount. From the nutritional viewpoint, the program had a positive effect on calorie intake in households that earned less than two minimum wages. With regard to the errors of inclusion, it should be noted that CONASUPO improved its list of beneficiaries through household visits during the program. 2.40 For the milk program, the criteria of nourishment and nutritional impact were used. In the fluid milk program, it was found that 15.8 percent of the families in the sample earned more than two minimum wages. The program had a positive effect on nutrient intake by vulnerable children under six in families that earned less than two minimum wages. 2.41 The family-income inclusion error in the powdered milk program was just 8.7 percent of the households in the probability sample. Although this study found that the subsidy was better directed to the target population, no significant differences were found in nutrient intake levels or in  38 malnutrition levels between the probability sample and the control group. The results for both groups indicated that calory and protein levels were insufficient, and that infant malnutrition was serious. B. PILOT NUTRITION, FOOD, AND HEALTH PROJECT 2.42 As agreed with the IBRD and the IDB, the pilot nutrition, food, and health project (PNAyS) had the following main objectives: (a) to raise the nutrition and health levels of a vulnerable group composed of children under the age of five, pregnant women, and lactating women; and (b) to evaluate the impact of the project on the members of those groups, and to determine its operational and financial feasibility. 2.43 The PNAyS operated for 10 months (September 1991 to June 1992) in 605 communities that are extremely poor in the large Otomi-Mazahua Indian zone in the State of Mexico, and the large Ixtla zone in the states of Nuevo Le6n, San Luis Potosi, and Tamaulipas. It covered a population of just over 200,000, and provided food aid for 33,000 families. The total number of people in the vulnerable group were 50,900 children under five, 5,700 pregnant women, and 7,700 lactating women. 2.44 The project involved five lines of action: (a) nutritional monitoring; (b) food and nutritional guidance; (c) food production by families for their own consumption; (d) conmmunity participation; and (e) food assistance. 2.45 The project evaluation indicated that the results were generally positive, and in some aspects they exceeded expectations. The main impact was on the nutrition and health of children under five, whose rates of malnutrition and diarrheal and acute respiratory infections abated considerably, particularly in the Otomi-Mazahua zone, where these Indian groups account for a large part of the population. 'The high levels of community participation in improving community sanitation conditions had a favorable impact on human health, by changing sewage and garbage disposal habits. The impact of the project on the cost structure of beneficiary households was only marginal, even though food aid accounted for about 10 percent of one minimum monthly wage. However, the program was an excellent stimulus for commnunity participation in health activities. 2.46 Each of the institutions that participated in the project was found to have sufficient administrative capacity to operate at adequate levels, although in the initial stage some problems stemming from insufficient internal coordination within the institution directly involved in the operation had to be solved. Solutions were also found for certain problems that had apparently not been foreseen in the design. 2.47 While the PNAyS was largely based on the MASSPA model (health care services for an open population) used by the Ministry of Health in some of its programs, the distinctiveness of this project lay in the special stress it placed on nutritional aspects and health actions in the home, supported by basic sanitation in the community. 2.48 It should also be mentioned that the original plan of the PNAyS was overly ambitious with regard to its multiple objectives, particularly in view of the short execution period. It was not possible, for example, to verify its impact on infant mortality or on the height-age variable for children. However, it did enrich the basic criteria for identifying target populations and the provision of food aid, inter alia.  39 2.49 In short, all the stages in the development of the PNAyS, from the design to the evaluation, provided valuable experience that was fully tapped in the programming of future actions to improve the nutrition and health of rural communities living in abject poverty. It should be underlined that the support provided by the consultants and staff of the Banks helped to achieve these good results and provided timely feedback. 4. SECOFI A. COMMENTS ON THE MILK PROGRAM 2.50 Specific corrments on the milk program have as follows: 2.51 With regard to paragraph 74 of this PCR, it would have been desirable to evaluate the surveys on nutrition that were used to support the World Bank's recommendations, so that we could have all been in agreement regarding the diagnosis from the outset. 2.52 With regard to paragraph 77 (a), while there is recognition that the milk program was directed more to urban than rural zones, there is no recognition that one of the problems in rural areas is the lack of participation by the population in food programs. This implies that a problem of identification exists, in which the lack of effectiveness of the program does not necessarily stem from the supply side, as the Bank tries to establish. 2.53 Paragraph 77 (b) says that coverage of the program was very low in urban areas, which is inexact; generalizations of this kind are not valid because there are state programs that provide very high coverage. 2.54 Paragraph 77 (c) mentions that the LICONSA program is not sufficiently targeted, as families above the poverty line are eligible. However, we feel that a study should have been conducted to obtain a better poverty line rather than accepting the one currently being used as an absolute truth. This social program and the tortibono program are based on different eligibility criteria, and it is not clear why they should have to be the same. 2.55 Section (d) mentions that the milk program is not efficient in nutritional terms because the food provision services did not coordinate with the health sector. However, this is a working hypothesis that requires empirical confirmation by comparing it with other intervention methods, which was not done. 2.56 Section (e) states that the milk program does not have an adequate social cost-benefit ratio, but we do not find any evidence in support of that point. 2.57 With regard to paragraph 91, we feel that the milk study has serious shortcomings that the World Bank has failed to consider in its report. LICONSA informed the Bank of those shortcomings timely.  40 B. COMMENTS ON THE TORTILLA SUBSIDY PROGRAM a. Background 2.58 The immediate precursor of the tortilla subsidy program was the tortibonos program in effect from April 1986 to October 1991. The tortibonos program formed part of the support that the federal government channeled to the maize tortilla chain, intended to strengthen the consumer stage. 2.59 The tortibonos program consisted of the sale of vouchers for one and two kilograms of tortillas at below market prices. The vouchers, known as tortibonos, were accepted by affiliated tortilla shops and were subsequently cashed by them for an amount equal to the market price. The subsidy, which was equal to the difference between the market price and the tortibono price, was paid by CONASUPO. 2.60 Tortibonos were distributed for sale to the general public by CONASUPO's retail food sale system (DICONSA), and by certain social and labor organizations who sold them to their members. 2.61 Despite the channels set up for the distribution of tortibonos, the scheme had no instruments to monitor and follow up on the beneficiary population that would permit it to be classified as a targeted subsidy program. b. Tortilla Subsidy Program 2.62 The first list of families eligible for the tortilla subsidy program, which provided them with one kilogram of tortillas a day, free of charge through affiliated establishments, was issued in November 1991. 2.63 When the tortilla subsidy program was set up, mechanisms were established to change the earlier scheme that involved a general subsidy to a targeted one, and to increase efficiency and transparency in the use of fiscal resources. Specifically: 2.64 A national list of beneficiaries selected though non-discretionary mechanisms was established and computerized. 2.65 Inclusion and exclusion criteria were defined, taking into account information on income, spending, housing conditions, and family possessions. The poverty line was defined as families with incomes of two minimum wages or less, calculated for each family using indirect methods. 2.66 A planning system was established based on a mapping frame that identified marginal urban areas, target population, and population served. A geographic information system based on digitized maps has been in use since 1993. 2.67 A personal identification system was instituted, based on cards with bar codes for the beneficiaries and optical readers in the affiliated tortilla shops. In 1994, a new technology began to be introduced based on "intelligent" or "memory" cards. 2.68 An independent specialized agency was set up to pay the subsidy, under the administration of a national credit institution (Banco Nacional de Comercio Interior) which worked on 'he basis ot a fully automated system.  41 c. Program Operating System 2.69 Program operation is based on the inclusion of families through household socioeconomic surveys, and subsequent data capture and evaluation using computer systems. Families that meet the eligibility criteria are given a personalized plastic card containing a unique bar code that identifies them as beneficiaries of the program. 2.70 Optical readers have been installed in the affiliated tortilla shops to read the bar codes. When the beneficiaries present their cards, provided they have not expired. an employee of the establishment gives them one kilogram of tortillas free of charge. 2.71 Subsequently, an employee from each shop takes the optical reader to an exchange center where the bar code information stored in it is downloaded through a computer linkup, and the shop is paid for the transactions at the official price per kilogram of tortillas. 2.72 As of December 1993, the tortilla subsidy program was operating in 202 Mexican cities, had 2.1 million beneficiary families, and 12,975 affiliated i:ortilla shops. 2.73 The program administra ion intends to continuAly monitor and update the list of beneficiaries, using a mechanism that verifies i random sample, who e results will be used to make statistical inferences on the reliabiliLy and accuracy of the list. 1 ie random verification will be carried out each quarter in each of the 202 participating cities. d. Comments on the Shortcomings in the Tortilla Subsidy Program Mentioned in Part I of the PCR (paragraph 77) 2.74 The tortilla subsidy program only covers urban areas. It was designed in this way to complement the subsidized corn flour distribution program carried out in rural areas through DICONSA. In urban areas, the idea was to accommodate the habits of city dwellers who prefer ready-made tortillas. 2.75 As of December 1993, the program covered 2.1 million families, which represented 60 percent of the target families, who number 3.5 million according to estimates based on CONASUPO's mapping study. 2.76 The list of beneficiaries of the tortilla subsidy program underwent s structural change when it was updated in 1992 and 1993. The updating involved verification of the s:ocioeconomic situation of 70 percent of the families registered in the list. Forty percent of those verified failed to meet the eligibility criteria and they were removed from the list and replaced with new beneficiaries. 2.77 A consisient rnetlhodology for the inclusion and exclusion of beneficiary families has been used in the tortilla and milk subsidy progranis since September 1993. At that time, the two institutions established a joint program to verify the whole list of milk subsidy beneficiaries, and to subsequently consolidate in CONASUPO the administration of a single list of beneficiaries of both social programs. This project will be concluded in October 1994 in the cities participating in the tortilla subsidy program, except for the metropolitan area of the Federal District. 2.78 The tortilla subsidy program is designed to transfer income (in kind) to poor families in Mexico's urban area through the provision of a staple food. Under the policies governing the  42 program, the amount of the transfer is the relevant element, and not the nutritional content or contribution to the diet of the beneficiaries. The possible integration of the tortilla subsidy program into a program for nutritional support and the provision of educational and health services would be desirable and advisable from the institution's standpoint. e. Main Lessons Learned from the Tortilla Subsidy Program 2.79 The introduction of a targeted subsidy program to replace the earlier program of general transfers has led to better control over fiscal resources by eliminating the market distortions caused by the general approach. 2.80 Permanent updating of the list of the beneficiaries of the tortilla subsidy program and its coverage have laid the groundwork for the possible liberalization of prices on the final tortilla market without placing the most economically vulnerable families at risk. 2.81 The consolidation of methodologies, inclusion and exclusion criteria, and the merger of the lists of beneficiaries of the tortilla and milk programs will allow for expansion programs that are congruous with institutional criteria, economies of scale in the management of the two programs, and consistency in the policy of targeted subsidies administered by the CONASUPO system. 2.82 The use of leading-edge technologies in the planning (digitized mapping) and execution of the tortilla subsidy program (intelligent cards and bar codes), and of computer systems for managing lists and information have led to greater administrative and operational efficiency. Their use in CONASUPO's social programs has been highly relevant in attaining the desired objectives. 2.83 Comments on Social Programs. Some comments on the social programs are as follows: (a) There are errors in the meaning of the abbreviations: DICONSA, LICONSA, PROCAMPO. (b) Paragraph 45 states that PROCAMPO will be fully implemented in October 1994; the correct date is April 1995. (c) Paragraph 59 states that the monopoly has already been eliminated; the correct information is that a directive has been issued to eliminate it for 1995 supplies. (d) Paragraph 87 states that DICONSA subsidizes maize production; it subsidizes consumption. (e) As a minimum, the tenses used in paragraph 88 are incorrect. At present, maize for tortilla production is sold everywhere in the country at below the price of its imported equivalent delivered to the consumption zone. With PROCAMPO, the price of tortillas would rise on that account alone. (f) Paragraph 101 states that PROCAMPO has a legal basis, which it still does not have. (g) Part 1, Table 3 (page 13) presents crops and their tariffs. However, since their classification within the tariff heading has not been included, it is difficult to determine which product is being referred to.  43 (h) One cause for confusion is oats. Tariffs on one type were completely eliminated on January 1, 1994 (heading 10.04.00.01). The other type of oats is classified under heading 09.10.20.01 and its tariff will be reduced over a ten-year period. (i) According to the table wheat flour will be subject to long-term liberalization. However, the annexes to NAFTA state that tariffs will be reduced over the specific period of ten years. (j) No comment is made on the timetable for changing the tariff on saffron. The annexes to NAFTA state that the tariff was completely removed on January 1, 1994. (k) Advance import permits are another important aspect. None of the cases in the table requires them. In particular, the permit requirement was eliminated for the United States and Canada for maize (grain), beans, wheat, and barley, and remains a requirement only for third countries. No permits are required for the other items. This information was confirmed by SECOFI's Directorate of Import and Export Permits. (l) Otherwise the te. t of Part I of the docu- ient gives an acceptable view of the current status of the trad liberalization prograt! and agricultural policy as it pertains to the agreed and guaranteed prices of staple Lc ops. 2.84 Conuneiits on Part III of the PCR. The information on SECOFI presented in Part III is correct and is a fair description of its actions to free prices and promote greater efficiency and competitiveness in Mexico. 2.85 Conunents on the World Bank's Petformance. It is generally thought that the Bank mission arrived in Mexico with a preconceived idea of what food programs should be like, and did not make an in-depth study of how the existing programs were operating. The project would have produced better results had it taken the approach of solving the problems in existing programs to obtain better coordination, rather than seeking drastic changes for which the organizations are ill prepared. 5. SHCP 2.86 Conunents on paragraph 110 of the PCR. The paragraph is not iccurate when it states that the "objectives and mechanism of the nutrition and food component were poorly understood and managed by the agricultural and finance ministries". Neither of those two ministries was directly responsible for this compornent at any time.   45 PART III Table 1 Page 1 of 1 MEXICO SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN Loan 3357-ME Related Bank Loans DATES LOAN PURPOSE f Approval j_Closing PCR Agricultural Sector Adjustment Program to remove 2/22/88 11/15/90 6/15/93 Adjustment (2918- global consumer subsidies, ME)a liminate public intervention, reduce government parastatals, reduce subsidies to agricultural inputs, and achieve a larger and more efficient public investment program in agriculture. l Trade Policy Programs to support Government's 7/29/86 11/30/89 2/28/92b (2745-ME & 2882- long term objective of gradual & & ME) openning of the economy through 11/12/87 12/31/88 trade reforms as a means of improving domestic efficiency and international competitiveness. l Industrial Sector Support program of reforms to 6/13/89 6/30/91 8/10/93 Policyv (3087-ME) moderanize the industrial sector by removing distortions in goods, service and factor markets, and by providing an appropriate institutional and regulatory environment to enable industrial enterprizes to meet the challenge of a more competitive world economy and thereby to stimulate investment and growth. Fertilizer Sector This hybrid policy and investment 3/15/88 12/31/93 11/16/93 Adjustment (2919- loan was intented to support a five ME) year program to put the fertilizer sector on a sound economic and financial basis. a/ AGSAL II was a continuation of AGSAL. b/ The date refers to Project Performance Audit Report. Source: Project Files.  46 PART III Table 2 Page 1 of 1 MEXICO SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN Loan 3357-ME Project Timetable ITEM PLANNED DATE __ACTUAL DATE Initiating Memorandum 12/11/90 Preparation 03/31/90 Appraisal Mission 01/15/91 Post-Appraisal Updating Mission 03/18/91 Negotiations 05/24/91 05/31/91 Board Approval 06/19/91 Loan Signature 06/25/91 Effectiveness 07/91 20/12/91 Loan Closing 02/28/93 12/31/93 Disbursement - First Tranche 01/22/92 Disbursement - Second Tranche 08/92 12/01/93 Source: Project Files  47 PART III Table 3 Page 1 of I MEXICO SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN Loan 3357-ME Studies STUDIES TITLE/DATE I PURPOSE sugar policy "Estudio Sobre el Sector define the sugar policy, including the Azucarero Mexicano", recommendation of a timetable for achieving March 1993 a target level of protection for sugar not to exceed 20 percent. p-ice and trade SARH, "Diagnostico del design an action plan defining price and policy for edible Frijol en Mexico", trade policy for edible beans. beans November, 1991 pesticide use, animal "Review of Agro- (i) diagnose usage of pesticides; (ii) assess health and plant Chemical, Animal and the legal and institutional framework; (iii) protection Plant Health and streamline procedures that promote Incpection Services in competition between producers and Mexico and Factor of distributors; (iv) establish guidelines on Harmonization with the minimum standards to deal with health, U.S. and Canada", environmental issues, and quality control October, 1992 enforceability; (vi) assess the regulation, organization, and procedures of the system of plant protection and animal health; (vii) elaborate a proposal to modernize the system and streamline its procedures. Source: Project files.  48 PART III Table 4 Page 1 of 4 MEXICO SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN Loan 3357-ME Status of Loan Covenants Section Cove Stat Description Fullfillhent Date -nant us Type LA 1.01(a) M OK Preparation of PCR not later than six months after June 13, 1994 the Closing Date (December 31, 1993). LA 4.01(a) F OK Maintain separate records and separate accounts for l____ expenditures financed with proceeds of the Loan. LA 4.01(b) F OK Independent audit of said records and accounts, and (c) including a separate opinion on statement of expenditures. Report to be submitted to the Bank, not later than 120 days after last withdrawal under each tranche. LA 6.01(a) M OK Execution of contractual arrangements for the transfer by the borrower to the guarantor of the proceeds of the Loan. LA 6.01(b), T OK Completion of a study to identify the regulatory Nov. 4, 1991 Schedule 2, framework and processes under which crop Part B.5 production targets are established, coordinated, and enforced, and elaboration of proposals to eliminate and dismantle such regulatory framework and processes. LA 6.01(c) F OK Issue a decree, satisfactory to the Bank, to modify Diario Oficial (D.O.) current cane payment arrangements. May 31, 1991 LA 6.01(d) T OK Satisfactory elimination of all export permits for: 1. D.O. 9/20/9i 1. Wheat 2. D.O. 9/20/91 2. Sorghum 3. D.O. 2/8/88 and 3. Feedstuffs TIGI 4. Soybean 4. D.O. 9/20/91 5. Barley 5. D.O. 2/8/88 and 6. Copra TIGI 7. Cartamo 6. D.O. 9/20/91 8. Cartamo oil 7. D.O. 9/20/91 9. Cottonseed 8. D.O. 9/20!91 10. Tobacco 9. D.O. 9i20/91 11. Eggs 10. D.O. 9i13/91 11. D.O. 9/20/91  49 PART III Table 4 Page 2 of 4 Section Cove Stat Description Fullfillhnent Date -nant us Type LA 6.01 (e) F OK Satisfactory elimination of all export taxes for: 1. D.O. 8/6/91 1. Raw Cotton 2. D.O. 2/8/88 and 2. Cotton fiber TIGI 3. Swine for Feeding 3. D.O. 2/8/88 and TIGI LA Schedule E OK Bank to be satisfied with the progress achieved by 1 the Guarantor in carrying out the program, and Paras. 4 and macroeconomic policy framework to remain 5 cons:stent with the objectives of the program. GA 3.05 T OK Furm sh to the Bank not lat, r than September 30, 12/19/91 1991, a satisfactory action I Ian to eliminate the system of crop production tLrgets. GA 3.06 T OK Not later than September 30, 1991, eliminate all D.O. 9/20/91 _ import permits for green coffee. GA Schedule TF OK Implement a system which will eliminate D.O. 12/06/93 l CONASUPO's monopoly on imports of powdered Para. I (a) milk, and allocate import permits in a transparent, competitive and efficient basis GA Schedule T OK Eliminate all export permits for fluid milk and D.O. 7/15/92 and I powdered milk D.O. 10/22/93 Para. 1 (b) GA Schedule F OK Allow for prices of tobacco to be freely determiiied I by the market Para. 1 (c) GA Schedule T OK Not to have increased the nominal protection fcir 1 wheat above its level existing in May 1, 1991 Para. 1 (d) __l GA Schedule F OK Flexibilize prices for: Complied I 1. Cookies (for all products) Para. 1 (e) 2. Pasta 3. Edible Oils 4. Cigarettes 5. Eggs 6. Beef 7. Dairy Products  50 PART III Table 4 Page 3 of 4 Section Cove Stat Description Fullflllment Date -nant us Type GA Schedule F OK Not to have increased the guarantee price of maize to New price of 750,000 1 a level over its equivalent real U.S. dollar value for pesos per ton Para. I (f) the Autumn-Winter cycle of 1990/1991 announced in May (i) 1992. GA Schedule F OK Not to have increased the domestic price of refined I sugar above its equivalent real U.S. dollar value in Para. I (f) January 1, 1991 (ii) GA Schedule T OK Based upon the results and recommendations of the I sugar study and on discussions with the Bank Para. I (g) approve a policy for the sugar sector, satisfactory to the Bank. GA Schedule F OK Not to have increased the nominal price of barley for New price of 685,000 1 the period June 1, 1991 to January 31,1992 above pesos per ton Para. I (h) the level of 680,000 pesos per ton, and have set the announced in (i) and (ii) nominal price of barley for the period February 1, Fall/Winter 92/93 1992 to January 31, 1993 at a level not to exceed 714,000 pesos per ton. GA Schedule T OK Maintain policy of allowing prices of pesticides to be I freely determined by the market Para. I (i) GA Schedule T OK Prepare and furnish to the Bank a satisfactory action I plan based upon the results and recommendations of Para. 2 the edible beans market study GA Schedule T OK Prepare and furnish to the Bank an action plan, 2/23/93 1 satisfactory to the Bank, based upon the results and Para. 3 recommendations of the studies on the regulation, organization and procedures of the system of plant protection and animal health GA Schedule T OK Prepare and furnish to the Bank an action plan, D.O. 11/26/93 1 satisfactory to the Bank, based upon the results and Para. 3 recommendations of the study on pesticides GA Schedule F OK Submit to the Congress a proposed 1992 Fiscal Year 12/31/91 I budget for agriculture with a budget level and Para. 4 composition consistent to the macroeconomic policy framework and with an efficient allocation of the government resources at the sectoral level  51 PART III Table 4 Page 4 of 4 Section Cove Stat Description Fullfillnent Date -nant us Type GA Schedule T OK Implement the Production Targets Action Plan in D.O. 09/29/92 1 accordance with its respective objectives, action Para. 5 timetables, and other terms GA Schedule T OK Eliminate restrictions that impede private sector D.O. 07/15/91 1 competition with PRONASE, PRONASE's monopoly Para. 6 of germplasm produced by INIFAP, and limits on plant breeding by the private sector. GA Schedule T OK Submit to the Bank a satisfactory evaluation of the 01/30/93 1 Sdle( ted Food and Nutrition Program in Accordance Para. 7 (a) with the Monitoring and EN duation System Implementation Plan. GA Schedule T OK Prepare and submit to the B; nk a satisfactory general D.O. 12/06/93 1 action plan and individual action plans for each Para. 7 (b) participating governmental department or agency, for the implementation of the Food and Nutrition Program during the period 1993-1994. GA Schedule F OK The Bank to receive audit report for first tranche I release. Para. X  52 PART III Table 5 Page 1 of 1 NIEXICO SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN Loan 3357-ME Use of Bank Resources -- Staff Weeks STAFF INPUT (weeks) FY90 |_FY91 FY92 FY93 3_FY94 TOTAL Through Appraisal 96.0 80.0 Appraisal through Approval 23.0 23.0 Approval through Effectiveness 30.0 56.0 Supervision 35.0 23.9 54.6 13.9 127.4 TOTAL 119.0 70.0 23.9 54.6 13.9 286.4 Source: World Bank MIS.  53 PART III Table 6 Page 1 of 1 MEXICO SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN Loan 3357-ME Use of Bank Resources -- Missions MISSIONS D ATE NUMBER STAFF SPECIALIZATION (M/Y) | OF WEEKS REPRESENTED l ________ __ PERSONS IN FIELD First 'reparation 09/89 10 18 tm, e, ae, ca(4), idb(3) Second Preparation 11/89 10 20 tm, e, ae, ca(1) idb(6) Pre-Appr .isal 03/90 6 10 tm, dc, ca, ce idb(2) Appraisal 01/91 3 3 tm, dc, idb Partial Supervision 03/91 1 1 de Partial Supervision 09/91 1 3 tml Full Supervision 11/91 2 2 tm, e Partial Supervision 06/92 2 3 tm, e Full Supervision 12/92 3 4 tm, e, ae Full Supervision 11/93 3 3 tm, dc, ae The numbers in parentheses indicate the number of representatives from the particular specialization, e = economist; ae = agricultural economist; ca = economist (commodity analyst); tm= task manager; dv = division chief; ce = chief economist; idb = IDB staff. Source: Project Files.  PART III Table 7 Page 1 of 7 MEXICO: AGRICULTURAL SECTOR ADJUSTMENT LOAN II POLICY MATRIX SUGGESTED MEASURES POLICY ISSUE POLICY OBJECTIVE ALREADY ACHIEVED EFFECTIVENESS AND DATED COVENANTS SECOND TRANCHE I. GENERAL CONDITIONS A. Macro-economic Framework A. Macro-economic Framework Provision to the Bank of evidence that the Provision to the Bank of evidence that the mnacroeconomic policy framework is consistent macroeconomic policy framework is consistent with the objectives of the program. with the objectives of the program. B. Maintain Progress B. Maintaining Progress Maintain policy reforms inplemented up to Maintain policy reforms implemented up to this moment artd documented under this Board presentation and documented under this project. project. H. AGRICULTURAL GROWTH PRODUCTION POLICY AND PRODUCTIVITY Problem: Low rate of growth, 1. Reduce direct policy interventions in inefficien resource use and output and input markets. tft stagnating productivity. 2. Improve allocation of public expendirure in agriculture. 3. Reduce government intervention in farmner's productiondecisions.  PARMr Il Table 7 Page 2 of 7 MEXICO: AGRICULTURAL SECTOR ADJUSTMENT LOAN II POLICY MATRIX SUGGESTED MEASURES POLICY ISSUE POLICY OBJECTIVE ALREADY ACHIEVED _ ___ EFFECTIVENESS AND DATED COVENANTS SECOND TRANCHE A. Price, trade policy and market reaulations (output and itiputs) 1. Distort trade and resource 1. Output markets I. outut arke 1. Output Markes 1. Output Market allocaton in production and a. Price and trade policy: consumption, a Liberalization of consumer and a. Price Dated Covenant: (I) implement action plan agreed upon; that is: producer prices of agricultural (a) implement a system which will eliminate 2. Large global subsidies to commodities and their industnal (I) The guarantee price system has been (I) Eliminate import permits for CONASUPO's monopoly on impons of inputs and producer prices derivatives, abolished for: wheat, sorghum, soybean, rice, green coffee no later than powder milk, and allocate import pernits in a achieving nodest results, barley, cotton seed, cartamo, sunflower, copra September 30, 1991; transparent, competitive and efficient basis; b. Reduction of general pnce subsidies. and sesame. Maize and some qualities of (b) eliminate all export permits for fluid milk, beans still remain in the guarantee price (2) Issue the decree that modifies and powdered milk; c. Reduction of regulatory market bamers system. present cane payment (c) allow for prices of tobacco to be freely and promotion of private sector arrangements. determined by the market; competition (2) Level of domestic producer prices for (d) not increase the nominal protection for green coffee and cocoa deteunined by wheat above its level existing on May 1, 1991; t.t LA international prices. (e) flexibilize prices for cookies, pasta, edible oils, cigarettes, eggs, beef and dairy products; (3) Prices of roasted coffee, soluble coffee (D nnt increase the guarantee price of maize to flexibilized. a level over its equivalent real US dollar value for she Autumn-Winter cycle of 1990/1991; (4) Pnces of paddy rice, sorghum, and (g) not increase the domestic price of sugar soybeans freely determined by the market. above its equivalent real US dollar value on lanuary 1, 1991; (5) Differential domestic price of sugar (h) not increase the nominal price of barley for according to user eliminated; one price the period June 1, 1991 to January 31, 1992 established for the same quality, above the level of 680,000 pesos per ton, and set the nominal price of barley for the period (6) Terms of reference agreed for study to Feb 1, 1992 to January 31, 1993 at a level not design a system which will eliminate to exceed 714,000 pesos per ton; CONASUPO's monopoly on imports of (i) discuss with the Bank the result of the powder milk and will allocate import permits sugar study and based on such discussion in a transparent, competitive and efficient approve a policy for she sugar sector; and basis. () agree on action plan that follows from the edible beans markct study. (7) Terms of reference agreed foe axdy to define price and trade policy for edible beans. (8) Terms of reference agreed to for study to define sugar policy.  PART In Table 7 Page 3 of 7 MEXICO: AGRICULTURAL SECTOR ADJUSTMENT LOAN n POLICY MATRIX SUGGESIED MEASURES POUCY ISSUE POLICY OIUECTIVE ALREADY ACHIEVED EFFECTrVEN AND DATED COVENANTS SECOND TRANCHE b. Trade: Effectiveness: (t) Export permits for coffee, nee, sesame, (I) Eliminste export tax for raw sunflower, and vegetable oil -except cartamo cotton, cotton fiber, and swine for and couonseed oil- lifted. breeding. (2) Export permits for beef and catde on the (2) Elimninate export pennit for hoof lifted, wheat sorghum., feedstuffs. soybean, barley, copra, cartamo, (3) A decree on catte export that determines a cartamo oil, cottonseed, tobacco gradual reduction of tariff on exports of male and eggs. animals, and elimination of such a tariff by September 1992, issued. (4) Restrictive export practices for fruits and vegetables eliminated. LA (5) Import permits for sugar eliminated. Protection granted through a variable levy system. (6) Import permits for sorghum, copra, ojlseeds and oilseeds oils lifted. c. Market regulations Restictions that prevented entry into the corn- tonilla industry abolished. 2. Input rmarkets: 2. Input markets: 2. Input markets: a. Liberalize prices and trade and a. Price and trade policy a. Price and trade Policy: eliminate regulatiois on the feedstuffs, seed, rmachinery and pesticide markets. (I) Import licenses for new agncultural (I) For pesticides: maintain policy of allowing machinery abolished. pfices of pesticides to be freely deternined by b. Design and enforce a regulatory system the market; for pesticide, plant protection and animal (2) Tractor prices freely determined by the health based strictly on quality control, market. health, phytosanitary, epideniiological and environmental protection grounds.  PART IH Table 7 I'age I of 7 MEXICO: AGRICULTURAL SECTOR ADJUSTMENT LOAN 11 POLICY MATRIX SUGGESTED MF:ASURES POLICY ISSUE POLICY OBJECTIVE ALREADY ACHIEVED EFFECTIVENESS ANDl DATED COVENANTS SECOND TRANCHE b. Market Regulations b. Market regulations: (I) For pesticides: agreement reached on terms (t) Agree on action plans to implement of reference for a study to diagnose current reconunendations of the studies on: (a) anirnal use, assess present legal and institutional health; (b) plant protection; and (c) quality framnework and streamline procedures to: (a) control of pesticides. Rules and regulafions promote competition between producers and would be based strictly on quality control, distributors; (b) establish guidelines on health, epidemiological, phytosanitary, and minimum standars to deal with health and environmnental protection grounds. environmental issues; and (c) enforce quality control. (2) For seeds: eliminate restrictions that impede private sector competition to (2) For animal health and plant protection: PRONASE, PRONASE's monopoly of agreement reached on terms of reference for a germplasm produced by INIFAP and limits on study to: (a) assess the regulation, organizauon plant breeding by the private sector and procedures of the system of plant protection and nimal health; (bj ciauauwi a 'n proposal to modernize the system and streamline its procedures. (3) Government has initiated the process of submitting to Congress a draft seed law that will elininate: restricbons that inpede private sector competition with PRONASE, PRONASE's monopoly of germplasm produced by !NIFAP, and limits on plant breeding by the private sector.  PART IlI Table 7 Page 5 of 7 MEXCO: AGRICULTURAL SECTOR ADJUSTMENT LOAN 11 POLICY MATRIX SUGGESTED NMEASURES POLICY ISSE POLICY OBJECTIVE ALREADY ACHIEVED EFFECTIVENESS AND DATED COVENANTS SECOND TRANCHE B. Parasttais controUing B. Parmstatals B. Parastatals production and marketing I. Dismande parastatal apparatus for I. Seventcen parastatals of SARH liquidated in 1. PmusuaLs gerued argc MAkCt intervcDtion as price and trade 1989 and 1990 (excludes sugar miDs). losscs and iacreased deficit of policy is mtionalized. public sector. 2. Distribution monopoly and the acquisition 2. Reduce waste in public sector right of purchase of sugar from mills taken 2. Introduced lare inefficiencies expenditures through agricultural away fronm AZUCAR. into markets ingervened by parastatals. parsatals. 3. Elimrinarion of the 50% tax precluding pnvate sector transactions in sugar and cocoa. 3. Precluded competition and discouraged private sector 4. Full divestiture of ttc 50 government-owned investinent. sugar mills. 5. Withdrawal of the parastatals for coffee O ) (INMECAFE). tobacco (TABAMEX). and cocoa (CONADECA) from marketing coffeec tobacco and cocoa. 6. All plants of ALBAMEX but onc sold' liquidation of company already audhorized. 7. Decision to resmscirec CONASUPO atud its affilaites; most important actions are: a. Divestiture of ICONSA; b. Process of ANDSA's divestiture has started; c. BORUCONSA's storage facilities open for cumuonrcial use by the social and private sectors; d. All 569 urban supermarkets closed; and c. Improved coverage of margirna areas by DICCONSA's rural stores.  PART III Table 7 Page 6 of 7 MEXICO: AGRICULTURAL SECTOR ADJUSTMENT LOAN II POLICY MATRIX SUGGESTED MEASURES POLICY ISSUE POLICY OBJECTIVE ALREADY ACHIEVED EFFlECTIVENESS AND DATED COVENANTS SECOND TRANCHE C. Public expenditure C. Public expenditure C. Public expenditure C. Public expenditure 1. Large public expenditure to 1. Improve allocation and efficiency of Government has provided satisfactory evidence Provision of satisfactory evidence that the subsidize agricultural producer public expenditure in agriculture. that the level and composition of budgeter level and composition of budgeted agricultural prices and inputs has been agncultural expenditure presented to Congress expenditure presented to Congress in the 1992 unproductive. 2. Increase public investment in in the 1991 budget are consistent with the budget is consistent with the macroeconomic infrastructure, research and extension. macroeconomic program and with an efficient program and with an efficient allocation of 2. Low level of public investtnent allocation of Government resources at the governnent resources at the sector level. expenditure in agriculture sector level, for the fiscal year 1991. particularly in infrastructure, research and extension leading to deterioration of infrastructure and the sector's productive capacity. D. SARH's production targets D. SARH's production targets D. SARH's Production targets D. SARH's Production targets D. SARH's Production targets SARH and other agencies set Dismantle system. agreement on terms of reference for study to Effectiveness Implement actions agreed upon to eliminate production goals guided by sonie identify the process, legislation and regulation and dismantle processes, and regulations that self-sufficiency criteria unrelated that gives SARH and other Government 1. Present study which identifies enforce the systeni of crop production targets. to market conditions. This entities the power to establish, coordinate and processes, legislation and system is a source of distortions enforce production targets. regulations that give SARH and in resource allocation, encourages other Government entities the resource waste at the farm level power to establish, coordinate and and drains initiative and enforce crop production targets.. entrepreneurial ability from farmers. Dated Covenant: 2. Based on the study, present to the Bank, not later than September 30, 1991, a satisfactory plan of action to eliminate and dismantle processes, and regulations that enforce the system of crop production targets.  PART III Table 7 Page 7 of 7 MEXICO: AGRICULTURAL SECTOR ADJUSTMENT LOAN II POLICY MATRIX SUGGESTED MEASURES POLICY ISSUE POLICY OBJECTIVE ALREADY ACHIEVED EFFECTIVENESS AND DATED COVENANTS SECOND TRANCHE III. FOOD CONSUIUPTION AND NUTRITION POLICY I. Agricultural price and 1. Reduce incidence of malnutrition in 1. Increase of targeted and semitargeted I - Present evaluation of food and nutrition marketing policy were Mexico in the medium-term. subsidies (torfibonos and milk programs, and programs as agreed to in the implementation subordinated to consumer price DICCONSA stores) from 0.13% of GDP in plan for MES. policy. 2. Improve effectiveness of nutrition and 1989 to 0.26% of GDP in 1990. primary health programs by fully 2. Agree with the Bank on general and 2. Global consumer subsidies exploiting complementarily. 2. Agreement on central guidelines for a agencies action plans for 1993-1994- resulted in a high fiscal cost and mediuiu-term food and nutrition program. waste of resources. 3. Eliminate consumer price control as the main instrument for implementing food 3. Definition of the target population for the 3. Because of substantial leakages consumprion policy. food and nutrition programs. global subsidies were not cost- effective in attacking poverty and 4. Free agricultural production and trade 4. Health system designated as executng agent malnutrition. policy from its subordination to consumer of the nutrition and health program. price policy. Ox 4. Targeted consumption 5. SPP designated as the agency in charge of: 0 programs are mainly urban while (a) preparing central guidelines for the medium most of the poorest live in rural term program; and (b) coordinating the: (i) areas. budget allocation for the food and nutrition programs to the executing agencies; and (ii) monitoring, evaluation and research of the food and nutrition progranns. 6. Agreement reached on: (a) terms of reference for the design of a system to evaluate and monitor food and nutrition programs (MES); and (b) a plan of action to implement such a system. 7. Agreement on a process for using the results of tbe monitoring and evaluation system (MES) to adpist the guidelines and pmgrams according to dhe lessons learned from expertence. 8. Implementation of agreed food, nutrition and health pilot project has been started. M:\MX\AGSAL2NPCR\PARTHI.TBL   I M Ai If LU' VepI'tNC 15b ? e r E, c - t c, ! . 14 5v i yp e : rC '