Statement by Jannes Hutagalung at the meeting of June 8, 1999

lntemational Bank for Reconstruction and Development International Development Association 87346 International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS99-185 June 7, 1999 05:21:44 PM Statement by Jannes Hutagalung Date ofMeeting: June 8, 1999 Mexico: Country Assistance Strategy We welcome the opportunity of discussing this CAS for Mexico and would like to compliment staff for preparing a candid and comprehensive document. The report describes well the substance of the development challenges faced by Mexico as well as strategies proposed to cope with them. The sections on the lessons learned are particularly informative and useful especially for countries that share similar experiences and exhibit similar characteristics as Mexico. We also find this proposed CAS very appropriate in dealing with the fundamental problems experienced by Mexico and hence, would like to express our support for it. The past few years have shown that Mexico has emerged quite well from the 1995 banking crisis. Its GDP growth has recovered reaching 8% in 1998 while many other developing countries have suffered a slump in their economic growth due to the global financial crisis. The Government of Mexico is to be commended for taking decisive measures in dealing with the Tequila crisis particularly in short-term macroeconomic management. Despite this achievement, however, Mexico still faces a number of challenging problems, among others, macroeconomic imbalances, fragility of the banking sector and worsening inequality. Coping with these problems has been made more complicated with the deterioration and uncertainties of the global economy. The stability of Mexico's domestic macroeconomic framework, therefore, still remains subject to external pressures. In this regard, we would like staff to elaborate on the steps taken by the Mexican authorities in coming out with policy options to cushion and preempt the adverse effects of a possible renewed turbulence in the international financial markets. The proposed WBG assistance strategy, which combines well the IBRD and IFC programs, is fully aligned with the government's own development agenda which places social protection, viable macroeconomic framework and financial sector, as well as private sector 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 \Vorld B:mk authorization. development, at the center stage of the development priorities. If rightly implemented, we believe that it should contribute significantly to address the country's fundamental challenges. The core of the strategy, which consists of taking economic adjustment measures while protecting the poor is very appropriate and has proven effective in enabling the government to implement the reform with generally satisfactory results. We concur with the proposed CAS that in order to achieve sustainable development, the key priority should be given to the resolution of the problems of the financial sector. In this regard, the availability of a suitable program for banking industry restructuring is crucial to provide the much needed stability in the domestic financial system. Although such a program has been passed by Congress, we are not sure as to the progress of its implementation. We would appreciate comments from the staff in this respect, especially after noting that progress has not been encouraging. We also note from past experience that the sexenio problem in Mexico is a real problem and to achieve a viable macroeconomic environment, the importance of maintaining prudent fiscal and monetary policies, therefore, cannot be overemphasized. Similarly, preserving social sustainability is critical during the difficult reform period. In this context, giving priority to education, health and other basic necessities for the poor is a commendable effort. Due to the substantial reform agenda, the concern of disparity in the implementation capacity of the government, both at state and local level, should be seriously addressed. In this regard, the Bank's plan to assist in the enhancement of the country's institutional capacity should bring positive results. We commend the government's effort to increase public accountability by improving the judicial and tax administration and enhancing transparency in public procurement. The acceleration of the decentralization drive should strengthen the governance mechanism further. However, decentralization without being accompanied by a matching transfer of accountability or an efficient structure would not be very effective. We would appreciate staff explanation oq what steps are being taken to address this issue. The increasing polarization in the structure of the Mexican private sector is not a healthy development. The uneven growth between internationally competitive conglomerates and inward-oriented SMEs would make the government's measure to improve equity more problematic. We are glad to note that more serious efforts will be taken to promote the competitiveness of the SMEs as stated in the government's forthcoming agenda of policy impediments to PSD. In this case, the World Bank Group's assistance to enhance the growth and competitiveness of private sector in the form of policy advice by IBRD and in the form of credit line lending and equity funds by IFC, we hope, would achieve significant development impact. Regarding the strategy's implementation risks, we feel that though still manageable, they need to be watched and monitored closely. We, therefore, support the proposed CAS and wish the government of Mexico success in its implementation.