Mexico - Country assistance strategy

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 19289-MX MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE UNITED MEXICAN STATES May 13, 1999 Mexico Country Management Unit Latin America and the Caribbean Region 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 withoui World Bank authorization.  MEXICO-FISCAL YEAR January 1-December 31 CURRENCY EQUIVALENTS (as of 15 April 1999) Cutrency Unit = Peso 9.53 Pesos = US$1 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS 13ANCOMEXT Banco Nacional de Comercio Exterior, S.N.C. ISSSTE Instituto de Seguridad y Servicios Sociales de BANOBRAS Banco Nacional de Obras y Servicios Publicos, los Trabajadores del Estado S.N.C. LCR Latin America and Caribbean Region CAS Country Assistance Strategy LIL Learning and Inovation Loan CFE Comisi6n Federal de Electricidad NAFIN Nacional Financiera, S.N.C. CMU Country Management Unit NAFTA North American Free Trade Agreement CNBV Comisi6n Nacional Bancaria y de Valores NCO Nongovernmental organization CONACYT Consejo Nacional de Ciencia y Tecnologia OCDE Organizaci6n para la Cooperaci6n y Desarrollo CONALEP Colegio Nacional de Educaci6n Profesional Econ6micos T'cnica OECF Overseas Economic Cooperation Fund CONASUPO Compafiia Nacional de Subsistencias Populares OED Operations Evaluation Department CSDL Contractual Savings Development Loan PAN National Action Party DIF Sistema Nactional para el Desarrollo Integral PRD Party, of the Democratic Revolution de la Fanilia PRI Institutional Revolutionary Party DRD Decentralization and Regional Development PROCAMPO Programa de Apoyos Directos al Campo ENIGH Encuesta Nacional de Ingreso y Gasto de los PROCEDE Programa de Certificaci6n de Derechos Hajores Ejidales y Titulaci6n de Solares Urbanos EXIM-J Export-Import Bank of Japan PRONAFIDE Programa Nacional de Financiamniento del FOBAPROA Fondo Bancario de Protecci6n al Ahorro Desarrollo FONHAPO Fideicomiso Fondo Nacional de Habitaciones PSD Private Sector Development Populares SAGAR Secretaria de Agricultura, Ganaderia y FOVI Fondo de Operaci6n y Financiamniento Desarrollo Rural Bancario a la Vivienda SECODAM Secretaria de Contraloria y Desarrollo FOVISSSTE Fondo de la Vivienda del Instituto de Administrativo Seguridad y Servicios Sociales de los SECOFI Secretaria de Comercio y Fomento Industrial Trabajadores del Estado SME Small- and medium-size enterprise GATT General Agreement on Tariffs and Trade SRA Secretaria de la Reformna Agraria GDP Gross Domestic Product SSA Secretaria de Salud GEF Global Environment Facility STPS Secretaria del Trabajo y Previsi6n Social 1DB Inter-American Development Bank UNDP United Nations Development Programme IFC International Finance Corporation UNEP United Nations Environment Programme IMSS Instituto Mexicano del Seguro Social WBG World Bank Group INFONAVIT Instituto del Fondo Nacional de la Vivienda para los Trabajadores 1BRD IFC Vice President Shahid Javed Burki Executive Vice President: Peter Woicke Chief Economist: Guillermo Perry Vice President, Investment Operations: Jemal-ud-din Kassum Country Director: Olivier Lafourcade Director, LAC: Karl Voltaire Lead Economist/Manager: Marcelo Giugale Manager: Bernard Sheahan Task Manager: Marcelo Giugale Task Manager: Toshiya Masuoka/Kalim Shah Team Production Support: Michael Geller  MEXICO FOR OFFICIAL USE ONLY COUNTRY ASSISTANCE STRATEGY TABLE OF CONTENTS ExECUTIVE SuMMARY ......................................................i I. INTrRODUCTION AND RATIONALE . .....................................................1 II. POLITICAL AND EcoNoMIc FRAMEWORK FOR THE WBG's ASSISTANCE ..................... 2 A. The Political Context-Recent Developments and Prospects ...............................2 B. Recent Economic Developments ......................................................3 III. MExico's DEVELOPMNT CHALLENGE: SOCIALLY SUSTAINABLE ADJUSTMENT AND GROWTH ......................................................5 A. Social Sustainability ..................................................,.5 B. Removing Obstacles to Sustainable Growth and Maintaining Macroeconomic Stability in the Framework of Globalization ...............................8 C. More Effective Public Governance . ................................................. 13 IV. THE WORLD BANK GROUP'S ASSISTANCE STRATEGY ............................................... 15 A. The Lessons of the Recent CAS .............. ................................... 15 B. The Lessons of IBRD Portfolio Management ................................................. 16 C. The Lessons of the Decentralization of the IBRD Mexico Country Management Unit (CM1) ................................................. 18 D. The Lessons from IFC's Implementation Experiences ........................................ 18 E. The Overarching Objective, Selectivity, and Prioritization Principles Applied in this CAS ................................................. 19 F. The Programming Scenario of this CAS ................................................. 20 G. Sectoral Support Strategies and Tools to Deliver this CAS ................................ 21 V. RiSKS IN THE PROPOSED CAS ................................................. 34 VI. COORDINATION WITH OTHER ORGANIZATIONS AND PARTICIPATION IN THIS CAS ... 35 VII. CoNcLuDiNGREMARKs ... 36 TEXT TABLEs Table 1. Mexico-CAS Matrix FY1999-01 ... 23-28 Table 2. Mexico-World Bank Group Financial Instruments-FY 1999-2001 ... 29-30 TEXT BOXES Box 1. Mexico's Recovery from the 1995 Crisis ....4 Box 2. Poverty and Inequality in Mexico ....6 Box 3. What Went Well and Less Well During the 1996 CAS Cycle-Some Lessons of Experience ... 16 Box 4. Linkages in IBRD-IFC Assistance to Mexico ... 19 Box 5. Role and Activities of the Inter-American Development Bank (1DB) ... 35 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.  ANNEXES A2. Mexico at a Glance .................................................. 37, 38 B2. Selected Portfolio Performance Indicators .................................................. 39 B3. Mexico-Bank Group Program Summary .................................................. 40 B3. Bank Group Fact Sheet-IFC and MIGA Program ............................................ 41 B4. Summary of Nonlending Services .................................................. 42 B5. Mexico-Poverty and Social Development Indicators ....................................... 43 B6. Mexico-Key Economic Indicators ................................................... 44-46 B7. Mexico-Key Exposure Indicators .................................................. 47 B8. Status of Bank Group Operations in Mexico Operations Portfolio ........... .......... 48 B1O. Private Sector Strategy .................................................. 49-62 B1 1. Statement of IFC's Held and Disbursed Portfolio .......................................... 63, 64 MAP  EXECUTIVE SUMMARY i. The consolidation of Mexico's democratic process will make the period leading to the next presidential election increasingly uncertain on the political front, with natural implications for the economic and social life of the country. This calls for a reordering of emphasis both in the authorities' development agenda and in the World Bank Group's (WBG) Country Assistance Strategy (CAS). The core challenge is to articulate a socially sustainable macroeconomic adjustment to the deteriorated external conditions, while protecting and, where possible, advancing sectoral reform agendas that could foster long-term growth. ii. The country counts on a substantial reform platform to meet that challenge. In recent years, progress has been achieved in many fronts (agriculture, short-term macroeconomic management, education). In other areas, the record is mixed (fiscal structure, finance, energy). In all sectors, and in spite of the political calendar (presidential elections are scheduled for mid-2000), one key factor favors sound policymaking-clear country awareness of remaining structural problems. iii. Thus, this CAS, which, as its predecessor, has been jointly prepared by the IBRD and IFC, seeks to support the Mexican government's efforts in achieving three overall objectives: social improvement; removing obstacles to sustainable growth and maintaining macroeconomic stability in the context of globalization; and enhancing public governance. It envisages a combination of multi-sectoral analytical work (some of which will build a knowledge base for the next presidential administration) and financial operations (with TBRD's projected commitments reaching some US$5.2 billion through FY01, a third of which will be in the form of adjustment loans). iv. Key among those operations is lending for social development (poverty reduction, basic education, basic health care, rural development in marginal areas, and so on). Efforts to support a faster, more efficient, more sustainable growth path will take the form of policy- based lending, investments, and analysis in the fiscal, financial, infrastructure, and agriculture sectors, coupled with extensive use of GEF-led activities for the protection of the environment. Finally, more effective public governance will continue to be fostered through lending and analysis in regards to decentralization (a rapidly accelerating process in Mexico), and through new support initiatives in the areas of tax administration, commercial dispute resolution, and governance mechanisms. v. The proposed WBG program is kept flexible, however, with the institution's commitment to specific operations aligned with the likelihood of implementation of necessary policy reforms. This responds to lessons learned during the current and past CAS cycles in terms of country dialogue, portfolio management, decentralization of IBRD management, and IFC experience. Several important risks are implicit in this CAS (fiscal imbalances in the period leading to the presidential elections, macroeconomic and financial instability, unexpected deterioration in social conditions, lack of sufficient funding). Suitable risk- mitigating factors as well as encouraging general policy positions are fortunately in place. i  vi. This CAS was drafted after extensive dialogue with and participation by the government and selective consultations with representatives of NGOs, the business community, unions, the banking industry, politicians, religious groups, academia, independent think-tanks, and the media (a special Consultative Country Meeting-Reuni6n de Consulta- was conveyed on April 15, 1999, to receive comments from those representatives). vii. The following issues are suggested for Board discussion: * Are the proposed assistance objectives and priorities appropriate given Mexico's forthcoming economic and political environments? * Is the mix of financial and nonfinancial services planned in the CAS adequate, and does it reflect and exploit the WBG (EBRD and IFFC) capabilities and comparative advantages? * Are the strategy's implementation risks acceptable? - Is the CAS sufficiently flexible to be able to respond to country circumstances and risks? ii  MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE UNITED MEXICAN STATES I. INTRODUCTION AND RATIONALE 1. The World Bank Group's (WBG) previous Country Assistance Strategy (CAS) for Mexico was discussed by the Board of Executive Directors on November 25, 1996 (Report No. 16135-ME), and its Progress Report was considered on March 6, 1998 (R98-49). The CAS objectives of sustainable growth, social development, and state modernization have proved fitting. A body of critical analytical work and an average US$1.1 billion annually in new lending commitments of improving implementation quality have been delivered under that CAS. More important, an enriched partnership has been forged with the Mexican government. 2. At present, however, a combination of sweeping domestic factors and a fundamentally altered external financial environment call for a reordering of emphasis, both in the authorities' development agenda and in the WBG's efforts to assist them. On the domestic front, the opening of the political spectrum, the rapid (and accelerating) decentralization process, the end of the presidential sexenio, persistent financial sector problems, security issues, and environmental degradation, among other matters, place policymaking in a more tightly constraining framework. Externally, the simultaneous collapse in international oil prices and turmoil in global financial markets have had, and are likely to continue to have, a major negative impact on Mexico's economy, especially on the living standards of the poor. 3. Because of that framework, and within it, the country is now faced with an immediate challenge-to articulate a socially sustainable macroeconomic adjustment to the deteriorated external conditions, while protecting and, where possible, advancing sectoral reform agendas that couldfoster long-term growth. This challenge will likely dominate public policymaking in Mexico over the next three years, and will be the overarching objective of the WBG's continuing assistance through FY2001. 4. This document presents a new CAS for Mexico. The proposed strategy, which, like its predecessor, integrates IBRD and IFC programs into one unified framework, is aligned with the government's own development programs and is dominated by three core themes-social sustainability, removing obstacles to sustainable growth and maintenance of macroeconomic stability in the context of globalization, and effective public governance. 5. At the outset, it is important to note that presidential elections will take place in Mexico in the year 2000, and that the WBG assistance strategy will need to be reassessed following those elections. 1  II. POLITICAL AND ECONOMIC FRAMEWORK FOR THE WBG'S ASSISTANCE a) The Political Context-Recent Developments and Prospects 6. Over the past years, the political situation in Mexico has become more complex. The new political environment was clearly shaped by the congressional elections of July 1997, which saw, for the first time in seven decades, opposition parties holding a majority in the lower house. This change, symbolic of an accelerating opening of the political process in the country, and elsewhere in the world, is profoundly altering the balance of power in the legislative branch and between the legislative and executive branches. Since the parliamentary elections of 1997, a number of partial elections (state governors and municipalities) have demonstrated a strengthening of the opposition parties, yet the party in power (the PRI) seems to have rebounded somewhat in the latest elections. This recent phenomenon may be partly attributable to a judicious selection of PRI candidates, perhaps the result of the opening of the democratic process within the party itself. 7. The political life of the country is already strongly influenced by the prospect of the presidential election scheduled for mid-2000. The end-of-sexenio syndrome, Mexico's political transition at the end of each president's six-year mandate, is already evident, and is expected to accelerate as the election approaches. For all practical purposes, the race for the successor to President Zedillo has already started, and several candidates from within each party are running for their respective party nominations. These developments are dominating the current political environment in Mexico, and there is an unusual amount of uncertainty as to the possible outcome, unlike the previous election, where the PRI candidate was generally expected to win. 8. This uncertainty on the political front is further complicated by the uncertainties of the relationships between the executive and the legislative branches dating from the 1997 parliamentary elections. Neither side is yet accustomed to the new paradigm. Several reform packages (for example, in the financial sector) have been delayed in Congress by the failure to reach a compromise (albeit, constitutional requirements have recently driven a last-minute compromise agreement on the financial sector and the 1999 budget between the opposition-led Congress and the administration). Working out these new relationships will necessarily take time, and during that time, the policy agenda is likely to move at a reduced pace. Combined with the political calendar leading to the 2000 election, the relationships between Congress and the administration may imply little progress on the fundamental policy agenda until at least a few months into the new administration-that is, by the beginning of 2001. 9. Concomitant to the general opening of the country on all fronts, and as a result of the political dynamics of the last two years, the process of decentralization, initiated only timidly and piecemeal some years ago on a sectoral basis (for example, in education), has taken on increasing momentum. This process is still under consideration and partly driven by political negotiations between Congress and the administration (this was evident in the last-minute arrangements reached with opposition parties during the 1998 budget discussions, a process repeated at the end of 1998 for the 1999 budget). The process of decentralization, however, is now clearly irreversible, and it is creating an entirely new set of power relationships among the federal, state, and municipal levels. The full implications of this new situation are yet to unfold, but they will probably lead to fundamental changes in the way the country operates for the next two decades. 2  10. The pressures for change in Mexico have created new expectations in the people and opened considerable opportunities for progress in the political, social, and economic development of the country. They have also brought forward issues of governance, as well as greater attention to social problems and to the specific demands of the poorest sectors of the population. 11. For the immediate future-leading to the presidential elections-the most important and urgent element has been the recently concluded discussion of the 1999 budget, which has seen strong opposition by the two main opposition parties (PAN and PRD) to the administration's proposal. Predictably, political negotiations and compromises have led to a substantially modified budget, largely influenced by political expediency. 12. In summary, the consolidation of the democratic process will make the period leading to the next presidential election increasingly uncertain on the political front, with natural implications for the economic and social life of the country. It is against this background that the proposed CAS is being formulated and will be implemented. b) Recent Economic Developments 13. Following an encouraging recovery from its 1995 banking crisis (see box 1), Mexico's economy has been negatively affected by the simultaneous collapse in international oil prices and turmoil in global financial markets. Through a combination of conservative fiscal policy, monetary tightening, and a flexible exchange rate regime, however, the country has fared relatively well thus far compared with the rest of Latin America. Mexico responded to the global crisis with three consecutive fiscal adjustments during 1998 (jointly worth about 1 percent of GDP) and, more recently, with a stern austerity budget for 1999 (see below). Monetary policy was tightened on several occasions during the year (at the temporary cost of annual interest rates on government paper of over 45 percent). Although the exchange rate depreciated substantially (by about one-fifth since the beginning of 1998) and inflation for the whole of 1998 may turn out to be higher than previously anticipated (18.6 percent p.a.), output still grew by 4.8 percent over the same year, with a balance of payments current account deficit of 3.8 percent of GDP, acceptable figures given current international standards. Exchange rate flexibility achieved the important goal of preventing a depletion of foreign exchange reserves and dampening contagion- driven losses of confidence. As will be explained later, this success in short-term macroeconornic management remains to be matched by a solution to more fundamental, structural issues: i) macro imbalances, notably the need to increase non-oil fiscal revenues (and reduce the ensuing fiscal dependency on oil reserves), strengthen the capital adequacy of the banking industry, and avoid recurrent current account financing risks; and ii) the need to have a broader cross-section of the private sector participating in the process of modernization and growth. 14. Critical to the World Bank's mandate, the Mexican government has, up to now, made particular efforts in combining fiscal austerity with protection of the so-called "social expenditure"' (now largely decentralized at the state level). Since 1995, this expenditure has increased as a percentage of GDP (and stands at about 9 percent), in real terms (by a cumulative 27 percent), and as a proportion of total programmable expenditures (from 53 to 61 percent). 1. Education, health, social security, labor, rural and urban development, and basic food supply and social assistance. 3  ... .... .. . ..... . ........ ..~~~-~ Eb~~~~ a) 29 ~ ~ ~ ~ ~ ~ 0~~~~~~~~~~~~~~T 401 ~~~~~~~~~~~~~ ~ ~ ~ ~ ~ ~~~~~I61 0~~~~~~~~~~~ .......... o 007 ,6 -pu ~~~~ ~~~~~~~O~~~~~~0 3 K.~(sojdE6) ozuoli I-~~~~~~~~~~~~~~~~... .... . .... .... . ...... ...~.. .. . . ......p. OP 00  This socially sustainable macroeconomic adjustment is a key priority in the recently approved budget proposal for 1999. Despite a further deterioration in oil prices2 and the rejection by Congress.of the administration's proposal of a new tax on telephone services, the approved budget keeps a moderate fiscal deficit target of 1.25 percent of GDP (the same as in 1998). Increases in other taxes (most notably on domestic gasoline sales) and reductions in nonpriority public expenditures and inefficient subsidies (such as for tortilla) allow for the maintenance or expansion of social expenditures. It should be noted, however, that the preservation of aggregate social expenditure budgets, while welcome, requires further improvements in the mechanisms to ensure the efficiency, sustainability (especially in capital expenditures), or impact monitoring of those budgets. 15. Mexico has no IMF program, but it is currently negotiating a two-year Stand-by arrangement. Some US$5 billion worth of IMF lending is due to be repaid during 1999. Because the government is unlikely to replace that lending with private financing, there is a strong likelihood that a program with the IMI will be put in place during 1999. This program will allow the IMF to effectively roll over a substantial part of its Mexican credits and, as explained later, the WBG to provide further adjustment operations for Mexico. m. MEXICO'S DEVELOPMENT CHALLENGE: SOCIALLY SUSTAINABLE ADJUSTMENT AND GROWTH 16. This section provides a summary of the key economywide and sectoral issues that are likely to dominate Mexico's development agenda over the next two to three years, and of the government's policy efforts to address them. This sets the stage, and provides the rationale, for the presentation in the next section of the WBG strategy to support those efforts. 17. The overall picture that emerges in this description shows a country (and a government) facing both a sudden deterioration of its external environment and a political period that will increasingly limit the room for reform. It also shows authorities who are well-aware of the need to adjust the economy to the new external framework, but rightly try to achieve that adjustment in a way that protects the poor. Their record across sectors, especially since the 1996 CAS, is mixed-advanced in some areas (agriculture, short-term macro management, and education) and pending in others (fiscal structure, finance, and energy). In all sectors, the quest for socially sustainable adjustment and growth translates into three deeply interrelated goals that guide the presentation below:3 social sustainability, removing obstacles to growth and maintaining macroeconomic stability in the framework of globalization, and more effective public governance. a) Social Sustainability 18. Differences in income and wealth, especially along regional, gender, and occupational lines, have proved persistent and have led to a growing need for social inclusion among significant portions of the Mexican population (see box 2). In recent years the authorities have 2. Oil-related revenues account for about a third of the federal government's total revenues. 3. The interrelated nature of these challenges, and of the policies needed to address them, cannot be overemphasized. For example, while environmental concerns are critical to the sustainability of growth, they are also critical to poverty alleviation, because much of the degradation of natural resources directly affects poor rural populations. 5  responded to that persistence with an overall rationalization, decentralization, and enhanced targeting of assistance programs for the most vulnerable and, more fundamentally, with a renewed effort to give the poor three critical long-term tools to overcome poverty-education, basic health, and support for the rural economy. The VWBG has closely monitored and supported this process. Box 2 Pevrty u4 hequaliy in Mxe (box0, a 1). AccorinA icon mtio mesu ' adutd ui-ndereotig neffh h rban pouat0 admoreA thnhafofU th ua ppltonwspor in 1996, Abou half ofthe xteme:poor areftoudi the agicultre setor, hile ignifcant haresof th moderately: .pOor: are distiutdinfth services affhun populaion, fter ontroling or oter houseold haraerstc suhadcto,ocption gegahic loaIo and demograp,hics, female-heade bd households al-so face. a hihe prbb1tyoWen pooo thamlehdd The rchestdecil of te poplatio in exico accounted for aprxmtl 4 pecn f household' ~expenditures n19,adtepoetdcl o ny1pret ncom ditrbuo isslighl more,ueul urban thanin ural aes Bo Tble 1. Share of thie: oplaton Belo Poet Lie,18-9 pret Headcount Index of Poverty Urban Rural National Unadjusted Adjusted Unadjusted Adjusted Unadjusted Adjusted Extreme Poor 1984 21.38 4.18 48.02 15.18 31.17 8.23 1989 18.13 3.29 41.83 12.74 27.04 6.91 1992 16.79 3.26 44.66 16.31 24.42 6.83 1994 10.95 1.31 49.78 16.78 21.46 5.49 1996 18.16 2.79 60.47 23.97 29.72 8.58 All poor 1984 54.00 22.97 74.75 41.83 61.55 29.90 1989 50.70 19.98 69.32 36.44 57.84 26.28 1992 49.14 19.49 73.26 41.47 55.74 25.50 1994 40.64 14.13 78.82 48.09 50.97 23.32 1996 53.25 19.12 84.84 53.80 61.88 28.60 ~N~rs The povrt masure prsne arecosuption- (rte hncome-)ased. The exreepor r thos h cannot afodtqk uyA basin fodbase that woudenable them toimeetthhe df6irutitiona nedsi. The modertelypocapy for their fod, bu they annot aford oher baic nees. The ategor."all.oor".i tesmothexrme an.11 modr ~ately urban... anPua ra,rsetvl,wr,i 96Mxcnpss 1. 7(Abouts U4 in 1996 pice)an 1.3 e dynaics s povidd i theWI forhcoing Poet sesen o eio The atioof uban o rralppltoenMxc a.2i 1984 1.6 n199 2.5i 92 .9i 94, an3266i 1996.~~~~~~~~~~~~~~~w 1;:7;4Oti. l 96P c A31pr Source: WorldpBank staff l estimte on th bapsof NItoI sremys. w xreo ~ , 19.nsv,nd i PROTECTINGoTe MOST tVUL R BLE.n More tadbhan7 peren of Mexcs populMxiatin.lve in urban areas, which means that, in absolute terms, the largest number of poor live in, or close to, cities. However, the poverty of those who live in rural areas is more acute (and the usual 6  remedies are less available to them). These characteristics are a major determinant in the design and implementation of social sector programs, especially the safety nets that are essential in times of. economic crisis. Mexico has a long history of commitment to social protection programs, and a large number of them. The management quality of these programs has been mixed, however, and their targeting efficiency needs assessment and is likely to require improvement. More reliance on individual choice and a larger proportion of cash support (compared to unconditional in-kind donations) are called :or, as is further decentralization of decisionmaking to better adapt to the needs of the beneficiaries and to local circumstances. This, in turn, will require strengthened institutional capacity at the state and municipal levels, and increased involvement of nongovernment agencies and civil society. 20. GivING THE POOR BETTER AcCESS TO EDUCATION. Building the human capital of the poor remains a central goal of the Mexican government. Despite substantial gains in the 1980s and 1990s and a near-universal primary school enrollment, the search for quality and efficiency in basic education continues, particularly in the poorest states (and, within these, in rural indigenous areas), where boys' and girls' drop-out and repetition rates are the highest, and preschool coverage, cognitive achievement, and absorption in secondary education are the lowest. 21. The challenges in educational quality faced by the authorities are formidable. Chief among them are the enhancement in the professional quality of teachers and improvement in pedagogic supervision (a problem compounded by an inadequate supply of textbooks, infrastructure, teaching materials, and relevant curricula); the development of institutional capacity for the states to deliver, supervise, evaluate, and increasingly to design education programs in the midst of the decentralization process (which could conceivably lead to the empowerment of the schools themselves); and the establishment of an effective role for the federal government in setting national strategic directions, goals, priorities, quality standards, and pedagogical/administrative legal norms and regulations. Beyond primary education, the authorities will also need to articulate, in the near term, a broad strategy to reform upper- secondary and technical education (an endeavor they plan to undertake with WBG assistance). The average member of Mexico's labor force has no more than eight years of schooling, and only one in four workers receives basic job training. More fundamentally, given the government's own limited fiscal resources and the growing demand for improved education services at all levels, at the crux of Mexico's overall education challenge is the identification of alternative mechanisms to finance service provision. 22. MAKiNG BASIC HEALTH ACCESSIBLE TO ALL. Mexico has made steady progress toward reforming its health sector. However, one of every ten citizens remains without access to basic health services and, predictably, the lack of access is highest among the poor (including, critically, among poor women in their reproductive years). Coupled with increasingly limited fiscal resources, this poses four main sectoral challenges over the coming years-improved equity; improved quality of services; containment of cost escalation; and reduced fragmentation of the system. 23. The government's strategy to address these challenges is based on successive reforms of the principal public sector health suppliers and a regulated opening to private participation.4 The Secretaria de Salud (Mexico's Ministry of Health, SSA) reform is already well under way, with 4. Only about 5 percent of the health coverage (but 45 percent of total health expenditure) is provided by the private sector. 7  special focus on access for the poor. The first phase in the reform of the Mexican Institute of Social Security (IMSS) is also proceeding, with the introduction of a managed competition framework based on the separation of financing from provision, the introduction of contracting, the decentralization of management, and a major institutional development effort. The third main public institution in the provision of health care, the Public Employees Social Security System (ISSSTE), remains to be reformed. Finally, and in line with the gradual introduction of competitive stimulus in the sector, the authorities have started to develop a regulatory framework for private sector participation aimed at minimizing risk avoidance strategies, improving the quality of care, and expanding consumer choice. 24. ATTEND NG ToTHE NEEDS OF THE RURAL POOR. As will be explained later, over the past decade Mexico's rural sector has undergone major structural reform that enhanced its capacity to compete in a more internationally integrated economy. Increased productivity, however, has not yet translated into better living standards for the rural poor, especially rural indigenous populations. Two-thirds of the rural population in the southern states is considered poor (compared with one-third nationwide). Four out of every five indigenous people-who, as a group, account for a third of Mexico's poor-are considered poor. The high incidence and persistence of poverty among the indigenous population raises issues of equity, social inclusion, and access to markets and to productive assets-land, labor, capital, infrastructure, and technology. If left unattended, this inequity may affect the social balance of Mexican society by polarizing the development agenda. It also challenges conventional government programs to improve their efficiency and their levels of acceptance, and to find ways to address indigenous issues in a fashion that is consistent with cultural preferences, traditional community authority structures, and local knowledge and needs. There is also increasing willingness on the part of the indigenous people to take ownership of their living and physical cultural heritage, and recognition by the government of the opportunities to involve them more closely in the preservation of that heritage (archeological sites, tourism-related activities, handicrafts, oral traditions, and traditional natural resources management practices). b) Removing Obstacles to Sustainable Growth and Maintaining Macroeconomic Stability in the Framework of Globalization 25. Until the current turbulence in the international financial and oil markets materialized, the Mexican economy was growing apace (5.2 and 7 percent in 1996 and 1997, respectively). Even with that turbulence, the expected growth rate for the whole of 1998 is 4.6 percent, and for 1999, 3 percent. Part of that growth was driven by the recovery from the 1995 recession that followed the banking crisis of that year. But a large part was the product of ongoing liberalization and reform (see box 1). Although those growth levels could be considered acceptable in view of the worsening external circumstances, growth in the Mexican private sector remains uneven, driven primarily by large, export-oriented firms with linkages to the rest of the economy. Because of its impending employment and poverty-reduction needs, however, Mexico cannot afford a marked deceleration in growth, nor can it forgo the benefits of reforms that could remove the remaining obstacles to a higher, more equitable growth path, as will be explained below. The Private Sector Strategy (PSS) in Annex BI1 provides more detailed discussions on private sector priorities for Mexico, particularly on impediments to higher, equitable growth. 26. The government has therefore been keen to tap into four main areas where policymaking can facilitate the economy's adjustment to the new external environment, and simultaneously 8  enhance its growth prospects (financial markets, private sector development, infrastructure provision, and the rural economy); maintain a viable macroeconomic framework; and make that growth environmentally sustainable. 27. IMROViNG THE EFFICiENCY AND TRANSPARENCY OF THE FINANCLAL SECTOR. Following two eventful decades (nationalization in 1982, privatization in 1991-92, a credit boom in 1992- 94, a full-fledged crisis in 1995, and a domestic credit crunch since 1995), Mexico's banking system is faced with two broad issues-a stock problem, associated with the implications for bank capital adequacy of FOBAPROA's pending liabilities adjudication and asset disposal, and, until recently, with the confidence-diluting effect of the political stalemate in the search of a solution; and a flow problem, associated with the incentive framework for banking activity (especially in deposit protection and loan guarantees, with their implications for moral hazard; disclosure standards; bank-borrower interaction; bankruptcy enforcement; securitization; and, fundamentally, the status of the commercial judicial system). Those two problems, paired with the development of other nonbank institutions and markets (notably, stock and pensions), comprise the core of the government's challenge in the financial sector. 28. The authorities have thus far addressed the challenge with a mix of institutional reform (for example, through the consolidation in 1995 of financial markets' regulatory authority in a single entity,5 and its subsequent institutional development program, which the WBG partly funded) and legal amendments (as through changes in the Law on Credit Institutions that facilitated the entry of foreign investors into the banking industry). These are initial steps in a large policy reform agenda, albeit steps that fall short of the related goals envisaged in the 1996 CAS and its 1998 Progress Report. Their implementation so far has been largely lacking (for example, long delays in the establishment of IPAB, the new savings protection institute), as it has been impaired not only by political realities, but also by the government's roles as owner (of development banks) and regulator/supervisor (through the SHCP, its subordinated technical agency; the CNBV; and, to a lesser extent, the Banco de Mexico), and by the resulting fragmentation and limited independence of the regulatory function. As a result, the domestic banking sector is still in fragile condition, undercapitalized, and unable to fulfill its expected role. Beyond banking, the need to further develop nonbank financial institutions (leasing, factoring) is a priority. These institutions could provide greater access to capital for middle- market companies and SMEs, and thus help increase their productivity and foster more equitable growth for the Mexican private sector. Enhanced disclosure standards and better protection of minority shareholder's rights remain as major impediments to stock market development and capital markets in general, while more flexible investment rules for private funds and reform in the retirement saving schemes for public sector workers are the key policy issues in the pension area. Overall, there is a broad consensus among national and foreign observers that resolution of the problems of the banking sector is a key priority for the sustainable development of Mexico. 29. REMOVING IMPEDIMENTS TO PRIVATE SECTOR DEVELOPMENT (PSD). The Mexican private sector has displayed an increasingly bifurcated structure. A dynamic and growing export sector, made up of internationally competitive conglomerates (including maquiladoras), coexists with often inefficient, inward-oriented, small and medium-size enterprises (SMEs).6 This structure, in which the exporting sector has yet to expand its limited linkages to the rest of the 5. The National Commission for Banking and Securities (CNBV). 6. SMEs include enterprises with fewer than 250 employees. This group is responsible for approximately half of the industrial and service GDP and at least 70 percent of total employment. 9  economy, while the SMEs fail to create sufficient employment or to contribute to productivity growth (primarily because of their lack of access to financial markets and to managerial and technical resources), is at the heart of the government's challenge in PSD-how to extend the efficiency gains brought about by trade liberalization to the overall economy. That extension would not only be good economics, it would also help address the large regional disparities between a vibrant, export-oriented private sector in the north and center of the republic, and a very weak, SME-dominated private sector in the southeast. 30. The government initially sought to respond to the uneven development of Mexico's private sector with a large array of federal and state industrial promotion programs, sponsored by both public agencies (SECOFI, STPS, and CONACYT) and publicly owned development banks (BANCOMEXT, NAFIN, and BANOBRAS).7 More recently, the authorities put forward two major initiatives to restructure both industrial policy (Programa de Politica Industrial) and promotion (mainly through its decentralization). Those initiatives have not yet fully produced the expected results. At the local level, however, several state governments have implemented effective development partnerships with the private sector (Aguascalientes, Nuevo Leon, Guanajuato, Jalisco, and Chihuahua). More fundamentally, a pending agenda of policy impediments to PSD is likely to occupy all levels of government in the near future. That agenda includes competition policy, contract enforcement, bankruptcy law and implementation, corporate governance mechanisms, and privatization in selected sectors (such as electricity), among other concerns. 31. ENSURiNG THE PROvIsIoN OF QUALITY INFRASRUCTuRE. While Mexico's overall infrastructure coverage is broadly adequate (but uneven and with some exceptions, such as wastewater treatment and coverage in isolated, poor rural areas), the authorities still face an array of first- and second-generation issues. For example, in the energy sector, the public-sector- owned National Electricity Company (CFE), which already serves 96 percent of the population as a constitutionally protected monopoly, is experiencing problems to cater, in quantity and quality, to a rapidly growing demand (7 percent per annum) for its services (some of which are provided on a subsidized basis, as in agriculture).8 The government is aware that access to outside financing will require major structural reform in CFE and in its other energy concerns, and it has very recently, and somewhat belatedly, taken an encouraging step of proposing to the Congress constitutional amendments to allow private investment in the entire power sector. Reforms are more advanced in the transport sector. Privatization of ports, the national railway, and airports has taken place or is being implemented. Equally important, these privatizations have been accomplished within the context of an improved legal and regulatory framework.9 In some sectors (including petrochemicals), progress has been slow, and in others privatization is simply not envisaged (hydrocarbons). 32. In the urban services sector, the disparity in the institutional capacity of the state and local governments, under whose regulatory jurisdiction the recently accelerated decentralization process has placed those services, has not contributed to encourage private participation and financing. In housing, the four public institutions that have traditionally controlled-with mixed results-the social-interest housing finance market (FOVI, INFONAVIT, FOVISSSTE, and 7. There were 56 federal SME assistance programs, and hundreds of additional ones at the subnational level. 8. While the WBG counted CFE among it first clients in the late 1940s, it has had no business relationship with the other pillar of Mexico's energy sector-the National Oil Company (PEMEX). 9. Significant privatization has also taken place within the telecommunications sector, and a telecommunications regulatory agency was established and is functioning. All this was done with WBG support, as indicated in the 1996 CAS. 10  FONHAPO) are being restructured, with the objective of both improving access for low-income populations and fostering development of capital markets. 33. The above pattern of first- and second-generation issues across subsectors forms the background for the government's efforts to meet its three overarching infrastructure-related challenges-urbanization, competitiveness within NAFTA, and decentralization. Mexico is both a highly urbanized country and a country with a high rate of urbanization. Northern border cities and peripheral enclaves around metropolitan areas (such as Mexico City) are estimated to be growing at about 7 percent yearly, taxing not only the capacity of existing urban services (notably, those related to water) but also the urban centers' "livability" (creating environmental degradation and posing challenges to civil security). This is of special concern to the urban poor (the majority of Mexico's poor live in cities), whose access to housing is, at best, limited. At the same time, Mexican enterprises will increasingly require higher-quality infrastructure services, especially in electricity, highways, and roads, if they are to effectively compete in, and profit from, NAFTA. Achieving that quality will call for a new approach to pricing and subsidization, financing, private participation, and capacity building among regulatory institutions at both the national and subnational levels. Finally, it is precisely at the subnational level that an increasing number of key infrastructure decisions will be taken in the coming years. There is no doubt that the orderly implementation of the decentralization process will become a critical determinant of the feasibility and efficiency of infrastructure investment programs. 34. FOsTERING AGRICULTURAL PRODUCTIVITY AND EFFICIENCY IN THE RURAL SECTOR. Over the past ten years, Mexico's rural sector has been the subject of sweeping reforms. They led to the emergence of a largely liberalized, market-oriented, and private-sector-driven rural economy. The government switched from distortionary commodity price subsidies to direct income transfers through the PROCAMPO program. It also embarked on the revision of the regulatory framework for land tenure (1992) and a subsequent land titling program (PROCEDE-1995), permitting ejido land transactions. The largely successful transfer of irrigation districts to the water users has formed the basis for the development of water markets. At the same time, the inclusion of the agricultural sector in international trade negotiations through the GATT and NAFTA agreements has created the basis for progressive exposure to global forces and the additional adjustments that will follow. Finally, the recent elimination of the tortilla subsidy has permitted the completion of the reform agenda in the maize sector by relinquishing the intervention of CONASUPO (which was, in turn, dismantled). 35. These important reforms permitted the establishment of a sound policy framework and fostered efficiency, but the performance of the sector has been lagging and growth has stagnated. While commercial agriculture has largely benefited from the reforms and has responded positively to the devaluation of 1994, the large ejido sector is going through significant adjustment, increasingly integrating into the nonfarm economy, diversifying income sources, and pursuing greater labor market participation and migration. Promoting agricultural productivity, fostering employment and micro-enterprise development in rural areas while accompanying the progressive integration of the sector to the rest of the economy are the main challenges of the rural development agenda. 36. The rural economy is poised for a sustainable enhancement in its productivity and performance, but a number of second-generation reforms will need to be pursued and constraints removed to respond to the challenges posed by international competition, the need to diversify the productive pattern, and the compelling responsibility to address equity issues. The incentive 11  framework for the sector shows declining real prices and negative nominal protection coefficients stemming from uncompetitive and segmented markets, and high marketing margins, storage, and transaction costs. Also, the low level of farmers organization hinders their capacity to better integrate in the production-marketing chain and in the rest of the economy. Improving the performance of financial services to the rural population remains one of the major issues facing the development of the sector. The shallowness of both formal and informal rural financial markets hinders the modernization of the sector and movement to more lucrative, non- farm activities. The development of more efficient factor markets (land, water, and warehousing) could also be fostered through a better regulatory and legal framework, facilitating secure transactions and offering better collateral possibilities. Public programs should enhance smallholder access to basic services, information, technology, and technical assistance and improve efficiency in the delivery of basic infrastructure and, when necessary, of seed capital for investments and innovation. 37. ASSURING A VLIBLE MACROECONOMIC FRAMWORK. As explained earlier, the Mexican authorities have handled the effects of the deterioration in the external environment with an effective mix of social policy protection and cautious fiscal and monetary management. This leaves the country well-placed to address internal sources of potential macroeconomic instability, which is necessary for rapid long-term growth as well as to make the country less vulnerable should external conditions worsen. There are several such possible sources including the volatility of oil prices, the slim effective tax base, the maturity structure and servicing cost of the consolidated public sector debt, the accelerated depletion in the stock of public infrastructure, various contingent fiscal liabilities, and the still unbalanced relationship between domestic and external savings. These are areas the government has watched carefully, but it is now time to design and implement precautionary policies. At stake is not only the growth-enhancing effect of sound domestic macro policy, but also the critical signaling role that such a policy will have in the availability and cost of foreign capital at a time when direct and portfolio investment will be scarce, and over a third of the expanding current account deficit is to be financed through net foreign borrowing (compared with a tenth in 1998). 38. THE URGENT NEED TO PROTECT TBE ENVIRONmENT. Estimates indicate that the annual cost of Mexico's environmental degradation is equivalent to over a tenth of the country's GDP. That degradation affects the full array of natural assets. Chief among those is water, which is likely to represent the main environmental challenge to Mexico in the medium-term. It is imperative to develop and implement a coherent strategy of water management and use (over 100 of Mexico's 258 aquifers are overdrawn), an area where politically sensitive pricing policies may be conveying perverse signals to consumers (especially in the arid and semiarid northern region) and where institutional reforms are needed. Also, only a small proportion of hazardous and solid waste, and less than a tenth of the wastewater, receives adequate treatment; the concentration of atmospheric contaminants in urban centers regularly exceeds acceptable levels; the deforestation rate ranks among the highest in Latin America; and growing losses of mega- diversity are just some of the environmental problems the Mexican government is attempting to address. 39. The authorities have articulated an initial response to their environmental challenge, and they are gradually implementing it. This accelerated the formal establishment in 1994 of a Ministry of Environment, Natural Resources and Fisheries, the issuance of a consistent legal and policy framework (the 1996 Ley General de Equilibrio Ecologico y Proteccion del Ambiente and 12  the 1995-2000 Environmental Development Plan), the reinforcement of the "polluter pays" principle, the initiation of an effort to decentralize environmental management to states and municipalities, the establishment of the basis for broader public consultation and awareness, and a stronger focus on biodiversity through the new Program for Natural Protected Areas. 40. On the basis of these achievements, five items are now top priorities in the environmental agenda. The first is more efficient pricing where, in the absence of appropriate mechanisms to reflect their scarcity, natural resources are often treated as free goods, leading to unsustainable practices. This applies particularly to water and water service provision, but also to other currently distorted markets (energy, timber, land). The second is institutional development. This will be a necessary condition if Mexico is to reap the benefits of the decentralization of environmental management, because it will drive necessary improvements in the enforcement capacity and accountability of state and municipal authorities. The third is more effective management of natural resources (water, forests) and pollution control (air, waste management). The fourth is the mainstreaming of global issues in order to comply with international agreements (such as OCDE, NAFTA, Climate Change and Biodiversity Convention, GEF, and the Montreal Protocol). Finally, Mexico is working to improve its disaster management capacity and be better prepared to prevent or mitigate the heavy recurrent losses it suffers (forest fires, earthquakes, floods, hurricanes, and so on). c) More Effective Public Governance 41. The policy agenda described so far will tax the government's implementation capacity over the next three years and beyond. It is thus critical to strengthen the public administration function as much as feasible, given the timing and political context of the country. Three areas for strengthening stand out-decentralization, the judicial and tax administration systems, and governance mechanisms. 42. OFFERING A SOUND, DECENTRALIZED PuBLIc ADMImSTRATION. Much of the fiscal discipline that will anchor Mexico's macroeconomic framework, and much of the long-term growth that is expected to be led by the private sector, depends on, and to a large extent is impaired by, the quality of the country's public administration. First and foremost, the speed and scope of the ongoing decentralization (a process deeply rooted in and driven by Mexico's political democratization) is taxing the institutional capacity of both federal and state governments. While presenting a unique opportunity to enhance the quality of public services through closer proximity of policymakers and final beneficiaries, the transfer of expenditure responsibility has not been accompanied by a matching transfer of accountability or an efficient incentive structure. This is affecting policy design and implementation in virtually all sectors of the development spectrum (social protection, education, health, infrastructure, and so forth). In response, the federal government is rightly seeking, as a matter of urgent priority, to create legal, regulatory, and institutional frameworks conducive to decentralization. This effort will entail, among other steps, the (re)definition of revenue sharing arrangements; incentives for local taxation; common budgeting, accounting, auditing, and disclosure standards; sector-specific expenditure performance agreements; borrowing rules; and triggers for federal intervention. Once in place, these parameters are likely to feed a growing demand for training and institutional infrastructure by the subnational governments. 43. ToWARD BETTER JuDICIAL AND TAX ADMNISTRATION SYSTEMS. While decentralization 13  is bound to dominate Mexico's public administration agenda in the medium term, two other areas of reform are equally critical-judicial systems and tax administration. Constitutional amendments introduced in 1994 significantly altered the appointment, tenure, and governance of the federal judiciary, giving the system a much-needed step toward independence. Similar reforms are now being contemplated in a number of state-level judicial systems. These initial efforts now need to be followed by a more comprehensive strategy for reform. In spite of recent improvements, the Mexican judicial system, at both the state and federal levels, continues to require strengthening in the areas of efficiency, effectiveness, and accessibility (especially for the poor). More fundamentally, its performance is a key element in the development of the financial sector in general, and in the resolution of pending banking distress in particular.10 Similar performance problems affect Mexico's tax administration system. Although the country effectively collects very little in the form of taxes (just over 10 percent of GDP in 1998), with a consequent macroeconomic dependency on oil prices, that system is seen as a major obstacle to business by the private sector. The authorities are aware of the need for reform of the tax administration function, and they are taking some targeted actions (notably, in customs administration). Up to now, however, they have not enjoyed sufficient political consensus to articulate a major reform in the tax and tax administration systems (for example, when suspending plans to overhaul the value added tax). 44. GOVERNANCE MECHANISMS. Finally, economic deregulation, political democratization, and an increasingly independent media have brought about enhanced awareness of the need for better public governance. While rent-seeking may no longer be a systematic problem (and less of a systemic one), improvements are still needed in the legal, administrative, and enforcement frameworks within which Mexican civil servants operate. In addition, Mexico's federal employees remain under a powerful internal comptroller (SECODAM) and an external auditor controlled by Congress (Contaduria Mayor de Hacienda). Similar problems affect state governments, especially in their newly decentralized functions. 45. The government is conscious of the need for strengthened public governance, both at the federal and state levels. It has recently taken important steps toward enhanced transparency in public procurement. In March 1996, Mexico subscribed to the Inter-American Convention Against Corruption in Caracas, Venezuela; every bid is now published electronically in the "Diario Oficial." SECODAM created a web page, "COMPRANET," where every government acquisition is published, as well as any complaints from suppliers, constructors, or consultants (the resolution of the complaints is also made public). Several anti-corruption seminars at the national and state levels were carried out in 1998. Bidding documents that include anti- corruption clauses have been standardized; the legislation that regulates SECODAM and the internal audit departments of the public agencies has been overhauled. A strong anti-corruption training program for public employees was put in place. Convenios (agreements) among SECODAM and several states to audit the use of federal monies were signed. Furthermore, SECODAM recently published a path-breaking book (Corrupci6n y Cambio, Fondo de Cultura Economica, February 1999) where specific corruption cases were analyzed and remedial actions presented. Additional work on the design of comparative corruption incidence indexes across states is planned to promote transparency at the subnational level. Despite these specific achievements, consensus for broader reform in the governance area is uncertain in the run-up to the coming presidential elections. Rather than coming about through specific actions, better 10. As an illustration of that performance, 500 ordinary court federal judges oversee some 350,000 cases annually, while lower-level courts maintain a backlog of about one-third of their caseload. 14  governance will primarily be pursued through more general initiatives, such as professionalization and political isolation of public servants, strengthening of enforcement bodies (judicial, police), and an increasingly assertive Congress. 46. Finally, the Mexican government has established an aggressive strategy for dealing with the Y2K problem both in the public and private sectors. A Presidential Commission has been created under the chairmanship of the President of the National Institute of Statistics, and the implementation of the strategy is well under way. Because of the progress in implementing the strategy, Mexico has been requested to provide support and assistance to countries in Central America on this issue. IV. THE WORLD BANK GROUP'S ASSISTANCE STRATEGY a) The Lessons of the Recent CAS 47. The 1995 CAS sought to help Mexico deal with the short-term imperatives of that year's banking crisis. The 1996 CAS and its 1998 Progress Report served the WBG in supporting the Mexican government's effort to put the economy back on a positive growth path. Several lessons have been learned while implementing those CASs, lessons that carry significant value in the design of their 1999 successor, as the latter will focus on a socially sustainable adjustment to worsened external and domestic conditions. (Specific project examples of the lessons discussed below are presented in box 3). 48. Understanding of the client's political reality and capacity for reform pays off in the long term. By keeping its assistance program sensitive to that reality, the WBG was able to continue providing advice in areas where the government was willing and able to undertake reform (for example, in the rural economy), and to maintain a monitoring stance in areas where opportunities for reform were more limited (for example, in energy). 49. Program flexibility is essential. Mexico has experienced sudden, unexpected changes, both domestically (for example, decentralization of Ramo 33) and externally (such as the fall in oil prices), that have altered its policy priorities, especially in the short term. The WBG lending, nonlending, and investment instruments should thus be seen more as a framework menu, both in financial amounts and analytical focus, than as an irreversible commitment to a specific task. This approach will allow rapid reallocation of resources when priorities shift (this will be particularly relevant for adjustment operations)."' 50. In part because of the domestic and external volatility faced by the Mexican economy, the use of progress benchmarks (particularly quantitative measures) should not be overemphasized. The 1996 CAS, for example, envisaged a series of actions that would lead to growth recovery of only around 5 percent in 1999. Although few of the actions were actually implemented, the economy had already grown by 7 percent in 1997. In contrast, decentralization was seen in the 1996 CAS as a tool to improve the utilization of local property taxes. While decentralization did happen (at an increased speed), that improvement did not take place for a variety of related reasons. In other words, the large array of variables outside the control of the 11. In the IFC's case, financing priorities will also shift in relation to the Mexican private sector's demand for, and access to, international funding. 15  WYBG (or, sometimes, of the government) seems to suggest that the success or failure of its assistance is better measured in the role it is able to play as a catalyst in the reform process (through advice and lending), rather than in the achievement of specific, time-bound benchmarks. This remains true even when there is sometimes a natural lag between WBG assistance and country-owned reform implementation. Box 3. W'hat We0ntWel ndLs 88WellDurng the996 CAS Cycle-oeLSSWn of_xperience ORD (on satisfctcn~y,the othr not) and on whose CR was ecentl oM-le teds, toit..W The otcomeof th Contactulesspsavngb evelopmnft Prga. .... 4W l2-E hchsppre structural reform~~~~~or intentonlpninsytmca atdhgl stsatr b E.ease"hsBn oeaion ihi the: sociasectrs notably i te eat are P.et SetrRfomI n 34 Ml~~~~~~~~~~~~~~:). ~~~, PI W. m In contrast, the Financial Sect..r .estructurin Loa...... (..3..M, hk. proide. eergnc supprt t thegovenmen folowin the1995fInacialcriss, ws fond b OHI to.ave.rodued.a lear-"emergency~~...... or.. reie program...I s are. not goodM : veIce for usigistt-oaYr eiltv reforms. This is especially tr..e.when,.as.In..this case.....the. Bank......s financial... cotrbuio.i..rlaivlysml seo buge edctin hath ore tranig)in the "~ yer1imedatl following: the95ciis, n turmol iineatOna fnacia marts First thWtchicl esg nedWoicld ibrsmn tm ameabl toproureentha is.. both.. acetal tote.G.n.eulryuedb.h.gvrmn Secod, iventheflui naureofemergncoprtnsitsesniatobete inta dvesig on soli prinipls tht cosel ti thestrtegc obectves f te prgra wit opratonalproedurs. nd, hir, i Opeossile va sectorm loa Oconistn ofH itracsreeaeuo flimentof crica poicn onitos n example, with theth 1D-B).6dbd: b) The Lessons of IBRD Portfolio Ma:r1nagementTe bianpq a nm ergo poecsi the prtfoli seti toiceas oapoimtl 6b heedo Y9 corresponding to an anticipated ~fincese: "in total commimnts of~ approxiatel US16bilo _-M .... CW W v-V16::  for the fiscal year. In FY98, disbursements under investment projects recovered significantly from the previous year (19.5 percent versus 13.1 percent, respectively), but, in FY99, are starting to slow down again because of the fall in the exchange rate and successive cuts in the federal budget. Currently, disbursements under investment projects stand at 8.7 percent for the six- month period ending December 31, 1998, and are projected to reach 15 percent by the end of the fiscal year. With little prospect for dramatic improvements in the macroeconomic situation, the portfolio will need to be monitored carefully, and adjustments, if necessary, carried out promptly. Some loans may be partially canceled due to the lack of counterpart funds and to the depreciation of the peso. One of the three unsatisfactory projects, Federal Roads Modernization, has very recently been canceled as the government plans to continue the project utilizing its own funds. One category of projects to watch with particular vigilance is the group that relies on onlending arrangements, where high local borrowing costs are choking off investment at the subnational level. In adjustment lending, the Bank disbursed US$400 million in FY98 and, in the second quarter of FY99, another US$750 million. Detailed IBRD portfolio performance indicators are presented in Annex B2. 53. The increasing decentralization of federal resources has had both a positive and a negative impact on the IBRD's portfolio. In some cases, a more evenly spaced and predictable pattern of budget transfers to sector agencies and subnational entities has facilitated the process of planning and budgeting, as well as procurement. At the other end of the spectrum, the direct transfer to states and municipalities under the social infrastructure fund of Ramo 33 essentially bypasses the federal monitoring and control system that had allowed the EBRD to disburse against municipal-level investments-hence, the unsatisfactory IP rating for the Second Decentralization and Regional Development (DRD II) project, which has stopped disbursement since January 1998. As the process of decentralization continues, the IBRD has been seeking ways to work directly with the states to install the necessary financial controls, not only to allow resumption of disbursement under a restructured DRD II, but also to facilitate other investments. Another important aspect in both implementation of existing projects and design of new ones is an ongoing discussion with the development banks-mainly BANOBRAS and NAFIN, who act as the exclusive financial agents for the channeling of IBRD funding-of their role and respective efficiency. In the case of BANOBRAS, which is currently the sole intermediary for credit-line operations, the structure, cost, and legal obligations underpinning onlending arrangements, in particular, need revisiting. 54. The creation of an Implementation Unit (led by a senior procurement specialist and a financial management specialist) in the Mexico CMU in late FY98 has started to pay off in faster processing time and improved client satisfaction. All procurement decisions are now being taken in the field, leading to turnaround times of approximately two weeks, compared with a previous average of six weeks. More importantly, additional mechanisms have been put in place to avoid corruption in WBG financed projects (for example, training executing agencies' staff in WBG procurement guidelines and procedures; agreement with the government on standard bidding documents and processes; enhanced ex-post reviews and verification of delivery; support to SECODAM's efforts to curb corruption). The presence of a financial management specialist has allowed the IBRD to improve its upstream preparation of projects through better design of financial management systems, and to start the process of converting (albeit slowly) existing projects to the new LACI system where applicable. As a further measure of rapprochement with the client, the functions of the country officer have also been moved to the field. The above actions, coupled with the increased operational experience of local staff in the office, will play a 17  significant part in helping the department to be prepared and to be more responsive to the client during this time of political and economic uncertainty. c) The Lessons of the Decentralization of the IBRD Mexico Country Management Unit (CMU) 55. The previous CAS was presented to the Board precisely at the time when the decentralization of the IBRD Mexico CMU was being initiated; that is, in the second half of 1996. Two-and-a-half years into the process of decentralization, it is quite clear that most of the expected benefits of this decentralization are being obtained. Among them, the most noteworthy are: (a) a much closer dialogue with the clients, especially the sectoral government agencies; this has been manifested by a better strategic focus of I1BRD interventions (with strong advances in strategic discussions in many sectors, such as agriculture, health, education, and the financial sector), an increase in the amount and impact of analytical and sector work, and improved portfolio performance; (b) greater coherence and effectiveness of the overall management of the IBRD program (lending, supervision, and NLS); and (c) a much improved understanding of the political and economic realities of the country, owing to a strong presence in the field (with an increasing contribution of locally recruited staff) and extensive contacts with representatives of Mexico's multifaceted civil society (private sector, academia, NGOs). 56. To be certain, the transition process has been a difficult one, and there is still much that needs to be done to ensure maximum effectiveness of the new system. A formal evaluation of the Mexico CMU's overall effectiveness since decentralization has not yet been carried out as it is still too early to assess fully its cost effectiveness component (although there are already encouraging indications). However, an important measure of the progress accomplished so far is the increasing manifestation of satisfaction expressed by government officials, from Hacienda and sectoral agencies, on the impact of the decentralization on the relationship between the IBRD and the government, particularly in traditional areas of friction (for example, procurement, disbursement, support to implementation, and availability and responsiveness of 1BRD staff). d) The Lessons from IFC's Implementation Experiences 57. Progress has been made in the implementation of most key areas of the last CAS for the IFC-in the financial sector and capital markets, private infrastructure, and regional development. An area that was not anticipated at the end of 1996, but has shown rapid progress, is the private health sector. In industry, demand for IFC support through the domestic banking sector has been greater than anticipated, while the IFC's direct financial support has been lower than envisaged. This is partially the result of dramatically improved access for large Mexican firms to international capital during 1996-97, and increased demand for long-term financing by middle-market companies and SMEs. In investment volume, the IFC's investment approvals during FY97-99 to date totaled US$601 million; US$379 million was for the IFC's own account. This was 38 percent of the anticipated FY97-99 total, net of syndications. Mexico's improved access to international capital markets and slow progress in privatization of infrastructure and petrochemicals during the period have been contributing factors (box 4). 18  B&x 4. Linkages in.LBRD-IFC Assist to Mexico The approaches and activities of the IBRI and IFC have increasingy been. compleienty and mutually reinforcing in helping Mexico address its p.rivate sector development objetives, as the followung :-examples-,i,ndicae:-, ..............................:-."-..-- The financial sector. The IBRD's assistance in. enhancing the legal and regulatorgy --environ,m,,ent and.the stren..ging of the banking sector would help, setthe stag for the - -FC's increased involvement in direct and in irect assi e to viable Me.a finacmia intermediaries. In nonlending assistance' the. IBRD) and IFC are also collaborating. t study the Mexican capital makets and inonbank financialinstitutiopns. Infrastucture. :A number of subsectors whee the..IBRD's assistance has helped improvefthe regulatoy framework have provided increasing opportuities forpthe IEC>s sequenlal :n.-mvolveent min]lping structre and mobiliz 'a finanal for eeg privte .. . - . . -........ - : - .. I ge -t -p . , . , ,. ... .... -. . infrastructure projects (for example, ports, power' and telecommunications). . SMEs. The IBRD is considering possi-ble SME development. pilots through bubsiess development services, which would draw on theUIFC's ep,erience with inipediments to private sector development generay, withSMEs, andwithbusiness developmenservices. This would, also support thei IC's increasing focUS on providing financia assistance for- SM-s.-and middle-market companies . h* Te consultation -process in preparation of this CAS (ns mentoned below) has been conducted jointly with IBRD and.IFC staff in the field. e) The Overarching Objective, Selectivity, and Prioritization Principles Applied in this CAS 58. Poverty reduction is the ultimate objective of the proposed CAS. Because of the current domestic and external circumstances, that poverty reduction objective will, over the next three years, translate into three imperatives. First, the poor (especially the most vulnerable among them) must be protected from the main structural consequences of the ongoing macroeconomic adjustment, and from eventual conjunctural circumstances (for example, natural disasters and external shocks). Second, the poor themselves and various segments of Mexico's society (with its very rich diversity) must be called upon to participate in the poverty reduction effort. And third, intensified support is needed for policy advice and projects that can effectively foster sustainable growth. 59. At the same time, the list of sectoral issues described in Section II amounts to a formidable development challenge, both for Mexico's policymakers and for the WBG's ability to support them, especially in light of the limited nature (and high opportunity cost) of the latter's resources. It is hence imperative to establish clear criteria for the selection of WBG assistance tools (both in each sector and in the aggregate), as well as for prioritization among those tools. 60. This CAS is thus driven by three main selectivity criteria. The first is marginal impact on poverty reduction. This underlines, for example, the primary importance of avoiding the adverse macroeconomic shocks that would likely hurt the poor-first and most severely. The second is the client's expressed needs. The WBG support agenda will be sensitive and proactive toward the authorities' sweeping reforms and pressing needs, such as the decentralization process or the degree of environmental degradation, and at the same time will be careful not to give the government grounds for disappointment in the face of unachievable requests. The final criterion is comparative advantage. The WBG is equipped to undertake support in a wide array 19  of areas, perhaps better equipped than any other donor (see Section VI). Yet it also needs to focus its resources where its capabilities can produce the largest return for Mexico. For example, this CAS envisages a decisive deployment of WBG environmental expertise. In contrast, there are areas where the WBG has neither the expertise nor the mandate to intervene (for example, the political process). 61. The above-mentioned criteria will guide the overall choice of WBG assistance tools. These, in turn, will be prioritized according to both their impact on poverty reduction and on growth (direct, indirect) and the likelihood of achieving, in the political time leading to the next presidential administration, country consensus around the necessary policy frameworks for the WBG assistance tools to be effective (already existing consensus, likely, less likely). The WBG will focus its support primarily on activities that have an impact on both poverty and/or growth, especially a direct impact, and for which suitable policy frameworks already exist or are likely to enjoy country consensus. In areas where country consensus is less likely, the WBG will follow a flexible, stand-by approach, seeking opportunities to foster reforms within the limits of feasibility, while "preparing the ground" for the next presidential administration. f) The Programming Scenario of this CAS 62. Within those objectives, selection, and prioritization criteria, and given the constraining nature of the political economy factors converging through the year 2000, the base case agenda of WBG assistance has been drafted under the assumption that the current, market-oriented overall reform stance is maintained, along with ongoing sectoral initiatives, and that access to private external financing remains limited and/or expensive. Major fiscal slippages in the run-up to the 2000 presidential election are avoided and, partly as a consequence, no further turbulence in the domestic financial sector occurs. An IMF program that would permit the effective rollover of some US$5 billion in vIMF credits that fall due during 1999 (a rollover that could be accompanied by a WBG fiscal adjustment loan) is in place, allowing for further WBG adjustment operations. Along with the previous CAS, and following recent agreements in Congress, this base scenario assumes that the banking restructuring plan is effectively implemented. In other words, this CAS, in line with realistic expectations for the next two to three years, assumes that external conditions will not substantially improve and that a major new reform impetus will not materialize. 63. This allows for a moderate growth rate of 3 percent in 1999 and a gradual resumption of growth up to 5 percent in 2000 (largely driven by strong private investment hovering around 24 percent of GDP and a continued expansion of exports); for inflation rates of about 13 and 10 percent, respectively, in those two years; and, more crucially, for an important reduction from current levels in the balance of payments' current account deficit to US$9.4 and 13.1 billion (or 2.2 and 2.8 percent of GDP) respectively, amounts to be financed primarily through foreign direct investment. Projections of the main macroeconomic aggregates, external exposure indicators, and projection comparisons with the last CAS under this scenario are shown in Annexes Al, B6, and B7. 64. A substantially less likely downside scenario could also be considered, in which fiscal discipline is weakened by the presidential election process. This would lead to substantial macroeconomic imbalances, paired with a loss of confidence in the stability of the financial sector. This loss of confidence translates into reduced access to foreign financing, as well as 20  reduced private investment (the latter may reach only 18 percent of GDP), which would produce slower growth (about 1 percent p.a.) and higher inflation (perhaps as high as 25 percent). No IMF program (and hence no rollover of IMF obligations or WBG adjustment lending) is in place, vastly curtailing the country's capacity to finance its current account deficit (albeit, with lower growth, that deficit would be smaller than in the base case). A reexamination of, and a contraction in, the WBG assistance program (in relation to the one described below) will be required if the downside scenario materializes, and virtually all emphasis would be placed on operations related to social sustainability. Similarly, even if the downside scenario does not materialize in full, the WVBG will refrain from adjustment lending in the financial and fiscal sectors if sufficient reform progress in these areas is deemed lacking. g) Sectoral Support Strategies and Tools to Deliver this CAS 65. Under the base case scenario, the WBG will align its assistance to the government's own policy priorities and tools. Both financial and nonfinancial instruments will be delivered across sectors, with special emphasis on their impact on poverty and growth (direct, indirect) and taking into account the likelihood that country consensus around the necessary policy frameworks materialize during an increasingly constraining political period (already existing, likely, less likely). The specific list of instruments and of the objectives and government actions that they attempt to support is presented in table 1. 66. As mentioned earlier, operational focus will be placed on activities for which country consensus either already exists or is likely. Where that consensus appears less likely, the WBG will seek to act as a catalyst for change, to accumulate knowledge, to foster and await reform opportunities, and to prepare a policy agenda that the next administration may adopt (separate sectoral strategy notes will be prepared for that administration). In all cases, a specific set of benchmarks will be used to monitor, on a continuing basis, progress in achieving the development objectives supported by this CAS (see table 1). 67. Following the lessons of the 1996 CAS, a degree of flexibility is essential and will be maintained in all sectors. This will help accommodate unexpected improvements or deterioration in either the underlying policy or the external environment. The goal of this CAS is less to commit the WBG to a predetermined program of operations than to maintain and develop an evolving partnership with the government in its quest to eradicate poverty. That flexibility is also necessary in the IFC's case, as its strategic priorities must be adjusted to rapidly developing market conditions and changes in the pace of reform. 68. Table 2 distills the flow of lending, equity, and other investments implicit in the proposed strategy. Altogether, US$5.2 billion in new IBRD commitments are envisaged through FY01; some US$1.9 billion would take the form of adjustment lending. While yearly commitment envelopes are provided, the individual project loan amounts are deliberately kept open to allow for the continuing flexibility that proved vital during the execution of the 1996 CAS. IFC activities are dependent on market conditions, the extent of the private sector's access to private financing, and the pace of reform; therefore, the implementation of IFC instruments listed in tables 1 and 2 (and their timing) is of an indicative nature. 69. The proposed CAS and its associated instruments are based on specific sectoral support strategies. In the implementation of these strategies, the WBG will pay increasing attention to the reality of large concentration of poverty in urban areas, while maintaining its strong focus in 21  rural areas where the incidence of extreme poverty is at its worst. The essence of these strategies is described below. 70. SOCIAL PROTECTION. The search for quality and participation in the delivery of social assistance programs will guide the WBG's support in this area. As a starting point, a LIL operation will be put in place to support the decentralization of DIF, a key institution in the government's social assistance strategy. An increased role for civil society in determining local DIF-sponsored policies will be sought, and an effort will be launched to professionalize the agency and build capacity in selected states and municipalities that deliver social programs under their recently decentralized responsibilities. This should place the WBG in a position to support a related nationwide institutional development program later on. In parallel, analytical work (and, eventually, financing) will be provided in social assistance for poor urban (male and female) youth, initially focused on the Federal District and other large cities. More generally, the WBG will continue and deepen its involvement in the monitoring of poverty and inequality trends, in the technical analysis of their determinants (educational, cyclical, labor-market-related, gender-related, and the like), and in the impact assessment of programs meant to reduce them. That involvement will take the fonn of issue-specific policy notes. These could eventually provide the conceptual underpinnings for emergency social assistance operations, should the need arise (for example, because of further deterioration in external conditions). In addition, and with an overall participation objective in mind, the WBG will support and contribute to the government's efforts in the formulation and communication of its national strategy on social assistance and social safety nets, something that would assist in the preparation of a longer-term policy agenda beyond the year 2000. 71. EDUCATION. Development of basic education, and increased access to these programs for the poor, will continue to be the central element of the WBG's sectoral strategy for the next three years. The objective is to achieve major improvements in equity, service quality, and institutional capacity for efficient delivery. Special attention will be given to assisting the states, under their newly decentralized educational responsibilities, in providing compulsory universal education through the twelfth grade (that assistance could eventually be provided to the schools themselves if decentralization eventually empowers that level of decision). Support for secondary education will focus on increased educational attainment, to gradually bring Mexico to the level of other OECD countries. In particular, Mexico has committed itself, in the Summit of the Americas, to reach a 75 percent enrollment in lower secondary education. In higher education, the WBG will continue to implement a market-based program of student loans to improve access to higher education, particularly for academically qualified but financially needy students, and to develop more effective, financially viable student loan institutions. Finally, WYBG assistance will seek to improve worker's opportunities in the labor market, primarily through the development of a more demand-driven, financially sustainable vocational training system with stronger links to industry and increased private sector participation, within the framework of a national system of labor competency norms and certification. 72. HEALTH. The WBG will continue to offer a range of lending and nonlending services to assist Mexico with the execution of systemic health sector reforms, with two main objectives in mind-facilitating access for the poor and furthering private sector involvement. Five lines of assistance will be pursued: (i) ensuring the efficient implementation of the existing portfolio, which includes loans for a first-phase reform of IMSS, as well as support for decentralization of public health services to the states; (ii) providing analytical support in the areas of private health care (de)regulation, fiscal cost of health care services, and impact monitoring of ongoing health reforms, all of which should set the stage for the next round of reforms; (iii) providing new 22  Table 1. Mexico-CAS Matrix FY1999-2001 WoRLD BANK GROUP INSTRUMENTS EFFECT ON FINANCIAL POVERTY RE- Country Consensus on Necessary Policy NONFINANCIAL GOVERNMENT DUCTION1 AND ON Frameworks During CAS Period (Knowledge accumulation, public DEV. STRATEGY/ PROGRESS ELIMINATION OF debate and awareness, problem- OBJECTIVE ACTION BENCHMARKS GRowTH Existing Likely Less Likely solving) OBSTACLES' (Seek to Continue (Seek to Support (Seek to "Prepare Ground" Support) Actual Reforms) for next Adrnin.) .Strenglhened sysmn of sodal otent.ionaedinpssmvthe Direc Poverty Reduction-FYOO Nat'l. Prog. on Social Poverty Assessment-FY99 effectivenes of federol mii- Asst. Decentralization National Forum on Social Assistance and povettyprogri,as inthe Loan-FYOI Social Safety Nets-FYOO i) Protecting the .por_t _ _ _ _ _ _ _ _ Urban Youth Assistance Study-FYOO most vuhierable elWbld popabdtien oe f Follow-up Policy Notes on Poverty and result of decentralioioen of r IdreAi.1 Social Assistance (DIF) Inequality-FY99-01 financimg and itioducion of }I c Decentralization LILFY99 ollow-up Policy Notes on Self-Employment densd-deivenafpproach. & Labor Markets -FY99-01 For WBG performrance Economic Implications of Gender-FY99 Effective-se of Sdcial Economic Policy for Micro Enterpnses-FYOO S Decentrazliz on LIL and Gender and Pension Refonn-FY99 0 Povertylteducfionl,oan both o PovoetbyeFY00 Gender Capacity-Building TA Grant-FYO1 c t.spovod quabity of teachers a ii) Griving the &o relesitimi of toachoreis iDirect Basic Education Education and Income Dist.-FY99 1 isolsied aurol arem Development APL Phase Education Decentralization Study-FY99-00 poor better . Improved ncad. achieve=ee II-FYOI OptiorLs for Education Expenditure and access to better of teorgt potpupo&lo reduced Financing-Policy Note FYOO education rame Training Mechanisms Reform-Policy Note S Increaasdfed. & sti-toVel n rt IFC (possible) Education FY00 our. & etootogic capacity & Inirectv LoanProgram-FYOI Strategy for Upper-Secondary Education U imcreased comer pat. in Reform-FYOI S schooi-nagement. t For WBG perforemance Deuvery of WBO ltehnical a _asiltmice leads, withiin thi CASperiod tothecesovalof polcy constnirnta, mch as n inefficiencies is the noocaion a ofresesrces c.. ss stoteo, atld a ~~~~~~~~~to sabtdiia hincises in the b coverage mid offectiveess of eduscfeonatptogemins In-rassed access to besic 1 iii~~~~ Making ~~healtharetothlepaer,.sopc. Det Basic Health Care (PAC) Health Care Regulation-Policy Note FY99 i iii) Mak-,ng in= b aem Direct'a Loan IC-FYOI Fiscal Impact of Health Insurance Reform- t accessible to l ofpublich athcare the---licyNoteFY00 instibtSioasSi -teHealth Care Refom1n qual. of their serkesi. Indirect Loan-FY0O For WsO perforesaoce IFC's Health Sector s. c Scessfullasct'e fo the detivory of a basic health care Financing-FY99-01 package fo If million micovered mad uadetseived r sand pew-urbanpoQT by FYOI continued 23  WoRLD BANK GROUP INSTRUMENTS EFFECT ON FINANCIAL PovERTY RE- Country Consensus on Necessary Policy NONFINANCIAL GOVERNMENT DUCTION1 AND ON Frameworks During CAS Period (Knowledge accumulation, public DEV. STRATEGY/ PROGRESS ELIMINATION OF debate and awareness, problem- OBJECTIVE ACTION BENCHMARKS GROWTH Existing Likely Less Likely solving) OBSTACLES2 (Seek to Continue (Seek to Support (Seek to "Prepare Ground" Support) Actual Reforms) for next Adrrtin.) i Espsusioss md dy. of Rural Dev. in Marginal Indigenous Populations Profile (Phase 11)- iv) Attending to ckegeafi Weos.- systmen Direct Ae P Mhareginal OYO inigenoospeples ra P hseI-YOF0 Social the needs of the Epsnded mnegnd re (associated with GEF Cultural Heritage Assessment-FYOO rural poor prqj.ctfioes6 regiomd to Oaxaca lHillside Sustain- . Dev~~~el of loudescet fin. Management) ability stuctureshimarslarea. Far WEG perform-ace . . En~~~~~~~~heaced urderstanding of (contiued) atd more effedtve effort toward addressing. theneeds of the rural poor(espeaily intheatls educaceon, productive ndkey anal services), wIl pticutar stention to isdigenoua popudltions i) Assuring a C Continsuteds-nd tad Directe" Fiscal Adjustment Loan-FYoo Fiscal Sustainability Study-FY99 mnonetay palicies including viable reducd ddsesrndcy an oil Fiscal Reform SAL 1t-FYOI Follow-sup Policy Notes on Macro Sustainability- macroccoiiomic relned r"mu. c.Wled ~~~~~~~~~~~~~~~~~~~~~~FY99-00 macroeconomic revewuca. opl Enhanced Tech Supp. n Macro Monitoring & framework Achievened mnaintin Forecasting-FY99 O1 manngement with lMt Management & Prevention of Extemal Shocks- Sustailoble balance af Policy Note-FY0O payments cit uls ccoant Efficiency & Effectiveness of the Tax Regime- deficits. Policy Note-FYOO For WltG perr-rmane State-Lovel Public Expenditure Reviews-FY00- Removing Estinhsnced country awreess 0 1 Removing ,~~~~~~md debde aoundkey macr 0 Obstacles vul-mbitiee ntqWy y6i. to need for comprehensive fiscw to refonn sa e,.f. videmc.dby Sustainable relevwnt refo prupnsals by Growth core interest groups and -hii) Improving . Pres new secured lensdng t Financial Sector Technical IFC's Credit Lines for The Mexicm Banling System: An Update-FY99 Main- the eff iciency ned bankmeptqy laws to Direct2 Assistance Loan 11-FYOO Middle-market Capital Markets Study-FYO0 taming and .Eitblihmt ofpodes and companies/SMEs-FY99- Non-Bank Financial Institutions Study-FYOO Macro- transparency of incentive framewors to 01 Development Banks Report-FYOI . . s ~~~~~emn,ou g- sfe and soaud economic the financial ope,tionofboaks - _ _ _-_-_-__ Stability sector penvol soytem reytan to I c2 Fin Sector Irft Loan I in pubtic sector. Iidirect (Secured Lending-FY99 the For WEG pefror-anee Registry Modemization Context of a wBG techiical assistance as Loan-FYOI a calyst for refosnin the Fin Sector Inf. Loan 11- Globaliza. ov-eih icentive sctdme for FY01 hsedor,petaTiallymthe -ar Contractual Savings of legal fitnawodc for Development Loan 111- bashzig opnca5ious (secured FY01 lending. bannpotdy, etc.) continued 24  WoRLD BANK GROUP INSTRUMENTS EFFECT ON FINANCIAL POVERTY RE- Country Consensus on Necessary Policy NONFINANcIAL GOVERNMENT DUCTIONI AND ON Frameworks During CAS Period (Knowledge accumulation, public DEV. STRATEGY/ PROGRESS ELIMINATION OF debate and awareness, problem- OBJECTrvE ACTION BENCHMARKS GROWTn Existing Likely Less Likely solving) OBSTACLES2 (Seek to Continue (Seek to Support (Seek to "Prepare Ground" Support) Actual Reforms) for next Admin.) iii) Removing Fcieanomyo Directf 2 IFC's Eq Funds for Fundacion Mexico IDF-FY99 CONOAR td revise Doirec SMEs, Mortg. Fin., & Decentralization of PSD Senrnar-FY99 impechnents to iorvetm.nrxtiuregm tir the private sector . nberoduce rssvv SIEFORES Fact. & Educ.-FYOO-0 I Indutrial Promotion Decentralization Study- growth and Rslioaalizs and --r--eli-e- - -_ Bxport Competitiveness Report-FY0O govamnent agency support to IFC Finatcial Asst. to State-level Private Sector APSeDFmeOts-FY0O-01 competitiveness SE i(ieeCroaeSco Id .Sdelc ptlot PSD progrnon at r e Finpoatcia AS sttor Id Regulatory Con straints to PSD-FYOO Removing etase levelv adth sdeqrute Corporate 1 Sector(lnd.p&aCorporate Governance of Conglomerates Study- Reluoving swe 1-1availaiit ofdeouastep Ser.)-FY99-01 FYOO Obstacles availabiEly of,.unterpart State-level Tech. Support for Business Partnerships in Obstwlcs fiands. Competitiveness LILs- Southern States-FYol to For WBG Perforlranee FY00 Sustainable .Delvery trough FY0l of Regional-level lending aid non-leading Competitiveness APLs- Growth services fossuedoethe and removtd ofbenieos to FY01 efficient linkag between Main- esport-oriented, lrge fiens sad domestci. rmaU sad tainig mdim merps Macro- economnic complee 'Whil Paper' n Stability iv) Ensuring the renrgyrefomns Direct' Very-Low-ancome Tech. Support for Energy Regulation & in provision of regyfmn v,rkr Housing Finance-FY99-01 the quality eneray newergy Macro Implications of Energy Reform-FYOO Context of infqrastucture Develop Very-Low-Income Housing Strategy-FYOO Context of i a c . Develop sor apocy City Assistance Strategy-FY0O Globaliza. De lp smans, market-baeed Alternative Energy Sources Assessment lasts to asist I.enicipalities in acessng funding (GEF)-FY01 . stablsh comunnity Urban Development Strategy-FYOO tnvesamest trus for slim Indirect FOVI Restructuring-FY99 IFC's Priv. Sec. Inv. in Border Infrastructure LILs- Transport Sector Strategy-FYOI (contiued) upgaedn Federal Roads-FY99 Infrastructure, Gas & FY00 Infrastructure Policy Notes Collection- elaeen tpnOrovgs effacimcy Solar Combined Cycle Petrochemical-FYOO-01 Energy Sector Loan-FYOO Beyond 2000-FYO1 anliaceest programe . Cotaiue refrms in otier (GEF)-FYOO Renewable Energy State Roads Investment public sad quai-public Wind Energy (GEF)-FYOI (LIL)-FY00 Loan-FYOI housing agensa City Develop. Strategy Water & Sanitation Loan III- . hOmplemen low-income (LIL)-FY00 FY01 h Develop new gsrrrciog Highway Finance-FYOO mechsanimes for transport I rnproved legal rcegudaory. sad financing awsework for -warsnadselidwaste. For WBG Perr.nnqnce . Enhanced ctalyst role in progosse towsrd shudulns refornsinkeyrnfirasuIurlos -bsectors, notably le.tricily, as evidenced by the produCion of a collection of sbssrtorl slwategioe throughTFY01 continued 25  WORLD BANK GROUP INSTRUMENTS EFFECT ON FINANCIAL POVERTY RE- Country Consensus on Necessary Policy NONFINANCIAL GOVERNMENT DUCTIONI AND ON Frameworks During CAS Period (Knowledge accumulation, public DEV. STRATEGY/ PROGRESS ELIMINATION OF debate and awareness, problem- OBJECTIVE ACTION BENCHMARKS GROWTH Existing Likely Less Likely solving) OBSTACLES2 (Seek to Continue (Seek to Support (Seek to "Prepare Ground" Support) Actual Reforms) for next Admnin.) v) Fostering Iamopmadpertfsumrasei Diwd Agricultural Productivity IFC Financing in Information Systems for the Rural Sector- agicultural chels, warehoumn& mtc,, Loan (associated with GEF agribusiness FY99 A.sAd) Alternative Rural Energy)- Bjido Sector Study-FY99 Removing productivity and . Impoved Fof rmad FY99 Support for Institutional Coordination in RObstacle efficiency in the farmc to produ,fve Rural Micro-Finance Regional Dev.-FY99 Obtacles rura~l sector tch ardmforn. (LIL)-FYOO Rural Micro-Finance Study-FYOO to rapllment a decerjrtlized Rural Social Infrastructure Food Marketing Policy Note-FYOO Sustainable strtegyprourot4gbelter indt APL-FYOI Land Markets Policy Note-FYOO CGrowth stoeno he and dabhsh a Rural Economy Policy Notes Collection- And drectdsa1sguenisthdstsesfer 1ndAr ct1 Irrigation Sector Loan- Beyond 2000-FYOI ann ersl mdsguslh rfiactmcf hsdire FY01 State-level Inst. Strength. IDF-FYOI Main- frDcil-g ta.i. . Complet. smd crsoDdate the taining trntsfereofungaon dishtcts Macro- to wvaerrsis srld promote inrigfoni disdnct econonuc mdenazltio. Stability FIbr WG Perfurmace in . Cotdbutio, troegh timely L ~~~~~~~~~~~delLvery of prrgrmund the seeorat AUaN nd loas, to Context of the compldtoneof the refom agemdatn thc-Uc9tre Globaliza. sector, to the decwstsizaion of key nsl&publeservices. (continued) rd to ne,emary load cWpseity bailddig continued 26  WoR1D BANK GRoup INSTRUMENTS EFFECT ON FINANCIAL POVERTY RE- Country Consensus on Necessary Policy NONFINANCIAL GOVERNMENT DUCTIONI AND ON Frameworks During CAS Period (Knowledge accumulation, public DEV. STRATEGY/ PROGRESS ELIMINATION OF debate and awareness, problem- OBJECTIVE ACTION BENCIMARKS GROWTH Existing Likely Less Likely solving) OBSTACLES' (Seek to Continue (Seek to Support Actual (Seek to "Prepare Ground" Support) Reforms) for next Adniin.) Removing Vi) Protecting dDesiassssdisnspltomrgt Direct Disaster Prevention Groundwater Management Study-FY99 schemes sad estabtish Env --- - -(-O-nFY00 Disaster Prevention Case Study-FY99 Obstacles the enviromnen:t Mgau. Fandsunpilot stats Env. Mgmt. Systems for Industrial Pollution- to Baild consensus on rsquired Odt2 Oaxaca Community Env. Management & FY99 s.f-efs in grosdwatee tsttr hiiect2 Sustainable SEansded fosLetydeveltop. Forestry Reserves (GEFl- Decentralization APL I- Energy-Environment Review-FYOO Growth Isitistives to new stdts sd FY99 FY99 Env. Policy Notes Collection-Beyond 2000- integrest withIPRODEFOR El Triunfo Reserve FY01 and * Eapsaded protected eems (GEF)-FY99 Inst. Strength. on Climate Change (IDF}- systeasta bznewresevervssad Air Quality 11 (Loan) & FY99 MVain- estaliahMesoartdescan taining biological coidor Greenhouse Gases (GEF)- Inst. Coordinatson for Reg. Dev. (IDF)-FY99 .sseprovd sir quality m Di, by FY00 Macro- sddressngozone sad Meso-American Corridor econornic psrthes pollutions(thoaughs (GEF)-FY00 Stability hopversionn transport ed Protected Areas II (GEF)- powersectors) FY In F tablish bteter dinaster the prevestion and mgmt. ssochstsmsi,. Context of ra a k l 11 o~~fr WBG P.rtor=nra Globaliza. Contr ibution to thecefldent (continued) dseenterlizatio- of eavirconenntatrdtssargesmesnt sytsta, to smpvved cost recovery of envimmomeontui sersvice, sad to effective mrnagessent of mtsrrd resources, with special monitoring eophtana on wtet., sic. foreos, soil and biodiversty 27  WORLD BANK GROuiP INSTRUMENTS EFFECT ON F1INANCIAL POVERTY RE- Country Consensus on Necessary Policy NONFINANCIAIL GOVERNMENT DIJCTION AND ON Frameworks During CAS Period (Knowledge accumulation, public DEV. STRATEGY/ PROGRESS ELIMINATION OF debate and awareness, problem- OBJECTIVE ACTION BENCJHMARKS GROwTII Existing Likely Less Likely solving) OBSTACLES2 (Seek to Continue (Seek to Support Actual (Seek to "Prepare CGround" Support) Reforms) for next Adrnin.) Continuu progress in the 2 Decentralization SAL- States Decentralization APL- Decentralization Policy Agenda- -FY99 i) Offering a de-etliao process with Direct FY00 FY00 State-level Inst. Dev. & Human Resource sound, development cepoetty a the State-level Public Admin. Mgmt. Strategies-FY0O-01 decentralized etete level and adequ-te (Lll>-FY0O Effective public ccomitability mechari--sms,- Public administration Fhr wst Perreaence Indirect Governance role im the imple.enestion of efcident decentralization, as desematioYn of o comprehensive policy agendo for decentreliaon end ensuing policy baed operrtion Lench comprefhcrsve oid Tech. Assistance Loan for Commercial Dispute Tax Administration Policy Note-FYOO . coemgercied dispssteeesolutiome Tax Administration Resolution Mechanism Reform Technical Support for Partnerships in the Commerial mech diess uersoui the Commnercial raecharsm- Reform-FYOO (LlIl)-FYOI Commercial Dispute Resolution Mechanism Dispute Implement iitable f-sca Reform-FYOO Resolution refomm progrrn, Commercial Dispute Resolution Mechanism Mechanisms and For WBG Perrorm=nc Reform Strategy-FYOO Triggering thaspoliy Tax edvics, initial steps (mhen s the podaction of sector Administration reform stesegies by FYOI) Systemns toward the refons of co-mmrcil dirpate rsolution mechanseims md more comprehensive reform of te iii) Eetpmllm ot gorvemee e- t2 Selected Public Covemance Country Procurement Assessment FYOO iii) Enhancing reform initiative in key. Direce selected public initutios,. Institutions (LIL)-FYO1 Govemance Policy Workshop-FYOO Govehanismsc ForewsG Perrormsnc Public Govemance Policy Note- FY01 Mechanisms Fee WBlGPeeffemeec * iailding coentry coseensos aremnd opec&ia istiai stepn towrdrefommiapublhc govemsn.c torte, espeialty thnuogh coasary-sponsored semomars adipubicetiom so the ceases emd coses ofwek govemence Note: The matrix includes both fonnal and nonfomnal ESW tasks. It does not include all non-ESW, nonfinancial activities such as seminar and conference support and participation (whose role is likely to expand), or substantial analytical work that may be carried out as parL of technical assistance and investment projects. 1. Direct or indirect effects on poverty reduction. 2. Direct or indirect effects on the elimination of obstacles to growth. 28  Table 2. Mexico-World Bank Group Financial Instruments-FY1999-2001 FY99 FYOO FYOI Fiscal Adjustment Loan Decentralization SAL Fiscal Reform SAL II Fin Sector Inf. Loan I (Secured Lending) Energy Sector Loan Contractual Savings Development Loan III Fin Sector Inf. Loan II ,, ; ,;,, . . Agricultural Productivity Loan (associated to GEF Health Care Reform Loan Nat'l/. Program on Social Asst. Decentralization Loan Alternative Rural Energy) Financial Sector Technical Assistance Loan II FC (possible) Education Loan Progam FOVI Restructuring Disaster Prevention (Loan) Basic Health Care (PAC) Loan II Federal Roads State Decentralization APL Registry Modernization Loan Tech. Assistance Loan for Tax Administration Very-Low-Income Housing Loan Reform Irrigation Sector Loan Poverty Reduction State Roads Investment Loan Highway Finance Water & Sanitation Loan III Air Quality II (Loan) & Greenhouse Gases (GEF) Rural Social Infrastructure Loan Env. Management & Decentralization APL Forestry Development Loan Rural Dev. in Marginal Areas APL Phase II-FYOO Basic Education Development APL Phase II (associated with GEF Oaxaca Hillside Management) Social Assistance (DIF) Decentralization LL State-level Competitiveness LILs-FYOO Commercial Dispute Resolution Mechanism Reform Renewable Energy (LIL) (LL) City Develop. Strategy (LL) Selected Public Governance Institutions (LL) Rural Microfinance (LIL) Regional-level Competitiveness LILs State-level Public Admin. (LL) Border Infrastructure (LLs) continued 29  Table 2. Mexico-World Bank Group Financial Instruments-FY1999-2001 (continued) FY99 I FY00 FY01 Oaxaca Community Forestry Reserves (GEF) Solar Combined Cycle (GEF) Wind Energy (GEF) El Triunfo Reserve (GEF) Meso-American Corndor (GEF) Protected Areas II (GEF) Fundacion Mexico IDF Gender Capacity-Building TA Grant OR . . . .. ~~~333-M.I . ...M- . Credit Lines for Middle-market companies/SMEs Credit Lines for Middle-market companies/ Credit Lines for Middle-market companies/SMEs Eq. Funds for SMEs, Mortg. Fin., & Fact. & Educ. SMEs Eq. Funds for SMEs, Mortg. Fin., & Fact. & Educ. Private Infrastructure, Gas & Petrochemical Eq.. Funds for SMEs, Mortg. Fin., & Fact. & Health /Education Sector Investment Health /Education Sector Investment Educ. Direct financial support for corporate sector in industry Direct finncial support for corporate sector in industry Health /Education Sector Investment & services (incl. tourism). & services (incl. tourism) Direct financial support for corporate sector in Priv. Sec. Inv. in Infrastructure, Gas & Petrochemical industry & services (incl. Tourism). Priv. Sec. Inv. in Infrastructure, Gas & Petrochemical