Mexico and The World Bank: Rebuilding a Country

Mexico and The World Bank: Rebuilding a Country

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Mexico and The World Bank: Rebuilding a Country

The 1994/1995 financial crisis in Mexico affected me in a very personal way. My family is from Mexico City, and my dad owns a small private firm that specializes in manufacturing tools. After the devaluation, I not only watched my father struggle with the failing economy and lack of business growth opportunities, I also witnessed a country begin to sink deeper into poverty and despair. There are many reasons for the devaluation, but one of the main ones is probably the “poor savings rates and the low rate of investment (only saved 19 percent of GDP from 1980-1994)” (Bloomburg). Low levels of social development and high levels of poverty consistently served as a drag to economic growth and reform measures.

Next fall I am going to spend a quarter in Washington D.C. completing an internship at the World Bank. I am going to work in the Latin American department, so I will have the opportunity to deal very closely with the Bank’s strategies and projects in Mexico. Therefore I have decided to research the relationship between the World Bank and Mexico.

The World Bank is one of the world’s largest sources of development assistance. It is not really a bank, but rather a specialized agency comprised of 184 member countries. Along with several other institutions, the Bank provides low-interest loans, interest-free credit and grants to developing countries. The Bank has provided assistance to Mexico for over 5 decades, and projects loans totaling $5 billion to Mexico up to the year 2005. Mexico holds the second largest share of the Bank’s portfolio, which totals to a whopping 11.1 billion dollars (9.4 % of total portfolio). The Bank works alongside Mexican authorities and officials and both regional and municipal levels to lay out plans and devise strategies that will hopefully help to build up the Mexican economy and social welfare. The Bank currently runs 31 active projects with a net commitment of $5.4 billion.

Today Mexico is defined as a middle-income country, although many of its residents continue to survive off less than 1 or 2 dollars per day. Those who live on less than $1 per day do not have access to sufficient food or clean water. Income per capita is $5070 (the highest in Latin America).

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Life expectancy at birth is now calculated to be 72. The under-five mortality rate dropped from 46 to 29 per 1000 births between 1990 and 2000. Almost three quarters of the population lives in rural areas, and 86 percent have access to clean water. Yet there is also a huge gap between the northern and southern regions of Mexico (with the Northern being more industrialized) and a huge gulf between the rich and the poor. There is room for much improvement, and Mexico must work hard at establishing an efficient government that will allow for economic growth and a rise in the standard of living.

Reducing poverty is generally accepted as Mexico’s main goal over the next few decades. But there are many underlying obstacles that must be addressed before poverty levels can begin to be quantifiably reduced. Development policies designed by the Bank attempt to focus equally on administration, infrastructure and the environment. These are the sectors that rely on the World Bank to provide investment and strategic management, but Mexico must also increase its competitiveness in the world market, boost its agricultural productivity and maintain economic stability. Only then will Mexico be able to directly address the poverty issue.

The acronym CAS stands for the Country Assistance Strategy. The CAS outlines a development agenda that is consistent with the Mexican National Agenda for the years 2001-2006. There are five main points to this agenda:

1-Consolidate macroeconomic gains
2-Accelerate growth through enhanced competitiveness
3-Reduce poverty by investing in human capital
4-Create environmental sustainability
5-Create a more efficient, accountable and transparent government

The first goal basically means that Mexico needs to establish economic stability, primarily by creating stricter budgetary rules, extensively reform taxes, and improve the tax administration. Once these goals are completed, the groundwork will be laid for Mexico to grow and compete more successfully in world markets. One example of a project designed by the World Bank to aid the financial sector is the Financial Sector Project (1995-2000). Under this project, banks in trouble were analyzed and restructured, and all major banks were audited. The World Bank also established a new regulatory framework for private debt and attempted to secure capital-market transactions. The main goal was to extend regulation and supervision of all banks so that they would be forced to act fairly.

The second goal basically states that Mexico needs to improve its infrastructure so that it can subsequently increase agricultural productivity and become more competitive. I think one of the greatest problems in Mexico is the lack of a legal and institutional infrastructure that would allow fair capital market transactions to take place. The central banking system is also in need of great reform. The World Bank is attempting to encourage the Mexican economy to integrate more small and medium-sized firms. This would mean increased investments in business like my father’s tool business, one that ultimately suffered from a complete lack of local investment. Just as importantly for business growth, the Bank proposes to remove barriers against private cash flows by liberalizing sectors that are dominated by public monopolies (for example energy and housing).

But increased investment is not only needed for businesses, but also for improving physical infrastructure. The road system in Mexico has greatly deteriorated, and efficient transport is a major problem. One project that was aimed at combating this issue is the Highway Rehabilitation and Safety Project. This project resurfaced around 51,000 kilometers of federal roads, and by the year 2000 around 61 percent of federal highways were proclaimed in good or fair condition, compared with only 43 percent before the project was enacted.

The third goal is mainly a focus on education and health issues in Mexico. One of the Bank’s goals is to ensure that all Mexicans have access to basic health care and educational services. It is also important to protect groups that were left behind in poverty during times of decent growth. The Bank attempts to fund projects that will remove labor distortions and move workers to more formal sectors of the economy.

The Basic Education Project of 1999-2001 improved the quality of education in rural, poor and indigenous areas. The project increased the number of secondary schools and attempted to improve the quality of teaching. The Primary Education II Project raised the standards of elementary education in some of the most backward and poorest states of Mexico. The main aim of this project was to bring the educational standards in these areas up to at least a national level. To reach this goal, management of schools was improved, new books and learning materials were provided, and teachers were given further training. Graduation rates rose from 66 percent in 1994 to 80 percent in 2000-2001.

A general program with the goal of reducing extreme poverty in Mexico was the Second Decentralization Project of 1996-2000. It focused on providing basic infrastructure to eight of Mexico’s poorest states by installing clean water, building decent roads, fixing schools and providing technical assistance to locals who were attempting to build up trades and businesses.

The fourth goal concentrates on sustaining the environment, which is consequently a means of also increasing agricultural productivity. In order to sustain future development, Mexico needs to protect its natural resources such as water supplies, and to manage waste, energy, air quality and forestry efficiently. If natural resources are not depleted, agriculture and industry can increase, and therefore poverty will no longer be generated or sustained by declining natural resources.

Air pollution in Mexico City is a huge issue that I am very familiar with. It was reduced substantially by enforcing standards for vehicle emissions and by developing guidelines for improving the standard of air quality. The Transportation Air Pollution Project of 1999, reduced the concentration of ambient lead by 98 percent, and reduced the level of sulfur and ozone in the air.

In the agricultural sector, the Bank developed a project called the Rainfed Areas Development Project that enabled farmers to invest in small-scale irrigation and drainage, and also soil conservation and livestock production. Previously these farmers had not had access to private-sector capital, and this project enabled them to change from corn production into crop production that would receive higher profits on the international market.

The last goal, and in my opinion the most important goal, is to create a more efficient and transparent government. During my experience in Mexico, I witnessed so much corruption and deceit, from officials and leaders essentially stealing money from the government, to poor people being robbed of even the most basic opportunity to create a business. Mexico needs to strengthen and improve its government on all levels. This includes anti-corruption procedures and reforming the legal system. The Mexico Decentralization Project of 2001 increased the transparency and public accountability of the tax system. It also imposed strict budget constraints on the federal funds provided to the lower levels of the government. Projects such as these strive to increase the efficient action between authorities at the federal, state and municipal levels. This will greatly aid in the much needed process of decentralization.

The Bank has designed projects to complement these basic goals such as modernizing crops, strengthening the land title system and expanding rural finance. The Bank has also created a program that will take the savings of Mexican migrants living abroad, and invest these savings into small business in their home towns (World Bank Website).

One of the most important improvements in Mexico’s agenda is the process of decentralization. Policy decisions in all the key development areas mentioned above, such as education, health, environment, business investment, and infrastructure, are now made at the regional level by the states and cities, in conjunction with the federal government. The World Bank is acting with this concept of decentralization in mind, by placing greater weight of state-level policies and programs. The Bank is currently investing in several programs that combat many of the goals listed on the CAS agenda. The Bank just approved a $202 million project to protect the environment, a $400 million loan for rural investment, and a $64.6 million project to improve financial services to the poor.

Mexico has a long way to go, but with the help and financial support of institutions such as the World Bank, it can hopefully develop into a strong and independent nation that is able to avidly compete in world markets.
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