Report No. 22525-ME Mexico Urban Development: A Contribution to a National Urban Strategy (In Two Volumes) Volume 1: Main Report July 15, 2002 Mexico Country Management Unit Finance, Private Sector and Infrastructure Management Unit Latin America and the Caribbean Region Document of the World Bank CURRENCY AND EOUIVALENTS Currency Unit: Mexican Peso 8.10 = US$1 1997 9.90 = US$1 1998 9.35 = US$1 1999 9.35 = US$1 2000 9.56 = US$1 2001 (March) WEIGHTS AND MEASURES: Metric System FISCAL YEAR: January 1 - December 31 Vice President David de Ferranti Country Director Olivier Lafourcade Sector Director Danny Leipziger Sector Leader Krishna Challa Acting Sector Manager Mila Freire Task Manager Rafael de la Cruz/Anna Wellenstein LIST OF ABBREVIATIONS Ags Aguascalientes BANOBRAS Banco Nacional de Obras y Servicios Puiblicos, S.N.C. BC Baja California BCS Baja California Sur BOT Build, Operate, and Transfer Camp Campeche Chis Chiapas Chih Chihuahua Coah Coahuila de Zaragoza Col Colima COPLADE Consejo de Planificaci6n Estatal CLOPADEMUN Consejo de Planificaci6n Municipal DF Distrito Federal Dgo Durango FAIS Fondo de Aportaciones para la Infraestructura Social FISM Fondo para la Infraestructura Social Municipal FONAHPO Fideicomiso Fondo Nacional de las Habitaciones Populares FOVISSSTE Fondo de la Vivienda del Instituto Seguridad y Servicios Sociales de los Trabajadores del Estado Gto Guanajuato Gro Guerrero Hgo Hidalgo IDB Interamerican Development Bank IMSS Instituto Mexicano del Seguro Social INFONAVIT Instituto del Fondo Nacional de la Vivienda para los Trabajadores ISSSTE Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado Jal Jalisco Mex Mexico Mich Michoacan de Ocampo Mor Morelos Nay Nayarit NAFTA North American Free Trade Agreement NL Nuevo Leon Oax Oaxaca PET Prograrna de Empleo Temporal PNDU Programa Nacional de Desarrollo Urbano PROBECAT Programas de Becas de Capacitaci6n para Desempleados PROGRESA Programa de Educacion, Salud y Alimentacion PROSAVI Programa Especial de Creditos y Subsidios para la Vivienda Pue Puebla Qro Queretaro de Aretaga Q Roo Quintana Roo SEDESOL Secretaria de Desarrollo Social Sin Sinaloa SLP San Luis Potosi Son Sonora Tab Tabasco Tamps Tamaulipas Tlax Tlaxcala Ver VeraCruz-Llave VIVAH Programa de Ahorro y Subsidio para la Vivienda Progresiva Yuc Yucatan Zac Zacatecas Z.M Zona Metropolitana (Metropolitan area) Z.M Zona Metropolitana de la Ciudad de Me'xico PREFACE AND ACKNOWLEDGEMENTS This task was prepared by Rafael de la Cruz and Anna Wellenstein (task managers) with the help of Marianne Fay (author of the main report), Gary Bland (Consultant), and Luis Javier Castro (Consultant) and under the supervision of Maria Emilia Freire. The initial report was shared with the Government in December 2001. The present version was updated in July 2002 to incorporate information on new initiatives concerning urban development and the fight against poverty in urban areas. Valuable contributions were received from the IDB in the forn of financial support for background studies and participation in the revision of this report and in meetings with local stakeholders. Special thanks are due to Huascar Eguino (main IDB counterpart), Jose Chibbaro, Bruce Ferguson, and David Wilk. Financial support for the background studies was also provided by the Corporaci6n Andina de Fomento (CAF).. The report draws extensively on the four background studies prepared by Mexican academic centers, and the policy dialogue that developed between the multilateral institutions and Mexican stakeholders. The background studies can be found in Volume II of this report. The report was prepared under the general supervision of Olivier Lafourcade, Country Director for Mexico and Danny Leipziger, Director of LCFPS. Christine Kessides, Margret Thalwitz and Fernando Rojas were peer reviewers. The team is grateful to the national advisory committee including key representatives from the three levels of government, the business and academic community, and civil society. The members of the Advisory Committee include Luis Ernesto Derbez Bautista, Secretary of Economy; Felipe Cantud Rodriguez, Mayor of Monterrey, Nuevo Le6n; Roberto Eibenschutz Hartman, Former Secretary of Urban Development of the Federal District and professor of the Universidad Aut6noma Metropolitana; Alejandro Encinas Rodriguez, Secretary of Economic Development of the Federal District; Miguel Fernandez, President of the Board of Directors of Embotelladoras Argos and member of the City Development Strategy Committee of Ciudad Juarez; Carlos Flores Alcocer, Head of Advisors to the President on Planning and Regional Development; Ricardo Guajardo Touche, President of the Board of Directors, Grupo Financiero BBVA/Bancomer; Guillermno Guemez Garcia, Vice-Governor of Banco de Mexico; Maria Teresa Kasuga, General Director, Industrias Kay de Tlaxcala; Eugenio Laris Alanis, Director of Financed Investments Projects, Comisi6n Federal de Electricidad; Santiago Levy Algazi, Former Under-Secretary of the Treasury and General Director, Instituto Mexicano del Seguro Social; Jose Antonio Madrigal, Director of Regional Development at the Presidential Advisory office on Planning and Regional Development; Melquiades Morales Flores, Governor of the State of Puebla; Alberto Mulas Alonso, Housing Comissioner, SEDESOL; Santiago Ant6 Garcia, Under- Secretary of Urban Development and Housing, SEDESOL; Bernardo Quintana, President of the Board of Directors, ICA; Pedro Ramirez Vazquez, Former Secretary of Social Development; Juan Carlos Romero Hicks, Governor of the State of Guanajuato; Rogelio H. Rueda Sanchez, Mayor of Manzanillo, Colima; Carlos Sandoval Olvera, President of Consejo Nacional de Industriales Ecologistas; Jose Luis Soberanes Reyes, Former Senator; Sara Topelson de Grinberg, General Coordinator, Centro de Investigaci6n y Docurnentaci6n de la Vivienda; Lorenzo H. Zambrano, President of the Board of Directors, CEMEX. We also want to express our thanks to several Mexican experts who, from different positions, have shown their commitment for the advancement of this work and of the urban agenda in their country. Among them are Luis Banck, General Coordinator for Planning and Development, Government of the State of Puebla;. Angel Villalobos, Coordinator of Advisors to the Secretary of Economy; Manuel Sanchez Gonzalez, Director of Economic Studies, Bancomer; and the members of the academic centres who took charge of the studies commissioned as an input to the policy dialogue: Enrique Cabrero, Rodolfo Garcia Del Castillo, Allison Rowland, Katya Rodriguez and Georgina Caire from Centro de Investigaciones y Docencia Econ6mica (CIDE); Sergio Raimond, President, Juan Pablo Llamas, Agustin Llamas Mendoza and Felipe GonzAlez y GonzAlez from Instituto Panamericano de Alta Direcci6n de Empresa (IPADE); Rodolfo De la Toffe, Cesar Velasquez, Gerardo Jacobs, Director the Department of Economics and Jesu.s Luis Garcia Garza, Director of Research of Universidad Iberoamericana; Leonardo Quintanilla, Director of the Urban-Regional Development Program at Centro de Estudios Estrategicos, Instituto Tecnol6gico y de Estudios Superiores de Monterrey (ITESM) and Jose Luis Cortes Delgado from Universidad Aut6noma de Mexico. We wish to thank Luis Enrique Berrizbeitia, Vice-President Ejecutivo of Corporaci6n Andina de Fomento (CAF) and Antonio Juan Sosa, Vice-Presidente de Infraestructura for their support from the very early stages of this project. We want to thank Seyril Siegel and Silvia Oteiza from CAF, and Antonio Trivizo, Lourdes Herrell and Gabriela Vidals for all their assistance. MEXICO URBAN DEVELOPMENT: A CONTRIBUTION TO A NATIONAL URBAN STRATEGY Table of Contents Executive Summary i I. Introduction 1 II. A Still Evolving Urban System 3 A. The Roots of Mexico's Urban System 4 B. The Emergence of a more Balances Urban System 5 C. The Urbanization of Poverty 7 D. Previous Government Programs for Urban Development 10 E. Implications for the Urban Strategy 10 III. Livable and Competitive Cities 12 A. What makes a City Competitive? 13 B. Land, Housing Markets and Urban Transport 16 C. Infrastructure and Basic Services 22 D. The Needs of the Urban Poor 25 E. Priorities forReform 31 F. New Government Initiatives on Urban Development and Poverty Alleviation 34 IV. Manageable Cities 36 A. Limited Powers within an Ambiguous Institutional Framework 36 B. Limited Own Financial Resources and Unpredictable Transfer 40 C. An Incentive Structure that does not Promote Responsible Urban Management 42 D. Priorities for Reform 43 V. Conclusions and Policy Implications 48 Bibliography 52 Annex I: The fast-growing Large and Intermediate Cities of Mexico, 1995-2000 56 Annex- II: State Business Conditions and Fast Growing-Cities 57 Annex HI: Map of Poverty and fast Growing Cities 58 Tables in Text Table 1: Mexico has largely completed its urban transition 3 Table 2: Manufacturing employment is not longer concentrated in Mexico City 4 Table 3: Where do the poor live-by the city size 9 Table 4: Where do the nation's poor live-by region 2000 9 Table 5: Distance to market and cost of transport are hey determinants of investment location across sectors of Activities 13 Table 6: A third of population of country's 124 largest Cities lives in sub-optional housing. 16 Table 7: States Typically grant few exclusive responsibilities to Municipalities for urban development 18 Table 8: Mexico City's center has been loosing population while its outer rings have grown very rapidly 22 Table 9: The two Mexico City: the get between the Federal District and conurbated municipalities in the State of Mexico 22 Table 10: Overall coverage is high, but still leaves many urban dwellers without Services 23 Table 11: The central city has much higher service coverage than the periphery 24 Table 12: Access to services among the urban poor is very low, Especially for sewerage, 1996 25 Table 13: Net enrollment rates of the poor vary across city size 27 Table 14: Leading indicators of social risk are high among poor Teenagers and young adults, (1996) 28 Table 15: Composition of Mexico's largest metropolitan areas 37 Boxes in Text Box 1: Local economic development initiatives that worked: some examples 15 Box 2: the elements of good urban transport 20 Box 3: Comparing apples and oranges: measures of deprivation in urban and rural areas 29 Box 4: Slum upgrading - an essential and effective instrument to tackle urban poverty 32 Box 5: Rolling out Oportunidades in urban areas 35 Box 6: The institutional framework for Urban Water Supply And sanitation 39 Box 7: Improving accountability for public transfers - The example of FISM 45 Box 8: The "Metropolitan Problem" 47 FIGURES IN TEXT Figure 1: Mexico's degree of primacy has declined steadily since the 1 980s 3 Figure 2: The rapid growth of Mexico's intermediate cities, 1990-2000 5 Figure 3: Urban poverty incidence has improved somewhat but the number of urban poor has increased since the mid-eighties 8 Figure 4: The distribution of FISM favors rural states 30 Figure 5: FISM resources tend to favor smaller cities, 1997 30 Figure 6: Differences in property tax collection are only partly due to differences in income per capita and degree or urbanization 41 Map 1: Urban clusters defined by transportation flows 7 EXECUTIVE SUMMARY 1. The goal of a national urban strategy should be to maximize cities' contribution to the country's sustainable development. In Mexico, the stakes are high. Three quarters of Mexico's population live in cities. Eighty five percent of the country's GDP is produced in urban areas, where nine-tenths of GDP growth was generated over the last decade. But cities are also where two thirds of the country's poor live, where the majority of crimes are committed, and where much of the country's pollution comes from. Cities are also at the front line of action for Mexico's National Development Plan and its goals of a competitive economy, regional development and inclusion. 2. The challenge this goal entails is to make cities more competitive, as well as more livable - in the urban economist's terms, maximize agglomeration economies while minimizing congestions costs. By agglomeration economies, we mean the gains in efficiency generated by the larger markets for inputs and outputs found in cities and by the rapid diffusion of ideas and knowledge allowed by proximity. Congestion costs include traffic and pollution, as well as other ills associated with crowding and the concentration of poverty (crime, violence, contagious diseases, loss of social capital, etc.) 3. Mexico is in a good position to take on this challenge. It has a relatively mature urban system, which implies overall urban population growth is at a manageable level (around 2% per annum, and projected to slow further as the urbanization rate slowly converges to 80-85% over the next decades.) The country also has a reasonably balanced system of cities. Urban population is no longer disproportionately concentrated in Mexico City, although traditional urban centers (Mexico City, Monterrey, Guadalajara) still account for about 25% of the country's population. A more balanced urban system is coming about through the rapid growth of a number of medium size cities, largely fueled by their locational advantage: distance to market (central region and border towns) or specific circumstances (tourism towns, state capital.) This is a positive development as it implies the emergence of a number of cities large enough to experience agglomeration economies, without generating unmanageable congestion costs. MAIN ISSUES 4. Key issues affecting the competitiveness and livability of Mexico's cities today can be summarized in three broad categories: Dysfunctional nexus of land management, housing markets and urban transport 5. This hampers people's ability to locate and move about efficiently (thereby minimizing agglomeration economies, while worsening congestion costs.) Particular issues are the following: Mexico: Contribution to a National Urban Strategy * Urban land management is generally ineffective - municipalities have limited control of zoning, urban development, land use, or land regularization which are responsibilities shared among all three tiers of government. Planning capacity is generally weak. * There are no good formal means of developing land for the low/moderate income population - and fewer informal solution since the law was modified in 1992 to allow for privatization of ejido (rural communal) land. About a third of the land in the periphery of medium and large towns is in the hands of high-end private-sector developers majority. The rest is ejido land, which can be privatized but under excessively high development standards. * The housing market is very illiquid and biased towards expansion at the periphery of cities. This is due to a small housing finance system, which only funds new, single home construction (thereby contributing to the inner city decline in most urban centers.) The housing finance systern effectively excludes the poorer half of the population, who is then pushed into self-help housing, typically on informal settlement on the outskirts of cities. The rental market is very underdeveloped - the legacy of years of rent control combined with non-functioning eviction procedures and the general unavailability of financing for rental housing development. * Urban transport is characterized by long commutes in individual cars and generally inefficient public transportation. Poor land use policies and the housing system that encourages urban sprawl are partly responsible for this, but so are the inefficient sharing of responsibilities between municipalities and states, the absence of metropolitan transport authorities, and the overall lack of resources - especially for poor communities on city peripheries. Unsatisfied demandfor quality basic services (water, sanitation, waste management) 6. Overall access numbers are quite good, masking fairly serious problems of quality and reliability and a large absolute number of people without access - all of which has serious impacts on the environment and public health ("congestions costs.") * Quality can be very poor and service partial: less than 30% of piped water undergoes potabilization, only a fraction of used water is treated, and less than half the households with piped water are serviced everyday, 24 hours a day. Only about three quarters of solid waste is collected, with about 35% disposed of under sanitary conditions. More than a quarter of the toxic waste generated by maquiladoras is unaccounted for. * Access is by no means universal: 5.7 million city dwellers are without running water, 8.7 million without sanitary drainage. 7. Sectorally, the most urgent improvements needed are those with the highest impact on the environment and public health (solid waste, toxic waste, wastewater treatment, etc.) Geographically, they are particularly pressing in informal settlements -colonias- where most of the un-served population is concentrated. Mexico: Contribution to a National Urban Strategy iii The lack of instruments to address the growing urbanization ofpoverty 8. As the population urbanizes, so do the poor. Today, 44% of the country's extreme poor live in urban areas, representing 12 million individuals and 38% of the extreme poverty gap. These numbers are even greater when overall poverty measures are used -35 million poor individuals live in cities, accounting for 64% of the country's poor and 56% of the overall poverty gap. 9. The productive capacity of cities can and should be harness to help reduce poverty. Integrating the poor into the work force and improving their earning abilities and quality of life is an essential element of making cities more competitive and livable for all. Yet knowledge about urban poverty is sketchy and few resources and programs are available to address it: * Urban poverty seems to be concentrated in large cities (up to 50% of the urban poor may be in cities of more than l/2 million) and in the central region and greater Mexico City (which account for more than half the country's poor, urban and rural.) Within cities, the poor tend to be concentrated in informal settlements (colonias) on the outer rings of growing agglomerations. * Urban areas have relatively lower social capital. Four fifth of female headed households live in cities- in half the cases, these women are the only adult in the house - and so do 2/3 of households formed of only people 65 years and older. Crime and violence are particularly acute issues, with a high proportion of poor youths at risk. * The urban poor have relatively higher human capital: they tend to be better educated, with higher literacy rates and higher enrollment rates than the rural poor. More of them work outside the home in paid employment, 55% in the informal sector which offers neither pension nor health insurance. * Health outcomes, such as the incidence of diarrhea among children, are about the same among the urban poor as among their rural counterparts, despite the urban poor having much higher access to basic services (water and sanitation.) This is due to poor quality and incomplete coverage of services, which in urban areas cause severe public health problems. * Only one quarter of public spending for the extreme poor goes to urban areas. Part of this is due to the fact that extreme poverty is more prevalent in rural areas particularly when measured though the poverty gap, but also to the fact that targeting is based on indicators that take systematically higher values in cities (access to electricity) or measure different things in urban and rural areas (drainage.) * There are very few programs to address the needs of poor urban children -- more than a million of which suffer from chronic malnutrition and stunting -- of the type developed in rural areas. iv Mexico: Contribution to a National Urban Strategy THE ELEMENTS OF A STRATEGY 10. The urban strategy for Mexico should be three-pronged. One prong should address the institutional and regulatory problems that hamper good urban management. This will help all municipalities and is largely a federal responsibility. A second prong should focus on urban poverty. This needs to be federally driven, though municipal and state government should be actively involved in design and implementation of programs. The third prong needs to tackle the individual problems of cities that are of prime importance within the country's urban system. These are the fast growing cities - medium size towns where jobs are being created, and which are encountering problems of congestion, pollution, increased concentration of poverty and irregular settlements - but also the country's historical population centers (Mexico City, Guadalajara and Monterrey) where a quarter of the country's population is still concentrated. Institutional and regulatory reform for improved urban management 11. Underlying many of the issues confronting Mexican cities are the limited powers, resources and often capacity of municipalities. The decentralization framework is characterized by concurrent responsibilities between all three tiers of government, limited responsibilities of the municipal level, weak accountability and an incentive framework that does not promote good local governance. Addressing these issues, clarifying the framework for private participation in infrastructure and urban land management, and reforming the housing finance system should therefore be the core of the national urban strategy. Federally driven institutional and regulatory reform should focus on the following areas: * Revisit the decentralization framework to: o Grant municipalities exclusive competence for municipal management and more generally eliminate the ambiguity and overlap in responsibility among the three levels of government. Concrete examples include making land use and the allocation of public transit routes municipal responsibilities. This should still allow for some standards, such as environmental ones, to be set at state or national level or for the shifting of powers from municipalities to metropolitan authorities. o Improve upward accountability by making grants and transfers conditional upon the receipt of budgets and audited accounts. This implies a change in the law, and so will require time. In the meantime, incentives for better accountability could be created by granting more responsibilities and/or resources to municipalities that respect minimum reporting standards. This will have the additional advantage of tailoring resources and responsibilities to a municipalities' capacity. Additional measures to improve financial management and transparency include technical assistance, especially to smaller municipalities, and encouraging the one third of the states that still need to pass laws governing budgetary procedures and financial management to be able to meet the minimum requirements. Mexico: Contribution to a National Urban Strategy v o Improve downward accountability. This is a long term goal since it requires electoral reform to eliminate the restriction on consecutive terms for mayors, and/or allow for direct elections of council members rather than the current system of party list. o Build into the transfer system incentives for municipalities to improve their own revenue raising efforts - through matching grants or through a system of premia based on measured tax effort. Demand driven technical assistance for improved revenue collection may help the generally low property tax collection performance, as could alternative to complex and cumbersome cadastres (such as fiscal cadastres or self-assessment.) o Develop instruments to address metropolitan issues. A number of options are possible, from single purpose authorities such as a metropolitan transport authority, to multipurpose metropolitan government structures. Multipurpose metropolitan governments are more desirable in that they can coordinate across related management areas (such as land use and urban transport) but they are complex to establish. The recommendation is therefore to create the most urgently needed single purpose authorities (typically transport) which can later be merged into a, metropolitan government structure. Alternatively, Institutos de transporte, such as the ones in Leon and Ciudad Juarez which have professionalized transport and provided an institutional memory, may be the more feasible starting point. * Improve states' regulatory environment for private participation in infrastructure to minimize uncertainty around concessions - this requires adopting regulations governing private sector participation (in place in very few states) and establishing distinct regulatory authorities to oversee service provision. In addition, these state level regulatory authorities could provide municipalities with much needed assistance in identifying, negotiating and managing concessions. These measures, however, can only supplement sector reforms, particularly in the water sector. * Reform the land and housing system to increase the liquidity of the housing market and the range of formal housing products available. This requires developing lending for used housing (a policy which will do much to revitalize decaying city centers), improve foreclosure capacity, and revitalize the rental market. Additional measures are needed to expand low income housing, notably through lower subdivision standards, a streamlined land development process and a number of complementary measures aiming at mimicking the gradual way in which the poor typically acquire housing and at developing an industry of low/moderate income land developers. Finally, state housing agencies need to be strengthened so they can convert agricultural to urban land and provide the macro infrastructure (trunk water and sewer lines), but also so that they are better able to facilitate partnerships (allowed by the 1992 law) between ejidarios and developers for land development. Since the best mix of housing solutions varies substantially by region, states and municipalities should be allowed to develop their own programs, although the federal housing program should set key vi Mexico: Contribution to a National Urban Strategy parameters. The Mexican Government and the Bank are currently collaborating on a low income housing strategy, which is developing many of these themes. Develop urban poverty programs 12. Additional, urgent work is needed to develop well targeted programs for the urban poor. Better knowledge of the urban poor is needed, however, if targeting is to be efficient. Mini censuses can be conducted in neighborhoods that are well known for being poor, while low income families residing in other areas could register voluntarily. Overall, however, Mexico needs a national targeting system such as the ficha CAS in Chile, or SISBEN in Colombia.' The following are some suggestions for priority interventions, which may be of use to the Government as it begins developing an urban poverty program: * Actions are needed to help the poor develop their assets - which in urban areas are basically housing and human capital. This requires developing the low income housing policies mentioned above, but also slum upgrading programs. In addition, OPORTUNIDADES, which provides integrated support for education, health and n'utrition for the very poor mostly in rural areas, could be expanded further in urban areas.2 * Urban specific interventions to help the poor improve their income earning capacity include public transport (discussed above), training and child care. PROBECAT (a training program) needs to be thoroughly redesigned and should be supplemented with schemes to facilitate entry into labor markets for school leavers and graduates (vocational training, apprenticeships.) Subsidized community child care may need to be developed since the current fornal system is too expensive and limited to women employed in the formal sector. * Interventions to improve security need to address income insecurity, violence and social capital. The reforms under way to open social insurance programs (IMSS and ISSSTE) to informal sector workers are essential and should be continued. In the longer term, it may be helpful to encourage formalization of the informal sector. Workfare programs, which exist in rural areas, could be developed in urban areas and gradually replace the costly and overlapping targeted food subsidy programs that still exist. Programs to address violence are complex but are very much needed in Mexico. International experience, such as Brazil's may offer some useful ideas on how to proceed.3 Finally, although social capital is difficult to foster Theficha CAS is a two page form that Chilean households must fill to apply for beneftts (income transfers, water subsidies, social housing, childcare centers.) It is cost effective and performs reasonably well, although it is prone to errors of exclusions. This is due to insufficient awareness of it among the poor, and to its inability to capture vulnerability associated with shocks such as unemployment and illness. For a discussion of theficha CAS targeting system see Clert and Wodon, 2001. 2 OPORTUNIDADES was developed in and for rural areas. It has recently started functioning in some urban areas, where it includes about 500,000 urban poor families. Estimates are that an additional 700,000 urban families need to be integrated into the 3rogram. A key question is whether some adjustments need to be made to the program's design to adapt it to urban settings. Documentation on Brazil's very rich experience with urban poverty alleviation programs (which includes programs to address urban violence) is available at http://lnweb] 8.worldbank.org/Extema/lac/ac.nsf/4c794feb793085a5852567d6OO6ad764/aOaa75a4359674aa85256a760069dObd?OpenD ocument Mexico: Contribution to a National Urban Strategy vii directly, the provision of community space in poor urban areas helps as do community based approaches to service delivery. 13. Another suggestion for reform concerns the need to replace the indicators used in the allocation of targeted spending under Ramo 33 with location neutral ones (that capture the living conditions of a population group regardless of whether they are in urban or rural areas.) Thus, instead of access to electricity and drainage, better and equally available indicators are access to safe water or quality of housing (durability of roof or wall material.) Develop joint programs for cities of national importance 14. Interventions to help specific cities should result from joint local and federal efforts, and probably include states. Current knowledge suggests interventions would need to address the following problems: * In the older mature cities, which are not growing fast but are very important in terms of population and output (Mexico City, Monterrey and Guadalajara), there is a need to revitalize decaying city centers, manage traffic and pollution and generally cope with congestion and poverty - the negative externalities associated with size. This will require developing a metropolitan management system since in Mexico City and Guadalajara, congestion issues spans several municipalities. Lending for used housing and efforts to develop rental markets could help reverse the outflow of population away from central districts and do much to alleviate problems of traffic and pollution. In addition, these cities are in a transition phase, concerning their economic and productive roles. Their fate (in line with the natural evolution of large urban centers) is to loose their manufacturing bases, so their future growth is predicated upon positioning themselves as centers for services and innovative industries. They also have an important role to play in linking the country with the rest of the world. In all three cases, there is scope for innovative local economic development strategies and improving the business environment - the business climate of Jalisco, Nuevo Leon and Federal District are ranked as 8h, 24th and 32nd (or absolute worst) among Mexico's constituent entities. * In the fast growing large and medium manufacturing towns of the north and the center, investments are needed to handle rapid population growth and tackle emerging congestion, environmental and social problems that could preclude further growth. A recent survey in Chihuahua shows that for small and medium scale enterprises the binding constraint currently is infrastructure. Similarly, recent press coverage in the US emphasized water issues and lack of appropriate housing in the fast growing border towns. In addition, private sector development analysts expressed the fear that the maquiladoras of the North may be going the Puerto Rico route (low skill, low wage activities in an enclave model) and develop in isolation from the rest of the economy. This suggest the need for local economic development strategies to foster local linkages. viii Mexico: Contribution to a National Urban Strategy * In the tourism cities such as Cancun, and Puerto Vallarta, the priority should be the infrastructure to protect their fragile ecological environment, and managed growth plans. * As to the southern capital cities, it is unclear at this stage what is driving their growth and whether they could be emerging as growth centers for the poorer states. A local economic strategy for them would assess this potential. 15. These suggestions are in line with the programs developed by the Government in both its Programa Nacional de Desarollo Social 2001-2006 and in its urban strategy Programa Nacional de Desarrollo Urbano y Ordenacion del Territorio 2001-2006. Most importantly, the urban strategy sketched here is well aligned with the central criteria of the National Development Strategy, namely inclusion, sustainability, competitiveness and regional development. Mexico: Contribution to a National Urban Strategy 1 1. INTRODUCTION 1.1 Three out of four Mexicans live in cities. Close to 85% of national value added is generated in urban areas. Increasingly, Mexico's economic activities are concentrated in cities where they benefit from ample markets for inputs, outputs and labor, and where ideas and knowledge are rapidly diffused. And thanks to these agglomeration economies,4 cities have generated more than 90% of Mexico's growth in the last decade. 1.2 Along with agglomeration economies come congestion costs such as traffic and pollution: in Mexico City, which accounts for 18% of the population and 23% of national output, unhealthy levels of ozone and particulates are the norm and the average resident spends hours every day in traffic. Mexico City also suffers other ills associated with crowding, such as crime, violence, contagious diseases and loss of social capital. 1.3 Fortunately, Mexico's urban system has become less concentrated following economic and political liberalization.5 The closed economy manufacturing belt around Mexico City has dispersed as its share of manufacturing employment fell from 47% in 1980 to 26% today. New industrial centers have formed in Northern Mexico and elsewhere in the Central Region. This has resulted in a decentralization of employment and a reduction in regional specialization as multiple manufacturing activities expand in the new industrial sites. Other clusters are developing around tourism in the South, creating another growth pole. 1.4 While this deconcentration is making Mexico City's problems more manageable, it is also creating new challenges. The rapid growth of other metropolitan areas and secondary towns has caused serious urban management problems. Urban sprawl and inner city decay plague larger cities - new and old. Municipalities, large and small, have difficulties keeping up with necessary services: 5.7 million urban Mexicans do not have running water; 8.7 million have no sewerage services, and 24% live in irregular settlements. And few municipalities have the means - financial or institutional - to cope with the 35 million poor who live in urban areas. 1.5 These facts suggest the need to assist emerging growth centers through interventions that improve their internal efficiency, help them cope with rapid population growth and take advantage of the opportunities offered by NAFTA. But this should not be at the expense of older, traditional urban centers. These -- Mexico City, Guadalajara and Monterrey -- remain extremely important and face problems of inner city decay, urban sprawl and growing slums at their periphery. For both traditional centers and the emerging growth centers, interventions should aim at making them more dynamic as well as more livable. 4 Agglomeration economies are of two types: economies of scale due to larger and thicker markets, and economies of scope associated with the wider diversity in supply and specialization of firms. 5This paragraph is based on Hanson, 1998. 2 Mexico: Contribution to a National Urban Strategy 1.6 Such a strategy requires the cooperation of all three tiers of government. At the federal level, the Government, through the Ministry of the Economy has expressed its willingness to strengthen the cadenas productivas that form the backbone of Mexico's metropolitan areas. Its support will also be needed to help develop the institutional structure necessary for city level governments to cope with their responsibilities. And both states and municipalities must cooperate to manage metropolitan issues and small town problems. 1.7 The present report was written as an input into policy dialogue with stakeholders from all three tiers of government, the business and academic communities and civil society. A national advisory committee and regional groups of city representatives considered core ideas which were subsequently presented in a seminar and then to the Federal Government for discussion. The World Bank, along with the IDB and CAF, supported this process. 1.8 The present report is structured as follows. Volume I presents the elements of an urban strategy. It offers a quick description of Mexico's urban system, analyzing how it has changed following economic and political liberalization. Policy recommendations are then organized along the themes of livable/competitive cities (highlighting the dysfunctional nexus of land use/housing markets/urban transport; the backlog of infrastructure investment; and the concentration of poverty in peri-urban areas), and manageable cities (how to develop the institutions to manage and implement these policies.) These themes are developed further in Volume II, which includes four background essays commissioned from Mexican academic centers: Economia Urbana: GCudl es la clave de la competitividad? analyzes factors that explain public and private sector investment decisions across cities and sectors and analyzes emerging geo-economic urban clusters in Mexico. Reconstruir las ciudades para superar la pobreza identifies the obstacles to urban poor's access to public goods and assesses the effectiveness of present policies. Alianzas institucionales: el desaflo de la decada analyzes how decentralization has impacted urban development and governance Aprendiendo de los Exitos y de las Dificultades de la Gesti6n Urbana draws on five case studies on city management and strategic development to extract applicable conclusions for successful administration of urban centers Volume II also includes a review of the World Bank's history of urban interventions in Mexico. Mexico: Contribution to a National Urban Strategy 3 11. A Still Evolving Urban System 2.1 Mexico is a "mature" urban country, in the sense that it has largely completed its urban transition. With two-thirds of the population already living in urban areas, the rate of growth of the urban population has slowed to around 2% and is projected to fall further as the urbanization rate slowly converges to about 80% (table 1.) Table 1: Mexico has largely completed its urban transition Urban population 1950 1960 1970 1980 1990 V2010 2020 2030 Million 11 18 28 45 58 | 87 99 110 % total population 43 51 59 66 71 7 79 82 Rate of growth/1 .. 4.8 4.7 4.6 2.6 g 1.8 1.4 1.I 1/ Preceding decade annual average. Sources: NEGI 2000; UN 1999. 2.2 Mexico's level of urbanization is similar to that of other countries at its level of income, and so is the speed at which this urbanization has occurred. Where Mexico stands out, however, is in the extent to which its urban population was concentrated in Mexico City and how this has reversed with political and economic openness since the 1980s (Fig. 1.) 2.3 Concentration of the urban population in the largest city is normal and even efficient, particularly at low levels of urbanization and economic development, when the concentration of scarce resources helps achieve economies of scale and scope. But in Mexico, this concentration was remarkably high, even by Latin American standards. At the peak, in 1980, a third of Mexico's urban population was concentrated in Mexico City, which was the world's third largest city (after Tokyo and New York.) Figure 1. Mexico's degree of primacy has declined steadily since the 1980s 32 - . ii 0 o LatinrAmerica & Caribbean Z5 111 Upper middle income .E = 26 - <1 0 CU -e 23 16 C~~~~~~~~~~ 20 1960 1970 1980 1990 1995 Source: World Development Indicators, 200 1. 4 Mexico: Contribution to a National Urban Strategy 2.4 Today, Mexico City accounts for less than 25% of the urban population, and the locus of economic and population growth has shifted to a second tier of cities, around the metropolitan area and in the central region, but also on the northern border and in the tourism areas. Part of this evolution is due to the normal dynamics of city formation: as industrialization proceeds, manufacturing activities begin to move to smaller cities outside the capital. It also reflects profound changes in Mexico's economic and political structure. A. THE ROOTS OF MEXICO'S URBAN SYSTEM 2.5 The concentration of population and economic activities in Mexico City finds its roots in the import substitution model followed by Mexico until the early 1980s. By then, Mexico City accounted for 46% of manufacturing employment and close to half national value added in manufacturing (Hanson, 1998; Tamayo Flores 1997.)6 Political centralism, with investment and pricing policies that favored Mexico City contributed to this concentration (Rowland and Gordon, 1993). 2.6 With the opening of the Mexican economy to trade in the mid-eighties and improvements in transportation and communication infrastructure, for many industries, the market advantage of Mexico City no longer offset its high and increasing congestion costs. In addition, political liberalization probably decreased the need for large companies to locate their headquarters in Mexico. As a result, regional industrial centers have replaced the dense concentration of industries in the metropolitan area and Mexico City's share of manufacturing employment fell from 47% in 1970 to 26% today (table 2.) Manufacturing employment is now weakly concentrated in the Central region (34%), with the Border region accounting another 26%. Table 2: Manufacturing employment is no longer concentrated in Mexico City (Share of manufacturing employment, by region 1970-2000) Region 1970 1980 1993 2000 Border 19 21 30 26 North 5 5 6 6 Central 22 23 27 34 i Gea_ter.fe 'xi--o4%; ++ : 2-4%; + : 0.75 to 2 MAP SECTION IBRD 31510 Tijun. hc 3 SW 9 nsecede , ' 0 < Nogols,t~-~----___r toddwrez U N I T E D S T A T E S O F A M E R I C A BAJA > -30 1 -G / \ 9 . =0 M ~~~~~~S O N M E< X IW C C. _ H I Hd U A,J H Cchihulohf / trooFAST GROWING CITIES { AND THE CONCENTRATION BAJAX o S = n \ ~~~~~~~~~~~~~~~C O A H U I L Ave'OFPV T RN;MOF POVERTY Li N V< 0 RIVERSS_, Q Viro0 17 G 0 X 0lKIMTR '0 ~~~~~~~\( ~ 5SURSAINE'S- A LUI PONC \, G0 L05ELECECIES STRNAT BOUNDARIES GROWING CITIES: o oi '0E R\ G~ u UANAfMJUxiATo_ 5-20 O. [CITI;ELS OTVER 250,000T IN R2E000 WIlTH 1995-2000 Pel olG aoocot 7 u n >t& \ '/ 2 POPULATION OROWON OREATER THAN 2%) ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ TAAUIPINERATONL OUDAIE Q P AST GROWING SMALLER CITIES JALISCO ; (, zp no \C*pce \' ___j (CITIES BETWEEN 100,000 AND 250 0001IN2000 WITH\ Arlo Pomd ,PUBA \ QINNA 1995-2000 POPULATION OROWTH 6REATER THAN 2%I)^,Zae t MICHOACAN ) M / b y o I C o m p e c b e |0D KLER W1 56% OPCOUNTRY'S POOR - CENTRAL REDION AND OREATER MEXICoclTy S ! ? "J / J T m 1 0X OP COUNTRY'S POOR - NORTH REGION S OA4 Thes mop woo pcodocod hy the Mop Psoige Set? of The World Bock.~{ ( ~ 'GtertA d o oS on this mop do cot -mply on the port of The World Recnk D roup, any \ \ fY ? r judpctoct on the legol stoIcs of ony tsccSiory, or ocx sendoctetnets or / ocooptonco of such boondonoss~ ] joo 100 ~~~~ ~~~~~~~~~~~~~~~~~~~~Topo \ HONDURAS ic- SW~~~~~~~~~~~~~~~~~~~GuIf fMxc GROWING CITIES: S) UA v z~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~LLT20 IMAGING Report No.: 22525 ME Type: SR