INTERNATIONALBANK FOR WORLD BANK R E T C N O E N STRUCTION PM AND DEVELO January 2005 No. 61 A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank`s Latin America and Caribbean Region POVERTY IN MEXICO AN ASSESSMENT OF CONDITIONS, TRENDS AND GOVERNMENT STRATEGY Michael Walton and Gladys Lopez-Acevedo In July 2004, in the first phase of a three-year work program close to the (high) Latin America average. Recently, progress on poverty reduction in Mexico and after extensive has been much weaker in Mexico and Latin America than in collaboration with government and Mexican specialists East Asia, but Mexico has performed better than the regional working on poverty, the World Bank published a report average since 1998 (see Figures 1a & b - Tendencies in assessing poverty conditions in Mexico and government poverty incidence in Mexico, Latin America and East Asia strategies to reduce poverty.1 using international poverty lines - using 1993 purchasing power parities.2) Poverty conditions and recent trends Figure 1a - Percentage of People Living Below $2 per Day In 2002, half of Mexico's population lived in poverty and one fifth in extreme poverty, slightly lower than before the 1994-1995 crisis. Mexico has made major progress in some poverty dimensions --health, nutrition and education outcomes, access to basic health and education services, electricity, water and (to a lesser extent) sanitation. Large increases in government spending enabled key social programs to expand. Programs also became more pro-poor, with new demand-side measures using cash transfers as incentives for poor households to send their children to school and attend health clinics. Slow economic growth and Mexico's high income Figure 1b - Percentage of People Living Below $1 per Day inequality have inhibited progress in income poverty. The recent pattern of poverty changes has closely followed macroeconomic and labor market cycles. The significant decline in extreme poverty in 2000-02 despite stagnant average incomes, is attributed to substantial income growth in rural areas, and declining inequality in rural and urban areas. Rising unskilled wages, and substantial remittances and transfers to the rural extreme poor (including through the OPORTUNIDADES program) boosted rural incomes. Mexico has generally had slightly less poverty than the Latin American average, and inequality 1 Mexico's recent improvement in income inequality relative Government strategy to the (very high) Latin American average may be partly cyclical, but also appears related to longer-term structural The Government has developed an explicit conceptual changes: falling returns to tertiary education in the labor framework and set of programs for reducing poverty called market; falling wage differentials between rural and urban CONTIGO. The excellent conceptual framework recognizes areas reinforced by remittance flows to rural areas; and a multiple dimensions of poverty and complementary domains reversal since 2000 of the earlier rise in rural inequality, with of public action, across the life cycle. Two areas could be more rapid growth in higher-productivity agriculture and articulated further: complex issues of social inclusion and non-farm rural incomes in areas closer to manufacturing and accountability; and the supply side of social policy, service centers. particularly the determinants of coverage and quality of public services that affect the lives of the poor, and how the Vulnerability to adverse shocks remains widespread, federal government can influence service coverage and affecting rural and urban poor and non-poor. Adverse shocks quality at subnational levels in light of Mexico's from ill health, unemployment, meager harvests and natural decentralization. disasters deepen poverty, and push some of the non-poor into poverty. Rural and urban workers appear to experience Some programs within CONTIGO -- OPORTUNIDADES, similar patterns of income fluctuations, though self- MICRORREGIONES and HÁBITAT -- reflect CONTIGO's employed and informal sector workers experience higher integrated conceptual framework, but it is unclear how many income variability, especially in rural areas. The large size of other programs relate to the framework, and programs vary the informal sector, associated with the in the extent to which they reach the regulatory and tax burden of poor. The social cabinet, under which formalization, leaves much of the CONTIGO falls, is concerned population uncovered by formal primarily with social programs. But mechanisms provisioning against risks. there are powerful complementarities Recently, weak labor market conditions between social and economic were reflected more in higher development, and a poverty reduction unemployment than lower wages than strategy must include both. Sensible was the case before. If future shocks are changes are being made, placing the associated with more long-term coordinating function under the unemployment, better mechanisms will Presidency and exploring ways to be needed to deal with unemployment focus on fewer, higher priority risk. programs. With respect to "social poverty" The Law on Social Development (Incorporación social), a tentative recently passed is an important step in qualitative assessment is that social institutionalizing a state policy for exclusion and the weak accountability social development. It states that of public institutions to poor groups municipalities will be the principal remain problematic, despite recent (though not exclusive) executors of progress. The position of indigenous some social development programs, groups is of particular importance and requires that social development because of historical patterns of social spending not be reduced in real terms exclusion and deeper levels of poverty. in any year, introducing problematic additional budget inflexibility. Large, long-standing differences in income poverty and Implementation will be challenging. other indicators of well-being across different regions remain, with a generalized gradient from North to South. Public finance for poverty reduction programs There has been some long-term special convergence in most indicators of services and social conditions. However, Expenditure on programs specifically targeted to the poor income and wages seem to have diverged in the 1990's, with now represents 1.3% of GDP compared to 0.7 % in 1990. areas closer to the border, or to urban centers, growing faster. Programs involving transfers to the poor, led by OPORTUNIDADES since it was created, grew by an There is considerable heterogeneity within states in poverty average of 8.4% per year during the 90's, and 9.8% per year levels and trends. Across Mexico, conditions tend to be best in after 2000. But growth of social security spending not more developed urban areas, less good in peri-urban areas and targeted to the poor is even more striking--35.2% per year smaller towns, and worst in remote rural areas. A high fraction since 1990. Social spending growth was achieved through of people who are self-identified as indigenous, or speak an large reductions in "economic sector"3 spending, which indigenous language at home live in poorer states, and in could be problematic from a poverty reduction viewpoint relatively small rural villages, with low levels of services. because of the potential impact on aggregate growth and 2 inclusion of the poor within the growth process. The fairly health, old age, and unemployment. These are particularly weak gains in income poverty heighten this concern. marked for those amongst the moderate poor who have neither access to the formal social security nor to The likely need to increase economic sector spending, OPORTUNIDADES. continued demands for social development spending, and the transitional costs of pension reform, will make the fiscal The analysis of incidence and reach indicates considerable position for spending affecting poverty reduction very tight scope for redistribution within the budget for greater impact without tax reform. A tax-increasing reform could be one of on the poor. For example, reducing the electricity subsidy or the most poverty-reducing actions the state could take, removing exemptions under the VAT and reallocating the provided increased resources are used effectively. There is funds to expand OPORTUNIDADES could have substantial also great potential for more effective use of public net benefits for the poor. spending. On average, public spending appears to be much more equal than incomes, and is becoming more equal and Key issues in design of social services and social protection pro-poor, but there remain large areas of spending with very unequal incidence, and some with rising inequalities in A continued push on access and quality for secondary incidence, for example ISSSTE pensions, tertiary education education, and mechanisms for giving bright poor children and IMSS benefits for active workers. Figure 2 illustrates access to tertiary education will be key to future progress in this using a summary measure of spending incidence across building human capital. Low and variable education quality, income groups: the concentration coefficient (similar to the especially for poor and indigenous groups, is a central but Gini coefficient) is ­1 if all spending goes to the poorest, 0 if complex issue (and also appears to apply to health and other everyone receives the same spending, and +1 when all services). spending goes to the richest. Most existing social protection programs are oriented to the There is also a mixed picture in how well programs reach the formal sector, including pensions, health and unemployment poor. Some basic services --education, water, electricity-- benefits. There is a clear need to expand social protection to have near-universal coverage and reach most of the poor. But poorer and informal households. The Government has programs that are highly targeted to the poor tend to have recently taken promising measures to extend health relatively modest reach, in Mexico and elsewhere. insurance for the uncovered population through SEGURO OPORTUNIDADES is an important exception, reaching POPULAR, which covered 625,000 families in 24 of the 32 60% of the rural extreme poor (2002 household survey) and states by the end of 2003. Tracking households' and service an estimated total 80% reach in 2003. Gaps remain in basic providers' behavior is crucial to ensure that the program service provision, especially for the extreme poor, and achieves the intended benefits. incomplete coverage of the social protection system --for The main poverty-targeted transfer programs, especially OPORTUNIDADES and PROCAMPO, have good to very good targeting, and help reduce risk for recipients, since transfers are not generally subject to shocks. However, Figure 2 coverage of vulnerable groups is incomplete. There is scope for extending conditional transfers to groups in extreme poverty not covered by OPORTUNIDADES and strengthening risk-based programs, such as public works, that kick in automatically in response to shocks. Promoting income growth amongst the poor Note: GINI refers to the distribution of private income. PROCAMPO is not Future income gains amongst the poor will depend on overall reported in 2000 because the 2000 survey is not representative. VAT fiscal growth and growth patterns, especially the pattern of job spending refers to exemptions and the zero VAT rate. creation. Because job-creation requires private investment, Source: Background work for World Bank (2004) and SHCP (2004) for the poverty reduction is inseparable from a competitiveness and VAT fiscal spending. growth strategy. International evidence suggests that macro 3 stability, infrastructure provision, tackling private sector Some recent initiatives exemplify best practice, but are protections, and measures to improve logistics are all confined to only a few areas and ministries. Careful important. monitoring and evaluation is crucial, to maximize learning, improve program designs, and provide user- Economy-wide measures to strengthen competitiveness need friendly information to the public to increase social to be complemented by strategies specifically oriented to pressures for accountability. income growth of the extreme poor (mostly in rural areas) and moderate poor (mostly in urban areas). The new IMPULSO strategy, involving measures to increase The World Bank work program includes further work on productivity, security and dynamism in the self-employed the characteristics of poverty in urban and rural areas, and and small-enterprise sector, is based on sound diagnosis, but structural and institutional influences on income growth, challenges remain in policy design and execution. More patterns of vulnerability and coping; the effectiveness of infrastructure investment is needed and policy reforms to current policies and institutions to support risk improve private and public sector efficiency and equity. management; and how to get effective and quality service Electricity subsidies and further land reform are important delivery under decentralization. It is hoped that this work areas. will be useful to government policy formulation and broader debates on strengthening efforts to reduce poverty The labor market reforms under debate are headed in the in Mexico. right direction of reducing disincentives to formal Notes employment. But the proposed law does not address the main 1 issues affecting the labor market, English version: http:// especially those which increase www.bancomundial.org.mx/ inflexibility in hiring and firing. pdf/estudiosporsector/ povertyinmexico/1.pdf More remains to be done to coordinate and improve rural Also available in Spanish on area programs, and to address http:// specific needs of poor rural www.bancomundial.org.mx indigenous groups. under "Temas y Sectores" 2 Cross-cutting institutional is- The World Bank's 1993 con- sues sumption PPP exchange rate for Mexico is 2.102. The PPP · Mexico has had some notable successes in the one dollar per day poverty line is about 68.82 pesos per struggle to reduce clientelistic and patronage-based person per month in 1993 prices.Source: Chen and Ravallion relations with poor groups. But Mexico's major (1994) and WB staff calculations. political, social and institutional transition while 3 deepening democracy is difficult, complex, and long- "Economic sector" spending covers infrastructure, rural term. development, energy, transport, communication, and other services and economic activities. "Social development" · A key challenge is further increasing transparency spending includes education, health, social security, social and participation by poorer groups, to improve assistance, regional and local development, and labor accountability and reduce capture by local elites. policy. "Government management" includes legislation, law and order, national security, election processes, gov- · Little is known about the impact of decentralization ernance and environment. on poverty outcomes, institutional interactions, and program management. · Indigenous groups remain, on average, much poorer About the Authors than others. More needs to be done to assess effectiveness and strengthen existing targeted efforts, Michael Walton is the Regional Adviser on Poverty Re- and to assess the needs of other excluded groups such duction and Human Development. based in the World as poor urban youth and slumdwellers. Bank's Country Office in Mexico City. Gladys Lopez- Acevedo is a Senior Economist in the Poverty Reduction Of greatest importance is continued assessment of what and Economic Management Department in the Latin does and does not work, building on successes, and pursuing America and the Caribbean Region, again based in opportunities for integration and complementary action. Mexico City. 4