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Mexico, with more than 80 million people, is one of the Bank's largest borrowers, accounting for $21 billion of lending, or 10 percent of the Bank's total commitments since 1948. Bank/Mexico relations, while always generally good, have become closer and more stable over the last decade. A new OED study examines the Bank's economic and sector work, policy dialogue, and lending--the three principal vehicles for country assistance--in relation to Mexico, as well as evolving objectives and expectations. It finds that converging strategies, and the economic progress facilitated by the Bank's assistance efforts, played a key role in shaping and strengthening the relationship.
Increasingly over the last decade, there has been agreement on policy directions between Mexico and the Bank, although not without extended dialogue. The Bank has provided economic and sector work, and expanded its lending program in support of Mexico's economic adjustment and debt strategy. The Bank has also helped to mobilize the international financial community in support of Mexico's debt restructuring and reduction efforts. Better arrangements for collaboration and coordination have increased the ability to avoid or withstand frictions, and external events and changes in attitudes have increased the acceptability of Bank advice and financing in Mexico. The growing attention paid by the international banking community to Bank assessments of country creditworthiness has also worked in the same direction. In parallel the Bank has expanded the range of its analytical services, and become more flexible in its financing and more responsive to Mexico's felt needs in its economic and sector work.
From 1948 to 1970 Mexico enjoyed remarkably high growth, low inflation, and moderate debt accumulation. Growth after 1970 was uneven, with dynamic bursts followed by sharp downturns and then recovery. The 1980s saw large public sector deficits, double digit inflation, balance of payments crises, and rapid growth in the external debt. Since 1989 inflation has been brought under control, the balance of payments has been strengthened, and growth has resumed. Problems of poverty and uneven distribution of income have recently been assigned high priority on the policy agenda.
While it is difficult to gauge the precise extent of the Bank's influence on Mexico's economic progress, it is clear that the Bank's assistance efforts have become increasingly accepted and effective. Several factors account for this change.
Strategies
Bank/Mexican perceptions of the Bank's role in Mexico were never far apart, but in the 1980s a confluence of circumstances and new actors with new approaches made relations closer and more comfortable. The role Mexico wanted the Bank to play, and the mission envisaged by the Bank, became more consistent for three main reasons.
Mexican strategy: Mexico shifted its economic focus toward the private sector in the early 1980s after an expansionist, public sector-oriented strategy and a reversal in oil prices left it with a massive foreign debt, a weak fiscal position, and strong inflationary tendencies.
At all times Mexico has had a basic idea of the role it wanted the Bank to play in its development. When stabilization was the main goal, Mexico looked to the IMF rather than the Bank for assistance. The priorities assigned by successive administrations to (1) growth versus equity; (2) public versus private as the leading sector; and (3) protectionism versus liberalism in trade affected the role Mexico wished the Bank to play in its development as well as the overall quality of relations. In general, Mexico saw a role for Bank financing and advice in pursuing growth objectives. When private sector development, open trade relations, and equity emerged as Mexico's priority objectives, Bank relations improved substantially.
Bank strategy: The Bank shifted its assistance strategy from one based on financial support for public sector investment and the use of leverage (to encourage Mexico to follow appropriate fiscal policies) toward one based on responsive support for Mexico's program for dealing with its problems of debt, weak balance of payments, and a slowdown in growth, as well as with national emergencies such as the 1985 earthquake and the 1992 gas explosion.
The Bank's strategy in Mexico evolved much as in many other countries--moving from an early concentration on infrastructure to a concern with direct interventions for poverty alleviation, and then to assistance for structural adjustment in the 1980s to deal with exogenous shocks and dysfunctional policy frameworks and to cope with massive debts.
In the 1980s in Mexico the Bank focused on trade liberalization; then, without pushing for a comprehensive structural adjustment loan as such, it provided quick-disbursing support of adjustment in several sectors. The Bank gave highest priority to supporting Mexico's debt restructuring and reduction efforts, providing large interest support loans as well as participating in the design of the negotiating strategy.
Present Bank strategy reflects the view that now that fundamental restructuring has been done or is underway, remaining issues can be addressed through increasing support for investment in economic and social infrastructure.
Changing players: In 1982, political change in Mexico brought the core of the country's intellectual/technocratic elite to the fore, and with them new ideas and strategies. The appearance of new economic management teams on both sides was also conducive to fresh approaches. In 1985 the US Treasury, in its initiative to assist Mexico with its debt, recognized the importance of the dialogue between Mexico and the Bank, and provided the opportunity for more formal Bank involvement in the macroeconomic policy dialogue. Structural adjustment, as a result, became an integral part of the long-term debt strategy. As a consequence of these changes, Mexico has become more willing to allow dialogue on a wider range of issues.
Country assistance
Economic and sector work (ESW)
ESW by the Bank on Mexico consists mainly of economic reports, prepared at frequent intervals since 1948, but also includes seminars, workshops, and informal papers analyzing current policy issues and initiatives. Some ESW is planned and implemented jointly with Mexico. Some is in the form of technical assistance, provided by international experts and Bank staff, as well as Bank support for research programs carried out by Mexican and other experts in Mexico.
Early reports, seeing the need for a well-coordinated national development program supported by sound fiscal policies, concentrated on verifying debt service capability and creditworthiness. After 1975, when the oil boom had allayed concerns over creditworthiness, Bank economic reviews turned to issues of poverty, population growth, and regional imbalances. Economic work in the early 1980s questioned the viability of the Mexican development strategy based on massive public sector investment and protectionism. After the 1982 change in Mexico's leadership and the consequent policy shift toward liberalism in trade and encouragement of the private sector, Bank ESW focused on providing analytical support for trade reform, for structural adjustment of the financial, industrial, and agricultural sectors, and for reform of the public enterprise sector.
In general, Mexican opinion of Bank ESW has been very positive. There is evidence that at times Bank ESW influenced directly or indirectly the course of Mexican policy-making, especially in the 1980s. The likelihood and degree of influence was determined mainly by the relevance of Bank advice, which in turn depended on the focus, analytical depth, and timeliness of ESW, the quality of Bank staff, and the continuity of their assignment to work on Mexico. Papers on trade liberalization, the debt, and more recent work on poverty issues, are outstanding examples of Bank ESW.
Bank ESW has experienced occasional difficulties, resulting from lack of access to data, and a lack of cooperation by Mexican authorities on topics such as population, land distribution, and the national petroleum company. A general weakness was the lack of attention by Bank staff to the political milieu in which development policy was being framed. This occasionally made for ineffective Bank advice and lending, especially in rural development. The overly restricted circulation of Bank ESW within Mexico caused additional problems. Though within the Bank, ESW on Mexico usually benefited from a vigorous dialogue, there were occasions when opinions not conforming to the dominant view were not given a fair hearing.
Policy dialogue
The scope and content of dialogue expanded over time as the Bank's approach changed--from attempting to influence policy decisions directly to contributing to an advisory process led by Mexican technocrats. Alongside the formal dialogue that takes place through twice-yearly country program (or strategy) implementation reviews is an informal dialogue in which Bank experts work with Mexican technocrats on urgent policy issues. At the same time, the Bank has been carrying on an expanded dialogue with other financial institutions to achieve more effective coordination with their Mexico programs.
After the beginning of the oil boom in 1976 and for the next five years neither side made much attempt to discuss macroeconomic or project issues. But the drying up of other sources of international financing, the beginning of a new administration, and the emergence of a new group of leaders in 1982 set the stage for a new phase in the Bank/Mexico dialogue. For the next three years discussions centered on trade liberalization, considered essential to Mexico's shift to an export expansion and diversification strategy. Meanwhile, Mexican leaders realized that the financial crisis was a long-term debt problem requiring fundamental structural adjustment of the economy as well as stabilization and financing. During the late 1980s the dialogue centered on adjustments in the policy and institutional framework of many sectors.
In the 1990s the focus has been on the reduced role of government in keeping with the private sector orientation of the economy. Some other topics--for example, environment, human development, and the social aspects of development--have been added to the agenda.
A significant achievement of the Bank/Mexico dialogue was the 1984 General Interest Rate Agreement, whereby the individual interest adjustment clauses under 15 ongoing previous loans in several sectors were replaced by an umbrella arrangement for all.
One objective--to regularize and reduce interest subsidies--has not been fully achieved although there has been a substantial reduction in subsidies, and dialogue continues on outstanding issues. Among areas where dialogue was inadequate, the case of oil and the national petroleum company was most noticeable. Here the lack of dialogue impeded Bank understanding of an important sector and especially of its impact on the debt. This may have been the reason the Bank failed to foresee the 1982 financial/debt crisis.
The lending program
From 1948 to March 1993, the Bank made 163 loans amounting to $21.2 billion to Mexico.
Early Bank lending was almost exclusively for investment projects in power, transport, and utilities. Lending shifted toward agriculture and industry in the 1960s, poverty alleviation in the 1970s, and then policy and adjustment in the 1980s. Current lending practices lean toward addressing infrastructure bottlenecks and long-standing social problems. Changes in the composition of Bank lending have responded in part to changes within the Bank and also to the preferences of the Mexican government.
Three-quarters of Bank lending to Mexico has been for projects and the remainder for support of policy reforms. Almost all Bank projects in Mexico have contained technical assistance components for training, consultant services, and studies, accounting for more than 7 percent of funding approved. As well as providing financial resources directly the Bank has helped to mobilize resources from the international banking community--first in 1985, through partial guarantees on Mexico's behalf of up to half of a $1 billion commercial bank loan, and then in 1990 when, at Mexico's request, it waived negative pledge restrictions in existing loan and guarantee agreements to clear the way for a pledge of up to $7.5 billion as collateral for principal and interest payments on commercial loans.
Conditionality on loans, purchasing of domestically produced goods, and complexity of procedures have been the main lending issues for Mexico:
- Before 1980 the Bank resorted to formal conditionality to encourage Mexico to act on revenues and pricing of public sector services, but these efforts were resented and achieved little. Since then explicit conditionality has been replaced by informal agreements and understandings. The Mexicans have generally met or exceeded commitments made in these circumstances.
- Bank limitations on the use of its funds to purchase locally manufactured goods have been regarded as inconsiderate of Mexico's import substitution strategy, but this concern has subsided with trade liberalization.
- Complex Bank procedures--procurement rules and competitive bidding requirements--are seen as having slowed drawdown and made Bank financing impractical for urgent social investments.
Bank concerns about the lending program have centered on slow disbursement, faulty procurement procedures, and inadequate domestic cost financing. Slow disbursement was due to failure to provide counterpart funds, lack of compliance with interest rate covenants, and administrative impediments. The Bank responded in the 1980s with a Special Action Program in which it made advance payment into a revolving fund, increased cost sharing, and provided working capital to lines of credit schemes and more intensive monitoring of implementation. In addition the Bank has supported procurement training in Mexico.
Lessons
- Access to information: The Bank in its role of advisor on development and economic management must have adequate access to information as an input in its ESW.
- Policy analysis and dialogue: Client participation in planning and implementing ESW helps ensure that recommendations are relevant and acceptable. Staff and client participation in a healthy technical debate, scheduled at regular intervals, can help assure that even unpopular views are considered and therefore makes for innovative and high quality ESW. Policy dialogue must be low profile, and appropriately timed in the political cycle and decision-making process.
- Staffing: The Bank must field intellectually strong, mature interlocutors, who are not subject to frequent staff turnover and are entrusted to make commitments on behalf of the Bank if the need arises.
- Program monitoring: Planning and coordination of the lending program through regular reviews with the client and including all relevant sections of the Bank can result in improved performance of the portfolio.
- Minimal explicit conditionality in the context of agreement on the development strategy can be more effective than formal conditionality and leverage. Bank responsiveness to the client's important needs and emergencies goes a long way to enhance the relevance of Bank assistance and the tone of Bank/client relations.
Institutional response:
In its response to the OED study, Bank management generally endorsed the recommendations made. On the importance of maintaining high quality standards, it noted that the region is creating thematic teams to work on cross-cutting issues, and that efforts being made to streamline loan processing procedures will allow staff and management to focus consistently on the policy content of operations. The region will continue strengthening the link between project design and economic and sector work, focusing greater attention on lessons from project implementation.
JAC response:
The 1994 Subcommittee on OED Reports of the Joint Audit Committee carried out an intensive review of the OED study on Mexico and endorsed the general thrust of its conclusions, noting that the quality of the dialogue between the Bank and Mexico appeared to be an indispensable ingredient for the Bank's overall impact in Mexico. The subcommittee encouraged OED to continue to undertake country focused studies and to look at the quality of the dialogue between the Bank and the borrowing countries; it agreed with OED that there would be merit in concentrating such studies on shorter time periods and on the overall developmental and economic impact of the Bank's strategy in the country.
Box: Methodology
A blend of two analytical approaches--the "events-driven" and the "strategy-driven"--comprised the study's methodological framework.
The events-driven approach identifies the main events that may have affected relations, and attempts to judge the nature and direction of effects on the relationship. This approach uses events to define stages in the relationship, and tries to identify factors that determine the evolution from one stage to the next. Events, direct or indirect, are seen as having the potential to raise or decrease tension, depending on how well the interests of both parties are served.
Complementing the events-driven approach is the strategy-driven approach. This method takes fuller consideration of the economic nature of the relationship, the essence of which is a transaction involving a mix of services (financing and advice) provided by the Bank in exchange for a consideration (interest and other charges) from the client country. The quantity and mix of services offered may differ from what the borrowing country regards as optimal, the difference being the main source of friction in relations. The tone of relations will be determined by the direction and extent of this difference and the adjustments on both sides to friction. The strategy-driven approach focuses on the way attitudes and events influence a country's demand for the Bank's services, and on the way in which the Bank's interpretation of its mission and assessment of country performance affect its willingness to supply a service. Together these determine the likelihood of friction and the efforts to reduce it. |