The chapters, or "policy notes," of this report, creating the foundations for equitable growth in Mexico 2006-2012, are dedicated to trying to solve parts of the puzzle as to why Mexico's level of economic development has failed to approach the level of its NAFTA trading partners, or the level of a typical OECD member state. Each chapter of this new report uses the 2000 policy notes as a reference.

OVERVIEW, by David Rosenblatt

Mexico has undergone a dramatic political, institutional and economic transformation over the last two decades. The political system has evolved towards open and highly competitive elections, decentralization of the public sector has progressed, some sectors previously controlled by state owned enterprises were privatized and barriers to international trade were substantially reduced. Sector reforms have resulted in expanded coverage of basic social services such as education and health, and the macroeconomic and trade reforms of the 1990s have established Mexico as a stable and more open economy.

The chapters, or “policy notes,” of this report are dedicated to trying to solve parts of this puzzle. Like many puzzles, the pieces are interlinked and we may not have completed the picture in every dimension. It has become a tradition at the World Bank to prepare a set of “policy notes” during political transitions. In 2000, the World Bank prepared a comprehensive set of notes that were published in 2001 under the heading Mexico: A Comprehensive Agenda for Development for the New Era. Economies evolve gradually and reforms necessarily take time to be implemented. As a result, much of the analysis and a number of the recommendations of that report remain valid today. Each chapter of this new report uses the 2000 policy notes as a reference. In this report, we have tried to be selective on the issues, and we explored multisector issues by joining themes like education and labor markets in one chapter, or health and old age security in a single chapter.

In this overview, we set the stage by outlining the common themes and messages that emerge from the eleven chapters of this report. There are three themes that we highlight:

• Mexico can do better. Economic growth could be much faster, given the natural attributes mentioned above. Poverty reduction could be much faster, and faster growth and poverty reduction are mutually reinforcing. Economic and social policy reforms that could improve the situation have been blocked by interest groups that prefer the status quo.
• Mexico is between two worlds and there are two worlds within Mexico. Mexico’s standards of living, human and physical capital and institutions are all quite advanced compared to low income countries or compared to lower middle income countries in Latin America. On the other hand, Mexico lags far behind OECD averages. Within Mexico, there is a further dichotomy due to the high degree of inequality across individuals and across regions.
• Policies for equitable growth are the answer. The new administration is developing a long term vision of Mexico in the year 2030. Equitable growth--growth shared broadly by members of society--could transform the country over the coming decades. In the chapters of this report, we emphasize that institutional change is the key to improving the regulation and performance of both the public and private sectors. We also highlight that restructuring government spending in a variety of sectors—in particular, establishing a more progressive allocation of spending—would be the key to initiating a phase of more growth and more equitable growth. Finally, we note that despite progress in improving economic and environmental stability in Mexico, there is still a remaining agenda of reform to assure sustainability.

Each of these three themes is discussed in more detail below. We will then provide a summary of each of the chapters, and explore in more detail the policy dimensions of each area. ...

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PREFACE

The Policy Notes, entitled Mexico 2006-2012: Creating the Foundations for Equitable Growth, were coordinated by David Rosenblatt (Lead Economist and Sector Leader), under the general guidance of Isabel Guerrero, Country Director at the time of preparation of the report. Chapters were produced by David Rosenblatt and Roby Senderowitsch (Political Transition); Jozef Draaisma and Juan Carlos Mendoza (Public and Private Finance); José Luis Guasch and Keta Ruiz (Regulation, Competition and Investment Climate); José Luis Guasch and Esperanza Lasagabaster (Innovation Policy); Angela Armstrong, Yewande Awe and Ethel Sennhauser (Environmental Management); Erik Bloom and Gladys López-Acevedo (Human Capital and Skills); José María Caballero, Frederic de Dinechin, Matthew McMahon and Yurie Tanimichi Hoberg (Agriculture, Rural Development and Land Policies); Douglas Olson and Gustavo Saltiel (Water Resources); Enrique Crousillat and Juan Carlos Quiroz (Oil and Gas); Luis Alberto Andrés, Angélica Núñez and Anna Wellenstein (Infrastructure); Andrew D. Mason, Maria-Luisa Escobar, Gladys López-Acevedo, Marcela Rubio Sánchez and Jaime Saavedra (Strengthening Social Protection). The “Overview” chapter was prepared by David Rosenblatt, but it benefited from detailed inputs, comments and suggestions from the entire team and from Isabel Guerrero. Please note that these chapters were written during October and November of 2006, and thus they relied on the information base available at that time.

Additional team members included Odracir Barquera, Gabriela Aguilar, Andreas Blom, Anna Corsi, Fernando Galeana, Rocío Lavalle, Takako Mochizuki, Mireya Olivas, Alexis Roach, and Alexandra Zenzes. This Report was produced in a highly participatory manner. A series of consultations were held with numerous Mexican experts and stakeholders from Political Parties, the Executive and the Legislative Branches, Academia, among others given their rich knowledge of priority issues in Mexico.

The team greatly benefited from the comments provided by the peer reviewers: Enrique Cabrero, Santiago Levy, Lant Pritchett and Michael Walton. World Bank staff who participated in the review meeting also provided invaluable comments.

The World Bank’s Vice President for Latin America and the Caribbean is Pamela Cox; the Country Director for the Mexico and Colombia Unit is Isabel Guerrero; the Sector Director for Poverty Reduction and Economic Management (PREM) in Latin America and the Caribbean is Ernesto May; the Sector Manager of Economic Policy Latin America is Mauricio Carrizosa; and the Sector Leader for PREM in the Mexico and Colombia Unit is David Rosenblatt.

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TABLE OF CONTENTS

OVERVIEW

CHAPTER 1: POLITICAL TRANSITION AND THE INSTITUTIONAL PROCESS OF POLICY MAKING
Edited by Roby Senderowitsch and David Rosenblatt

CHAPTER 2: PUBLIC AND PRIVATE FINANCE FOR EQUITABLE GROWTH
Jozef Draaisma and Juan Carlos Mendoza

CHAPTER 3: MEXICO’S REGULATION, COMPETITION AND INVESTMENT CLIMATE: SOME PROGRESS BUT KEY CHALLENGES AHEAD
José Luis Guasch and Keta Ruiz

CHAPTER 4: STRENGTHENING SOCIAL PROTECTION IN MEXICO – RECENT PROGRESS, FUTURE CHALLENGES
Andrew D. Mason, Jaime Saavedra, Maria-Luisa Escobar, Gladys López-
Acevedo, and Marcela Rubio Sánchez

CHAPTER 5: DEVELOPING AN INNOVATION POLICY TO ACCELERATE MEXICO’S GROWTH
José Luis Guasch and Esperanza Lasagabaster

CHAPTER 6: ENVIRONMENTAL MANAGEMENT
Angela Armstrong, Ethel Sennhauser, and Yewande Awe

CHAPTER 7: HUMAN CAPITAL AND SKILLS FOR A COMPETITIVE LABOR MARKET
Erik Bloom and Gladys López-Acevedo with inputs from Andreas Blom, Andrew Mason, and Alexis Roach

CHAPTER 8: AGRICULTURE, RURAL DEVELOPMENT AND LAND POLICIES
José María Caballero, Yurie Tanimichi Hoberg, Frederic de Dinechin and Matthew McMahon

CHAPTER 9: WATER RESOURCES – AVERTING A WATER CRISIS IN MEXICO
Douglas Olson and Gustavo Saltiel

CHAPTER 10: OIL AND GAS SECTOR
Enrique Crousillat and Juan Carlos Quiroz

CHAPTER 11: INFRASTRUCTURE FOR HUMAN WELFARE AND ECONOMIC GROWTH
Anna Wellenstein, Luis Alberto Andrés and Angélica Núñez

ABBREVIATIONS AND ACRONYMS

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