Af J5 S 5 44L_-

Document of

The World Bank

FOR OFFMCIAL USE ONLY

Report No. P-5520-ME

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

pROPOSED AGRICULTURAL SECTOR ADJUSTMENT LOAN II

IN AN AMOUNT EQUIVALENT TO US$400 MILLION

TO

NACIONAL FINANCIERA S.N.C.

WITH THE GUARANTEE OF

THE UNITED MEXICAN STATES

MAY 29, 1991

Ths document bas a restricted distribution and may be used by recipieots only in the performance ofteir official dutkes Its contents may not otberwise be disclosed witht World Bank authoriation.

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CURRENCY UNIT - PESO (MEX$)

On May 27, 1991, the exchange rate in the controlled market wasUS$1 = Mex$2988.2; and in the free market US$1 = Mex$3002.75. The controlledexchange rate is currently being devalued by four-tenths of a peso a day.

FISCAL YEAR

January 1 - December 31

WEIGHTS AND MEASURES

1 hectare (ha) = 10,000 square meters (i2)1 kilometer lkm) = 0.62 mile (mi)

1 square kilometer (km ) - 0.39 square miles = 100 ha1 kilogram (kg) = 2,205 pounds (lbs)

1,000 kilograms = l metric ton (t) = 0.98 long ton1 liter (1) = 2.26 gallons (gal)

FOR OFFICIAL USE ONLY

PRNCPL AB TiOIS A AONMS USED

AOSAL I Agrlcultural Sector Adjustment Loan IAOSAL IY Agricultural Sector Adjustment Loan SIALSAMEX Altimentos Balanceados Mexicanos (Mexican Foodstuffs)ANAOSA Aseguradora Nacional Agricola (National Agricultural Insuranc- Agency)ANOSA Almacenes Nacionales de Doepsito (National Warehouses)AZUCAR Sugar ParastatalBANRURAL Banco Nacionol do Cr6dito Rural (National Rural Bank)BORUCONSA Bodegas Rurales CONASUPO (CONASUPO's Rural Warehouses)ccC United States Commodity Credit CorporationCFE Comtsi6n Federal de Electricidad (Federal Electricity CommissIon)CICOPLAFEST Intersecretarial Commission for the Control of Procesinlg and Use of

Pesticides, Fertilizers and Toxic SubstancesCIF Cost, Insurance ond FreightCONAL ComisI6n Naclonal de Alimentaci6n (National Food CommissSon)CONADECA Comisi6n Nacional del Cacao (National Cocoa Commission)CONASUPO Compaeif Nacional de Substetencias Populares (National Food Supplies Company)DICCONSA Dietribuidora CONASUPO (CONASUPO Stores)DIF Programs do Deserrollo Integral do Is Familia (Program for the Integral

Development of the Family)ENIaH Encuosta Noclonal de Ingresos y Gastoe de lon Hogares (National Household

Income and Expenditure Survey)ESL Fxport Sector LoanFERTIMEX Fortilizantes Mexicanos (Mexican Fertilizers)FIRA Fideicomisos Instituidos en Relacion con Is Agricultura (Trust Funds for

Agriculture)FOB Free on BoardanP Gross Domestic ProductGNP Gross National Product0OM Government of MexicoICONSA Industrias CONASUPO (COHASUPO Industries)IDB Inter-American Development BankINCO Instituto Nacional del Consumidor (National Consumer In* ttute)INMECAFE Instituto Mexicano del Caf6 (Mexican Coffee Institute)IMF International Monetary FundZUSS Instituto Mexicano del Seguro Social (Mexiean Institute for Social Security)INIFAP Instituto Nacional de Investigaciones Forestales, Agrlcolas y Pecuarlas

(Agricultural R"earch Institute)ISPL Industrial Sector Pollcy LoanLICONSA Loche Industrializada CONASUPO (CONASUPO's Industrialized Milk Subsidiary )NAFIN Nacional Financiert, S.N.C.PACTO Economic Solidarity PactPASSPA Programs de Apoyo de los Servicios do Salud para la Poblocl6n Abierta (Health

Services Support Program for the Uninsured Population)PRONAL Progroma Nasional de Alimentaci6n (National Food Program)PRONASE Productora Nacional de Semilla (National Seeds Producer)PRONASOL Programa Nacional de Solidaridad (National Solidarity Program)PECE Pacto pars ts Estibilizacion y et Crecimiento Economico (Pact for

Stabilization and Growth)QRs quantitative RestrictionsSARN Secretaria de Agricultura y Recursos Hidraulicos (Ministry of Agriculture and

Hydraulic ResourcesSECOFI Secretaria de Comercio y Fomento Industrial (Ministry of Trade and Industrial

Development)SEDUE Socretaria de Desarrollo Urbano y Ecologia (Ministry of Urban Development and

the Environment)SHCP Secretaria de Hacienda y Credito Publico (Ministry of Finance and Public

Credit)SQE Statement of ExpendituresSPP Secretaria do Programacion y Presupuesto (Ministry of Budget and Planning)SSA Secretaris de Salud y Asistencia (Ministry of Health)TABAMEX Tabacos Mexicanos (Mexican Tobaccos)TPL I First Trade Policy LoanTPL II Second Trade Policy LoanTRICONSA Trigo Industrializado CONASUPO (CONASUPO's Industrialized Wheat)

This documnent has a restricted distribution and may be used by recipients only in the perfornmw.ceof their official duties. Its contents may not otherwise be disclosed without World Bank - -zation.

MEXICOAGRICULTURAL SECTOR ADJUSTMENT LOAN

LOAN AND PROGRAM SUMMARY

Borrower and Nacional Financiera S.N.C. (NAFIN)Beneficiaryt

Guarantor: United Mexican States

Executing Asency: Secretaria de Hacienda y Credito P(iblico (SHCP) throughSecretaria de Agricultura y Recursos Hidraulicos (SARH),Secretaria de Comercio y Fomento Industrial (SECOFI),Secretaria de Programacifn y Presupuesto (SPP), and HealthSystem [Secretaria de Salud y Asistencia (SSA) and otherentities of the health system]

Amount_ US$400 million equivalent

Termss Repayment in 17 years, including five years of grace, at thestandard variable rate.

Obiectives: The AGSAL II is part of a program of Bank support to thegovernment's objectives of increasing the rate of growth ofagriculture, raising productivity and improving theefficiency of the agricultural sector through better-functioning output and input markets, and alleviating thepoverty of the most vulnerable population groups throughtargeted food programs. This loan would support: (a) tradeand policy reforms that increase competition and reduce thegovernment's role in the production, planning, marketing,storage and processing of agricultural products and inputs,and by allowing more competition from the private sector;(b) revision in the allocation of government expenditure inconsumer programs by eliminating generalized food subsidiesand increasing spending for improved targeted foodassistance and nutrition programs; and (c) the institutionaltransition of SARH to a smaller but more effective role inagriculture, emphasizing policy formulation andimplementation and basic regulatory functions.

Description: The program includes measures to reform the price and tradepolicy regime for agricultural products and their industrialderivatives, abolish the system of mandatory productionplanning for agricultural products, reduce and streamlinemarket regulations and barriers to entry and competition,and make food consumption and nutrition programs more costeffective and successful by increasing coverage andimproving targeting of the poorer population.

Benefits and If the objectives outlined above are achieved, then theRisks: benefits accruing from the project may be significant.

Continuing liberalization of agricultural trade and pricesand streamlining of the regulatory environment willcontribute to expand agricultural production and betterresource allocation, improve real income and generate abetter nutrition and health status for the poor. There are

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few risks to this program. The government has carriedthrough its program of trade, deregulation and gradual priceliberalization as part nf the broader program ofstabilization and structural reform over the past fiveyears. Risks may be twofold. First, one important lessonof economic history is that the macroeconomic climate mustbe supportive of policy reforms. The key requirements arefiscal discipline, a prudent monetary policy and a realisticexchange rate. Second, the very purpose of agriculturalpolicy reform is to encourage improved resource allocation.Changes in pattern of resource use are resisted by those whobenefit from the status quo. If governments do notresolutely follow through with credible policy change, themomentum for reform may be lost and the program endangered.Over the past five years the Mexican record of overallpolicy reform has been strong. The risks seem manageableand are outweighed by the likely benefits of AGSAL II.

Disbursements: The proceeds of the loan will be used to finance eligibleimport expenditures, and statements of expenditures (SOEs)will be used as a basis for the preparation of thedisbursement requests. The first tranche would becomeavailable upon loan effectiveness, expected in July 1991,and the second tranche, expected in August 1992, onfulfillment of specific conditions related to progress inimplementing the program and general conditions onmacroeconomic consistency and satisfactory execution of theprogram.

Appraisal Report: This is a combined Staff Appraisal and President's Report.

Schedule ofDisbursementst Schedule of Disbursements Bank Fiscal Year

FY92 FY93

First Tranche 200 _Second Tranche - 200Cumulative 200 400

mXco

AGRICULTURAL SECTOR ADJUSTMENT LOAN II

TABLE OF CONTENTS

Page No.

LOAN AND PROGRAM SUMMARY . . . . . . . . . . . . . . . . . . . . . . .i-i

PART I. THE MACROECONOMIC CONTEXT .... .... . 1

A. Macroeconomic Developments . . . . . . . . . . . . . . .2B. The Debt Restructuring Package of 1989/90 . . . . . . . . 3C. Oil Prices and the Macroeconomic Situation . . . . . . . 4D. The Real Exchange Rate .... . . . . . . . . . . .. 4E. Fiscal Consistency, Debt Management and the

Stabilization Program .... . . .5..... . . . . . SP. The Pacto/PECE and the Decline in Inflation since 1987 . 7G. Medium-Term Finance for Growth . . . . . . . . . . . . . 8H. External Debt and Creditworthiness . . . . . . . . . . . 9

PART II. THE SECTORAL CONTEXT . . . . . . . . . . . . . . . . . . . . 10

A. Introduction . . . . . .. . . . . . . . . . . 10B. Policy Issues for Agricultural Growth and Productivity . 11

1. Price, Trade Policy and Market Regulations . . . . . 11

a. Background and Actions Taken . . . . . . . . . . 11b. Proposed Actions . . . . * ...... ... . . . 18

2. SARH's Production Targets . . . . . . . . . . . . . 22

3. Government Expenditure . . . . . . . . . . . . . . . 23

a. Credit and Input Subsidies . . . . . . . . . . . 23b. Investment Expenditure . . . . . . . . . . . . . 24

C. Food Consumption and Nutrition . . . . . . . . . . . . 24

1. Introduction .... . . . . . . . . . . . . . .. .24

2. A New Food Consumption and Nutrition Strategy . . . 26

a. Elements Already in Place . . . . . . . . . . . 26b. Key Elements of the Long-Term Strategy . . . . . 27c. Constraints and Transition . . . . . . . . . . . 29d. Pilot Nutrition and Health Project . . . . . . . 29e. Maize Consumption Policy . . . . . . . . . . . . 30

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Page No.

PART IIT. GO'ERNMENT AND BANK STRATEGIES . . . . . . . .. . . 32

A. Government Strategy . . . . .. . . . . . . . . . . . 32B. Bank Assistance Strategy . . . . . . ... .... 33C. Sectoral Composition of Bank Lending . . . . . . . . 34D. Poverty, the Social Sectors, and the Environment . . 36E. Collaboration with IFC . . . . . . . . . .. . *. .. 37

PART IV. THE PROPOSED LOAN . . . . . . . . . . . . . . . . . . . . 37

A. Rationale tor AGSAL II . . . . . . . . . . . . . . . . 37B. Amount and Loan Objectives . . . . . . . . . . . . . . 38C. The Borrower, the Guarantor and Disbursements . . . . 38D. Procurement and Financial Management and Auditing . . 39E. Benefits and Risks . . . . . . . . . . . . . . . . 39F. Cofinancing . . . . . . . . . . . . . . . . . 40G. Negotiations, Effectiveness, Dated Covenants and

Second Tranche Release Conditions . . . . . . . . . 40

PART V. COLLABORATION WITH THE IMF . . . . . . . . . . . . . . . 43

PART VI. RECOMMENDATION . . . . . . . . . . . . . . . . . . . . . 43

ANNEX 1. MACROECONOMIC INDICATORS . . . . . . . . . . . . . . . . 44

ANNEX 2. STATUS OF BANK GROUP OPERATIONS IN MEXICO . . . . . . . . 46

ANNEX 3. POLICY LETTER . . . . . . . . . . . . . . . . . . . . . . 48

ANNEX 4. POLICY MATRIX . . . . . . . . . . . . . . . . . . . . . . 83

ANNEX 5. RECENT POLICY REFORMS IN AGRICULTURAL COMMODITY MARKETSAND PARASTATALS . . . . . . . . . . . . . . . . . . . . 92

A. Price and Trade Policy . . . . . . . . . . . . . . . . 92B. Parastatals . . . . . . . . . . . . . . . . . . . . . 94

ANNEX 6. FOOD CONSUMTION PROGRAMS . . . . . . . . . . . . . . . . 95

A. Programs . . . . . . . . . . . . . . . . . . . . . 95B. Brief Assessment of Targeted Programs . . . . . . . . 100

ANNEX 7. SUPPLEMENTARY LOAN DATA SHEET . . . . . . . . . . . . . . 103

MAPs IBRD 20343

ZNTEMRJZONAL RANK TOR RECONSTRUCTION AND DJ iLOPnTi

REPORT AND RI COIUNDATZONS OF TUE PRESWENT TO TME UXUCUTIVEDIRECTORS ON PROPOSED SECOND AGRICULTURAL SECTOR ADJUSTUNUT

LOAN TO NACIONAL FINANCIERA S.N.C. ("AFix)

I submit the following report and recommendation on a proposed loanto Nacional Financiera S.N.C. (NAPINSA), with the guarantee of the UnitedMexican States, for the equivalent of US$400 million in support of a programfor agricultural sector reform. The loan will have a term of 17 years,including 5 years of grace, at the standard variable interest rate.

PAR? I -TE MACROECONOMIC CONTExT

1. Beginning with the economic crisis of 1982 and particularly since1985, the Mexican government has been implementing a strong program ofeconomic stabilization and structural adjustment that has been supported bythe international financial community. The strategy of relying onprotectionism and public sector-led growth has been abandoned in favor ofpromoting international competitiveness and private sector expansion. sincemid-1985 the cornerstone of the structural reforms has been far-reaching tradeliberalization, which in turn has promoted expansion and efficiency of thetradable sector. The World Bank has supported trade policy reform with theTrade Policy Loan I (TPL I) in July 1986 and the Trade Policy Loan II (TPL II)in October 1987, each of US$500 million. In June 1989 the Board approvedthree loans of US$500 million each to support adjustment programs in thefinancial, public enterprise, and industrial sectors. In December 1989 theBank approved an interest-support loan of US$1.26 billion to support thegovernment's debt reduction plan and in June 5, 1990 an adjustment loan ofUS$380 million to support policy reforms in the transportation andtelecommunications sectors.

2. The Bank has maintained a close dialogue with the government onagricultural and food policy and has supported the adjustment process with theAgricultural Sector Loan I (AGSAL I) for US$300 million approved in March1988. As a follow up to AGSAL I, the proposed Agricultural Sector AdjustmentLoan II (AGSAL II) would support reforms ins (a) price and trade policy inagricultural output and inputs; (b) regulation in the production anddistribution of agricultural commodities and their industrial derivatives; and(c) food consumption and nutrition policy.

3. AGSAL II will support measures that fit in well with thegovernment's development strategy. With the stabilization programconsolidated successfully and the debt issue resolved, eccarmic policy willshift toward the attainment of high and sustainable rates of growth and toissues of poverty alleviation. These objectives will be furthered bycontinued liberalization of Mexican agricultural markets and improvedproductive efficiency as well as by reforms in trade and price policy,government expenditure, and the regulatory environment. Poverty alleviationwill be improved by better targeting of food and nutrition programs to poor

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and vulnerable households, especially in rural areas. Overall, increasing thefreedom to produce and trade in agricultural commodities will provide a strongengine for agricultural growth.

A. Macroeconomic Developments

4. Between 1950 and 1974, Mexico enjoyed high growth, low inflation,and moderate external debt accumulation. Real growth averaged 6.4 percent,and inflation was in single digits. This era came to an abrupt end in theearly 1970s. Government involvement in the economy expanded rapidly, andincreased public expenditure pushed up aggregate demand and the rate ofeconomic growth. However, the higher government expenditure was not matchedby rising public sector revenues. As a result, the inflation tax and externaldebt became increasingly important sources of public finance. At the sametime a decline in savings incentives (real Interest rates turned sharplydownward) prevented a matching increase in private savings; external debt thusincreased, increased oil revenues notwithstanding. The period of single-digitinflation ended in 1973, the peso started to appreciate in real terms, andexternal debt accelerated above the GNP growth rate. A comparatively briefcrisis in 1976 terminated after major oil discc eries in 1977. The ensuingprosperity lasted until 1982, when falling international oil prices, risingworld interest rates, and massive capital flight led to a refusal by externalcreditors to roll over Mexico's short-term debt. This led to Mexico'ssuspending interest payments on its external debt.

5. The financial and economic crisis of 1982 brought on explosiveinflationary and balance of payments difficulties. Initial strong fiscal andmonetary adjustment efforts were undermined by external shocks such as thecollapse of international oil prices in 1986. Inflation accelerated,partially in response to the sharp real devaluation of the exchange ratenecessitated by the 1986 downturn in the terms of trade. The subsequent defacto targeting of the real exchange rate 1/, together with frequent wage andcost adjustments, created instability in the system, culminating in a run onthe peso in the last quarter of 1987 and triple-digit inflation.

6. The government responded in 1987 with the Economic Solidarity Pact(Pacto), an agreement among business, labor, and government that called foraccelerated structural reform, further tightening of fiscal and monetarypolicy, a freeze of minimum wages and of basic public and private sectorprices, and, the cornerstone of Pacto, a freeze of the nominal exchange rateagainst the U.S. dollar. This partial freeze was extended at three-monthintervals through 1988 and was renewed in late 1988, with some modifications,by the new Mexican administration. The main change under this renamed Pactfor Stabilization and Growth (PECE) was the daily adjustment of the exchangerate--of one Mex$ peso against the U.S. dollar, later lowered to Mex$0.8pesos and, most recently, to Mex$0.4 pesos per day. (PECE was recentlyextended through 1991.) The fiscal measures, backed by the temporary exchangerate freeze and an array of formal and informal wage and price controls, have

;/ The real exchange rate is defined as the price of foreign goods relativeto domestic goods. Appreciation thus implies a decline in this relativeprice.

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been dramatic in reducing the rate of inflation--from 159 percent in 1987 to30 percent in 1990.

7. Throughout this period of macroeconomic turmoil, Mexico has beentransforming itself into one of the most open economies in the world, throughextensive trade reform. Trade liberalization, mostly between 1985 and 1988,has lowered the percentage of domestic (non-oil) tradeable production coveredby import quotas from 100 percent in 1984 to less than 15 percent at present.Maximum import tariffs were cut by a similar magnitude. Non-oil merchandiseexports, which represented less than one-third of total exports in 1984, havedoubled their share since then.

8. These "core" reforms have been complemented by many others. In May1989, foreign investment regulations were considerably relaxed and made moretransparent. The tax system underwent a series of reforms, bringing marginaltax rates more in line with the levels in major industrial countries,encouraging the repatriation of flight capital, and increasing the sanctionsfor tax evasion. The impact of inflation on the (corporate) tax system waseliminated by removing purely inflationary gains from the tax base. Thegovernment initiated a parallel process of financial market liberalization,abolishing ceilings on commercial banks' deposit interest rates, forcingallocation of commercial credit toward favored sectors, and reducing creditsubsidies granted through official development banks. Recently, it wasannounced that privatization of commercial banks, which were nationalized in1982, would take place.

B. The-Debt Restructuring Package of 1989190

9. Despite Mexico's far-reaching reforms, international capitalmarkets did not provide the resources to bridge the difficult period when thecurrent costs of the economic reform program were not yet matched by the(future) benefits of the program. The uncertainty caused by future transferproblems--through the impact of transfers on the perceived sustainability ofthe exchange rate regime and from there to domestic real interest rates--thusdirectly threatened the survival of the stabilization program and therestoration of economic growth. Therefore, in 1988, the government initiatednegotiationo to restructure its external debt.

10. On September 15, 1989, the Government of Mexico and the BankAdvisory Committee representing commercial bank creditors agreed to afinancing package to cover 1989-92, thereby restructuring USS48.9 billion ofMexico's external debt. The agreement's menu of financing options includedtwo debt and debt service reduction facilities and four new money facilities,which were implemented over eight months. A total of US$22.8 billion wasexchanged for par bonds at a fixed rate of 6.25 percent, and US$19.8 billionfor discount bonds at market rates, but with the principal reduced by 35percent.

11. The debt relief package reduced by almost US$4 billion per year thenet transfer that Mexico must make to its creditors from 1989 to 1994. Thisis on average slightly below 2 percent of GDP. Half this amount results fromthe lengthening of maturity implied by the deal, with the rest coming fromlower interest payments and new money disbursements from banks that did not

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choose the debt service reduction options. The reduction in required externaltransfers has a direct beneficial impact on Mexico's fiscal situation and itslikely output growth. However, at least as important have been the indirect,secondary effects of renewed confidence. Reduced net external transfers meanreduced pressure on the exchange rate, which greatly reduces the riskassociated with peso-denominated public sector debt. Nominal interest ratesfell from 56 percent to around 36 percent immediately after the details of thepackage became known and fell a further 12 points to about 25 percent in early1991. At the same time, the maturity structure of public debt has lengthenedconsiderably, another indication of private confidence.

C. Oil Prices and the Macroecon2Mi. Situation

12. In 1990, just as Mexico was looking forward to a feasible althoughsomewhat precarious economic recovery, the entire short-term outlook changedbecause of events in the Middle East. The Gulf crisis clearly boostedMexico's oil revenue in the last four months of 1990. But the increasedvolatility of oil markets since late-August has increased the uncertaintyabout Mexico's future balance of payments and hence has complicatedmacroeconomic management. Because of anticipated disruption in the oilsupply, the benchmark West Texas intermediate oil price--US$16 per barrel asrecently as last July--shot up to more than US$37 pb in October 1990.Mexico's oil price responds to this benchmark after about a one-month lag,with a typical negative price difference of around US$3.50 (changes inMexico's export mix may affect this difference). After the Gulf war startedin January 1991, however, the West Texas oil price dropped to around US$21 pb.There is a possibility that oil prices may fall substantially below currentlevels now that the war is ended. This illustrates how uncertain Mexico's oilexport prospects remain, and in fact, at current oil prices the value ofMexican oil exports in 1991 will be lower than in 1990. The MexicanGovernment has therefore wisely devoted the entire windfall gain to therepurchase of public debt and has submitted a budget to congress based on thisstrategy (the budget assumes that the oil price will be US$17 per barrel, onaverage, for 1991).

D. The Real Exchange Rate

13. Exchange rate policy in Mexico is complicated because the nominalexchange rate remains an important ingredient of PECZ. But with price andwage rigidities still prevalent--also because of PECE--the nominal exchangerate policy cannot be separated from real exchange rate developments.

14. Mexico's real exchange rate shows a somewhat ambiguous trend (seeFigure 1). Measured against U.S. wholesale prices, much of the increase incompetitiveness that occurred during the 1986-87 real depreciation has beenlost; however, the economy is now back where it was around 1984-85, withcompetitiveness improved by about 36 percent over the clearly unsustainablelevel of 1981.

15. Since 1981, the real price of oil has dropped by almost 30 percent,trade barriers have been reduced, and government expenditure (most of which isfor Mexican goods) has been reduced drastically. These changes would callfor a real depreciation, although it is hard to judge whether 30 percentagainst U.S. producers is enough. There is some additional reason for concern(see second line in Fig. 1) in terms of competitiveness as measured not

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against U.S. producers, but against other countries exporting to the U.S.(note the use of the U.S. import unit value as the foreign price index).Since other exporters by and large Figure Ihave not followed the U.S. dollar up--but followed It down--Mexico'sincrease in competitiveness in the MElC. REL ECHANGE RATEearly 1980s was smaller, but its Of MW kWrIs. A* 1@a)

subsequent loss of competitiveness was 1A - k

not. The net result is that, measured w , x

against other exporters to the U.S., *-rMexico is 24 percent more competitivenow than it was in 1981 and only 12percent more competitive than in 1980.

16. Attaching much weight to b_ SWsuch trends demands caution.Structural. changes in Mexico and inits export markets, changes inmacroeconomic policy both abroad and in Mexico, and so on, limit the relevanceof the past real exchange rate for an assessment of current competitiveness.In the first half of 1990 there was a legitimate reason for concern: thestrong expansion in private demand that is behind Mexico's widening tradedeficit did not seem to translate into increased demand for Mexican goodssince GDP growth slowed to below 2 percent. This could have signaled anovervaluation of the real exchange rate, especially since manufactured exportsalso slowed down significantly. If increased aggregate demand does not spillover to increased sales of Mexican goods, it could be that these goods are tooexpensive, i.e. that the real exchange rate is overvalued. However, morerecent data do not support such an interpretation. Manufactured exportsstrongly recovered in the third quarter of 1990 and in the first two months ofthe fourth quarter by more than 20 percent. GDP growth recovered as well, upto 5.5 percent in the third quarter and, on a preliminary basis, 5 percent inthe last quarter of 1990. Strong export sales and increased sales of Mexicannon-oil goods (i.e high GDP growth) do not support an interpretation ofovervaluation of tne real exchange rate.

17. Of course third- and fourth-quarter data may be misleading in thatthey indicate a temporary surge rather than a return to a trend. Thus,continued monitoring will be important. In this context, it should be notedthat Mexico is about to enter the third year of an Extended Fund Facility(EFF) with the IMF; under that program the exchange rate and more externalcompetitiveness are key variables being monitored on a quarterly basis.

S. Fiscal Consistencv. Debt Manacement. and the Stabilization Prooram

18. Previous sections concluded that Mexico is likely to achievesatisfactory output growth over the years, depending on whether supportivemacroeconomic policies are in place and if private sector developmentmaterializes. So that entrepreneurs will be convinced that the favorablecurrent environment is permanent, the credibility of the government's programis an essential precondition for a private sector-led investment program tosucceed.

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19. Very little is known about what establishes macroeconomiccredibility, but a great deal is known about what will destroy it. Inparticular, inconsistency is at the core of many recent stabilizationfailures--between on the one hand, fiscal policy, solvency constraints on thedebt issue, and the resulting need for monetization and, on the other hand,announced inflation targets, possibly embedded in an exchange rate rule.Figure 2 summarizes the basic facts about fiscal deficits in Mexico. It showsthe primary and the operational surplus (a negative number indicates adeficit) of the consolidated government, including all non-financial stateenterprises and the Bank of Mexico. The primary surplus is the mostfundamental indicator in that it measures the net transfer the governmentmakes with respect to all non-public agents in the economy. Subtracting allinterest paid on foreign debt and real interest payments on domestic debt(shaded area) leads to the operational surplus.

20. The figure highlights two important points. First, Mexico's fiscaladjustment over the past decade has been extraordinaryi its primary balanceturned from a deficit of 7 percent of GDP into a surplus of around 5 percentin the mid-1980s. This surplus further increased to between 7 and 8 percentof GDP in the last couple of years. The period over which the adjustment hasbeen sustained is as impressive as its extent. The second point has to dowith the extreme volatility of interest payments on domestic debt. Whileinterest payments on foreign debt have not varied much, except for the breakcaused by last year's debt deal, domestic interest payments rose frombasically zero in real terms (1987) to around 6 percent of GDP by 1989 andfell to 2-3 percent of GDP in 1990.

21. It is clear that Mexico's "heterodox" stabilization program was thefinal phase of a long-running,initially entirely orthodox effort to Figure 2reduce inflation through fiscalrestraint alone. When success did and Interest Paymentsnot result from the fiscal effort, Deficits (nOfP)however, and when inflationaccelerated in late-1987, the Pactowith all its unorthodox componentswas put in place. The first question athis experience suggests is how muchfiscal adjustment is enough?Mexico's adjustment has been -tsubstantial, but was it enough, given sthe ambitious goal of eventuallyreaching single-digit inflation? _______________-_______-_o. ____

22. A fiscal stance that doesnot conflict with sustained lowinflation, even in the event of unfavorable external developments andcontinued high real interest rates, is clearly necessary--although possiblynot sufficient--to allay inflationary fears. The fixed exchange rate regimewill be sustainable only if the inflation rate compatible with public financerequirements is compatible with the inflation rate implied by the fixedexchange rate itself. This in turn is the cornerstone of the PECE. Thus,medium-term consistency requirements, when violated, signal greatcomplications in short-term macroeconomic management, which will requirerestrictions on both the overall deficit and its mode of financing.

23. The debt package of 1989/90 reduced annual interest payments byabout US$1.2 billion per year, or approximately 0.5 percent of GDP, through acombination of lower debt volume and lower interest rates. This alone yieldsa reduction in the equilibrium Inflation rate (i.e. the rate for which nofurther fiscal adjustment would be necessary) by S percentage points, from 25to 20 percent based on 1989 fiscal policy parameters. This is a significantreduction, but by no means as dramatic as the impact of lower real interestrates on domestic debt. At an average real interest rate of 10 percentinstead of 30 percent, the fiscal balance (which, at the 10 percent real ratethat obtained for 1990 and inclusive of the effects of the debt package, willshow an operational surplus of around 2 percent of GDP1 exerts no inflationaryimpulse at alls it can be financed wlthout any reliance on monetaryfinancing. Thus, Mexico's dramatic fiscal adjustment is more than adequatefor the inflation targets, if the credibility problems that underlay theextreme interest rates of the past can be overcome. The increase in inflationin 1990 cannot be ascribed to lack of fiscal austerity, but instead to aloosening of price controls and to adjustment of public sector and controlledprices. There was thus a "catch-up" component to it. Some cautious optimismabout future inflation is therefore justified, even under continuation ofcurrent policies.

F. The Pacto/PECE and the Recline in inflation since 1987

24. The Pacto/PECE was very successful: inflation was more than halved(from 159 to 52 percent) in 1988, and more than halved (to around 20 percent)again in 1989. Some rebound occurred in 1990; inflation rose to 30 percent.But the program clearly has been a success in having prevented a majorrecession. In fact this period saw the beginnings of renewed economic growthfor Mexico.

25. Pacto's early success demonstrates that a change of policy can bemade more credible, and strategic delays in price adjustments offset, by usingwage-price guidelines and a fixed exchange rate to signal the new policystance and snap a country out of a high-inflation equilibrium. But suchmeasures lose their effectiveness if sustained for too long since theyeventually signal not attainment of a new, low-inflation equilibrium butrather the economy's failure to achieve it.

26. Since inception of the Pacto/PECE, controlled prices and the pricesof goods provided by public firms have been lagging considerably behind non-controlled prices and the prices of goods from private firms (see Figure 3,where electricity prices are used as a proxy for controlled prices). Thefigure shows another pattern, one that is revealing about Pacto/PECE's realeffect. Public prices, after lagging most of 1989, were adjuated in discretesteps in December 1989, May 1990, and November 1990 (for a period extending toend-1991). These adjustments clearly contributed to lower relative pricedistortions; at the same time they triggered sharp increases in recordedinflation, pushing inflation above the 1989 level in the process. By the sametoken, the failure to adjust earlier has reduced recorded Inflation below whatit would have been under a more gradual adjustment process. What the erraticadjustment pattern does is artificially lower recorded inflation in one year,only to raise it in the next year parallel to the necessary catch-upadjustments. Price controls by now seem to have become a mechanism fortemporarily postponing inflation.

27. Pacto extensions (the latest Figure 3in November 1990 until December 1991)have in fact implemented reductions inprice controlus currently only 25 Ratio of Eectrtctty price Indexpercent of private sector prices over CPI.remain under control, down from "s 4effectively 100 percent in 1988. It itMoreover, remaining controlled andpublic sector prices have been t adjusted considerably. Thus, progresshas been made toward removal ofinterference in private price-setting. wtbAnother indicator of the successful ht

stabilization and increasedcredibility of the exchange ratepolicy is the reduction in domesticinterest rates. Annual nominalinterest rates on public debt recently dropped to around 25 percent. Theserates are market determined, indicating that the private sector estimatesinflation will be considerably below last year's 30 percent rate.

0. Medium-Term Finance for Growth

28. Mexico's general program of economic reform is well designed,skillfully implemented, and now reaching a crucial phase as it tackles what isby far the most distorted sector in Mexico--agriculture (see Part TI). Priorto the Gulf crisis, the program offered a sound medium-term funding package,although somewhat tilted to funding for its later years. Because of the highcash outlays needed for the debt package and because of the time required totranslate direct foreign investment applications into actual projects, theearly years of the program were underfunded and the later ones overfunded.For this reason, Bank strategy envisaged substantial structural adjustmentlending initially and a rapid phasing out after FY91.

29. As indicated, the recent increase in oil prices has had asubstantial impact on the Mexican balance of payments. The windfall gains in1990 do not translate into more leeway for Mexico, however: under the 1990program agreed to with the IMF, additional oil revenues are matched, with asmall margin, by tighter reserve targets. As for the 1991 outlook, if theaverage price of Mexican oil is indeed US$23 a barrel, as assumed in theprojections presented in this report, the windfall gain in 1991 would bebetween US$2.5 billion and US$3.3 billion (based on the pre-crisis projectionof US$17.1 a barrel for 1991). Again, as indicated, Mexico's CY91 financinggap is highly sensitive to assumptions about future oil prices--an average1991 price of about US$24 a barrel will be required to close the financing gapfor the year. The government's intention of fully using any windfall for debtreduction or reserve accumulation is likely to be reflected in the economicprogram about to be negotiated with the IMF under the existing EFF agreement.The Bank's lending program has been designed as a compromise. Adjustmentlending is cut back substantially to reflect the improved balance of paymentssituation but is not fully eliminated. This is in recognition of remainingrigidities and vulnerability because of the volatility of the major sources ofexternal funds.

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30. By cutting back but not eliminating adjustment lending, Bankstrategy recognizes both the short-run uncertainty about oil prices and theneed to safeguard the economy from future declines in the terms of trade.Cutting back adjustment lending tends to reduce Bank exposure and increase itscapacity to respond flexibly in the event terms of trade decline. Butretaining some adjustment lending provides Mexico with predictable balance ofpayments support in the event that the price of oil is lower than currentlyprojected. And in the event that current projections are realized, thegovernment can further "crisis proof" its economy through a domestic debtretirement program tied to the oil windfall. This would enhance thegovernment's capacity to respond adequately in the future should the terms oftrade deteriorate once again. Domestic debt reduction will also reduce themost volatile public expenditure item--domestic interest payments. (TheBank's strategy for Mexico is discussed further in Part II).

H. External Debt and Creditworthiness

31. With implementation of the commercial bank debt reduction packagein 1990, Mexico reduced the principal on its external debt by US$6.5 billionthrough the issue of discount bonds. In addition, US$22.8 billion was swappedfor instruments carrying a fixed rate of 6.25 percent. Combined principal andinterest debt relief totaled US$12.9 billion. Finally, debt-equity swapsequivalent to US$2.7 billion were auctioned in 1990, carrying an average 52percent discount. However, implementation of the swaps is expected to takeplace primarily in 1991. Despite commercial debt reduction, total grossexternal debt rose slightly in 1990 to US$97.6 billion. This increase was duemainly to additional multilateral and bilateral lending in support of the debtreduction operation. Note that the debt figure does not net out the US$7billion in collateral assets acquired by Mexico as part of the debt package.In 1990 the Bank's share of Mexico's long-term debt and debt service increasedto 11.9 percent and 13.3 percent, respectively, while Mexico's share in theBank's total exposure rose to 11.3 percent. However, Mexico's total debtservice burden, which captures both principal and interest reduction,decreased from 40 percent of exports of goods and non-factor services in 1989to 32.5 percent in 1990. The ratio of total debt to GDP dropped from 47.6percent to 43 percent during the same period. Thus, provided that the currentdomestic economic policies continue, and the external environment remainsfavorable for the execution of the policies, Mexico is considered creditworthyfor Bank lending.

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PART II - THE SECTORAL CONTEXT

A. introduction

32. For more than three decades, Mexican agriculture has been thetarget of extensive government intervention. Overvalued exchange ratessupported by a battery of trade controls discriminated against all tradable,including agriculture, while industrial sector protection reduced theagricultural/nonagricultural terms of trade. Intervention through subsidizedfoodstuff imports and selective price controls further reduced farmers,incomes. Subsidies on credit, irrigation water, fertilizer, seeds, and otherinputs counterbalanced in part the lower prices for farm products whileparastatals expanded their roles in marketing, stor4ge, and processing. By1985 Mexico had perhaps the most thoroughly regulated and state-controlledtrade and marketing regime in Latin America. The agricultural sector came todepend primarily on the government for credit, technology, inputs, storage,and processing. Government intervention, intended to aid the rural poor,promote food self-sufficiency, and compensate for an inadequate marketinginfrastructure, actually benefitted the relatively better off farmers andsuppressed development of private markets, private storage, agroindustry, andinformal rural finance. As a result of these policies agricuitural growth hasbeen slow, the alleviation of poverty in rural areas limited, and privateinvestment low.

33. The de la Madrid and Salinas administrations moved to reform manyof the detrimental policies, mainly in the macroeconomic and trade policyareas, thereby sharply reducing the negative impact of indirect interventionson agricultural growth and productivity. Exchange rate policy and industrialtrade policy have been reformed. For example, the coverage of non-tariffbarriers for most non-agricultural products has ceased, the tariff structurehas become simpler, more uniform, and less protective, and measures toencourage exports are in place. In addition, some agricultural policy reformshave been implemented: the government has restructured and reduced the sizeof the parastatal sector, closed the government agricultural insurance agency(ANAGSA), begun reform of the agricultural credit system, rationalized anddecentralized the Ministry of Agriculture and Hydraulic Resources (SARH),reduced subsidies on prices for fertilizer, electricity and water, andreoriented public investment in agriculture toward rainfed areas and small-scale irrigation projects. AGSAL I supported some of these reforms and manyactions taken went beyond the agreed conditionality (see paras. 45-48 andAnnex 5).

34. Now with discrimination against agriculture reduced, importantreforms in agricultural policy are still necessary to exploit the fullpotential of Mexican agriculture to earn foreign exchange, increase domesticfood supplies, and reduce food import dependency. The policy reforms underthe proposed AGSAL II will build on and go beyond actions taken up to thismoment and aim ats (a) increasing the rate of growth of agriculture, raisingproductivity, and improving the efficiency of the agricultural sector throughbetter-functioning output and input markets; and (b) alleviating the povertyof the most vulnerable population groups through targeted food programs.Actions include: (a) trade and price policy reforms that increase competitionand reduce the government's role in the production, planning, marketing,

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storage, and processing of agricultural products and inputs, by reducingconsumer and producer price controls, lifting import and export restrictions,and allowing more competition from the private sector; and (b) revision in theallocation of government expenditures in consumer programs by improvingtargeted food assistance and nutrition programs, and assuring that poorconsumers are protected from the real income losses resulting from theconsumer price effects of agricultural protection of food commodities.

B. Policy Issues for Aaricultural Growth and Productivity

35. Mexican agriculture's main problems have been its low growth rate,inefficient use of resources, and stagnating productivity. The roots of theseproblems are the direct policy interventions (price, trade and regulatoryenvironment) in output and input markets and the decline in -ublic investmentexpenditure. The latter has probably led to a reduction in the stock ofphysical capital and in the development and availability of new agriculturaltechnology.

1. Price, Trade Policy and Market Reaulations

a. Backaround and Actions Taken

36. The government has set or strongly influenced consumer andproducer prices for major agricultural and agroindustrial commodities, usinginternational prices only as a reference. The most important objectives ofthese interventions have been, first, to keep consumer food prices low and,second, to raise rural income and achieve food self-sufficiency. During the1980s the result of these policies was disappointing. Per capita agriculturalproduction declined, and efforts to maintain low food prices in the urbanareas led to large and growing consumer price subsidies. At the same time,producer prices were depressed for some products.

37. Farmaate prices. Prices guaranteed to producers were set forvarious crops each planting season (maize, beans, rice, wheat, barley,sorghum, soybean, cotton seed, cartamo, sunflower, copra and sesame, pluscoffee, tobacco, sugarcane, and cocoa) and at the same level throughoutMexico. This penalized production close to consumption centers and subsidizedproduction farther away. For food crops, CONASUPO channeled the subsidiescovering transportation, losses, and storage costs. Furthermore, prices wereadjusted infrequently during the year, distorting production decisions andmaking private storage unprofitable.

38. Because international prices, representing the opportunity cost ofdomestic production, served only as a reference for domestic prices, the levelof producer prices relative to international prices has varied over time andby crop. The ratio of domestic to international prices depends on theprevailing exchange rate, government priorities, and the government's abilityto cover the differential between low consumer prices and high producerprices. Because it became more difficult, for fiscal reasons, to maintainhigh guarantee prices and low consumer prices, adjustments in the guaranteeprices have been moderate, and nominal rates of protection (NRP) are now lowerthan their peak in 1980-1982. They are still high, however, for maize (around70 percent), wheat (around 40 percent), barley (around 60 percent), and sugar(around 80 percent).

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39. Agricultural commodities outside the guarantee price system alsohave been subject to varying degrees of government intervention. Thisintervention did not result in higher producer prices in general becauseconsumer prices (such as sugar) were controlled to favor the urban population.Until the second half of 1989, government parastatals were actively involvedin the processing and marketing of major agricultural exports such as cotton,tobacco, coffee, and cocoa. Bad management and inadequate price policiesgenerated large deficits and distorted market incentives. By liberalizing themarket for these commodities and dismantling the parastatals, the governmenthas reduced their drain on fiscal resources.

40. Real producer prices of commodities under the guarantee pricesystem have experienced a long downward trend. In 1985-87 as a result of thefiscal crisis, the government decided to reduce the consumer-producer pricedifferential for grains and oilseeds. Government expenditures for generalsubsidies on grains and oilseeds declined sharply from 0.5 percent of GDP in1985 to 0.24 percent of GDP and 0.005 percent of GDP in 1986 and 1987,respectively. Combined with the desire to keep urban food prices low, thiscaused real farmgate prices to fall. In December 1987, as part of the Pacto,the government pledged to support real guarantee prices at their 1987 level.This, with the pledge to keep consumer food prices low, resulted in newsubsidies for the production and consumption of agricultural products, thatreached 0.37 percent of GDP in 1988 and 0.74 percent of GDP in 1989. During1990 the government adjusted consumer prices upward while keeping producerprice increases moderate, thereby reducing general government expenditure formaintaining a difference between producer and consumer prices of food.

41. Agricultural and Aaroindustrial Trade Recime. As part of itsindustrial development strategy, Mexico resorted to various tradeinterventions that in the end favored industry and damaged agriculture. Sincemid-1985, however, these policies haye changed significantly. Key reformsinclude more flexible management of the nominal exchange rate to promote thetradeable sector, abolition of reference prices for imports, removal oflicensing for most imports and exports, and reduction in the level and rangeof tariffs. (Some summary quantitative indicators of liberalization are shownin Table 1 below.)

42. On the import side, the tariff structure has been simplified andmade more uniform and less protective. Between June 1986 and February 1990,the average tariff fell from about 24 percent to 12.5 percent, and thedispersion among sectors declined by more than half, to about 6.2 percent.Furthermore, the coverage of non-tariff barriers has been sharply reduced,and, as a result, the fraction of tradable national production covered by QRshas declined from 47 percent in June 1986 to 20 percent in June 1990, asmeasured by 1986 production weights. For the non-mineral primary andagroindustrial sectors (sectors 1-4 and 11-23 of the Standard InternationalTrade Classification (SITC)), import liberalization has not proceeded as fast;about 30 percent of its production remains under QRs. Import barriers havebeen sharply reduced for major agricultural inputs such as machinery andpesticides. Thus, these overall and sectoral trade policy reforms havereduced direct and indirect price discrimination against agriculture.

43. Allowing the private sector to import basic foods, previously amonopoly of CONASUPO also has progressed. However, some importantagricultural commodities still require import licenses, and CONASUPO retains

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its monopoly on importing beans and powdered milk. A significant constrainton competition in some areas iu that only industrial users are permitted toimport a particular commodity (for example, maize). The exclusion of tradingfirms from importing goods is detrimental because, combined with the loss ofeconomies of scale in importing, their absence discriminates against smallprocessors. Food imports by the private sector also are constrained because,under the PECE, some controlled consumer prices have remained significantlylower than CIF import prices.

44. For many products, export controls enforce the set price; beef andrice are two important examples. consistent with AGSAL I conditionalityexport controls for high-quality rice and cuts of beef were eliminated.Export restrictions on fruits and vegetables, which represent 25 percent ofcrop output, have also been lifted. Moreover, export restrictions have beenremoved for other agricultural products.

Tabi1: TRADE LI8ERALIZATION, 1985-1990

Ju8 Dc M86 D156 Jun87 De8 jun88 Nov89 Jun90

"imot Liesing gI 92.2 47.1 46.9 39.8 35.8 25.4 23.2 20.3 19.9Refren Pfies A/ 18.7 25.4 19.6 18.7 13.4 0.6 0.0 0.0 0.0Tariff-Mauimum 100.0 100.0 45.0 45.0 40.0 20.0 20.0 20.0 20.0

-Aveage h/ 23.5 28.5 24.0 24.5 22.7 11.8 11.0 12.8 12.5Export Control A/ n.a. n.a. n.a. n.a. n.a. 24.8 23.4 17.9 17.6Real Effective 100.0 121.8 134.7 145.2 136.0 128.5 112.6 115.0 113.1

Exchane Rate gI

a' Percentage coveage of production of tadable; 1986 weights.h/ Weighted by producdon of tradable; 1986 weights; excludes five percent surchurge.g Inwase in the index reprsents a depreciation of the peso in real terms.

Soure: Ba of Mexco

45. Mexico has made substantial progress in improving agriculturalpolicy to allocate resources in the sector more efficiently. (Furtherdetails are presented in Annex 5.) Parts of this reform have been supportedby AGSAL I under which the government agreed to: (a) maintain during 1988guarantee prices for agricultural crops in real terms at the base pricesprevailing on March 1, 1988; (b) set guarantee prices for 10 of 12 products inthe system (except for maize and beans) within a 90-125 percent range ofinternational prices, or within another range based on the results of a studyon the guarantee price system; (c) remove export controls on high-quality riceand beef; (d) eliminate export controls or QRs on fruits and vegetables,except for hygienic reasons; and (e) reduce QRs on imports of agricultural andagroindustrial products by 5 percent of total national production from thelevel of such production existing on November 30, 1986.

46. The first condition under AGSAL I was intended to protectproducers from eroding prices. The second condition reauired the movement of10 auarantee 2rices into the 90-125 percent range of international prices.

The guarantee price system has been abolished for these 10 crocs (and retainedonly for maize and beans). A decision has been announced to confineCONASUPO's purchases of these crops to the quantities needed for the CONASUPO

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distribution system only. This move represents a major step toward market-determined prices. However, a system of orecios de concertaci6n wasintroduced to encourage producers and industrial consumers to agree on prices.For products like rice, sorghum, soybeans, copra, sunflower, sesame, cartamo,and cottonseed where import permits have been eliminated, these prices areclose to international prices because import tariffs are equal to, or lessthan, 20 percent.

47. AGSAL I also required the removal of export controle on high-quality rice and beef, fruits, and vegetables, except for hygienic reasons.These conditions were fulfilled. Moreover, the government lifted exportpermits for beef and cattle on the hoof (not just high-quallty cuts) anddecreed the gradual reduction and elimination by September 1, 1992, of thetariff on exports of male animals weighing up to 280 kgs. Further detail. ofthese reforms are provided in Annex 5.

48. As part of the agricultural reform process aimed at enhancingcompetition and improving resource allocation, the following actions have beentaken in outout marXetst

(a) the differential domestic prices of sugar according to users wereeliminatedt

(b) domestic prices of paddy rice, sorghum, soybean, green coffee andcocoa are allowed to be freely determined by the market;

(c) prices of roasted coffee and soluble coffee are allowed tofluctuate following the international price for green coffee;

(d) restrictive export practices for fruits and vegetables have beeneliminated;

(e) import permits for sugar were eliminated and protection to theindustry is now granted through a variable levy system; and

(f) import permits for sorghum, copra, oilseeds and oilseed oilslifted;

(g) restrictions that prevented entry into the corn-tortilla industrywere abolished.

49. *GSAL I started the dialogue between the Bank and the governmenton agricultural policy and food consumption policy. AGSAL I was aimed atpromoting greater efficiency and higher productivity in the agricultural andagroindustrial sectors, and supported reforms in the areas of consumer foodsubsidies and their targeting, improvement of producer pricing policies,privatization of parastatals, agricultural and agroindustrial tradeliberalization, streamlining and decentralizing of the Ministry of Agricultureand rationalization of public investment in agriculture. Some of the actionstaken by the government were beyond the conditionality agreed under AGSAL I,in particular on price and trade policy, decentralization and streamlining ofthe Minlstry of Agriculture, and privatization and parastatal reform.

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50. AGSAL II continues and deepens the support of policy reform insome of the above areas and opens new areas for reform by supporting: (a) adeepening and broadening of the process of price and trade policy reform foragricultural products and inputs started under AGSAL I; (b) the dismantlementof SARH's system of crop production targets (not covered under AGSAL I);(c) the continued rationalization of public agricultural expenditure; (d) theprotection of the real income of poor families by improving the effectivenessof the targeted subsidies and expanding its coverage; (e) the implementationof a food, nutrition and health pilot project which will determine and testthe most adequate institutional arrangements and staffing to implement anexpanded program at the national level; and (f) the process and impactevaluation of the pilot project and of the most important food consumptionprograms now in operation. The far-reaching actions taken by the governmentin parastatal reform and privatization of agricultural institutions do notrequire further support through AGSAL II. Reforms of specific agriculturalinstitutions are supported by the time slice for irrigation, an agriculturaltechnology project and a rural iinancial sector operation under preparation.

51. Parastatals. An extensive parastatal system controlledagricultural marketing, storage, processing, food distribution, and productionand distribution of agricultural inputs. Major agricultural sectorparastatals were the Mexican Sugar Company (AZUCAR), charged until recentlywith the production and distribution of sugar; CONASUPO, which controlledmarkets for basic grains; INMECAPE, which controlled the coffee market,TA8AMEX, the tobacco market, CONADECA, the cocoa market, and ANDSA, which is astorage warehouse business. The government has divested itself of INMECAFE,CONADECA, TA8AMEX, has privatized ICONSA (Industrias CONASUPO), has begun theprocess for privatizing ANDSA, and has sold all government owned sugar mills.

52. For parastatal divestiture, the following conditions were agreedupon under AGSAL I: (a) closure or sale of six sugar mills owned by AZUCAR;(b) liquidation of CONASUPO's wheat-processing affiliate TRICONSA;(c) closing, or moving to poor neighborhoods, 500 DICCONSA retail foodoutlets; and (d) sale or closure of 15 parastatals in the agricultural sector.Government actions have gone beyond these conditions (further details inAnnex 5).

53. To reduce waste in public sector expenditures through agriculturalparastatals engaged in marketing and promote private sector storage andmarketing during project preparation, the government took the followingactions:

(a) 17 parastatals from SARH (excluding sugar mills) were liquidatedin 1989 and 1990;

(b) the distribution monopoly and the acquisition right of purchase ofsugar from mills were taken away from AZUCAR, S.A.;

(c) the 50 percent tax precluding private sector transactions in sugarand cocoa was eliminated;

(d) the 50 government-owned sugar mills were fully divested;

(e) the parastatals for coffee (INMECAFE), tobacco (TABAMEX), andcocoa (CONADECA) have withdrawn from marketing those products;

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(f) all plants of Alimentos Balanceados Mexicanos (ALBAMEX) but onewere sold and the liquidation of the company was authorized;

(g) it was decided to restructure CONASUPO and its affiliates; mostimportant actions taken are: (i) divestiture of ICONSA;(ii) initiation of ANDSA's divestiture process; (iii) BodegasRurales CONASUPO (5ORUCONSA's) storage facilities are opened forcommercial use by the social and private sectors; (iv) all 569urban supermarkets were closed and (v) improvement of coverage ofmarginal areas by DICCONSA's rural stores.

S4. Input Prices and Reoulations. To counterbalance discriminationagainst agriculture because of low farm prices, the government resorted tocompensatory subsidies on redit and inputs. Almost all agricultural inputs--including fertilizer, fuel, water, credit and crop insurance--are or weresubsidized. These subsidies have distorted resource use, have had detrimentaleffects on agricultural institutions, and have raised the fiscal deficit.Meanwhile, government intervention in the seeds, feedetuffs, machinery andpesticides markets, has resulted in high prices relative to internationalprices, low-quality products, and burdensome trade barriers that hindercompetition.

55. The most important subsidies have been provided through low costcredit, crop insurance, electricity, fertilizer, and water. During 1989,annual government expenditures to finance these subsidies reachedapproximately US$2.5 billion, distributed as follows: (a) US$2000 million fortransfers to the rural financial system; (b) US$350 million for subsidies onelectricity tariffs for irrigation; (c) US$100 million for fertilizersubsidies: and (d) US$50 million to cover the operating and maintenanceexpenses of irrigation districts. The government has started major reform ofrural financial institutions, which already has reduced these financial sectorsubsidies and which will be supported by the planned rural financial sectorproject. Issues of water pricing are being addressed within the plannedirrigation time-slice project. Remaining fertilizer pricing issues are dealtwith under the existing fertilizer sector adjustment loan. Compliance withthe conditions of this loan has been on target, and fertilizer prices are now80 percent of international prices. Electricity pricing is also beingadjusted under ongoing Bank loans to the power sector. Regulations andreforms in the seeds sector are being analyzed in the agricultural technologyproject under preparation. Two important restrictions on the seedc marketthat are proposed to be addressed in AGSAL II ares (a) the monopoly by PRONASE(Productora Nacional de Semillas) of germplasm produced by INIFAP; and (b) thelimits on private plant breeding. A law is required to eliminate theserestrictions.

56. AQricultural Machinerv. Mechanization of agriculture in Mexicohas been constrained by high prices and the generally poor quality ofmachinery, thus hindering productivity gains in the sector. High prices onagricultural machinery reflect a history of import restrictions that protecteddomestic tractor producers and encouraged them to build up production capacityfaster than was warranted by agriculture sector development. Since September1989, domestic producers of agricultural machinery can import new machinery bypaying the corresponding import duty (10 percent on parts for the assemblyindustry, on other agricultural machinery, and on Implements, and 15 percenton tractors). This practice creates a virtual oligopoly for producing firms

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and precludes the entry of traders who might be more efficient. To eliminatesuch monopolistic practices, reduce costs, and promote competition, thegovernment has eliminated import permits for new agricultural machinery andequipment.

57. Pesticides. Agrochemical inputs have been characterized by highprices and uneven quality, resulting in higher production costs, and loweragricultural productivity. The structure of the industry, combined withgovernment control, creates barriers to entry and reduces competition as well,which tends to drive prices up. The government's regulation of the market byenforcing entry barriers--without imposing in-factory quality controls--favors dominant firms and results in the production of chemicals of uncertainquality. Dominant firms are price leaders, and they set prices, on average,above international levels. Barriers to entry result from registrationprocedures, import and export license requirements, price controls, andprotracted government response. Reaistration is required for every agent whowants to produce, import, or distribute a product. It is an expensive processthat can be handled only in Mexico City, and the registration must be renewedevery two years. Pesticide import and extort 2ermits from SECOFI, SARH,SEDUE, and SSA are required because of trade, phytosanitary, environmental,and health reasons and are handled in an inter-governmental committee(CICOPLAPEST). To facilitate processing of permit applications, thegovernment has published a manual that explains the steps that need to betaken to import pesticides. Moreover, during the Salinas administrationprices of pesticides have not been controlled.

58. Regulation of the pesticide market needs revision to eliminateentry barriers and to establish clear long-term policy guidelines foreconomic, health and environmental purposes. This would mean dealing withhealth and environmental issues on strictly epidemiological and environmentalgrounds. To address these issues it is necessary to make a study to assessprocedures and regulations on pesticide use and manufacturing. Similarly,animal health and plant protection regulations and related bureaucraticprocesses contribute to restricting external trade and domestic competition.Animal and plant services (provided by SARH) warrant adjustment to theemerging environment of trade and market liberalization. To promote andfacilitate the adjustment to this new environment it is necessary to assessprocedures and regulations on: (a) plant protection; and (b) animal healthsystems.

59. To enhance competition and improve resource allocation in inputmarkets, since appraisal the government has taken the following actions:

(a) abolished import licenses for new agricultural machinery;

(b) allowed tractor prices to be freely determined by the market; and

(c) initiated the process of submitting to Congress a draft seed lawthat will eliminate restrictions that impede private sectorcompetition with PRONASE, PRONASE's monopoly of germplasm producedby INIFAP, and limits on plant breeding by the private sector.

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b. Pronosed Actions

60. In terms of price, trade policy, and market regulation, theobjective of AGSAL II is to supports (a) liberalization of producer prices foragricultural commodities and their industrial derivatives5 (b) furtherliberalization of import and export trade in agricultural commodit'es andtheir Industrial derivatives; (c) development of private sector storage andmarketing; (d) competition between the private sector and agriculturalparastatals; (e) reduction of input subsidies and elimination of regulationson feedstuffs, machinery, and pesticides; and (f) regulation of pesticides,animal health, and plant protection based strictly on quality control, health,epidemiology, and environmental protection.

61. When loan preparation started in October 1989, the followingelements characterized the state control of production, marketing, processing,and international trade of agricultural products in Mexico:

(a) Guarantee (suoRort) _roducer prices for 12 food products (grainsand oilseeds), plus coffee, cocoa, sugarcane, and tobacco;

(b) Consumer nrice controls on around 50 products (those listed inAttachment 1 of Annex 4) and price controls on agriculturalmachinery and equipment, and fertilizers;

(c) guantitative restrictions (QRs) on most agricultural imports;

(d) Quantitative restrictions on all exports except high-quality riceand certain cuts of beef;

(e) Taxes on exports of livestock, swine for breeding, coffee, andcotton;

(f) Taxes on internal transactions of suaar and cocoa whichdiscouraged the participation of private traders in the marketingof such products;

(g) A larae oarastatal anparatus that intervened in the marketing,processing, and international trade of grains, oilseeds, coffee,cocoa, sugarcane, tobacco, milk, fertilizer, seeds, and otheragricultural inputs; and

(h) Mandatory oroduction Planning for the main agriculturalcommodities.

62. At the conclusion of the AGSAL It program, most constraints onproduction, marketing, processing and trade will have been dismantled, and thesituation for agricultural policy, price, trade, and regulatory institutionsin Mexico will be as follows:

(a) Guarantee sauanortV producer prices eliminated for all but twoproducts: maize and beans;

(b) Consumer price controls eliminated for about 30 agricultural andagro-industrial products, and agricultural machinery, andsubetantially relaxed (flexibilized) for another 16 commodities;

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(c) ORe on imports eliminated for all products but maize, wheat,barley, fruits, processed coffee, tobacco, cigarettes, chicken,poultry, meat, dairy products, and eggsl

(d) ORe on exports eliminated for all products except maize, sugar andbeans;

(e) Nominal tariff protection not to exceed 20 percent (except formaize, sugar, barley and wheat);

(f' ExDort taxes abolished;

(g) Mandatory Droduction Dlanning abolished; and

(h) A substantially reduced streamlined oarastatal apparatus,intervening only in the maize and beans markets.

63. To reach the above stage during the duration of the project, thegovernment will implement an action plan for price and trade policy reform,whereby major trade restrictions and price interventions would be removed.The action plan involves the following componentss (a) elimination of most QRsfor imports and exports; (b) elimination of existing export taxes;(c) elimination of consumer and producer price controls for a set of products,and greater administered price flexibility for those products still undercontrol; (d) a cap of 20 percent on import tariffs, except for maize, sugar,wheat and barley; (e) publication of a decree that regulates new cane paymentarrangements and the institutional aspects of the sugar sector; (f) theimplementation of an action plan derived from the study on the edible beansmarket; (g) a mechanism to allocate milk import quotas in a transparent,competitive and efficient basis; and (h) a study to define sugar policy, theresults of which will be used to approve and announce a policy for the sugarsector. The specific actions to be implemented are listed in para. 66 andsummarized in the attachment to Annex 4.

64. During negotiations, agreement was reached on terms of referencefor:

(a) a sugar study to define the sugar policy, including therecommendation of a timetable for achieving a target level ofprotection for sugar not to exceed 20 percent (para. 146 (a));

(b) a study to define the price and trade policy for edible beans(para 146 (b));

(c) a study to design a system which will eliminate CONASUPO'smonopoly on imports of powdered milk and will allocate importpermits in a transparent, competitive and efficient basis (para.146 (c));

(d) a study on pesticides to diagnose current use, assess presentlegal and institutional framework and streamline procedures to:(i) promote competition between producers and distributors;(ii) establish guidelines on minimum standards to deal with healthand environmental issues; and (iii) enforce quality control (para146 (d)); and

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(e) a study on animal health and plant protection tos (i) assess theregulation, organization and procedures of the system of plantprotection and animal health; and (ii) elaborate a proposal tomodernize the system and streamline its procedures (para. 146(e)).

65. To enhance competition and better resource allocation in outputmarkets, the Bank and the government agreed at negotiations that vrior toeffectiveness the government will issue a decree that modifies present canepayment arrangements, eliminate export permits for wheat, sorghum, feedstuffs,barley, soybean, copra, cartamo, cotton seed, tobacco, eggs, coffee, rice,sesame, sunflower, vegetable oil (oilseed oils), beef and cattle on the hoof,and eliminate export taxes for raw cotton, cotton fibre, and swine forbreeding (para. 147). It was also agreed that prior to second tranche release,the following actions will have to be taken (para. 149(a)(i)a.)s

(a) implement a system which will eliminate CONASUPO's monopoly onimports of powdered milk, and allocate import permits in atransparent, competitive and efficient basis;

(b) eliminate all export permits for fluid milk, and powdered milk;

(c) allow for prices of tobacco to be freely determined by the market;

(d) not to have increased the nominal protection for wheat above itslevel existing iI May 1, 1991;

(e) flexibilize prices for cookies, pasta, edible oils, cigarettes,eggs, beef and dairy products;

(f) not to have increased the guarantee price of maize to a level overits equivalent real U.S. dollar value for the Autumn-Winter cycleof 1990/1991;

(g) not to have increased the domestic price of sugar above itsequivalent real U.S. dollar value in January 1, 1991;

(h) not to have increased the nominal price of barley for the periodJune 1, 1991 to January 31, 1992 above the level of 680,000 pesosper ton, and have set the nominal price of barley for the periodFebruary 1, 1992 to January 31, 1993 at a level not to exceed714,000 pesos per ton;

(i) discuss with the Bank the results of the sugar study and based onsuch discussions approve a policy for the sugar sector;

Mj) agree on an action plan that follows from the edible beans marketstudy; and

(k) eliminate import permits for green coffee not later thanSeptember 30, 1991.

66. To enhance competition and improve resource allocation in inputmarkets, it was agreed during negotiations that prior to second tranche thegovernment will: (a) eliminate restrictions that impede private sector

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competition to PRONASE, PRONASE's monopoly of germplasm produced by INIFAP andlimits on plant breeding by the private sector (para. 149(a)(ii)a.) t (b)maintain policy of allowing prices of pesticides to be freely determined bythe market (para. 149(a)(ii)b.); and (c) reach agreement on action plans toimplement recommendations of the studies on animal health, plant protection,and quality control of pesticides. Rules and regulations would be basedstrictly on quality control, health, epidemiological, phytosanitary andenvironmental protection grounds (para. 149(a)(ii)c.).

67. GATT and Free Trade Agreement with U.S. and Canada. The actionssupported by AGSAL II will advance very significantly agricultural policyreform. Nevertheless, excessive protection for maize, sugar, wheat and barleywill not be eliminated fully over the time period of program implementationfor the reasons explained below.

68. In view of the ongoing GATT negotiations, and the forthcomingnegotiations on the free trade agreement with the U.S. and Canada, the MexicanGovernment stated that it was unable to make commitments on protection levelsand policy instruments for maize, wheat and barley. All these are commoditieswhich are or can be imported from the U.S.A. The Bank agreed that policyconditions under AGSAL II should not in any way undermine Mexico's position innegotiating the free trade agreement. At the same time, the MexicanGovernment does not view the current high protection level as permanent butintends to fully define the policy regime for these commodities in the FTAnegotiations. Under AGSAL II the government would commit itself either not toincrease protection levels or to reduce them as explained below.

69. Masie. The government has agreed at negotiations to limitincreases in the guarantee price of maize so that its real dollar value wouldnot increase for the crop cycle Autumn-Winter 90/91, Spring-Summer 91/91,Autumn-Winter 91/92 and Spring-Summer 92/92 (see paras. 65(f) and 149(a)(i)a.)

70. Wheat. During 1991, international wheat prices dropped 30percent and protection levels increased relative to the domestic producerprice (precio concertado). The government has agreed at negotiations not toincrease the nominal protection of wheat over its present level, using a fiveyear moving average of international prices to calculate the coefficient ofnominal protection. (See paras. 65(d) and 149(a)(i)a).

71. Barley. The price of "concertaciono of barley has been set at680,000 pesos per ton for the Spring-Summer 1990/91 and Autumn-Winter 91/92production cycles which implies a nominal protection of 60 percent. Thegovernment has agreed at negotiations that it will increase nominal price forthe 92/93 crop cycle by at most 5 percent. Given projected internationalprices, domestic inflation and exchange rate movements, this would lead to areduction in real peso price and in protection levels. (See paras. 65(h) and149(a)(i)a.)

72. Suaar. The government has implemented far-reaching reforms insugar cane pricing and payment arrangements which will greatly enhance theefficiency of cane and sugar production. A decree will be issued shortly toformalize these new arrangements. It has also privatized all 50 sugar mills.The sugar industry requires major investments for rehabilitation andmodernization. The government, sugar cane growers and sugar mill owners

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agreed on a domestic price policy which would make rehabilitation andinvestment profitable. This policy fixes a conotant real dollar price forsugar for the 1991 and 1992 crop years. The price is maintained constantthrough a variable levy on sugar imports. At today's international prices,the level of protection io about 80 percent. Changes to this recently agreedpolicy might jeopardize other agreements reached to modify the heavilyregulated environment of the sector. The Government committed itself not tofurther increase the domestic price of sugar above its equivalent real doliarvalue on January 1, 1991. (See paras. 65(g) and 149(a)(i)a.).

73. The Mexican government considers that the level of protection andthe timetable to phase out such protection should be the result of a detailedanalysis of the situation of the sugar sector. Therefore it could not at thistime commit to a particular level or to a timetable to reach it. It was agreedthat, in the policy letter, the government will state its intention of movingto a maximum level of protection of 20 percent within a reasonable time span,a level which is consistent with the country's general tariff policy. Thegovernment will carry out a study to define sugar policy under terms ofreference agreed with the Bank at negotiations. Based on presently availableinformation the Bank would consider a reasonable time period to reach thestated policy objective not to exceed five years. Prior to second trancherelease, the results of the study will be discussed with the Bank and, basedon that discussion, a policy for the sugar sector will be approved andannounced (paras. 65(i) and 149(a)(i)a.).

2. SARH's Production Taraets

74. SARH's production targets have been for many years a cornerstoneof Mexican agricultural policy. SARH expected that its specific productiongoals be achieved, including greater food self-sufficiency in basic grainssuch as maize, wheat, rice, and beans. Production targets determined at thenational level are used by government agencies to "guide" resource allocationat the farm level.

75. National targets become the basis for the targets for eachagricultural development district and for each centro de anoyo, whichinteracts directly with the farmers. Support measures such as subsidizedcredit, fertilizers, and farm machinery encourage farmers to produce theselected commodities. Allocation and delivery of water for those crops isagreed upon between producers and government authorities. Extension effortsat SARH, Banco Nacional de Cr6dito Rural (BANRURAL), and FideicomisosInstituidos en Relaci6n con la Agricultura (FIRA) concentrate heavily on thetarget crops--not necessarily the most profitable ones for the country. Thewaste inherent in this system was not as clearly a constraint on production aslong as irrigated land and other resources were expanding rapidly. Yet asresource growth declined, the constraints imposed by the system became moreapparent. This system of centralized planning with large subsidies foragriculture has not achieved its objectives. The end result is that thecountry is dependent on imports for its food supply.

76. This centralized system also would hinder transmission of theeffects of the price and trade policy reforms to be implemented under AGSALII, which are intended to increase productivity and improve resource

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allocation at the farm level. To allow the full transmission of price andtrade policy reforms to the agriculture sector, as condition of effectivenessthe Government will present a study which identifies processes, legislationand regulations that give SARH and other government entities the power toestablish, coordinate and enforce crop production targets. Based on suchstudy, the government will present to the Bank, not later than September 30,1991, a satisfactory plan of action to eliminate and dismantle processes andregulations that enforce the system of crop production targets. (para. 147).This action plan will be implemented before second tranche (para. 149(b)(i)).

3. Government Expenditure

77. Total government expenditure in the agricultural sector was high,around 33 percent of agricultural GDP in 1988. This expenditure includes:(a) subsidies for credit, insurance, fertilizers, electriclty, and irrigatlonwaterS (b) capital transfers to BANRURAL, ANAGSA, and other governmententities and parastatalsg and (c) current and investment expenditure by SARH.Agriculture's poor performance in the 19800 Indicates that, overall, thisexpenditure has been unproductive and that substantial reforms are the onlyway to eliminate waste in government spending and increase the efficiency offuture expenditures.

a. Credit and Input Subsidies

78. Total input and credit subsidies in 1988 amounted to US$2.1billion, four times the public investment budget in agriculture. Compreseingthese subsidies has allowed to increase public agricultural investment whilestill sharply reducing expenditures. Untar-sted credit subsidies remain amajor problem for agricultural policy and the government budget. Thegovernment, however, already has taken some action to restructure the ruralfinancial subsector. It announced in February 1990 that ANAGSA would beliquidatedl since then ANAGSA has ceased to operate. The government hassharply cut staff and begun important institutional reforms of BANRURAL and isgradually transferring the cost of FIRA's technical assistance and guaranteefund to the producers. These actions are expected to result in lesserreliance on government funds in the medium term. The Rural Financial SectorLoan under preparation is addressing these and other related issues.

79. Fertilizer prices, which at present are 20 percent belowinternational prices on average, are being increased according to thetimetable agreed to under the Fertilizer sector Adjustment Loan. LoSelectricity tariffs charged to farmers for operating irrigation pumps are alsoa major subsidy for agricultural production. The Federal ElectricityCommission (Comisi6n Federal de Electricidad (CFE)) estimated that in 1988electricity for irrigation and for corn mill. was sold at a ratio of price tolong-run-marginal-cost of 0.26 and 0.21 respectively. However, between thefirst semester of 1989 and January 1991, real electricity tariff ratesincreased by 72 percent. Still, the ratio of price to long run marginal costis below 0.40. A reform of electricity pricing is under way to reduce thesesubsidies.

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b. Investnt Expenditure

80. Public investment in the Mexican agricultural sector deterioratedsharply, falling in nominal terms from US$2.5 billion per year in 1980-82 toleos than US$0.7 billion in 1986-1988 (investment in agriculture as a percentof agricultural GDP fell from 18 percent to 6 percent during the period). Asa result, rural infrastructure deteriorated. To improve rural infrastructure,under AGSAL I the government agreed to submit to congress an agriculturebudget for 1989 that exceeded the 1988 budget (US$S503 million) by theequivalent of US$200 million in real terms. This condition was not fulfilledin 1989. Measured against actual expenditure, the increase in the investmentbudget between 1989 and 1988 was approximately US$80 million. However, theagriculture investment budget approved by Congress for 1990 was US$864million, which represents a US$361 million increase over investmentexpenditures in 1988, thus exceeding substantially the objective of AGSAL Ione year later. Although this recovery is important, major recovery ofinvestment expenditure is still necessary to accelerate agricultural growth.

81. Investment expenditures in two areas need to be reviewed, forinfrastructure and research and extension. Investment in rural roads, dams,and canal irrigation programs and the draining of floodplains and other majorwaterlogged areas have been a major source of agricultural growth in Mexico,and their expansion remains critical for future growth. The Mexicangovernment has begun to redress the imbalance in agricultural investment byboosting investment expenditure to US$864 million in 1990 and US$1,112 millionin 1991.

82. Technology development and extension also have suffered underfiscal retrenchment, particularly in the generation and distribution ofagricultural technology. Principal issues are the inadequacy of financingpublic agricultural research, the means for transferring technology toagricultural producers, the definition of research priorities, and the legaland institutional aspects of seed production. In addition, definitions arealso tequired for the appropriate division of labor between private and publicresearch and for seed production. The proposed Agricultural Technology loanis expected to address these issues. An increase in public spending forresearch and development is needed to increase productivity and reach farmerseffectively.

83. The government has provided satisfactory evidence that the leveland composition of budgeted agricultural expenditures presented to Congress inthe 1991 budget are consistent with the macroeconomic program and with anefficient allocation of Government resources at the sector level. Agreementwas reached at negotiations that prior to second tranche release, the MexicanGovernment will provide satisfactory evidence that the level and compositionof budgeted agricultural expenditure presented to congress in the 1992 budgetis consistent with the macroeconomic program and with an efficient allocationof government resources at the sector level (para. 149(c)(i)).

C. Food Congumotion and Nutrition

1. Introduction

84. Nexican food policy has long been concerned with balancing theneed to keep producer prices high to stimulate domestic production and the

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need to keep consumer prices low to protect real consumer income, particularlyfor the poor. As a result, food consumption policy has not permitted theformulation and implementation of an independent agricultural price and tradepolicy and has led to large fiscal outlays that have not been cost effectivein fighting poverty and malnutrition. The purpose of the food and nutritioncomponent of AGSAL II is to makes (a) agricultural policy fully independent offood consumption policy; and (b) poverty alleviation programs more costeffective and successful by increasing coverage and improving targeting of thepoorer population.

85. During the past two decades Mexico has not suffered any foodshortages. Internal production has provided over 80 percent of the total foodsupply, the cost of food imports has been less than 10 percent of the value oftotal exports of goods and services, and the country has the infrastructure tostore and transport food as needed.

86. Nevertheless, poverty and malnutrition, particularly among poorwomen and children, are widespread. According to nutrition surveys (EncuestaNacional de Nutrici6n) in 1988, malnutrition among children under five yearsold is extensive, with estimates ranging from 22.3 percent (1.1 millionchildren) when malnutrition is measured as low height for age (minus 2standard deviations below average) to 13.9 percent (700,000 children) when itis measured as low weight for age (minus 2 standard deviations below average.Moreover, the national nutrition survey indicates that around 29 percent ofnon-pregnant women aged 12-49 have low weight for their height. Studies byPrograma Nacional de Solidaridad (PRONASOL) indicate that in 1988approximately 41 million people lived under poverty corditions, around 65percent of them in rural areas. It is clear that low income, seasonalvariations of food supplies, short-term unemployment, intra-family differencesin food consumption, and nutrient losses due to parasites and other diseasesare among the primary contributors to this situation.

87. While economic adjustment is the basis for more equitable growth,a coherent food consumption and nutrition strategy is needed now. Since theinitiation of the Pacto, food price policy has been subordinated to theobjectives of maintaining constant real wages and reducing the rate ofinflation. This has led to rising costs in programs which drove a wedgebetween producer and consumer prices, reaching about 0.74 percent of GDP in1989. Taraeted food 2roorams are directed mainly to urban groups andconcentrated in the Federal District. It is estimated that the cost of theseprograms in 1989 was 0.13 percent of GDP. Nevertheless, 1990 saw asignificant reduction of generalized subsidies and an increase of targetedsubsidies. As a result, general subsidies declined to 0.49 percent of GDP in1990 while targeted subsidies increased to 0.27 percent of GDP. Foodassistance provided through the health system remains minimal.

88. Past consumer price policies undermined the considerable effortsto rationalize agricultural producer price and trade policies. Moreover, thecurrent system, which does not rely anymore on general consumer subsidies toprotect the real income of low-income urban groups, does not effectivelyaddress food consumption and nutritional objectives. This is because:

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(a) the rural poor receive only minimal benefits from the programsdespite the high concentration of poverty and malnutrition inrural areas;

(b) targeted food consumption programs do not take advantage of theproven complementarity among primary health services, nutrition,and nutrition education;

(c) the programs are fragmented and use different targeting criteriaand mechanisms; and

(d) the current programs continue to force the government to handlelarge amounts of food and to maintain producer price and tradeinterventions.

2. A New Food Consumptign and Nutrition Stratea

89. Because Mexico's food and nutrition programs have been costly,fail to protect much of the population from malnutrition, and have a negativeimpact on agricultural producer incentives, a new strategy should:

(a) sharply reduce under-nutrition and malnutrition in Mexico,especially in rural areas, at an acceptable fiscal coat; and

(b) liberate agriculture policy and trade policy from theirsubordination to consumer price policy.

90. To prevent and correct malnutrition cost-effectively, it isnecessary tos (a) reform the food and nutrition programs further; and(b) expand coverage of the target population substantially, especially inrural areas. This must be preceded by policy definitions and actions thatsupport long-term policy objectives.

a. Elements Already in Place

91. Current programs contain many elements worth preserving. Duringthe 1980. Mexico introduced and expanded urban food subsidy programs (e.g.LICONSA milk coupons and Tortibonos see Annex 6). These have helpedhouseholds, food security by supporting their purchasing power. The reformedTortiboa2s program (Tortivales) which selects its beneficiary families from arecently completed list of all urban families with income below two minimumwages, entitles beneficiary families to receive tortilla coupons that can beexchanged for up to one kilogram of tortillas per day. The LICONSA milkprogram allows beneficiaries to purchase milk at subsidized prices (belowproduction cost). Despite the lack of direct evidence and verification, it isreasonable to assume that these programs have prevented a major deteriorationin the nutrition status of the urban population since the debt crisis.However, these programs cannot reach the rural poor who do not buy tortillas,and it is costly and cumbersome to distribute liquid milk in rural areas.

92. Since mid-1987 the maternal and child health care program has beendelivering food baskets in 28 states to families with undernourished childrenunder age five and to pregnant and nursing women. The program reaches only140,000 families, however, while the total population eligible for coverage isestimated at 1.4 million. Integral Family Development (Desarrollo Integral de

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la Familia--DIF) implements other food and nutrition programs for selectedfamilies.

93. The main programs for protecting the purchasing power of the ruralpoor are: (a) the DICCONSA rural community stores; and (b) the maize flourprogram. The DICCONSA stores can deliver food to the most remote parts ofMexico and can serve a market-regulating function in areas with deficientretail systems. However, the DICCONSA stores effect a much smaller transferof income to the rural population than do similar programs to the urban poorand cannot be used to enhance the purchasing power of the poorest rural groupssubstantially. The maize flour subsidy is a semi-targeted program thatreaches only those rural poor who buy maize rather than grow it themselves."Semi-targeting" is achieved through the choice of maize--the predominant foodstaple of the poor--as the commodity to be subsidized and by locating storesin poorer rural areas.

94. Following the findings and recommendations of a study of food andnutrition programs, on-going programs are being modified to improve theirefficiency and targeting. Analytical work carried out by Comisi6n Nacional de

Alimentaci6n (CONAL) has led to further classification of target populations

and of each program's potential effectiveness. General food subsidies havebeen replaced by targeted ones. The Secretaria de Comercio and Fomento

Industrial (SECOFI) and the Compafita Nacional de Subsistencias Populares(CONASUPO) are reforming their semi-targeted programs to improve their cost-effectiveness and income transfer effect. In addition, the Health ServicesProgram for the Open (Uninsured) Population (Programa de Atencifn de Servicios

de Salud para la Poblaci6n Abierta--PASSPA) model of primary health care will

focus on improving and extending delivery of basic health care and nutritionassistance for 13 million uninsured people in Oaxaca, Chiapas, Hidalgo,Guerrero, and the Federal District. Special emphasis will be on families withundernourished pregnant and nursing women and children under five. Therecently approved Primary Health Project supports the PASSPA program.

95. Finally, to improve the efficiency of various food and nutritionprograms and to monitor their effects, Secretariat of Programming ardBudgeting (Secretaria de Programaci6n y Presupuesto--SPP), CONAL and theNational Institute of Statistics, Geography and Information (INEGI) aredeveloping proposals to enhance their ability to analyze and evaluatenutritional data.

b. Kev Elements of the Long-Term Strateav

96. Although the current programs contain many positive elements, theyare far from reaching their basic nutritional objectives. CONAL's reportproperly concludes that the prevalence of malnutrition--especially among womenand pre-school children--demands direct actionY Experience shows that to

2/ CONAL - Documento Iintesiss Evaluaci6n de Proaramas para keiorar la

Situaci6n Alimentaria v Nutricional de la Poblaci6n do Baios Inoreso-.Seounda Etapa (Evaluation of Programs to Improve the Food andNutritional Situation of Low Income People.) (M6xico, D.F., Junio de

1989.)

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achieve food security and basic nutritional objectives in a cost-effectiveway, a strategy must require: (a) provision of food supplements to those atrisk of malnutrition; (b) health interventions to prevent or treat parasiticand other diseases that generate waste of nutrients; (c) educating thepopulation about better use of their available food; (d) providing thevulnerable population (pregnant women, lactating mothers and children underfive) with sufficient purchasing power to obtain food; (e) using the haalthsystem to identify beneficiaries; (f) using the private sector to deliverfood; and (g) eliminating untargeted subsidies and consumer price controls.

97. The most effective way to identify vulnerable groups is throughschools and the health system, especially through nutrition-monitoringprograms for pregnant and lactating women and for small children. Suchmonitoring programs are in place in the IMSS/PRONASOL and DIF (IntegralDevelopment of the Family) programs. Once identified, beneficiaries could usecoupons at private and/or DICCONSA stores for food purchases. Combining foodcoupons with the provision of health services would greatly: (a) enhancetargeting and, therefore, the effectiveness of the food programs; and(b) provide an impetus to improve the health service and thereby exploit thelink between health and nutrition.

98. Based on these considerations, to achieve food security andadequate nutritional status for the poor and vulnerable groups of thepopulation, the government has defined the following elements for its foodconsumption and nutrition strategy:

(a) targeted food, nutrition and health programs, which are animportant means to alleviate poverty and malnutrition in urban andrural areas;

(b) program beneficiaries to be the poor (families with income belowtwo minimum wages) and vulnerable groups. They will be thepriority groups for an expanded nutrition and health program, withspecial emphasis on rural areas;

(c) execution and expansion of food and nutrition programs based on anequitable distribution of benefits between urban and rural areas,acceptable fiscal cost, and allocation of resources among programsbased on the results of a new monitoring and evaluation program;

(d) the health system to play a central role, including theidentification of beneficiaries (who will automatically becomeeligible for other food and nutrition programs);

(e) means testing to be confined to urban areas;

(f) CONASUPO and DICCONSA to handle food delivery to beneficiaries forthe time being;

(g) a pilot project, to evaluate procedures, operational viability,and cost-effectiveness of the nutrition and health program (seeSection d); and

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(h) a monitoring and evaluation program for the pilot project andexisting programs; results will be used to adjust the food andnutrition programs.

99. The Government of Mexico has prepared central guidelines for amedium-term food and nutrition program that incorporates the above elements ofthe strategy and has designated SPP as the agency in charge of coordinatings(a) budget allocation to the executing agencies; and (b) monitoring,evaluation, and research of the program. These guidelines have beenincorporated into the food consumption component of the policy letter (seeAnnex 3).

c. Cgonstraints and Transition

100. Three main factors constrain this strategy: (a) inadequatecapacity of the basic health system to provide services in the urban and ruralsectors alike; (b) inadequate budget for the existing primary health system,and expanding it to poverty areas; and (c) absence of government budgetallocation for providing food through the nutrition and health program. Allthe other elements necessary to establish an effective food and nutritionprogram are there, especially the food distribution system of CONASUPO,DICOONSA, and private stores.

101. Since the health system is not able to cover a larger segment ofthe vulnerable population in the short- and medium-term, there is a rationalefor maintaining the current targeted and semi-targeted food subsidy programs.The Tortivalos program is closer to a direct income transfer, and the LICONSAprogram, by focusing on mothers and children, is closer to a nutritionintervention-cum-income transfer. In the long run the Tortivales program canbe: (a) maintained as an income transfer program for the urban poor by furtherimproving its targeting and operation; or (b) merged with the nutrition andhealth program. Furthermore, because the LICONSA social milk supply programshares many elements with the proposed health and nutrition program, theinfrastructure of the LICONSA program can be used to support the nutrition andhealth programs and be merged quickly with it.

102. The DICCONSA store system primarily regulates the market andprovides only minimal targeted income transfer and nutrition benefits to thepoorest of the rural poor. It also has the maize flour program, whichconsists of sales of maize flower below cost. As the coverage of the food andnutrition program increases, this subsidy will become redundant. In the shortterm, however, the maize flour program should be maintained in rural areas, asit is the only program capable of conferring substantial benefits to the ruralpoor at this time.

d. kilot Nutrition and Health Proiect

103. The pilot project follows the basic design of the nutrition andhealth programs now under implementation by Secretaria de Salud. The pilotproject will: (a) provide food assistance to around 45,000 rural families inthe states of Nuevo Le6n, Tamaulipas, San Luis Potosi, and Mexico; and(b) test different methods for operating a nutrition and health program.Evaluation of the pilot project will provide adequate information on which tobase an expanded national nutrition and health program. The localities which

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will be beneficiaries of the program were selected for two reasons. First,their extreme poverty, adverse climatic conditions, poor natural resourceendowment, poor health infrastucture at the household level -absence ofpotable water and excretal disposal-, and high degree of malnutrition amongchildren under 5 years made them a natural selection for this program. Second,because the selected towns are located in non-PASSPA states they do not haveaccess to the benefits of PASSPA. Thus, for equity reasons, the pilot projectwill extend the benefits of poverty alleviation programs to those localitiesnot covered by existing programs.

104. The main purpose of the pilot project is to guide theinstitutional arrangements and define the most adequate design for an expandednutrition and health program. Its taraet -ooulation will be the low-incomefamilies at risk of malnutrition and for that include pregnant and lactatingmothers or children under age five (estimated at 3.6 million families). Thepilot program will cover 45,000 families and will:

(a) be based on nutrition and health interventions to reduce maternaland child mortality, prevent and treat malnutrition, and promote abetter growth and development of the target population;

(b) determine and test the most adequate institutional arrangementsand staffing to implement the nutrition and health program;

(c) determine and test the most adequate packages of benefits and thecriteria for selecting beneficiaries, with cost effectiveness ofthe proposed food supplementation basket(s) carefully evaluated,in particular;

(d) determine and test the most adequate systems and procedures for(i) selecting and identifying beneficiaries; (ii) providingentitlements to food baskets; (iii) redeeming entitlements; and(iv) transporting and storing food baskets;

(e) determine and test the design of the proposed information,supervision, accounting, and auditing systems and how to identifyand assess the performance of the responsible units;

(f) design and implement an action research program that will evaluatethe effectiveness of the various nutrition and income-supportinterventions;

(g) analyze the technical, administrative, and financial feasibilityof the project activities, their estimated cost and timetables;and

(h) prepare a detailed estimate of the cost of an expanded program forparticipating institutions, including unit costs, and costingcriteria.

e. Maize Consumotion Policy

105. Until recently, the government-owned ONASUPO subsidized maize andmaize flour to urban tortilla manufacturers much that their prices were belowboth the international and the domestic price equivalents, therefore granting

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urban consumers untargeted maize subsidies. Rural consumers, about half ofwhom are net buyers of maize, were not receiving such subsidies, but paidessentially the producer price. During the past three years, producers wereincreasingly protected, leading to rising budgetary costs of maintaining lowurban tortilla prices, and to rural consumers paying prices higher than theinternational equivalent. Ever since AGSAL I approval in 1988, it has been theobjective of Mexican policy to reduce the untargeted subsidies to urbanconsumers, and to replace them with targeted distribution of maize to poorconsumers. In the urban areas this has led to the Tortivales program whichprovides one kg of tortillas each per day free of charge to 2.1 million poorfamilies. In the rural areas the government subsidizes maize flower and maizethrough its rural DICCONSA stores, which target the poorest areas.

106. The government recently proceeded to deregulate the maize-tortillachain, simplify the complex structure of prices and subsidies stretching fromthe production of maize to the consumption of tortilla, and to reduce thebudgetary cost of its maize policy. It therefore raised consumer prices ofmaize and tortillas to nearly the costs of CONASUPO of acquiring, handling andprocessing maize, thus raising consumer prices above their internationalequivalent. Only in Mexico City is the price of tortillas slightly below theinternational equivalent. The new price policy therefore amounts to aregressive consumer tax which falls mainly onto rural consumers and urbanconsumers outside of Mexico City, and which benefits producers.

107. Without maintaining the large and inefficient CONASUPO purchaseand sales apparatus for maize, the consumer tax can only be eliminated byreforming producer price policy, a task which now has to be addressed in thecontext of the PTA negotiations. Pending the outcome of the PTA negotiations,to minimize the impact of the consumer tax on poor urban consumers, it wasagreed at negotiations that the government will compensate poor families(those with income below two minimum wages) from the real income lossesresulting from the consumer price effects of protection granted toagricultural producers in whatever food commodities the protection is applied.The instrument for this compensation will be the tortivale program or asuitably redesigned targeted food subsidy program.

108. For the rural areas the ultimate objective is to expand the pilothealth and nutrition project to the national level. In the meantime it makeslittle sense to greatly increase or further target the existing maize andmaize flower subsidy program through the DICCONSA stores, but rather justmaintain it in its present form as a temporary and imperfect palliativemeasure. Therefore, in rural areas, DICCONSA will use its maize and maizeflour programs in order to alleviate the impact on rural consumers of producerprotection. However, as the nutrition and health program is expanded, themaize and maize flour programs can be phased out in those areas covered by thenutrition and health programs.

109. During neaotiations, the Bank and the Mexican government reachedagreement on:

(a) central guidelines for a medium-term food and nutrition program(para. 146(f));

(b) terms of reference for the design of a system to evaluate andmonitor food and nutrition programs (para. 146(g));

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(c) a plan to implement the said monitoring and evaluation system(para. 146(h))t and

(d) a process for using the results of the implemented ongoingmonitoring and evaluation system (MES) to adjust the guidelinesand programs according to the lessons learned from experience(para. 146(i)).

110. The government ham begun implementation of the food, nutrition andhealth pilot project. Evaluation of the experience derived from the pilotproject and agreement on actions to extend a suitably revised program to alarge segment of the vulnerable population are necessary to extend thebenefits of these programs. During negotiations it was agreed that prior tosecond tranche release, the government will:

(a) present to the Bank an evaluation of food and nutrition programsas agreed to in the implementation plan of the NES (para.149(d)(i)); and

(b) agree with the Bank on general and agencies' action plans for1993-1994 (para. 149(d)(ii)).

PART II! - OVRNMNT AND MANU &TR_UEOIE8

A. aovernment Strateaw

111. After a protracted period of falling per capita income, Mexico hasresumed economic growth. Successful debt restructuring arrangements werefinalized with the assistance of the Bank in 1990. Having achieved thesegoals, the government's overriding objective in the remainder of its six-yearterm (which ends in 1994) is to sustain economic growth and deepen thecountry's modernization process. To achieve these objectives, the ongoingstabilization process has to be consolidated successfully, external capitalhas to be attracted to spur investments, and structural reforms must be kepton track. Furthermore, the government is fully aware of the long termstructural problems that could, if left neglected, derail any medium-termsuccess. It has therefore declared agricultural reform, structural povertyalleviation and the environment as top priorities. Government at the sametime is implementing its plans for decentralization to increase the fiscalauthority and re isibilities of the states and municipalities.

112. The government strategy is based on the recovery of crowth throuahprivate sector investments, which would be complemented by supporting publicinvestment. To create a climate conducive to private sector activity, thegovernment intends to continue its structural reform program, which would helprationalize the incentive structure and further reduce government interventionin the economy. The government is proceeding with the privatisation of thetelephone company and has announced the privatization of the commercial banks.The opening of negotiations with the USA and Canada for a free trade agrementis expected to take place later in the year. Privatization of the commercialbanks is likely to improve the efficiency of the financial system, help publicfinances, and has already induced an increased return of flight capital.Major new initiatives have also been launched to eliminate the remaining anti-agricultural bias in the incentive and trade regime.

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113. Public sector investments complementing private sector activitywould be allocated for infrastructur to increase efficiency and servicelevels (ln irrigation, power, and transport); for noverty alleviation toemphasize basic social sector programs (including health, nutrition, andeducation) and safety net arrangements for the truly needy; and for theenvirognmnt (air pollution, deforestation) to improve the health and livingconditions of the country's people and economic growth.

114. The sharp increases in the price of oil since the September oilshock have altered Mexico's balance of payments outlook, but there issubstantial uncertainty regarding balance of payments prospects. Thegovernment has been extremely cautious in calculating the potential windfallbenefits, and has for the time being decided to utilize any increased oilgenerated foreign exchange earnings to increase reserves and decrease debt.

S. Bank Assistance Strateav

115. The Bank has greatly expanded its assistance program to Mexicoover the last five years. In FY85 commitments for the year amounted to US$598million, and gross disbursements were US$788 million. Since then, Bank annualcommitments to Mexico have more than doubled, in support of the government'sadjustment program and structural reforms, including support for debtreduction. In FY90, gross disbursements reached an all time peak of US$3.6billion in FY90, and net transfers, a peak of US$2.5 billion.

116. The government's successful adoption of a comprehensive andbalanced economic program and the conclusion of Mexico's Bank supported debtrestructuring exercise In early 1990, had begun to shift Bank lendingstrategy, even before the oil price change, from an emphasis on quicklydisbursing adjustment operations to investment loans directed atinfrastructure institution building, the improvement of services in the socialsectors and the targeting of assistance to the poor.

117. Ae noted in Part I, if a US$23 per barrel average price of oil issustained in 1991, then there would be a "windfall gain' between US$2.5 and ofUS$3.3 billion for the year over what had been projected based on a pre-criesiaverage price of US$17.1 per barrel. However, the projections for the priceof oil are highly uncertain and Mexico's foreign exchange earnings are verysensitive to changes in economic conditions in the United States. Someadditional quickly disbursing adjustment lending for FY91 is necessary toprovide Mexico with a predictable source of balance of payments support. Thiswould be done through this US$400 million AGSAL II and the US$25 millionadjustment component of the recently approved Export Sector Loan (seepara. 123)--as well as through IDB cofinancing of US$450 million for the twoloans.

118. Provided there is no major change in Mexico's current balance ofpayments prospects, the Bank strategy is to continue the shift from adjustmentto investment lending. The main thrust of the Bank's assistance strategywould then be to finance investment for physical and social infrastructurethat would support private sector led growth. This would be complemented byspecific operations to assist the poor and protect the environment. Thestrategy of shifting emphasis from adjustment to investment project lendingrequires strengthening the project pipeline. The Bank and the government areworking together to do this.

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119. As a result of the Bank's increased level of lending in Mexicoover the last several years, its exposure in Mexico rose to US$11.03 billionas of the end of FY90, which amounted to 11.33 percent of the Bank's totalexposure. Mexico remains in need of substantial amounts of lending to supportthe needs of its public sector investment program; however, the phasing downof adjustment loans will contribute to a gradual decline in Bank exposure,even with a continuation of substantial amounts of investment lending. TheBank strategy also contemplates continuing with an extensive and well-focussedeconomic and sector work program which could provide a basis for proceedingwith adjustment lending if conditions warranted it.

120. Bank lending will emphasize infrastructure and human resourcedevelopment in support of the government's efforts to revitalize privatesector led growth. Infrastructure investment in the 1980s was reduced as partof the stabilization programs. As a result of this and the increased demandfor infrastructure associated with the resumption of economic growth, expandedinfrastructure investment is required. To meet these needs, a major emphasisin the Bank's lending program will be to support infrastructure investment andgovernment policies to (a) reduce excessive regulation and interference;(b) decentralize administration and financing of infrastructure to the locallevel; and (c) utilize private sector management skills and capital to expandinfrastructure services. Human resource development has also not kept pacewith growth. During the sharp economic downturn of the 1980s, the humanresources sector, which includes education, health, and nutrition, hassuffered more than other sectors, and is now hampering the recovery. TheBank's program of financial and technical assistance is designed to supportthe government's increased efforts to strengthen Mexico's human capital base.In particular, the Bank program envisages assistance to basic education andhealth care as well as in the area of vocational education and manpowertraining.

C. 8ectoral Comnosition of Bank Lendine

121. As of December 31, 1990, Mexico had received 126 loans from theBank, amounting to US$16.73 billion, net of cancellationg and terminations; ofthese, 85 loans, totalling US$13.45 billion, were fully disbursed and US$3.28billion remained undisbursed. The Bank's exposure was US$11.03 billion on acash basis. The sectoral composition and policy content of past lending, aswell as the design of major new lending operations are discussed below for keyareas of the Mexican economy in which the Bank has been active over the years.

Agriculture

122. Because of the crucial importance of agriculture for the one-thirdof the country's population living in rural areas, some 23 percent of theBank's past lending has supported agricultural development, and nineoperations are currently under supervision. The Bank's lending program inagriculture is aimed at: (a) helping correct the incentive regime inagriculture through gradual reductions in input subsidies and export controls;(b) promoting more efficient and rationale use of natural resources supportedby improved technologies and services; (c) generating employment-intensiveinvestments in rural areas and effective assistance to small farmers; and(d) creating an integral framework for sound rural development. To support

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these goals: in FY88 the Bank made a US$300 million AGSALI in FY90 made twoloans (one for investments for agricultural marketing and storage facilitiesand the other for forestry development); and in FY91 made one fordecentralization and regional development. Additional operations are plannedto support rehabilitation of the irrigation infrastructure, including improvedcost recovery and maintenance operations, for food security and povertyalleviation, and for agricultural technology.

rade

123. About 10 percent of past Bank lending has been for trade, and twoloans remain under supervision. Two trade policy loans (TPL I and TPL It) ofUS$500 million each were made in FY87 and FY88 in support of the government'ssweeping trade reforms. The two operations supported the speedy reduction ofnon-tariff barriers (quotas and official reference prices) and rationalizationof the tariff system (reduced levels and dispersion). The Bank supported thedevelopment of non-oil exports through two export development operations inFY83 and FY87. These export development loans were intended to strengthen thesupply response by Mexican industry to the new trade policy signals. A US$500million Industrial Sector Policy Loan (ISPL) in FY89 has supported additionaltrade measures designed to liberalize imports and rationalize the incentiveregime in key subsectors. The recently approved US$300 million Export SectorLoan (ESL) will support trade and custom reforms and the transition ofBancomext to a more efficient role in trade financing in a more competitivefinancial system.

Industry and Finance

124. Some 21 percent of the Bank's lending has supported industry, andcurrently eleven projects are under supervision. The Bank's lending strategyfor industry, covering small- and medium-scale industry, mining, industrialrestructuring and technology development, is designed to support: (a) tradepolicy reform; (b) strengthening a competitive financial sector, including theprovision of resources for restructuring financial intermediaries; and(c) industrial restructuring, regulatory reform, clarification of foreigninvestment rules, and export promotion to assure a vigorous supply response totrade liberalization and increased international competitiveness. The FY89US$500 million ISPL and the FY89 US$500 million Parastatal Enterprise ReformLoans provide support for policy reform in industry, and for the moreefficient management and privatization of public enterprises. The PY88Fertilizer and Steel Sector Loans and the FY89 Industrial Restructuring Loanprovided support for restructuring of the fertilizer, steel, automotive parts,textile, and flower sectors, and other key private industrial subsectors inneed of restructuring. Another adjustment operation in FY89, the USS500million Financial Sector Adjustment Loan (FSAL), has been providing supportfor the liberalization of the financial sector, elimination of forced lendingto the government at subsidized rates, increasing competition among banks andbrokerage houses and improving regulations in the banking sector.

Infrastructure

125. Lending for transportation, power and water accounts for 20percent of the Bank's total in Mexico, with 8 projects currently undersupervision. Lending for infrastructure is focussing on regional development,decentralization, more efficient public investment allocation, and improved

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cost recovery. Recent Bank loans supported the highway, railways and portsub-sectors. Emphasis was placed on obtaining more realistic user feel anddeferring all but the highest-yielding investment projects so as to permit aminimum of budgetary outlays for maintenance expenditures and protect theexisting capital stock. Proposed loans would support the government'sdecentralization initiatives, cost-based pricing, and managerial improvements.Loans are being considered to finance highway maintenance and construction,railway rehabilitation, port development, electric power energy developmentand water supply and sewerage system investment.

Nousin@ and Others

126. The Bank has lent some 13 percent of its total for tourism, urbandevelopment, housing and vocational training. Currently three housing loansare under supervision. Government housing programs are designed to improvecost recovery. A Second Housing Finance Loan under execution is supportinggraduated loan cost recovery linked to the income of final borrowers, thusensuring a reduced drain on the budget. Further financing in the housingsector is contemplated which would benefit low-income groups and achievefurther housing finance sector reform.

D. Poverty, the Social Sectors and the Environment

127. While rapid, private sector-led growth is the most effective meansof securing sustained increases in the incomes of the poor, not all willbenefit from this process, or at least not quickly enough. This points to theneed for special programs to assist the disadvantaged. The Bank's strategy isto support efforts to design more cost-effective programs for the provision ofbasic social services to the needy in the four poorest states of Mexico.Provision of low-cost housing and efforts to expand social safety nets tothose outside the formal insurance programs are also in process. The Bank isassisting the government in redesigning public health, education, and humanresource programs to make them more cost effective and targeted to meet theneeds of the poor. A recently approved health project, the Bank's first inthe sector in Mexico, would support decentralization measures, finance newprimary health facilities, and strengthen professional services. similarinitiatives are being pursued in education and nutrition. A basic educationproject is planned for next year and other operations are planned in the nearfuture for vocational education and manpower training. A pilot project hasbeen approved for improving the well-being of women in low-income areas. Itincludes the provision of piped water, health and educational services,training for productive activities, and credit for launching newmicroenterprises.

128. Bank strategy gives high priority to programs to safeguard theenvironment. The Bank is preparing an air pollution operation in the FederalDistrict, which would tackle pollution caused by urban transport, and theBoard has approved an amendment of an ongoing urban transport operation tosupport immediate relief measures requiring investments. A loan to supportthe Government's onvironmental ministry is under preparation. The loan wouldprovide institutional assistance to the ministry, finance sectoral policystudies, prepare proposals for investment projects and help support mnnitoringand pollution control activities. To increase external resources, the Bank ispromoting cofinancing of environmental investments, particularly with Japan.

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S. Collaboration with IFC

129. The IFC has worked with the Bank tot (a) identify private sectorinvestment opportunities likely to thrive in the current climate of greaterintegration with the world economy; and (b) assist in strengthening thecountry's capital markets. In FY89 and FY90, IFC provided three lines ofcredit, totalling US$140 million, to commercial banks for industrial financingemphasizing export-oriented projects. As of March 31, 1991, the IFC had grostotal commitments of US$1458.6 million in Mexico of which US$970.80 millionhad been sold, repaid or canceled.

PALM IV - TU PROPOSD

A. Rationale for AGSAL IL

130. Current Bank strategy recognizes both the short-run uncertaintyover oil prices and the need to safeguard the Mexican economy from declines inthe terms of trade. The macroeconomic justification for continued balance ofpayment support, albeit at substantially smaller levels than previouslyplanned, also reflects the short-run volatility in the oil market and thelong-run concern of insulating the economy from external shocks. With themacroeconomic situation calling for a reduced level of adjustment lending,current priorities in the Mexican adjustment program provide a clear rationalefor focusing this reduced flow on the agricultural sector.

131. Continuation of agricultural policy reforms (price and tradepolicy) is key to further improving the incentives for the efficient andincreased growth of the Mexican agricultural sector. Elimination of tradebarriers is vital to permit the efficient transmission of signals that willguarantee that the full impact of reforms is felt. Reforms in foodconsumption policy are fundamental to: (a) improving the efficiency ofgovernment expenditure on anti-poverty programs; (b) increasing the living andnutritional standards of the poor; and (c) permitting a smooth shift away froma system of price and trade intervention. As government intervention declinesand producers and consumers realize more freedom of choice, the need for alarge parastatal sector disappears, and the closure of parastatals or theirsale to the private sector will be a natural outcome of the reform process.

132. The government already has exceeded AGSAL I conditions in theprice reform, trade reform, and reduction of agricultural parastatals. Thestrength of the ongoing programs and the impressive record of past actions inthese areas provide the rationale for continued Bank support of thegovernment's program of agricultural sector adjustment.

133. Other elements of the Bank's strategy for agriculture and ruraldevelopment include: (a) the Decentralization and Regional Development Projectthat will support rural infrastructure in the four poorest states (FY91);(b) a planned irrigation sector time-slice loan that will supportrehabilitation of existing irrigation systems, completion of unfinishedprojects, and initiation of a few high-payoff additions to the irrigationsystem (FY92); (c) a rural financial sector operation that will consolidateand deepen ongoing reform of the rural financial sector (FY92); and (d) thepreparation of an agricultural technology operation to support the nationalresearch and extension effort (FY93). Agricultural environmental issues will

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be dealt with in each of these operations. For example, the agriculturaltechnology operation is expected to contain a major component in support ofsoil conservation, research and extension, the irrigation sector loan willaddress salinity issues, and the AGSAL II will initiate reforms of pesticidepolicy.

134. In the area of food consumDtion and nutrition nolicX, AGSAL Isupported the gradual shift from general to targeted food subsidies andsponsored an evaluation of food and nutrition policies and programs in Mexico.This evaluation led to selected but isolated reforms of food and nutritionprograms and policies. The Bank has continued the dialogue with thegovernment during the preparation of AGSAL II, aiming at the definition of afully coherent food consumption and nutrition strategy that addresses theserious nutrition problems in the country, especially in rural areas. In thissontext, the government will carry out a pilot program to evaluate thefeasibility and mechanisms of a health-based nutrition program that wouldcombine health services and nutrition education with food entitlement. Toexpand at the national level, the health and nutrition program requiresstrengthening the basic health system, which the Bank is supporting throughthe recently approved Basic Health Care Project.

135. AGSAL II is a natural follow-up to AGSAL I, TPL I and II, and theIndustrial Sector Policy Loan supporting trade liberalization, elimination ofregulations, and price liberalization. AGSAL II also would have strong tiesto the Fertilizer Sector Adjustment Loan, the ESL, and the Basic Health CareProject.

B. Amount and Loan Obiectives

136. Loan Amount. The AGSAL II is proposed at US$400 million. Thefirst tranche of US$200 million would become available upon loan effectivenessanticipated for July 1991, and the release of the second tranche of US$200million is expected for August 1992 on fulfillment of: (a) specific conditionsrelated to progress in implementing the program (see para. 149); and (b)general conditions referred to in para. 148. The closing date of AGSAL IIwould be February 28, 1993.

137. Obiectives. AGSAL II is part of a program of Bank support to thegovernment's objectives of promoting efficient private sector development andincreasing the effectiveness of public sector institutions so as to enable theresumption of economic growth. The loan would support: (a) trade and pricepolicy reforms for expanding agricultural production; (b) food consumptionpolicy reforms for reducing poverty, providing income protection to the poor,and improving the nutritional status of the most vulnerable groups of thepopulation; and (c) the institutional transition of SARH to perform a smallerbut more effective role in agriculture, emphasizing policy formulation andimplementation and basic information and regulatory :unctions.

C. The Borrower, the Guarantor. and Disbursements

138. Borrower and Guarantor. The government has designated NacionalFinanciera S.N.C. (NAFIN) as the borrower, in line with its function as one ofMexico's official financial agents. NAPIN has also been the borrower underAGSAL I and its performance has been fully satisfactory. The loan would beguaranteed by the Mexican government. The Secretariat of Finance and Public

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Credit (SHCP) would be the project executing agent through SARH, SPP, SECOFI,and SSA.

139. Disbursements. The proposed US$400 million loan will supportpolicy changes. Statements of expenditures (SOER) will be used as the basisfor the preparation of the disbursement requests. These disbursements will beused to finance eligible import expenditures. Contracts in excess of US$5million will be disbursed against full documentation. All adjustment loans toMexico use a negative list because disbursements can only be made againstCentral Bank receipts, which cover only a fraction of Mexico's overallimports. Attempts to use a positive list in the past have been abandonedbecause of the small volume of imports against which disbursement could takeplace.

D. Procurement and Financial Manacement and Auditina

140. Procurement. Contracts in the public and private sectors valuedat US$5 million or more would be procured through international competitivebidding (ICB) with simplified advertising and currency provisions followingWorld Bank guidelines. Procurement has been satisfactorily handled inprevious adjustment loans. Therefore, contracts valued below the ICBthreshold would continue to be awarded, as in past operations, on the basis ofthe normal procurement practices of the purchasers, which have been reviewedand are acceptable to the Bank.

141. Financial Manasement and Auditing. The borrower would beresponsible for maintaining loan accounts and for preparing and submittingwithdrawal applications. Withdrawals from the loan account would be on thebasis of statements of expenditures (SORs), and Banco de Mexico would ensurethat all supporting documentation is maintained adequately and made availablefor review by the Bank. Disbursements will be made for eligible imports,i.e., those not specifically excluded (the standard "negative list"). Auditsof the accounts of the project and the supporting documentation for SONs willbe carried out by independent auditors. The audit reports will be submittedto the Bank as follows: (a) for the first tranche, within a period of 120 daysafter the disbursement of the tranche; and (b) for the second tranche, within120 days of the full disbursement. A timely and acceptable (clean auditors'opinion) audit report after first tranche release must be received prior toreleasing the second tranche.

S. Benefits and Risks

142. Benefits. Implementing price and trade reforms, dismantlingsystem of mandatory production planning, streamlining regulations on plantprotection, animal health and pesticides, and allocating governmentexpenditures towards infrastructure and development of new technologies willimprove incentives for efficient sector growth. Liberalizing prices and tradewill allow producers and consumers to exploit the best production and tradingopportunities in both domestic and international markets. Dismantling systemof mandatory production planning will let production and marketing decisionsbe based on price signals and market opportunities rather than by bureaucraticprocesses. streamlining present regulations on plant protection, animalhealth and pesticides will result in, first, simpler and more efficientadministration of regulatory system, second, elimination of artificialbarriers to entry and competition, and third, adoption of rules and procedures

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which will facilitate Mexico's access to international markets. Targetingprograms to the poor and vulnerable population, increasing their coverage andmonitoring and evaluating food and nutrition programs will: (a) separateagricultural and food consumption policy; (b) provide transparency anddistinguish budget allocations which support agricultural producers from thosethat protect the poor; and (c) make government expenditure in food andnutrition programs more cost effective. As a result, the government will beable to reduce the incidence of malnutrition by the end of the currentadministration.

143. Risks. Firgt, one important lesson of economic history is thatthe macroeconomic climate must be supportive of policy reforms. The keyrequirements are fiscal discipline, a prudent monetary policy, and a realisticexchange rate. Policy reversal in any of these areas would endanger theprogram. Second, the very purpose of agricultural policy reform is toencourage improved resource allocation. Changes In patterns of resource useoften are resisted by those who benefit from the status quo. If governmentsdo not resolutely follow through with credible policy change, the momentum forreform may be lost and the program endangered. Third, relying on the U.S.-Mexico-Canada PTA to implement trade policy reform in maize, wheat, and barleydoes not necessarily guarantee trade and price liberalization. Over the pastfive years the Mexican record of overall policy reform has been strong,sometimes going beyond Bank's conditionality. Moreover, the U.S. and Canada,large producers of wheat and maize, have strong interests in guaranteeingtheir producerb -ccess to the potentially large Mexican market. Therefore,the risks seem manageable and are outweighed by the likely benefits of AGSALII.

P. Coflnancina

144. The Bank and the IDB have collaborated closely in the preparationof AGSAL 1I, and IDS is planning to cofinance the program with a loan ofUS$200 million.

G. Neaotiations. Effectiveness. Dated Covenants and Secoid Tranche ReleaseConditi2na

145. At negotiations, the government and the Bank agreed on the finaltext of the government's policy letter on acriculture and food consumption(policv letter) policy statement and on the timetable for the introduction ofthe policy reforms. The policy letter describes a program of actions,objectives and policies designed to promote greater efficiency and higherproductivity in Mexican agricultural and agro-industrial sectors, reducepoverty and malnutrition and improve the cost-effectiveness of governmentexpenditures in food and nutrition programs. This policy letter has twopartst one on agricultural growth and productivity and other on foodconsumption and nutrition policy (see Annex 3). In the part on agriculturalarowth and oroductivitv the governments (a) reaffirms the continuation ofreforms and sets out a plan for further action on price and trade policy foragricultural commodities and inputs; (b) reaffirms its intention to dismantlebarriers to entry and competition since they hamper resource allocation;(c) agrees to streamline those rules and regulations required for theefficient operation of markets; and (d) states its intention to allocateinvestment expenditure to improve rural infrastructure and agriculturalresearch and extension. In the section on food consumption and nutrition the

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government states its intention oft (a) compensating poor families for thereal income losses from the consumer price effects of protecting agriculturalfood production; (b) improving the present system of targeted subsidies; (c)implementing a pilot nutrition and health program; and (d) increasing thecoverage of food consumption and nutrition programs in rural areas. Thespecific actions taken and to be taken are detailed in para. 149 and thepolicy matrix and its attachment (Annex 4).

146. During negotiations, the Bank and the Mexican government reachedagreement on:

(a) a sugar study to define the sugar policy, including therecommendation of a timetable for achieving a target level ofprotection for sugar not to exceed 20 percent (para. 64 (a));

(b) a study to define the price and trade policy for edible beans(para. 64(b));

(c) a study to design a system which will eliminate CONASUPOS'Smonopoly on imports of powdered milk and will allocate importpermits in a traisparent, competitive and efficient basis (para.64(c));

(d) a study on peL.icides to diagnose current use, assess presentlegal and institutional framework and streamline procedures to:(i) promote competition between producers and distributors; (ii)establish guidelines on minimum standards to deal with health andenvironmental issues; and (iii) enforce quality control (para.64(d));

(e) a study on animal health and plant protection to: (i) assess theregulation, organization and procedures of the system of plantprotection and animal health; and (ii) elaborate a proposal tomodernize the system and streamline its procedures (para. 64(e));

(f) central guidelines for a medium-term food and nutrition program(para. 109(a));

(g) terms of reference for the design of a system to evaluate andmonitor food and nutrition programs (para. 109(b));

(h) plan to implement the said monitoring and evaluation system (para.109(c)); and

(i) a process for using the results of the implemented ongoingmonitoring and evaluation system (MES) to adjust the guidelinesand programs according to the lessons learned from experience(para. 109(d)).

147. Prior to geffctiveneas, the government has agreed to: (a) issue adecree that modifies present cane payment arrangements (para. 65); (b)eliminate export permits for wheat, sorghum, feedetuffs, barley, soybean,copra, cartamo, cotton seed, tobacco, eggs, coffee, rice, sesame, sunflower,vegetable oil (oilseed oils), beef and cattle on the hoof (para. 65); (c)eliminate export taxes for raw cotton, cotton fibre, and swine for breeding

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(para. 65); and (d) present to the Bank a study which identifies processes,legislation and regulations that give SARH and other government entities thepower to establish, coordinate and enforce crop production targets (see para.76). As dated covenants it was agreed that not later than September 30, 1991:(a) based on the study, the government will present a satisfactory action planto eliminate and dismantle processes and regulations that enforce the systemof crop production targets (para. 76); and (b) the government will eliminateimport permits for green coffee (para. 65(k)).

148. General conditions for aecond tranche release are: (a) that thegovernment will provide the Bank with evidence that the macroeconomic policyframework is consistent; and (b) maintaining the policy reforms implemented upto Board presentation and documented under this project. (Actions describedin the policy matrix and its attachment; see Annex 4.)

149. During necotiations agreement was reached that the followingactions, satisfactory to the Bank, will have to be taken prior to secondtranche (see also Annex 4):

(a) Price. Trade Policy and Market Reaulations

(i) Output Markets

a. Implement the action plan agreed upon and described in(para. 65(a) to 65(k)); and

(ii) input Markets and Health Regulations

a. Eliminate restrictions that impede private sectorcompetition to PRONASE, PRONASE's monopoly ofgermplasm produced by INIFAP and limits on plantbreeding by the private sector (para. 66(a)).

b. maintain policy of allowing prices of pesticides to befreely determined by the markets (para. 66(b));

c. agree on action plans to implement recommendations ofthe studies on animal health, plant protection, andquality control of pesticides (para. 66(c)); and

(b) SARH's Production Taraets

(i) Implement actions agreed upon to eliminate and dismantleprocesses, legislation and regulations that enforce thesystem of crop production targets (para. 76).

(c) Public ExDenditure

(i) Provision of satisfactory evidence that the level andcomposition of budgeted agricultural expenditure presentedto Congress in the 1992 budget is consistent with themacroeconomic program and with an efficient allocation ofGovernment resources at the sector level (para. 83).

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(d) Food Consuamtion and Nutrition

(i) Present evaluation of food and nutrition programs as agreedto in the implementation plan of the monitoring andevaluation system (MRS) (para. 110(a)); and

(li) agree with the Bank on general and agencies' action plansfor 1993-1994 (para. 110(b)).

PkMT V - COLLABORATION WITS TINF

150. Bank/IMF collaboration has been close over the years, especiallysince 1982 when the Fund began to assist the government in addressing theunderlying causes of its economic crisis. Since that time, the government hasbonefitted from an extended arrangement for SDRS 3.4 billion, a specialemergency drawing for 8DRo 291 million after the 1985 earthquake, a stand-byfor SDRs 1.4 billion in 1986, and in 1989 for an SDRs 2.8 billion extendedarrangement through 1992, and a drawing of SDRe 453 million under thecompensatory facility.

151. Consultations between Fund and Bank staff concerning Mexico'scurrent economic situation and prospects have led to a common understandingabout the measures needed to bring the stabilization program to a successfulconclusion, strengthen the balance of payments, and restore sustainablegrowth. Further consultations on macroeconomic performance will take placebetween the two institutions during our ongoing adjustment operations.

PMRT VI - R3COMHNEDaXION

152. I am satisfied that the proposed loan would comply with theArticles of Agreement of the Bank, and recommend that the Executive Directorsapprove the proposed loan.

Barber B. ConablePresident

AttachmentsMay 29, 1991Washington, D.C.

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- 48 Annex 3Page 1 of 35

MEXICO: AGRICULTURAL SECTOR ADJUSTMENT LOAN

Policv Letter from the Mexican Government onAariculture and Food Consumntion Policy

A. Acricultural Growth and Productivity

As it is known, the Mexican economy has experienced a profoundtransformation which is mainly characterized by reduction and control ofinflation, reorganization of public finances, public sector restructuring,external debt renegotiation, trade liberalization for most products and theestablishment of a maximum tariff of 20 percent, gradual substitution of importpermits by tariffs, as well as the elimination of general subsidies.

At present, the set of macroeconomic and structural adjustmentpolicies undertaken by the Mexican Government lay the basis for a more adequateeconomic environment leading to the development of the agricultural sector.

The main objectives of the agricultural modernization policy aretincrease production and productivity of the agricultural sector, promote thedevelopment of adequate investment schemes, as well as raise the producers,welfare, mainly of those with low income.

The agrioultural sector policy addresses a fundamental change in therole of the public sector for the planning and regulation of agriculturalmarkets. At present, the strategy is to promote a major participation of thesocial and private sectors, including the communities and associations of ruralproducers.

The Mexican Government's strategy for the agricultural sector willbe to support the process of structural adjustment through the followingmeasuress shift public expenditures in favor of infrastructure rehabilitationand creation; eliminate institutional distortions and rigidities that restrainthe production capacity of the sector; reduce and eliminate subsidies within theframework of a highly distorted international market} create and promote newproduction and marketing schemes within the context of an open economy; establishan adequate environment for larger investmentst develop an effective linkagebetween the technological development and the producer through integratedextension schemes; develop a statistical, financial and market information systemwhich provides adequate information to producers for a timely and effectivedecision-making in the allocation of their resources.

Several measures, without precedent at the international level, havebeen taken in order to meet these objectives. These measures have been orientedto eliminate excessive regulation in the production and marketing of mostagricultural products, and to liberalize foreign trade (in spite of having toface an international environment characterized by a high level of protection andgovernment subsidies of agricultural products in most countries). At the sametime, government intervention to set agricultural product prices for producersand consumers has been substantially reduced. The process of parastatals

- 49 - Annex 3Page 2 of 35

disincorporation and the elimination of general food subsidies, which are beingreplaced by targeted subsidies to the poor.

The main measures adopted by the administration to improve theproductivity and efficiency of the agricultural sector ares

1. The elimination of "Guarantee Prices" for the following products: rice,wheat, sorghum, barley, soybean, cottonseed, safflower (cartamo),sunflower, copra and sesame. This implies that the prices are determinedby market forces and that the Government has no intervention in themarketing of these products.

2. Elimination of import permits for beef, pork, rice, sorghum, oat, soybean,oilseed and a considerable amount of agricultural inputs (seeds and newagricultural machinery).

3. Elimination of export permits for beef, cattle on the hoof, coffee andtobacco.

4. Elimination of barriers to entry to the wheat-tortilla industry.

S. Elimination of restrictive export practices which favor monopoly by someproducers, associations.

6. In less than a year and through a difficult and complex agreement process,the Mexican authorities have made a considerable effort, to make the sugarindustry productive and liberalize its market. Substantial changes havebeen achieved such as: elimination of the sales tax; elimination ofA3UCAR S.A. monopoly which is practical3y no longer involved in thepurchase and distribution of sugar, thus encouraging the establishment ofprivate channels for its marketing; elimination of differential priceslliberalization of sugar imports by using a scheme of variable tariffs; andcompletion of the privatization of all sugar mills.

Another substantial change was the modification of sugarcane paymentarrangements, which rationalizes trade relations between sugar workers andindustrialists and establishes inc6ntives for improving sugar production.The main changes introduced ares modification of the payments systemaccording to sugar content or sugar extracted, the elimination of loans toproducers which led to the development of excessive fragmentation oflandholdings, the modernization of labor relations thus facilitating thedevelopment of new sources of employment In the sugar fields, therebyleading to improvements in the efficiency of the sugar industry.

Other actions taken were the liquidation or disincorporation of 17parastatal enterprises from the agricultural sectors Tabaco Mexicanos,Comision Nacional de Fruticultura; Productos Forestales Mexicanoo,Alimentos Balanceados de Mexico, Centro Nacional de InvestigacionesAgrarias, Fideicomiso para el Sostenimiento del Patrimonio Indigena delValle del Mezquital y la Huasteca Hidalguense, Aceitera Guerrero,Impulsora Guerrense del Cocotero, Complejo Fruticola Industrial de laCuenca del Papaloapan, Desarrollo Industrial del Cafe Mexicano, Industriasde Agricultores, Maderas Industrializadas de Quintana Roo, Nutrimex,

- so - Page 3 of 35

Servicios Ejidales, Servicios Forestales, Triplay de Palenque, Fideicomisopara Apoyo al Instituto Nacional de Investigaciones Forestales yAgropecuarias.

CONASUPO restructuring which includes: reduction in the purchase ofgrains and oilseeds under the "Guarantee Prices" system; disincorpozationof ICONSA; approval for the disincorporation of LICONSA's industrialplantes access of the social and private sector to BORUCONSA's facilities;sale or relocation of DICCONSA urban stores as well as improvement ofservices in the rural stores. Additionally, the disincorporation of partof ANDSA's facilities was initiated.

Rationalization of government subsidies granted through credits and quotasfor water or electricity consumption for irrigation purposes. Likewise,the crop insurance system has been reformed in order to make it moreefficient.

It is important to underline that most of the measures taken haveimplied a change in the government's role in the agricultural sector, mainly inthe marketing process. The non-intervention of the government in directmarketing activities has created a gap due to lack of marketing agents and callsfor Government's attention and determination for the creation of such markets.

In spite of transition problems, the Mexican Government is committedto carry out the modernization of the agricultural sector in order to improve thewelfare of the rural population. This is why it will continue with theapplication of policies which strengthen the measures adopted during the lastyears.

The strategy to be undertaken comprises guidelines and actions to beadopted with regard to foreign trade, prices, inputs, research and publicinvestment.

As regard to foreign trade, the government policy will continuesupporting exports of agricultural and forestry products through the eliminationof regulations limiting trade, and promoting ar.d identifying new markets andfinancial alternatives. This in order to integrate the national economy into theinternational trade. Also the liberalization process continues in concordancewith bilateral and multilateral negotiations being carried out by the MexicanGovernment in the trade area.

With regard to the price policy for agricultural products, theintention is to continue reducing government intervention so that prices bedetermined according to the market forces operating in an open economy. Atpresent, most products have been excluded from the "Guarantee Price" system, withthe exception of maize and beans. Prices for certain agricultural products areestablished through the "System of Agreement on Prices" (Precios deConcertacion), which includes both producers and consumers, and which pricelevels are linked to international prices. The objective of this scheme is tofacilitate the transition of the price liberalization process, since there werenot corresponding markets.

Annex 3Page 4 of 35

However, due to the characteristics of the markets and the strategicsituation of maize, wheat, sugar and barley, these will receive specialtreatment:

I Maize: A formula to calculate price increases will be established so thatthe dollar equivalent price will be constant in real terms, thus givingmore certainty to producers.

II Sugar: It is at present necessary to capitalize the sugar industry. Tothis effect, a constant real price in dollars will be maintainedtemporarily. At the same time, the Mexican Government's intention wouldbe to reach, in a reasonable time, a protection level of 20 percent,compatible with Mexico's foreign trade policy.

However, it should be noted that the international market for sugar ishighly volatile with regard to price due to the serious distortions whichresult from the intervention of different countries with high subsidiesfor sugar exports and protection of their local markets. This situationmakes it difficult to achieve this goal.

For the above reason and in order to have the analytical elements toreduce protection, a study will be undertaken to evaluate and quantify theneeds for capitalization of the sugar industry. Based on the diagnosis ofthe study, the time and timetable to implement a price stabilizationsystem within a range of prices which protects both the producer andconsumer from extreme price fluctuations will be determined.

III Wheat: Due to its importance in the negotiations of the Free TradeAgreement with the United States and Canada, the Mexican Government'sintention is to maintain its current level of protection.

IV Barley: Its current level will be maintained for the 1991-1992 cycle.However, an increase not greater than 5 percent in nominal terms isexpected during next year.

Moreover, an improvement in the linkages between research andextension services, as well as a better quality of zoosanitary and phytosanitaryservices, essential to achieve a better international integration, will befavored. At present, specific studies which will provide the necessary elementsfor the improvement of these services, are under preparation.

A study on Mexico's agricultural planning system is expected to becarried out in order to identify and eliminate the distortions that such systemgenerates.

As one of its fundamental tasks, the strategy of agriculturalmodernization aims at facilitating producers' access to quality inputs atmoderate prices. To this end, import permits for inputs will be abolishedprovided this is congruent with the country's general foreign trade policy.

With regard to seeds, the Federal Government decided to revise thecurrent legislation and will soon submit a Bill on the Production, Protection,Certification and Trade of Seeds, to be consideres by Congress. This bill calls

- 52 -Annex 3Page 5 of 35

for the elimination of excessive regulation and will promote private sectorparticipation as well as free competition to PRONASE.

It is also considered necessary to create an integrated support andinformation system of agricultural markets, by which producers can make gooddecisions and efficiently diversify their production.

With regard to production infrastructure, public expenditures willbe devoted to promote those activities which increase productivity, encouragingthe participation of all sectors in the expansion and rehabilitation of theinfrastructure. Likewise, it is expected to facilitate and create an appropriateenvironment for investment in order to increase transportation and storagecapacity.

The transformation of the agricultural sector proves to be adifficult challenge, mainly because of the many existing distortions in theinternational markets. This situation creates problems beyond those of aneconomic nature. However, we in the Mexican Government are certain thatconsolidating the progress so far achieved through the success of our futureactions, presented in the annex to this letter, will raise the welfare of theagricultural sector and of our country, as a whole.

S. Food Consumotion and Nutrition Policy

The priority of the Mexican Government is to put an end tomalnutrition, which is linked to poverty. The existing food programs have beenimproved so as to provide more benefits to the poor. The Mexican Government willcontinue developing these programs and will create those which are more adequateto protect segments of the population most exposed to potential problems due toa lack of nutrients.

The main strategy to improve the existing food programs has been abetter targeting of the food subsidies. A scheme of general subsidies is beingreplaced by another scheme in which subsidies targeted to specific groups of thepopulation are predominant. At present, subsidies are mostly directed to thosewho really need them, consequently the Federal Government saves on subsidieswhich previously reached the better off segments of the population. Theimprovement in targeting of subsidies has taken place both in the rural and urbansectors.

0 In the urban sector, the generalized subsidy of tortillas has beenreplaced by a daily allowance equivalent to one kilogram of tortillas forhouseholds with incomes below two minimum wages-Tortivales Program. Likewise,CONASUPO industrialized Milk distributes subsidized milk to poor households withchildren under the age of 12.

In the rural sector the DICCONSA chain of stores have been relocatedin isolated communities without marketing systems or where they were notefficient. The population buys basic goods at better prices through an adequatesupply in the rural stores. In particular, thers is a special subsidy programfor powdered milk, corn and flour. The expansion of the DICCONSA chain of stores

-53 - Anne 3Page 6 of 35

in the rural communities has been accompanied by the elimination of these storesin the urban areas where the non-poor population predominates.

The support program for the consumption of staple food by the poorpopulation described in the last two paragraphs (Food Program in the context ofthis letter) will continue to be in effect, even though the modalities could varyso as to better direct subsidies to the targeted population.

While the Food Program is devoted to the poor, special attentionshould be given to that sector of the population which has been identified aspotentially more vulnerable to the effects of an eventual nutritLonal deficiency.For operational purposes, this vulnerable population has been defined as the poorsector comprising pregnant or nursing women as well as children under the age offive. The Mexican Government has considered a special program for this segmentof the population. This program consists in delivering a food supplement, whichis linked to medical care (Food, Nutrition and Health Program, in the context ofthis letter).

However, due to the potential problems that would result from theIntroduction of the Food, Nutrition and Health Program at the national level andbecause of the risk of not reaching the desired nutritional objectives, a pilotproject is being carried out. This project will provide a basic idea on theoperational, institutional and financial viability of expanding the Food,Nutrition and Health Program at the national level, mainly in the rural areas.

The Mexican Government will continue to provide food and nutritionalsupport to the poor through different components under the Food and NutritionProgram. However, due to the importance of protecting the vulnerable populationand in the absence of sufficient resources to cover all the poor, priority wouldbe given to the most vulnerable segment of the population.

The different programs to eradicate malnutrition are complementary.The different instruments of the Food Program facilitate the improvement, Ingeneral terms, of the food, nutrition and socioeconomlc conditions of the poorand, consequently, of the most vulnerable segment of the population whlch isconsidered as a subset of the poor. On the other hand, the Ministry of Realth,through the Health and Nutrition Program, provides food support and nutritionalorientatlon to the vulnerable population by using the infrastructure of thehealth services. The food supplements distributed through this program come frominternational donations only. The Health, Nutrition and Food Program, at presntin the preliminary stage of a pilot project--as already indicated--differs fromthe Health and Nutrition Program in that the food component is financed by fiscalresources which are partially complemented with external credit. For thepurposes of this letter, the set of programs to improve nutrition and eradicatemalnutrition--including the Food Program as defined before--will be called theFood and Nutrition Program.

It is convenient to differentiate consumption subsidies from theprice policy and the promotion of the agricultural production to obtain a clearerpicture in the programming and budgeting of the subsidies policy of the MexicanGovernment. This distinction is also important to ensure support of basic foodconsumption by vulnerable groups. Consequently, subsidies and support provided

_ 54 Annex 3Page 7 of 35

to the agricultural production will be independent from those given to the Foodand Nutrition Program for accounting purposes.

In the urban areas, the Mexican Government will compensate poorhouseholds (defined as targeted population for the Tortivales Program) for lossesin their purchasing power which result from the effects that protection affordedto agricultural producers of food products have on consumer prices. Thiscompensation will be effected through the Tortivales Program or another programof targeted subsidy adequately designed for that purpose.

In the rural areas, DICCONSA will continue to use corn and corn floursubsidies to lessen the impact that the support policy to producers has on ruralconsumers. However, as far as the coverage of the Food, Nutrition and HealthProgram is extended, this program could replace maize and maize flour subsidiestthis would be subject to what is indicated in guideline No. 10.

Within this framework, and in order to carry out the National FoodProgram 1990-1994, published in the Official Newspaper (Diario Of icial) on August23, 1990, the Food and Nutrition Program for 1992-1994 will include the followingguideliness

1. The Mexican Government believes that the Food and Nutrition Program is animportant instrument to alleviate poverty and malnutrition in the ruraland urban areas.

2. The implementation of the Food and Nutrition Program should be consistentwith the execution of other priority programs of the Mexican Governmentand with the equilibrium of public finances.

3. Within the Food Program, it will be recessary to ensure that thevulnerable population of the urban areas be included among thebeneficiaries, if they have not been included yet because of lack ofinformation or other reasons. The participation of the Health System,through medical services provided to the vulnerable population, will benecessary to detect whether this part of the population is dully includedin the list of beneficiaries, according to the mechanism agreed withConasupo.

4. The Ministry of Health is responsible for the execution of the pilotproject for the Food, Nutrition and Health Program, and for its possibleexpansion.

5. The results of the pilot project, at present under implementation, willprovide a preliminary diagnosis of the present administrative capacity ofthe health system for the implementation of the Food, Nutrition and HealthProgram.

6. Priority will be given, in the short run, tsj the design and implementationof the Food, Nutrition and Health Program in rural areas. At the sametime, the application of the Food Program will continue to be improved soas to increase its cost-effectiveness. It will also be necessary toensure that the most vulnerable segment of the population benefits from

_55 Annex 3Page 8 of 35

the Program, and to reach a reasonable balance in the distribution ofbenefits between the rural and urban areas.

7. In general terms means testing will serve to identify the beneficiaries ofthe Food, Nutrition and Health Program, and of the Nutrition Program inthe urban area. only.

8. The infrastructure of CONASUPO and its branches will serve as a primarychannel for supplying and distributing food related to the Food, Nutritionand Health Program, and to the Food Program, in areas where better meansof distribution are non-existent. However, in the case of the Food,Nutrition and Health Program the social organizations or municipalitieswill carry out the secondary or final distribution in communities whereCONASUPO does not have the infrastructure or where this is notappropriate.

9. According to the implementation capacity of the different institutionsinvolved, and based on the results from the evaluation and monitoringsystems described below, the government will make the budgetary provisionsto continue with the application of the programs.

10. A program, under the coordination and responsibility of the Ministry ofProgramming and Budgeting, will be designed and implemented in order tofollow-up, monitor and evaluate the pilot project and the Food andNutrition Program. The results from the monitoring and evaluation programwill determine the future of the Food and Nutrition Program. In sums

3) If the project is considered to be successful, it would be expandeddepending on the implementation capacity of the health system.Measures will be taken to increase this capacity.

b) If the pilot project fails due to administrative reasons anddeficiencies in its implementation, it would be redesigned andincluded in the medium-term action plan--whose elaboration will becoordinated by SPP--to be executed for an additional year.

c) If the pilot project fails to achieve its nutritional objectives, itwould be abandoned.

d) The results obtained from the evalua_ion of the Food and NutritionProgram would serve as a basis to make its components congruent tothe guidelines of the medium-term program (1992-1994). Theparameter to evaluate all programs, with the exception ofTortivales, will be their nutritional benefit on the targetedpopulation. The Tortivales program will be evaluated on the basisof its efficiency and effectiveness to support food consumption bythe targeted population.

e) The results from the evaluations would also be used to reallocateresources among the different components of the Food and NutritionProgram.

-56- Annex 3Page 9 of 35

11. The Ministry of ProgrammLng and Budgeting vill be in charge to ensure theexistence of the necessary analytical capacity for SES implementation.

12. The action plans of the Food and Nutrition Program will include theproposals for budgetary resources to implement the program during 1993 and1994.

may 29, 1991

- 7 -

¢1ll SECRETARIA PARTICULAR Page a0nf 3

Of. No. 547

tM4xico. D.F. a 29 de mayo de 199t.

SEI

NCIEND Y CRE1011 PUSLICO

SR. BARBER CONABLZPresidenteBanco MundialWashington. D.C.

con relariAn Al Sagundo PrfttauoSectorial Agropecuarlo (AGSAL II), adJunto D1 presente me peruitOenviar a usted la Cartk de Politica de "Productividad y CrecimientoAgricola" suscrita por el Secretario de Agrlcultura y Recursos Hi-drAulicos, Profr. Carlos Hank GonZAlez, asi como la correspondienteal "Programa Nutricional y Alimentario" suscrita por el Secretarlode Prograuacitn y Presupuesto. Dr. Ernesto Zedillo Ponce de Le6n,quienes son los responsables de coordinar l Instrumentaci6n de laspoliticas deecritas en cada una de ellas.

La matriz de pol3itica adJunta,resume log objetivos, politicas y acciones del programa del SectorAropecuario y Programa Nutricional y Alimentario del Gobierno Fede-ral para los pr6ximos aftos.

Agradezco de antemano su atencifnal presente, y sin otro particular, reitero a usted la seguridad demi consideraci6f =As distinguida.

SUFRAGIO EFECTIVO. NO REELECC ION* ~~~~~~~El Sec cienda y

o Pbl co

OF. NO. 1.O.-O19. Page 11 of 35

SECRLCTARIAI Dt PROGRAIACION MEXICO, D.F., A 29 DE MAYO DE 1991.y PRE5uPUESTO

SR. BARBER CONABLEPresidente del Banco MundialPresente.

Terminar con Ia desnutrici6n asociada con Is pobreza es prioritario pare el Gobbemo deM6xico. Los programas de alimentaci6n existentes han sido perfeccionadas pare quebeneficien mas a la poblacl6n pobre. El Gobierno de Mdxico los continuar6 mejorando ycrearb los que convengan pare r ander a la poblaci6n mis expuesto a problemaspotenclales por fafta de nutrientes.

Dirigir mojor los subsidios alimentarios ha sido la estrategia central para mejorar losprogramas de alimentaci6n exisitentes. Un esquema de subsidios generalizados hadado su lugar a otro en el cual predominan los subsid os dirigidos a grupos especficosde la poblad6n. Los subsidlos benefician ahora mis a quienes realmento los necesitan,a] tiempo que el Goblerno Federal ahorra el costo de dar subsidios a sectores de lapoblact6n que no los requieren. La mejor direcci6n de los subsidios ha tenido lugartento on el medio urbano como en el rural.

Por lo que toca at medio urbano, el substdio generalizado a la tortilla ha sido sustitufdonor Is entrega diaria de un kilogramo de tortff!a a las tamilias quo perciben un ingrosoInterior de dos salarios mfnimos -Programa de Tortivales-. Por su parte, el programs dodistribuci6n do leche subsiaiada por parte de la empresa Leche IndustrialzadaConasupo, se dirige especsifcamente a las familias de escasos recursos con niAosmenores a los doce alos de edad.

En cuanto of medio rural, se ha iniciado la reubicaci6n de las tindas Diconsa, parasiuarlas en comunidades apartadas que carec(an de sistemas de comercializaci6n, o enIas quo 6stos no er-n eficlentes. Mediante un adecuado abastecimniento de las tiendasrurales, la poblaci6n consigue los productos bisicos a mejores preclos. En particular,existe un programa especial de subsidios a la leche en polvo, el marz y su harina. Laexpansi6n del sistema Diconsa en las comunidades rurates ha ido acompahada de uncierre de tiendas en aquellas zonas urbanas en las que predomina la poblaci6n quo noes pobre.

El programa de apoyo al consumo de alimentos b6sicos de la poblaci6n pobre descrhoen los dos pirrafos anteriores (Programa Alimentario, para efectos de esta carts) seguirhvigente, aunque sus modalldades pudieran variar bn la medida en que fuera factibledirigir mejor los subsidios a la poblaci6n objetivo.

Annex 3w - 59 - Page 12 of 35

5ECRCTARWA OE PROGRAMACIONV PRESUP%ASTO

Si blen el Programa Alirnentario permite atender a la poblaci6n pobre, especial cuidadomerece la poblaci6n que ha sido identificada como potencialmente mis vulnerable a losefectos de una eventual deficiencia nutricional. Para tines operativos, diche poblaci6nvulnerable se ha definido como la pobre formada por las mujeres gestantes o enperiodo de lactancia, asf coma los ninos menores de 5 anos de edad. Para estapoblaci6n, el Gobierno de M6xico ha considerado un programa especial que consisteen la entrega de un complemento alimentario ligado con la atenci6n m6dica (Programade Alimentaci6n, Nutrici6n y Salud, para efectos de esta carta).

Sin embargo, en vista de las dificultades potenciales que significar(a implantar dichoPrograma de Alimentaci6n, Nutrici6n y Salud a nivel nacional y del riesgo de no alcarnzarlos objetivos de nutrici6n deseados, se estS realizando un proyecto piloto. Este proyectodart urna primers idea sobre la viabilidad operativa, institucional y financiera de expandire1 Programa de Alimentaci6n, Nutrici6n y Salud a nivel nacional, particularmente en lasireas rurates.

El Gobierno de Mexico continuart brindando apoyo alimentario y nutricional a lapoblacion pobre mediante los diversos programas que componen el Programsutricional y Alimentario. Sin embargo, en raz6n de la importancia de no dejar

desprotegida a la poblaci6n vulnerable en caso de que los recursos no permitieranatender a la totalidad de la poblaci6n pobre, se darta pr oridad a la poblacl6n vulnerableen la cobertura de los programas de apoyo alimentario y nutricional.

Los diferentes programas para erradicar la desnutrici6n son complementarios. Losdistintos instrumentos del Programe. Alimentario permiten melorar en t6rminos generaleslas condiclones alimentaras, nutricionales y socioecon6micas de la poblaci6n pobre y,por ende, de la poblaci6n vulnerable -1a cual constituye un subconjunto de la pobre-. Porsu parte, la Secretar(a de Salud, mediante el Programs de Nutrici6n y Salud, imparteasistencia alimentaria y orientaci6n nutricional a la poblaci6n vulnerable, utilizando paraello Is infraestructura de servicios de salud. Los complementos atimenUicios distribu(dosmediante este programa se limitan a aqu6llos que provienen de donacionesinternacionales. Por su parte el programa de Alimentaci6n, Nutrioi6n y Salud,actualmente -como ya se indicG- en Ia fase preliminar de la aplicac!6n de un proyectopilotot, se distingue del anterior por el hecho de que el componente alimentario sefinancia con recursos fiscales, que podrian ser parcialmente complementados concr6dito externo. Para efectos de esta carta, el conjunto de programas para mejorar laalimentaci6n y erradicar la desnutrici6n -inclufdo el Programa Afimenterio en los terminosdefinidos con anterioridad- se denominara Programa Nutricional y Alimentario.

Cm

- 60 - Annex 3Page 13 of 35

SCCZTARtA Ot PROGRO 4ACIONY pRCSUPUfSTO

Es conveniente distinguir los subsidios al consumo de Is polfica de loclos y fomento ala producci6n agropecuaria, con el prop6sito de lograr una mayor daridad program4ticay presupuestal en Ia poiftira de subsidios de: Gobiemo de M6xico. Esta distincbntambi6n es ilportanto para salvaguardar el apoyo de consumo dirigido a los gruposvulnerables. En consecuencia, los subsidlos y spoyos otorgados a la producci6nagropecuaria serhin contablemente lndependientes de los otorgados dentro delPrograma Nutricional y Alimentario.

En las areas urbanas, el Goblerno de MkxIco comnensari a las famflias pobres (definidasComo Ia poblaci6n objetivo del Programa de Tortivales), por la p6rdlda de poderadquisitivo que resulte de los efectos sobre los precios al consimidor a causs de Iaprotecci6n otorgada a los productores agrfoolas de productos alimenticios. Elinstrumento para esta compensacl6n sera el Programa de Tortivales u otro programs desubsidio dirigido adecuadamente dise'iedo.

En las zonas rurales, Dicconsa continuar6 utilizando sus programas de subsidlo el ma4y a la harina de mafz pars atenuar el impacto de to polkica do apoyo a los productoressobre los consumidores rurales. Sin embargo, en la mriedida en que se decidloraextender la cobertura del Programa de Alimentaci6n, Nutrici6n y Salud, en las zonas enque se ampriar6 dicha cobertura, este programa podrfa desplazar a los programas desubsidlos al mafz y a ls herinn de ma(z; lo anterior, sujeto a lo seAalado en el punto 10..

Dentro de este marco, y en ejecuci6n del Programa Nacional de Alimentaci6n 199D-1994, publicado en el Mlario Oficial de la Federac6n el 23 de a%osto de 1990, elPrograms Nutricional y Alimentario para el periodo 1992-1994 incluina los lineamientossiguientes:

1. El Gobiemo de Mkxico considera que el Programs Nutricional y Alimentario es uninstrumento importante para aliviar la pobreza y la desnutrici6n en las areasrurales y urbanas.

2. El Programa Nutricional y Alimentario deberd ser congruente con ls reaUizaci6n deotros programes prioritrios del Gobierno y con el equilibrio de las finaraspbblices.

3. Dentro del Programa Alimentario, ser necesario procurar que en eo medio urbanoC i"^ Ia poblacl6n vulnerable quede debidamente inclufda dentro de los padrones de

beneficiarios, en el supuesto de quo por falts de informaci6n o por otras causasno estuviera ya inclurda. Seri necesaria la participaci6n del Sistema de Salud pamquo las consuftas mddicas de la poblaci6n vulnerable sirvan como un filtro quopermita detectar ei dicha poblaci6n esti debidamente lnclufda en los padrones debeneficiarios, conforme ai mecanismo que se ecuerde con Conasupo.

- 61 -Annex 3

*jI1DS.~ Page 14 of 35

SCCCT^RIA DE PROOPAMACIONY PRCSUPUCSTO

4. La Secretarfa de Salud es responsable directa de la ejecuci6n del proyecto plotopara el Programs de Alimentcidn, Nutrici6n y Salud, y de su posible amplial6n.

5. Los resultsdos del proyecto piloto quo se reallza sctualmente permltir6n contarcon un dlagn6stico preliminar de la capacidad operativa actual del sistema desalud en ia ejecuci6n del Programs de Alimentaci6n, Nutrici6n y Salud.

6. En el corto plazo, se dar prioridad al disefo y ejecuci6n del Programa de,immentaci6n, Nutrlci6n y Salud en el medio rural. Al mismo tiempo se continuar6mojorando 18 aplicaco6n del Programa Alimentario, tratando de alcanzsr mejoresresultados en la relacd6n costo-beneficio de dicho programa. Tambi4n ser6necesarlo buscar que los beneficios alcancen prioritariamente a Is poblaci6nvulnerable, ssf como alcanzar un razonable equilibrio en Ia distrlbucl6n de losbeneficios entre el campo y las cludades.

7. En tdrminos generales, las pruebas de Tngreso servirAn pars identificar a losbenseflarlos del Programa de Allmentaci6n, Nutrici6n y Salud y del ProgramsNutricional s6to en las zonas urbanas.

8. La infraestructura de Conasupo y de sus filiales serviri Como medio pnimsrio pareproveer y distribuir los alimentos relacionados con el Programa de Aiimentacl6n,Nutrici6n y Salud y con el Programs Alimentarlo, cuando se trate de zonas en lasaue no haya otros meciios mejores de distribuci6n. No obstsnte, en el caso del

rogramwa do Alimentacn, Nutici6n y Salud, las proplas organizaciones socialeso municiptos reaIizarFn Is distribucKn y provisi6n seocundaiia o final, cuando enesa comunidad la Conasupo no tenfa rnfaestructura o eSta no sea la spropiada.

9. De acuerdo con la capacidad de ejecuci6n de las distintas instftuclonesinvoluc.adas, y los resultados de los sistemas de evaluaci6n y segulimentodescritos en el punto siguiente, el Gobierno hari las previsiones presupuestariasnecesarias pars continuar con la aplicaci6n de los progrsmas.

10. Pars el seguimiento, supervisl6n y evaluaci6n del proyecto photo, as[ como delPrograma Nutriclonal y Alimentario en t6rminos generales, se dlseflar6 y ejecutar6un programs quo estara bajo la coordinscl8f y responsabilidad de la Secretarbade ?rogramaclbn y Presupuesto. Los resultados del programa de evaluaci6n_yseguimonto determinarfin el futuro del Programa Nuticonal y Alimentarlo. Enconceto:

- 62 - oo.Page 15 of 35

S£CPRTRt^A OE PROORAMACIONY PRESUPUESTO

a) Si or proyecto pi{oto se evalua como ex)toso, so expandirfa tan rbpido comolo permitiera It capacidad de ejecuci6n del sistema de salud, tomando enconsideraci6n las medidas que pudieran tomerse para aumentar es8capacidad.

b) Si 01 proyecto pioto alara paf raznes administrativas y deficiencias en suajecun, seria redIsefdo e induido en el programa de acci6n dem-iediano plzo -uya elaboracl6n coordlnar6 ia SPP- para ser ejecutadopor un afo adiclanal.

C) Si el proyecto piloto fracasa en alcanzar sus objetivos nutrickonales, serfsabandonado.

d) Los resutacdos de la evaluaci6n del Programa Nutricional y Alimentarboservirfan de base para ajustar sus corrponentes a los lineamientos delprograma de mediano plazo (1992-94). El par&metro para evaluar todos lospro ramas, salvo of de Tortivales. ser6 su beneficio nuticlonal sobre lasoblacione s objetivo. El programa de Tortivales ser6 evaluado en cuanto au eficacia y ociena para apoyar el consumo de alimentos de supablacl6n objotivo.

e) Los resuftados de las evaluaciones tambi6n so utilizartan para reasignarrecursos entre los distintos componentes del Programa Nutricional yAlimentario.

11. La Secretarat de Programaci6n y Presupuesto se encargarA de que exista lacapacidad anaifica necesaria para la instrumentaci6n del SES.

12. Los planes do acci6n del Programa Nutricional y Alimentario IncluirFn baspropuestas de recursos presupuestales para su instrumentaci6n en 1893 y 1994.

Ate ntamente

Ernesto ZeIo Ponce de Le6n

- 63- AnnRex3Page 16 of 35

^>,W,k 8ECRZTARIA DE HACIENDA Y CRZDITO<|;s#- ~~~~~~~puBLICO.

63CRzTARIA DZ AGRICULTUA Y CURSOSHIDRAULICO0

Oflcie N9. 545

m6xico, D.P., 29 de Mayo de 1991.

5M. SIARB COuauz.Presidents del Banco Mundlal.6180 B. Strest. W.N.

Washington D.C., U.S.A.

como on de nu conocLmientoe, to sconomia mexicans ha experS.mentado una profunda

ttgnsforMaci6z, cuyas csracteristLcas sobresaUlentes sont abatimiento y control

de la inflacL6n, saneamilnto de lan finanzas pdblicas, redimensionamilnto del

sector pftbi;o, renegociacidn de la deuds externa, apertura camercaal para la

mayoria de productoo eetableci1ndo un arancl* m&ximo de 200, suatitucifnprogreeiva do los pormisos provios para importacifn por aranceles, a*L comeeliminacitn de lo subsidios gonerales.

Actualsunto, el conjunto de politicas macroecon6micau y de cambic extruoturalaplicadas por el Gobierno Mexicano forman le base pars un entorno *conomico &as

adecuado par& el dcearroll0 del sector agropecua4ro.

Dentro de ia actual polItica pars 1as odernizacifn del canmpo s han estabiocido

como cbjetivos fundasmntales aumentar la produccoin y la productJ.vidad del

sector, ispular el desarrollo do egquemaspropicios pars la inverzi6n, ad como elevar el bienentar de Ion preductores,fundamentalmente, de Ian sector*s de balos lngresos.

La politica para el sector agropecuario contompla un camb0i fundamental an *1

papal quo desempefta e1 sector pfiblico tanto en ls planeacitn, coe en los

ecaaniamo de regulaci.n de los mwrcadoe agropecuario. Actualmonte. la

estrategia. consists en promover uns mayor participaci6n de lon sectores privado

y social, incluyendo a lae comunidades y asociaciones de productores ruralee.

La estrategia del Gebierno Kexicano par o-l sector agropecuario aonaiotir& on

apoyar al proosso de camblo ostructural, medianto las *lgulentoe accton,s:

reorentaci6n del gasto pibllco hacJa' la rehabilittcifn y creacibn de

Lafraestructura; eliminacifn de las distorsjones y rigldeces institucionalos quo

frenan la capacidad productiva del campol reducclon y raciona1izacifn do loe

-64 - Page 17 of 35

subsLdi0o dentro del marco de un cwez*rlo lnternacional sumamentO diCtarsionaddo

creaci6n y fomento de ouevos esquema. de producci6i y comorcilasal.tGn on el

contexto de una economa abiorta; establecLmiento de un ambiente propiolo paraqoe fluyan mayores inversiones; vLnculaciGn efectiva entre el decarroUlltecno16gico y el productor, por medLo de esquemas fotogrados de exteneionLmoi

desaxrollo de un sLatema de informaci6n estadistica, financiera y do mercados quo

brlnGd la informacl6n adecuada para qu lo i productores tomn decl-lones GptLmas

y oportunas en .* asignaci6n de recuruec.

Para lograr estoe prop6sitos, a la fecha se han aplicado una *erle de medLdas,sin precedente a nLvel LnternacLonal, orientadas a el.minar 1 r.glamentacionexcesiva an la produccln y comercializacifn de la mayoria d lo productos

agrtcolas, lUberalizar el comercLo exterior (a pesar de enfrentar un ambiente

internacLonal caraaterizado por un alto nivel de proteccifn y do subaidiosgubernamentalee a lo productos agropecuarLos por parte de la mayoria de log

pa3seo). Asim2mo, se ha disminuido ouotancialmente la Intervencifngubernamental en l. fltjacin de precios al productor y al ponsuildor de produotoragropecuarion. Be continua con ol procomo de desincorporacifn do ompresa.paraietatales y la elimLnacifn de lou subeldios ge3ralLsadoe a 1o0 productosaiimenticios, oustltuyAndose Aston por apoyos seleotivou dl1:igl4fo a los grupossarginados.

Entrc las prinaipalee acciones adoptadas por 1B administraci6n que buscanincrementar la productividad y la eficlencia del sector agropecuarto doetacant

1.- gxclusl6n del oetem& de "Precios de GarantLam de loe siguientesproductost arros, trigo, eorgo, cebada, soya, senmilla de algod6n, cArtamo,girasol, copra y ajonjolt. zNto implica quo Ica precio se fti3an por Ioncondictones prevaleclentes en .1 wercado y quo e1 Istado se retlro de la

comercializact6n de Ioe mismlo.

2.- I1uinnaci6n de lo& poruisoe previos para la itportacifn do carn de ganado

bovine y poreino, arroz, sargo, avena, soya, oleaginosas y de grn partede loo insumos agricolas (semllas y maquinaria agrScola nueva).

3.. glimi.nacin de loo permisce de exportacifn, entre otros, Fara eane,

ganado en pie, caft y tabaco.

4.- Abolicifn de Ian restrLeciones a la entrada en la lndustria moat-tortilla.

s vc - 65 - Annex 3Page 18 of 35

S.- "Supreeifn de lam prActicas reatrictivas a la exportacifn quo garantisabanpoder monopfUico a ciertae asociaciones de productores.

6.-. En el cgsO del subsector asucarero, a travIs de un proceso de conoertacifndiflcil y COmplejo, an manes de un sio se ha realixado un *sfuersomayEoculo por parte de las autoridade. u.xicana. par* ef icientar a laindustria y liberalizar el neroado. Se han logrado cambioo *ostantivoocomos la supresifn del impuesto de venta del dule;t la .lim.naeoin delmonopolio de AZUCAR, S.A. y prfcticamente el rotiro de la emprona de lacompra y distribuci6n de aszcar, fomentando *1 establecimiento de canalsd* comercialitacitn privados; deamantelacift del sietema de proc.padlferoncialoal liberalizac,in de la importacifn de ardoar utilistndoos une*quema de aranceles variables, asi 0o00 la conclusitn del proceso deprivatisacifn del total de Ioc ingenios azucareroe.

Otro cambio de gran trascendencia fue la modificael6u del Decreto CaAcro,quo racionaliza las relaciones comarciales ntre cafteros a industrial.s ysotablece 108 inoentivos quo estimulan una mayor oficLenclo en laproducciln de aa0car. Dentro de los camblo. principales plasiadoa aneste Decreto se oncuentra Ia uodificacitn del sistema do pago. por azdearrocuperable; lo eliminacifn de preotaciones 1 ptroduetor quo inducian *1minifundiamo, as como la modernizacifn de lan relaoiones laborales,rwaviondo lc obot6culos quo 8* oponian &I desarrello de nuevsc fuente.do ampleo en las tonas cafleor y diflcultaeba la mayor oficiencia do laindustria.

Otras acciones comprenden la liquidacifn o deeincorporacoin de 17 empreoasparaestatales del sector agropecuarios Tabacoo Mexicanos, CoomlsnMaclonal d* Fruticultura, Productoc Forestaloc Kesxoano, alUmentocBalanceados de MExico, Centro Nactonal de Znvsetigscion-o Agrarlae,Fildecomiuo para el Soutenlmiento del Patrimonio Indigena del Valle delNexquital y la Duasteca BdGalguense, Aceitora Gusrreto, 2mpulsoraGuerrexonse del Cocotero, Complejo Frutlcola Industrial de la Cuenca del

papsloapan, Decarrollo industrlal del Caf& Mexicano, Znduatrias d*Agricultores, Haderas Industrlaliadas de Quintana Roo, Kutrimex,Gervlcios Ijidales, Servicios Forestales, Triplay de Palenque, Pldeieomisopa"a Apoyo a) Instituto mactonal do Investigaciones Iroutaleu yagropecuarlso.

,41000S^, A- 66 - anelx 3-'N' Page 19 of 35

- eestructuracL6n de OONASUPO incluyendo: la reduccit6n de la* comprae dogranos y oleaginoas que estaban dentro del siatemt de OPrecLes dGarantla'l desincerporacift de ICONSAI aprolbaci62 de la desincorporaoiftde las plantas industr±ales de LICONSA; apertura al uto por parto delsector privado y soc±al de las unldades do DQRUCONSA; vent& ytoreubicacidn de lao tiandas urbanas de DrCCONSA, &at com oel mejorlst.ntode oue servicios on zona0 ruralas. Adicionalsente, so inici6 el proesso dedesincorporaci6n do una parte de lan instalaciones de A2DSA.

Racionalizacti6r de loe subsidios gubernamentales otorgadoe modianto loe

cz6ditoo y las cuotas por consumo de aqua y electricidad par. riego

agricola. Asimismo, ao ha reformado el siteima de .aeguramiento decultivoo, a fin de lograr una mayor eficiencia en este servicLo.

Cabe destacar quo gran parte de las medidas adoptadas han implicado un cambio en

el pap.l del Katado en el sector agropecuario, especialmento en lo& proceeos de

comercializaci6n. 21 retiro del gobierno en la comerciali:acidn directa, hacreado un vacia pot la falta de agentes econ6micos de intermediacifn y demandala atencin y pereeverancia gubernamental pars In formacidr do eutos msrcados.

A pesar de loo problemas de la tranoici6n, el Gobierno )exicano set& co=prometido

en consolidar 1Ba odernizacldn del sector agropecuaric para lograr un mayor

bienestar rursl. Es aaL que pretend. continuaLr con la aplicscidf de politicas quofortalozean laa medidas adoptadas duranto lee 6ltimos aAoc.

La estrategia que as aplica ccopronde lineamiento. y accionos respecto a oomercloexterior, precios, insumoo, invoetigacift e inverui6n pdblica.

En materia de comercio exterior, con el objetivo de integrar la oconomLa nacionala los fluloa £nternacionales de comercio, la politica gubernamental tiene comaprop6aitos continuar ol apoyo A la exportaoi6n de productoe agropecuarios yforesta2es, a trav6s de la elim.nac.dn de regulaciones que l.mitaban el comercio

y la promoci6n e identificacidn de nuevov mercadom y alternativag financisraa.Auimismo, se continfia con el proceso de liberalizaci6n, an congruencia con IaO

negociaciones quo realiza '6xico en el imbito multilIteral y bilateral en out&

materia.

<5tgiWO°5S,,$ Annex 3- 67 - Page 20 of 35

Referente a la polS.tica de precios de los productos agropecuariov, la intensi6f

ec continuar con la reduccon de 1 intervenci6n gubernamental, con el objeto de

qua dichoa preclos sean dteterminados con base on las condiciones del mercado, en

Una economic ablirta. Actualmente, ao han exoluLdo del sistema de "Preolo. de

Garantla" a la mayorta de los producto, quaedando flniecwnto el malz y el frijol.

Para le productos que dejaron de pertenecor a dicho sistoma, sus preciosreflejan loe precios internacionales respectivoe, mis el nivel de proteocifnarancelaria cerrespondiente. En alguno caoos eapeciales, para facilitar la

comercislizacofn de lo productosI as ha llevado a cabo un proceso de

concertaci6n an el quo concurren productorel y consumidores establecifndoee,taembln en auto caso, niveles de precios ligados a loa meroados £nternacionale5.

-1 objetivo de eats euquema so orienta a facilitar la tranxicifn on ol proceao4. liberecifn de loe pnrcioa, en virtud de quo no exitSeun los mercdoescorrespondientes.

sin embargo, par las caracterioticas y l.a situacin estrat&gica de productos ymeradoos del malt, trigo, azcear y cebada dotos tendr&n un tratamnieto

diferencialt

I In el caseo del Mal& se propone establecer una f6rula de ciloulo do log

incrementos On su precio, de tal manor& quo dicho prOcLo Medido en d6lares

so mantonga constante on trMiAnom reales, otorgando una mayor certidumbrea los productoreo.

II Iespecto el az6car, so considera necesario en eStOO momentos buscar una

Capitalizaci6n de 1i industria azucareta. Para tal efecto, oo perov

gantener un precio real constanto en d6lares on f crma temporal.Asimismo, la intanci6n del obierno xeicano eer1a leger Oft un plszo

razon&ble a un nlvel de proteccLfn del 20 por cLento, cOMpatible con la

politica general de ceinrcio exterior de nueotro pals.

,Sn embargo, debe reconocerse quo el mercado Lnternecional del dulce osta

caraeterizado por une cIte volatilidad en Ou precW, ocasionada por law

graves distorieoneg derivadas de la intervencion de distintoG pals.e qus

subsidian fucrtemente sue axportacionos y protegen sue mereadoe interno.s

ltuaciOn quo dificulta la coneecusi6f do la mete antes sefial4da.

En tol virtud, pare conter con los slementot .nalitltoo para disminuir la

protecci6n otorgada, as realizarri un estudlo pare evaluar y cuantificar

lee necefidadee de capitallzacift de la industria azucarerg y, con base en

40VAV A~~~~~~~~~~~~~~~nnex I4v, - 6 -Page 21 of 35

-68-

dicho diagnostLco, definir e1 plaro y la gradualidad con quo wore aplicadouan sitema do etabllizaci6n de precioo dentro do u'a band& quo protejatanto al productor cooo al consumidor do lam variacones eoxtreme delprocLo.

XL? En el caBo del trig*, debido a au impertania on lam negociacion dolWratedo L.bro Comrcio con lao Zotados Unldos y Canadt, el Gobierno tienels intencLtn de entener el nivel actual de prat.ccL6n otorgado a outs,product*.

IV Respect* a cebada, pars el ciclo 0-1/1991-1992 s mantondr& au nivel,actual. Pare el pr6ximo s*no as proev otorgar un lncr.eanto no mayor al St,en t&z=LIon no io alos.

Por otra parts, as Vreyv favorecer una mayor artloulaci6n entre la lnvestigaciay l08 servicios de extenmi6n, &al como l mejoramiento io la clidad de lonserviciso fitosanitarLos y soosanitarios, lon cuales son una pieza angular paralograz una myor lntegracifn internaclonal. Actualmuto so encuentran enprepaxacidn ostudios ospeclficos quo aportarin lon slemntos ncosartos pars. *1mejoramiento d estos gervlcloo.

Por otra parts, we prev6 la roalixacsiG do an *studLo sabre el cistert doplanificaci6n agropecuarla on MAxico, a fin de identificar y oli"ma lasdistoraLones goneradas par dichoo aistma.

La estrategta de mdernitssciOn del oapo contampla, coam una do sue tareasf9ndamtlea, lograr quo Ion productores tengan accsso a Lnsumos de calidad aproclos adecuado . Pars ello, so alrnAne loo pormios pevios a la importacidde insuroC, en log casos y on Joe tiempos quo resulten congzuentos con lapolStica gewral de co.zarcio exterior.

particulamonte, on atetria do aemIlas el Gaobierno Federal docidfi revisar lalogLulacJn vigento y pr6xl_rnntO as presentarA una iniciativa de Lay sobreproduccifn, protocctdn, CertifiLacin y Cowereto do semllla, a la considoracLGdel B. Coneso do 3. Uni6n. esta propuesta conloeva la olimLnaci6n do lareglamsntaoi6n excosiva y prmovers la participacidn del soctor privado S &at Comola libro competencia con PRONASS.

Anm" .-69- Page 22 of 33

Adiclonalente, so coneLdoea necesomia *rear an lJstm de Lafomacia yprqmoc±Gn integral do los m:rcadoa agropecuarlos, qgu pes Lta a L*s produote.stosar sun decisones en forms Optim lnducit una divetaLfslo iafln of aieto deau produocifn.

RAepecto a la lnftrastrcutura para la produccJ.6n. e1 gasio pfibco I.palsavAaquellas obras quo aumantn la productividad, promolvindo la partJ*Lpacln datodos lon sectores n la ampllacifn y rehoablLtac56n de In lnfraosttuatua.Atmmmo, soe contempla is facLlitacIGn y creacftn de condLonoass propLelaw pala lnvarai6n pars tucrmAtar la aapsctdad de transporte y an_lto.

La traunformacifn dol sector rqprosenta un veto difLct1, spsoialunteo pe Lagran cntiad de dlltopatdonse exlstente. an 0l Jilto lnteraaconal, situactLquo ocasiona problemas m=As al deo l* aspectos ocoufatLoo. sna ,mbtq@ a*n1oGoberno IWLecano .stos seguros quo c on la onsolLdaaJAn d los avansswrelisadoe por medio de la conecucift de Ian oo1iones futurss, IpSented....e1 an0xo, aumnetacr el bienestar *n *1 sector agropecuarlo y on asetro PAID onas coawunto.

slfRAGCO IFlOWvo. NO MILXO .

TRO SPow m -a-

~~~~~1_ w_ _DE an

°Mur malw wm" m w s __ _ ___ sinmma,1. LIZB~S

ALEl NW"s de pufttie m In goea Prmmfw evidlmf. de 4e el wa deconsistere cm toe d vjeto dd prop o, pltift "m, ca es a

cm Los objethws dtt p-mSL fuAntar Isi *A.M9

AL tatuw too *MOM,Commuss L n efrms I0 politics6 hatest. t. este xeterLan refo de potitCe

to, .plicas Sito g pemat-clin delgiroctwi, y datt a at ent.

it. creefttm de PrMmoclGL

hsLlCa. . 1. Rufc to hintawiudidirecto do las umiada de

PrdAi&_ Baja two I V de pnAutadi creclfnote. ue martc.tm.lnficiest. de tore r v 2. oJorw to aluwdldnesteieto 4t to delsl pte pMIl en toproitvidid. grladtw.

o3. ERr to &tWwaWuddot Bter an tasdIsiml di praAeidm de

L. Prudes. Ptice 1. 1. Wedo de pI9WLtStt- h-dMerc di , PrwNv*. jdeBe ern di P*tes.Rem(mlgifs di a. itbwatizcidn di s. Precfo. a. Poliic. d woei w ae f. poitica d ,t v cacia.lNercado. pucies *1 cmdwur p atd _nerpruxtau de les putes (1) Et sitemo de precie de saretto ht side (1) Efecutwr e pta de atidn<PrActis e I1mms) arqie8aie y de s a emidnab pmras trigo, swmp, soya rraz* (1) Etiwar Los persin sarded., comisteste udert_ khitriotes. ,d. smttla di steodBn. cdrth. gr1i. pwr Ioptactd di cef1. camtio y capes y aeM. ftfzy frilolt eo,ta n bujo we wd. nt.e del 30 de a) Apitrar a wines qae etlhhme etssluefdn de recrs b. ft* da de les dl I tmim de precas de watt:. t ep-liawe de 199. rezpo tl diOWAW eto iqiaraw isdistorsionados ou sAnids uanuratl a too de ledie an pto, v asigw lefro*Xcidn y csmu. plciso. pnuo. di impsitdn *sr. huse

trsrPrent,, cpFetst w t ofielete.2. Grwde aiudigauiles n 1

bP Eltlbm todis lts perisa Uspstias *t psteri tiUc di ltee lfqsidi y ans canzsn Modesto,

pol;voresuttabs. ,_ . _. _ __ -_ _ _ - _ - _. _ _ ____- ____. __. ___________

0* Ee redieci&t siact. Us les asasUsm di politics a. se nmetro at b.a diammt. lebcates deL grstin.

_ Oinr _ OIIUZM amnJi1 f Gp1 2

c. Qums1n Es a ) Eit raidwlE prsa at p odeoto pwa @1 t2) &Map Deco q3 c) Paritlr _ et praefo _1 _ I_ _barrrs q9 rquArn st .61w6 de v ccas. so dam Wron pur los modifie e1t actud an EstalmE par *I mdrc..acad-. 7 ptWoctn de to prteies ltntcl.tn p1s gi po de cafb.caat_af a dat seor di ft twetwtr Ie preMct&aprf_.. (<) Los pras pwa at csf tostt r nos1mi psWe trip, pw i-w detwtdAe hen sidd flexiblinla. niwel exhesht et la s p. de 1W9?.(4) Los prdes dei eav plvy. sp p e) ftleiftier to preclos de- deteamin lihw.te por et marc. wiletes, puta, eites smesiiblet.

ci germ. huew, cmwn de rfs y(SS Los pwcS i dlawiwaa do Po aicitbs dtefasr.ezr 1isk s*I& et hlamic.; ft hb aldeledo- preao pwa to slow coll Id. f) No 1nasrmwer et prto de

gamasto e t asx, on %a nivet par(6) Los tnmle de rferawEe dot estuSa. esfe de so vuAr eeiwivAeta reed pmu dadier iun ddatm1 gpso ekIinlm et -dets puq et dci.. O- IW-9mm2po&iot masO Ient aisaqrto Pd < sleade en po1w, r siprd to perdmu de *) ft fn_a euetaal prech del azsriwrtshdi _obre uis bus tra _,srnt.. p aeam des au walor aqAadentecaoupeitiw p eficemnt. real en deldr del I'm d enao de(9 Le t&iMnow des rafem la dd estuaHopar deltnir la politice de rich.s Y Ii) u Iwurmter d ptcho rimt deaci,e d1 frf lot tcmtibto. to Wm par et periods vjuwia/-

3,10t10do, sabre .1 nad Ed 40,(10) TEroaulri dm "frefeaidels* estsado Wsr gaes par ton p flier of pradEsilnir t* poftics dot sacer. _tIhub po et jerhi*d tIfdirej-311mr19 as n dlel q eacidlos 714.00 paw por twelejt.

3 Of sct sr too s.u1t de estudio_re .1 v.rp, cat bAss en discd

disewift, oeprbr is pLftics par et

j) d et pdtL do accin gioeulte dot estujia udar ot meurcddel frijl.

6o~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

ta

0

b -- mm

0I te_s, w emp1-cif 4bak 0 Eit _4 topo a

b_ _=

A

wr,sibew, offms(, uuutn W wutsls1 n eui s1aft(aumpt. dirdtin r' de eiilt* 4* aodes), .mna mgi.din anIbro vk1m slim lsWiII. sIguo wm p. die, jCis.

CO pmtasl*a pte mab is m pndo 4 3a . ImF*sw too lies de~,pm * _,, aebsim,- . q Amufu a r*eSh Inbd diafwremi. op S a(g6I~ ~ ~ _, a,dtnmt fbf ad f mtel INo twifse a tIn pmuusii ai imI. tds.w v kam.tm. V Io WM di did*. tulfa p.m

s_t-ed de IM

(4) Owipreu is tm ~cuis, res.tuitIs aIs a urt.dI a fi fdetnn vtduis.(5) Lo pariu di lqwtsin pw. aa_whIo afdi e(ain_n. La p tncsl&I at emncsmuds popr smi* de m sit drecluwd mwde.I

(60 El ImiIdn dB Los psaim pwt I-a torin, ._a *lool ss mit"s de

c. lmddim s nm_.

Motk.i. de ts rerbet_ q iqw&mto I , ISO a a_to____ t s-tortill. l-a, _

L getcak dB 2. Owcmdp dl IfWAIM, . t i ltwmms. tibmUersar tos, pmu. a. Priqdu X Peftfhsa C.mwci a. twicI etwic Ci tt si.v .d tin i, r glimlurIgo swulnW l an Cs. (1) "t}in id t tsfeeml de Iaportuslkn (1) Pam pesticids.: mltm Itfte de fiteji, pen qaolwi sploods mm. llIfttes qm vuomts qm lot pre1-#mitsU, Wh V

so dsterWlain Lirmte po 1.pustaidei (2) LOB preci n do trecto Sam &Ktumlan mieb.1bmS por et mmib. bih_ r p PO o IN in vigeli" I reehulter pur

pti_e*h , prI I2eci_wustn p sli inm,

o

ear-,. _i .uis .dpcotcc.hdg inaemitaeia.

0fit.seuhtarf.*_ _ _ _ _ _ _ _ _ _ _ _ _ i w5l eS k y M w e" i.- I _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

- mmloau alE lill= Pis. £

inro ki mmuii _ . c i u - -- rww ame inm -N- a1b..__

(1) Pu. p_eatkWb aItm* OEr. $a () kardlr _as PtCC 4I E ts Pwetuwa * rfe,s del mils re imt,ta_r lfd r low dodi_uattsar es in int, cv&m_ dt -w ias _odm lb da Ad _tl.ot m fultiwsil vlgmwt v alqmtfIw Cb) P *r vustal1 v Ccc =itkm W*ieatim FM; (a) p i to 4k lljPiwi rtic1w Lastegioetuam1s eno*e productwe y v rawdnm a" rs om e indts.iukulom; eas *astiAag mus y gStifitb UKate do £aI6ld v i,It I mre of1m - atrtr tm par auclis" e m Pw *Wttmie ft$tmdwmIsiuli v itarLe; v (e) I r r_ r e l y tis calfisia VW. l, * _p

t~~~~~~~~~~~~~~2) Pare" amb .11_t: Last idet(2 Pae patmi WqMd y a"lz W*ml: mICMrIIIma qa. iqilsn at metea.unt an t1 tisrtm dk sfue kt pril t1q cm UinIE etintuit pwm to) astar ls rth,adis m Ipsl' dip SE et*Iugto zacfd p uihaiuutas del *tIdn de .A rmapi prut lb pWr el OtWproll"a gtat Il l nlid -Ilt; y 2 t r mtdmle at mIawiust.atdsm Wm Ipmas PM iN r_ et we"t per pat. dot at priveam.sistn y afqilf flw am prmad.Umdo.d3o h *t1f4kelCum barr_da ha is sea tA O_ l et bor aft tuto 1toy4 d M kIUt gm otd_ nottiSw

qn lqido et ter pil _tir can_NE, eat moplf ise de ma Rb I ot t- -111 pi=idmI urn Mt#. v lamobt _ma . de prrlot vgtalper prt.

.__ _ _ _ _ _ _ _ _m . t ter F -iwis. - _ _ _ _ _ _ _ _ _ _ _ _ __sector_ _ _ _

0

o 't' B

-74-

Annex3Page 27 of 35

I

al

a

i~ i 14ijf j I jI 'A f * j !bE

< a _ g "%4 J~ * ei 45o 4Ki

1_ 11111it U - - I jB{~g}*:

531SE 7m ZTIj3w*

AUID MJETIWO IE PoL1ttCA ACCIE9 WfiALZS IfEcriviDe SE1a RWDF- IlJe Pbl P e M c- Ana mC. c e,1. Fl Wm pte Wsr 1. uijer ta uprsIih V El nivet y i arlefo dot pita g*.ta rcswiw evidnif de qua et ntel ysduuidlar los pricins eftelweacla del onto paspatadi- y preai at Cmwr, an c isidnh *1 Sato wlcelaat p Ator agrsel pate.en t IarlulAwa. 1991, ao camlatme csi et vwim prmpatsb ypres ctndo at Ca leowy tas bhms ha sfde m orcPieald, y cm we aaicwin of iciantt psra IW. s a eruitteo an etbqpaldctlo. 2. AUmtAr ta i tNoln di tts recrs. a nivul Sector pWA ci duo propvm mcr.emt c- r ac mmp1tia en afrestructure. fisat 191. ftsi~Sn efdlctae de Law2. El ba1o niwt de ifnvesti*aciEne v a fivte di ert..peat. PON Io et exteashu arcol.inm9l6a wrtxlo,prttailarte enin$rapstructuro,1nvestleact6n ycx tensl.cnft s ,deterifr6 Latafruastrectur y to

capactdd prchatlvadi se r. ._ _ _ _ _ . _ _

0. ts dwe D. Weta OD Pr*x:ci& 0. awe Am Pradwcdn to me, D. ft=s dr P JnadWi& de ta D. Wta de Pradt*u di takJLWI IaJMt $. =00. ma.Isuerdm de Usa *m de eel eeta a StAWI r otteas O_Saneiaw et sistee. esLuio d.e ktI ficwidn det po n, Efaettv1db Ejecu tam sa cm ecrdda pardipenimaclas fijan lot tfepticida y r locieo qi dn a to SM y elisha y dm*eler too pescea latas do p,ad fac, ears aet tas 6ernowiates, et p_der b 1. Preseard et eastue quo repAdis i gm b1i tonas didas.aTd ar criterlos esld,er , cordiner y bacer cau*4r too ldatifice las prem. wtes.e MasWitlencia re hoes de prWad t6n. legldlaed*n reulacimreacinads cm en gpou dan a ts SA t otncandicion-sc de ati- g _ARantataUwcb . Este sistm et podkr de est*Alcer,ea wr funte de coordiosa y hacerGistarshi en ta 4Aigeterim tes ate deas I gnsc i n de pieci&L

d,eaperdicljo dea ars & nite de Fe Acrb s:f e. y dislnwe Laatctotiv y k*ildad 2. Basad, on exte astufio,e aerlt de too ats dot 30 de aqleebret iattaes. de 199. presmtar u plan

de cIldn sattasftrie seetitine v diaatele tosprame... y repastaimfa spa:btfi a aqatlir didc Sb__._,__ .�- ____________________________________________ ________________________,__________________________________

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ lO ,

- m - -

. rrwee~~~unm mi. _o , ~~~~~~ - - .- ~ - - - -- ,-.-

Ill. edtk3 1. SuMs to lmiet ._ do 1. amwl Sin kidI a eutlip 1.pwmM to imtumb di tollutJisL(a di wtctcln as Nc l e mi-saectl_va v urwm die pwrr VW nI a y muinZaLhl*z. on am dIm ptin. ldptl I t1: ) di 013I dii "P m so mm. on to itch2. bias? la of.aira d SO9 a 0.1c*1 d lO VW 9IW. dot Visa om at ML1. Peale #wkotm y lto pn s di u*rlefft . AmAft d s LIbilm - s t ast_h dot 2. * do PLm$ de acctSp o l t i c * d e sal pri_ rla, per iuo p'om dw gtrici y pl emtfmttsi de omarnrn v Pr IS psw 093esuarolal tzecIEu de wri *xpit.tsidn sWfm plain (Carts di Mtiftien). 1994.c-brcdlbwFel" * toa Caipt e ommatfr.

pailtkca de prause &I 3. efInledf d st pdASefA t passemsidar. L Eitemr aetl t d eltr a de t tp wsdi wtIcfd atprsts at -1 e _ cm

2. le s 1i.s at 1f8ntrusato oft 4. ODfWmihn d s de slad camgl* tes at e _ ur, pas t rhtz.t t 41101*0, d, t pruwrmn da mtrlcidr.so tw _sm an to tdte l fut do inwu.. de r atsLcoste' fscal p alf* ia.desperdice1s de S. La VP fue dhis cm aitsmari_s. 4. Prw*cen qics, a I ssb de (a) pupv ta tIosde_ts

patitic e at m ta dot ps'pm do ind1u ptlow v3. *Dud a Is s u ldsl a(b) m t rs fl 1 to asiuletd dik Us*ubs *anc 0 t*os pitftti de praos at prevsium pnmpaeatds a Ims efecutdevisct1ons, tos e_hbmidr. dit pror_ma * wtrutcfd v *Umnttcfs vsubstdles stlates (Cii t wim., &*Amw * _etigm _ sfutrm cmtveftctl Pis PORMen COW(Ir to nsay diwutrieiS. *. Samadi es to trnu de nerumls

pSrI et ddbse de an sisetm de aatwidn y4. La prgrmas di w4rvlisf de Wa px _w de mt"c(in ycasntons eotin dtlwtaefM C(M; y Chb an pl e d. ettfid I * I I S d a s pam i'wtn.mtr dkd. staten.principalont* a um,uims. ulatras que 7. Aou*b en et Ipreum par mmm t_ntoo ads P*me vfn rmAttm dot sistum de anmcki ren zom rwats. lwrvIiAs (ES) pus nts. Lo

Iliai.n s _ ti p _mma de I Iei es

p_Ads. (cato deifutltme.

IL Ba ee ta el.uedn Wdt prtate_tote de nutirci WA Siltaeb p sald.

0_0

to 0

u nm I no a uin a in, inu. V a w mimE .

nJE-no~~ ~~~~~~~~ WeoLmm__.31 . _WII -K0- h,.fAE A-SC-I'I___.._...._.SEC . ."=n ' - -w- -- ! -t- -- I- - L.wcic3us ISESAL *iflIO Z' luAU 35110AL @rncyijo Zn IRAE 351 AL OI DAETRo 2' 1mU bott Im

SLUM I seIl- __ -

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__ p __ _m~~~~~~~~~~~~~~p cc _cCO1=1 ,T ____- -- t . 1= L L L _ _

- - =~~~~~~~~~=Z=mm2w= M=v%= ocm

bTrg P Pp P P L P 6 t0 C1cc(2 1 ¶ 19.T I -_______.__ .__._._..__ J_____lwtiltt,"~ j . , . .- _ 19C-' C-!

pEmourdtrig |J L L L P P L C I C |C j

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I I IluKo I 1 6. 1 L I. . L L I ___L__r.-= = = - = - --- =-- f -1

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- - - - -lS. Frijol p p j PI0~~~~~dm U P P1~~~ 8(4) 6(4) 0(4)olI I I 2.55.107~~~~~~~~~~~~0,

Aninex 3-78- Page 31 of 35

'IC~~~~~~~~~~

1110 umnm M L aI a ANXInD viKF im. i SE OEmi_s * tlU i0 Wm _~-3

I ~~~~~~~~~~~~~~~~~VALM WLCALEUDos IrW cES -ac- E mrACtU -IIc- ICID DE LAP . . _ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~El t99

ACCI^S 15OD AL OUEtCIlO p mU 15130 At. D1111 )0 Z6 IWM - Su _AI DuiR O 2P TWOID W Iiwss de

S;.ilade t zdn L L _ L L _ _____hpte de ALL IL L __ I [ _ _ F

__ . nLt1 _. .;:& 2S En _ r_ _ __ LL t I L -, L( L =

FfIlro L L JLL L LET) L._ L_:__

W01*5:

1.- N Ieotar .1 palsr de rstxla t del wf r etictt i mior rel dt la e an dMwst pare et siteo 0-11IW-I9I.2.- Lb iuwrr,to p1s6*, rerlmsl prs tris par .mI. de t vt aMlate ta d1 1 £ tW1Wl.3.- Preioo a to pae taldn at 01reetorlo. dir ld e t*rm de r*krs dat eatike pam definlt to poiftica erciat y de precs..*.- Ls prda. at cw=Mdmr atfn tiberaiss.

S.- ib irmommtar A. preclo uumiu de to cdmb edwun et perfod IJ,mlot/1¶9 a 31Iener.W/992, par ens det nlwt de 6180 miL ptos por tatlei, y estsblecer etprfos mmnm de to d e rd Wfa 1tff*srstt9f a 3lImso/lM en un nivel qp m ame t In T sit ps por tantlde.6.- Etfutfar tes Ipstam de ptrtldn.

r.- Elidimr loe 1tasre d ampattacw.

* -par eu epwtasi I* Fm toplWv- 5P UPeuus; It - %Lbt de pmeU'.

f9 et Sg r u - atuulfe; O a -'.cwrte -; F - 1ft1 ibfl; L a O'LlbwatLidU y C =ortrotlad.

ll _ t F EL KM E O ZIEATA tFqlM V _PA. 4

r V~~~~~~~~A" ILOSALrem_tm ESwa . imIm -n- WWuIES -ic- PUECLO OE LAWWI E 11.DII___I10_ _ _ ___ ___tlZ_ _ __ PTA 0D "_ Uall

SWM v4MOZ Iw Vas_m Z#EM P-SMl ._ . _ 1 :- . . S__".___.- .r_ - .E: -: 9_

FltffA (1?. P P L L L L L L ,,lEIXuS L t 2SL L L L L L L M .36

.wrAs - P P P(2> L L L L L L 1.O1t,9W 1WTALU - 1. U P L t L C 5 t

uble- P - . -P . L t L -f1. _I I _ - ' _ -. . -

C - L4 L L _. L L I L L L 1a.3m olobte _= L L L t L L L

aw .

2. C ma ._ _ _ _ ,__ _ _ ,__ _.__ .__ _ _ _ _ _ _ _

1.CddeA - - - -.

b_ ~ ~ ~~~ ~ ~~L L t P _ , C CXS) Ct5)

r feF5 ~ ~ ~ ~ ~~L L L p P PC C(S) Cff)AO T CI ___ _ _ .

2. Czeo PM - L - - - -

L~~~ H 3 - P P PIL _ . C C(S C_ S 7,46,5

3. - 1. P P P L L ____t__._ o

f6ft

_l rm U uutFm Kn .tr DEL A

~~~~~~,. 5

_s E~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~PWCIOS _.N ENm Im.- .wKw -- .wvcu -in-Si Iam$ CUAQS At DnMVM ESIMO A DIAICTIRIIIt 2' T EWAN ADL DICTIO 2l mito lows de' -. __I_11--1-l ' --- - -- I - -, E-

1. G _ L I I L L L L L2. cw L I L L L I . CM6) f f 2,Y,913,135S.cn 1p L L L L L L L L L

4. Cefs We L L L L 117) L L i. LPie d oel. C._

S. CUM dC* L L I L L . I L L6. MAI" WU . P p P L L L L L L ___________

T. cM 1 dB P p p L L L L Lpo_ . .__ _ _ .__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ___ _t_ _IL IW_ P P p p A. I f 1 f 2 4.U2 P. Lad Fr P P P P P L C c C 6,3903,m10. LnbS P P6 (9P P P L C C fan P0w _ . .

P1 r .ts P P P L L L C C fl1m__ _ __ .. _ ___ ___

- 82 - Annex 3Page 35 of 35

! ,4 i1 4 e

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;~~~ M t.i i,Xe

L2, ,

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-' .'

Page I afeMEXCO: AGRICULTURAL SECTOR ADJUSTMl ENT LOAN n

POLICY MATRIX

SUGGESTED MEASURESPOIUCY ISSUE POLUCY OBJECTIVE ALREADY ACHIEVED

EFFECTIVENESS AND SECOND TRARCHEDATED COVENANTS

I. GENERAL CONDIJIONSA. wacro-economic Framework A. Macro-economic Framework

Provision to the Bank of evidence that the Provision to the Bank ofmacroeconomic policy framework is evidence that theconsistent with the objectives of the macroecnomfc policypr.gram. tramework is consistent with

the objectives of theB. Maintainlno Proares program.

Maintain policy reforms implemented up to B. Maintainina Progressthis moment and documented under thisproject. Maintain policy reforms

implemented up to Boardpresentation and docicented

It. AGRICULTURAL GROWTH AND PRODUCTION POLICY under this project.PRODUCTIVITY

Problem: low rate of 1. Reduce direct policy lgrowth, inefficient interventions in output andresource use and stagnating input markets. ODproductivity.

2. Inpxove allocation ofpubilc expenditure inagriculture.

3. Redwue goverrmentintervention in farmer'sproduction decisions.

A. Price. trade Poltcv andmarket reulatlo-ns

(output and inputs)

1. Distort trade and 1. Output markets 1. outout markets 1. Output Markets 1. Ootd Marketslresource allocation inproduction wnd a. Liberalization of consuewr a. Price a. Price wnd trade policy:consumption. and producer prices of Dated Coveat:

agricultural comwdities lnd (1) The guarantee price system has been (1) elimfnate hport (1) tilpement action plan2. Large global subsldles their industrial derivatives. abolished for: wheat, sorghum, soybean, permits for green agreed upon; that is:

to inputs and producer rice, barley, cotton seed, cartamo, coffee no later than (a) inplement a system whichprices achieving modest b. Reduction of general price sunflower, copra and sesame. Maize and September 30, 1991; will etiminate CONASUPO'sresults. subsidies. soae quatities of beans still remain in m y an allorts of

the ggarantee price system. odEr~ miltk, and alltocate

MMte 4P"ae 2 of 9

MEXICO: AaRWCULTRmAL SECTOR AOUMUSMET LOAN IIPODLCYMA4TF"X

POLICY ISSUE POIUCY OBJECTiVE ALREADY ACHIEVED S _ MEASURESE3FFECTIVEDEBS AND SECOND TRANCHE

DATED COVENANtS

Efefhvemb ne: ipqort perWmts in ac. Reduction of regulstory (2) Level of domestic producer prices for (2) Issue the decre transperent, oqeotitive andmarket barriers and promotion green coffee and eocoa determined by that modifies present efficient basis;of private sector coopetition. internatfonal prices. ean piraet (b) eliminate alt export

arrareements. permits for fluuid milik, aid(3) Prices of roasted coffee solubte arrangements. =od r milk;coffee ftexibilized. Cc) altow for prices of

tobac-o to be freely(4) Prices of paddy rice, sorghtu, and determined by the market;soybeans freely determined by the market. (d) not increase the nominal

protectlon for _at above(S) Differentlat dmestic price of suar its level existing on fay 1,according to user eliminated; one price 1991;established for the s_e quality. te) flexibilize prices for

cookies, pasta, edible oils,(6) Teros of reference agreed for study to cigarettes, eggs, beef anddesign a syste which will eliminate deiry products;CONASIIPO s monopoly on Irports of powder (f) not increase themitk nd will allocate iqort permits fn a srantee price of maize totransparent, cepetitive and efficient a level over Its equivalent cobasis. real US doltar value for the o-

AuttaniWinter cycle ofIT) Terms of reference agreed for study to 1990/1991; tdefine price and trade policy for edible (8) not incr_e thebeans. domestic price of sugar

above its equvalent reel US(8) Terms of reference agreed for study to dollar value on Jarmry 1,define sugar policy. 1991;

(h) not inerease the nminalprice of barley for thoperiod Jwie t. 19°1 toJanuary 3t 1992 above the

ton, and set t°e nominalprice of barley for theperod Feb 1, 192 toamry 1, 19. 3 at a levet

not to exceed 714,000 pesop ton;

ME)AC0. AaRCULURA SOAJUST LOM n

POIJCY ISSUE POUCY OBJECTIVE ALREADY ACIOEVEDEFFECTIV0IE AND SECOND TRANCHDATE COVENANTS

(i) discsus ith the easkthe result of the suarstud and based an suchdiscusfon approve a polfcyfor te suiar sector; and(j) Agree en action planthat foltows frtS the ediblebeaws market study.

b. Ita1: Effec*anes:

(1) Export permits for coffee, rice, () Eiminate exportsesame, sunf lower, and vegetable oil tax for rsa cotton,-except eertamo end ett@nseed oft- cotton fiber, wd swinelIfted. for breeding.

(2) Export pernits for beef and eattle on (2) Eliminate exportthe hoof lifted. permit for ueaet,

sorghum, foeedtuffs,(3) A decree an eattle export that swe, bterley, copre, odetermines a gradual red.ction of tariff carteoo, cartmo oit, con exports of male aninals, and cottonseed, toahcco andetImination of such a tariff tY Septusber _1992, issued.

(4) Restrietive export praectices forfruits and vegetables etlminated.

(5) Icport permits for susar eliminated.Protection granted through a varleble lay

(6) IWort permits for sorghum, capra,oltseeds and of Idseed oils lifted.

C. Orket Z aLtetaisRestrictions that prevnted entry Into thecorn-torti l Indf stry abot lshed.

2. IrLu *arkbts 2. Inoutm rkgts; 2. kIna .mrktel:

a. Lfbewal1xe prices and trade a. Price End trade aliev a. Price and trade mfelwanideliinate reo lationa anthe feeastuftf, sed (1) llpoct licese for new sarioulturml (1) fot pesticides: maintainmechinery end pesticede mhinry olished. poIcy of allowing prices ofmrkets. pestiecdes to te freely

detefmined br the market:

Pagex 4.1MEXICO: AGRICULTURAL SECTOR AWJUSTUENT LOAN II

POUCY MATRFX

SUGGTESED MEASURESPOIICY ISSUE POUCY OBAJECLT AREADY ACHIEVED A

IFFEClTME11ESS /UND SECONhD 11RANCHEDATED CMNEUNTS

(2) Tractor prices ftreely determined bythe market.

b. Design oid enforce a b. Market Realdations b. Market regulations:regulatory system forpesticide, pilnt protection (1) For pesticides: agreement reached on (1) Agree on action parks toand animal health based terms of reference for a study to diagnose implement recou_ndation ofstrictly on quality control, current use. assess present legal aid the studies on: (a) animathealth, phytosanitary, institutionat framewrk and stremtiine health; (b) plantepidemiological and procedwres to: (a) promote coqpetition protection; and (c) quatityenviro Iental protection between prodecers and distributors; control of pesticides.grounds. (b) establish guidetines on minimu Rutes and regulations would

standards to deal with health and be based strictly on quality coenwiromental issues; and (c) enforce control, health,quality control. epidemiotogical,

phytosaniary, end(2) For animal health and plant enwironmental protectionprotection: agreement reached on terms of grounds.reference for a study to: (a) assess theregulation, organization and procedures of (2) For seeds: eliminatethe system of plant protection and animal restrictions that impedehealth; and (b) elaboratt a proposeal to private sector competitionmodernize the system and streamline its to PROMASE. PROMASE'sprocedures. monopoly of germplasm

produced by INI FAP and(3) Government has Initiated the process limits on plant breeding byof submitting to Congress a draft seed law the private sector.that wil etiminate: restrictions thatfcpede private sector competition withPRRMASE, PRONASE's monopoly of germplasmproduced by iNtFAP, and limits on plantbreeding by the private sector.

AMM4

MEXICO: A RICULTURAL SECTOR ADJstTMBEr LOAN nPOLCY MATRIX

SUGESTED MEASURESPOUCY ISSUE POUCY OBJECTIVE ALREADY ACHIEVED

trPECENESS AND SECOND 1TRNCHE

DAEIC0IEIUANTS

B. Batata c rolls B. Parastatals B. ParastatalsM HiiOW"n and marketi

1. Parastatals generated 1. Dismantle parastatal 1. Seventeen parastatals of SARUlarge losses and 1ncreased apparatus for market liquidated in 1989 and 1990 (excludesdeffcit of public sector. intervention as price and sugar mills).

trade policy is rationalized.I2. introduced large 2. Distribution manooly and theInefficiencies into markets 2. Reduce waste in public acquisition right of purchase of sugarintervened by perastatats. sector expenditures through fram mil ls taken away from AZUCAR.

agricultural parastatals.3. Precluded competition 3. Elimination of the 50% tax precludingand discouraged private private sector transactions in sugar andsector investment. cocoa.

4. Full divestiture of the SO governent-owed sugar mitls.

5. withdraual of the parastatats for ocoffee (INNECAFE), tobacco (TABANEX), and -4cocoa (CoNADECA) from marketing coffee,tobacco and cocoa.

6. All plants of ALSANEX but one sold;liquidation of company already authorized.

7. DecisIon to restructure CONASUPO andits affiliates; most important actionsare:a. Divestiture of ICOUSA.b. Process of AMDSA#s divestiture hasstarted.c. BORUCONSA*s storage fsc.lities open forcommercial use by the social and privatesectors.d. All 569 urban supermarkets ctosed.e. Improved coverage of marginat areas byDICCONSA's rural stores.

AMah

mUxIOOi £ACULMALM SCTO AWUMSYMB LOAN UPMATMX

mm o MEAURESPO' CY1U' POUCY O" ECTIVE ALREADY ACHIEV

_^DCWEM N SECOND DACEDATED TSNLW

C. C. PAhlfc exmqiditure C. P"hlic exendfture C. Pi%lfc xoendfture1. Lag pbic expenditure 1. l1rn allcation and t sW Sat1S t Provsofn of satisfactoryto scfhedime agrfeiutural effiienfy of psbtlc eide that and caposition of evfd ene that the level wdproucr prices ad inputs expediture in agriculture. coqeltifn of budpetedhas been urodective. presented to C ess in the 1991 d agricuttural expediture

2. Increase pAlle ievestmlstent th the c presented to Congress in the2. Lm tlevl of pAblto in rnfoastrnture, research prrm Ord uith an off letent allocation 1992 uge is consistentinvestment expenditure In n extension. of so6ent resources t the sector with the maeroeconomiewgriclturt particutarly In lenet for the fiscat year 1991. progran end with eninfrastructur research efficent altocation ofand extension leadin, to gefrient resources at thedeterioration of sector level.Intrastructure and thesector's productive

caaity.

D. RHNI's wrodcvtion 0. SARH s aradutlon taorets 0. Mliffs Prodectian tarsets D. SW* poction D. SAlK's arodection taroetstornots ~~~~~~~~~~~~~~~targets co

San K d other agencies et Dismantle system. Agreeent en ters of reference for study Ef3otiems: loplment actions agreedproduction golst guided by to Identify the prcems, legislation and 1. Present study shich open to elimfnate and tsome seltf-sufficiency regulation that gives SONK and other ietntifies proces Wses criteria unrelated to Goverment entities the power to tegislation a regulations that enforce themarhet conditions. This establish, coordinate and enforce reguatitons that give sY5t of crop pro<*tIonsysten is a source of production targets. Si onother ttretsB.distortion in resource GSWrsnt entitles theallocation, encourwes poer to establish eresource aste at the farm coordinte ond enforcet-! and drains initiative cocp prodectlonawd entrepreneurial ability targlets.from faorers.

Dated Cove :.2. Based on the study,preent to the Baicnot later thenSepteber 30, 1991, asatisfactory plan ofactin to etiminate onddismantle processes,Nd regulations thatenforce the system ofcrop prodictiontargets.

ADflx 4Peg. 7sof S

MOW*-.: AGRICULTURAL S-ECTOR ADJUSTMENT LOAN n

SUGGETED MEASURESPOLICY ISSUE POLICY ODJUTIVE ALREADY ACHIEVEDvNSSAD EOD RM

DATED COVENMTS

III. FM OGO cUSUTIC AND

1. Agricultural price and 1. Red=e incfdence of 1. increase of targeted and aemtargeted 1. Present evaluation ofmwarkting poicy were matnutritfon in Nexico in the subsidfes (tortibonos and mIl k pirogs.am food wnd nutrition programsubordinated to medfta-term. and OJICOUSA stores) from 0O.13Z of GDP in as agreed to In theconstuer price policy. 2tprvefciensof 1969 to 0.26X of GDP fn 1990. ieptemmntation plsn for *IES.2. Gtlota consuer nutrition and primary heaLth 2. Agreement an cenvtrat guidelines for a 2. Agree with the B"ankostsidieas resuted fn a pi ogrua by fully exploiting medium-term food and nutritfon program. geneal and agences actionhigh fiscat cost and coepLementarity. plans for 199-1996.waste of resources. 3. Definition of the target population for

3. Eliminate consmer price the food ard nutrition program.3. Becmaue of substentiat control as the main instrument

leakae stglota for ispeameting food 4. tealth system designated as executingsubsidies were not consuitfon policy, agent of the nutrition and health prooram.cost-effective inattacking poverty and 4. Free agricultural S. UPP designated as the agency in chargemalntrition. production and trade policy of: (a) p-qreparn central guidelines for

from Its sihordintatin to the isediu term progrm; and4. Targeted consAption consumer price policy. (b) coordinating the: Ci) budgetpirogram are mainly aLlocation for the food and nutritionura hile most of the progrm to the executing agencis; andpoetlive In rural (ii) monitoring, evaluation and research

areas. ~~~~~~~~~~~of the food and nutrition programs.

6. Agrainnt reacedW on: (a) terms ofreference for the design of a system toeveluate and monitor food and nutritfonprogam (NES); and (b) a plan of actionto ixplement such a system.

7. Agreement on a process for using theresults of the monitoring and evaluatfonsystem-(NES) to adjust the guidelines and

prgam acrding to the lessons learnedfro xoperience.

S. loptementatfon of agreed food,nutrition and heatth pilot project hasbeen started.

- 90 -

Annex 4Page 8 of 9

COMMODITY SPECIFIC ACTION PLAN FOR TRADE AND PRICE POLICY Of AGRICULTURAL PRODUCTS AttachmentPage I of 2

GrossStudiesl Imports -ORs- Expots -Re- Price value of

Product Other Status on Board Second Status on Board Second Statuson Board Second outpit 190Actione 1-24-01 Tranche 1-24-01 Tranche 1-24-91 Tranche (Million Pesos)

GRAINS AND DERIVATIVfS

1. Maize and derivativesMaize P P P P p p a G(1) G(1) 7,211,564Tortilla C C C

2. WheatWheat P P P P L L Cc Co Cc (2) 1.819.584Wheat flour L L L P P L C C CCookies L L L L L L C C FPasta L L L L L L C C F

3. RicePaddy Rlce L L L L L L Cc L L 226.101White Rice L L L L L L L L L

4. SorghumSorghum L L L P L L Cc L L 2,781,779FeedLtuffs L L L P L L L L L

5. Beans (3) P P Agree on P P Agree on 0 (4) G (4) G (4) 2,688,707action plan action plan

. Barley P P P P L L Cc Cc Cc (S) 294,883

OILSEEDS AND DERIVATIVES

1. SoybeanSoybean L L L P L L Cc L L 355.828Soybeancake L L L L L L L L LSoybean oil L L L L L L C C F

2. CopraCopra L L L P L L L L L 211,202Copra oil L L L L L L C C F

3. Sunflower n.a.Sunflower L L L L L L L L L8unfloweroll L L L L L L C C F

4. SesameSesame L L L L L L L L L 127,200Sesame oll L L L L L L C C f

5. Castmo (Safflower)Canamo L L L P L L L L L 191,93Caitamo oll L L L P L L C C F

S. CottonseedCottonseed L L L P L L L L L 397,450Cotonsed cake L L L L L L L L LCottonsed oil L L L L L L C C F

FIBERS

1. Cotton n.a.Raw L L L L L (6) L L L LFiber L L L L L (7) L L L L

(1) not increase the guarafntee pice of maie over Its equvalent real US dollar value for the Autumn/Winter cycle of 190191(2) not Increase the nominal proteton for wheat above Its level existing In May 1, 19091(3) prior to Board presentation agree on terms of reference for study to define price and trade policy(4) consumer prces are free(5) not Increase the nominal price of barley for the perIod June 1 19091 to January31. 1902 above the level of MexSe80000 pesos per ton, and set the

nominal price of barley for the period February 1 1092 to January 3i. 1993 at a level not to exceed MexI 714000 per ton(a) Eliminate export tax(7) ElIminate export tax

QRe -import and export-: P means permit L means free of permitPrices: GuGuarantee; CosConcertaclon; FaFtexlbilized; L- Free C-Controlled

- 91 -

Annex 4Page 9 of 9

COMMODITY SPECIFIC ACTION PLAN FOR TRADE AND PRICE POLICY OF AGRICULTURAL PRODUCTS AttachmentPage2 2 2

Gross value ofProduct Studies/ Imports -QRs- Exports -GRs- PrIce agricultural

Other Status on Board Second ataue on Board Second Status on Board Second output In 1990Actione 1-24-91 Tranche 1-24-91 Tranche 1-24-91 Trancho (Million pesos)

FRUITS (1) P P P L L L L L L 2,768,018

VEGETABLES L L L L L L L L L 663,386

BEVERAGES

1. offeeGreen P P L(2) L L L L L L 1.016,941Roasted P P P L L L C F FSoluble P P P L L L C F F

2. CocaCocoa L L L L L L L L L 103.370Chocate In bare L L L L L L L L L

SUGAR AND SUGAR CANE

1. Suger cane (3)2. Sugar (4)

8ugar'mascabado L L L P P P C C (S) C (S) 7.462,518Raw euga L L L P P P C C () C (s)Refined ugwr L L L P P P C C (a) c (a)

TOBACCO AND CiGARETTES

1. Tobacco P P P P L L Co Cc L 1S5,1492. Clgarettes P P P L L L C C FS. Clgars P P P L L L L L L

LIVESTOCK POULTRY AND DAIRY

1. Cattle L L L L L L L L La. eof L L L L L L 0(6) f F 2,934,913,1S3

.Swlne for laughter L L L L L L L L L4. Swine tor breeding L L L L L 7M L L L LS. Forkmcat L L L L L L L L LS.LUvechicken P P P L L L L L L 1,604,624,651667. Chlcken most P P P L L L L L L8.Eggs P p P P L L F F F 2,794,4329. Fresh mlUk P P P P P L C C C 6,393,30610. Powdered milk P P (a) (a) P P L C C F11 Dalryproduote P P P L L L C C F

AGRICULTURAL INPUTS AND MACHINERY

1. New trawtore L L L L L L Co L L2. Equipment L L L L L L L L LS. Pesticides L L L L L L(10)

(1) Impon permits for fruits are applied to some temperate zone fruits; permite are also applied on a seasonal basis(2) Import permits of green coffee to be eliminated on 9-3-1991(3) Issue new decree that modifies present cane payments arrangements(4) for Board presentation agree on terms of reference for study to define sugar pollcy: for second tranohe, discuss results of

sugar study and based on auch discussion approve a policy for the sugar sector;(6) not Increase the domestIc price of sugar over Its equlvalent real US dollar value In January 1. 1991(6) prIoe control applied on poputar cuts of beef(7) eliminate export tax(8) prepare study to dedign system whIch will eliminate CONASUPO's Import monopoly(9) Implemen system which will elIminate CONASUPO's monopoly on Imports of powder milk, end allocate

permits for Import of powder milk In a transparent, competitive and efficient basie(10) have maintained pollcy of allowing prices of pesticIdes to be freely determined by the marketQRe -Import and export-: P means permit: L means Sree of permitPrioes: G-Guarantee: CcuConcertaclon: FuFiexIbilized; La Free; OdContriled*1 Value of fruit Includes melon, avocado, lemon, apple, orange, plantain, and Crapes. (data on strawberry, mango, and watermelon are not available)I *J Value of vegetables Is only for red tomaftoes. Data on other vegetables not avallable.

+ Value of slaughter for 1988.SOURCE, For values: Cantos SalInas de Gortari. Segundo Inform. do Goblerno 1990: and

INEGI. Anuario Estadistioo do los Estado Unidos Mexaionoe. 18-1S6

- 92 -AnDD s

Page 1 of 3

MEXXCO: AGRICULTURAL SECTOR ADJUSTMENT LOAN II

Receat Policy Beformg in hAricultural Commodity Marketsand Parastatals

A. Ptice and Trade Policy

1. ,Cff,ee. Since the suspension of the International CoffeeAgreement (ICA) quota system in early July 1989, the most important changes inthe coffee market include:

(a) Elimination of the Official Minimum Purchase Price (OMPP) inOctober 1989 and gradual phase-out of purchases by INNECAP!.INMECAFE's purchasing activities are to be limited to buying onlyfrom producers committed to selling a portion of their output toINMECAFE before the harvest for the next three crop years. Afterthe third crop year (i.e., 1992/93), INMECAFE's purchasingactivities would cease.

(b) Elimination of export permits and minimum export registrationprice. As a result, there has been a considerable reduction inthe paperwork needed to perform coffee export transactions.

2. cocoa. The Mexican cocoa sub-sector until recently was fraughtwith market interventions and distortions: (a) producer prices--which didnot reflect world prices--were determined periodically by a committee ofproducers, manufacturers and the government parastatal CONADECAQ(b) manufacturers of cocoa products and chocolate were not allowed to exportbut were forced to sell all their products to one of the producercooperatives, VNPC (Uni6n Nacional de Productores de Cacao) or UREPCC (UnifnRegional Estatal de Productores de Cacao del Estado de Chiapas), which in turnobtained export permits from CONADECAI and (c) a 50 percent tax on purchasesof cocoa beans by private traders practically made this activity prohibitive.In effect, this allowed UNPC and UREPCC to tax producers. Since September1989, imports and exports of cocoa and chocolate products have beenliberalized and controls on producer prices and the 50 percent tax onpurchases by private traders have been eliminated.

3. Tobacco. For tobacco, the restructuring of TABAMEX, whichessentially eliminated the government'e commercial role in the tobaccoindustry, was announced in Mexico on September 29, 1989. TABAMEX continuedits financial and commercial roles during the 1989-90 crop year. Since then,it participates only as a member of the supervisory committee to arbitrate theannual negotiation of tobacco prices between tobacco growers and tobaccomanufacturers and exporters, basing those decisions on criteria ofinternational efficiency.

4. Suaar. For sugar, the conditions of AGSAL I required the closureof six sugar mills and the preparation of a study on sugar pricing.

- 93 -A"nnex 5

Page 2 of 3

Government actions have gone well beyond that. They include: (a) liftingnon-tariff import barriers; (b) divesting AZUCAR of its monopoly acquisitionright of purchase from mills; (c) abolishing all requirements for a license toimport; (d) introducing a variable import levy to enforce a floor sugar price;(a) abolishing the requirement that mills must pay a 50 percent tax to marketsugar outside the A8UCAR distribution system; (f) selling all government-ownedsugar mills; and (g) modifying the cane payment arrangements.

5. Corn-tortilla chain. Government actions to protect consumers andfavor producers produced a web of price controls and regulations thatstretched from agricultural production to manufacturing and distribution. Asobjectives multiplied, regulations mounted. The corn-tortilla sector has beenone of the most controlled sectors, together with the wheat-bread and oilseed-vegetable oil chains. The conflicting objectives of paying a high price tomaize producers and providing cheap tortillas to the urban population led tothe creation of a complex battery of regulations along the corn-tortillachain. These regulations comprised price and trade interventions plusbarriers to entry to manufacturing.

S. The subsidy mechanism was extremely complex. There was a singlenational support price for corn and four different prices for the sale of cornto millers, producers, and DICCONSA. Each industrial producer set twodifferent prices for dough and flour, depending on location, and the tortillahad three different prices (one for Mexico City, one for the rest of thecountry, and one for tortibonce). The structure of the industry, with themixture of traditional-versus-modern producers, was artificially determined bythis ad-hoc intermediate pricing system. This system has been substantiallymodifieds the differential price of maize has been abolished for practicalpurposes and the Tortibono has been replaced by the Tortivales, which entitlesa beneficiary family to receive one kilogram of Torillas per day. In ruralareas, where a proper system to alleviate poverty and attack malnutrition isnot in place yet, a subsidy for maize flour is being provided in the DICCONSAretail outlets of CONASUPO. This subsidy will be retained until a bettertargeted health and nutrition program Is implemented.

7. In addition to the complex pricing system, regulations thatdeterred entry and promoted capital intensity in the manufacturing side of thecorn-tortilla chain were abolished in July of this year. Moreover, thesubsidy arising from the preferential electricity tariff rate for nixtamalmills and tortillerias, estimated at US$25 million, was also abolished.

8. Inuts. Although A6SAL I did not request policy reforms forinputs, it requested preparation of a plan for a system of agriculture watercharges to achieve recovery of operation and maintenance costs. The planprepared under AGSAL I was inadequate. In the context of the preparation ofthe Irrigation Sector Loan, however, the government has provided a plan thatgives sufficient basis for further policy dialogue and that will be supportedby the Irrigation Sector Loan. The main points in the action plan are totransfer management of irrigation districts to the users progressively and tocharge fees for irrigation water according to use. This is to ensurefinancial viability in irrigation districts, including recovery of O&M costsand a reasonable portion of the capital costs. The government already hasinitiated this program.

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Page 3 of 3

9. In addition to the above, the requirements for import licenses fornew machinery have been dropped for domestic producers of machinery, and atariff has been imposed as the only protection mechanism. Although thismeasure does not go all the way in liberalizing machinery imports, it is astep in the right direction.

D. Parantatals

10. Suaar Parastatal (AZUCAR). The government has fully divesteditself from the sugar mills and has taken away from AZUCAR its distributionmonopoly and the acquisition right of purchase of sugar from mills.

ll. CON8UPO. The government has embarked on a program ofrestructuring CONASUPO that includess (i) privatization of ICONSA (IndustriasCONASUPO) and ANDSA (Almacenes Nacionales de Dep6sitoes) (ii) closure or

privatization of all DICCONSA retail outlets in high-income neighborhoods$(iii) closure or privatization of some storage facilities and rationalizationof operations of BORUCONSA (Bodegas Rurales CONASUPO) and IMPECSA (Impulsoradel Pequeflo Comercio).

12. coffee oarantataljIXNMECAPS1. Gradual sale of INNECAFE'sprocessing facilities to the farmer co-operatives (UZPCo) is under way.

13. Cocoa arantatal IC =O lD,C Government has divested fromCONADECA.

14. Tobago- parastatal (TASAME). The process of divestLture ofTABAMEX is well advanced and proceeding as planned.

S5. Others. In addition to the above, the government lso(i) privatizing ALBAMEX (AlLmentos Balanceados Nexicanos) through publicsalesl and (Ui) restructuring the Instituto Nacional de Capacitaci6n Rural to

increase private sector participation in its operation.

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Page 1 of 8

MEXICO, AGRICULTURAL SECTOR ADJUSTMENT LOAN II

Food Consumption Programs

A. Programs

1. Between 1982 and 1989 real per capita income fell 17 percent inthe urban sector while it remained stagnant in the rural sector. On average,real per capital income fell 12 percent. Initially, as part of the adjustmentprocess, general food price subsidies were reduced. In 1983 the Oovernmentrealized that these changes would increase the risk of malnutrition forfamilies below the poverty line/. It, therefore, introduced or expandedtargeted food price subsidy and food distribution programs in the framework ofthe Proorama Nacional de Alimentacifn 1983-1988 IPRONAL).

2. To protect the real income of consumers and promote food self-sufficiency, the government has traditionally subsidized urban consumption andsometimes the production of certain foodstuffs. These programs have resultedin large fiscal outlays, have not increased food self-sufficiency, and havenot reached the neediest groups. Their fiscal cost has fluctuated sharply.After reaching an all-time high of 1.253 percent of GDP in 1983, untargetedfood subsidies were compressed to only 5 percent of that amount in 1987. Theretail price freeze instituted as part of the stabilization measures of TheEconomic Solidarity Pact (the "Pacto") was maintained for an especially longtime for basic foods. At the same time producer prices, especially of maize,rose in real terms. As a result, untargeted food subsidies to maintain thewedge between producer and consumer prices rose again to 0.86 percent of GDPin 1989 (see Table A6.1).

3. Under AGSAL I the Government committed itself to limiting budgettransfers to CONASUPO to US$85 million for the purpose of general foodsubsidies. While fulfilling this commitment, the expansion of food subsidieswas instead financed by borrowing, especially through lines of credit fromagricultural suppliers (Commodity Credit Corporation and others).

1/ The poverty line is determined by the family income needed to obtain a"basic food basket" (canasta bAsica) providing sufficient nutrients to afamily of five, including two children under 12 years. PRONAL estimatedthis to be equivalent to one-and-one-half minimum salaries.

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Page 2 of 8

Table A6.1s GOVERNMENT EXPENDITURE IN GENERAL AND TARGETED SUBSIDIES(As percent of GDP)

1983 1984 1985 1986 1987 1988 1989 1990

Targeted 0.000 0.000 0.000 0.031 0.067 0.118 0.126 0.175Tortilla 0.000 0.000 0.000 0.013 0.050 0 047 0.041 0.045Milk 0.000 0.000 0.000 0.018 0.017 0.071 0.085 0.130

General 1.253 1.061 0.513 0.238 0.005 0.370 0.736 0.490

Total 1.253 1.061 0.513 0.269 0.072 0.488 0.862 0.748

Source: CONASUPO, Direct information. General subsidies correspond tosubsidies in grain and oilseeds.

* Estimate

1. Untaroeted

4. Untargeted programs are implemented through producer and consumerprice controls, which are made effective by trade policy decisions, andgovernment procurement and distribution through CONASUPO. Consumer pricecontrols are primarily effective in urban areas, which means rural areasderive almost no benefit from this policy and under current price policy netbuyers of maize, wheat and sugar in rural areas are heavily taxed. For sometime, after the start of the stabilization effort in 1983, the decision to cutthe fiscal deficit led to a sharp reduction of expenditure in generalsubsidies. However, because of the price freeze implemented with the Pacto deSolidaridad Econ6mica in December 1987 (Pacto then, PECE now) and rising realproducer prices of maize, government expenditure in general food subsidiesincreased to 0.74 percent of GDP in 1989 from 0.37 percent of GDP in 1988.

5. Because of substantial leakages, general subsidies are not a cost-effective way to attack poverty and malnutrition. Expenditure by the threerichest deciles of the population for beans, tortillas, bread and sugar, is noless than 24 percent, 39 percent, 47 percent and 33 percent of the totalexpenditure in each commodity. Assuming that tha subsidy received byhouseholds is proportional to total household expenditure in each commodity,it is estimated that more than US$100 million reaches the three richestdeciles of the population. Elimination of price controls should lead to theeventual disappearance of general subsidies. Part of the savings resultingfrom the dismantling of general subsidies is expected to be used to supportthe expansion of a modified and expanded system of targeted subsidies.

6. To eliminate general subsidies the following actions are necessarys

(a) elimination of the generalized subsidy for maizet

(b) increase of tortilla prices; and

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Page 3 of 8

(c) elimination of the system that endows producers of nixtamal (maizeflour) and tortillas with subsidized maize.

2. Targeted

7. There are four categories of targeted food and nutritioninterventions, executed through 13 programs that are administered by seveninstitutions. These programs cover urban and rural populations, high-riskgroups, and consumer education. Available information provides a good pictureof what these programs are doing to help the poorest segments of thegopulation in urban and rural areas and those at high risk of malnutrition.

Regrettably, no systematic monitoring of the effect on the nutritionstatus of the beneficiaries takes place; therefore, no claim can be made,based on direct evidence, regarding the effectiveness of the programs incombating malnutrition.

8. The most important targeted programs are the tortibono program, theLICONSA social supply of milk (Abasto Social de Leche), the alimentaryassistance program Desarrollo Integral de la Familia (DIP), which coversseveral direct food transfer programs, and the DICCONSA rural retail food saleprogram. Since 1984 there has been a steady increase in targeted foodsubsidies, mainly in the provis;.on of maize tortillas and milk. Asinternational milk prices have increased rapidly and coverage of the programshas expanded in urban areas, the cost of these targeted subsidies hasincreased to about 0.18 percent of GDP in 1990 (See Table A6.1).

9. Urban Pomulation. The main programs for the urban poor are thetortibonos and the LICONSA social supply of milk, which respectively providetortillas and milk at subsidized prices to families with incomes below twominimum wages. Beneficiaries of the tortibonos program are selected from twosources: (a) members of trade unions that have an agreement with DICCONSA forselling tortibonos; and (b) through individual selection after registering ata store authorized to sell coupons (CEPAC, CONASUPO stores, concessionaires ofCONASUPO, LICONSA dairies, associated stores, as well as stores from socialorganizations). There is a long queue of potential beneficiaries. TheLXCONSA milk coupon program sells liquid milk to eligible families withchildren younger than 12 years old. This program operates in urban areasonly. However, LICONSA has started to provide powdered milk to rural areas asan experiment. The milk coupon program is financed through fiscal transfersfrom the Treasury and through a system of differential prices that generatescross subsidies from high- to low-income groups.

10. In 1988, the LICONSA and tortibonos programs were reaching about 2and 1 million families respectively (or 50 percent and 25 percent of the total

2/ CONAL-BANCO MUNDIAL, Documento Sinteuiss Etaluacidn de Proaramas ParaMelorar la Situacifn Alimentaria v Nutricional de la Poblacifn de lSaioInoresos, Segunda Etapa (Documento Coordinado por Marcel Morales Ibarra),Mexico, D.P., junio de 1989.

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Annex 6Page 4 of 8

number of urban families with incomes below two minimum wages). Familiesbenefitting from both programs could save, respectively, US$90 and US$105 peryear in their purchases of milk and tortillas (equivalent to, respectively, 6percent and 7 percent of average total income of urban families in the lowestincome decile in 1984, or 9 percent and 10 percent of the minimum wage in1988).

11. On October 16, 1990 the Government of Mexico announcedmodifications to improve the tortilla system. Starting in November 1990, thepresent tortibonos program is being replaced by the Tortivales. The newsystem is based on a census of beneficiaries of CONASUPO services. Urbanfamilies with a family income lower than two minimum wages will be thebeneficiaries. The number of beneficiaries is about 2.0 million families.All the beneficiaries are entitled to receive free-of-charge one kilogram oftortillas per day. The list of beneficiaries will be updated throughinformation and registration systems. Anybody can request membership, as longas a social worker verifies that the applicant meets the test for enrollment(household income below two minimum wages). Members will be monitored bysocial workers who will visit them periodically. This revised system willimprove considerably the operation of the present scheme, and the Banksupports these revisions.

12. Rural Population. The main program serving the rural population isDICCONSA-Rural, which supports the establishment and operation of rural storeswhere basic staples and other items of popular consumption are sold at cost.Several studies coincide in estimating that prices in DICCONSA rural storesare 14 percent below those of alternative rural outlets. As a result, in 1988the rural population that benefitted from the program (5.2 million families)enjoyed a direct saving of US$9 per family per year, which represented 1percent of the minimum wage. However, in 1989 tne Government introduced amaize flour subsidy program in the rural areas, which is the rural equivalentof the tortibono program. Maize flour is distributed by DICCONSA-ruralstores, and all those living in rural areas with access to DICCONSA-ruralstores can benefit from the program. The ad-valorem subsidy rate isapproximately 30 percent, and during 1989 close to 150,000 tons of maize flourwere distributed.

13. Food Supplementation for High-Risk Groups. The main programstargeted for the high-risk population are food distribution programs operatedby the National Welfare Institute (DIF) and the Nutrition in Health programoperated by the Secretary of Health. In 1988 the DIP program covered 1.1million families, and Nutrition in Health reachel some 54,000 mothers and248,000 children under five years old.

14. Consumer Education. In addition to the direct health and nutritioneducation provided by the institutions serving the high-risk groups, theInstituto Nacional del Consumidor (INCO) carries out a mass media informationprogram to help the general public use their income efficiently and to develophealthy eating habits.

15. Table A6.2 summarizes the main achievements of the Government'sfood and nutrition programs as of 1988. First, income transfers perbeneficiary family are large for the milk coupon and tort2bonos programs

Annex 6Page 5 of 8

(US$91 and US$106 per year respectively) and are relatively low for the ruralcommunity stores (US$24 per family per year). Second, the tortibonos programis the most cost effective program in terms of nutrients transferred perdollar spent. Third, the rural poor are served mainly by the DICCONSA ruralcommunity stores, which serve practically all the rural population. Fourth,for the tortibonos and LICONSA milk programss (a) leakages have beenrelatively large, in as much as approximately 40 percent of the benefits go tobetter-off urban families, and (b) coverage of the urban poor is not large--tortibonos serves approximately 30 percent of the urban poor (families havingfewer than 1.5 minimum wages) while the LICONSA milk program serves 45 percentof the urban poor. Fifth, coverage of the vulnerable groups (poor pregnantand lactating women and children under five) in the urban sector also islimited: about 10 percent covered by the tortibonos program and 20 percent bythe LICONSA program. However, coverage by the food supplementation program,directed to these groups, is relatively better, reaching 40 percent of targetpopulation.

Table AG.2: Targeted and Sesitargjtted Eond Price Subsidies: 1I8

CONCEPT UA PROiM RURAL COIHNJlTY FOD SWPLE-TORTI9ONS MILK COUPONS STORES MNTATION

Estimated sevinjc to beneficiaries

Total (USIsillion) 98 198 o1 191- of which to poor. (USSaillicn) 62 128 28 1S8

gtirated Benefits to Blneficiaries

Income transfer per fami ly (USS per year) 1106 9 -

Nutrients transferred per ersmon per day c

C Calories 89 172 10 14 - 248- Proteins 24 6 5 3J- 6.4

E;=U Ii Do prd

Total (millions) 1.0t l.6 S.20 1.08Of which:

Urban poor:Hili1ions O0 SSl.lS - 0.60As X total urban poor 27 44 - 24Mitr Ilkmii t t - 0.04 2,es 0.4eAs Sof total rural poor - 1 94 16

Peole srved In vulnerable orouea

Poor pregnant and lactating weoenand children under 6

MillIons 0.43 0.74 2.5 2.0A Sxof total poor 1o 17 69 40

Poor children 8 to 12Millions 0.87 0.98 8.1 0.62As s of total poor 10 17 87 12

Memo ItI= all fiaures are estimates for 1988 end siven In millions)

Totl Population 62 7 88 0 27 7Toal osholds l6. 11.0 8.8Poor fa ll esc 86 2. 8 8.01

Pren nt and nureing woman and children under 6Total 119 6.9 8.0Poor 4.8 1.8 2.7

Children 8 to 12Total 1s5. 9.3 6.2Poor 8.4 2.1 8.8

v Based on the percentage of families shown in NIGH-84 as having an incoe below 1.8 minimum salaries.we Average requiresents are about 2,100 keel and 80 grass of protein per pereon per day

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Annex 6Page 6 of 8

B. Brief Assessment of Taroeted Proarams

1. Positive Asoects

16. The broad development of targeted programs over the past few yearsprovides an administrative and implementation capacity that would allow thecomplete replacement of untargeted food subsidies with subsidies clearlytargeted to low income groups. With the existence of targeted progrsms, thejustification for general food subsidies disappears.

17. The Tortivales program has implemented a mechanism of food couponsthat entitle the holder to receive tortillas at private shops. This permitsthe private sector to supply tortillas and, therefore, can lead to aconsiderable reduction of fiscal outlays. The process of convertingtortibonos to cash will be simplified. During the past two years the relativecoverage of the program decreased and income transfers increased, therebydiscriminating against those below the poverty line who do not have access tothe program.

18. The LICONSA nilk program uses a socioeconomic survey to selectbeneficiaries by combining geographical elements (marginal zones) with thesocioeconomic characteristics of the beneficiary families. However, LICONSAhas become a very expensive program due to the sharply rising internationalprice of powdered milk. The transport and distribution infrastructurerequired to provide liquid milk is excessively costly. To increase itseffectiveness, this program should provide milk to a smaller population thanthe present one (for example, pregnant women and children under five yearsinstead of children under 12 years). Other beneficiaries for whom milk isless essential could be given a food coupon that would entitle them to abroader and cheaper set of commodities. Alternatively, instead of providingmilk in liquid form, it could be provided in powdered form. The processingand distribution tasks could be transferred to the private sector.

19. The rural stores program of DICOONSA has implemented a system forcommunity participation in the financing, construction and operation of thestores that shows how the beneficiaries of the program can contribute to itsfinancing.j/ The rural stores of DICCONSA and the milk stores of LIOONSAconstitute a commercial attraction and a physical infrastructure that has notbeen used effectively by other programs. None of the programs provides therural poor with protection comparable to that afforded to the urban poor,despite poverty and malnutrition being more prevalent in rural areas than Inurban areas. The CONASUPO Rural program has the physical and socialinfrastructure to reach the rural poor and, properly modified, can be used asa vehicle for directly transferring income to tie rural poor and to supportactions targeted to the high-risk groups. This is being done with the maieflour subsidy program, where all those living in rural areas can benefit fromthe program. Those peasants who produce maize for their own consumption donot benefit from the program.

I/ LICONSA also has a program of community participation.

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Page 7 of 8

20. The main mechanisms of the present programs that should be kept ina modified food consumption program aret (a) the structure established todistribute, redeem and reimburse the tortibonos, which permits the use ofprivate stores to deliver the tortillas; (b) the method of survey-and-visitsused by LICONSA to select beneficiary families; (c) the system of communltyparticipation in the construction, management and supervision of CKNASVPOrural stores; and (d) the access mechanisms to the DIP food rations programfor school-age children.

2. Problems

21. The main drawbacks of these programs ares

(a) Coverage of rural areas, where most of the poor live, is very low(less than 2 percent of population), except for the DXCOONSA ruralretail program, which covers almost all the rural populatlon.Thus, most of the program's beneficiaries are urbanites andheavily concentrated in Mexico City (DF).

(b) Nutritionally the programs are not efficient because they do notcombine the provision of food with the provision of healthservices and nutrition education.

(c) Even in urban areas, coverage of the target population is stilllow. However, the government has expanded to 2 million familiesthe Tortivales program in the urban areas, covering approximately12 million people.

22. The problems with the tortibonos and LICONSA programs were that*(a) they were insufficiently targeted, ln as much as families above the

poverty line been eligible; (b) milk and tortillas do not provide anutritionally balanced or cost-effective ration; and (c) the programs werebeen uncoordinated, and based on different eligibility criteria. As a result,some urban families were served by several programs at the sam time whileothers may be reached by none. However, with the census of the poor urbanpopulation carried out by CONASUPO, and the improved coordination of thetortibales and Liconsa programs, a major improvement in the working of the twoprograms is envioaged. Administrative savings will come from usingldentical selection criteria and by consolidating the rolls of eligiblefamilies for both programs, and coordinating the perLodic reviews ofbeneficiary eligibility. Targeting will be improved as CONASUPO has alreadyidentified the potential beneficiaries of the programst families with anincome below two minimum wages, living in urban centers of more than 200,000inhabitants.

23. The LICONSA program requires a costly infrastructure to, flrst,rehydrate powdered milk and, second, distribute it to the beneficiaries. Thleproduct is difficult to supply in rural areas, especially in those whereaccess is difficult. For this reason, the program needs tot (a) incorporatethe private sector in the production and distribution processt (b) increa"the distribution of powdered milk; and (c) use substLtuto products with thesame nutritional value at lower cost.

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Page 8 of 8

24. For a food program to serve as an in_entive for participation inhealth or education programs, the food ration must be large enough to inducebeneficiaries to demand the complementary social programs. Only the urbanprograms of milk coupons and tortibales have a benefit level (9 percent ofminimum wage) that can be considered large enough to serve as an incentive.But interaction with the health and education programs is still very small.There are no corresponding food programs in rural areas, where there isgreater need for the joint intervention of coordinated social programs.

3. Conclusions

25. The key issues surrounding the targeted programs are: (a) lessthan 10 percent of the income transfers in those programs reach the ruralareas where most of the poor population lives and where most of the seriousmalnutrition occurs; (b) targeting rules of the individual programs need to beconsistent; (c) the programs provide only tortillas and milk, which is acostly ration and nutritionally inappropriate; (d) how to phase out thesubsidies for present beneficiaries who would not be eligible under newtargeting rules} and (e) how to revise and incorporate the various programs inan integrated health and nutrition program that would reach the poorest peopleof Mexico.

26. Criteria for selecting a target population should include othersocioeconomic aspects in addition to income levels, in particular those thatindicate the health and nutritional status of the target population.Targeting can best be achieved by health- and school-based programs thatmonitor mothers and children. Therefore, food entitlements should be assignedto families identified within these programs. Moreover, combining foodentitlements with health and school programs can greatly increase theirattractiveness.

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MEICO: AGRICULTURAL SECTOR ADJUSTMENT LOAN II

Sunglementarv Loan Data Sheet

Section XL Timetable of KNv Eventg

(a) Time taken by the country to prepare the loan: 18 months

(b) Appraisal missions January/March 1991

(c) Completion of negotiations: May 24, 1991

(d) Planned Date of Effectiveness July 1991

aectlon XII g8iecial Rank IMolementation Actigog

None

asetctl xxII- Ratcial Cogditions

1. Contractual arrangements referred to in Section 3.01 of the LoanAgreement have been executed.

2. The government has issued a decree that modifies present cane paymentarrangements (see paras. 65 and 147(a)).

3. The government has eliminated export permits for wheat,. sorghum,feedstuffe, ,rley, soybean, copra, cartamo, cotton seed, tobacco, eggs,coffee, rice, sesame, sunflower, vegetable oil (oilseed oils), beef andcattle on the hoof (see paras. 65 and 147(b).

4. The government has eliminated export taxes for raw cotton, cotton fibre,and swine for breeding (see paras. 65 and 147 (c)).

5. The government will present to the Bank a study which identifiesprocesses, legislation and regulations that give SARH and othergovernment entities the power to establish, coordinate and enforce cropproduction targets (see paras. 76 and 147 (d)).

Dated Covenants

Not later than September 30, 1991s (a) based on the study the governmentwill present a satisfactory action plan to eliminate and dismantleprocesses and regulations that enforce the system of crop productiontargets (paras. 76 and 147)1 and (b) the government will eliminate.import permits for green coffee (paras. 65(k) and 147).

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lamand Sa

1. Price. Trade Policy and Markot Reaulations

(a) Output Markets

(i) Implement action plan agreed upon, that iss

a. implement a system which will eliminate CONASUPO'smonopoly on imports of powdered milk, and allocateimport permits in a transparent, competitive andefficient basis (paras. 65(a) and 149(a)(i)a.)p

b. eliminate all export permits for fluid milk, andpowdered milk (paras. 65(b) and 149(a)(i)a.);

c. allow for prices of tobacco to be freely determined bythe market (paras. 65(c) and 149(a)(i)a.),

d. not to have increased the nominal protection for wheatabove its level existing in May 1, 1991 (pares. 65(d)and 149(a)(i)a.)g

S. flexibilize prices for cookies, pasta, edible oils,cigarettes, eggs, beef and dairy products (paras.65(e) and 149(a)(i)a.)

f. not to have increased the guarantee price of maize toa level over its equivalent real U.S. dollar value forthe Autumn-Winter cycle of 1990/1991 (paras. 65(f) and149(a)(i)a. )

g. not to have increased the domestic price of sugarabove its equivalent real U.S. dollar value inJanuary 1, 1991 (paras. 65(g) and 149(a)(i)a.)s

h. not to have Lncreased the nominal price of barley forthe period June 1, 1991 to January 31,1992 above thelevel of 680,000 pesos per ton, and have set thenominal price of barley for the period February 1,1992 to January 31, 1993 at a level not to exceed714,000 pesos per ton (pares. 65(h) and 149(a)(L)a.);

i. discuss with the Bank the results of the sugar studyand based on such discussions approve a policy for thesugar sector (paras. 65(i) and 149(a)(i)a.):

j. agree an action plan that follows from the ediblebeans market study (paras. 65(j) and 149(a)(L)a.); and

k. elimiq4te import permits for green coffee not laterthan b etsmber 30, 1991 (paras. 65(k) and149(a)(LI)a.).

- 105 - Annex 7Page 3 of 3

(b) Input Markets and Health Regulations

(i) eliminate restrictions that impede private sectorcompetition to PRONASE, PRONASE's monopoly of germplasmproduced by INIFAP and limits on plant breeding by theprivate sector (paras. 66 (a) and 149(ii)c.);

(ii) maintain policy of allowing prices of pesticides to befreely determined by the market (paras. 66 (b) and149(ii)a.)u and

(iii) reach agreement on action plans to implement recommendationsof the studies on animal health, plant protection, andquality control of pesticides. Rules and regulations wouldbe based strictly on quality control, health,epidemiological, phytosanitary and onvironmental protectiongrounds (paras. 66 (c) and 149(ii)b.).

2. SARR's Production Taraets

(i) Implement actions agreed upon to eliminate and dismantleprocesses, legislation and regulations that enforce the system ofcrop production targets (paras. 76 and 149(b)).

3. Public Exgenditure

(I) Provision of satisfactory evidence that the level and compositionof budgeted agrLcultural expenditure presented to Congress in the1992 budget Is consistent with the macroeconomic program and withan efficient allocation of Government resources at the sectorlevel (paras. 83 and 149(a)).

4. Food Consumotion and Nutrition

(i) Present evaluation of food and nutrition programs as agreed to inthe implementation plan of the monitoring and evaluation system(MES) (para. 110(a) and 149(d)(i)); and

(ii) agree with the Bank on general and agencies' action plans for1993-1994 (para. 110(b) and 149(d)(iU))).

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