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Interview with Corbacho and Schwartz: Pro-poor policies in Mexico aim to reduce income disparities and improve efficiency

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2002
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IMFSurvey: Why did you undertake this study?

Schwartz: This study started a year after the Mexican crisis of 1994-95, when it was important to understand, first, how badly the crisis would affect income distribution and poverty and, second, what expenditure policy measures could be taken to address these issues. An initial version of the paper was included in the 1997 Selected Issues Paper for Mexico’s Article IV consultation, but we felt we needed more time to assess the full distributional consequences of the crisis. Ana joined the IMF last year—having just completed her dissertation related to income distribution, with Mexico as one of the case studies—and additional data are now available, so we thought we would revisit these important issues with a longer time perspective.

IMFSurvey: What is at the root of Mexico’s unequal income distribution?

Corbacho: Like other Latin American economies, Mexico has a very unequal income distribution that can largely be attributed to inequality in factor endowments—such as land, natural resources, and physical capital—and in human capital formation—that is, differences in access to education and health care. Income inequality in Mexico has a marked urban-rural and regional dimension: average incomes in urban areas and in the richest states are much higher than those of the rural areas and poorest states. Lagging rural development and a strong urban expenditure bias are frequently seen as being at the root of Mexican poverty and inequality. In addition, a fairly unstable macroeco-nomic environment during much of the past three decades may have worsened income distribution.

IMFSurvey: What happened to Mexican income disparities in the 1980s, and what was the effect of the December 1994 crisis?

Schwartz: Until the 1980s, Mexico’s income distribution was evening out. However, in the 1980s, there was a relatively strong increase in income disparities, at a time when Mexico and other Latin American countries were going through a debt crisis and had major macroeco-nomic problems. The increase in inequality largely reflected an increase in the income gap between the very rich and the rest of the population. During the early 1990s, there was neither a further increase nor a significant reduction in Mexico’s income disparities, similar to what has been observed for much of the region.

Correction: In the article on Asian crisis countries in the February 25 issue of the IMF Survey, thechart on page 57 (bottom panel) was mislabeled. The corrected version follows.

Asian crisis countries more flexible but not like some industrial countries

(ratio of exchange rate volatility to reserves volatility in postcrisis period)

Data: Authors’ calculations

The December 1994 crisis seems to have reduced income disparities in the short term but increased poverty. Real wages dropped in 1995, dramatically in many sectors. In the agricultural sector, for example, the decline in incomes was steep, which probably led to a significant increase in the incidence of poverty in rural areas. The crisis also had a big impact on the unemployment rate, with manufacturing and construction sector workers in urban areas probably the hardest hit.

IMF Survey: What happened to government expenditures during the crisis, and after?

CORBACHO: During 1990-2000, social expenditures increased sharply, particularly in the first half of the 1990s, and then leveled off in the second half. In this paper, we looked at spending on health, education, social security, and some special poverty programs. Total social expenditure amounted to about 9.5 percent of GDP in 2000, compared with 6.1 percent of GDP in 1990, which implies an increase of 83 percent in real terms over the decade. While this probably helped to mitigate the effects of the crisis on the poor, overall government expenditure patterns did little to improve income distribution.

SCHWARTZ: To some extent, this was because of the impact of additional crisis-related expenditures. For example, government programs geared toward providing short-term support to the banking system directly benefited those population groups with outstanding consumer and mortgage credits, who tend to be middle- and upper-income groups. Other government programs that restructured loans or provided support for specific interest groups, such as highway concessionaires, also benefited better-off income groups. In addition to these direct transfers, public finances had to absorb the cost of operations to restructure the banking system. In parallel, however, over the past several years, the Mexican government has worked hard to direct social expenditures to lower-income groups. Although aggregate indicators of social well-being have already begun to improve—some quite significantly—access to basic health care, education, and social security needs to be improved further, particularly for the rural poor.

IMFsurvey: What is the government doing to improve the distributional impact of social spending?

CORBACHO: The Mexican government is working to reduce wasteful overlap between different expenditure programs and to improve expenditure targeting. In the education sector, there has been a massive effort to reallocate resources from tertiary to basic education, and quality standards and controls have been strengthened. Also, the central government has passed operational responsibilities to the states, enhancing the efficiency of the education system.

In the health sector, basic health care has been improved and access has been broadened, including for remote communities. In social security, a reform implemented in July 1997 was important from an efficiency perspective but should not be expected to improve distribution significantly because large parts of the working population, including the working poor, do not participate in the system. Finally, the government has significantly increased resources for many social assistance and anti-poverty programs that target specific poorer population groups. Many of these programs have already shown good results.

IMF Survey: Which pro-poor policies have worked particularly well?

Corbacho: PROGRESA—the government’s integrated program for education, health, and nutrition—is an example of a program that has been working particularly well. PROGRESA links the size of income transfers to families to their compliance with a schedule of preventive health checkups and vaccinations and to continued primary and secondary school enrollment for children up to age 16 in their households. This is expected to provide strong educational and health incentives. When it started in 1996, the program operated in one state but has since expanded; by 2000, it covered 2.6 million families, or about 40 percent of all rural families. The most recent results indicate that in the rural areas of Mexico where PROGRESA is currently operating, infants are more robust and have better nutrition, and children are more likely to enroll in school. Adult PROGRESA beneficiaries have also shown signs of improved health, and visits to health clinics and early prenatal care have increased.

IMFSurvey: Could other Latin American countries duplicate programs like PROGRESA? How about other regions of the world?

Schwartz: Because PROGRESA is still a new program, whose total effects will be felt only after the current young beneficiaries enter the labor force, it seems too early to predict how it might work in other regions. Some other Latin American countries, including Argentina, Brazil, Colombia, Honduras, and Nicaragua, are implementing similar incentive-based welfare programs. It would be interesting to compare these various PROGRESA-type programs across countries, to see how their performance has differed and could be further improved.

Richer households spend disproportionately more on education and health care

… but inequality has declined slightly since 1994

1 If the distribution were perfectly equal—as represented by the equality line—households in the first income decile (poorest10 percent of total households) would account for 10 percent of the spending, those in the second income decile would account for 20 percent of total spending, and so on. The actual distribution lies below the equality line, indicating inequality in the distribution of the household spending, which is more pronounced for education than for health care.

Data: Ana Corbacho and Gerd Schwartz, Mexico: Experiences with Pro-Poor Expenditure Policies (Washington: International Monetary Fund, 2002)

IMF Survey: What other policies could help improve the equity and efficiency of social expenditure?

Schwartz: Despite the government’s efforts to improve distributional equity, income inequality in Mexico was not reduced in the 1990s, making it more of a challenge to improve the efficiency of social expenditures. Other policies that would further improve the equity and efficiency of social expenditure include introducing user fees for higher education, reducing the pro-urban expenditure bias in health care, and increasing the coverage of the social security system.

Corbacho:

Specifically, we suggest that, in the education sector, the government introduce user fees in higher education and also identify and strengthen the support for those inputs in primary education that are effective in increasing enrollment and attainment—for example, books and school materials. These suggestions are designed to reduce education inequality and therefore income inequality. In the health sector, it would also be important to extend health care coverage to the entire population. For the social security system, improvements in equity and efficiency would critically depend on increasing the number of insured workers. But at the same time, increased participation in the system would mean increased labor costs in companies where workers currently do not participate and, therefore, may adversely affect the demand for labor.

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IMFSURVEY: How does your work fit into the top Millennium Development Goal of halving poverty by 2015?

SCHWARTZ: We don’t make projections in the paper, but we can see that the government is on the right track. Much of what will happen in the next 13 years will depend on how these programs are implemented and what lessons are learned to improve them. Of course, a stable macroeconomic environment is a precondition for achieving any goal of poverty reduction.

IMFSURVEY: How can boosting pro-poor spending be reconciled with the need for sound fiscal policies? Does it necessarily entail higher taxes?

Schwartz: A main challenge in all expenditure policy reforms is to make more efficient use of existing resources. This may mean cutting programs that don’t work and expanding those that do work, always within the limits of the overall expenditure envelope—that is, while maintaining fiscal sustainability. We have seen what happens to income distribution if this imperative of macroeconomic stability is not maintained. That was the experience of the 1980s, when income distribution clearly got worse. The scope for these efficiency-enhancing reforms is usually large—most countries could do a lot more with existing resources. At the same time, there is usually scope for cautiously exploring user fees for those government expenditures that largely benefit better-off population groups, which could help free up government financial resources. There is no contradiction between boosting pro-poor spending and maintaining fiscal sustainability, and the governments of many Latin American countries, including Mexico, are showing how it can be done.

Copies of Working Paper 2/12, Mexico: Experiences with Pro-Poor Expenditure Policies, by Ana Corbacho and Gerd Schwartz, are available for $10.00 each from IMF Publication Services. See page 72 for ordering information.

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