Cablegate: Bank of Mexico Conference On Poverty Challenges,

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Introduction and Summary

1. (SBU) Mexican economic leaders and World Bank economists
discussed the causes and potential solutions for the
country,s persistent poverty at a July 19 Mexico City
conference &Growth and Reduction of Poverty in Latin
America: Virtuous Cycles and Vicious Cycles.8 At the
conference, Central Bank Governor Guillermo Ortiz pointed to
the need for education and human capital creation as the crux
of the problem. World Bank economists Guillermo Perry and
William Maloney noted the role the eighties and nineties in
terms of financial crises played in suppressing incomes of
the poor. They pointed as well to the temporary disparity
liberalizing measures such as NAFTA create by benefiting the
better off first, though such measures are essential to
alleviating poverty in the long run. Most participants made
the basic point that more and better jobs are key to reducing
poverty. Academics also described the inequalities created
by poor fiscal policies and subsidies, as well as the growing
North-South divide in Mexico. Hacienda (Treasury) Secretary
Gil Diaz closed the conference highlighting the success of
Mexico,s economic stability and its impact on spurring
private investment and reducing poverty. While the
North/South PAN/PRD divide threatens to stall reform in the
upcoming Congress, the poverty conference reinforced the
message that the incoming Mexican government resist the
temptation for short term political fixes such as subsidies
and entitlements, and find the political courage to stick
with fiscal reforms to cement long-term poverty reduction.

Remarks by BOM Governor Guillermo Ortiz

2. (SBU) BOM Governor Guillermo Ortiz opened the event with
an overview of Mexico,s economy. He criticized the elevated
unequal regional distribution of income, as well as deficient
economic growth over the last decade. Ortiz explained that
in the sixties, Mexico,s income per capita was greater than
both Korea,s and Spain,s and currently their income per
capita was twice Mexico,s. This, he highlighted, is the
consequence of the instability generated by Mexico,s
economic and financial crises of the eighties and nineties.
According to a study developed by the Bank of Mexico, without
these crises, income per capita would be 70 percent greater
than the current 9,000 dollars.

3. (SBU) Ortiz added that more efficient social programs,
like the &Opportunities Program8 created to reduce poverty
by benefiting the poorest communities, are substituting
historic schemes of generalized subsidies, which often
benefit the medium and high-income population. At the same
time, he said that the government,s efforts of an increase
in job creation through infrastructure development and a
reduction of debt has not been sufficient to fight poverty.

4. (SBU) According to Ortiz, employment is key to a reduction
of poverty, since human capital improvements create more and
better jobs. However, the rigidity of the labor markets in
Mexico threatens future employment creation. Ortiz stated
that there is no tradeoff between policies geared to
generating economic growth and those aimed at reducing
poverty. Hence, focusing on one goal will also accomplish
the other.

Results of the World Bank Study

5. (SBU) World Bank Chief Economist for Latin America
Guillermo Perry, and William Maloney, Lead Economist
presented a poverty and inequality study showing that despite
the region,s rich natural resources it suffers from modest
economic growth with 25 percent of the population surviving
on less than 2 dollars per day. According to Perry,
education is the most important factor in income difference.
In Mexico, Perry explained the correlation on the years of
study between parents and sons is 55 percent, which means
that 45 percent of Mexican children will out earn their

MEXICO 00004144 002 OF 004

parents, compared to 80 percent in the U.S.

6. (SBU) Perry highlighted that Latin America,s historic
inertia led to the creation of exclusionary institutions
reserved for the elite, and although other countries had
similar histories, they subsequently invested in improving
education. Perry explained, that between the fifties and the
seventies, Latin America,s economic growth exceeded the
current rate, but, in the eighties, other developing
countries implemented a prudent macroeconomic policy, while
Latin America experienced many economic crises. This led to
segregation between rural and urban sectors. Urban/rural
discrimination in education, investment, and research
continues throughout much of the region.

7. (SBU) All pro-growth policies will generate a decrease in
poverty in the long-term, according to Perry. Yet, in the
short-term there are tradeoffs as it is easier for those with
better access to take full advantage of opportunities
provided. As an example, NAFTA,s effect in Mexico was
positive yet uneven, as the most needy rural regions did not
benefit as much or at all, while urban regions did benefit.
Therefore, he concluded that the poorest regions require
greater emphasis on education and investment.

8. (SBU) Maloney explained that education is fundamental to
increasing productivity, which in turn attracts investment,
improves human capital, and reduces poverty. Inequality gaps
widen as investment flows first to wealthier regions.

The south of Mexico is the country,s poorest region with
very low levels of education and human capital, and hence
remains unattractive for investors.

9. (SBU) Maloney concluded that to reduce poverty levels in
Mexico, economic growth is needed, however poverty itself
prevents economic growth, creating a vicious cycle. Maloney
explained that in Mexico an increase of poverty by 10 percent
generates a 1 percent decrease in economic growth and a five
percent decrease in investment.

--------------------------------------------- ----
Growth and Reduction of Poverty Levels in Mexico
--------------------------------------------- ----

10. (SBU) In Mexico one out of every four people live in
extreme poverty, according to Santiago Levy, Ex-Director of
the Mexican Social Security Institute (IMSS). Levy added
that a majority of those that live in the most rural areas do
not own the land they live on, and those that do own land,
own an average of one-third hectare. The job market in
Mexico plays a central role in the reduction of poverty, as a
key to reducing poverty in Mexico is the generation of
productive jobs.

11. (SBU) Levy explained that the notion of a segmented job
market does not reflect current reality, as there is a
continuous and intense labor movement between the formal and
informal sectors. He said that there are incentives to work
in the informal sector given permanent subsidy-generating
programs, hence increasing the informal market. Levy
explained that government should not only focus on increasing
the availability of incentives, but on "compatibility of
incentives8 which he described is understanding that social
policies should serve the same purposes as economic policies.
He noted that incentives should be geared towards an
increase in productivity, which could generate a virtuous
cycle. Levy concluded that the large gap in productivity
between the formal and the informal market, and the smaller
size of informal businesses, contributed to Mexico,s
inadequate economic growth in recent years.

12. (SBU) An adequate fiscal policy is an important tool for
the reduction of poverty and unequal distribution of income,
according to Fausto Hernandez, Economics Professor at
Mexico,s Center for Economic Research and Teaching (CIDE).
Hernandez highlighted that total government expenditure in
Mexico is equivalent to 20 percent of GDP of which only 0.9
percent is destined for social programs, whereas in the U.S.
government social expenditure is 20 percent of GDP. An
improved Mexican fiscal policy could increase social
expenditures, and thus reduce poverty. Hernandez added that
there are four main problems with the current fiscal policy:

MEXICO 00004144 003 OF 004

the size of the effort, a high proportion of fiscal
resources, the net progress of fiscal instruments used, and
the low efficiency of redistributive and social programs.
Mexico needs a fiscal reform, as total tax collection in
Mexico is only 9.8 percent of GDP, yet in order to make
fiscal reform appealing to the masses the Mexican government
would have to promote it as a reform to increase social

13. (SBU) Subsidies in Mexico represent a great risk to the
economy. For example, subsidies for electricity alone
represents twice the amount of the Opportunities Program,
according to Ricardo Samaniego, Economics Professor at the
Mexican Autonomous Technical Institute (ITAM). Without fiscal
reform it is impossible to eradicate poverty and spur
economic growth. Samaniego presented four main impediments
to economic growth in Mexico: low productivity, inefficiency
in the financial system, inequalities in the commercial
system, and the internal market. From 1980 to 1996,
productivity in Mexico increased at an average of 0.5 percent
per year, and from 1996 to 2003 the increase improved to 1
percent annually; therefore, as long as total factor
productivity continues to lag, Mexico,s poverty problems
will continue. According to Samaniego, almost half of
Mexico,s total population lives in poverty and 20 percent
live in extreme poverty. The richest 10 percent of Mexicans
receive 35.6 percent of the country,s total earnings whereas
the poorest 10 percent receive 1.6 percent. Structural
changes in Mexico favor qualified and high-tech employment
generating an increase in inequality; therefore, in order to
eradicate poverty, an economic policy that is at the center
of political policies needs to be implemented.

--------------------------------------------- ---
The World Bank Research,s Political Implications
--------------------------------------------- ---

14. (SBU) Mexico is naturally divided between a poor South
and a growing North, according to Gerardo Esquivel, Economics
Professor at the Colegio de Mexico. Esquivel added that
commercial openness in the long run would benefit the
country, yet in the short-run it is widening the inequality
gap. Esquivel suggested that unequal access to higher
education in Mexico is hurting lower income youth: four out
of five young adults do not attend school.

15. (SBU) The presidential election highlighted the
politicization problem. Both frontrunners focused on
discrediting the other,s vision, yet each one personified a
side of the country,s situation according to Gonzalo
Hernandez, Executive Secretary of the National Council of the
Evaluation of Politics for Social Development. Hernandez
blamed Mexico,s mediocre economic growth on a combination of
factors: in the last 13 years manufacturing productivity in
Mexico grew by 70 percent compared to 190 percent in South
Korea, average schooling in Mexico is 7.8 years, and it takes
an average of 58 days to open a business. Hernandez
highlighted that improving education, infrastructure,
strengthening competition, deregulating new businesses,
improving capital markets, and generating macroeconomic
stability are policies that generate growth and equal
distribution; therefore, due to the unpopularity of reforms,
these should be &buried8 under the above policies, which
would be easier to approve.

--------------------------------------------- ------------
Concluding Remarks by Secretary of Treasury Francisco Gil Diaz
--------------------------------------------- ------------

16. (SBU) Secretary of Hacienda (Treasury) Francisco Gil Diaz
stated that without maintaining economic stability, attempts
to reduce poverty will not be successful, as economic
stability stimulates private investment and demand and
decreases currency volatility. Additionally, Gil added that
Mexico is restructuring government expenditure to emphasize
investment in human capital and programs to reduce poverty.
In 2005, 4.7 percent of GDP was used for investment and total
resources used to eradicate poverty increased by 55.9


MEXICO 00004144 004 OF 004

17. (SBU) The conference, despite not covering much new
ground, reinforced the current preoccupation by Mexican
officials, business leaders, academics, and others with the
persistent challenges of poverty and inequality, and its
implications for the nation,s development and competitive
standing in a fast-moving globalized world. We can expect
more of these types of well-attended events in the months
ahead as a new GOM works to define its economic and social
priorities. End comment.

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