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Viewing cable 06MEXICO4144, BANK OF MEXICO CONFERENCE ON POVERTY CHALLENGES,

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Reference ID Created Released Classification Origin
06MEXICO4144 2006-07-26 17:54 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Mexico
VZCZCXRO2011
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #4144/01 2071754
ZNR UUUUU ZZH
R 261754Z JUL 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 2358
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 04 MEXICO 004144 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
FOR WHA/MEX, WHA/EPC, EB/IED 
TREASURY FOR IA MEXICO DESK: JASPER HOEK 
COMMERCE FOR ITA/MAC/NAFTA: ANDREW RUDMAN 
ENERGY FOR KDEUTSCH AND SLADISWAN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ENRG MX PGOV PINR PREL
SUBJECT: BANK OF MEXICO CONFERENCE ON POVERTY CHALLENGES, 
SOLUTIONS, AND IMPLICATIONS 
 
 
Sensitive but Unclassified, entire text. 
 
-------------------------- 
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 
expenditure. 
 
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 
percent. 
 
-------- 
Comment 
-------- 
 
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. 
 
 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity 
 
BASSETT