MEXICO

SOUTHERN STATES DEVELOPMENT STRATEGY

Volume 1: Synthesis Report

October 20, 2003

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This synthesis was written by Gillette Hall and Christopher Humphrey, with extensive assistance from Heather Layton. We are grateful to the World Bank Southern States Development Strategy Team for the background papers upon which this volume is based (see Annex 1). Special thanks to the following World Bank colleagues and Mexican government counterparts who provided input to this document:

World Bank Staff José Maria Caballero Mark Cackler Tania Carrasco Krishna Challa Sandy Davis Joost Draaisma Marianne Fay Indermit Gill Marcelo Giugale Christian Gonzalez José Luis Guasch Isabel Guerrero Mark Hagerstrom John Kellenberg Olivier Lafourcade Daniel Lederman Gladys C. López Miguel López Connie Luff Claudia Macías Mario Polese María Guadalupe Toscano Eloy Vidal Michael Walton Steven Webb Quentin Wodon Presidencia de la Republica Lic. Jorge Diez de Sollano Elcoro Lic. Pilar Rivero Laborde Lic. Monica Tapia Chiapas Dr. Fernando Alvarez Simán Ing. y M. en F. Sergio Araiza Bahena Ing. Rafael Camargo Vidal Lic. Maria de los Ángeles Cruz Hernández Ing. Gustavo de la Rosa del Valle Ing. Efrén Fuentes Montero Lic. Roger Grajales González M. SC. Walter López Baez

Pacífico Hugo Orantes Montes Lic. Jacinto Robles Ramírez Biol. Moisés Silva Cervantes Guerrero Mtra. Sonia Amelio Amador M.C. Jorge Briceño Hinojosa Profra. Ma. Guadalupe Castillo Díaz Lic. Marco Antonio Castrejón Lobato Ing. Fulgencio Díaz Díaz Arq. Fernando Figueroa Camacho Lic. Antonio Gaspar Beltrán Lic. Heriberto Huicochea Vázquez Lic. Francisco Leyva Jiménez Dra. Verónica Muñoz Parra Dr. José Ignacio Ortiz Ureñas C.P. Daniel Pano Cruz Lic. Héctor Popoca Boone Lic. Raúl Reducindo Ramírez Lic. Juan Salgado Tenorio Lic. Marcelo Tecolapa Tixteco Lic. Wilibaldo Valente Pastor Oaxaca Lic. Celestino Alonso Alvarez Ing. Omar Juárez Lic. Daniel Pérez Montes Lic. Daniel Vanzini Sepúlveda Lic. José María Villalobos Rodríguez

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Table of Contents

Executive Summary………………………………………………..……………………3 The Southern States: Mexico’s Poorest Region………………………………………6 International Comparisons……………………………………………………..7 Is the Poverty Gap Closing?……………………………………………………8 Why is the South so Poor?…………………………………………………………….11 High Cost of Doing Business…………………………………………………11 Not Specializing in Competitive Sectors…………………………………… 15 Inefficient Government Activity………………………………………….….18 Policy Options for More Successful Poverty Reduction in Mexico’s South……..24 Focus First on Increased Efficiency…………………………………………..25 Increase Resource Allocations for Poverty Reduction in the South………28 Stimulate Economic Growth in the South…………………………………...30 Address Social Exclusion and Conflict in the South………………………..34 Annex 1: List of Southern States Development Strategy Policy Notes and

Authors………………………………………………………………………….36

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Executive Summary

The Southern States Development Strategy was undertaken in 2002 at the request of the Mexican government. Building on the 2001 World Bank Report “Mexico, a Comprehensive Development Agenda for the New Era,” this volume consists of a set of 22 Notes, each addressing one specific aspect of the development prospects and problems in Mexico’s southern region—from macroeconomics and labor markets to themes such as gender and indigenous peoples. The report focuses on the three states of Chiapas, Guerrero, and Oaxaca, the poorest states in the country, which together present the Mexican government with perhaps its greatest challenge: How to harness the potential of a region that, despite a wealth of assets (water, extensive biodiversity, and a vibrant indigenous cultural heritage), is nevertheless plagued by excruciating poverty? This synthesis draws together the main findings from a large body of work that encompasses two questions, simple to pose, but exceedingly difficult to answer: Why is the region so poor? And what can the Mexican government, both federal and state, do to address this poverty? The synthesis is organized as follows: Section one briefly sets the stage, cataloguing the extent of poverty in the south, its historical roots, and its potential for improvement without further policy change. We find that the south is unlikely to meet the first Millennium Development Goal of halving poverty by the year 2015 under current conditions. Section two asks why incomes are so low in the south as to produce this persistent poverty, and finds that it is because the south is unproductive—the value of goods and services produced per person in the south is less than half as much as in the rest of Mexico. We group the reasons for this low productivity, and hence low income, into three categories: (a) high cost of doing business that reduces the income that can be generated from economic activity and raises risk, ranging from poor infrastructure to insecure land tenure and violence; (b) not pursuing competitive advantages , which means that the pattern of economic activity currently in the south is concentrated in products and technologies with low productivity, particularly in the agriculture sector; and (c) inefficient government activity ranging from federal transfer and pricing policies that have in some cases been biased against the south, to inefficiencies and misuse in the administration of government resources, poor education quality, an inefficient judicial system, and inconsistent protection of social rights, which together reinforce the problems and perpetuate the cycle of poverty in the south. Section three discusses a series of policy options that might be taken at the federal and state level to hasten the pace of poverty reduction in the south. Major policy recommendations include the following:

1. Focus first on improved poverty reduction outcomes through increased efficiency. To provide immediate improvements in poverty reduction, existing federal and state resources for poverty reduction in the south should be used

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more efficiently by reforming how federal resources are distributed and how state governments use those resources. Eliminate or reduce rigid restrictions on federal resource transfers, which impede state governments from undertaking sectoral reforms. Reorient federal and state spending patterns, which currently favor urban, non-poor residents (particularly in education, housing, and pensions) to free up resources for poverty reduction. Reform inefficient and redundant services, such as dual federal–state education sectors, and programs with high administrative overhead and low poverty-reduction impact, for example, family assistance, and housing. The scope for efficiency gains in social infrastructure provision is particularly great. Should the south attain international levels of service delivery costs, universal coverage in water, sanitation, and electricity could be attained in five years even at current spending levels.

2. Selectively increase resource allocations to the southern states, tied to efficiency

gains. While efficiency improvements can have a significant and immediate impact, it is evident that the poverty gap between the south and the rest of the country will not be closed without an increase in federal resources to the southern states. A massive immediate increase in federal transfers to the south, however, is neither recommended nor realistic. Instead, a modest boost in federal resources should be directed at certain key bottlenecks to poverty reduction and economic growth in the south. These resources should be preconditioned on improved results by state and municipal governments. Greater resources also should be dedicated to expanding poverty reduction programs such as Oportunidades, which successfully reach the poor with little overhead. Further resource gains for the south can be made by eliminating regional biases that exist in certain aspects of federal subsidies and pricing policies.

3. Stimulate economic growth in the south. Poverty reduction is not just a matter of

garnering and efficiently spending federal resources, but in fostering higher levels of economic activity in the south itself. It is equally important to increase income potential for southern workers by eliminating key obstacles to economic activity in the south. Transportation can be improved by completing a few key missing transportation links, particularly highways connecting the south to the rest of Mexico, and by completing deregulation of the local freight industry. State and federal governments should mediate and resolve the numerous land titles and boundary disputes, which create tremendous uncertainty over land holdings and constrain profitable economic activity on the land. Improvements in the lagging agricultural sector should be promoted through agricultural technology, the organization of producers for processing and marketing, the production of more competitive agricultural products, the development of agro-industry, and seeking out new markets. As well, rural development strategies should focus not just on agriculture, but also on latent economic potential in rural areas, such as the exploitation of wood and non-wood forest resources and tourism (particularly specialized products such as eco-tourism). Value-added manufacturing presents another potential sector for growth if constraints

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such as low education levels, expensive transportation, and limited credit can be eased.

4. Address social exclusion and conflict in the south. Gains in efficiency, resources,

and growth do not automatically guarantee comprehensive (across-the-board) poverty reduction. Social exclusion and conflict are principal obstacles to poverty reduction and must be addressed directly such that the vast inequities plaguing the region are not reproduced. Priority actions include reforming the judicial system to protect social and property rights, focusing on separation of powers between the executive and judicial branches, and autonomy for federal and state prosecutors following United Nations (U.N.) guidelines, coupled with greater transparency and civil society participation and access to the court system. Government policy related to indigenous peoples should facilitate an increase in resource flows to indigenous groups, along with increased space for social participation and a larger role in the supervision of implementation of basic services and education, including bilingual education.

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I. The Southern States: Mexico’s Poorest Region The southern states of Chiapas, Guerrero, and Oaxaca are Mexico’s poorest. The Mexican government’s Marginality Index and the U.N. Human Development Index both give the states the lowest three rankings in terms of social indicators and living conditions. Income data for 2000 confirm the concentration of poverty in the south. One quarter of the nation’s extreme poor live in these three states, which are home to just 10 percent of the country’s population.1 Mean incomes in the southern states are roughly half of the Mexican average, such that about two thirds of the population in the south are poor, compared with under half of the national population.2

Beyond these averages, incomes also are significantly stratified by region (urban/rural) and ethnicity (indigenous/non-indigenous) in the south. Four of five people in the rural south are poor (86 percent), compared with less than half of the urban population (48 percent). Rural poverty is also “deeper”: the bulk of the rural population—almost three of every four people—lives in extreme poverty (72 percent) compared with just 21 percent of the urban population. Incomes also are stratified by ethnicity in the southern states, which have the highest concentration of indigenous peoples in Mexico. Average incomes of indigenous peoples range from one third (Chiapas) to one half (Oaxaca) of the incomes of non-indigenous people, a finding that suggests an important intersection between ethnicity and poverty in the region.3

Poverty in Mexico’s south is a centuries-old problem. Colonial history casts a long shadow over the region, which has long been viewed as an intractable development problem for Mexico.4 Resolving the deep poverty of the south is important not only for the well-being of the millions of poor who currently inhabit the region, but also for all Mexicans. Social tension in the south, rooted in long-standing inequities and deep impoverishment, is otherwise likely to dampen prospects for consolidating prosperity, democracy, and peace in the country as a whole. The recent increasing democratization of Mexican politics, has provided a basis for optimism for southern development. It is clear that both the national and local political systems are fostering greater political participation . Mexico has begun to lay the foundation for greater government accountability. . The federal government and local state governments,

1 Based on household income estimates from household survey by the National Institute of Statistics, Geography, and Information (Instituto Nacional de Estadística, Geografia e Informática—INEGI), 2000. 2 See Table 1. 3 Of about 11 million indigenous peoples in Mexico, 2.8 million live in these three states and represent 38 percent of the total state populations (INEGI Census, 2000). 4 While anthropologists point to the south of Mexico as a seat of wealth, power, and cultural development before the Spanish conquest, circumstances deteriorated after colonization. The 1878 report “Analysis of the General Situation of the State of Chiapas” by Federal Secretary of the Treasury Matias Romero states: “If you can penetrate the intricate labyrinth that passes for government here … you would be astounded at the meagerness of the Treasury, an impotent and odious administration of justice … the most repugnant slavery, the monopolization of agricultural wealth whose exploitation is condemned to antediluvian customs, until at last … An Intractable Malady!” (Thomas 1996, p. 22). Since 1950 when the first index of poverty and marginalization was constructed from Census data, these three states have placed last. (Justice Note).

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aware of the need to show results and be responsive to the voting citizenry, have shown an increased commitment to elevating the living standards and economic opportunities of people in the, recognizing that Mexico’s long-term growth potential will be limited if an entire region is excluded from the development process. International Comparisons Because the southern states are so much poorer than the rest of Mexico, it is no surprise to find that many social indicators in the region are also much lower than elsewhere in the country. It is worth noting, however, that other countries with gross domestic product (GDP) per capita similar to the levels of the southern states (see Figure 1) fare much better in many social indicators. For example, infant mortality rates in southern Mexico are an average of 29.7 per 1,000 children under 5 years old5, more than 1.5 times the rate in Sri Lanka (18 per 1,000),6 which has a per capita income slightly lower than the southern states (see Figure 2). As well, education attainment rates in the southern states are surpassed by Sri Lanka, China, and Peru. These findings suggest that, given the region’s average income level, the southern states exhibit very low social indicators. This is especially true for the indigenous populations in the South (Chart 2).. Chart 1. The South Is Far Poorer Than Mexico as a Whole, but Average Incomes Are on par with Many Middle-Income Countries…

Source: World Development Indicators 2002.

5 www.inegi.gob.mx 6 World Development Indicators, 2002.

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Chart 2.…Some of Which Exhibit Higher Social Development Indicators, Such as Education

Source: World Development Indicators 2002. Is the Poverty Gap Closing? While the poverty of the south may be rooted in history, when we cast an eye toward the future, the fundamental policy question to ask today is: Is the gap closing? In other words, are the necessary federal and state policies now in place such that eliminating the south’s poverty gap is just a matter of time? Or, alternatively, will the south continue to fall short of poverty-reduction goals—comparing poorly with the rest of Mexico—unless additional policy measures are taken?

This report finds that the outlook is mixed. Without a doubt, Mexico’s recent democratic opening and stable macroeconomic environment, twinned with the reordering of national spending priorities toward poverty reduction (a 55 percent increase since the early 1990s) and the implementation of innovative poverty-reduction programs such as Oportunidades that are now proven to reach the poor, have had a positive effect on the country’s poverty-reduction prospects. However, despite the range of recent laudable policy initiatives, the south, as opposed to Mexico as a whole, is not projected to meet Millennium Development Goals (MDGs) for poverty reduction under current conditions. Prevailing poverty levels in the south are so high and the causes of the south’s poverty so deeply rooted that, without additional policy changes, the development lag of the south will persist. Growth and Poverty Reduction in the South: Recent Trends. The pace of poverty reduction depends on two main factors: becoming richer as a society (gains in average income, measured in terms of rising output or GDP) and becoming more equitable (distributing those gains more progressively to poor households). Unfortunately, the south remains on a path of impoverishment relative to the rest of Mexico on both counts.

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Between 1993 and 2000 the Mexican economy grew at an average annual rate of 3.6 percent; the annual growth rate in the south was just 2.1 percent. More disheartening, while inequality was stable in Mexico during the 1990s, it rose in the south such that income gains accrued increasingly to the better-off as opposed to the poor.7 Above-average population growth in southern Mexico has further accentuated poverty and natural resource pressures in the region, particularly in rural areas. Table 1. Poverty Rates Are Falling More Slowly in Mexico’s South, with Almost No Change in Rural Areas Mexico Southern States

All Urban Rural 1992 54 82 77 88 2000 42 67 48 86 Percent change - 22% - 18% - 38% - 2% Source: Wodon and others 2002 (Poverty Note).

Against this backdrop, progress in poverty reduction during the 1990s was slower in the south than in the rest of Mexico, and was virtually nil in rural areas (see Table 1). The poverty rate in the south fell by 18 percent, compared with 22 percent nationwide during the period 1992–2000. In rural areas, where almost all households were in poverty to begin with (88 percent), the poverty rate registered an almost imperceptible decline of 2 percentage points. Resolving the issue of rural poverty in the south is a critical component to any successful poverty-reduction strategy. Looking Ahead: Reaching the Millennium Development Goals in Mexico. According to base-case projections for Mexico,8 the country as a whole stands a good chance of meeting the MDG of reducing poverty by one half by the year 2015. Conversely, under base-case assumptions,9 the south will not manage to halve extreme poverty or poverty in this same period (Table 2). Furthermore, under a “high-case” per capita growth rate of 3.3 percent per year—not out of reach for Mexico, but would require more than tripling the current southern growth rate—Mexico as a whole would cut both extreme poverty rates and poverty rates by half; in the south, extreme poverty would be halved, but the key MDG of halving poverty rates would remain out of reach (Table 3).10 The possibility of achieving these goals in the south is further put at risk if income inequality in the region continues to rise.

7 Estimates of the Gini coefficient, which takes a value of zero under perfect equality (all incomes are the same) and one under complete inequality (all income accrues to one person) rose from 0.52 to 0.56 in the south between 1992 and 2000; it remained unchanged at 0.53 in these years for all of Mexico. 8 Base-case projections for Mexico as a whole assume a relatively conservative per capita growth rate of 1.8 percent—just under that prevailing in the 1990s—and no change in income distribution, mirroring the stability of the 1990s in this indicator. 9 Base-case assumptions suppose a relatively favorable per capita growth rate of 1 percent for the south—just over that prevailing in the 1990s—and no further deterioration in the distribution of income, holding all else equal. 10 Base- and high-case growth scenarios are developed in Draaisma 2002 (Macroeconomics Note).

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Table 2. Base-Case Scenario: Mexico is Likely to Reduce Extreme Poverty by Half in 2015, but the South Is Not Southern States (1% per capita

annual income growth) Mexico (1.8% per capita annual

income growth) Extreme poverty rate 1992 2000

54 46

23 17

2015 40 11 Reduced by half? No Yes Poverty rate 1992 2000

82 67

54 42

2015 61 30 Reduced by half? No No Source: Jayasuriya and Wodon 2002 (Millenium Development Goals Note). Table 3. High-Case Scenario: Mexico is Likely to Reduce Poverty by Half in 2015, but the South Is Not Southern States (3.3% per capita

annual income growth) Mexico (3.3% per capita annual

income growth) Extreme poverty rate 2000 46 17 2015 26 7 Reduced by half? Yes Yes Poverty rate 2000 67 42 2015 51 22 Reduced by half? No Yes Source: Jayasuriya and Wodon 2002 (Millenium Development Goals Note). To sum up the above findings, this report shows that (a) poverty levels are higher in the south than in the entire nation; (b) the pace of progress in poverty reduction has been slower in the south; and (c) projections indicate that this trend will continue unabated, such that unless further policy shifts occur, the MDGs will remain out of reach for the south. Motivated by these findings, this report focuses on answering two principal questions: Why is the southern region still so poor relative to the rest of Mexico? And what can be done about it?

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II. Why is the South so Poor? The southern states are poor relative to the rest of Mexico because they are less productive. The value of goods and services produced per person in the southern states (GDP per capita) is 58 percent lower than in the national average, which translates into lower earnings per person.11 At the same time, the south has higher labor force participation rates than the rest of the country.12 Thus, although southerners are actively participating in the local economy as much or more than people elsewhere in Mexico, critical constraints keep them from translating that hard work into higher earnings. These constraints can be broadly grouped into three main categories that in reality are deeply interrelated and at times overlap or underpin one another:

• High cost of doing business. High costs exist in several areas of the southern economy, including transportation, information, financial capital, land, and security. As a result, productivity in the south, and hence income for southern workers, is much lower than it would be without these additional costs.

• Not pursuing competitive advantages. The businesses and governments of

southern states have not systematically pursued their competitive advantages in promoting economic growth in the south. Because of a lack of adequate employment alternatives, a significant proportion of southern workers remain in an agricultural economy with low productivity that is unable to provide an above-poverty income. As well, the tourism industry has not grown in an optimal or sustainable fashion, manufacturing jobs are scarce, government spending makes up a disproportionately large share of the economy, and the natural resource assets of the south are deteriorating.

• Inefficient government action. The actions or lack of actions by federal, state,

and municipal governments have played a significant role in the low productivity levels in the south. This factor includes historical neglect of the south by the federal government; poor performance in government services (particularly education and social infrastructure); complex and overly rigid formulas for redistributing federal resources to states and municipalities; inefficiencies at different levels of government; and weak public institutions that contribute to a conflictive atmosphere, which hinders economic growth in the region.

High Cost of Doing Business Despite wages that are on average significantly lower than in other parts of Mexico and an abundant supply of labor, the south has been unable to attract capital investment. A myriad of obstacles to doing business in the south translate into costs and risks that are

11 Macroeconomics Note. 12 The labor force participation rate is 56 percent in Mexico and is about 60 percent in the southern states (Fretes and Cox Edwards 2002 [Labor Markets Note]).

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higher in the south than in other regions, and which act as a direct tax on private enterprise, making the region a much less attractive place to invest. To give an example, logistics costs (which include transport, storage, customs, packing, distribution, and related management) in the southern states are estimated to account for fully 29 percent of the region’s GDP, compared with only 18 percent in Mexico as a whole and 10 percent in Organisation for Economic Co-operation and Development (OECD) countries.13 Broadly defined, these high costs stem from four factors: lack of access, a weak financial system, unclear land rights, and an atmosphere of conflict and violence. Each of these is discussed in turn below. Lack of Access. Perhaps the most significant factor raising the costs of doing business in southern Mexico is the lack of physical integration of poor regions within the southern states, and of the southern states as a whole with the rest of the country and the outside world. Moving products, people, and information in and out of the southern states is unreliable, time-consuming ,and expensive. In good measure this difficulty of access can be explained by the mountainous geography of the south combined with an inadequate transportation and communication infrastructure. Chiapas, Guerrero, and Oaxaca are, apart from a narrow coastal strip and a few intermontane valleys, covered with rugged mountains, making it difficult to service with adequate infrastructure. Natural obstacles are further compounded by the extreme dispersion of the population into numerous remote and small communities. For example, Chiapas has some 20,000 localities with an average of 195 inhabitants each.

The lack of access is most critical in remote mountain regions, which also are the areas of the worst poverty in the southern states, and in all of Mexico. The south has a rural road density above the national average, but many rural communities remain isolated, without year-round access, some reached only by foot. In Oaxaca for example, 40 percent of the state’s localities, accounting for 15 percent of the state’s population, are not served by a road.14 Poor maintenance of existing roads compounds the problem, especially in a mountainous region affected by heavy seasonal rainfall.

Difficult access exacts a heavy price on these remote regions, limiting the ability of local residents—in the majority indigenous people—to freely seek out new markets for their goods and services to help improve their economic prospects. The time and cost to move agricultural produce from the mountain regions of the south to even in-state markets are prohibitively high, meaning that farming—on which 40 percent of the regional population depends to survive—is much more of a subsistence industry in the south than elsewhere in Mexico. An informal survey among campesinos in the rural south, carried out by World Bank employees during a recent field mission, indicates that half or less of a given harvest reaches market. This difficult access and dispersed settlement pattern also makes it much more expensive to be reached by public and private utilities. The rural south accounts for 10 percent of Mexico’s population but 27%

13 Economic Activity Note. 14 Infrastructure Notes.

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of the population not served by electricity. The three southern states also have the lowest telephone density rates in the country.15

Not only are rural regions poorly integrated into the rest of the southern states, but the southern states themselves also are poorly integrated with the rest of the country and the outside world. Port, rail, and highway infrastructure in the south is deficient. The two largest ports in the region, Salina Cruz, Oaxaca, and Acapulco, Guerrero, are dedicated almost exclusively to Mexican Petroleum (Petróleos Mexicano—PEMEX) operations and tourism, respectively, and would require major investments in new equipment to be able to handle cargo. Railroad service, for either freight or passenger, is almost nonexistent following the restructuring of the industry and the subsequent closing of a number of lines.

The region has a much lower than average highway density, with the major highway network missing key connections and with many segments in need of rehabilitation. The one exception is the Acapulco-Mexico City toll road, which, although in good condition, is used more for tourism than merchandise shipping because of its high toll fees. The problem is further compounded by an uncompetitive and antiquated freight industry with truck load factors 30 percent lower and idle time ratio 75 percent higher than in the rest of the country, and with a small number of trucks able to handle perishable commodities. Regional transport costs are 20 percent higher than the national average and 45 percent higher than in the north, for a deadweight loss equivalent to 2 percent of the GDP of the southern states.16 These high transport costs add to the final price of products, making them much less competitive when they do reach a market.

Although the allocation of federal infrastructure spending in recent years tends to favor the south, the region still lacks adequate infrastructure. This shortage persists partly because the south started from a much more disadvantaged position, and federal funds have not been sufficient to help the states catch up to the rest of the country. But equally important is the lack of overall infrastructure plans worked out with all three levels of government, as well as adequately trained specialists, particularly at the municipal level. Weak Financial System. The cost of doing business in southern Mexico is higher than in the rest of the country—particularly for home-grown business—by the scarcity and poor quality of financial services in the region. Chiapas, Guerrero, and Oaxaca have the lowest bank density ratios in the country, and the number of bank deposits per capita was 23 times higher in Mexico City and 4 times higher nationally than in the southern states in 2000.17 Only 15 percent of Banca Popular institutions18 and 5 percent of Mexican commercial banks operate in the south. The money deposited with banks in the south is mostly lent out elsewhere, especially to the federal government in the form of bonds, rather than being invested in the capital-starved enterprises of the south. Much of the 15 Infrastructure Notes. 16 Economic Activity Note. 17 Finance Note. 18 Banca Popular is a broad term denoting savings and loan societies, credit unions, and other cooperative financial institutions.

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population has no possibility to seek credit because of a lack of collateral or credit history. As well, indigenous people often face discrimination when trying to access credit, even if they do have a viable project and sufficient collateral. The intermediation of remittance money sent to the southern states from elsewhere in Mexico or from the United States is costly, accounting for 15 percent or more of the amount transferred. Because of the importance of remittance money to the southern economy—accounting for 5 percent of GDP in Guerrero and 4.3 percent in Oaxaca—this represents a significant cost. Recent efforts to reduce the cost of remittances have been accompanied by a marked increase in the flow of total remittances. Unclear Property Rights. Conflict over property rights creates another significant cost to productive activity in the south, tying up one of the south’s major assets—its land—in legal and extralegal disputes. Uncertainty over land holding, duplicate and triplicate titles to the same land, and disagreements over boundaries create additional costs to investment, further depressing output in an already lagging sector. The authorities have not fully resolved all of these conflicts. The largest backlog for the land certification program exists in the marginalized zones in the three southern states. Unresolved conflicts over land rights are numerous and at times lead to violence in rural areas. Also, the south has the highest percentage of communal land in the country: 80 percent in Oaxaca and 45 percent in Guerrero and Chiapas. Communal land ownership is preferred by many indigenous communities, which have strong traditions of collective action. Even when communities choose to go through the conversion process to privatize communal land, however, the process as managed under the Program for the Certification of Ejidal Rights and Titling of Plots (Programa de Certificación de Derechos Ejidales y Titulación de Solares—PROCEDE) is complex and time-consuming, leading to legal disputes.19 Atmosphere of Conflict. Conflict and violence are major problems in the southern states and act both as a significant disincentive to starting a business or investing in the region and as additional costs and risks to those who do business there. While violence and conflict certainly exist in other, wealthier parts of Mexico, they are especially severe in the south because of the particular social and historical characteristics of the region. Land disputes (discussed above) are a major cause of conflict. Linked to land issues is the prominent and as yet unresolved Zapatista rebel movement in the Lacondon Jungle region of Chiapas, brought to the attention of the world in 1994. Less well known are the Popular Revolutionary Army (Ejército Popular Revolucionario—EPR) and the Insurgent People’s Revolutionary Army (Ejército Revolucionario del Pueblo Insurgente—ERPI) guerrilla movements in certain mountainous regions of Oaxaca and Guerrero. Kidnapping is a problem in certain regions. The illegal drug trade further fuels the violence. Certain mountain regions in Guerrero and Oaxaca, and to a lesser degree in Chiapas, have become major opium poppy and marijuana production zones, with a commensurate upswing in violence among drug producers and law enforcement authorities.20 According to United States government estimates, the southern states,

19 Particularly in peri-urban areas, basic infrastructure investments are delayed and even canceled because of protracted legal processes around communally owned farm lands (ejido) conversion. 20 Narcotics Note.

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mostly Guerrero and Oaxaca, produce enough opium poppies to make between 2 and 4 tons of heroine, as well as 1000 tons of marijuana.

Primarily because of the drug trade and guerrilla activity, military and police activity are present in the southern states, with patrols, house searches, and road blocks, particularly in poor rural regions.21 While justifiable to combat criminality, this activity is extremely disruptive to residents attempting to make an honest living. As well, civil society frequently accuses the police and military of arbitrary detention and other social rights violations in southern Mexico, furthering the mistrust felt by many of the region’s poorest residents towards the authorities. It is clear that an important link exists between the high level of conflict in the south and the lack of sustained economic growth and poverty reduction in the region. Not Specializing in Competitive Sectors A second major factor inhibiting economic growth in the southern states is that their economies are not oriented toward sectors in which the south has a significant competitive advantage. The majority of economic activity in the south is generated by the service sector (60 to 75 percent of GDP), which is dominated by the public sector or government spending (30 to 50 percent of GDP). Having a local economy rely on government spending to this degree is relatively unproductive and may also be unsustainable, particularly in a time of budgetary constriction.

Much of the population of the southern states works in the agricultural sector, which yields little income and perpetuates high rural poverty rates. The poor condition of southern agriculture is a heavy weight holding down the south and limiting economic development. Nearly 40 percent of the working population (a majority of whom are indigenous people) is employed in the agricultural sector, yet it accounts for only 16 percent of the GDP of the southern states. Productivity levels are poor throughout the southern economies, but they are exceptionally low in agriculture. Crop yields are well below averages elsewhere in Mexico. Much of the agriculture in the south is small-scale subsistence production to ensure basic survival, with only a limited focus on crops produced for the market. Certain bright spots exist, for example, improved technology and marketing for traditional products as well as increased production of fruits, vegetables, spices, and organic coffee in certain areas of the south. However, these success stories are not generally representative of the agricultural sector in the southern states.

A number of factors have combined to leave agriculture in southern Mexico in a critical state. Lack of access (transportation, communication, and marketing infrastructure), as discussed above, plays a major role in hampering the ability to move produce to viable markets with reasonable cost and time. Information for producers on

21 It should be noted that while both drug production and rebel activity take place in rural regions of the south, there is no evidence that the two are linked in any way, unlike (for example) the experience of Colombia.

16

weather, commodity and input prices, and potential national and export markets is extremely limited. As well, because of the increasing shortage of land suitable for agriculture and the growing population, the size of the majority of these holdings is quite small, insufficient to guarantee a decent family income. This situation forces many small farmers to migrate temporarily or permanently or to look for other local income sources. The lack of alternative local income sources and the social costs and uncertainty associated with migration make many small producers cling to their small subsistence plots to try to improve food security. Subsistence agriculture constitutes a sort of safety net for many poor farmers. Add to these problems the poor soil quality, lack of irrigation capability, and limited ability to invest because of the poverty of most farmers and their lack of access to credit. All the above factors combine to generate low yields with limited marketing possibilities. One cash crop produced in the south with a significant export market is illegal narcotics, which offers short-term economic gain but in the long run only serves to perpetuate the poverty of the rural south, by entrenching a culture of criminality and violence. Despite the dangers, however, daily wages of US$10–12 a day offered to growers, compared with the prevailing daily wage of US$3–4 for legal agricultural labor, is an extraordinarily compelling temptation to poor farmers (campesinos) struggling to feed their families.22

In short, too many people are trying to make a living off the land in the southern states using low productivity techniques to produce crops with falling international prices on low-quality soil. Even if production and transportation costs were lower, traditional crops grown in the south that could potentially be exported, such as corn, coffee, sugar, beans, and cattle, are all facing falling international prices, which are unlikely to rebound significantly if at all. Certain commercial crops, such as tropical and temperate fruits, different types of peppers, organic coffee (already a major crop in Chiapas), and spices, have interesting potential for both the internal and export market. These sectors are already showing a certain dynamism, but they are only a small minority and lack large-scale, well-organized promotion programs. Forestry, based on the sustainable exploitation of wood and non-wood forest resources, has great potential to boost rural income in southern Mexico, particularly for indigenous people (who control large portions of forest as part of their communal land). However, low technology, weak government oversight, and poorly planned logging have imperilled the extensive forests of the south. Natural Resources: An Asset under Threat. The immensely rich natural resources of the southern states constitute one of their principal assets and should be viewed as a competitive advantage to be used sustainably to boost economic growth and reduce poverty. The southern states contain 25 percent of forests and jungles in the entire country and are the top three states in terms of biodiversity. Half of Mexico’s water runoff passes through the three states and is used to generate 57 percent of the country’s hydroelectric and 23 percent of total national power generation. The number of microclimates in the mountains, valleys, and coastlines of the southern states give the region one of the widest ranges of agricultural production possibilities in the country.

22 Narcotics Note.

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However, rural population growth, destructive farming practices, and deforestation place these natural resources under serious threat. Despite their extensive forests, the southern states rank second, third, and fourth among states with forest cover in need of restoration. In Guerrero, where deforestation is heaviest, some 34 percent of the state territory has been deforested. The Mexican government estimates that 92 percent of the soil is degraded in Guerrero, 83 percent in Oaxaca, and 76 percent in Chiapas.23 Some subregions, such as the poverty-stricken region of La Montaña in Guerrero, face extreme desertification. The legal situation of property rights (see above) is another major obstacle to putting land to its optimal use.

Considering the many magnificent natural, cultural, and archaeological assets in the southern states, tourism is clearly an area where the south can compete both nationally and internationally. Currently, the industry provides the southern states with US$4.5 billion annually and employs 245,000 people directly and indirectly. Tourism investment in southern Mexico, however, has been directed almost entirely at “mega” tourist projects, which have not lived up to income-generating expectations and have brought along major environmental difficulties. The underperformance of the southern tourism sector can be attributed to the lack of, or the incomplete implementation of, a coherent, integral plan taking into account environmental conditions, limited services infrastructure, and the involvement of local communities. Transportation infrastructure also plays a role. For example the development of Huatulco, Oaxaca, has fallen far short of original expectations, despite an unbeatable natural setting, because of difficulties getting to the resort. Value-added manufacturing. Value-added manufacturing forms only a small part of the southern economy: 5 percent of GDP in Chiapas and Guerrero and 13 percent in Oaxaca.24 Most manufacturing that does exist is for local consumption, such as tortillas, beverages, or printed material. Despite the existing tourist market, few linkages exist with local manufacturing, which represents an unexploited, high-paying market. A small number of maquila plants operate in Oaxaca and Guerrero, but their total volume is low when compared with other parts of Mexico. Some specialized industrial centers exist, linked to particular local conditions, such as Tuxtepec (sugar refining) and Salina Cruz (petrol refining), both in Oaxaca. On the whole, however, the southern states have not had much success in selling goods or services to the rest of the world. Most local manufacturing, with low human capital and technological requirements, adds little value and hence creates little wealth locally. Main Export of the Southern States: Its People. In the face of the declining agricultural economy in the south, a growing rural population, and the scarcity of manufacturing or services jobs, a significant number of people have left for other regions of Mexico or the United States, either as temporary migrant workers or permanent migrants. Guerrero has one of the highest net emigration flows in the country, and Oaxaca and Chiapas also

23 Natural Resources Note. 24 Urban Infrastructure Note.

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have sizable net outflows.25 Guerrero and Oaxaca send the highest number of jornaleros agrícolas, migrant workers who travel for several months a year to agricultural regions elsewhere in Mexico and in the United States before returning home. The great majority of jornaleros are indigenous people, meaning the social patterns of indigenous communities are changing. These migrants provide a much-needed source of income for some of the poorest regions of the south. Remittances from migrant workers in Guerrero and Oaxaca are estimated to reduce the share of the population in poverty by 2 percentage points—not a large number on the face of it, but roughly equal to the effectiveness of poverty-reduction programs such as Oportunidades. Temporary migration also is associated with a 20 to 25 percent increase in per capita income.26 Inefficient Government Activity Historical Neglect of the Southern States. It is impossible to understand the high level of poverty in the southern states without considering their development over history. For a variety of reasons too complex to be adequately analyzed here, during the colonial era and in the first century after independence from Spain the southern states developed economies based on plantation-style social arrangement. The economy was controlled by a small number of non-indigenous landowners, who owned most of the quality agricultural land and controlled entirely the apparatus of government. The great majority of the population, the indigenous people, either survived as subsistence farmers or worked as peons for non-indigenous landowners. Great wealth was created in the region, mainly through cattle and sheep ranching during colonial times and through coffee plantations and timber concessions after independence, but the majority of that wealth remained highly concentrated and was not reinvested in the south. Because of the remoteness of the region and the high concentration of indigenous population, this exploitive relationship lasted much longer in the southern states than in many other parts of Mexico.=

The economy of the south was not considered a strategic region by the federal government during the boom years of investment and economic growth (roughly 1945–1970) of heavy public investment to spur economic growth. The centralized government-led growth model directed almost all investment resources for industry and agriculture to the central and northern regions of Mexico. Southern Mexico was left basically as a subsistence agricultural economy, maintained partially via agricultural assistance programs. The consequence of this development strategy was that the northern and central states developed industrial capacity while the southern states remained dependent on primary commodity production.

In the 1970s, the boom in global petroleum prices coupled with the discovery of significant hydrocarbon reserves in the south and southeast of Mexico led the federal government to view the resources of the south as key for national development. Based

25 Chiapas has a lower net outflow than the other two states because it also attracts migrant labor from Guatemala and other parts of southern Mexico, particularly to its coffee plantations. 26 Migration Note.

19

on the potential wealth derived from oil and gas, the federal government took out large loans to fund petroleum exploration in the south and the construction of hydroelectric plants in the region.27 Much of the money generated by this energy boom was controlled by the federal government and used to create myriad new government programs and public companies throughout the country, once again exploiting the resources of the south in a sort of federal colonialism. When oil prices crashed and Mexico entered a period of recurring financial crises, the center and north part of Mexico remained in possession of the resources transferred from the south and continued to have access to government-controlled, low-priced energy and raw materials produced in the south.

The agricultural economy of the south, already lagging far behind other regions of Mexico in terms of investment, modern techniques, and productivity, was further threatened with the dropping of trade barriers and the reduction of assistance programs in the early 1990s. The federal government has since provided some additional help to southern farmers, notably through the Program for Direct Assistance in Agriculture (Programa de Apoyos Directos al Campo—PROCAMPO), Alliance for the Countryside (Alianza para el Campo), Assistance and Services for the Commercialization of Livestock (Apoyos y Servicios a la Comercialización Agropecuaria—ASERCA), and the National Program of Agricultural Workers (Programa Nacional con Journaleros Agrícolas—PRONJAG). However, these programs have been insufficient to alleviate the extreme poverty afflicting the rural south and have not adequately promoted the modernization of traditional production or encouraged new crops with good competitive possibilities. Nor have these programs stimulated adding value locally in the productive chain or the diversification of economic activity in rural areas.

In short, the southern states have historically been viewed by federal authorities principally as a source of low-priced raw materials, energy, and labor. Whenever investments were made in the south, they were mainly aimed at extractive industries whose benefit was felt more in the rest of the country than in the south itself. What the south has historically lacked, and continues to lack, is any concerted effort on the part of the federal government to invest in the south’s own productive capacity beyond extraction of raw materials. But while it is tempting to simply blame southern poverty on a history of neglect, there are clearly many areas in which state government operations, and the workings of federal programs that do exist in the south, are inefficient. This situation should be cause for optimism: history cannot be changed, but the shortcomings of governance in the southern states can be improved. Inadequate Education Services. Investing in human development through education is perhaps the single most important way a government can help improve the lot of its people, and, in this area, the southern states fare poorly. The southern states have one of the lowest rates of educational attainment and worker training in the country. While an average student stays in school 9.7 years in the Federal District, 8.1 years in northern Mexico, and 7.5 years in central Mexico, in the southern states students stay in school

27 As outlined by Jonathan Heath, in his book Mexico and the Sexenio Curse (CSIS Press 1999: Washington D.C., p. 22), the level of external debt grew by an average of 30 percent in each year between 1973 and 1981.

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only 6.0 years on average. Dropout rates in primary school are twice the national average, and enrolment rates are 5 to 10 percentage points below the national average. Education quality, as measured by either internal efficiency indicators or standardized test results, is markedly worse in the south than in the rest of the country.28

The indigenous people of the south are particularly disadvantaged by inadequate education systems. An indigenous person in the southern region stays in school only 2.2 years on average, compared with the region-wide average of 6.0 years. This difference results in part because of the remote and dispersed locations where many indigenous people live, which makes providing education services more difficult, and in part because indigenous education programs do not have sufficient trained teachers or appropriate bilingual and intercultural education components. As well, spending priorities work strongly against indigenous education. By way of contrast, the Centers for Early Childhood Development (Centros de Desarrollo Infantil- CENDIS), a service offered to public sector employees, has a unitary cost of about US$2,100 per student/year and higher education for teacher training costs US$2,200 per student/year, while indigenous schooling receives only US$8 per student/year.

The shortcomings of the education systems in the southern states result in a labor pool of poorly trained, unskilled workers. Some 64 percent of workers are unskilled in the south compared with 52 percent in the rest of the country. The adult literacy rate is approximately 13 percent lower on average than in other Mexican states (88.7 percent in Mexico versus 72.8 percent, 75.2 percent, and 75.4 percent in the southern states, respectively). Nor is the private sector making up for the weaknesses of the government education system: only 41 percent of southern businesses have training programs compared with 70 percent of businesses elsewhere in Mexico. Federal Policies on Pricing, Subsidies, and Resource Distribution. In several cases, federal pricing policies, subsidies, and patterns of resource distribution have functioned as measures that have subsidized other regions at the expense of the south. For example, the south, with 45 percent of the rural population and 23 percent of agriculture and livestock, receives only 9 percent of federal agricultural subsidies. As well, four states in the center and the north capture 52 percent of subsidies for electrical tariffs (for agricultural irrigation), while the three southern states receive only 4 percent. Nor have federally mandated uniform prices for petroleum products throughout the country reflected the fact that the south produces and refines large quantities of oil and gas, and hence should pay lower prices for those products.29

Policies on transferring funds from the federal government to states and municipalities also are sometimes problematic for the southern states. All states receive a high percentage of their spending resources from a complex system of central collection of tax revenue and subsequent transfer of resources from the federal to sub-

28 Education Note. 29 Federalism Note.

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national governments,30 but the southern states have a particularly high dependence on federal transfers (94 percent of total public spending) because of their low level of economic activity and own revenue. The formulas used for redistributing federal resources are at times prejudicial to the south. For example, the allocation formula for Ramo 33 (social spending) does not take into account geographic factors, as the southern state governments contend they should, because of the increased cost of providing services in remote regions with dispersed populations. Inefficient Use of State and Federal Government Resources. The southern states may be short-changed in certain areas by the federal resource distribution system, but evidence indicates that the resources that are dedicated to the south are not always well spent. While this is a problem in many states, statistical analysis indicates that the southern states have worse-than-average problems in certain areas.31 This, in turn, suggests that savings and improved results are possible through more efficient administration of public spending, on both state and federal levels.

A major problem in the south and, indeed, in many parts of Mexico, is inefficiencies and overlaps caused by partial decentralization of some formerly federal services to states and municipalities. While authority for managing healthcare and education services have technically been devolved to local governments, along with corresponding resource transfers, local authorities in practice have only limited decision-making ability. Rigid stipulations attached to federal funds effectively prevent local governments from generating savings and finding more efficient uses for resources according to the particularities of their states or municipalities. For example, under the healthcare decentralization reforms, the federal healthcare union was left with a powerful influence over policies for hiring and firing workers and creating or eliminating positions. This prevents the state governments from undertaking significant reforms in the sector to improve efficiency. As well, the decentralizations have left overlapping services, such as the parallel education systems currently existing in Chiapas—a clear waste of resources, all the worse considering the extremely poor results for education in that state.

State government policies also are a major source of inefficiency in the south. Procurement policy is one example. All three of the southern states have policies that favor local businesses in purchasing goods or services, even if a higher price is charged or quality is not as good. Chiapas took steps to correct this problem when, in 2003, it passed a new law stipulating that local businesses would be given contracts when there exists a maximum 10 percent difference between local and external prices. Other programs absorb a large portion of state spending and do not offer coverage to those most in need. Of major importance in this category are the state worker pension

30 This system is currently in a process of change under a decentralization drive initiated by the Zedillo administration and continued under the Fox administration, but the federal government will likely control a majority of resources spent by states and municipalities for years to come. 31 The Millenium Development Goals and the Rural Infrastructure Notes indicate that specific areas of inefficiency markedly worse than in other states include infant and child healthcare in Guerrero, education programs in Chiapas, and the provision of social infrastructure in all three states.

22

systems. . In Chiapas, for example, the state government spent 40 percent of state tax revenue in 2001 to finance programs for the state social security system, ISSTECH32 (pensions, medical insurance, and loans), for about 14,000 people, or only 0.5 percent of the population, and most of them urban and non-poor.33 In agreement with an independent actuarial study, the annual pension payments in Chiapas will rise from 8 percent of salaries in 2000 (114 million pesos) to 36% in 2030.34 Housing funds also are strongly biased in favor of urban areas, again benefiting the sector of the population that least needs assistance.35

As well, some state social service providers are notoriously wasteful with their resources and are in need of reform. For example, the housing agency (Instituto de la Vivienda) of Oaxaca spends fully 75 percent of its budget on salaries and other administrative costs, leaving only 25 percent to fund low-income housing. DIF Guerrero, managed at the state level with federal funds, is meant to be social assistance to the poor; however, the program is currently involved in everything from food distribution and medical services to buying Mother’s Day presents and running the state zoo. Operating these multiple programs with unclear and diverse mandates reduces efficiency by requiring a large staff, thus incurring relatively high administrative costs while spreading staff thinly over a wide range of interventions, and facilitates the distribution of benefits along political lines, not always according to the most efficient and transparent criteria for poverty reduction.

Nor are municipal governments exempt from these inefficiencies. One telling example is the supply of drinking water, which is managed by municipal-controlled utilities. For every 1,000 liters extracted from a source, only about 400 liters generate any resources for southern utilities. This is because of extremely high water losses and low commercial efficiency (only 55 percent of bills issued are collected).36 In addition, average tariffs are very low, about half of what they are in the more efficient northern towns.37 As a result, average collection per cubic meter is about a quarter of what it is in northern cities, where utilities are tending toward financial self-sufficiency, and about half the national average. Lack of Trust in Political and Legal Institutions. National and international nongovernmental human rights organizations report continued and frequent arbitrary detentions by state police, particularly of opposition leaders and activists. The freeing by order of President Fox of Teodoro Cabrera and Rodolfo Montiel, two environmental

32 Institute of Social Security of the State of Chiapas (Instituto de Seguro Social para los Trabajadores del Estado de Chiapas) 33 The total payments for the ISSTECH system were 759 million pesos in 2001 (65% of the state contributions). Of this, 482 million pesos (40% of contributions) were directly financed by the state (employer contributions, in this case, the state, and a direct subsidy to ISSTECH). The rest is financed by employee contributions, interest, and other ISSTECH financial products. 34 Cigma, Consultoria Actuarial. 2000. “Instituto de Seguridad Social de los Trabajadores del Estado de Chiapas: Informe de los estudios actuariales”. Tuxtla Gutiérrez. 35 Social Protection Note. 36 Rural Infrastructure Note. 37 This is principally because southern municipalities do not charge enough to cover costs, although it is also in part because of higher prices for water in the more arid north.

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activists from Guerrero accused of involvement in the drug trade, is a notable case, but others exist as well. Local and international human rights groups frequently report evidence of physical torture in the southern states, either by the Army or the state Judicial Police. In the south, as in other parts of Mexico, serious problems of judicial independence exist, according to a 2001 report by the United Nations.38 Poor people involved in the justice system face the additional obstacle of being unable to afford the fees for many judicial proceedings (for example, a court injunction in Oaxaca costs US$3,000) or to hire qualified lawyers, frequently having to accept public defenders who are not well trained and invariably face huge workloads. Furthermore, indigenous people are often not provided with qualified interpreters if they do not speak Spanish.

The response of the Mexican federal government to rural guerrilla activity and illicit drug production, mentioned above, in southern Mexico has been largely with the use of law enforcement. However, the application of law enforcement in the south to combat guerrillas and drug producers has, according to the Organization of American States, at times crossed the line into repressing legitimate social organizations and violating human rights, especially in rural, indigenous areas.39

The indigenous people, who form 38 percent of the population of the south and by far the poorest sector of the states, are deeply affected by this conflict. Much of the violence plaguing the south takes place in rural, indigenous regions. Indigenous communities have been vocal in demanding special legislation giving them more control over managing their own resources, assets (particularly land and natural resources), and political and justice systems. The constitutional reform of 2001 went part way toward satisfying these demands, but key elements of the reform were modified, such that many indigenous organizations, and in fact the congresses of all three southern states, have opposed the final reform.

38 Justice Note. 39 See Comisíon Interamericano de Derechos Humanos. 1998. “Report on the Situation of Human Rights in Mexico.” OEA/Ser.L/V/II.100. Similar reports can be found by the United Nations, Amnesty International, and Human Rights Watch Mexico.

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III. Policy Options for More Successful Poverty Reduction in Mexico’s South The above outline of the geographic, historic, and social obstacles facing the southern states implies that there is no simple solution, no magic bullet to put to rest the poverty plaguing the region. A few simple policy interventions cannot be expected to immediately reverse trends that have been developing for centuries. Nevertheless, the extremely positive political and economic opening of Mexico in recent years has brought the southern states, and the country as a whole, to a unique juncture, one that offers the opportunity to put the south on a new path toward job creation, growth, and—most important—sustainable poverty reduction.

The aim of this section is to provide suggestions for key areas in which federal and state policies can be improved so as to better achieve measurable results on poverty reduction in the southern states. Many of the following recommendations require political will as much, if not more, than extra resources. Even if a national agreement is reached on the need to transfer more resources to the south, these resources will not arrive overnight, but will be the result of ongoing national renegotiation over the medium term. This fact should not be a rationale for inaction in the short term by federal, state, and municipal governments. In some cases, immediate action to improve poverty reduction outcomes can be taken in a variety of areas at relatively little or no cost.

The array of policy issues pertaining to the poverty gap of the south can be organized under four major themes:

1. Focus on what can be done immediately: improve the efficiency with which federal and state resources currently allocated for poverty reduction in the south are used. In a number of different areas, resources are used inefficiently in the southern states, and implementing changes in how federal resources are distributed and how state governments use those resources has the potential to provide immediate improvements in poverty reduction in the south.

2. While efficiency improvements can have a significant impact, it is evident that

the poverty gap between the south and the rest of the country will not be closed without an increase in federal resources to the southern states. A massive immediate increase in federal transfers to the south is neither recommended nor realistic; instead, a selective boost in federal resources should be directed at certain key bottlenecks to poverty reduction and economic growth in the south, preconditioned on improved efficiency indicators by state and municipal governments. As well, certain aspects of federal subsidies that work against the south could be modified to the benefit of the southern states.

3. Poverty reduction is not just a matter of garnering and efficiently spending

resources, but in fostering higher levels of economic activity in the south itself, that is, generating its own resources. A major goal of public policy in the southern states should thus focus on how to best capitalize on the comparative advantages of the south to stimulate faster economic growth in the region.

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4. Gains in efficiency, resources, and growth do not automatically guarantee

comprehensive (across-the-board) poverty reduction. Pervasive social exclusion (particularly against indigenous people, who are disproportionately poor) and political conflict are principal obstacles to poverty reduction and should be addressed directly such that the vast inequities plaguing the region are not reproduced.

Focus First on Improved Poverty Reduction through Increased Efficiency The great majority—some 94 percent—of public state spending is directly controlled by the federal government, much of it through block transfers. Thus, federal transfer policies have an overwhelming impact on state spending. However, the rigid restrictions placed on spending federal resource transfers leave the state governments with a limited ability to undertake reforms to improve efficiency and quality in service delivery. Examples include education services (discussed in more detail below), healthcare, housing, and infrastructure spending. At the same time, these rigidities are often compounded by sub-optimal state management of resources. For example, about 75 percent of the resources of the state housing agency (Instituto de la Vivienda) in Oaxaca goes to salaries and administrative overhead, rather than to building houses for the poor. Another example is the state family assistance program (DIF) in Guerrero, which spreads its resources thin by undertaking multiple programs. Each of the states currently runs costly and heavily subsidized public employee pension programs. In the most representative case, in Chiapas, the social security program absorbs about 40 percent of state revenues each year to finance heavily subsidized benefits to state employees, who represent less than 0.5 percent of the population and most of whom are non-poor. This pension system, medical insurance, and subsidized loans, like others in the region, provides benefits to a limited sector of the population and has a finance structure that demands a growing and unsustainable share of public resources. The laws that regulate these social security systems, and other benefits offered to state employees, should be revised to ensure greater financial sustainability. This requires changes to state pension laws that determine the benefit structures and the number of years of service, as well as those pertaining to participant contributions. It is a difficult challenge, that many other states and nations in the region are also facing (for example, Brazil), but it is a necessary step, as much for ensuring financially stability of social security systems as for targeting more resources to poverty reduction. Procurement policies in all three southern states, which favor in-state businesses in purchasing goods and services, frequently leading to higher costs and lower quality, should be modified.

While efficiency improvements can be made in many areas of federal and state government policy, research shows that two areas stand out for their levels of inefficiency , compared with both national and international averages: education and social infrastructure. As these two areas are both crucial to increase human development and decrease poverty in the south, they should be priorities for reform.

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Efficiency Gains in Education. The importance of improving education results in southern Mexico cannot be overemphasized. Considering the extraordinarily low results on education discussed in the diagnosis, and the lack of well-trained and educated workers, better education is key to improving the employment prospects of southern workers, whether they choose to farm, go to a local city in search of a job, or migrate to another state or outside the country. Of particular importance for the rural poor is providing education in skills that are portable (of high, nationally competitive quality) such that today’s rural children have in the future options for different economic activity either in or outside of the rural south.

While increasing the education budgets of the southern states would be laudable, more important is to look for improvements through a more efficient use of existing resources. The top priority should be to find ways to give state governments the necessary control over the education system to undertake pro-poor reforms. Teaching posts and salaries are currently negotiated principally between the national teacher’s union and federal education authorities, with little influence by the states. Excessive union influence also reduces the need for teachers to be held accountable for education outcomes, or even for their own attendance. Policies on hiring all graduates from teacher training schools, regardless of demand, also are wasteful, and the system of teacher postings heavily favors urban areas over rural regions. As well, the 1992 education decentralization left wasteful redundancies caused by the existence of dual state–federal systems, particularly in Chiapas and Guerrero, which should be eliminated. Further gains in education attainment can be found by adjusting federal spending priorities, which currently heavily favor urban, non-poor adult and secondary students at the expense of primary education for the rural poor, particularly indigenous people. As an example, higher education for teacher training is more than US$2,200 per year, while the unitary cost per year for indigenous initial education is only about US$8. Efficiency Gains in Social Infrastructure. Despite benefiting disproportionately in recent years from federal resources for basic social infrastructure services, this analysis indicates that the southern states do not use these resources efficiently. For example, the south currently spends US$2,000 on average per household on providing new electrical service, well above international best practice or benchmark cost structures (US$800 to $1,000 per household). Similarly, costs for service provision in water and sanitation are twice as high as best practice. How can service provision in the south be improved such that unit costs are lowered? First, municipal efforts should be complemented with technical assistance at the state level, particularly for electrification. Second, improving expenditure efficiency requires changes in the national level sector organization and regulations, for example, privatization of Telecom’s rural telephone services, along with creating a universal service fund subsidizing phone services for the most poor. Nevertheless, significant progress could be achieved through local reforms. In particular, the water and sanitation, electricity, and transport sectors would benefit greatly from sector plans with specific coverage goals, alternative technologies, and costing benchmark or cost-benefit standards. In urban areas, de-linking the provision of services for irregular settlements from regularization of land tenure would greatly streamline urban service provision, particularly to the poor.

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The potential for efficiency gains in infrastructure provision are enormous. Though the absolute needs of the south are large and immediate—more than half a million rural households without piped water, nearly 1 million households without sanitary drainage, and a quarter of a million without electricity—in many instances the south may have enough in terms of resources to attain universal coverage in five years if efficiency in provision is improved.40 Using international best practice cost estimates (as seen through World Bank projects around the world) for water, sanitation, and electricity, the cost of providing universal access to these three services in the south would be about US$ 1.2 billion (see Table 4).41 Even if only half of current transfers from the Federal Transfer Fund for Social Infrastructure (Fondo de Aportaciones para la Infraestructura Social—FAIS) to the three southern states (US$504 million in 2001) were used for provision of these three services (leaving the other half for transport and other social infrastructure) it would suffice to provide universal coverage in the region in water, sanitation, and electricity in less than five years. Table 4. The South Can Attain Universal Infrastructure Coverage in Water, Sanitation, and Electricity in About Five Years at International Best Practice Costs Households without Service, and Costs to Provide Coverage for: Piped Water Sanitary

Drainage Electricity Total Cost

Rural households without service

531,409

824,976

247,208

Unit cost of service provision ($US)

$350

$350

$1,200

Total cost for rural universal access

$186 million

$289 million

$297 million

$771 million

Urban households without service

157,658

221,905

40,937

Unit cost of service provision

$540

$1,125

$500

Total cost for urban universal access

$85 million

$250 million

$20 million

$355 million

Total cost for universal access

$271 million

$538 million

$317 million

$1,126 million

Source: Rural and Urban Infrastructure Notes.

40 In addition to monetary resources, in some cases the south actually also is naturally endowed with the resources needed; 80 percent of the country’s water resources originate in the south, yet only half of the households in the south have daily water service as opposed to about three quarters nationally. 41 Unit cost estimates for electricity (US$1,200) are relatively high because if connection to the grid is not feasible, the above cost structure assumes some degree of service will be provided via an off-grid solution, such as solar systems, and so forth. For sanitation, the number of households still needing access may be somewhat overestimated, because households in rural areas may have alternative systems that are satisfactory in a low-density setting. Data on the number of households without access are from the INEGI 2000 Census.

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Increasing Resource Allocations for Poverty Reduction in the Southern States The south currently receives a net positive income transfer from the federation (national tax income from the federation to the south exceeds southern tax proceeds collected by the federation), although in per capita terms the three states receive about the national average of all states (roughly 3,500 pesos per capita). This slight redistribution of federal resources in favor of the south is appropriate, considering the size of the gaps between the south and the rest of the country in social indicators and key inputs to income growth, and considering that one of the principal roles of the federal transfer system is precisely to rectify such national imbalances. However, this limited fiscal support has been and will continue to be insufficient to overcome the deep-seated development lag faced by the southern states. While much improvement can be made through a more efficient use of existing resources, if the goal is significant and sustained poverty reduction in the south, further federal resources will be required. This is especially true given the low income levels of the south that yield a low tax base, such that the states have relatively low potential to use their own resources to achieve better poverty-reduction outcomes (state spending currently represents about 6 percent of all spending in the south; the rest comprises federal transfers). As well, because of the difficult geography and highly dispersed population in the south, the provision of government services in the south costs more money than in many places in Mexico, a fact that is not, but should be, taken into account in the formulas governing federal resource transfers.

Harnessing additional resources at the federal level is not out of the question. While federal social spending has increased by roughly 55 percent since the early 1990s, Mexico still falls behind countries such as Brazil, Chile, and Uruguay in terms of the share of spending allocated to the social sectors, and fiscal pressure (expenditures as a share of gross national product [GNP]) is relatively low (see Table 5). There is scope in Mexico for increasing federal resources (via tax policy) available for more aggressive social policy. Mexico’s level of spending in the social sectors remains relatively low given its level of economic development. Table 5. Mexico’s Level of Social Spending Remains Relatively Low Given Its Level of Economic Development, and There Is Fiscal Room for Higher Spending Levels Fiscal Pressure: Expenditures as Share of GNP

Fiscal Priorities: Share of Public Spending Going to Social Sectors (numbers in

parentheses = share of social spending in GNP) Less than 40% 40% to 60% Over 60%

More than 30% Nicaragua (13%) Colombia (15%)

Costa Rica (17%) Argentina (20%) Brazil (21%) Uruguay (23%)

20% to 30% Honduras (7%) Bolivia (16%) Chile (16%) Less than 20% El Salvador (4%)

Dominican Rep. (7%) Peru (7%)

Guatemala (6%) Paraguay (7%) Mexico (9%)

Source: Economic Commission for Latin America and the Caribbean (Comisión Económica para América Latina y el Caribe—CEPAL) 2001, as cited in Wodon and others 2002 (Poverty Note).

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However, simply allocating more resources to relatively inefficient sectors is not recommended because it does not provide incentives to force these sectors to reform themselves and become more efficient service providers. Any additional resources provided to the southern states from the federal government should be explicitly and directly linked to efficiency improvements in the areas where the resources are sent.

A related issue is federal subsidies, which evidence suggests have been, and in some cases continue to be, measures that subsidize other regions at the expense of the south. For example, the south, with 45 percent of the rural population and 23 percent of agriculture and livestock, receives only 9 percent of federal agricultural subsidies. As well, four states in the center and the north capture 52 percent of subsidies for electrical tariffs (for agricultural irrigation), while the three southern states receive only 4 percent. Amounts spent on these subsidies are not negligible, such that eliminating regional biases within them would free up sizable amounts of resources for the south.42 Federal pricing policies, particularly nationally uniform oil and gas prices, should be modified to reflect the fact that the south produces and refines large quantities of oil and gas, and hence should pay lower prices for these products.

The low level of state debt, and current tendency to run fiscal surpluses, presents another opportunity for increasing both the resources available for poverty reduction activities in the south, and for moving away from the states’ current position of almost complete fiscal dependence on the federal government. Federally funded and designed programs sometimes lack appropriate state-specific designs, particularly for effective poverty reduction given the specific needs of the south.43 The states’ strong fiscal positions create the opportunity for them to leverage additional funds for supplementary poverty-reduction activities and to design the rules governing their use. However, it is essential that the fiscal space for borrowing not be exploited until clearly identifying how borrowed funds can be invested so that they can both be repaid and generate income returns for the south. Also, it is necessary that the southern states act with prudence and not become too indebted, in order to ensure long-term fiscal sustainability.

Where and how any additional resources (federal or state) for the southern states should be spent to best reduce poverty and improve economic activity is a difficult question, which can be answered only by an open debate among federal and state governments according to the development priorities of all and according to how many resources are available. Certain key areas, however, should be considered priorities to

42 For example, the above-mentioned electrical subsidies cost 4.6 billion pesos per year, more than double the amount spent on the largest rural development program: Alianza para el Campo. Cited in: Dávila, Enrique, Georgina Kessel, and Santiago Levy. 2000. “El Sur también existe: un ensayo sobre el desarrollo regional de México.” Mexican Ministry of Finance, Mexico City. Processed. 43 For example, the rules governing the federal housing program allocate funds for disaster relief according to an annual calendar that doesn’t coincide with the south’s climactic conditions (funds must be spent by a certain date or returned), such that program managers must either bend the rules or return the funds. Federal counterpart funding requirements from beneficiary households, while set at an acceptable level nationally, implicitly exclude the poorest in the south, who cannot afford the payment.

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receive increased or new resources. These areas are detailed in the following two sections of recommendations. Stimulating Economic Growth in the South Reduce Major Bottlenecks to Doing Business in the South: Transportation, Finance, and Land. The lack of adequate transportation links between the southern states and the rest of the country, as well as with the outside world, is clearly a major hindrance to developing any significant export-oriented agriculture or manufacturing in the south. Poor transportation also works against the high-potential local tourism industry. As resources for infrastructure are limited, it is important to focus on just a few key transport links that could have a strong impact. A priority should be improving or building key highway linkages with the rest of Mexico, for example Oaxaca City-Huatulco, Toluca-Ciudad Altamirano-Zihuatanejo, and Ocozocuautla-Las Choapas in Chiapas. Funds should continue to be dedicated to expanding and improving the rural road network in the southern states, to decrease the time and cost required for the region’s poorest residents to access outside markets and services. Freight transport services in southern Mexico are extremely inefficient and expensive compared with the rest of the country, and a significant reduction in business costs would be possible if the sector could be improved. The partial deregulation of the sector should be continued, allowing more competition in a sector currently dominated by a few powerful companies that offer high prices and poor service.

The weak and expensive market for financial services in southern Mexico is a significant bottleneck for economic growth. Major subsidies to promote the expansion of the banking system are not recommended, as such an expansion must be demand-driven if it is to be viable. State governments can help spur increased credit availability by encouraging Banca Popular institutions (through, for example, limited subsidies for property leases) such that the number of branches are extended. Facilitating and lowering the high cost of migrant remittances, which are an extremely important part of the southern economy, via increased competition in the remittance market or government incentives to remittance service providers, would allow for an even larger poverty-reduction impact.

Eliminating the legal backlog of land conflicts is a priority to release the potential of one of the most important resources in the south, its land. Uncertainty over land holding, duplicate and triplicate titles to the same land, and disputes over boundaries create disincentives for investment, productive activity, and risk taking in new, potentially vibrant environmentally sustainable activities on the land, further depressing output in an already lagging sector. As well, land disputes are a major cause of conflict—sometimes violent conflict—in the southern states. Recommendations are threefold: (a) facilitate land conversion by simplifying the rules and procedures that govern the process; (b) legally recognize existing informal agreements; and (c) take a much more active role in mediating disputes over land boundaries and ownership.

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Boosting Income Generation in the Southern States. The fact that nearly half of the population continues to work in the large and uncompetitive agricultural sector of the south is perhaps the single most important factor underpinning the south’s slow progress in poverty reduction relative to the rest of the country. In the long run, it is evident that fewer people can generate above-poverty earnings in an environmentally sustainable fashion than are currently attempting to do so through agriculture and cattle ranching.44 State and federal government should concentrate on promoting job-creating businesses in both rural and urban areas to allow people to leave the agricultural sector. The government also should seek to develop more efficient and profitable farming practices and products to improve the incomes of those who choose to remain farmers. IMPROVING THE AGRICULTURAL SECTOR. What can be done to help rural areas? As a start, rural subsidies should be reoriented to (a) provide incentives for the conversion to new, more profitable technologies and crops; (b) promote the use of environmentally friendly agricultural techniques; (c) help develop marketing and food processing; and (d) stimulate the entire productive chain, not merely commodity production. The reorientation of subsidies should aim to consolidate the many existing rural support programs. A great variety of programs exist, managed by different institutions, which often overlap. Further policy options include the removal of any government incentives for unsustainable economic activities, such as cattle ranching in regions ill-suited for this purpose.

State and local governments can play an active role in rural development in a number of ways, for example, by helping producer organizations undertake market feasibility studies to identify potential markets—local, national, and international—and possible alternative products such as niche fruits and vegetables, non-genetically modified corn, and organic coffee, among other possibilities. The government of Chiapas recently launched this type of program to help local campesinos. A prime target market, in particular for the state of Guerrero, should be local tourist centers such as Acapulco and Ixtapa, which currently receive much of their produce from Mexico City. Also, international markets for specialized products should be found. For example, the government of Guerrero promotes the export of mescal to Europe and Asia. The Rural Sustainable Development Councils, created by the new Rural Sustainable Development Law, can play a key role in bringing together large and small producers and different levels of government to design a strategy to develop rural spaces in the southern states. Information dissemination programs, for example with state-sponsored radio programs, can supply input and product prices and weather information badly needed by southern farmers if they are to successfully access markets. Assistance and training with quality and export certification processes, as well as with organic certification, can help make local farmers viable competitors on international markets. In choosing locations in which to focus rural development projects, particular attention should be paid to regions of illegal drug production, most especially in Guerrero, but also in

44 As a comparison, countries that have brought poverty to low levels support less than 3 percent of their population in rural areas, and then only with heavy subsidies to agricultural activity.

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Oaxaca and Chiapas. Alternatives should be offered to the poor farmers tempted into illegal cultivation for lack of economic options. SUPPORT ECONOMIC DIVERSIFICATION IN RURAL AREAS. Equally important to increasing productivity and income in the agricultural sector is to create and expand alternative ways to generate income in the rural south, to offer job possibilities to those who cannot make a decent living farming, but who do not want to migrate elsewhere in search of work. A key first step to understanding the best ways to create jobs in the rural sector is to undertake a comprehensive land-use assessment to determine optimal, ecologically sustainable land use patterns for the different regions of the south, a process already started by the government of Chiapas. The natural resources of the southern states are one of the region’s principal assets but, as noted above, they are currently neither valued nor protected to the degree that they should be.

Considering the extensive, though gravely threatened, forests in the southern states, sustainable forestry projects have great potential. Community forestry projects, such as ones in Oaxaca and Guerrero implemented with the assistance of the World Bank and similar projects in Chiapas, point the way to achieving sustainable forestry that benefits an entire community, thus providing improved incomes, helping preserve natural resources, and encouraging community action. The great majority of these forests are the property of poor rural communities, many of them indigenous. The development of the forests will thus directly help reduce poverty and improve the living conditions of the indigenous population. At the same time, by giving local communities a stake in the surrounding natural areas, local residents will have a much greater incentive to protect the forests, which can help slow the indiscriminate burning and logging currently plaguing the south.

Income generation from forests does not necessarily imply cutting down trees. Other forestry-based income sources could include marketing non-wood forest products such as resins, medicinal plants, mineral waters, mushrooms, and honey, as well as the development of value-added activity for extracted wood from forestry, such as promoting craft production. The southern states also might more aggressively seek financing for sustainable resource management via carbon trading markets, in which polluters in industrial countries pay to offset their institutional greenhouse gas emissions via financial transfers to support ecologically beneficial activities elsewhere. One example of such a program, the Scolel Té (planting trees) project in Chiapas, uses carbon finance dollars to pay local farmers to plant trees, increasing tree cover and soil carbon and generating alternative sources of income.

Other ways to value the potential of territorial assets and increase income generation in rural areas include developing historical, cultural, natural landscape, environmental, artistic, musical, and gastronomic assets. Examples include exploiting mineral resources (rock quarries, salts), rivers, lakes, and dams for fishing and aquatic sports; culinary or musical festivals to promote, for example, the traditional music of the Mixe indigenous group; or the organization of specialized tourist “routes,” such as the “route of the butterflies,” the “route of textile art,” or other possible routes with historic, archaeological, cultural, or environmental significance. European countries, rich in

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cultural and tradition as is the south of Mexico, have been able to take advantage of the commercial opportunities that these territorial-based assets offer, converting them into sources of income for the local population. Experience shows that, apart from generating income and jobs, the valuing of these assets contributes to maintaining and promoting cultural diversity and strengthens the identification of the people with their historical roots and their land. TOURISM. One sector with great potential for growth and further job creation is the local tourism industry, which remains relatively underdeveloped despite the region’s natural beauty and world-renowned cultural heritage.45 Existing tourist projects, principally large-scale projects such as Huatulco, modeled after Cancún, are not performing as well as hoped, and are bringing with them environmental problems. However, as the cracks in the Cancún model appear, both in terms of ecological sustainability and social impact, the slow growth of Huatulco may be a blessing in disguise.46 The south may in fact be poised at a moment of opportunity to avert the costly lessons being painfully learned elsewhere in Mexico, and instead generate a southern-style approach to tourism that is at once more ecologically sustainable and secures greater positive social impact, via incomes (jobs) but also community-level development and protection of natural and cultural resources.

Eco-tourism, the fastest growing segment of the international tourism market, has particular promise for Mexico, given its proximity to the United States, and specifically for the south given its endowments of natural resources.47 Costa Rica, where tourism is the most dynamic sector of the economy and is increasingly fueled by eco-tourism, provides an interesting model upon which to draw.48 In addition to the preeminent importance of education and infrastructure mentioned elsewhere in this report, specific policies for facilitating the growth of a dynamic tourism sector include creating state or regional statistical services regarding the tourism market, for easy access by investors; focusing public resources on developing differentiated tourism products; capitalizing on the variety of specialized geographic and cultural assets of the

45 In 2000, the share of GDP arising from hotels, restaurants, and related commercial activities averaged 21 percent for the nation as a whole, but only 12 percent in Chiapas and 16 percent in Oaxaca. Only Guerrero exceeded the national average, at 31 percent, largely because of Acapulco, but even with this attraction was overshadowed by Quintana Roo, where more than 50 percent of state GDP stems from tourism (Tourism Note). 46 After 30 years of development, only 35 percent of the population in Cancun has access to sewerage systems, and serious ecological damage has resulted from contaminated raw sewerage entering the fragile coastal ecosystems, damaging the very natural beauty that underpins the region’s tourist attractions (Freidland, J. 1999. “El Caribe Mexicano se Ahoga en su Exito.” Tourism Note). 47 In the United States, the country from which the majority of visitors to Mexico originate, 55 million people who traveled at least once in the past three years were considered eco-tourists (Travel Industry Association of America, Tourism Note). 48 Tourism in Costa Rica generated $US9 billion in earnings and 307,000 jobs (17 percent of the economically active population) in 2000. The tourism sector is projected to grow by 4.4 percent per year through this decade in Costa Rica, compared with 1.2 percent in Mexico. Costa Rica pioneered the concept of ecotourism in the mid-1980s as a measure to combat deforestation and at the same time foster economic growth. (“Costa Rica Eco-Tourism,” Trade Environment Database Projects, American University, http://www.american.edu/TED/COSTTOUR.HTM, April 1996).

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south; and reducing the focus on high-density projects such as massive beach developments. Furthermore, a careful analysis of the visitor capacity of major tourist attractions should be conducted, and zoning laws requiring commensurate investment in public services and infrastructure should be implemented. Finally, highlighting the role of local communities in developing and managing tourist sites (particularly the indigenous at cultural heritage sites) is critical, as is offering training programs for service providers, an internationally recognized key component to successful tourism ventures. VALUE-ADDED MANUFACTURING. Government agencies, particularly at the state level, can also play a more active role in promoting value-added manufacturing, given the competitive advantage of low wages prevailing in the south. The small maquiladora industry is an example of this potential, but development of this sector is heavily constrained by inadequate infrastructure. The states can, however, play an active role in facilitating manufacturing industries, along the lines of the small-scale but functional Chiapas State Business Promotion Agency (Secretaría de Desarrollo Económico—SDE), based on the Guanajuato model. This agency functions both as an investor prospecting agency and export promotion office, offering advice and training to local businessmen and encouraging local initiatives. The support is primarily not financial, but in the form of information and networking. Its officers accompany local businessmen on market visits. The SDE has already met with some success in attracting new firms; it also creates a strong signal to entrepreneurs that the state government is willing and able to assist them.49 Such initiatives are quite appropriate and could be expanded. Address Social Exclusion and Conflict in the South An improved judicial system for protecting social and property rights is a fundamental prerequisite to breaking the cycle of conflict that currently hinders economic and social development in the region. Conflict over land and other social conflicts plagues the region, and has led some to turn to extralegal conflict, be it guerrilla activity, vigilante justice, or straightforward violence between the parties involved. Priority judicial reforms should include separation of powers between the executive and judicial branches and autonomy for federal and state prosecutors, following the “U.N. Basic Principles on the Independence of the Judiciary” and “U.N. Guidelines on the Role of Prosecutors.” Increased transparency in the selection process for judges and prosecutors, coupled with enhanced scope for civil society organizations to access information on the court system and judicial procedures, will raise trust in the system. Once fundamental issues in the functioning of the judiciary have been resolved, allocating more resources to fund additional judgeships and ancillary services would be critical to speeding the pace of court procedures. As well, lowering costs of judicial

49 According to SDE, Chiapas’ only comparative advantage at the moment lies in labor costs. As local labor acquires new skills and an industrial work ethic (see next paragraph), more sophisticated products can eventually be envisaged. At the moment, Chiapas’ cities offer neither the diversified labor nor the necessary network of suppliers and services (technical, consulting) to attract medium or high value-added activities.

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procedures and ensuring adequate translation services are necessary to allow poor and indigenous people greater access to and confidence in the legal system.

A number of policy actions can be taken to help the indigenous communities of southern states, by far the poorest segment of the region’s population, improve their economic circumstances and help them feel more a part of a society that has in the past excluded them. First, while the governmental resource flow designated to improve well-being among the indigenous has increased, it is equally important to increase resource flows via programs that are now known to successfully reach the indigenous.50 The next important step is to give indigenous peoples more control over those resources, if possible using legal mechanisms included in the recent constitutional reform on indigenous rights. Programs intended to help indigenous communities, whether federal, state, or municipal, must be designed with the input of the indigenous communities themselves, as well as designed to take advantage of the strong collective action ability of these communities. Bilingual education programs should be expanded, as evidence shows51 that indigenous children remain in school longer when bilingual education is offered as opposed to monolingual (Spanish) education. Publicity campaigns in local media that promote the value of indigenous culture also could be helpful in tackling the persistent problem of ethnic discrimination in the southern states.

How to best accomplish the difficult task of ending these armed conflicts is beyond the scope of this report. But the armed conflict exists in the south in large measure because of extreme poverty and a feeling of exclusion in rural, mainly indigenous, communities in the south. Until those causes are resolved or at least ameliorated, the conflict will persist.

A priority should be social assistance programs targeting poor rural families, the poorest segment of the southern states. However, assistance must be linked as much as possible to investments in assets that are portable, such as human capital (education). Mexico has been extremely successful in pioneering such programs; there is now compelling evidence that Oportunidades successfully reaches poor families, with little overhead costs or waste, while stimulating educational attainment among children in rural areas. In the south, the problem is the size of the poverty gap (the distance between family incomes and the poverty line) and the sheer number of poor families, such that this program has made but a small dent (a 2 percent reduction) in the poverty rate. Given the fact that Oportunidades has attained near universal coverage among rural poor families with school-age children, turning attention to complementary programs that expand the coverage of the existing safety net to the currently uncovered (for example, non-contributory pension coverage for the elderly poor) is essential. Programs such as Brazil’s rural old-age pension have proved to have a high poverty reduction impact in the impoverished rural northeast and may be a useful model to consider. 50 This would include programs such as Oportunidades, PROCAMPO, and the Fund for Municipal Social Development (Fondo para la Infraestructura Social Municipal—FISM), though FISM in particular also requires adjustments to ensure more efficient use of funds at the local level, first. 51 Parker, Susan W., Luis Rubalcava, and Graciela Turel. 2002. Schooling Inequality Among the Indigenous: A Problem of Resources or Language Barriers. Inter-American Development Bank.

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Annex 1. List of SSDS Policy Notes and Authors

Note Author(s) 1. Poverty in Mexico’s Southern States Quentin Wodon, Gladys Lopez-Acevedo,

and Corinne Siaens 2. Meeting the Millennium Development Goals: Poverty, Education & Health

Ruwan Jayasuriya and Quentin Wodon

3. Indigenous Peoples and Poverty Reduction in the Southern States

Tania Carrasco, Shelton H. Davis, María Eugenia Valdés, and Quentin Wodon with Christopher Humphrey and Corinne Siaens

4. Macroeconomics of the South Joost Draaisma 5. Fiscal Federalism and the Southern States Steven Webb 6. Economic Activity and Infrastructure Logistics in the Southern States

J. Luis Guasch

7. Why NAFTA Did Not Reach the South Gerardo Esquivel, Daniel Lederman, Miguel Messmacher, and Renata Villoro

8. Labor Markets in the Southern States Alejandra Cox and Vicente Fretes Cibils 9. The Financial Sector Carlos E. Cuevas and Juan Navarrete 10. Tourism: Tool for Development in the Southern States

Fernando Flores Kato

11. Urban Infrastructure: Cities of the South- Challenges and Opportunities

Marianne Fay

12. Agriculture and Rural Development Jose Maria Caballeros 13. Rural Infrastructure for Growth and Poverty Alleviation

Marianne Fay, et al.

14. Sustainable Natural Resource Use in the South

Jose Luis Samaniego

15. Culture and Development Shelton H. Davis, Tania Carrasco, and Maria Eugenia Valdés

16. Migration And Poverty In Mexico’s Southern States

Quentin Wodon, Diego Angel-Urdinola, Gabriel Gonzalez-Konig, Diana Ojeda Revah, and Corinne Siaens

17. Narcotics, Economics, and Poverty in the Southern States

Christopher Humphrey

18. Education Eduardo Velez 19. Health Vicente Paqueo and Christian Gonzalez 20. Social Protection Gillette Hall, Heather Layton, and Maria

Guadalupe Toscano 21. Crossroads of Gender and Culture: Impediments to Economic Development in the Southern States

Wendy Cunningham and Francisco Cos-Montiel

22. Justice and Poverty Shannon Speed