Notes on Mexico?s Oportunidades (Program)

In 1997, Mexico launched an incentive -based poverty alleviation program focused on enhancing the human capital of the poor. This program, initially known as PROGRESA, and now as OPORTUNIDADES, currently benefits five million families, almost one out of every four Mexicans, and evaluations indicate it is having a positive impact on the educational, health and nutritional status of the poor.

This program was part of a change in Mexico?s poverty alleviation strategy, which also involved changes in other programs, to strengthen the redistributive impact of public spending :

Why Oportunidades may be of interest to others?

From a macroeconomic perspective:

● Although initiated in the context of a short-run economic crisis (1994-95), Oportunidades was designed as a medium term response that would yield lasting improvements in the well being of the poor;

● a significant redistribution of income in favor of the poor was achieved under tight fiscal conditions , by gradually replacing generalized food subsidies with direct monetary transfers; and,

● Oportunidades transfers can mitigate short-run macroeconomic shocks and facilitate the phase-out of distributionally-motivated price or tax distortions (price ceilings, subsidies, consumption tax exemptions, etc), that are ineffective and generate substantial dead-weight losses, while maintaining or even increasing poor households? real income.

From a microeconomic perspective:

● The substitution of isolated income transfers for the poor through various means (in-kind delivery of good, price discounts, etc.) by an integrated approach that exploits the complementarities among health, education and nutrition;

● the association of income transfers with appropriate incentives that:

avoid long term welfare dependency, and,

empower the poor to play a central role in overcoming their difficult conditions;

● a focus on the combination of interventions that are most effective at each stage of an individual?s life cycle; and,

the link between program design and operation with impact and operational evaluations.

From a political economy and public policy perspectives:

● The institutional setting and decision-making process that allowed to phase-out, decentralize, transform and coordinate various agencies and programs;

● how design and implementation considered the political sustainability of the program and the consistency and coherence of the overall effort;

● the process that allowed PROGRESA to carry on from president Zedillo?s administration (1994-2000), into OPORTUNIDADES during president Fox?s administration (2000-2006) within the context of Mexico?s democratic transition; and,

● the importance of detailed analytical work to decide upon and substantiate the different characteristics of Oportunidades and changes to other programs.

On the other hand:

● deficiencies in their conceptual design;

● uncoordinated operation and little transparency;

● duplication of efforts and excessive bureaucracy;

● urban/rural imbalance;

● increasing fiscal resources, most through generalized subsidies;

● little effectiveness; and,

● lack of evaluation. Until 1996 there were many food, health and education programs in Mexico, operated by different federal agencies, and characterized by: For example: (i) infant malnutrition rates for children under five in rural areas remained at around 50% from 1974 to 1996; (ii) 60% of poor rural families did not receive any support from the government.

In consequence:

To effectively enhance the human capital of the poor, it is essential to recognize the complementarities that exist among nutrition, health and education. Programs that satisfy one of these needs in isolation may not reach the central objective of developing poor families? capabilities, even if they manage to target correctly their benefits (which was not the case). It is necessary to transform food subsidies (generalized and targeted), and isolated health and educational programs into an integrated approach that: assures the simultaneous provision of a basic package of health, education and nutrition; takes advantage of their complementarities; and provides certainty to families of achieving a minimum of well-being.

Oportunidades marks the transition towards a new integrated approach; it constitutes a far-reaching effort of the Federal Government, in recognition that previous isolated programs had had a limited impact.

Oportunidades? objectives:

● Improve the education, health and nutritional status of families in extreme poverty;

● integrate education, health and nutrition interventions;

● encourage the responsibility and active participation of the family; and,

● redistribute income to those in extreme poverty.

Beneficiaries co-responsibility

Participation of parents is essential for the education, health and nutrition of children. It is critical:

● to induce more family responsibility tying benefits to specific actions;

● to fully respect poor families? decisions on the use of their cash transfers, school attendance of their children, and their health care; thus they assume responsibility for results; and,

● to provide enough information so they can make informed and responsible decisions.

Oportunidades promotes a more respectful relationship between the government and beneficiaries.

Oportunidades targets efforts on the most needy

This has two implications:

1. Reorienting public spending towards rural areas, recognizing that needs are greater and deeper in these communities, without neglecting poor urban zones.

2. Establishing effective and transparent targeting mechanisms that insure the proper use of resources for extreme poverty alleviation.

Program operation

● Cash transfers are individually delivered to the mother, and var y depending on the number of children enrolled in school, their attendance and the progress made in different grade levels, and their attendance to health centers;

● all mothers participating in the program are informed with individually delivered pamphlets that the benefits of Oportunidades are not conditioned on participating in any political event or voting for any political party; and,

● operation is transparent, and Operation Rules of the Program are available in internet (www.oportunidades.gob.mx) and in the Federal Register. A list of the number of beneficiary families by locality, municipality and state is also published.

All of Oportunidades? information is auditable.

Evaluation and initial results

At the outset of the Program, IFPRI (International Food Policy Research Institute) was hired to evaluate its impact. In turn, this institution hired the services of well-known academics. With these purposes, a sample scheme and a baseline survey were designed which allows an objective statistical evaluation of the results, through the continuous monitoring of 24 thousand families. Since then, various other researchers have evaluated various aspects of Oportunidades.

After eight years of operation, results so far are encouraging (although there still are operational problems). These results point to some trends, but do not capture

Oportunidades? full impact, since this will only be fully observed over the long-term.

The evaluation was carried out by researchers that are independent of the Federal Government.

The decision making and implementation process

● March 1995: the first proposal to substitute in-kind for cash transfers linked to health care is presented, in the context of wage negotiations in the middle of an economic crisis.

In 1995, no known experience of a targeted poverty program with a life cycle approach to the simultaneous provision of health care, education and nutrition.

● October 1995: pilot program begins.

Coverage: 31,300 families in 3 localities.

● March 1996: decision to launch Progresa is taken.

● August 1997: Progresa starts operations in rural areas.

Coverage: 300,000 families in 6,300 localities. Budget: 46 Million US$.

● January 2001: Increase in education benefits, Progresa starts in urban areas.

Coverage: 2.5 million families in 53,152 localities. Budget: 1,247 Million US$.

● May 2005: Oportunidades reaches practically all in extreme poverty.

Coverage: 5 million families in 82,856 localities. Budget: 2,93 2 Million US$.

Some lessons from poverty policy change in Mexico

? Design a conceptual framework for poverty alleviation:

? identify/give transparency to subsidies and income transfers;

? role of individual programs; and,

? consistency and coherence of the overall effort.

? Define the institutional arrangement:

? few good programs; and,

? Identify level of government responsible for each program.

? Strengthen the ability to carry out and maintain change:

? need an agency with strong decision power over budget allocation and program design;

? promote a ?horizontal? view of what ministries and agencies do;

? strong political support;

? legitimize proposal on empirical evidence; and,

? design and monitor implementation carefully.

? Insure financial sustainability:

? no add-ons; and,

? consistency with economic policy.

Continuity, consistency and coherence overtime:

? transparency: public information on objectives, operation rules and results;

? evaluation and monitoring;

? no link to political activities or individual persons; and.

Balance of poverty policy change and Oportunidades

Oportunidades:

● now covers 5 million families, about one out of every four Mexicans, practically the entire universe of families in extreme poverty. Coverage of should not increase any more;

● effectively replaced price and in-kind subsidies with monetary transfers even in remote rural areas, without inflation pressures, family violence or increased alcoholism. The problem of the poor is lack of income, not access to food;

● was not a pressure on the Federal Budget. Targeting was successful in using resources more effectively;

● was built with a ?horizontal? view of what ministries do, as opposed to the traditional ?vertical? or self-contained view of each ministry; and,

● transited from president Zedillo?s (PRI) administration into president Fox?s (PAN) administration.

Santiago LEVY ex-Minister of Finance, Mexico

Strategies

Lessons to be learnt about Chile?s success

1. The cases of Chile and Argentina?middle-income, relatively small, natural-resources-endowed economies, may be of particular interest for Mauritius. While back in 1980 both Chile and Mauritius had per capita incomes (PPP) of just about 40% of the level achieved by Argentina, these three countries now exhibit very similar incomes per head of around US$13,000.

2. This dramatic realignment is explained by the very dynamic growth enjoyed by both Chile and Mauritius in the last twenty-five years, as well as by the mediocre performance of Argentina?s economy during that period.

3. International observers generally consider that Chile is likely to continue outpacing industrial countries? growth in the coming years, while their assessment of the prospects for Argentine is rather lukewarm. The differences in the recent performances of these two neighboring countries as well as in forecasters? perceptions, can be attributed to their different economic strategies. The interesting and relevant point here for our discussions about Mauritius is that these two strategies have been two nearly diametrically opposed reactions to external trade shocks and may thus present some interesting parallels with the challenge that Mauritius is currently facing.

4. Let me briefly summarize Argentina?s and Chile?s economic history. Argentina, a rich colony, enjoyed an income per head of about two-thirds of the average level of industrial countries at the time of its independence (early 19th century). At that time Chile, less naturally endowed than Argentina, had lower living standards, equivalent to less than one half the industrial-country average. But both countries did very well in their first century of independent lives. In fact, right before the First World War Argentina had reached living standards somewhat above the ones enjoyed by the industrialized world and Chile had positioned itself quite close to that level (some 25% below).

?These two strategies have been two nearly diametrically opposed reactions to external trade shocks and may thus present some interesting parallels with the challenge that Mauritius is currently facing.?

5. That encouraging convergence was achieved thanks to a very open trade strategy, with both countries providing commodities to industrial countries and obtaining manufactured products in exchange. But with the two world wars and the intervening Great Depression, Argentina and Chile faced significant trade shocks throughout that period. Ironically, even though average growth in the two countries was not that different from the rates achieved by industrial countries ?in 1948 their relative positions were similar to what they had been in 1910?a negative sentiment towards external trade had developed in response to the volatility of the inter-war period. As a result, protectionism made its appearance, and a full-fledged import-substitution strategy was launched.

6. By 1975, Chile?s living standards had fallen to the equivalent of one third of those enjoyed by industrial countries and Argentina ?s to about two thirds. At that point, Chile collapsed both politically and economically. As a result, its economic strategy was completely altered, reopening the economy to international trade and finance and reinstating the private sector as the principal economic force. Argentina, for its part, muddled through, maintaining protection and shifting the role of the private sector back and forth.

7. After a decade of glaring economic-policy mistakes (1975-1985) ?predominantly in the macroeconomic domain?Chile began to grow fast reaching an unprecedented dynamism that has remained until today, while Argentina continued lagging behind. Chile has already recovered to levels of above one half of the income per head observed in industrial countries and has caught up to Argentina?s standards for the first time in its history.

8. The first lesson that arises from this brief story is that trade shocks are better dealt with through more, rather than less, trade. Further opening has been the key component of Chile?s success. But Chile?s new strategy has by no means been smoothly implemented, and perhaps more lessons can be learned from our mistakes.

9. But before turning to the errors, let me give you some facts. Although the open economy strategy is designed to develop the tradable sector, both agriculture and industry have continued to see their share of GDP decline, while mining?s share has done no more than remain constant. However, the rate of growth of these sectors has been somewhat higher and far more stable than it was in the closed economy-period, thus providing enough foreign exchange to meet the needs of some very dynamic non-tradable sectors, such as energy, communications and construction. At the same time tradable sectors are increasingly becoming exporters rather than import competitors, with exports growth systematically outpacing GDP growth.

10. The more dynamic sector has been financial services, with financial savings currently exceeding GDP and bank assets/GDP far surpassing the level of this ratio in any other country in the region. The financial deepening has been, together with dynamic exports, instrumental in allowing resources to move appropriately to the sectors that provide business opportunities and to finance a fairly high rate of capital formation.

11. Now if we turn back to the mistakes that were made, we can, with the benefit of hindsight, identify some key lessons. The first one is that the opening process can lead to overkill in some sectors unless some additional supporting measures are adopted. If the trade shock puts some downward pressure over the currency, then accommodate it. If the Central Bank can develop a solid reputation, then the depreciation of the currency will have only a limited impact on inflation. On the contrary, trade opening coupled with a strong currency will lead to unnecessary losses of competitive strength and jobs.

12. A second lesson is that sound fiscal policy is crucial to trigger and maintain the growth momentum. First, because the deepening of the financial sector is a key element to allow for a fluid reallocation of resources. Government debt crowds out the private sector from the pool of financial savings. Second, because a sound fiscal position is needed to allow for some counter cyclical room of maneuvering; this may be needed especially given the volatility of the external demand for basic products. Third, because fiscal soundness is necessary to develop a sound financial integration to international capital markets, a step that is instrumental to acquire financial depth.

13. A third lesson that emerges from Chile?s experience is that, if possible, it is better to achieve fiscal consolidation through revenue enhancing measures rather than through expenditure cuts. Resource reallocation needs government support, especially through education and training, besides well targeted subsidies to the unemployed and the ones in need. Never underestimate the importance of social cohesion.

14. On the expenditure side, it is better to save room for the measures that are instrumental to foster competitive skills. Untargeted subsidies should be eliminated to the extent possible. Tax breaks and, more generally, tax expenditures are almost always too generous and exploited by rent seekers. In Chile?s experience only very few of the multiple tax incentives have passed a cost-efficiency test, and in most cases they just foster tax elusion and evasion.

15. The role of the public sector in building competitive strengths is very important, but can be confined to only a few endeavors. First and foremost, build human capital. All the developed countries and the fast growers devote a significant share of GDP to education and training. Second, upgrade the R&D capacity, including through more public resources. To ensure the relevance of the public money devoted to R&D, a high level committee, with the participation of top public officials, lead scientists, universities, technology centers, innovation experts and the private sector may be needed to guide the process and identify the opportunities (hopefully clusters).

16. Fourth, built a sound and deep financial sector, and, within it, foster the seed and risk capital industries. The catalytic role played by a well developed financial sector in facilitating resource reallocation ?with the appropriate supervision and regulation to avoid sectors gambling for resurrection-came somewhat late to our understanding.

17. Fifth, foreign direct investment could fill a lot of gaps or weak links in our productive chains, including in the human capital domain. It is important to have stable rules to attract such investment, but also to preserve a leveled playing field with domestic investors.

18. Last but not least, it is important to foster flexible labor markets. In our experience, we failed to understand that we should aim more to develop institutions that preserve income (unemployment insurance) rather than employment. High hiring and dismissal costs can become a severe constraint to an economy that is learning how to fit in the global economy, sometimes, unavoidably, through trial and error.

By Nicolás EYZAGUIRRE Ex-Minister of Finance, Chile.