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In 2010, the government of Felipe Calderon will get a World Bank loan of 1.5 billion dollars; in exchange, it will amend the tax system, make the labor market more flexible and liberalize trade even more. With this commitment, three years after taking office, the Calderon administration's debt with the Bank reaches nearly 6 billion dollars. Commitments have been granted through 19 "active" projects that must be cleared in an average period of 15 years.

On 24 November 2009 the financial institution – headed by Robert Zoellick since 2007 –announced that Mexico would receive 1.5 billion dollars, with the P118070 project, which aims to implement "economic policies in response to the global crisis".

The loan justifies the delivery of resources by the 9.2 percent contraction in gross domestic product (GDP) in 2009, reflecting that “Mexico has a very open economy that has been substantially affected by the global crisis and the drastic drop of international trade.”

The AB5168 report indicates that the Ministry of Finance and Public Credit (SHCP) will be responsible for implementing economic policies to “mitigate” the impact of the global crisis and to strengthen in the medium term the “economic recovery and growth”.

Actions to be performed by the second administration of the National Action Party (PAN) include a 35 percent increase in the number of bank branches, together with their financial services; a reduction of 5.3 percent in manufacturing imports fees and an increase of 10.3 percent of non-oil tax revenues GDP, among others.

Towards labor flexibility

“Labor policies are one of the program’s five pillars to address the global crisis, which President Calderon announced in January 2009,” says the World Bank document.

The arguments of the Bank “support labor market flexibility, which causes increased precarity of labor and does not enhance the welfare of workers,” says Valeria Enriquez, researcher of Fundar, Center for Analysis and Research, who is currently developing a project to analyze the transparency of World Bank loans to the Mexican government.

The study Labor Flexibility, the Case of Mexico, prepared by Danae Duana Avila, Ph.D. candidate in economics from the National Polytechnic Institute, explains which labor market characteristics prevail in the country: rising unemployment, the appearance of “internal” or part-time jobs, a fall in purchasing power, the abandonment of the minimum wage, new forms of labor market segmentation and the strengthening of informal activities.

“The flexibility and precariousness of employment is one method that allows companies to have a greater margin of control regarding management and human resource availability, through the adjustment of collective agreements and work regulations consistent with the changing needs of the production plant,” she adds.

Contrary to the favorable comments issued by the World Bank, the Report on the economic situation, public finances and public debt, third quarter of 2009, issued by the SHCP, shows a decline of more than 500 thousand work places as far this year.

In her study, Duana Avila affirms that the Mexican model of labor regulation “does not put any limits to the deteriorating working conditions nor does it provide incentives to encourage commitments based on productivity, ongoing training or high wages. There cannot even be a resolution of differences favorable to employees.”

“Former governments have encouraged foreign investment. That is why current law was retained, because it favors the strategy of competitiveness through low wages.”

Urgent fiscal policy

Fiscal policy and public expenditure management are other subjects in which the World Bank intervenes. The World Bank report points out that due to the global crisis, the Mexican authorities were able to initially increase and maintain the level of public spending to withstand the severe contraction in aggregate demand.

Contrary to this, he says, “the sharp drop in earnings in the public sector that can be attributed to global and national recession in economic activity has not been offset by a reduction of total public spending or a tax increase. Thus, fiscal policy would allow automatic stabilizers to operate.

In late 2009, President Felipe Calderon submitted to Congress a tax package intended to increase by 2 percent the Value Added Tax. It also sought a “temporary increase” in income tax for higher income workers, from 28 percent to 30 percent through 2012.

Moreover, the package stipulates differentiated increases to the Special Tax on Production and Services that applies to cigarettes, alcoholic beverages, games and sweepstakes. The tax rate on cash deposits rose from 2 to 3 percent from 15 thousand pesos per deposit, and not from 20 thousand pesos, as at present.

Valeria Enriquez said that with the development policy loans, the World Bank determines the Mexican government to continue with the neoliberal economic policy.

More banks, less fees

Regarding the financial sector policy, Mexico stands out due to policy reforms implemented in 2009 which include: protection of consumers of financial services, expanding channels for the provision of financial services through banking agents and transparency of the market, says the World Bank.

In this situation, the Bank “recommends” the Mexican government 35 percent increase in points of sale offering banking services. Moreover, it should also increase the quality of information provided by financial intermediaries to users.

The World Bank also criticized the Mexican government, saying that despite the reforms of trade policies implemented since the 1980s, there are still weaknesses in the trade regime and of opportunities to reduce negotiation costs.

The proposed operation of the international agency to “support” the Mexican government is to carry out a comprehensive reform to gradually reduce tariffs applied to imports of manufactured goods. This plan should be applied until 2013, said the official document.

Risks

The loan of 1.5 billion dollars, says the World Bank report, will be useful in case there is a “weak recovery of the current economic crisis,” which considers the possibility of a “double fall” of the economic recession in the U.S., which is Mexico’s main trade partner. This situation, warns the report, could lead to a second year of mediocre economy. The government would find it difficult to maintain levels of spending in major infrastructure and social programs.

“The labor market conditions could continue to deteriorate, even in an incipient recovery,” says the document. In response, the government might have to expand or improve the proposed support measures to mitigate the social and economic impact. These actions could face fiscal constraints, particularly in the case of immersion in a “double” recession.

Jonathan Fox, a scholar at the University of California, USA, explains that the various World Bank projects are useful to justify the transfer of foreign currency to the financial coffers of the government: “With more foreign currency, the Finance Ministry is strengthened. Moreover, expectations of loans serve to discipline other units. In this sense, as a good intermediary, the Treasury is the main winner in the transaction.”

A few years ago, he says, the annual level of World Bank loans to the Mexican government had diminished a lot, especially compared to the 1990s. Around 2005, the Bank representative expressed concern about the low demand for their services of the Mexican government, and predicted that within a decade the country would “graduate” and no longer have to borrow.

However, with the current economic crisis, the international bank was again a very important “partner” for the country’s economic cabinet, argues Fox. “It is no coincidence that the World Bank is giving priority to large quick disbursing projects to help stabilize the economy in the short term.”

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