**Plc,Research, and External Affairs**

# **Country Operations**

WPS 679 This paper is a product of the Country Operations I Division, Country Department 11, Latin America and the Caribbean Regional Ofrice. Copies are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Margarel Stroude, room 18-155, extension 38831 (94 pages).

Among the liindings is this ambitious analysis of poverty in Mexico: increasing investment in rural roads, irrigation, extension serviecs, and the like).

Mexico's moderately poor lack some goods and services that everyone should enjoy, given Mexico's wealtlh. The extremely poor have so few resources as to be at risk of undemutrition and illness.

> * Eliminating urban bias in social and infrastructure spending

* Bringing private costs of production in urban areas in line with social costs.

At most, 1 peIrcent of **ihe** population is extremely poor (probably **an** overestimate), and extreme poveity is mostly a rural problem. The extremely poor have larger households, more children, and the higlhest dependency ratios.

The tlhree main determinants of poverty are urban hias, macroeconomic uncertainty, and institutional arrangements and government policies in rural arcas that discriminate against the poor. Urban bias in social and infrastructure spending reduces the rural poor's ability to increase their human capital. Macroeconomic uncertainty and stop-go cycles depress the permanent demand foi unskilled labor and the steady stream of social spending. Institutional arrangements and resource allocation policics to increase agricultural output deliver substantial rents to high-income agricultural producers while depressing retums to land and the demand for unskilled rural labor, the two main assets of the rural poor.

Policies to alleviate poverny must allow for the fact that the extremely poor are less able to bear risk, have higher fertility rates, have higher price and income elasticities of demand for food, and may experience more household inequality. The moderately poor, on the other hand, can migrate, can benefit from educational opportunities, and can participat; more fully **in** the labor market.

There is a strong case for direct targeting of benefits onlt to the to **the** extremely poor. Such benefits should be administered under a single program that simultaneously delivers food (through coupons rather than price subsidies), preventive health services, and education about hygiene, birth control, and food preparation and conservation. Food pricing policies should be divorced from poverty considerations. A poverty program for the extremely poor should direct its efforts at reducing fertility, morbidity, undernutrition, and infant mortality.

Development policies to help the poor should focus on:

* Furthering the process of institutional reforni of the incentive structure in rural areas.

* Changing the way resources are channeled to rural areals (eliminating price subsidies and

Intertemporal, incentive, and administrative considerations all argue that the govemment can best help the moderately poor indirectly. This can be done through policies that increase the permanent demand for unskilled labor, returns to land, and the poor's access to education and social infrastructure.

I The P'RE Working Paper Scrics disseminaics the findings of work under way in thc Bank's Plolicy, Research, and External AffairsCornplx. An ohjccLivc oflhc scries is to get thcsc findings out quickly, cven if prcsentations arc Icss than filly polished. **The** findings, interprctations, and conclusions in **ilicse** papers do not necessarily represent official Rank policy.

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