-42-

subsidies (see section VII.2 below).<sup>In addition, urban inhabitants,</sup> particularly in Mexico City,<sup>also profit from large subsidies to water,</sup> transportation and other services<sup>provided at the expense of the whole</sup> 69 country . Two, subsidies to Mexico City<sup>and other urban areas reduce private</sup> costs of production below social<sup>costs70.</sup> This lowers the demand for rural labor in those activities that<sup>could be decentralized. Three, huge</sup> expenditures in the development<sup>of the urban infrastructure</sup> reduce available 71 resources for rural infrastructure.

To sum up: the combined effects<sup>of intra and inter-sectoral</sup> government policies doubly discriminate against<sup>the rural poor. First, to the extent</sup> that agriculture and the rural<sup>areas as a whole receive an inequitable share</sup> of the total resources devoted to<sup>social and infrastructure</sup> investment. Second, to the extent that those<sup>resources that are channeled to the rural</sup> areas are mostly untargeted and<sup>benefit better-off producers in those areas.</sup> Some of these policies hurt<sup>the rural poor directly, limiting the demand for</sup> their labor or the returns to their<sup>land by increasing transport costs,</sup> reducing crop choice, mobility;<sup>others do so indirectly, limiting their access</sup> to education, information, health services and general possibilities<sup>to</sup> improve their human capital.<sup>This combination of institutional</sup> arrangements and government policies taxes agriculture, particularly the rural poor, and generates inefficiencies. Taxing<sup>agriculture might have been the unavoidable</sup> cost of urbanization and industrialization.<sup>But if poverty is to diminish</sup> this taxation and these efficiency<sup>losses must end.</sup> 69The pattern of transfers between the federal budget and Mexico City is complex, but favors the latter;<sup>see World Bank, 1989c, Vol. I, pp. 85-100.</sup> 70Gil Diaz (1985) presents an illuminating case study of the distortions introduced by the fact that<sup>the private marginal cost of water in MexicoCity</sup> is zero; other services like transportation are subsidized, while user charges are below marginal costs.

> 71The relationship between urbanization and poverty<sup>in Mexico deserves a</sup> study of its own. Polak and<sup>Williamson (1989) make the interesting</sup> observation that in England<sup>and other countries industrializing in the XIXth</sup> century poverty was mostly an<sup>urban phenomenon. They attribute this partly to</sup> the fact that modern urbanization<sup>is immensely capital intensive, requiring a</sup> large share of the country's resources.<sup>A. Lewis (1978, p. 29) notes that:</sup> "Urbanization is decisive because<sup>it is so expensive. The difference betwee.</sup> the cost of urban and rural development<sup>does not turn on comparing the capital</sup> required for factories and<sup>that required for farms. Each of these isasmall</sup> part of the total investment,<sup>and the difference per head is not always Ln</sup> favor of industry. The difference<sup>turns on infrastructure.'</sup>