## wpiea2021244-print-pdf - Section V discusses policy recommendations and concludes

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### Social spending: level and composition
- Social spending in Mexico was 10.9 percent of GDP in 2019, declining from its historical peak of 12.1 percent of GDP in 2015.
- Around 40 percent of the spending goes to social protection while education and health comprise 27 and 23 percent, respectively; the remainder is for housing and community support and environmental preservation.
- In 2020, social spending increased to 12.4 percent of GDP, driven mainly by the sharp drop in nominal GDP; both the nominal and real growth of social spending was lower in 2020 compared to 2019.
- From a cross-country perspective, Mexico’s social spending lags behind regional peers, partly reflecting its low revenue-to-GDP ratio.

### Social protection: definition and components
- Social protection spending usually includes social insurance and social programs.
  - Social insurance: protects households from adverse shocks affecting incomes and welfare and is typically financed by contributions or payroll taxes.
  - Social programs (social assistance): protect households from poverty and are financed by general government revenue.

### Social assistance spending: trends and composition
- Overall social assistance in Mexico declined from 2.5 percent of GDP in 2015 to around 1.8 percent of GDP in 2018.
- Transfers to individuals and households decreased from 0.9 percent of GDP in 2015 to 0.5 percent of GDP in 2018, due to the decline in both conditional and unconditional transfers.
- Around 61 percent of total social assistance funding went to fee waivers and subsidies in 2018, followed by around 28 percent in transfers and 8 percent in social pensions.
- States with higher poverty rates and lower income per capita received higher amounts of social assistance from the federal government when expressed as a share of state GDP.

### Socioeconomic disparities prior to the pandemic
- Poverty rate (CONEVAL multidimensional measure) declined from 44.4 percent to 41.9 percent between 2008 and 2018 across most states.
- Poverty rates by state in 2018: Nuevo Leon 14.5; Baja California Sur 18.1; Oaxaca 66.4; Chiapas 76.4.
- Extreme poverty rate declined from 11.0 to 7.4 percent between 2008 and 2018.
- Extreme poverty by state in 2018: Nuevo Leon 0.5 percent; Chiapas 29.7 percent; Veracruz increased from 16.8 to 17.7 percent over 2008–2018.
- Using WDI poverty headcount at $1.90 a day: Mexico’s poverty rate is slightly higher than the G20 EM average, lower than Brazil and Colombia, but higher than Chile, Thailand, Uruguay.
- Using WDI poverty headcount at $3.20 a day: Mexico’s poverty rate is slightly lower than the G20 EM average.
- Income share of the poorest: improved from 4.6 percent in 2004 to 5.4 percent in 2018; in 2018 this share was lower than G-20 EM averages but higher than Latin American averages.
- ECLAC-UNICEF (2020a) findings (circa 2018 household data for households with children/adolescents where head/spouse is 15–64 years):
  - 40 percent of households in Mexico do not have any protection.
  - 34 percent have contributory protection.
  - 22 percent have non-contributory protection.
  - 4 percent have mixed protection.
  - Percent of households with no protection is larger than Latin America aggregate of 33 percent and some regional peers (Argentina and Brazil, 21; Chile and Costa Rica, 15), but lower than Colombia (44) and Peru (58).

### Government’s social policy approach in 2019–24 and observed reallocations
- Guiding principles:
  - (i) Priority to people in areas with majority indigenous and Afro-Mexican populations, areas with high marginalization, or high rates of violence.
  - (ii) Financial and in-kind support delivered directly without intermediaries, preferably by bank instruments.
  - (iii) A single beneficiary registry to be integrated, continuously reviewed for validation, updating, and auditing.
  - (iv) Actions to identify beneficiaries and geographic location.
  - (v) Specific mechanisms for community participation and social comptrollership.
- Outcomes in 2019 relative to 2018:
  - Overall spending on social assistance programs increased from 1.8 percent of GDP in 2018 to 2.1 percent of GDP in 2019.
  - Social pensions increased from 0.15 percent of GDP in 2018 to 0.50 percent of GDP in 2019.
  - Transfers to individuals and households decreased from 0.50 percent of GDP in 2018 to 0.35 percent of GDP in 2019.
  - Share of transfers in total social assistance programs decreased from 28 percent in 2018 to 17 percent in 2019.
- Programmatic changes:
  - IMSS-Bienestar remains the largest-funded program but its share of funding decreased from 31 percent in 2018 to 25 percent in 2019 and 2020.
  - Two major programs discontinued and replaced:
    - Seguro Popular was discontinued in 2020 and replaced by INSABI (Institute for Health for Wellbeing) aiming to establish fully funded, integrated public health networks, cancel private subcontracting, and offer free and universal services.
    - Prospera was discontinued; Prospera had been the second largest program in 2018 and provided conditional direct payments to poor families.
- New or restructured programs and allocations:
  - Three scholarship programs, each receiving around 4–5 percent of total funding:
    - Benito Juárez Basic Education Welfare Scholarship: for families in poverty with children in initial, preschool, primary, or secondary education (under 15 years); payment is per family and there is no conditionality related to health or nutrition.
    - Benito Juárez Universal Scholarship Program: targeted to students in Higher Secondary Education in public institutions.
    - Young People Writing the Future (active labor market program): links people aged 18 to 29 who do not study or work with companies/institutions to develop skills; provides monthly support and medical insurance up to one year.
  - Increased emphasis on social (non-contributory) pensions reflecting prevalence of old-age poverty, limited coverage of the pension system (particularly for women), and low replacement rates.
  - CONEVAL multidimensional poverty data for elderly in 2018: 34.4 percent in moderate poverty and 8.8 percent in extreme poverty.

### Social pensions and pension program changes
- Social pensions rose from 36 billion pesos in 2018 to 129 billion pesos in 2020 in the social program Pensión para el Bienestar de las Personas Adultas Mayores (previously called Pensión para Adultos Mayores).
- The program’s share of funding increased from 8 percent in 2018 to around 20 percent in 2019 and 2020.
- Monthly payments more than doubled from 580 pesos per month in 2018 to 1275 pesos per month (2550 pesos bimonthly) in 2019 (DOF 2019).
- As of July 2021, the monthly payments are at 1550 pesos per month.
- Presidential announcement: target of 3000 pesos per month (or 6000 pesos bimonthly) by 2024.
- Minimum age reduced from 68 to 65 years; previously minimum age was 65 years for the indigenous population and 68 years for other adults.
- Projected budgetary cost increases:
  - around 136 billion pesos in 2021 (approved budget)
  - around 240 billion pesos in 2022
  - around 300 billion pesos in 2023
  - around 370 billion pesos in 2024
- Fiscal impact: translates into an increase of around 0.6 percentage points of GDP from 2021 to 2024.
- Outcome note: elderly poverty rates improved in 2020.

### Effectiveness of social programs (assessment against four characteristics)
- Four characteristics of good social assistance (per Hannan et al. (2020)):
  1. Broad coverage and adequate progressive benefits.
  2. Cost effectiveness by avoiding fragmentation and beneficiary overlaps.
  3. Preservation of work incentives and enhancement of human capital via linkages (public works, health care, education, training).
  4. Financial sustainability within overall expenditure envelope and consistency with other social protection programs.
- Mexico’s performance relative to regional peers and emerging markets (EM):
  - Coverage: significantly lags in coverage (share of population that receives a benefit) for all social protection and labor programs and social assistance programs.
  - Benefits incidence: percentage of benefits going to each quintile for the poorest quantile is lower than most regional and EM medians in social assistance programs.
  - Adequacy of benefits: transfers received as a share of total income/expenditure of beneficiaries are comparable to regional and EM medians for all social protection and labor, and better than comparators for social assistance programs.
  - Benefits incidence is comparatively high for high income group in social assistance programs.
  - Beneficiary incidence: percentage of beneficiaries in each quintile relative to total beneficiaries is comparatively better than comparator groups.
- Operational and coordination weaknesses:
  - Early evidence suggests many programs had little or no operational structures (CONEVAL, 2020a).
  - Limited evidence of coordination in planning between central units (e.g., CGPD and SEBIEN) on objectives, goals, work plans, and mechanisms.
  - Need for better training, adequate resources, and efficient coordination between central planning units and program implementers.
- Targeting issues:
  - High-priority programs operate largely on geographical or territorial basis (high/very high marginalization, indigenous people, high violence).
  - Problems: territories with high marginalization may have heterogeneous poverty levels; marginalization data are out-of-date relative to poverty data; CONEVAL found no evidence of prioritizing by areas of violence.
- Historical context:
  - Before 2019, non-contributory benefits were a smaller share of earnings in Mexico than in other countries.
  - Increase in social/non-contributory pensions was needed given prevalence of old-age poverty.
  - 2018 social pensions were low in OECD comparison; planned 2024 levels are relatively high controlling for per capita incomes.

### Program evidence and risks
- Prospera (and predecessors Progresa and Oportunidades) impacts:
  - Positively impacted school enrolment, education and health levels, nutritional status, and helped reduce poverty in rural areas.
  - Noted concerns: targeting, exclusion errors, and corruption.
- New programs and potential adverse effects:
  - Programs with similar per-family payments to Benito Juárez Basic Education Welfare Scholarship had opposite effects on school attendance of other household members.
  - Need to monitor school attendance (particularly for girls) and ensure health and nutrition are not negatively affected by removal of conditionality.
  - Concerns amplified by pandemic-related risks of school dropout and economic scarring.

### Education: demand, expenditures, and efficiency
- Constitutional mandate to universalize secondary education implies rising demand and sectoral shift toward secondary and tertiary levels; potential fiscal pressures requiring efficiency gains.
- Government education expenditure as share of GDP: in line with OECD, EMs, and Latin America averages.
- Education expenditure per student: well below OECD average; somewhat below EMs; higher than LA.
- Teacher-to-student ratios (per 100 students):
  - Primary and secondary teacher-to-student ratios are well below OECD average.
  - Primary ratio is below EM and LA; secondary ratio also lower relative to Mexico’s secondary benchmark.
- Frontier (efficiency) analysis (DEA): room for efficiency gains, particularly in secondary enrollment.
- Outcomes:
  - Adult literacy rate: below OECD, above EM and LA.
  - PISA score: well below OECD average, slightly below EM, higher than LA.
- Subnational variation:
  - Strong correlation between income per capita and literacy rate across states.
  - Example teacher-to-student ratios: Mexico City and Colima higher than 7 teachers per 100 students; Tabasco and Puebla at 5 teachers per 100 students.
  - Dropout rates vary considerably across states.

### Health: spending, coverage, and efficiency
- Total health spending: declined by around 1 percentage point of GDP from 6.4 percent of GDP in 2009 to 5.5 percent of GDP in 2018.
- Public share of health spending:
  - Increased from 46.7 percent in 2009 to 53.2 percent in 2014, then declined to 50.1 percent in 2018.
- Comparisons (2018):
  - Total health expenditure: Mexico 5.5 percent of GDP vs OECD 8.9 percent, EM 6.6 percent, LA 7.5 percent.
  - Public health expenditure (share of GDP and of total health expenditure) lower in Mexico compared to these groups.
  - Total health expenditure per capita: significantly below OECD and somewhat below/comparable to EM and LA averages.
  - Hospital beds, nurses, physicians (per 1000 persons): lower than OECD.
- Efficiency frontier: Mexico is below the health efficiency frontier, implying scope to increase quality and efficiency.
- Subnational coverage variation:
  - Affiliation to health services: >80 percent in Chihuahua, Baja California Sur, Colima, San Luis Potosi.
  - <70 percent in Jalisco, Hidalgo, Chiapas.
  - Lowest coverage: Michoacan de Ocampo at 62.2 percent.
  - Higher proportion of females affiliated to health services compared to men.

### The impact of COVID-19 (macro and poverty indicators)
- Labor poverty dynamics:
  - National labor poverty spiked by 7 percentage points between Q42019 and Q32020, then decreased.
  - At 40.7 percent in Q42020, labor poverty remained 3.4 percentage points higher than pre-pandemic levels.
  - State-level variation: Quintana Roo, Mexico City, and Tabasco increased by more than 10 percentage points between Q42020 and Q42019; eight additional states had increases >5 percentage points.
  - In Q22021, three states' labor poverty rates were 5 percentage points above Q42019 levels; eighteen states had positive increases.
- Gender and vulnerability:
  - Poverty in 2018 was higher for women compared to men.
  - 2020 increases in domestic violence and gender violence suggest more hardships for females.
- CONEVAL (2021b) updated poverty measurement (note: new series not directly comparable to previous):
  - Poverty rate increased from 41.9 percent to 43.9 percent between 2018 and 2020.
  - Number of people in poverty increased from 51.9 to 55.7 million.
  - Extreme poverty increased from 7.0 to 8.5 percent; number of people in extreme poverty increased from 8.7 to 10.8 million.
  - Lack of access to health services increased by 12 percentage points in the same period.
  - Elderly poverty decreased by 5.3 percentage points, from 43.2 percent to 37.9 percent between 2018 and 2020.
  - Rural poverty fell from 57.7 percent to 56.8 percent.
  - State heterogeneity: poverty in three states increased by over 8 percentage points; poverty decreased by 1.5-2.7 percentage points in Chiapas, Guerrero, Oaxaca, and Veracruz.
- ECLAC-UNICEF (2021b) projection: Mexico saw one of the highest increases in poverty in 2020 in absolute levels given its income per capita.

### The impact of government programs during the pandemic (fiscal response and cross-sectional analysis)
- Government fiscal response:
  - Increased health spending and direct budget support to households and firms by 0.7 percent of GDP.
  - Raised below-the-line measures and contingent liabilities by 1.2 percent of GDP.
  - These supports were lower than EM averages: direct and below-the-line budget support of 4.1 and 2.6 percent of GDP respectively.
  - Much of the increase in social program spending was predominantly budgeted before the pandemic.
- Cross-sectional regressions (state-level, 2020 outcomes vs 2019):
  - A state increasing spending by 0.27 percentage points of GDP (75th percentile) increased employment by 5.4 percent.
  - A state increasing spending by 0.15 percentage points of GDP (25th percentile) increased employment by 3.1 percent.
  - Employment effects were higher for males than females.
  - Retail sales increased by 2.8 percent for the 75th percentile compared to 1.6 percent for the 25th percentile (results for retail sales not statistically significant).
  - Labor poverty reduced by around 4.5 percentage points for the 75th percentile compared to 2.6 percentage points for the 25th percentile.
  - Interpretation: higher social program support correlated with better outcomes on employment, retail sales, and labor poverty.
  - Additional findings: states more exposed to tourism experienced larger drops in retail sales and larger increases in poverty; higher population density associated with larger adverse impacts.

### Pandemic, scarring risks, and longer-term concerns
- Mexico’s 2020 output drop was historic and among the largest in G20 and regional peers; limited fiscal support increases scarring risks.
- Factors heightening scarring risks:
  - High informality.
  - Relatively limited recourse to social safety nets.
  - Low health expenditure.
- Comparative evidence: increases in unemployment, poverty, and inequality after pandemics have been lower in countries with greater fiscal support, lower informality, higher family benefits, and higher health spending.
- Education-specific scarring risk:
  - Pandemic resulted in largest disruption of education systems in history, affecting nearly 1.6 billion people in more than 190 countries.
  - School closures exacerbate pre-existing education disparities; global evidence indicates potential long-term learning losses.

### Education impacts, digital divide, and risk of dropouts
- Estimated learning losses of "0.3 and 1.1 years of schooling adjusted for quality" and "close to 11 million students from primary and secondary education could drop out due to the income shock of the pandemic."
- Exclusion and inequality risk: already marginalized and vulnerable groups (girls, ethnic minorities, and persons with special needs) are likely to be more adversely affected by school closures.
- Internet access gaps across income groups:
  - For 15-year-old students, access to the internet at home is in line with the Latin American average for the top income bracket but "25 percentage points lower for the fourth quartile."
  - The gap of internet access for 15-year-old students across income groups is the highest in Mexico (alongside Panama) and above the Latin American average.
  - Mobile internet access gap: "88.8 percent of children in Quintile I lack access to internet", compared to "18.4 percent in Quintile V."
- Consequences: internet-access gaps could lead to school dropouts and education gaps, impairing human capital accumulation and future job prospects.
- Policy implication: schools require resources not only to address pre-existing disparities but also to "rebuild the loss in learning during the pandemic," with priority to programs that address school dropouts.

### Path to the Sustainable Development Goals (SDGs) — framework and target spending
- SDG Financing tool evaluates financing needs for education, health, roads, electricity, and water and sanitation with dynamic projections up to 2050.
- Education and health SDG spending targets:
  - Health: "6.4 percent of GDP"
  - Education: "6.6 percent of GDP"
- Roads, electricity, and water and sanitation gaps and targets:
  - Roads gap estimated at "1.15 percent of GDP".
  - Electricity spending requirement: "0.4" percent of GDP.
  - Water and sanitation spending requirement: "0.2" percent of GDP.
- Caveats: model results are sensitive to assumptions and should be regarded as illustrative; pre-pandemic estimates are likely to be lower bounds.

### Scarring effects: calibration and illustrative scenarios
- Scarring channels: human capital depreciation, diffusion, and two efficiency parameters on the return to education.
- Scenarios: baseline and two scenarios where the four calibrated parameters are worsened by "5 percent" and "10 percent."
- Illustrative outcome:
  - Under "5 percent" scarring, model simulations suggest "long-term real GDP per capita could drop by about 4.5 percent over the long-term (2050) owing to COVID-19."
  - Deterioration would be more pronounced under the "10 percent" scarring scenario.

### Financing needs to meet SDGs and implications for fiscal policy
- Estimated additional financing required to meet satisfactory progress toward the SDGs by 2030 (five areas): "around 4.6 percent of GDP per year."
- Additional impact of scarring: scarring effects are likely to further increase funding needs by "around 0.2- 0.4 percentage points of GDP."
- Fiscal-space implications:
  - The required additional spending is large and will require raising adequate resources while ensuring debt/GDP declines over the medium term.
  - Mexico significantly lags OECD countries and regional peers on non-oil tax collections; medium-term tax reforms—implemented gradually as the economy strengthens—would be necessary to finance these needs and reduce public debt/GDP.

### Recommendations and conclusions
- Urgency: the pandemic has made it more urgent to narrow gaps, limit scarring, and make satisfactory progress toward the SDGs in social protection, health, and education.
- Comprehensive approach recommended: increase both the amount and efficiency of spending across social protection, health, and education.
- Pragmatic medium-term initial step:
  - Consider enhancing spending for social assistance, education and health for "about 2 percent of GDP over the medium-term" broken down as:
    - "1 percent of GDP for social assistance"
    - "1 percent of GDP for education and spending over the medium term"
- Complementary measures:
  - Increase spending on quality physical infrastructure to raise medium-term growth and productivity.
  - Improve efficiency by addressing gaps, overlaps, and fragmentation across social programs and high labor market informality.
  - Implement a medium-term tax reform to durably enhance collections as the economy strengthens.
- Social program design enhancements:
  - Improve targeting with progressive transfers to reduce leakage to high-income groups.
  - Use community-based methods and new instruments (e.g., mobile money) to identify and reach those in need.
  - Create a single registry of beneficiaries and strengthen administrative capacity to reduce overlaps.
  - Increase use of evidence-based analysis in program design.
  - Consider introducing a national unemployment scheme, building on smaller-scale programs.
  - Improve progressiveness of public transfers to mitigate income drops for lower-income households following the pandemic.
- Education-specific recommendations:
  - Rebalance spending toward investment in equipment and facilities.
  - Conduct payroll audits to identify ghost workers and curb absenteeism.
  - Invest in equipment, facilities, information technology and modern infrastructure to align with evolving labor demands.
  - Enhance quality of early-childhood education and access in low-coverage regions and for disadvantaged children.
- Health-specific recommendations:
  - Better target investment to impoverished areas with deficient access to services.
  - Decrease administrative and insurance costs and reduce beneficiary duplication.

*Source: wpiea2021244-print-pdf - Section V discusses policy recommendations and concludes.*

### Section V discusses policy recommendations and concludes.

### wpiea2021244-print-pdf - Section V discusses policy recommendations and concludes.

### Social spending: level and composition
- Social spending in Mexico was 10.9 percent of GDP in 2019, declining from its historical peak of 12.1 percent of GDP in 2015.
- Around 40 percent of the spending goes to social protection while education and health comprise 27 and 23 percent, respectively; the remainder is for housing and community support and environmental preservation.
- In 2020, social spending increased to 12.4 percent of GDP, driven mainly by the sharp drop in nominal GDP; both the nominal and real growth of social spending was lower in 2020 compared to 2019.
- From a cross-country perspective, Mexico’s social spending lags behind regional peers, partly reflecting its low revenue-to-GDP ratio.

### Social protection: definition and components
- Social protection spending usually includes social insurance and social programs.
  - Social insurance: protects households from adverse shocks affecting incomes and welfare and is typically financed by contributions or payroll taxes.
  - Social programs (social assistance): protect households from poverty and are financed by general government revenue.

### Social assistance spending: trends and composition
- Overall social assistance in Mexico declined from 2.5 percent of GDP in 2015 to around 1.8 percent of GDP in 2018.
- Transfers to individuals and households decreased from 0.9 percent of GDP in 2015 to 0.5 percent of GDP in 2018, due to the decline in both conditional and unconditional transfers.
- Around 61 percent of total social assistance funding went to fee waivers and subsidies in 2018, followed by around 28 percent in transfers and 8 percent in social pensions.
- States with higher poverty rates and lower income per capita received higher amounts of social assistance from the federal government when expressed as a share of state GDP.

### Socioeconomic disparities prior to the pandemic
- Poverty rate (CONEVAL multidimensional measure) declined from 44.4 percent to 41.9 percent between 2008 and 2018 across most states.
- Poverty rates by state in 2018: Nuevo Leon 14.5; Baja California Sur 18.1; Oaxaca 66.4; Chiapas 76.4.
- Extreme poverty rate declined from 11.0 to 7.4 percent between 2008 and 2018.
- Extreme poverty by state in 2018: Nuevo Leon 0.5 percent; Chiapas 29.7 percent; Veracruz increased from 16.8 to 17.7 percent over 2008–2018.
- Using WDI poverty headcount at $1.90 a day: Mexico’s poverty rate is slightly higher than the G20 EM average, lower than Brazil and Colombia, but higher than Chile, Thailand, Uruguay.
- Using WDI poverty headcount at $3.20 a day: Mexico’s poverty rate is slightly lower than the G20 EM average.
- Income share of the poorest: improved from 4.6 percent in 2004 to 5.4 percent in 2018; in 2018 this share was lower than G-20 EM averages but higher than Latin American averages.
- ECLAC-UNICEF (2020a) findings (circa 2018 household data for households with children/adolescents where head/spouse is 15–64 years):
  - 40 percent of households in Mexico do not have any protection.
  - 34 percent have contributory protection.
  - 22 percent have non-contributory protection.
  - 4 percent have mixed protection.
  - Percent of households with no protection is larger than Latin America aggregate of 33 percent and some regional peers (Argentina and Brazil, 21; Chile and Costa Rica, 15), but lower than Colombia (44) and Peru (58).

### Government’s social policy approach in 2019–24 and observed reallocations
- Guiding principles:
  - (i) Priority to people in areas with majority indigenous and Afro-Mexican populations, areas with high marginalization, or high rates of violence.
  - (ii) Financial and in-kind support delivered directly without intermediaries, preferably by bank instruments.
  - (iii) A single beneficiary registry to be integrated, continuously reviewed for validation, updating, and auditing.
  - (iv) Actions to identify beneficiaries and geographic location.
  - (v) Specific mechanisms for community participation and social comptrollership.
- Outcomes in 2019 relative to 2018:
  - Overall spending on social assistance programs increased from 1.8 percent of GDP in 2018 to 2.1 percent of GDP in 2019.
  - Social pensions increased from 0.15 percent of GDP in 2018 to 0.50 percent of GDP in 2019.
  - Transfers to individuals and households decreased from 0.50 percent of GDP in 2018 to 0.35 percent of GDP in 2019.
  - Share of transfers in total social assistance programs decreased from 28 percent in 2018 to 17 percent in 2019.
- Programmatic changes:
  - IMSS-Bienestar remains the largest-funded program but its share of funding decreased from 31 percent in 2018 to 25 percent in 2019 and 2020.
  - Two major programs discontinued and replaced:
    - Seguro Popular was discontinued in 2020 and replaced by INSABI (Institute for Health for Wellbeing) aiming to establish fully funded, integrated public health networks, cancel private subcontracting, and offer free and universal services.
    - Prospera was discontinued; Prospera had been the second largest program in 2018 and provided conditional direct payments to poor families.
- New or restructured programs and allocations:
  - Three scholarship programs, each receiving around 4–5 percent of total funding:
    - Benito Juárez Basic Education Welfare Scholarship: for families in poverty with children in initial, preschool, primary, or secondary education (under 15 years); payment is per family and there is no conditionality related to health or nutrition.
    - Benito Juárez Universal Scholarship Program: targeted to students in Higher Secondary Education in public institutions.
    - Young People Writing the Future (active labor market program): links people aged 18 to 29 who do not study or work with companies/institutions to develop skills; provides monthly support and medical insurance up to one year.
  - Increased emphasis on social (non-contributory) pensions reflecting prevalence of old-age poverty, limited coverage of the pension system (particularly for women), and low replacement rates.
  - CONEVAL multidimensional poverty data for elderly in 2018: 34.4 percent in moderate poverty and 8.8 percent in extreme poverty.

*Source: wpiea2021244-print-pdf - Section V discusses policy recommendations and concludes.*

### 7.3 in OECD Pensions at a Glance (2019)). Social pensions rose by more than threefold,

### wpiea2021244-print-pdf - 7.3 in OECD Pensions at a Glance (2019)). Social pensions rose by more than threefold,

### Social pensions and pension program changes
- Social pensions rose from 36 billion pesos in 2018 to 129 billion pesos in 2020 in the social program Pensión para el Bienestar de las Personas Adultas Mayores (previously called Pensión para Adultos Mayores).
- The program’s share of funding increased from 8 percent in 2018 to around 20 percent in 2019 and 2020.
- Monthly payments more than doubled from 580 pesos per month in 2018 to 1275 pesos per month (2550 pesos bimonthly) in 2019 (DOF 2019).
- As of July 2021, the monthly payments are at 1550 pesos per month.
- Presidential announcement: target of 3000 pesos per month (or 6000 pesos bimonthly) by 2024.
- Minimum age reduced from 68 to 65 years; previously minimum age was 65 years for the indigenous population and 68 years for other adults.
- Projected budgetary cost increases:
  - around 136 billion pesos in 2021 (approved budget)
  - around 240 billion pesos in 2022
  - around 300 billion pesos in 2023
  - around 370 billion pesos in 2024
- Fiscal impact: translates into an increase of around 0.6 percentage points of GDP from 2021 to 2024.
- Outcome note: elderly poverty rates improved in 2020.

### Effectiveness of social programs (assessment against four characteristics)
- Four characteristics of good social assistance (per Hannan et al. (2020)):
  1. Broad coverage and adequate progressive benefits.
  2. Cost effectiveness by avoiding fragmentation and beneficiary overlaps.
  3. Preservation of work incentives and enhancement of human capital via linkages (public works, health care, education, training).
  4. Financial sustainability within overall expenditure envelope and consistency with other social protection programs.
- Mexico’s performance relative to regional peers and emerging markets (EM):
  - Coverage: significantly lags in coverage (share of population that receives a benefit) for all social protection and labor programs and social assistance programs (Figure 10).
  - Benefits incidence: percentage of benefits going to each quintile for the poorest quantile is lower than most regional and EM medians in social assistance programs (Figure 12).
  - Adequacy of benefits: transfers received as a share of total income/expenditure of beneficiaries are comparable to regional and EM medians for all social protection and labor, and better than comparators for social assistance programs (Figure 11).
  - Benefits incidence is comparatively high for high income group in social assistance programs.
  - Beneficiary incidence: percentage of beneficiaries in each quintile relative to total beneficiaries is comparatively better than comparator groups.
- Operational and coordination weaknesses:
  - Early evidence suggests many programs had little or no operational structures (CONEVAL, 2020a).
  - Limited evidence of coordination in planning between central units (e.g., CGPD and SEBIEN) on objectives, goals, work plans, and mechanisms.
  - Need for better training, adequate resources, and efficient coordination between central planning units and program implementers.
- Targeting issues:
  - High-priority programs operate largely on geographical or territorial basis (high/very high marginalization, indigenous people, high violence).
  - Problems: territories with high marginalization may have heterogeneous poverty levels; marginalization data are out-of-date relative to poverty data; CONEVAL found no evidence of prioritizing by areas of violence.
- Historical context:
  - Before 2019, non-contributory benefits were a smaller share of earnings in Mexico than in other countries (Figure 13).
  - Increase in social/non-contributory pensions was needed given prevalence of old-age poverty.
  - 2018 social pensions were low in OECD comparison; planned 2024 levels are relatively high controlling for per capita incomes.

### Program evidence and risks
- Prospera (and predecessors Progresa and Oportunidades) impacts:
  - Positively impacted school enrolment, education and health levels, nutritional status, and helped reduce poverty in rural areas (World Bank, 2014; Parker and Vogl 2018).
  - Noted concerns: targeting, exclusion errors, and corruption (Bearman 2019; Covarrubias 2018).
- New programs and potential adverse effects:
  - Programs with similar per-family payments to Benito Juárez Basic Education Welfare Scholarship had opposite effects on school attendance of other household members (CONEVAL 2020b).
  - Need to monitor school attendance (particularly for girls) and ensure health and nutrition are not negatively affected by removal of conditionality.
  - Concerns amplified by pandemic-related risks of school dropout and economic scarring.

### Education: demand, expenditures, and efficiency
- Constitutional mandate to universalize secondary education implies rising demand and sectoral shift toward secondary and tertiary levels (IMF, 2019b); potential fiscal pressures requiring efficiency gains.
- Government education expenditure as share of GDP: in line with OECD, EMs, and Latin America (LA) averages (Figure 14).
- Education expenditure per student: well below OECD average; somewhat below EMs; higher than LA.
- Teacher-to-student ratios (per 100 students):
  - Primary and secondary teacher-to-student ratios are well below OECD average.
  - Primary ratio is below EM and LA; secondary ratio also lower relative to Mexico’s secondary benchmark.
- Frontier (efficiency) analysis (DEA): room for efficiency gains, particularly in secondary enrollment.
- Outcomes:
  - Adult literacy rate: below OECD, above EM and LA.
  - PISA score: well below OECD average, slightly below EM, higher than LA.
- Subnational variation:
  - Strong correlation between income per capita and literacy rate across states (Figure 15).
  - Example teacher-to-student ratios: Mexico City and Colima higher than 7 teachers per 100 students; Tabasco and Puebla at 5 teachers per 100 students.
  - Dropout rates vary considerably across states.

### Health: spending, coverage, and efficiency
- Total health spending: declined by around 1 percentage point of GDP from 6.4 percent of GDP in 2009 to 5.5 percent of GDP in 2018 (Figure 16).
- Public share of health spending:
  - Increased from 46.7 percent in 2009 to 53.2 percent in 2014, then declined to 50.1 percent in 2018.
- Comparisons (2018):
  - Total health expenditure: Mexico 5.5 percent of GDP vs OECD 8.9 percent, EM 6.6 percent, LA 7.5 percent.
  - Public health expenditure (share of GDP and of total health expenditure) lower in Mexico compared to these groups.
  - Total health expenditure per capita: significantly below OECD and somewhat below/comparable to EM and LA averages.
  - Hospital beds, nurses, physicians (per 1000 persons): lower than OECD.
- Efficiency frontier: Mexico is below the health efficiency frontier, implying scope to increase quality and efficiency.
- Subnational coverage variation:
  - Affiliation to health services: >80 percent in Chihuahua, Baja California Sur, Colima, San Luis Potosi.
  - <70 percent in Jalisco, Hidalgo, Chiapas.
  - Lowest coverage: Michoacan de Ocampo at 62.2 percent.
  - Higher proportion of females affiliated to health services compared to men.

### The impact of COVID-19 (macro and poverty indicators)
- Labor poverty dynamics:
  - National labor poverty spiked by 7 percentage points between Q42019 and Q32020, then decreased.
  - At 40.7 percent in Q42020, labor poverty remained 3.4 percentage points higher than pre-pandemic levels.
  - State-level variation: Quintana Roo, Mexico City, and Tabasco increased by more than 10 percentage points between Q42020 and Q42019; eight additional states had increases >5 percentage points.
  - In Q22021, three states' labor poverty rates were 5 percentage points above Q42019 levels; eighteen states had positive increases.
- Gender and vulnerability:
  - Poverty in 2018 was higher for women compared to men (CONEVAL, 2020c).
  - 2020 increases in domestic violence and gender violence suggest more hardships for females.
- CONEVAL (2021b) updated poverty measurement (note: new series not directly comparable to previous):
  - Poverty rate increased from 41.9 percent to 43.9 percent between 2018 and 2020.
  - Number of people in poverty increased from 51.9 to 55.7 million.
  - Extreme poverty increased from 7.0 to 8.5 percent; number of people in extreme poverty increased from 8.7 to 10.8 million.
  - Lack of access to health services increased by 12 percentage points in the same period.
  - Elderly poverty decreased by 5.3 percentage points, from 43.2 percent to 37.9 percent between 2018 and 2020.
  - Rural poverty fell from 57.7 percent to 56.8 percent.
  - State heterogeneity: poverty in three states increased by over 8 percentage points; poverty decreased by 1.5-2.7 percentage points in Chiapas, Guerrero, Oaxaca, and Veracruz.
- ECLAC-UNICEF (2021b) projection: Mexico saw one of the highest increases in poverty in 2020 in absolute levels given its income per capita (Figure 19).

### The impact of government programs during the pandemic (fiscal response and cross-sectional analysis)
- Government fiscal response:
  - Increased health spending and direct budget support to households and firms by 0.7 percent of GDP.
  - Raised below-the-line measures and contingent liabilities by 1.2 percent of GDP.
  - These supports were lower than EM averages: direct and below-the-line budget support of 4.1 and 2.6 percent of GDP respectively (IMF Fiscal Measures Database, July 2021).
  - Much of the increase in social program spending was predominantly budgeted before the pandemic.
- Cross-sectional regressions (state-level, 2020 outcomes vs 2019; regressors include change in social program spending in 2020 measured as (actual 2020 minus actual 2019) divided by 2019 GDP; controls: state-level income per capita, tourism and export exposures, population density, mobility, cases per capita, lagged dependent variable):
  - A state increasing spending by 0.27 percentage points of GDP (75th percentile) increased employment by 5.4 percent.
  - A state increasing spending by 0.15 percentage points of GDP (25th percentile) increased employment by 3.1 percent.
  - Employment effects were higher for males than females.
  - Retail sales increased by 2.8 percent for the 75th percentile compared to 1.6 percent for the 25th percentile (results for retail sales not statistically significant).
  - Labor poverty reduced by around 4.5 percentage points for the 75th percentile compared to 2.6 percentage points for the 25th percentile.
  - Interpretation: higher social program support correlated with better outcomes on employment, retail sales, and labor poverty; higher support would likely have limited negative effects on economic activity and poverty further.
  - Additional findings: states more exposed to tourism experienced larger drops in retail sales and larger increases in poverty; higher population density associated with larger adverse impacts.

### Pandemic, scarring risks, and longer-term concerns
- Mexico’s 2020 output drop was historic and among the largest in G20 and regional peers; limited fiscal support increases scarring risks.
- Factors heightening scarring risks:
  - High informality.
  - Relatively limited recourse to social safety nets.
  - Low health expenditure.
- Comparative evidence: increases in unemployment, poverty, and inequality after pandemics have been lower in countries with greater fiscal support, lower informality, higher family benefits, and higher health spending (Cuesta Aguirre and Hannan, 2021).
- Education-specific scarring risk:
  - Pandemic resulted in largest disruption of education systems in history, affecting nearly 1.6 billion people in more than 190 countries (UN, 2020).
  - School closures exacerbate pre-existing education disparities; global evidence (Azevedo et al., 2021) indicates potential long-term learning losses.

*Source: wpiea2021244-print-pdf - 7.3 in OECD Pensions at a Glance (2019)). Social pensions rose by more than threefold,*

### 0.3 and 1.1 years of schooling adjusted for quality and close to 11 million students from

### wpiea2021244-print-pdf - 0.3 and 1.1 years of schooling adjusted for quality and close to 11 million students from

### Education impacts, digital divide, and risk of dropouts
- Estimated learning losses of "0.3 and 1.1 years of schooling adjusted for quality" and "close to 11 million students from primary and secondary education could drop out due to the income shock of the pandemic."
- Exclusion and inequality risk: already marginalized and vulnerable groups (girls, ethnic minorities, and persons with special needs) are likely to be more adversely affected by school closures.
- Internet access gaps across income groups (Figure 21):
  - For 15-year-old students, access to the internet at home is in line with the Latin American average for the top income bracket but "25 percentage points lower for the fourth quartile."
  - The gap of internet access for 15-year-old students across income groups is the highest in Mexico (alongside Panama) and above the Latin American average.
  - Mobile internet access gap: "88.8 percent of children in Quintile I lack access to internet" (the second highest in that income group for the countries considered), compared to "18.4 percent in Quintile V."
- Consequences: these significant internet-access gaps could lead to school dropouts and education gaps, impairing human capital accumulation and future job prospects.
- Policy implication: schools require resources not only to address pre-existing disparities but also to "rebuild the loss in learning during the pandemic," with priority to programs that address school dropouts.

### Path to the Sustainable Development Goals (SDGs) — framework and target spending
- The SDG Financing tool (IMF, 2021b) is used to evaluate financing needs for five development areas: education, health, roads, electricity, and water and sanitation, with dynamic projections up to 2050 and a production function linking spending to output.
- Education and health SDG spending targets (from IMF (2019b)):
  - Health: "6.4 percent of GDP"
  - Education: "6.6 percent of GDP"
- Roads, electricity, and water and sanitation gaps and targets:
  - Roads gap estimated at "1.15 percent of GDP" (needs minus 2007-2015 actual).
  - Electricity spending requirement to meet SDG: "0.4" percent of GDP.
  - Water and sanitation spending requirement to meet SDG: "0.2" percent of GDP.
- Caveats: model results are sensitive to assumptions and should be regarded as illustrative; pre-pandemic estimates are likely to be lower bounds.

### Scarring effects: calibration and illustrative scenarios
- Scarring channels considered: human capital depreciation (e.g., unemployment effects), diffusion (difficulty of young people entering the labor force), and two efficiency parameters on the return to education (difficulty creating human capital in remote learning).
- Scenarios: baseline and two scenarios where the four calibrated parameters are worsened by "5 percent" and "10 percent."
- Illustrative outcome:
  - Under "5 percent" scarring, model simulations suggest "long-term real GDP per capita could drop by about 4.5 percent over the long-term (2050) owing to COVID-19."
  - Deterioration would be more pronounced under the "10 percent" scarring scenario.
- Interpretation: if unaddressed, pandemic scarring could lead to substantial long-term deterioration in income per capita.

### Financing needs to meet SDGs and implications for fiscal policy
- Estimated additional financing required to meet satisfactory progress toward the SDGs by 2030 (five areas): "around 4.6 percent of GDP per year."
- Additional impact of scarring: scarring effects, if materialized, are likely to further increase funding needs by "around 0.2- 0.4 percentage points of GDP."
- Fiscal-space implications:
  - The required additional spending is large and will require raising adequate resources while ensuring debt/GDP declines over the medium term.
  - Mexico significantly lags OECD countries and regional peers on non-oil tax collections; medium-term tax reforms—implemented gradually as the economy strengthens—would be necessary to finance these needs and reduce public debt/GDP.

### Recommendations and conclusions
- Urgency: the pandemic has made it more urgent to narrow gaps, limit scarring, and make satisfactory progress toward the SDGs in social protection, health, and education.
- Comprehensive approach recommended: increase both the amount and efficiency of spending across social protection, health, and education.
- Pragmatic medium-term initial step:
  - Consider enhancing spending for social assistance, education and health for "about 2 percent of GDP over the medium-term" broken down as:
    - "1 percent of GDP for social assistance"
    - "1 percent of GDP for education and spending over the medium term"
- Complementary measures:
  - Increase spending on quality physical infrastructure to raise medium-term growth and productivity.
  - Improve efficiency by addressing gaps, overlaps, and fragmentation across social programs and high labor market informality.
  - Implement a medium-term tax reform to durably enhance collections as the economy strengthens.
- Social program design enhancements:
  - Improve targeting with progressive transfers to reduce leakage to high-income groups.
  - Use community-based methods and new instruments (e.g., mobile money) to identify and reach those in need.
  - Create a single registry of beneficiaries and strengthen administrative capacity to reduce overlaps.
  - Increase use of evidence-based analysis in program design.
  - Consider introducing a national unemployment scheme, building on smaller-scale programs (IMSS, ministry of social development, Mexico City).
  - Improve progressiveness of public transfers to mitigate income drops for lower-income households following the pandemic.
- Education-specific recommendations:
  - Rebalance spending toward investment in equipment and facilities.
  - Conduct payroll audits to identify ghost workers and curb absenteeism.
  - Invest in equipment, facilities, information technology and modern infrastructure to align with evolving labor demands.
  - Enhance quality of early-childhood education and access in low-coverage regions and for disadvantaged children.
- Health-specific recommendations:
  - Better target investment to impoverished areas with deficient access to services.
  - Decrease administrative and insurance costs and reduce beneficiary duplication.

*Source: IMF working paper content (wpiea2021244-print-pdf).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021244-print-pdf.pdf_