Mexico’s urban poor
work harder for less
A report by the World Bank

27 August 2005: Even though Mexico’s 2002 to 2004 poverty-reduction trends are encouraging – particularly as far as rural poverty is concerned – the country still faces challenges such as reducing urban poverty, which has fallen into a rut of sorts, as well as the challenge of making its social protection system less regressive and more equitable so as to provide coverage for more of its poor.

The indication came from the study Income Generation and Social Protection for the Poor, conducted by the World Bank at the request of the Mexican Government. The document, the second of a three-part programme study on poverty in Mexico, shows that in 2002 national and rural poverty levels recently reverted to the levels observed before the 1994 – 1995 crisis.

According to Jaime Saavedra, World Bank Poverty Manager for Latin America, Mexico has made considerable strides in poverty reduction since the late 1990s, with performance above the Latin American average. Saavedra explained that: “Between 2000 and 2004, extreme poverty fell almost seven percentage points, which can be explained by development in rural areas, where extreme poverty fell from 42.4 per cent to 27.9 per cent. The urban poverty rate, however, got stuck at 11.3 per cent.”

According to the study, the factors that have contributed to rural poverty reduction include macroeconomic stability, an increase in public and private transfers, including remittances, and the diversification of income from non-agricultural activities, such as tourism and services.

And yet, poverty rates in the urban sector have not improved. The urban poor work harder and earn less. Labour income is the main and often the only source of income for the urban poor. In Mexico, 57 per cent of the income of the poorest urban quintile comes from manual labour, which is higher than the Latin American average.

As Gladys Lopez-Acevedo, a Senior Economist at the World Bank and author of the study put it: “Although wages have improved since 1996, the evidence shows that the urban poor still work more but earn less in 2003, compared with 1991. Over the last 15 months, labour market trends have not been encouraging, which is why one of the greatest challenges is to increase access to productive work opportunities for the poor."

Another point made in the report is that since its inception in the 1940s, the Mexican social protection system has not made the necessary adjustments to tackle the risks faced by the poor. By not providing coverage for poorer households, the public social security institutions have failed to mitigate the persistent inequalities in the Mexican society, and as a result the vast majority of the poor have little means at their disposal to cope with risks.

The study explains that Mexico has been investing less in social protection and in the social sectors in general, as a consequence of a reduced fiscal budget, which reflects the limited tax base and low fiscal revenues. Public resources to pursue enhancements and expansions of the poverty reduction programs and to increase social security coverage, particularly for the more vulnerable groups, are currently very limited.

For this reason, a fiscal reform capable of expanding the budget is critical. While countries such as Brazil and Chile dedicate 16 and 19 percent of their GDP to social spending, Mexico allocates nearly 10 percent to the social sector; this is reflected in relatively low levels of per-capita social spending.

By the same token, the greater part of spending on social protection does not reach the poor because of the system’s dual structure. Almost 90 per cent of spending on social protection is channelled through institutions geared towards providing health and pension services to workers in the public and private sector, resulting in the exclusion of informal workers.

Currently, the IMSS (Mexican Social Security Institute) and the ISSSTE (Social Security Institute for Government Employees) together represent a major contingent liability, which is in the region of 82 percent of GDP. This structure poses a threat to maintaining and expanding other social spending programs that better target the poor.