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What works in public utility reform: Lessons from evaluations in the energy and water sectors

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What works in public utility reform:  Lessons from evaluations in the energy and water sectors
Utility reform has never been more important. The COVID-19 pandemic has badly impacted utilities across the world. Many utilities are now under intensified financial stress due to budget reductions and a loss of revenue, resulting from a sudden drop in collection rates, suspension of billing, and tariff adjustment in some countries. This, in turn, has made it more challenging to ensure continued Show MoreUtility reform has never been more important. The COVID-19 pandemic has badly impacted utilities across the world. Many utilities are now under intensified financial stress due to budget reductions and a loss of revenue, resulting from a sudden drop in collection rates, suspension of billing, and tariff adjustment in some countries. This, in turn, has made it more challenging to ensure continued service delivery. IEG recently published the synthesis Public Utility Reform: What lessons can we learn from IEG evaluations in the energy and water sectors?, a compilation of evidence of what worked and what did not work, and why, in World Bank support of public utility reforms in the energy and water sectors in its client countries. Its findings are even more relevant in the context of uncertainty about medium-to long-term outlook for recovery from the challenges imposed by COVID-19. Well before COVID-19, financial viability and institutional accountability were the two main challenges faced by public utilities in improving service outcomes in the energy and water sectors. Now, the effectiveness of utilities in these two fundamental areas remain critical for ensuring the quality and sustainability of these vital basic services during a post-pandemic recovery. Financial Viability IEG analysis reveals a range of World Bank interventions geared to support financial viability in both the energy and water sectors.   Recovering the cost of service is at the core of sector reform. Across both water and energy sectors, inadequate cost recovery is a key driver of financial underperformance. Poor bill collection and operational inefficiencies (including excessive network losses) also have a significant role. IEG finds that, while tariff reform is fundamental, improving operational efficiency of service providers is crucial for financial sustainability. The cumulative evidence indicates that when inefficiencies result in high-cost service provision, improving utilities’ operational efficiency should precede or go hand-in-hand with tariff increases. Additionally, the gains from reductions in technical and commercial losses, improvements in payment collection, financial management, and demand side management proved easier to sustain once implemented. Evidence points to the importance of strengthening utilities’ commercial orientation, which is vital for the provision of adequate and reliable services, regardless of whether the service delivery agents are under public or private ownership. Utilities that emphasize cost control, customer orientation, and responsiveness to incentives are more likely to make meaningful progress. For example, World Bank operations in Vietnam and Turkey helped improve financial sustainability of electric power utilities through technical support and policy reforms, incrementally implementing tariff and market regulations in the electricity sector. Utilities may need more financial support as they weather the economic crisis triggered by the pandemic. However, as the recently published IEG evaluation State your Business! An evaluation of World Bank Group support to the Reform of State-Owned Enterprises cautions, temporary subsidies introduced at the time of COVID-19 can pose “policy traps” supported by powerful vested interests, which can be hard to reverse once the crisis is over.   Institutional Accountability Creating the right accountability and incentives is essential for effective service delivery. In both energy and water sectors, institutional accountability is critically tied to performance.  Sustaining reforms requires competent institutions and strong administrative capacity.  Improved performance can be a first step towards attracting private sector investment.  Strengthening sector planning, utility management, capacity and skills, can improve sector outcomes. A solid sectoral fiscal, financial, and regulatory framework also defines and sets the context for leveraging markets and the private sector to support service delivery. There are multiple institutional pathways that could lay the foundation for improved and sustained service delivery. There is no single model but there are certain principles that work. In energy, improved accountability and regulatory performance drive sector outcomes. Good practices on corporate governance and regulation enable the sector environment to leverage markets and the private sector. In Rwanda, for example, the World Bank (through budget support operations), the International Finance Corporation  (through advisory services), and Public-Private Infrastructure Advisory Facility (PPIAF) helped the government develop sector regulatory structures and separate water and electricity utilities to improve governance, accountability and transparency. Institutional and policy reforms transformed the Rwanda Energy Group into a commercially operated state-owned enterprise and helped attract private finance. In water, improved capacity, incentives, and transparent rules on accessing funds can ensure good sector outcomes. Good financial and operational data systems are also important. In Peru, the utility Sedapal radically changed its corporate management approach and work culture, including adopting a new performance-based compensation and incentive system driven by reaching results targets. IEG’s field-based assessment confirmed a steady improvement in access coverage, basic service parameters, and operational and financial performance. Political and social challenges In both sectors, utilities' operations and management are closely linked to the political economy in which they operate. Political economy considerations can inform specific design elements, including choices of programmatic instruments vs. standalone operations, or front-loading vs. back-loading of important reform actions in a programmatic series. Experience shows that support to operations needs to match the time frame in which effective government action can reasonably take place. The World Bank’s experience shows that complementary interventions and sustained support contribute positively to favorable and enduring results. Regarding tariff reform, the institutional, political, and social challenges are considerable. Public opposition to tariff reforms reflects a lack of confidence in public service improvements and that vulnerable groups will be protected. At the same time, it is important to address potentially negative distributional consequences of reforms through such measures as differentiated tariffs and targeted assistance programs. Their success depends on the government’s ability to reach vulnerable households through fiscally sustainable programs. Read the report | Public Utility Reform: What lessons can we learn from IEG evaluations in the energy and water sectors? Pictured at top, clockwise from left: The main drinking water pipeline for 750 households in Alapars and Karenis communities (Kotayk region) being fully rehabilitated. Armenia. Photo credit: Armine Grigoryan / World Bank The control room at the thermal power station at Takoradi, Ghana, June 21, 2006. Photo credit: Jonathan Ernst/World Bank Electrical Substation in Kenya. Photo credit: Andrew Stone Windmill, Nicaragua photo credit: Ihsan Kaler Hurcan Wegala Community Water Supply and Sanitation Project. Sri Lanka. Photo credit: Simone D. McCourtie / World Bank Girl gathers drinking water from a community water pipe. Photo credit: Dominic Sansoni / World Bank

Bhutan CLR Review FY15-19

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This review of the World Bank Group (WBG) Completion and Learning Review (CLR) covers the period of the Country Partnership Strategy (CPS) FY15-19, as updated in the Performance and Learning Review (PLR) dated May 8, 2017. Bhutan is a small, land-locked, lower middle-income country. Between 2015 and 2019 the annual real GDP growth has varied between 6.2 percent and 3.7 percent. The country’s Show MoreThis review of the World Bank Group (WBG) Completion and Learning Review (CLR) covers the period of the Country Partnership Strategy (CPS) FY15-19, as updated in the Performance and Learning Review (PLR) dated May 8, 2017. Bhutan is a small, land-locked, lower middle-income country. Between 2015 and 2019 the annual real GDP growth has varied between 6.2 percent and 3.7 percent. The country’s economic growth was bolstered in recent years by investments in hydropower. Gross National Income (GNI) per capita is now only ten percent below the threshold for upper middle-income countries. Between 2007 and 2017 the poverty headcount ratio (measured at the US$3.20 poverty line in 2011 purchasing power parity terms) dropped from 36 to 12 percent of the population. The CPS noted that Bhutan needed to sustain macroeconomic stability while creating a business environment to promote private sector growth and job creation. The hydro-led growth had created some short-term macroeconomic imbalances, which called for careful management of fiscal and monetary policies. At the same time, it was critical to provide a better investment climate that would be more conducive to private sector development, diversification of the economy and job creation. Also, Bhutan’s large stock of natural capital called for increasing its sustainable contribution to the economy, while protecting the environment and human well-being. Related challenges included rapid urbanization, low agriculture productivity, limited infrastructure, difficult topography, and vulnerability to disaster and climate change. The 2020 Systematic Country Diagnostic (SCD) confirmed these development challenges.

State Your Business: What are the keys to successful reform of state-owned enterprises?

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State Your Business: What are the keys to successful reform of state-owned enterprises?
State-Owned Enterprises SOEs are critical to many developing and emerging economies where the lives of millions of citizens are deeply affected by how these enterprises are run. Governments use SOEs to provide services across multiple sectors and to address the impacts of economic downturns or crises, such as the current COVID-19 crisis.  Show MoreState-Owned Enterprises SOEs are critical to many developing and emerging economies where the lives of millions of citizens are deeply affected by how these enterprises are run. Governments use SOEs to provide services across multiple sectors and to address the impacts of economic downturns or crises, such as the current COVID-19 crisis.   Although many SOEs are run well and have made important economic contributions, many others suffer from low productivity and efficiency, which have a detrimental impact on growth and consumer access to services. SOEs’ mixed institutional mandates and their political importance often pose performance and governance challenges. Poor performance can also generate substantial public fiscal losses. Aware of the importance of SOE reform to achieving economic development and service delivery goals, the World Bank Group (WBG) has long supported developing countries to address the associated challenges.   IEG recently published the evaluation State Your Business! An Evaluation of World Bank Group Support to the Reform of State-Owned Enterprises, its first systematic assessment of the Bank Group’s support for the reform of SOEs, focusing on the energy and financial sectors, where Bank Group investments in the last decade have surpassed USD 70 billion. The political importance of SOEs can impose substantial challenges to introducing and sustaining reforms. Such political economy risk factors help to explain why countries such as Bangladesh, Egypt, and Indonesia have signaled their intent to privatize state-owned banks but later halted efforts because of internal political constraints. The allocation and pricing of power and finance can evoke intense public reaction and mobilize vested interests.  Further, temporary crisis response programs can turn into irreversible “policy traps”, locking SOEs in to underfunded mandates even if it damages their long-term viability.    IEG’s evaluation sheds light on key factors driving successful SOE reforms and points to risks and obstacles that limit reforms with potentially dire consequences for SOE performance and delivery of services to the public. These factors include:   Sector competition  Research on the subject shows that enhanced competition improves SOE performance in both the financial and power sectors, both by itself and in combination with other reforms. First, there is strong evidence that SOEs perform better in the power sector (and in general) when competitive conditions prevail at the sector and enterprise levels. For example, an econometric assessment of power sector data for 36 developing and transition countries over 18 years found that gains in economic performance stemmed mainly from allowing private participation.   Privatization or regulatory reforms were less effective without a competitive market. Private sector participation can take various forms and involve different functions of the power market (generation, transmission, distribution, and retail). A key aim of Bank Group support has been to strengthen competition and regulation in SOE markets, in part to foster a level playing field between SOEs and private companies  One example of WBG support to achieve a more competitive power market is in Vietnam, where Electricity of Vietnam (EVN) and other SOEs dominated power generation. EVN also fully owned the entity that operates and maintains the national transmission grid.   The Bank Group engaged comprehensively in all aspects of the power sector (rural electrification, generation, transmission, distribution, load dispatch, renewables, development of wholesale and retail power markets, regulatory aspects, and SOE reform), using a wide range of instruments. The credibility and trust generated enabled the Bank Group to support the government in sequencing sector wide reform.  In 2012, EVN unbundled its generation subsidiaries into three separate generation companies, at the same time as the launch of Vietnam’s competitive generation market, in which independent power producers and generation companies compete in a power pool to sell to individual buyers. As of 2016, 24 percent of installed capacity in Vietnamese power generation was privately held.   In the financial sector, research shows bank concentration is more constraining to firms’ access to credit in countries with higher shares of state bank ownership. More competitive environments enhance the benefits of bank privatization.  The Bank Group's private sector arm, the International Finance Corporation (IFC) has committed to promoting “competitive neutrality” in the SOEs that it invests in.   Given the greater success of reforms with better competitive conditions, the IEG report recommends that the World Bank Group should gear up to do more competition analysis at the sector and project level, as part of a selectivity framework for engaging in SOE reform.  Control of Corruption  The oversight and accountability challenges of SOEs noted above can make them hard to manage and frequently exposes them to corruption. Corruption powerfully undermines SOE performance. In Ukraine, for example, widespread corruption impeded the progress of SOE reforms. By June 2018, more than 194 of the 793 criminal proceedings handled by Ukraine’s National Anticorruption Bureau dealt with about 50 SOEs and their officials, according to an OECD report. In Kenya, petty corruption among field staff responsible for installing and reading electricity meters reportedly hindered efforts to stem power system losses.   The IEG report finds that a country’s control of corruption is strongly associated with the likelihood of SOE reform success. Other things being equal, a country with high control of corruption is more than twice as likely to see SOE reform interventions succeed as a country with low control of corruption. In conditions of low control of corruption, it is more difficult to strengthen the governance, regulation, or performance of public enterprises.  IEG thus recommends that the Bank Group apply a selectivity framework for its engagements on SOE reform that considers country governance conditions. Where corruption control in the country is weak, IEG recommends that World Bank Group either sequence SOE reforms (first addressing public governance) or actively mitigate corruption risks through close attention to the strength of client commitment, supervision, simplicity of project design, and appropriate sequencing.  Mobilizing Private Finance  In its review of the Bank Group's experience, IEG found positive experiences from collaboration across its institutions, a key to mobilizing private financing and capabilities. Yet, IEG found these examples somewhat infrequent. The IEG report recommends scaling up the collaborative approach known as “Maximizing Finance for Development” (MFD) to enhance internal coordination among WBG units and help mobilize private financing and capacity including through ownership reforms such as privatization and public-private partnerships.  However, the recommendation to prioritize private solutions for SOE reforms through an MFD “cascade” approach is not a call for privatization alone. Rather, the World Bank Group should consider a full range of options, including improving regulation and competition, strengthening SOEs’ corporate governance, or supporting ownership reform. The end goal may range from better preparing SOEs to tap private capital markets, to creating a level playing field for competition between private companies and SOEs, to public-private partnerships or outright privatization.    Sequential and Complementary Support  IEG found that sequential and complementary interventions, often involving more than one Bank Group institution, aid successful reform. This includes good prior analytic work. For example, over many years, WBG strategies and programs in Bangladesh’s power sector were aligned with successive government five-year plans. Since at least 2004, the Bank Group engaged in unbundling and building technical capacity through financing and technical assistance. This covered regulation, generation, transmission, and distribution.   The World Bank also supported the successful Power Cell, which channeled technical, planning, and coordination support to government while facilitating the role of private power producers. The regulator, Bangladesh Energy Regulatory Commission, benefited from WBG support since its creation. The World Bank, IFC, and MIGA (the WBG’s agency for insuring against political risk) were all involved in a “cascade” approach in supporting independent power providers. Over time, sector performance improved in reduced losses, reduced arrears, and an elimination of the energy gap, with the Bank Group as a trusted partner bringing expertise in the field, access to global expertise, long-standing relationships with key government agencies, coordination of donors, and a consistent policy view.  Through selectivity, coordination and sequencing, the Bank Group can help client countries better serve their citizens through SOE reform. This is especially pressing now as governments cope with the effects of the pandemic and launch economic recovery efforts.   Read IEG's Evaluation: State Your Business! An Evaluation of World Bank Group Support to the Reform of State-Owned Enterprises Pictured above, clockwise from top left: 1. The Akuapem Rural Bank Ltd., founded in 1980, in the town of Mamfe, Ghana, June 19, 2006. Photo credit : Jonathan Ernst / World Bank 2. Kabul Afghanistan: Mirwais Zamkaniwal, 27 years old, Northwest Kabul Breshna Sub Station Manager, on site. Photo credit: Graham Crouch / World Bank 3. A female entrepreneur is visiting a bank in Vientiane. Vientiane, Lao PDR. Photo credit: Stanislas Fradelizi / World Bank 4. Interior of power plant. Kenya. Photo credit: Curt Carnemark / World Bank    

Lao People's Democratic Republic: Nam Theun 2 Hydroelectric and Social and Environment Projects (PPAR)

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The Nam Theun 2 Hydropower Project (NT2 HPP) was a major undertaking in the Lao People’s Democratic Republic (Lao PDR) when the country’s energy sector was nascent, the overall economy was transitioning from central planning to greater market orientation, and private participation was limited in the energy sector. The NT2 HPP was developed primarily to export electricity to Thailand to boost Show MoreThe Nam Theun 2 Hydropower Project (NT2 HPP) was a major undertaking in the Lao People’s Democratic Republic (Lao PDR) when the country’s energy sector was nascent, the overall economy was transitioning from central planning to greater market orientation, and private participation was limited in the energy sector. The NT2 HPP was developed primarily to export electricity to Thailand to boost economic growth in Lao PDR in support of the implementation of the country’s Growth and Poverty Elimination Strategy. The project was also designed to be catalytic—a model to guide subsequent exploitation of the country’s extensive hydropower resources. Ratings for the Nam Theun 2 Hydroelectric Project are as follows: Outcome was satisfactory, Bank performance was moderately satisfactory, and Quality of monitoring and evaluation was substantial. The NT2 HPP—given its scale, complexity, and significance—provides many lessons for consideration in future hydropower development initiatives: (i) A project design to capture more comprehensive development outcomes from hydropower, as recommended in the World Bank’s Water Working Note “Directions in Hydropower: Scaling Up for Development,” needs to balance its ambitions with the corresponding implementation capacity, particularly as it relates to experience with environmental protection and social development that may exceed the capabilities of many hydropower developers (World Bank 2009a). (ii) Strategically catalytic interventions, such as the NT2 HPP, can lead to transformational impacts when there is a commitment to and capacity for implementing follow-on actions such as replicating and mainstreaming its features. In the NT2 HPP, power financing through a PPP was catalytic in helping to develop the sector and fueling export-led growth. (iii) Bank Group (and other IFI) participation, including the use of guarantees, can be instrumental in mitigating risks and enhancing the private sector’s confidence to mobilize in nascent markets with unexploited potential and scalable investment opportunities. (iv) A government’s adherence to its commitment to implement a sound development strategy may be a more significant driver for achieving broader poverty alleviation outcomes than earmarking revenues for specific expenditures that are fungible within a general budget. (v) Hydropower can produce sizable global environmental benefits in terms of combating climate change, although the negative impacts that can arise from greenhouse gas emissions from storage reservoirs should also be accounted for.

Public Utility Reform: What lessons can we learn from IEG evaluations in the energy and water sectors?

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Public Utility Reform: What lessons can we learn from IEG evaluations in the energy and water sectors?
This synthesis provides a review of operationally relevant findings and lessons from World Bank-supported utility reforms in the energy and water sectors, as identified in IEG evaluation products.This synthesis provides a review of operationally relevant findings and lessons from World Bank-supported utility reforms in the energy and water sectors, as identified in IEG evaluation products.

Evaluation of the World Bank Group’s support for electricity supply from renewable energy resources, 2000–2017

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Pictured above: Ain Beni Mathar Integrated Combined Cycle Thermo-Solar Power Plant. Photo credit: Dana Smillie / World Bank
This evaluation assesses the performance of the World Bank Group (WBG) in its support to electricity production from renewable energy resources in client countries over the period 2000 to 2017.This evaluation assesses the performance of the World Bank Group (WBG) in its support to electricity production from renewable energy resources in client countries over the period 2000 to 2017.

Tajikistan: Energy Loss Reduction Project (PPAR)

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This project was approved on June 30, 2005, for a cost of $30.0 million, including an International Development Association credit of $17.9 million. The project cost increased to $48 million after restructuring and additional finance of $18.0 million. The project closed on December 31, 2014, two and a half years later than the originally scheduled date of June 30, 2012. The original objective was Show MoreThis project was approved on June 30, 2005, for a cost of $30.0 million, including an International Development Association credit of $17.9 million. The project cost increased to $48 million after restructuring and additional finance of $18.0 million. The project closed on December 31, 2014, two and a half years later than the originally scheduled date of June 30, 2012. The original objective was, to assist [Tajikistan] in reducing commercial losses in the electricity and gas systems, and to lay the foundation for the improvement of the financial viability of the electricity and gas utilities in a socially responsible manner. In 2012, the project objective was expanded to include, to assist in the viability assessment of the proposed Rogun HEP [hydroelectric project] in Tajikistan. Ratings for the Energy Loss Reduction Project are as follows: Outcome was moderately unsatisfactory, Risk to development outcome was high, Bank performance was unsatisfactory, and Borrower performance was moderately unsatisfactory. Lessons from this project include: (i) The development effectiveness of the World Bank’s continuous sectorwide engagement in a country can be diminished significantly if the risk analysis at project appraisal is not comprehensive and candid and if prompt course corrections are not made during implementation when a major risk is realized. (ii) The World Bank should proactively ensure that a project component that is crucial to achieving the project development objective and is funded through parallel financing arrangements is designed and implemented in an effective and complementary manner. (iii) The World Bank’s convening capacity can contribute to resolving politically complex and technically demanding development issues that cut across national boundaries, by creating a transparent and inclusive consultative process, and marshaling globally recognized expertise.

Rwanda CLR Review FY14-20

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In summary, under the Rwanda CPS for FY14-FY20, the World Bank Group supported the government to address problems in areas and sectors that could help reduce poverty and improve shared prosperity. The CLR’s most relevant lessons are summarized as follows. First, government discipline and leadership enhance the effectiveness of official development assistance and the country’s ability to progress Show MoreIn summary, under the Rwanda CPS for FY14-FY20, the World Bank Group supported the government to address problems in areas and sectors that could help reduce poverty and improve shared prosperity. The CLR’s most relevant lessons are summarized as follows. First, government discipline and leadership enhance the effectiveness of official development assistance and the country’s ability to progress. Second, more qualified people working on financial management, procurement and safeguards is needed to enhance the impact of projects and program. Third, plans for agricultural modernization require considering interactions between the rural and urban labor markets to ensure migrating rural workers have gainful urban employment. Fourth, generating knowledge through ASA can help identify binding constraints and design policy reforms in a timely manner. IEG adds the following lesson: Poor results framework make it difficult to learn from a program’s experience, attribute results to the program and assess its achievements, and build knowledge that can guide future program design and implementation. To assess programs, build knowledge and guide future actions, the WBG needs to ensure CPF Results Frameworks have: (a) a clear and coherent results chain and (b) indicators that can be measured, are useful for assessing the achievement of objectives and are linked to the program’s interventions.. In Rwanda, the CPS results framework has shortcomings that makes it difficult to measure the achievement of some objectives, build knowledge and guide future WBG programs.

Sierra Leone - Completion and Learning Report : IEG Review

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This is a validation of the Completion and Learning Review (CLR) for the World Bank Group’s (WBG) engagement in Sierra Leone covering the Country Assistance Strategy (CAS, FY10-FY13). For completeness and learning purposes, and while the CAS formally expired in FY13, IEG has elected to examine the period FY14-FY19 as well as no CPF was in place to replace the CAS. Owing to data limitations and in Show MoreThis is a validation of the Completion and Learning Review (CLR) for the World Bank Group’s (WBG) engagement in Sierra Leone covering the Country Assistance Strategy (CAS, FY10-FY13). For completeness and learning purposes, and while the CAS formally expired in FY13, IEG has elected to examine the period FY14-FY19 as well as no CPF was in place to replace the CAS. Owing to data limitations and in line with relevant provisions of the Working Arrangements between the Independent Evaluation Group and WBG, IEG’s review does not rate the CAS’s overall development outcome or the World Bank Group’s performance.

Mexico - Completion and Learning Review : IEG Review

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This review of Mexico’s Completion and Learning Review (CLR) of the World Bank Group’s Country Partnership Strategy (CPS) covers the CPS period FY14-FY19 and the Performance and Learning Review (PLR) of January 26, 2017. Mexico is an upper-middle-income country with a gross national income (GNI) per capita (in current US$) of US$9,180 in 2018. During 2014-18, the average annual GDP growth rate Show MoreThis review of Mexico’s Completion and Learning Review (CLR) of the World Bank Group’s Country Partnership Strategy (CPS) covers the CPS period FY14-FY19 and the Performance and Learning Review (PLR) of January 26, 2017. Mexico is an upper-middle-income country with a gross national income (GNI) per capita (in current US$) of US$9,180 in 2018. During 2014-18, the average annual GDP growth rate was 2.2 percent in a show of resilience in the face of a complex external environment. In the first half of 2019, economic growth came to a virtual halt owing to policy uncertainty, tight monetary conditions and budget under-execution as well as slowing global manufacturing activity. Over the longer term, Mexico’s economic growth has been below the level needed to converge toward advanced country economies. The country’s per capita GDP, which is closely related to productivity, stands at 34 percent of U.S. per capita GDP compared with 49 percent in 1980.2 Poverty rates (share of individuals living on less than the 2011 PPP US$1.90 per day poverty line) fell from 3.8 percent of the population in 2016 to 2.2 percent in 2016. There was a small decline in the Gini index from 48.7 percent in 2014 to 48.3 in 2016. IEG’s Country Program Evaluation for Mexico (2018) indicates that Mexico’s multidimensional poverty index for the extremely poor fell from 11.3 percent in 2010 to 7.6 percent in 2016, helping reduce the overall index from 46.1 percent to 43.6 percent. At the same time, income growth of the bottom 40 percent was below the population mean.