Category Archives: Volume 2, Issue 1

Mexico’s Militarized Anti-Drug Policy: Understanding Its Origins Through Examination of Institutional Legacies, Democratization, and Public Opinion

By Katherine Michaud‡

Abstract

Mexican President Felipe Calderón boldly decided to confront organized drug traffickers with military support, despite prognostications that this would ignite great violence. Little academic literature comprehensively assesses the origins of his policy decision. Employing an institutional framework, this article  compares Mexico’s historical and contemporary party system and law enforcement institutions to reveal their effect on Calderón’s campaign environment and public opinion, which shaped his anti-drug policy.

This paper demonstrates how Mexico’s historical party system and law enforcement institutions  allowed drug trafficking to strengthen while leaving the Mexican presidency and state weaker. It argues that these institutional legacies, combined with the forces of democratization, public opinion, and United States (US) influence, resulted in Calderón’s decision. Discussion concludes with lessons learned and  potential policy implications for Mexico.

Introduction

After winning Mexico’s 2006 presidential election, Felipe Calderón decided to use the military to dramatically escalate the government’s battle with organized crime and drug trafficking. This article examines the factors that led to this decision. It builds upon previous research to demonstrate that Mexico’s historical party system and law enforcement institutions allowed drug trafficking to strengthen while leaving the Mexican presidency and state weaker. The paper discusses how these institutional legacies collided with Mexico’s democratization, public  opinion, and US influence to result in Calderón’s decision.

The decision to pursue such a confrontational policy was a risky one, as pointed out by Jorge Chabat of Mexico’s Center for Research and Teaching in Economics prior to Calderón’s election. Chabat warned that a confrontational war on drugs in Mexico would likely bring about great violence, as occurred when the Colombian government attempted a similar crackdown.[1]  Examining Calderón’s decision is necessary to understand both why he ran the risk of unleashing such violence and the potential policy implications for Mexico.

Mexico Under the Partido Revolucionario Institucional

The end of the twentieth century brought a wave of change to Latin America as nations transitioned to democratically governed societies. Mexico, however, did not become a genuine democracy until Vicente Fox’s 2000 presidential victory, which ended decades of rule under the hegemonic Partido Revolucionario Institucional (PRI). Prior to the 2000 election, Mexico’s popular elections were historically superficial, as they were prone to ballot rigging and dishonest tallying practices.[2]  Although opposition parties existed and were represented in Congress, their inclusion was intended to lend the appearance of credibility to Mexico’s political system rather than genuinely challenge the centrist PRI.[3] This was especially true prior to the late 1980s and 1990s, which is when the PRI’s control began to weaken.

For decades, the PRI maintained control of Mexico’s government through a powerful patronage system.[4] The PRI’s role was to galvanize voters, manage patronage  distribution, and disseminate political messages to the public. Although the PRI possessed an aura of power, the president ultimately determined policy. This distinction kept the party at a distance from actual policymaking, weakening its power to shape government actions.[5]

What was able to strengthen under the PRI’s rule was organized drug trafficking. While increased violence and media attention regarding Mexico’s drug problem are a new phenomenon, drug trafficking within the country’s borders has existed for decades, with the PRI’s assistance. Reports referring to the PRI highlight some members’ belief “that cutting backroom deals with organized crime in Mexico is the best way to control violence.”[6] Negotiating with organized crime constitutes a markedly different approach than disarming it—the objective expressed by Calderón’s Administration.[7]

A symbiotic relationship emerged between the government and the drug trafficking community. The PRI gained its legitimacy through electoral support,[8] which traffickers could contribute. This strengthened Mexico’s one- party dominance in elections while fostering a “state sponsored racket,” which Richard Snyder and Angélica Durán-Martínez define as “informal institutions through which public officials refrain from enforcing the law or, alternatively, enforce it selectively against the rivals of a crime organization, in exchange for a share of the profits generated by the organization.”[9]

As a hegemonic, centralized authority not threatened by other parties, the PRI and its presidents were able to control law enforcement, or lack thereof, as they pleased. Well-organized traffickers were reliable partners, and the PRI gave them favorable treatment on operating licenses, and in some instances integrated them into governmental agencies.[10] Drug lords even appeared in public with elected officials, including at the wedding of governors’ children.[11] Mexico existed in a state of “pax mafia.”[12]

Clientelism  under  the  PRI  reign  also  extended  to  civilian  law enforcement, which has historically been a weak institution that has failed to gain the trust of Mexican citizens. In past years, politicians have used police forces as a political tool, sometimes to employ violence against citizens.[13] The corrupt character of civilian law enforcement further cemented citizen distrust in the institution. George Grayson provides an overview of Mexican law enforcement’s corruption in the context of the Federal Security Directorate (DFS), an elite police force also involved in intelligence activities:

“[The] DFS epitomized the worst in police forces. It recruited poorly educated individuals, mostly men aged 30 to 45; its roster included both civilians and military personnel; it demanded that operatives show loyalty to their individual sponsors, thus privileging personal commitments over institutional loyalties; it paid relatively low salaries and turned a blind eye when members supplemented their incomes by trafficking in drugs, extorting money, or selling protection to hapless businessmen and prostitutes.[14]”

Eventually, the DFS was disbanded precisely because of its corrupt character. However, other federal, civilian law enforcement agencies have been discredited for similar reasons. The Federal Judicial Police and Federal Highway Police, for example, were charged with torture and drug trafficking offenses.[15]

Due to law enforcement corruption, drug lords such as Sinaloa leader El Chapo could remain safe; El Chapo supposedly disbursed five million dollars monthly to bribe police and other officials.[16] Police susceptibility to bribes increases in institutions where resources and a culture of professionalism are lacking. This was the case with Mexican police forces, which have been consistently under-paid,  under-trained,  and  under-equipped,  contributing to a sense that serving on the force is not a professional career.[17]   Mexico’s contemporary law enforcement remains ineffective as a result of this history.

Democratization: the PRI’s Decline and the Challenge of Organized Crime

In the 1980s and 1990s, the PRI’s grip on power began to loosen. During its leadership, the PRI broadcasted messages outward rather than bringing them in from lower party levels.[18] This is distinctly different than a party that relays citizen concerns up the chain of  command to influence presidential policies. Such a process risks alienating the citizenry, which was likely compounded by Mexican presidents’ free  reign—restricted only by a six-year term limit—under the PRI regime.[19] After decades in power, the PRI’s dominance weakened due to internal party conflict and Mexico’s economic crisis, along with the resulting transition towards a market economy.[20]

In response, the party system began to shift toward genuine democracy. The center-right Partido Acción Nacional (PAN) and the center-left Partido de la Revolución Democrática (PRD) rose as legitimate challengers to the PRI. A larger and stronger plurality of party representation in the legislature reflected the increased competition and presidential limitations.[21] For example, even prior to complete democratic transition, President Ernesto Zedillo—a member of the PRI—had difficulty passing reforms without a PRI majority in the legislature.[22]

The PRI’s fragmentation also impaired the Mexican government’s ability to collude with and control organized crime. Democratization led to the collapse of the state-sponsored racket when the hegemonic PRI fell and could no longer shield traffickers from law enforcement. Increased violence resulted as cartels fought to assert their control against a state intent on enforcing the law.[23] This is an ironic effect of democratization, given that democracy is often seen as the end of the road, the ideal state.

Former Argentine President Raúl Alfonsín referred to democracy as what “cures, feeds, and educates.”[24]   However, democratization led to the collapse of the PRI patronage system, which opened a power vacuum that organized crime filled and used to develop a parallel, informal authority.[25]

During his visit to Zitacuaro in Mexico, William  Finnegan  witnessed cartels’ capacity to establish such authority. Finnegan offers Mexican citizen testimonies that exemplify how cartels’ power has permeated society. Much of his article discusses one cartel, La Familia, which provides employment and help for those in need. If residents in their territory fall ill, but are without the financial resources to seek medical assistance,  the cartel pays for the necessary hospitalization and medical care.[26] Some Mexican  residents even associate cartels with modernity and progress.[27] “‘They’re a second law[,]’ a schoolteacher in Zitacuaro said of La Familia, ‘Maybe the first law.’”[28]

Such good deeds as those described by Finnegan are likely not done for the greater good of society, but rather to establish cartels’ authority and popularity in a given territory. To maintain their prominence, cartels need to  establish  informal  mechanisms  of   control,  such  as  by  extorting  local businesses.[29] The cartels’ extortion system challenges the Mexican government’s authority by establishing a parallel tax system, which places a  burden on small businesses.[30]  Cartels’ provision of services threatens to legitimize illicit organizations that, unlike the government, are not accountable to the people, and are thus unreliable and prone to discriminate against those that do not obey their orders.

Calderón’s Decision to Dismantle Organized Crime

Mexico’s transition to democracy began with former President Vicente Fox, who attempted to reinvigorate the war on drugs after years of PRI collusion with traffickers. Upon taking office, Calderón could choose either to continue with this effort or not to advance it further. Selecting the latter would have risked sending a message to traffickers and Mexican citizens that the government was either incapable of, or indifferent to, ending the drug trafficking challenge. It also would have bolstered the growing perception that increased violence was undermining the state.[31]

Using military force is a visible and traditional manner to assert authority, which Calderón chose to demonstrate he was the commander in chief.[32]  His need to assert this authority resulted from democratization and his election environment. While democratization strengthened Mexico’s party system, it diminished presidential power.[33] Also, Calderón’s victory was contested as he superseded his 2006 presidential opponent by an extremely thin margin – one percentage point. Calderón’s opponent, Andrés Manuel López Obrador, did not quietly accept defeat. Instead, Obrador engaged in five months of protest that continued until inauguration day.[34]   Drug trafficking presented a highly visible opportunity for Calderón to assert himself and gain public support.

Calderón apparently took public opinion into consideration in deciding to run on a law and order platform – a position which he then acted upon in office by using the military to fight drug trafficking. In 2005, when Calderón was running for office, 71 percent of people living in urban areas reported feeling insecure in their cities of residence.[35] Drug trafficking was of particular concern amongst citizens around this time. According to a 2006 poll by one of Mexico’s most circulated newspapers, El Universal, nine out of 10 people considered drug trafficking a serious problem.[36]

Results from 2006 exit polls corroborate that Calderón was in touch with voter priorities: the area of highest concern for Calderón’s supporters was insecurity.[37] Only four days into his campaign, Calderón stated that he would be the drug traffickers’ worst nightmare, as he would fight against the danger that drugs and alcohol present.[38]   Once in  office, he fulfilled this campaign promise. Rather than allowing drug trafficking to persist in a controlled manner in exchange for political support, the Calderón Administration has tried to fragment cartels.  This decision received early support:  Calderón’s public approval ratings stood at 68 percent in April 2007,[39]  despite the controversial circumstances of his election.

Calderón’s Decision to Use a Military Approach

Local government was unprepared to handle the task of managing organized drug trafficking, due to PRI policies that constrained development. The PRI concentrated expenditures at the federal level for years.[40] This limited Calderón’s resources, since local  police were “starved to dysfunction” and likewise unprepared to combat organized  crime.[41]    The military was left as Calderón’s sole viable option to combat drug trafficking.

Additionally,  after  years  of   PRI-fueled  corruption,  the  Mexican public does not hold law enforcement in high regard. There is a widespread fear among citizens “that the police may be in league with the criminals.”[42]

According to Latinobarómetro, a top surveyor of public opinion in the region, the  percentage of  Mexican citizens expressing no confidence in the police has oscillated between 48, 34, and 37 percent for the years 2005, 2006, and 2008 respectively.[43] The highest level of mistrust in the police over these three years preceded Calderón’s presidency. Given Calderón’s slim victory and the changing party system dynamics that weakened the presidential institution, his decision to reform the police and rely on the military to combat trafficking is logical. It is also difficult to fight a challenge with an institution not seen as legitimate.

Calderón’s decision to use the military was also influenced by the nature of the drug trafficking problem, which requires the government to confront a well-rooted and well-organized force. Cartels use sophisticated weaponry that is significantly more powerful than what the police forces possess.[44] This has contributed to great violence that challenges the state’s authority:

One of the most critical elements in the decision to use the military was the amount of violence between the election and when we took  over,  a senior presidential adviser said. The executions,  the  decapitations,  the  confrontations  between the drug gangs [gave rise  to]…a perception in society of lawlessness, that there was no state.[45]

Strengthening the law enforcement system will be a long process. Therefore, “while even Mexican military elites caution against involving the military in policing drug trafficking in the medium-to-long run, they believe it is the only short-term option available for President Calderón to establish social order.”[46] It is also a policy that Mexico’s northern neighbor historically supports.

US influence was a likely factor in Calderón’s decision to use the military. The US government has been involved directly or indirectly in Mexican counter-drug efforts since the beginning of the twentieth century.[47]  This is a natural development given Mexico’s geographic proximity, the resulting shared economic and political concerns, and the high drug consumption rate in the United States.

As early as World War II, US policy has been attempting to “twist the arm of Mexican policy makers to curb the export of illegal substances.”[48]A US-approved policy on a controversial, cross-border issue – which military intervention in drug trafficking was – could improve Mexico’s relations with its powerful neighbor.

US foreign aid requirements create another powerful incentive for strong anti-drug efforts. Since the 1980s, the US has required nations with drug production and trafficking issues to report adequate efforts at drug curtailment in order to receive foreign aid. Mexico and Colombia are included on the list of nations that must fully cooperate with US narcotic reduction goals to qualify for foreign aid.[49]   Colombia lost its certification in 1997, and the subsequent aid withdrawal likely contributed to destabilizing and  discouraging  financial investment in its economy.[50] Although Mexico never lost its certification under the PRI leadership, corruption related to drug trafficking was a source of tension between the US and Mexico.[51]  Calderón’s confrontational approach to uprooting drug traffickers represents an attempt to distinguish his leadership from previous administrations[52] and send a cooperative signal to the US

In October 2007, almost immediately after Calderón took office and increased the use of force against drug traffickers, the US Congress passed the Mérida Initiative. Its passage demonstrates that Mexico received increased foreign aid following its implementation of measures that the US traditionally supports. Critics branded the initiative as a “Colombianization of  Mexico,” as it seeks to militarize law enforcement to fight the drug war, with the US providing a substantial amount of financial aid.[53] Despite efforts by the US Congress to earmark funding for “softer” items like institution building and anti-corruption efforts, only $50 million of the $1.3 billion in Mérida Initiative funding over fiscal years 2008 through 2010 has been allocated towards the non-security focused Economic Support Fund. The remaining $1.28 billion has  been  appropriated  to  the  International  Narcotics  Control  and  Law Enforcement (INCLE) and Foreign Military Financing (FMF) accounts.[54]

Cooperation and diplomacy on the part of both countries are necessary to resolve drug trafficking and related violence. Demand for drugs in the US fuels Mexican production and trafficking to satisfy the cross-border consumption. Additionally, 93 percent of the firearms recovered by the Mexican government in 2008 alone originated in the US.[55] Calderón could not assume that choosing a policy in line with the US’ preference would prompt more stringent arms control. However, his strategy could represent a cooperative move made with the hope that the US would make such a concession.

Looking Forward

Gauging Calderón’s Policy Via Public Opinion

There are many ways to assess a policy’s effects, but public opinion remains an important indicator. Domestic perceptions were a contributing factor to Calderón’s policy decision, which he determined at a time when Mexicans were concerned with security and drug trafficking.[56] If the public deems the government’s war on drug traffickers  unsuccessful, the Mexican state stands to be discredited as a crime controller. This result would reinforce organized drug traffickers’ strength, as they would be seen as having won the battle and able to continue their illegal activities.

Though the policy’s effectiveness may take years to gauge, early indications show that the Mexican public largely supports Calderón’s strategy.

According to an April 2010 Mitofsky report, 47 percent of Mexicans consider the government-instituted operations to fight organized crime a success.[57]

Additionally, 74 percent of Mexicans still believe that the army is the institution to combat drug trafficking, despite a slight decrease from earlier poll numbers.[58]

Despite this early support, public opinion may shift toward disapproval if the current violence levels continue. Violence has increased markedly since Calderón’s inauguration. In 2009, the number of drug-related causalities reached 6,587, an increase of over 500 percent from 2001.[59] However, administration officials  believe this may be an indication that organized crime groups are losing their control over the state.[60]  Such visible conflict could also contribute to a public impression that the  government is actively addressing the drug trafficking challenge, which would help strengthen the state’s legitimacy.

Another potential implication of Calderón’s policy, and the uptick in conflict, could be a public desire to return to a policy of colluding with drug traffickers as a way to minimize violence. Whether either side would accept this retreat is debatable. Negotiations with cartels would also represent a step backwards for the Calderón Administration, which has invested great effort in defeating organized drug trafficking. It would also send the undesirable signal that cartels overpower the state.

The Importance of Building Civilian Law Enforcement Capacity

Mexico’s contemporary law enforcement remains weak because of its history. Its  lack of  resources and professionalism, combined with endemic police corruption, has resulted in low citizen confidence in local and federal level forces. This institutional weakness contributed to Calderón’s decision to use military force to fight drug trafficking.  After all, as Ángel Gustavo López-Montiel stated, even “after painful experiments with military, police, and civilian commands, public safety remains the weakest and most vulnerable aspect of every local administration.”[61]

While  Calderón  initially  relied  on  the  military  for  public  safety, he is now  working to improve civilian law enforcement. For example, he initiated  “Operation  House-Cleaning”  to  remove  corrupt  public  officials, including some from police forces, that were colluding with cartels to thwart Administration anti-drug efforts.[62] Calderón also restructured the federal police units to create a single agency, using Spanish and French forces as examples, in hopes of  improving the institution and increasing its  professionalism. [63]

Additional efforts to improve civilian law enforcement include the creation of a new national database to facilitate information and intelligence sharing and the provision of federal subsidies to incentivize state and municipal units to meet certain standards.[64] Calderón has even attempted to strengthen the civilian police forces by integrating military personnel. Military forces, fearful of downgrading their benefits and reputations, resisted this move.[65]    This recalcitrance underscores the negative reputation  that continues to plague civilian law enforcement.

However, despite these efforts, much work remains. As  recently as October  2008, members of  the Federal Office of  Special Investigations of  Organized Crime (SIEDO) were dismissed for their role in selling anti- drug  information.[66] Civilian  law  enforcement  reform  remains  important because informal institutions often supplement weak ones; “if people don’t trust the police or courts, crime groups will fill those roles.”[67] As the second democratically elected President, Calderón bears the burden of reversing public opinion and the mistrust in the formal institutions that was so prevalent at the time of his election.

The Importance of Strengthening Formal Institutions

If the government can incorporate more citizens into the formal sector, establish itself as a legitimate force to tackle illicit activities, and create a more equitable society with opportunities for citizens, drug traffickers will lose a key resource. However, as long as the formal economy and institutions do not offer a good alternative to illicit activities, people will continue selling drugs despite the increasing risks because the drug trade is extremely profitable.[68]  By fostering a more equitable society and a more robust formal economy, the government can diminish incentives for people to engage in drug trafficking as a means to make a living.

Also important for Mexico’s future is the manner in which it invests government funding. An emphasis on security spending can divert funding from other important streams such as education, health, and infrastructure. These are areas in which future dividends are reaped, since they support human capital development. How the Mexican state balances these investments in light of the drug trafficking issue will have future consequences for the state’s ability to advance its economy and society. Security spending is critical to combat organized crime and its associated violence. Concurrent investment in aforementioned budget items that support citizen development, as well as in job creation, is essential to incorporate citizens into the formal sector and reduce incentives to enter the profitable drug trade.

Conclusion

Before Calderón took office, there were predictions that aggressive anti-drug policies would cause violence as the Colombian drug war had.[69] Due to years of collusive coexistence with the hegemonic PRI, drug cartels were highly entrenched in Mexican society. Despite the challenge involved, Calderón made confronting the cartels a priority for several reasons.

Mexico’s  party  system  was  historically  weak  and  dominated  by one  hegemonic  entity.  Its collapse initiated a contemporary system with increased congressional and party system strength, which in turn weakened the presidency.[70] The PRI regime, which allowed traffickers to establish their networks, also planted the seeds for violence when it fell from prominence and its protection for cartels vanished. Cartels needed to fight to assert their control against a state intent on enforcing the law.[71] Years of corruption, collusion, and growing drug trafficking violence created a perception of insecurity amongst citizens.

Understanding why Calderón selected the military as a main component of his policy requires consideration of the other independent and intervening variables this article examines. Mexican civilian law enforcement still struggles against long-standing deficiencies related to its general lack of preparation and professionalism. Past party system legacies contributed to weak localities with long established cartels; therefore, a prepared police force was needed to support Calderón’s policy. Since the existing police force lacked such preparation, the military was a viable alternative.

This approach aligns with historical US preference, a strong intervening variable explored in this article. Given the US’ historical involvement in Mexican drug policy and its preference for a militarized anti-drug strategy, its influence stands out as a likely contributor to the policy selection. Relations with the US also occupied a place on the 2006 Presidential agenda, likely influencing Calderon’s decision further.[72]

Calderón’s  decision  also  coincides  with  Mexican  public  opinion trends.  Prior to his election, insecurity and crime, in addition to economic concerns, were citizens’ main preoccupations.[73] Early in Calderón’s campaign, the Mexican newspaper El Universal published a survey indicating that drug trafficking was a serious public concern.[74] Domestic opinion also supported military involvement given low confidence levels in  police forces, and the public continues to support this method.[75] Noting the policy’s articulation as a response to public opinion is not to distinguish it as the only or best way forward, but rather to demonstrate the link between Calderon’s decisions and the citizens he represents – a necessity, given Mexico’s recent transition to a democracy.

Examining Calderón’s policy origins also highlights lessons learned. Mexico demonstrates the danger of centrally concentrated power and resources. Despite Eduardo Medina-Mora Icaza’s statement that the Administration would prefer anti-drug efforts to be a police force issue, the PRI apparatus left local levels unable to wage the drug trafficking fight.[76] In fact, democratization allowed drug traffickers to fill the local-level vacuum that was created when the hegemonic PRI authority was removed, which presents an additional challenge to resolving the drug trafficking problem.[77]

Decreasing organized drug trafficking strength would benefit the Mexican government and prevent it from being discredited as unable to control crime. It would also provide it more flexibility in allocating funding away from security efforts as well as in setting the tone of the nation’s policy agenda. Determining the policy’s success or failure remains to be seen, as Mexico’s battle against organized drug traffickers is a fluid phenomenon with effects that cannot yet be comprehensively assessed. What can be explained, and what this article has outlined, are the factors that led to the policy’s emergence, lessons learned, and potential implications for Mexico.

Endnotes

[1] Jorge Chabat, “Mexicos War on Drugs: No Margin for Maneuver,Annals of the American Academy of Political and Social Science 582 (2002):145.

[2]            George Philip, “The Presidency, the Parties and Democratization in Mexico,” Democratization 9 no.3 (2002):132-136.

[3]            Victoria Rodríguez and Peter Ward, “Disentangling the PRI from the Government in Mexico,” Mexican Studies 10 no.1 (1994): 166.

[4]            Joseph Klesner and Chappell Lawson, “Adiós to the PRI? Changing Voter Turnout in Mexico’s Political Transition,” Mexican Studies 17 no.1 (2001): 20.

[5]            Rodríguez and Ward, “Disentangling the PRI,” 170-172.

[6] David Luhnow, “Mexicos President Must Work With Longtime Foe,The Wall Street Journal, July 7, 2009.

[7]            Eduardo Medina-Mora Icaza, “Contemporary Mexico,” (Public lecture in London School of Economics Hong Kong Theatre, London, UK, March 16 2010).

[8]            Klesner and Lawson, “Adiós to the PRI,” 20.

[9]            Richard Snyder and Angélica Durán-Martínez, “Does Illegality Breed Violence?

Drug Trafficking and State-Sponsored Protection Rackets,” Crime Law Soc Change 52 (2009): 254.

[10]          Snyder and Durán-Martínez, “Does Illegality Breed Violence,” 262-263.

[11]          George Grayson, Mexico: Narco-Violence and a Failed State? (London: Transaction Publishers, 2010): 29.

[12]          William Finnegan, “Letter from Mexico: Silver or Lead?” The New Yorker, May 31,

2010, 44.

[13]          Anthony LaRose and Sean Maddan, “Reforming La Policia: Looking to the Future of Policing in Mexico,” Police Practice and Research 10 no.4 (2009): 336.

[14]          Grayson, “Narco-Violence,” 133.

[15]          Grayson, “Narco-Violence,” 138.

[16]          Grayson, “Narco-Violence,” 58.

[17]          LaRose and Maddan, “Reforming La Policia,” 338.

[18]          Rodríguez and Ward, “Disentangling the PRI,” 172.

[19]          Philip, “Presidency, Parties and Democratization,” 132.

[20]          Philip, “Presidency, Parties and Democratization,” 140.

[21]          Jorge Domínguez, “The Scholarly Study of Mexican Politics,” Mexican Studies 20 no.2 (2004): 399.

[22]          Domínguez, “Scholarly Study,” 399-400.

[23]          Snyder and Durán-Martínez, “Does Illegality Breed Violence,” 265.

[24]          Snyder and Durán-Martínez, “Does Illegality Breed Violence,” 265.

[25]          Finnegan, “Letter from Mexico,” 44.

[26]          Finnegan, “Letter from Mexico,” 41.

[27]          Victoria Malkin, “Narcotrafficking, Migration, and Modernity in Rural Mexico,”

Latin American Perspectives 28 no.4 (2001): 116.

[28]          Finnegan, “Letter from Mexico,” 39.

[29]          David Luhnow and José de Córdoba, “The Perilous State of Mexico,” The Wall

Street Journal, 22 February 2009.

[30]          Luhnow and de Córdoba, “Perilous State”.

[31]          Grayson, “Narco-Violence,” 152.

[32]          Francisco González, “Mexico’s Drug Wars Get Brutal,” Current History 108 no.715 (2009): 74.

[33]          Philip, 131.

[34]          Joseph Klesner, “The July 2006 Presidential and Congressional Elections in Mexico,” Electoral Studies 26 no.4 (2007): 803-806.

[35]         Instituto Ciudadano de Estudios Sobre La Inseguridad, Cuarta Encuesta Nacional Sobre Inseguridad/Urbana, (Mexico City, Mexico: Instituto Ciudadano de Estudios Sobre La Inseguridad, 2006): 49.

[36]     Diana Zavala Rojas, “Opinan Que Narcotrafico Rebase al Gobierno,” El Universal, February 23, 2006, México.

[37]          Análisis de la Elección 2 de Julio de 2006: La referencia en encuestas, Consulta Mitofsky, 7.

[38]          Francisco Cardenas Cruz, “Pulso Político: Madrazo y Calderón Encaran al Narcotráfico,” El Universal, January 23, 2006.

[39]          “Mexico: Military Manoeuvres,” The Economist Intelligence Unit: Business Latin America

21 (May 2007): 1.

[40]          Chappell Lawson, “Mexico’s Unfinished Transition: Democratization and Authoritarian Enclaves in Mexico,” Mexican Studies 16 no.2 (2000): 282.

[41]          Sam Quinones, “State of War,” Foreign Policy 171 (2009): 79.

[42]          Grayson, “Narco-Violence,” 141.

[43]          Latinobarómetro Online Analysis, Latinobarómetro, 2005, 2006, 2008.

[44]          Eduardo Medina-Mora Icaza, Contemporary Mexico.

[45]          Grayson, “Narco-Violence,” 152.

[46]          Fernando Pacheco, “Narcofearance: How has Narcoterrorism Settled in Mexico?”

Studies in Conflict and Terrorism 32 no.12 (2009): 1038.

[47]          Chabat, “Mexico’s War on Drugs,” 142.

[48]          Grayson, “Narco-Violence,” 25.

[49]          Fernando Pacheco, “Narcofearance: How has Narcoterrorism Settled in Mexico?”

Studies in Conflict and Terrorism 32 no.12 (2009): 1038.

[50]          Bewley-Taylor, “Certification Meets NAFTA,” 421.

[51]          Chabat, “Mexico’s War on Drugs,” 138.

[52]          “Mexico: Military Manoeuvres,” 1.

[53]          Pacheco, “Narcofearance,” 1022.

[54]          Clare Seelke, “Mérida Initiative for Mexico and Latin America: Funding and Policy Issues,” US Congressional Research Service, (Washington: Library of Congress, January 21, 2010): 17.

[55]          Seelke, “Mérida Initiative,” 6.

[56]          Cardenas Cruz, Zavala Rojas.

[57]          “Percepción Ciudadana Sobre La Seguridad En Mexico,” Consulta.mx. Consulta

Mitofsky, April 14 2010.

[58]          “Percepción Ciudadana Sobre La Seguridad En Mexico.”

[59]          David Shirk, “Drug Violence in Mexico: Data and Analysis from 2001-2009

Report” (San Diego, California: University of San Diego Trans-Border Institute, January 2010): 4.

[60]          Eduardo Medina-Mora Icaza, “Transnational Organised Crime: Mexico’s Experience and its International Implications,” (Public lecture at the All-Party Parliamentary Group on Transatlantic and International Security, London, UK, December 14, 2010).

[61]          Ángel Gustavo López-Montiel, “The Military, Political Power, and Police Relations in Mexico City,” Latin American Perspectives, 27 no.2 (2000): 81.

[62]          Grayson, “Narco-Violence,” 128.

[63]          Grayson, “Narco-Violence,” 143.

[64]          Seelke, “Mérida Initiative,” 21.

[65]          Grayson, “Narco-Violence,” 143-144.

[66]          Seelke, Mérida Initiative, 21.

[67]          Finnegan, “Letter from Mexico,” 43.

[68]          González, “Drug Wars Get Brutal,” 75.

[69]          Chabat, “Mexico’s War on Drugs,” 145.

[70]          Domínguez, “Scholarly Study,” 399-400.

[71]          Snyder, Durán-Martínez, “Does Illegality Breed Violence?,” 265.

[72]          Klesner, “The July 2006 Elections,” 804.

[73]          González, “Drug Wars Get Brutal,” 74.

[74]          Zavala Rojas.

[75]          “Percepción Ciudadana Sobre La Seguridad En Mexico.”

[76]          Quinones, “State of War,” 79.

[77]          Finnegan, “Letter from Mexico,” 44.

 

‡  Katherine Michaud holds a Bachelor of  Arts in International Studies and Spanish from Elon University in North Carolina. She has also studied in Spain and Guatemala. More recently, Mi- chaud graduated from the London School of Economics and Political Science (LSE) with an MSc in Comparative Politics, focusing on Latin America. Prior to her studies at LSE, Michaud worked at the White House Office of Management and Budget as a Program Specialist. Michaud currently works in Washington, DC, as a Management Analyst with the US Department of  Health and Human Services.

 

Does Privatization Lead to Benign Outcomes?: A Case Study of India

By Kumar V. Pratap‡

Abstract

Conditioned by the International Monetary Fund’s Stand-By Arrangement of 1991 and growing domestic support, India adopted many ‘Washington Consensus’ policies, including privatization of state enterprises. The privatization policy has since continued with the aim of  augmenting resources and improving the efficiency of  these enterprises. As the Indian government looks to expand privatization with the objective of raising over $5 billion per year, it is critical to evaluate the results of  privatization in India to date.

Through 2008, privatization has raised $12.9 billion, enough to bridge 2.6 percent of  the Indian fiscal deficit per year. Privatization has increased productivity and efficiency, but there have also been significant employment losses, especially in the case of  asset sale1 privatization. As privatization can unshackle the productive potential of  state enterprises, the government should pursue it, as planned.  However, to derive optimum benefits, the government should customize the method of sale to the size and profitability of the enterprise being divested.

The Economic Need for Privatization

India initiated its privatization program in 1991 as part of  a larger macroeconomic  stabilization  and  structural  reform  effort  to  cope  with extremely  difficult  economic  conditions.  Inflation  had  risen  above  15 percent and foreign  exchange reserves were dangerously low. India had to access International Monetary  Fund  (IMF) resources through a Stand-By Arrangement in 1991. The policies adopted by the country around that time covered the whole gamut of ‘Washington Consensus’ policies, including the privatization of state enterprises.2   There was a growing domestic consensus that state-owned enterprises were not generating adequate returns and were suffering from low efficiency, and the government expected that privatization of these enterprises would lead to better outcomes. In this context, the two main objectives of privatization in India were to raise revenues to ease the fiscal crunch and to improve the profitability and efficiency of  the divested enterprises.

Literature Review

There is extensive literature on privatization which discusses both the general  principles behind it and how it operates in developed, developing, and transition  economies. William Megginson, Robert Nash, and Matthias van Randenborgh looked at  the effect of  privatization on 61 companies from 18 countries and 32 different industries during the period from 1961 to 1990.3    Their main finding was that “the mean  and median profitability, real sales, operating efficiency, and capital investment spending of . . . sample firms increased significantly (in both statistical and economic terms) after privatization.” The results are quite robust, as they are supported when the data is  partitioned into various sub-samples. However, this study does not control for business-cycle effects. In addition, the sample favors larger firms, which subjects the results to selection bias and reduces the ability to generalize the impact of privatization on firm performance.

Studies in different political settings corroborate the positive economic impact of  privatization. Simeon Djankov and Peter Murrell, reviewing more than a hundred empirical studies on the privatization experience in transition economies, find that “the aggregate  effects of  privatization are positive.”4

However, the authors add that while privatization, done correctly and under the right circumstances, can have positive effects, it can also have detrimental results. The varying consequences of privatization across transition economies could be partly explained by the level of development of supportive institutions, such as courts for promoting the rule of  law, and also by the adoption of sound competition and corporate governance policies.

While the economic impact of  privatization is generally found to be benign, studies have found that the distributional impact is less so. Both Katharina Gassner et al.5   and Sunita Kikeri6    have found that privatization decreases employment. Large-scale labor redundancy at state-owned enterprises, caused by political and bureaucratic patronage, makes labor contraction prior to or following privatization especially likely. Some studies have found that this labor contraction is not necessarily a negative result; state-owned enterprises are often over-staffed, and therefore releasing excess labor to the economy could be beneficial in allowing that resource to be used more productively.[7]

While some researchers suggest that governments could use public resources to help mitigate the adverse effects on unemployed workers, that issue is also a source of contention in its own right, and outside the scope of this paper.[8]

Nancy Birdsall and John Nellis develop the distribution argument further, noting that privatization’s positive effects on economic efficiency come at a cost:

“[Privatization] is seen as harming the poor, the disenfranchised, the workers, and even the middle class; throwing people out of good jobs and into poor ones or unemployment; raising prices for essential services…[9]”

T.T. Ram Mohan, in a study focusing on privatization in India from 1991 to 2000, concludes that in many [developing countries], neither of the two essential conditions for successful privatization (i.e., market-friendly macroeconomic environment and openness of the economy to competition) may be met adequately. Under these circumstances, private ownership cannot be expected to produce high standards of  performance.[10]

The extant literature on privatization in India does not rigorously examine  the  impact  of  strategic  sales—defined as  asset  sales  leading  to transfer of management control to the private sector—on firm performance. If ownership matters, the impact of strategic sale on enterprise performance should be analyzed. In addition, it is important to distinguish clearly the effects of change in ownership on firm performance from those of deregulation and economic liberalization. This paper endeavors to fill these gaps in the literature by comparing the impacts of strategic sale and partial privatization on firm performance. A difference-in-differences analysis is used to isolate the effect of change of ownership from other changes taking place simultaneously. In addition, this paper uses a fixed effects model to control for unobserved time- constant firm characteristics and further isolate the impact of privatization on firm performance. Through these methods, this paper aims to enrich the literature on privatization in general and privatization in developing countries in particular.

Managing the Political Economy of Privatization

Privatization is fraught with political economy problems associated with organized labor, entrenched political interests, and bureaucratic inertia. These powerful forces can both derail the privatization process and adversely impact other economic reforms that a country is undertaking simultaneously with privatization. Therefore, the Indian government has made special efforts to manage the political economy of privatization. To  increase  employee support for privatization, companies have reserved a  certain percentage of shares for employees, who can buy them at a discounted price.[11] This gives employees an opportunity to make an immediate capital gain. Another effort to increase employee support was to provide an employment guarantee for at least one year following asset sale, as well as subsequent lay-off terms that could not be worse than government-provided terms.

The government has also tried to turn small investors into privatization ‘stakeholders’[12]   in order to increase political support for privatization. Many companies (e.g., Dredging Corporation of India, Gas Authority of India Limited, IBP, and Oil and Natural Gas Corporation) offered shares to small investors at a five percent discount. This strategy increased the number of shareholders, which was expected to augment the political support necessary to make privatization irreversible.

The government also restricted foreign ownership of the divested shares, largely for political economy reasons. Foreign investors were given access to shares only from 1994-95,[13] whereas the privatization program started in 1991-92. In the case of asset sales, insufficient efforts to attract foreign buyers may have reduced privatization receipts; however, these restrictions helped insulate the privatization program from allegations that companies were being sold-out to foreigners.

Data description[14]

Though there have been sales of government stakes in banks, this paper concentrates on the privatization of non-financial companies. Fourteen companies have undergone asset sales with transfer of management control, while 36 companies have undergone share issue privatization, in which the government retains majority management control. These 50 non-financial companies comprise all the companies that have undergone traditional privatization in India in the period from 1991 to 2008.

Financial data was located for 37 of these companies from 1988-89 to 2008-09. Thirteen companies were omitted due to insufficient information.

This creates potential for selection bias: smaller loss-making companies may not have finalized their accounts or released them in the public domain for many years, allowing for an over-representation of larger, more profitable firms in the analysis. These omissions also reduce sample size, limiting the ability to find statistically significant results and to make generalizations.

Methodology

Comparison of Mean and Median Performance Parameters: I used the following performance parameters to compare mean and median performance prior to and following privatization, and assessed the significance of any change:

•   Profitability:

o Return on sales = net income / sales.

o Return on assets = net income / total assets.

o Return on equity = net income / equity.

•   Efficiency:

o Sales efficiency = sales / number of employees.

o Net income efficiency = net income / number of employees.

•   Output:

o Real sales = sales adjusted for inflation using the wholesale price index.

•   Employment:

o Total number of employees.

 

In addition, I examined the following parameters for any changes following privatization:

•   Leverage:

o Total debt / total assets.

o Debt-equity ratio.

•   Dividend payout:

o Dividend paid or proposed (provision) / sales

o Dividend paid or proposed (provision) / net income.

These ratios were calculated over a nine-year period divided into three-year sub-periods: the pre-privatization period, the transition period, and the post-privatization period.[i]   The mean and median of  each performance variable for pre- and post-privatization periods were assessed for significant changes using the Wilcoxon signed-rank test and the t-test. Since both the pre- privatization periods and the post-privatization periods are only three years long, this analysis shows the short-term changes associated with privatization.

I also tested the robustness of  my results by comparing the same pre- and post-privatization performance variables for sub-samples of  firms privatized through asset sales (13 firms), and firms privatized through other means (24 firms).

To verify robustness further, I examined the performance change over the entire period for which complete data was available (1988-89 to 2008-09). The longer time period for analysis was intended to prevent short-term effects of privatization from being interpreted as sustainable improvements.

Difference-in-differences    analysis:    Difference-in-differences     analysis removes the influence of factors extraneous to privatization in influencing firm performance by constructing a control group, which is the set of all firms in the same industry as each privatized firm. This method distills the impact of privatization on firm performance from simultaneously occurring external dynamics that affect all firms, such as deregulation and the liberalization of the Indian economy. The difference-in-differences analysis compares pre- and post-privatization industry-adjusted performance variables.[15]

Linear regression with firm fixed effects: I used Ordinary Least Squares regression with performance parameters as dependent variables, after controlling for size of the firm, to see the impact of privatization on firm performance. I also controlled for unobserved time-constant firm characteristics with firm fixed effects.

Results of Privatization

Privatization Receipts Have Not Been a Major Source of Government Revenues

Compared    to    Organization    for    Economic    Cooperation    and Development (OECD) and transition countries,[16] the Indian privatization program is modest thus far. Only 50 state-owned enterprises (SOEs), or 21 percent of total federally-owned SOEs, were privatized in the period from 1991 to 2008. Through 2008, the Indian government raised approximately $12.9 billion at current exchange rates through partial (36 firms) and full privatization (14 firms). This amount is small compared to the government’s entire SOE portfolio. There are currently 242 federally-owned SOEs in India, and the government’s shares in the 44 listed SOEs are valued at over $200 billion at current exchange rates, or over 15 times the amount raised through privatization by 2008.[17]  Table 1 compares annual privatization receipts against the fiscal deficit of the respective year, as one of the major motivations for privatization was to raise resources to plug the fiscal deficit.

Table 1: Privatization Receipts in India Compared to the Fiscal Deficit [in USD million unless stated otherwise]

Salient features of revenue generation from privatization are stated below:

Direct government revenues: While privatization successfully raised $12.9 billion from 1991 to 2008,[18] this amount bridged only about 2.6 percent of the federal fiscal deficit over the last 18 years (1991-92 to 2008-09). Therefore, it has not been a major fiscal cushion to the government. Annual receipts also varied considerably: while the privatization receipt to fiscal deficit ratio was as large as 12.6 percent in 2003-04, many years saw no privatization receipts.[19]

Privatization receipts have met about half (49 percent) of the government’s targeted privatization receipts. Receipts exceeded targets in only four out of 18 years. Privatization receipts in a single year (2003-04) accounted for about a quarter of the total privatization receipts.[20]

Indirect government revenues: The discussion of privatization receipts thus far relates only to their direct impact on government revenues. However, privatization may also indirectly affect government revenues by (1) reducing annual subsidies granted to loss-making government companies; and (2) generating increased tax revenues from more profitable and productive newly privatized enterprises.  Governments as diverse as those in Mexico, Côte d’Ivoire, and Mozambique received more tax revenues from privatized firms in the first few years following sales than from direct proceeds of these sales.[21]

Potential government revenues: There is considerable scope for further privatization. There were 242 federally-owned SOEs in India at the time of this analysis. The value of  the shares held by the government in the 44 listed federal SOEs[22] as of July 24, 2009 was over $200 billion at current exchange rates.[23] To emphasize the potential for additional privatization in the country, the government, in its Economic Survey prescribed the following: (1) revitalize the disinvestment[24] program and plan to generate at least $5 billion per year; (2) complete the process of  selling five to ten percent equity in previously identified profit-making SOEs; (3) list all unlisted SOEs and sell a minimum of

10 percent equity to the public; (4) auction all loss-making SOEs that cannot be revived. For those SOEs in which net worth is zero, allow negative bidding in the form of debt write-off.[25]

Profitability, Efficiency, and Employment Impact of Privatization

The profitability of  SOEs in India faces challenges due to multiple and sometimes conflicting objectives. Examples of  these objectives include modeling  employer  best  practices,  promoting  employment  and  balanced regional development, and diversifying industrial activity. After privatization, these multiple objectives yield to the dominant objective of profit maximization.

Table 2: Summary Results of Privatization in India (full sample)

Comparison of Mean and Median Performance Parameters

By comparing the mean and median performance parameters before and after privatization, and testing the significance of  the change, I show that there is an increase in profitability, efficiency, and real output following privatization. Other significant results are an increase in dividend payout and a decrease in leverage post-privatization (see Table 2).

The mean and median employment in privatized firms decreases after privatization in the short-run (see Table 2). The decrease in employment is also significant for the proportion of firms that experience an employment decrease. I get similar results showing decreased employment after privatization in both my sub-samples of firms (firms privatized through asset sales and firms privatized through other methods). However, there is one result that stands out: each and every firm that was divested through asset sales saw a highly significant decrease in employment.

Over the longer time period, the impact of asset sales on employment changes.  In   the  long  run,  CMC,  Indian  Petrochemicals  Corporation Limited, and Videsh  Sanchar Nigam Limited, which underwent asset sales, increased employment as a result of  major increases in their real output with commensurate rise in their demand for workers. In the other 10 companies for which I have data, employment decreased after asset sales because the real output growth was weaker. Therefore, even with asset sales, a decrease in employment is not a foregone conclusion; in the longer time period, there may be an actual increase in employment in firms that experience a sharp surge in output as they will then need to hire more workers even with rising sales efficiency.

Perhaps the most politically problematic aspect of privatization is its perceived association with employment losses at the firm level. In India, the impact of privatization on employment is a very sensitive issue because formal jobs are scarce: only 2.7 percent of India’s population of 1.03 billion[26] is employed in the organized sector.[27] To add to this, recent years have seen jobless growth as shown in Figure 1. This explains why trade unions and some political parties vehemently oppose privatization, especially in the form of asset sales, and why the government has jettisoned the asset sales variant of privatization in recent years.

Difference-in-Differences Analysis

Most industry-adjusted profitability ratios improve after privatization, as do mean dividends. These results mirror the findings above (where I do not adjust the firm performance variables with industry performance variables). However, very few of the changes are statistically significant.

One highly significant result is that the real output relative to the industry improved in only three of the 35 firms. Thus, while privatization is associated with a significant increase in real output, the industry output increased even more. This is in line with Rafael La Porta[28] and Florencio López-de-Silanes’[29] findings that monopoly power does not play an important role in explaining the increased profitability of Mexican privatized firms.

Linear Regression with Firm Fixed Effects

Table 3 shows the effect of privatization on profitability, efficiency, and  employment using Ordinary Least Squares regression with firm fixed effects. OLS results mirror the results found above and indicate that, holding everything else constant,  privatization has a significant positive impact on return on sales, return on equity, sales efficiency, and net income efficiency, while having a significant negative impact on employment.

Table 3: Privatization Results using Linear Regression with Firm Fixed

Effects

Avenues for Future Research

The social impact of privatization on employees and consumers needs to be studied more rigorously in India’s case. If privatization is associated with price increases and job losses, then a judgment on the overall outcome of privatization would have to weigh these effects against the demonstrated profitability and efficiency increases.  In addition, further research should examine whether the profitability and efficiency increases at the firm level translate into employment gains for the wider economy to partially compensate for the job losses at the firm level.

The issue of policy endogeneity has not been explicitly addressed in the existing  body of  literature: why were the specific firms that have been privatized chosen for privatization?[30] The issue of endogeneity persists despite using  difference-in-differences  analysis  and  firm  fixed  effects  models  in an effort to get unbiased estimates of  the  impact of  privatization on firm performance. Unobservable and potentially time-varying characteristics may have led the government to choose these firms for privatization, which may bias the results. Similar issues of endogeneity arise in cases of firms selected for asset sales as opposed to partial privatization. The issue of endogeneity has not been adequately addressed in this paper and should be addressed in future research.

Selection bias remains a potential problem. Though 50 companies were privatized in India in the period from 1991 to 2008, I only had sufficient information to analyze the performance of 37. Because smaller and poorly performing companies would be more likely to have insufficient financial information available in the public domain, bigger and better performing firms may be over-represented in the analysis. These omissions also reduce the size of the sample, limiting the ability to find statistically significant results and make generalizations. Thus, the next stage of analysis should emphasize data collection and analysis of the entire range of privatized SOEs in India.

Conclusion

Privatization in India has led to significant improvement in profitability and efficiency of firms. In addition, it has provided a modest financial boost to the government through privatization receipts. However, the impact on employment is negative. This is true for SOEs privatized through share issues and asset sales, over the short-run and long-run, and after controlling for the impact of deregulation and liberalization on SOE performance. Regardless, the government should continue with the policy of privatization, mainly because of its potential to unleash the productive potential of state-owned enterprises through significant improvements in their profitability and efficiency.

The government is not currently emphasizing asset sale privatization, owing primarily to its significant adverse impact on employment. However, it is necessary for the government to have all methods of privatization in its arsenal rather than being dogmatic about a particular method. Though not examined in this paper, the size of the company and its profitability status should be important considerations in deciding the method of sale. For example, Jessop and Company Limited and Lagan Engineering Company Limited have both become profitable after asset sale.[31]  Given their small size and  loss-making status, they would have attracted little investor interest in share issue  privatization but were eminently suitable for asset sales. By the same token, the share issue privatization of Oil and Natural Gas Corporation in 2003-04 was appropriate given its size and profitability status. The positive changes in its profitability and efficiency since partial privatization demonstrate the effectiveness of this method in motivating positive change. Thus, to derive optimal benefits from privatization, the government should customize the method of sale to the condition of the state-owned enterprise being divested.

 

Endnotes

[i] “Pre-privatization” is defined as four years before privatization to one year before privatization (t-4 to t-1); “transition period” is defined as one year before privatization to one year after privatization, including the year of privatization (t-1 to t+1); “post-privatization” is defined as one year after privatization to four years after privatization (t+1 to t+4).

 

[1]           India has used two main variants of privatization, i.e., asset or strategic sales or full privatization leading to transfer of management control to the private sector; and share issue privatization or partial privatization in which government retains management control.

[2]            It is to be expected that difficult policy measures like privatization would be taken up during periods of grave crisis: organized labor, entrenched political interests, and bureaucratic inertia would prevent the policy from being launched during normal times.

[3]           William L Megginson, Robert C. Nash, and Matthias van Randenborgh, “The Financial and Operating Performance of Newly Privatized Firms: An International Empirical Analysis,” Journal of Finance 49 no.2 (1994): 403-452.

[4]            Simeon Djankov and Peter Murrell, “Enterprise Restructuring in Transition: A Quantitative Survey,” Journal of Economic Literature 40 (2002): 739-792.

[5]            Katharina Gassner, Alexander Popov, and Nataliya Pushak, An Empirical Assessment of Private Sector Participation in Electricity and Water Distribution in Developing and Transition Countries (Washington, D.C.: The World Bank, 2007).

[6]           Sunita Kikeri, “Labor Redundancies and Privatization: What should governments do?” Viewpoint Note No. 174. (Washington, D.C.: The World Bank, 1999).

[7] Martín Rama, “Public Sector Downsizing: An Introduction, The World Bank Economic Review, 13 no. 1 (1999): 2.

[8]           Rama, “Public Sector Downsizing,” 2.

[9]           Nancy Birdsall and John Nellis, “Winners and Losers: Assessing the Distributional Impact of Privatization,” World Development 31 no.1 (2003): 1617-1633.

[10]         T.T. Ram Mohan, Privatisation in India: Challenging Economic Orthodoxy (New York: Routledge Curzon, 2005).

[11]         Generally less than 10 percent of shares have been reserved for employees.

[12]         Graham advocates ‘the stakeholders approach’ to make privatization sustainable.

See, Carol Graham, Private Markets for Public Goods: Raising the Stakes in Economic Reform (Washington, D.C.: The Brookings Institution, 1998).

[13]         The Indian Financial Year is from 1 April to 31 March.

[14]         The data used in the analysis comes from the following sources:

– Prowess database of the India-based market research company, Centre for Monitoring Indian Economy (CMIE). The database provides detailed financial information for companies for the period 1988-89 to 2008-09.

– The website of the Department of Disinvestment, the nodal department in the Government of India which deals with privatization. [“Summary of receipts from disinvestment : 1991-92 till date”, accessed July 20, 2009, http://www.divest.nic.in]

– Public Enterprises Survey (various issues) of the Department of Public Enterprises, Government of India. [“Public Enterprises Survey,” 2006-07, 2007-08, and 2008-09, accessed July 2009, http://dpe.nic.in/newsite/pesurvey.htm]

– The website of the Bombay Stock Exchange [“Stock Reach,” accessed July 25, 2009, http://www.bseindia.com]

– The website of the Economic Times [“Stocks,” accessed July 2009, http://economictimes.indiatimes.com]

– The websites of specific companies [Oil and Natural Gas Corporation “Annual Reports,” accessed July 2009, http://www.ongcindia.com; Jessop & Company Limited “Financials,” accessed July 2009, http://www.jessop.co.in/financials/ financials.php; Lagan Engieering Company Limited “The Company,” accessed July 2009, http://www.lagan.co.in/about_us.html]

– World Bank, World Development Indicators, Washington, D.C., 2008.

[15]        Industry-adjusted performance variables are calculated by subtracting industry performance variables from firm-level performance variables.

[16]         Transition countries here refers to newly independent countries in Eastern Europe and former communist countries.

[17]         As of 24 July, 2009. [Source: Bombay Stock Exchange website (“Stock Reach,”accessed July 2009, http://www.bseindia.com.)]

[18]         This number has not been adjusted for inflation, and was calculated using current exchange rates.

[19]         Given that revenue in terms of GDP does not vary much in this period, oscillating between 13.7 percent and 15.9 percent, the conclusions would hold even if the ratio was calculated as a percent of revenue, rather than as a percent of the deficit.

[20]         This large receipt was due to the ONGC issue that raised about $2 billion. This was the largest share issue in India till 2008, and tops the total privatization receipts in the country in all other years.

[21]         Birdsall and Nellis, “Winners and Losers,” 1621.

[22]         For listed SOEs, see Government of India, Department of Disinvestment (Ministry of Finance), White Paper on Disinvestment of Central Public Sector Enterprises (New Delhi, 2007): 41.

[23]         Share prices were obtained from Bombay Stock Exchang website (www.bseindia. com).

[24]         Privatization in India is referred to as disinvestment.

[25]         Government of India, Ministry of Finance, Economic Survey 2008-09 (New Delhi, 2009).

[26]         2001 census figures. [Source: “2001 Census,” accessed August 2009, http://www.censusindia.net)

[27]         Organized sector refers to public sector establishments irrespective of size and private sector non-agricultural establishments employing 10 or more persons.

[28]         Rafael La Porta and Florencio López-de-Silanes, “Benefits of Privatization – Evidence from Mexico,” Quarterly Journal of Economics. 114 no. 4 (1999): 1221.

[29]         Increased monopoly power would imply an increase in the output of the firm relative to the industry. This did not happen in India.

[30]         Timothy Besley and Anne Case, “Unnatural experiments? Estimating the Incidence of Endogenous Policies,” The Economic Journal, 110 no. 467 (2000).

[31]         The return on equity improved from -62.5 percent (short-run, pre-privatization) to +37 percent (short-run, post-privatization) and -63.2 percent (long-run, pre- privatization) to +26.9 percent (long-run, post-privatization) in the case of Jessop & Company Limited. Corresponding numbers in the case of Lagan Engineering Company Limited were -34 percent, and +4 percent in the short-run, and -12.5 percent and +14.1 percent in the long-run. [Source: author’s analysis.]

 

‡  Kumar V. Pratap is a doctoral candidate at the University of Maryland, College Park. He was handling the affairs of  the Ministry of  Disinvestment (later Department of  Disinvestment) dur- ing his tenure as Deputy Secretary at the Indian Prime Minister’s Office in the period 2002-06, where he developed insights into privatization policy and implementation. In addition, he has been a diplomat and has worked for the Indian Ministry of Finance. Currently, he is on leave from the Government of India to work at the World Bank.

Bringing in the Peri-Urban Poor: Options for Expanding Mexico City’s Transportation Network

By Sophia Cristina Peters‡

Abstract

As urbanization patterns shift and population growth rates soar in the developing world, peri-urban areas—where the cities’ poorest residents live removed from the city center—are expanding rapidly. Demographers predict this fringe growth will be the main form of urban change in Latin America in this next century. Latin American cities have implemented many new, successful urban transport models, but these improvements have not reached the peri-urban areas, where most of the population lives. Using Mexico City as a case study, this paper advocates for an expansion of  Mexico City’s urban transportation system to provide greater economic opportunities to the poor and reduce the city’s pollution levels and greenhouse gas emissions. It examines existing public transportation models, outlines potential barriers, and concludes with a justification for why now is the appropriate time to expand public transportation options to the peri-urban poor in Mexico City.

Introduction

The past fifty years have brought unprecedented changes to the world’s urban  landscape, with rapidly growing megacities of  ten million or more residents becoming commonplace, and a shifting of population density from rural to urban areas. These patterns are likely to accelerate. The Population Reference Bureau projects that by 2050,  urban residents will make up 70 percent of the world’s population compared to 50 percent today.1 In the world’s poorest countries, the bulk of this growth will occur in fringe developments outside the megacity center. In these areas, poverty rates are higher than in the city center and the provision of basic public services is more limited.[2,3] These growth patterns will be especially problematic in Latin America, where income equality, despite recent improvements, is still unacceptably high.[4]

Despite  a  growing  need,  many  megacities  have  failed  to  provide affordable and efficient ways for peri-urban residents to access the city’s core.[i] Policymakers often ignore peri-urban areas, resulting in inadequate access to education, sanitation, and health infrastructure as well as poorly enforced zoning and building standards. Furthermore, people tend to amass in peri-urban areas due to a desire to be close to the city’s economic opportunities coupled with an inability to relocate to the center itself because of  prohibitively high prices and predatory zoning policies. The combination of these two factors makes the peri-urban poor reliant upon the city center for their daily needs. In large megacities, accessing the city center is often expensive and time-intensive, which  can  be  especially  problematic  for  poor  residents  with  constrained budgets. This restricted access to the center, therefore, is problematic in two main respects. First, it reinforces the cycle of  poverty by trapping peri-urban residents in their low-income neighborhoods. Second, it encourages the use of inefficient pollutant-emitting automobiles and microbuses in already congested megacities. Affordable, efficient public transportation can, therefore, address both social development and climate goals.

As peri-urban areas become even more pronounced in Latin American cities, local governments should prioritize sustainable transportation systems from the city center to peri-urban areas. Urban transportation systems have a unique ability to mitigate increases in income inequality and uneven growth if properly implemented. While several Latin American cities have recently built innovative sustainable transportation infrastructure in their city centers, the literature remains largely silent on how to extend these transportation models to the growing peri-urban areas outside the megacity.

This paper attempts to fill that gap, using Mexico City as a case study, by analyzing sustainable transportation alternatives that would provide both access to the city center for the poor, and, in the long-term, support growth that limits increases in pollution and greenhouse gas (GHG) emissions.

As Latin America’s largest city with a sizable peri-urban area, Mexico City can offer broader lessons to the region’s growing capital cities. Mexico City exemplifies the problems many Latin American capital cities face: high levels of income inequality, persistent political corruption, high local pollution levels, and, until recently, a haphazard public transportation infrastructure. In spite of these challenges, Mexico City has created an award-winning urban public transportation system.

The paper begins with an exploration of Mexico City’s population growth and current urban transportation infrastructure. It discusses ways to expand that network to connect Mexico City’s city center to its peri-urban area and why now is the right time to push for these reforms. It then discusses potential obstacles to public transportation expansion. It concludes by noting that the lower comparative cost and recent successes of  Mexico City’s Bus Rapid Transport (BRT) system, the Metrobús, make it the best model  to extend to the peri-urban poor in the short term.

Mexico City Background

Mexico City exemplifies the peri-urban shift. The greater Mexico City Metropolitan Area (MCMA) encompasses the traditional city center, el Distrito Federal (DF), and the surrounding peri-urban and suburbs in the surrounding state, el Estado de México (EM, or State of Mexico). The population of the city center decreased by two percent from 1970 to 1990. In the same time period, the population located in the metropolitan periphery grew by 6.1 percent. These patterns continued from 1990 to 2000, during which the city center lost 1.3 percent of its population and the metropolitan periphery increased by 3.3 percent.[5]

The metropolitan area has also grown geographically during this time period, as shown in Figure 1. Natural barriers in the south and southeast have forced urban growth primarily north and east. In the last two decades, small urban municipalities in the surrounding suburbs have increased significantly, indicating a dispersed pattern of urban growth.[6]  Around 40 of these smaller urban centers have developed more rapidly, due to productive and labor ties to the city center.[ 7]

Figure 1. Geographic Expansion of Mexico City Metropolitan Area

Source: Adrián G. Aguilar, Peter Ward, and C. B. Smith, Sr., “Globalization, Regional Development, and Meta-city Expansion in Latin America: Analyzing Mexico City’s Peri- Urban Hinterland,” Cities 20 no. 1 (February 2003): 10.

For the most part, Mexico City’s poor residents are the segment of the population that is relocating to the outer fringe of metropolitan area. The World Bank estimates that 4.8 percent of Mexico City’s population lives in extreme poverty and 25.8 percent in moderate poverty.[8]  This urban poor population has become increasingly marginalized and segmented from Mexico City’s middle and upper class neighborhoods.[9]  The Mexico National Population Council’s (CONABO) Urban Marginalization 2005 Index[ii]  of the Valley of Mexico, in which the DF and EM sit, illustrates that these poor, “marginalized” households are mostly located in the urban fringe surrounding the DF city center to the north and west. The richer, less marginalized communities are located within the city center and the east of DF. This is consistent with a World Bank report and statistical study on urban poverty in Mexico showing that in Mexican urban settings, average income levels in poor neighborhoods is negatively correlated to distance from centers of employment, the settlement age, lower access to public services and propensity to natural disasters.[10]

Unfortunately, this outward movement of the population has not been coupled with a corresponding extension of the urban transportation system. Thus, the poorest citizens in the urban fringe remain dependent on an inefficient and expensive private bus system (colectivos) or on automobiles, for those with the financial resources to purchase cars.[12] While large metro and public bus systems exist in the city center, neither has expanded beyond the city limits.

Several agencies within the Mexico City government, most importantly the Secretary of Transportation and Roads, are responsible for transportation policy for the DF. These agencies fall under the purview of the mayor of DF. Historically, the federal government, headquartered in DF, has played a significant role in local politics and heavily influenced city policies. The mayor of DF only became a publically elected office in 1997. Prior to 1997, the position was reserved for a presidential appointee. In the surrounding EM, the state government’s Secretary of Transportation is the regulatory agency in charge of transportation. While the MCMA region is certainly not exempt from the corruption problems and implementation challenges that other Mexican state governments face, the past several administrations in the DF and the EM have committed themselves to reforming the MCMA’s transportation infrastructure.

Mexico City’s Current Transportation Network

As the city grew in size and population, a wide variety of transportation mechanisms cropped up to serve the transportation needs of the rapidly growing MCMA population. In this section I describe the current state of the Mexico City public transportation system as well as its recent innovations. I then argue that the most efficient way to integrate the peri-urban poor into the city center’s wider economic opportunities is to extend the public transportation network north and west into the peri-urban fringe.

Colectivos: the Dominant Transportation Method Connecting the Inner City to the Outer Rings

While the DF government has developed clean, efficient public transportation alternatives for its city residents, the peri-urban population continues to be dependent on colectivos as the only mass transportation option. Colectivos are small, privately owned mini-buses with unregulated routes and frequent stops, which make them much more flexible than the government bus system. They are the only bus system that operates in both the DF and the EM.

The colectivos began to appear in the 1980s, after the city government privatized the public transport sector. Catering to a segment of the market with no other public transportation option, the colectivos expanded and began to compete directly with the Mexico City metro system. Slowly, they captured the majority of the city’s public transportation trips.

Despite their prevalence, the colectivos are troublesome to municipal authorities.[13]   Since the 1990s, colectivos have contributed significantly to the MCMA’s traffic  congestion  problems and the city’s dangerous air quality issues.[14]  Large enough to seat 20 to 25 passengers, the GHG and contaminant emissions of colectivos are comparable to a similarly loaded local freight truck,[15] creating much more pollution than cleaner-fueled Metrobus vehicles.

Colectivos also engage in illegal operational practices, often charging higher rates than advertised and exceeding capacity limits on their microbuses. Given the lack of other public options, the peri-urban poor are the victims of the colectivos’ predatory pricing.[16]

Since the city government implemented the BRT model in DF, the government has permanently removed 839 colectivos operating in the MCMA area.[17] However, as the Metrobús still does not operate outside the city center, colectivos remain the only available transport option in peri-urban areas.

Metrobús: DF’s Innovative, New Bus Rapid Transit System

As mentioned previously, the Metrobús is Mexico City’s city center Bus Rapid Transit (BRT) system, which the DF Mayor Marcelo Ebrard put into place in 2005 as part of a larger climate action plan for the city. An innovative take on traditional bus systems,  BRT  systems  have  become  increasingly common in Latin American capital cities such as Santiago, Chile and Bogotá, Colombia.  In most instances, they have resulted in high ridership rates, decreased motorization, and environmental co-benefits. Relative to traditional bus systems, BRT systems are:

1.  Cleaner: most of the buses in this system operate on clean-burning ultra low sulfur diesel fuel;

2.  Faster: the new buses typically utilize dedicated traffic lanes in the

urban center so the buses are not mired in car traffic; and

3.  More efficient: predetermined routes and strict oversight prevents the buses from collecting people at non-official roadside points.

Mexico City’s Metrobús system has grown rapidly since its inception. The BRT began with one bus line running south to north and recently inaugurated its third line in February 2011. Today, the Metrobús system transports 620,000 passengers per day and results in a reduction of an estimated 100,000 tons of carbon dioxide emissions every year.[18] Its efficiency and penetration have begun to change transportation patterns in the city. Recent surveys show that 15 percent of Metrobús passengers are also car owners, and have elected to use the Metrobús system rather than drive.[19]  Furthermore, the Metrobús cost approximately US$30 million to build, a fraction of the cost of a subway or other light rail system along the corridor.

Mayor Ebrard’s and the city government’s work on the Metrobús system has  been lauded by various urban policy think tanks and academic institutions[20] as an impressive and successful urban planning effort.[21] As the Metrobús has begun to grow, however, it has remained confined to the DF city limits.

The Metro: DF’s Established, Reliable Train System

Mexico City also has one of the largest metro systems in the world, transporting 4.5 million people daily.[22] The metro consists of a vast network of eleven different train lines stretching across the city center. However, the metro does not extend into the surrounding state, which contains half of the metropolitan area’s population as well as the peri-urban area. All eleven lines of the city metro, apart from the one new “suburban line,” terminate at the DF-EM border, along which the system’s busiest stations are located.[23]   This line, while a tremendous first step, caters to a wealthier municipality and is not nearly enough to service all the demand in the EM. Various studies show that downtown is the primary destination of metro travelers from the outskirts of the city, and the busiest metro lines all connect to the downtown stops.[24]

Given this, an expansion of the metro system into the EM would reduce transportation costs and travel time for lower income peri-urban residents, who currently must use private transportation to access the city center.

Recommendations for Extension of Public Transportation to the Peri- Urban Ring

Due to the lack of public alternatives to the expensive, privately owned transportation, the poor in the greater MCMA region spend a disproportionally large amount of their household income—approximately 25 percent—to commute into and out of the city center. [25] This suggests a relatively inelastic demand for access to the city center.

Extending public transportation lines can reduce prohibitively high transaction costs for the urban poor in accessing economic opportunities. World Bank economist Marianne Fay notes that the spatial distribution of employment makes it difficult for those with restricted mobility in the peri- urban areas to be aware of  and connected to  employment opportunities. According to Fay, “[a]ccess to good jobs is also likely to be hindered by lack of appropriate transportation to and from areas where urban poverty is concentrated.”26   Her analysis of Latin America’s urban poverty notes that poverty alleviation programs focused on improving access to better economic opportunities  might  lead  to  higher  employment  levels,  as  compared  to programs that attempt to attract businesses and economic opportunities to relocate to disadvantaged areas.[27]  However, such poverty alleviation programs usually exist in the city center. The study cites improved public transportation options as an important way to improve access for disadvantaged, peri-urban populations.[28]  The high rates of ridership on the colectivos that access the city center and  the  volume of  traffic that feeds into the DF, despite commute times of up to three or four hours[29] round trip, provides evidence that public transportation routes are in demand.

The current political environment for climate change legislation in Mexico City provides an opportunity to push for peri-urban transportation reforms. The country’s transportation sector contributes about 18 percent of Mexico’s GHG emissions, making it second only to energy generation as an emissions source. Moreover, the World Bank reports that, “Mexico’s transport emissions have increased by 27 percent between 1990 and 2005 and now account for about two percent of the global transport sector’s GHG emissions.”[30] Mexico’s transport emissions also continue to rise at an annual rate of about two percent.[31] Recently, Mexico has taken steps to position itself as a climate leader amongst other emerging economies. Mexico hosted the

2010 United Nations Framework Convention on Climate Change (UNFCCC) international climate negotiations, and has developed a new national strategy to combat climate change that was passed into law in late 2008.

At the city level, the DF government announced in December 2010 the passage of a city-level climate bill. The bill aims to reduce the city’s total GHG emissions through various mechanisms, including the creation of a climate change fund and commission; the establishment of a domestic carbon market in the city; and the authorization of the city government to impose “green taxes” to incentivize environmental benefits. Each of these mechanisms would be an ideal avenue to promote policies that would expand the transportation system to peri-urban areas. Given the publicity surrounding the creation and expansion of the BRT system and the addition of the suburban metro line, the EM government and the DF mayor are clearly excited about growing the city’s public transportation network. The poverty alleviation and pro-climate aspects of expanding public transportation options makes supporting expansions of the BRT and metro lines a politically advantageous move even at the federal level with the Calderón administration. Given the traditional involvement of the federal government in DF policies, it would be feasible for Calderón to support the local initiatives.

Expanding the DF Metrobús to Strategic, High Resident Density, Peri-Urban Areas

The expansion of the Metrobús system requires strategic planning for the dedicated road space and location of loading stations because these public transportation routes impact future development in peri-urban areas and can create opportunities for sustainable growth. [32] The stations should be located in the centers of strategic peri-urban neighborhoods, while remaining close to the city’s main thoroughfares.

Were the Metrobús to extend out of the city center, it would have to rely on highways to connect the peri-urban areas with the city center. Thus, these highways should have dedicated Metrobús routes, which would make the bus route faster than other transportation options and therefore more attractive than the colectivos. The EM government recently announced an ambitious plan to build new second-level highways within EM to expand access to the downtown, making this an opportune time to set aside one lane of these multiple lane highways exclusively for public transportation.[33]  Dedicated lanes would help mitigate some of the increased motorization resulting from the new highways, as well as significantly reduce travel times for those utilizing public transportation as compared to traditional motorized transportation.

Adding New Peri-Urban and Suburban Lines to the Current Metro System

DF policymakers have begun to realize the need for more public

transportation options and recently inaugurated the first Metro line from Buenavista (in DF) to Cuautitlán (in the northern EM) in June 2008. Called the “suburban” line, it carries 100 million passengers per year and reduced the time for a rush hour trip from Cuautitlán to DF from 2.5 hours to 25 minutes.[34]   The Buenavista-Cuautitlán line was built using abandoned freight rail tracks. Since these industrial plants serviced by freight rail are permanent fixtures in the northern and eastern peri-urban areas, there is the potential to replicate the Buenavista-Cuautitlán model with other new peri-urban metro lines. [35]

A metro extension should take into consideration the demographic issues facing its new line. Robert Cervero, a Latin American transportation scholar, warns that metro expansions in Latin America have actually exacerbated income inequality in Latin American megacities, arguing, “metros have been criticized for failing to alleviate poverty and specifically for being regressive, using scarce government financial resources for purposes that benefit the rich far more the poor.”[36] Future expansions of this transit system must not cater exclusively to the wealthier suburbs. Rather, expansions should connect to the lower-income peri-urban areas. Given the cultural stigma associated with using the Metro and the lack of demand for this mode of transportation from the richer segment of society, expanding the Metro to the peri-urban poor neighborhoods should be an easier task in the MCMA.

Ensuring the Recommended Solutions Benefit the Peri-Urban Poor

Fair Transportation Costs Reinforce Success of Transportation Improvements in Reaching the Poor

Transportation policy must account for political and economic realities. To ensure transportation legislative change actually results in the intended outcomes, policymakers need to think carefully about accompanying fare pricing. As mentioned  previously, research shows that those workers living on the city fringes spend a significant portion of their total earnings on transportation.[37] Therefore, to serve the peri-urban poor, the new urban transportation mechanisms need to be more cost effective  for the targeted population than using colectivos or purchasing a car.

To achieve this goal, the DF and EM governments should institute a price ceiling on the fare for the bus and metro systems and subsidize the bureaus that operate the transportation systems directly for any cost disparities. Politically, this makes sense given the public good nature of the externalities that result from promoting this more efficient form of transport as well as the increased access to public services for the poor. Providing government subsidies for public service delivery is common practice in most municipal transportation arrangements, especially in developing countries, and feasibly could be implemented in Mexico City. Either way, the system design needs to incorporate the user cost associated with the new transportation option because it lies at the heart of the transportation equity issue that faces the peri- urban poor today. The pricing and government subsidies issues at hand are, however, complicated in both political and economic terms, and should be the subject of further research.

Potential Obstacles to Expansion

Interest Group Coordination

Transportation  projects  and  infrastructure  change  have  traditionally been difficult to implement in developing countries due to the number and heterogeneity  of  involved  stakeholders.  Brazilian  urban  planning  expert Haroldo da Gama Torres discusses this problem in a 2008 report to the United Nations: “[Transportation reform] mobilizes a complex set of individual and business interests, including developers, the construction  industry, the auto industry, retailers, and landowners, as well as the middle and upper classes that demand more urban space and environmental quality.”[38]

The  city  government  should  develop  incentives  for  these  different interest groups to work together toward a mutually beneficial partnership. It is important that a neutral third party monitors these partnerships so that they do not become opportunities for corruption or government handouts. To this end, involving non-government organizations, local community groups, and civil society could help keep projects focused on those people that the projects are designed to benefit and build in mechanisms to ward off corruption.

Opening up the process for public consultations on the BRT and metro expansion  process would create a space for civil society to voice concerns and monitor the process.  Urban planning experts Andrés Valderrama and Ulrik Jørgensen argue that inclusive negotiations and transferring ownership of the process to the actors involved in the  discussion can help surmount traditionally difficult planning obstacles, specifically in terms of the system’s stability in the long term.[39]   They offer the following ideas, based on a study of Bogotá’s transportation work, on how to improve citywide transportation planning processes[40]:

1.  Ensure no one party possesses autonomy and all are implicated

in the complex process;

2.  Ensure the identity and reputation of the actors at stake; and

3.  Emphasize that the outcome has significant repercussions for the whole transport sector within the region, making the stakes high for disagreement.

As megacities continue to grow in number of  residents, the number of  public  authorities, strong local governments, and decentralized agencies involved in citywide  decisions grows in tandem. Valderrama and Jørgesen’s framework provides guidance on how to organize a large number of actors to make technical transportation decisions.[41]

Applying this framework to the Mexico City case illustrates that public support of the new public transportation models in DF may be able to overcome interest group coordination. First, the city’s public transportation projects have garnered widespread attention. The national and international media have covered the initial construction of the BRT system and its subsequent new line openings. Furthermore, in a term of increased violence and drug trafficking, both President Felipe Calderón and DF Mayor Ebrard have used Metrobús to highlight their public policy accomplishments. Politicians and the media gave similar attention to the opening of the Buenavista-Cuautitlán “suburban line.” When the line first opened, President Calderón and EM Governor Enrique Nieto inaugurated the new extension by riding in the conductor’s car for the first trip, holding press conferences, and speaking about its environmental and traffic benefits.[42] Public and media attention to public transportation projects help ensure the identity and reputation of  the stakeholders involved in the process while raising the stakes for cooperation among stakeholders.

A  second  reason  to  believe  interest  group  coordination  may  be manageable if  the government extends the current public transport system outward is that the infrastructure needed for the extension projects already exists. The national government is currently building additional highways to the peri-urban areas along which it could extend the BRT system. Additionally, there is an existing network of old freight rail lines extending north and west that the government can convert into subway extensions. With these basic structures already in place and owned by the government, there is less room for disagreement among non-governmental interest groups. Given that the foundations for these projects are already in place or are in the process of being constructed, the suggested expansion of the public transport system now has a certain forward momentum, making it more politically difficult for interest groups to derail the projects. Furthermore, since the new public transport lines could run off existing infrastructure, policymakers can avoid potentially contentious land tenure and resettlement issues that have often been major limitations to large scale infrastructure projects.

Intra-Government Coordination

Not only do the aforementioned projects require coordination between the private sector interest groups and the government, they also demand intra- government synchronization. One of the most basic obstacles to creating widespread transportation access from the peri-urban area of Mexico City is the fact that the EM government controls the surrounding areas and is fiercely protective of its jurisdiction. It has traditionally passed its own transportation laws independent of the city center.

The growing decentralization of MCMA politics and growth of strong local governments within the larger megacity has made it harder to build and coordinate transportation systems across jurisdictional lines. This presents a serious problem for extending public transport options that originate in the city to the peri-urban areas. Earlier in the decade, these types of cross- jurisdictional projects encountered two main issues. First, a federal government issued a ruling banning bus services from crossing state boundaries, which was designed to prevent intra-state competition.[43]  Second, disagreements between the DF and EM governments over financing joint transportation  ventures limited expansion of  the metro line to solely within DF, even when it was evident that the state needed the development most.

Recent   evidence    indicates   that   these    jurisdictional   issues   are surmountable. First, while the state and the city have historically opposed joint funding in transportation projects, they were able to work through traditional barriers and find mutual benefits from creating a joint financing scheme for the Buenavista-Cuautitlán “suburban line.” This sets both a precedent and a framework for collaboration in transportation projects. Second, improving public transportation is a top priority for the Calderón administration as it dovetails with his national climate change legislation. Since the President and his administration are located in DF, the federal government has traditionally been heavily involved in the city’s municipal projects. Therefore, if the national government sees the MCMA public transportation extension as advantageous, it can exert its influence on the laws regulating cross-jurisdictional transportation projects.

Public Transport’s Social Stigma and the Peri-Urban Poor’s Limited Lobbying Capacity

Society’s perception of the city’s transportation network could be another obstacle to its expansion. In general, upper and middle class Mexican citizens view the city’s metro system as crowded, low class, and unsafe. The majority of people who use the metro are the city’s poor. Instead, middle and upper class Mexican households tend to buy cars, for convenience and to signal economic status.[44] As a result, the federal government tends to favor infrastructure projects, like the current highway expansion, that cater to the auto lobby and the richer motorized public.

A World Bank assessment of its Latin American public transportation projects  states, “[a]ccording to initial results from focus groups and local observations,  psychological barriers are one of  the most difficult obstacles to overcome in many areas,  including the poverty stigma associated with using public transport.”[45] Therefore, public transportation expansion in the MCMA is not likely to be driven by the upper and middle classes. If these politically powerful groups do not see the expansion of public transportation as beneficial, it will be politically more difficult to motivate policymakers to fund the extensions of this service to the poor peri-urban areas.

Further exacerbating this problem is the “invisibility” of  the peri- urban poor to policymakers.[46] Peri-urban populations are normally transitory, causing the demographic make-up of peri-urban neighborhoods to fluctuate frequently.  The  constant  turnover  in  the  population  makes  organizing, measuring,  and  quantifying  this  segment  of   society’s  needs  particularly difficult.[47] Their distance from the city makes it easier for media, politicians, and other city residents to overlook its occupants and discount their needs. This confluence of factors makes it hard for peri-urban residents to influence the government and make their needs a priority for policymakers.

The cultural stigma associated with public transportation and the limited capacity of peri-urban groups to lobby policymakers are both deeply embedded social problems.  Therefore, to overcome these challenges to extending the public transportation network, policymakers need to engage the upper and middle classes to support the expansion. To do so, policymakers could implement a combination of the following strategies.

First, policymakers should market the public transportation expansion as a win for the MCMA area at large and not just the peri-urban residents that will benefit most from the extension. Ideally, expanding the city’s innovative public transportation would put Mexico City in the headlines for its ingenuity and cutting edge urban design. Furthermore, it would move colectivos off the road due to decreased demand, reducing traffic and pollution for all MCMA residents.

Second, policymakers should roll the public transportation legislation into larger transportation infrastructure legislation that tangibly benefits the upper and middle classes. Creating a “package deal” might dissuade the upper and middle classes from objecting to the public transportation components. The expansion of the highway system from EM to the DF provides a perfect example. Since the motorized public views the highway expansion as a major need, residents are unlikely to oppose a public transportation addition if it was a compulsory part of the larger project.

Finally, policymakers should ensure that the new extensions of the public transportation system be built in a way that assuages upper class doubts about public transport. This could come in the form of increased police visibility along with cleaner stations, buses, and Metro cars. Since these will be new extensions of the BRT and metro lines, it will be logistically easy to include security systems and other built in safety measures. The newest line of the Metrobús system, opened to the public in February 2011, includes some of new these safety measures, such as closed circuit cameras, better lighting at the bus stations, and better access for those with limited mobility. [48]     These improvements, however, have likely added to the cost of the new bus lines.

Additional Infrastructure Costs

A significant expansion of the public transportation system will represent a large cost to the DF and EM city governments. While the country’s economy is recovering from the financial crisis, municipal budgets remain strained. Bus rapid transport systems are highly acclaimed for their cost effectiveness and compressed construction timelines when compared to metro systems. EMBARQ, an international sustainable transport think tank, estimates that “the cost of building a heavy rail system like a subway [can] reach as much as

10 times that of bus rapid transit.”[49]  Light rail lines are cheaper than heavy rail, but still run more than four times the cost of bus rapid transit.[50]

The Metrobus is no exception. The first line of the Metrobus required a Mexican government-financed capital investment of approximately US$70 million.[51] As the  Metrobus system grows and improves its infrastructure, the capital costs associated with  each new line are increasing. The recently inaugurated third line of the Metrobus system cost 2.8 billion Mexican pesos, which in today’s exchange rate is US$233 million, financed by both loans from international finance institutions and the Mexican government itself.[52]   The Metrobus fare, which is affordable at US$0.33, covers the system’s operation and maintenance costs, including the financial payments for the new efficient buses.[53]

In comparison, the initial capital cost of financing the “suburban line” was US$670 million. Furthermore, the metro system as a whole currently requires nearly US$400 million in annual operating subsidies from the federal government.[54]  The strong political  leverage of  private operators, builders, and contractors in Mexico exacerbates the financing situation. The political influence of  these groups makes it hard for public  officials to move from the status quo of  currently existing contractual arrangements.[55] High initial capital costs and traditionally difficult political problems might be manageable in this case, however, since a network of freight train tracks already exists in the northern and western region of the MCMA.

The cost of the expansion projects, while substantial, should not be prohibitive.  The Metrobús and, to some extent, the metro suburban line addition have garnered enough international publicity that a wide variety of donors have offered financing mechanisms to continue the construction. The World Bank helped finance the first Metrobús line and continues to provide loans to the country for the development of low carbon transportation options. Foundations and non-profit organizations have contributed as well with grants and direction donations to the DF government, in large part specific to the Metrobús system.

Therefore, the comparatively low construction costs and relative speed with which the Metrobús system makes it the best candidate for growth in the short term. An extension of this system out to the peri-urban areas, via the newly constructed highway system, will lay the foundation for a greater public acceptance of future expansion of other public transportation options. To this end, policymakers should analyze where an expansion of  the metro system might have the biggest impact on the peri-urban poor, as funding constraints may only allow the construction of one or two more “suburban lines.” What type of evaluation process should be used for this, however, is beyond the scope of this paper and should be the subject of future research.

Conclusions

The simple expansion of Mexico City’s city transportation could greatly benefit the peri-urban poor. While the challenges to expanding the public transportation infrastructure are significant, they are not insurmountable. These challenges—interest group  coordination,  intra-state  competition,  cultural stigmas associated with public transport, and peri-urban disfranchisement— originate  from  contentious,  historical  political  issues.  However, there is currently a unique political opportunity for public transportation legislation in DF and EM. Mexico City’s public transportation system is the recipient of international awards, well regarded by its wide ridership, and viewed as a key component of national and regional climate change legislation. It makes sense for politicians to support its expansion and continued success, especially since these politicians can claim few other domestic political victories with recent increases in drug trafficking and gang violence. This political impetus can move the extensions of the Metrobús and metro forward.

As Mexico City moves to expand its Metrobús and metro systems into the peri-urban areas it will face the new challenge of integrating public transportation into one cohesive system. The tools that policymakers can use to extend the public transportation system outward will likely be the same skills to what they could use to bring the system together, as it will involve navigating similar obstacles with interest group and intra-state coordination.

This is a unique opportunity for Mexico City, one of the largest megacities in the world, to become a leader in poverty reduction, equity and climate change. Furthermore, the demographic and political challenges that the MCMA policymakers face are very similar to those facing other large cities throughout the continent. These parallels with other Latin American cities make Mexico’s public transportation reforms an important issue not only for Mexico’s peri-urban poor, but also for peri-urban neighborhoods all across Latin America.

 

Endnotes

[i] In this paper, peri-urban is used to describe the typically low-income communities growing on the outskirts of major cities. The city center generally corresponds to the original city limits. Together, these areas comprise the metropolitan area, which includes the city center and surrounding peri-urban hinterland, and is a useful unit in megacity analyses.

 

[ii] The Mexican National Population Council (CONAPO) creates an Urban Marginalization Index every five years. It is created from eight variables: (1) access to potable water, (2) percentage of the population 15 years and older illiterate, (3) percentage of population 15 years and older who did not finish primary school, (4) percentage of dwellings without bathroom, (5) percentage of dwellings without electricity, (6) natural log of average dwellers per room in a dwelling, (7) percentage of dwellings with dirt floor, and (8) percentage of occupied population who receive a salary equivalent to up to two minimum wages.. The estimation is disaggregated at the Basic Geostatistical Area (AGEB), a unit equivalent to 20 to 40 blocks of the city.

 

[1]           Population Reference Bureau, “World Population Highlights,” Population Bulletin

63, no. 3 (2008): 9.

[2]           Barney Cohen, “Urban Growth in Developing Countries: A Review of Current Trends and a Caution Regarding Existing Forecasts,” World Development, 32 no. 1 (2004): 48.

[3]           Haroldo da Gama Torres, “Social and Environmental Aspects of Peri-Urban Growth in Latin American Megacities,” Prepared for the United Nations Expert Group Meeting on Population Distribution, Urbanization, Internal Migration and Development, (New York: January 2008): 9-10.

[4]           Ibid, 20-21.

[5]           Ibid, 11.

[6]           Ibid, 13.

[7]           Ibid, 13.

[8]           World Bank, “La Pobreza en México. Una evaluación de las condiciones, las tendencias y la estrategia del gobierno,” (Washington: World Bank, 2004): 98.

[9]           Dejan Sudjic, “Making Cities Work: Mexico City,” BBC News, http://news.bbc. co.uk/2/hi/5061626.stm.

[10]         World Bank, “Urban Poverty in Mexico,” Income Generation and Social Protection for the

Poor, (Washington DC: World Bank, 2005): 152.

[11]         México Consejo Nacional de Población (CONABO), Urban Marginalization Index

2005, Valley of Mexico, http://www.conapo.gob.mx/index.php?option=com_contnt&view=article&id=331&Itemid=194.

[12]         Michael Gilat and Joseph M. Sussman, “Coordinated Transportation and Land Use Planning in the Developing World: Case of Mexico City,” Transportation Research Record, 1859 (2003): 103.

[13]         Rebecca Dodder, Joseph Sussman, and Joshua McConnell, “The Concept of the CLIOS Process: Integrating the study of physical and policy systems using Mexico City as an Example,” (paper presented at Engineering Systems Division Symposium, Massachusetts Institute of Technology, March, 2004): 12.

[14]         Ibid, 12.

[15]         Georges Bianco Darido, “Managing Conflicts Between the Environment

and Mobility: The Case for Road-Based Transportation and Air Quality in Mexico City,” (Massachusetts Institute of Technology, Department of Civil and Environmental Engineering, 2001): 45.

[16]         Darido, “Managing Conflicts,” 105, 151.

[17]         PRNewswire, “Mexico City Metrobus Wins Prestigious Environmental Award From Harvard University,” November 12, 2008, http://www.prnewswire.com/ news-releases/mexico-city-metrobus-wins-prestigious-environmental-award-from- harvard-university-69846167.html.

[18]         Jonna McKone, “Mexico City Launches its Third Line of the Metrobus BRT,” February 10, 2011, http://thecityfix.com/mexico-city-launches-third-line-of- metrobus-brt/.

[19]         Christine Russell, “Take the Metrobus in Mexico City,” The Atlantic, November 17, 2009, http://www.theatlantic.com/technology/archive/2009/11/take-the- metrob-s-in-mexico-city/30339/.

[20]         “Harvard University honors Mexico City’s Metrobus,” Shell Foundation, http://www.shellfoundation.org/pages/core_lines.php?p=news_content&page=ournews&newsID=378&t=0.

[21]         Christine Russell, “Take the Metrobus in Mexico City.”

[22]         Gilat and Sussman, “Coordinated Transportation,” 104.

[23]         Ibid.

[24]         Ibid.

[25]        Robert Cervero, “Urban Development on Railway-Served Land: Lessons and Opportunities for the Developing World,” Working Paper, (UC Berkeley Center for Future Urban Transport, December 2009): 16.

[26]         Marianne Fay, “The Urban Poor in Latin America,” (Washington, DC: World Bank,

2005): 64.

[27]         Fay, “The Urban Poor in Latin America,” 65.

[28]         Fay, “The Urban Poor in Latin America,” 53.

[29]         Sam Dillion, “Mexico City Spawns to Distant Suburbs,” The New York Times, December 18, 1999.

[30]         World Bank, “Mexico: Seeking a Low Carbon Growth Path,” (Washington, DC: World Bank, Latin American and Caribbean Department, June 15, 2009), http://go.worldbank.org/UE80OOMNX0.

[31]         World Bank, “Mexico: Seeking a Low Carbon Growth Path.”

[32]         Cervero, “Urban Development,” 17.

[33]         Gilat and Sussman, “Coordinated Transportation,” 105.

[34]         Presentación Suburbano,” Ferrocarriles Suburbanos, 2008 http://www. fsuburbanos.com/pdf/la_empresa/presentacion_suburbano.pdf.

[35]         Emilio Fernández, “Autorizan suburbano de La Paz a Chalco,” El Universal, October 30, 2006, http://www.eluniversal.com.mx/ciudad/80284.html.

[36]         Cervero, “Urban Development,” 16.

[37]         Cervero, “Urban Development,” 16.

[38]         da Gama Torres, “Environmental and Social Aspects,” 14.

[39]         Andrés Valderrama and Ulrik Jørgensen, “Urban Transport Systems in Bogotá and

Copenhagen: An Approach from STS,” The Built Environment, 34 no. 2 (2008): 203.

[40]         Valderrama and Jørgensen, “Urban Transport Systems,” 210.

[41]         Ibid, 215.

[42]         “Estrenan Calderón y Peña Nieto el Tren Suburbano,” Noticieros Televisa México, May 7, 2008, http://www.esmas.com/noticierostelevisa/mexico/730150.html.

[43]         P. Christopher Zegras and Ralph Gakenheimer, “Driving Forces in Developing Cities’ Transportation Systems: Insights from Selected Cases,” Working Paper, (Cambridge: Massachusetts Institute of Technology Department of Transportation and Urban Planning, December 2006), 4.

[44]         Daniel Sperling and Deborah Salon, Transportation in Developing Countries: An Overview of Greenhouse Gas Reduction Strategies, (New York: Pew Center on Global Climate Change, May 2002): 9, 14.

[45]         Pierre Graftieaux, Walter Vergara, and Todd Johnson, “Global Environment Facility Support for Sustainable Transport Early Lessons from World Bank– Assisted Projects in Mexico City, Mexico; Santiago, Chile; and Lima, Peru,” Transportation Research Record, 1848 (2003): 13.

[46]         da Gama Torres, “Social and Environmental Aspects,” 10.

[47]         da Gama Torres, “Social and Environmental Aspects,” 16-17.

[48]         “Arranca la Línea 3 del Metrobús,” Centro de Transporte Sustentable, México, February 8, 2011, http://ctsmexico.org/node/395.

[49]         “Bus-Rapid Transit,” EMBARQ: The WRI Center for Sustainable Transport, http://www.embarq.org/en/node/28.

[50]         Ibid.

[51]         Claudia Sheinbaum, “The Metrobus in Mexico City,” The Academy of Sciences for the Developing World (TWAS) Newsletter, 19 (2007): 44.

[52]         “Arranca la Línea 3 del Metrobús.”

[53]         Claudia Sheinbaum, “The Metrobus in Mexico City,” 45.

[54]         Zegras and Gakenheimer, “Driving Forces in Developing Cities’ Transportation Systems: Insights from Selected Cases,” 14.

[55]         Ibid, 13.

 

‡  Sophia Peters is a 2011 graduate of the Woodrow Wilson School at Princeton University, where she focused her studies on the intersection of  climate change policy and international development. Peters  completed her undergraduate studies at the Sanford School of  Public Policy, where she graduated magna cum laude and with Highest Distinction. Her honors thesis focused on the role of media in ending the Pinochet regime in Chile. Peters maintains deep connections to Latin America, has consulted on domestic energy efficiency and clean energy initiatives, and interned for US Agency for International Development in Mexico City.

 

Reforming Public Education: Implementing Lessons from the Non-Profit Sector during Times of Economic Turmoil

By William Smith and David Lange‡

Abstract

Although per pupil spending in the US has steadily increased since 1970, the current economic crisis will prevent this trend from continuing in the coming years. State budgets have contracted, resulting in significant cuts to school district budgets. In this policy review, we investigate how the financial challenges and structural evolutions in public education have made it necessary for policymakers to adjust their approach to educational funding. In applying the lessons learned by the non-profit sector during the current recession to the state of public education in America, we provide three policy recommendations. These financial and public relations propositions include: (a) moving away from complete dependence on state funding by diversifying sources of revenue, (b) looking for opportunities to advance partnerships with private and non-profit organizations, and (c) cultivating stronger relationships with communities.

Introduction

Schools cannot operate and improve without proper resources. For the past 40 years, per-pupil spending in K-12 schools has been increasing.[1]

However,  current  spending  levels  are  unsustainable  given  the  persistent economic  recession  and  its  impact  on  state  budgets.  With low reserves, increasing operating costs, and shrinking budgets, school districts will need to make far-reaching changes in their budgetary practices. Districts will need to cut ineffective programs, supporting those that work instead. Districts must also leverage technology or restructure staffing and compensation to boost productivity and efficiency.

To move in this direction, school districts should look to the best practices of  the non-profit sector, which has also been directly affected by the current economic crisis.[2]  We identify strategies that have been successful in the non-profit sector and explore ways that school districts can implement them.  The first section discusses the changing economic state of K-12 education in America and the increased competition for both students and resources. The second section explains why lessons learned from non-profits can be appropriately applied to public education and draws on recent research in philanthropy to provide three recommendations for administrators and policymakers.

The Current State of K-12 Schools

While school budgets and finance vary dramatically among different states and districts, states generally use a combination of taxes (income, corporate, and sales) and other fees to provide approximately 49 percent of the budget for K-12 schools. Local school districts provide approximately 43 percent of the K-12 budget, primarily through property taxes. The federal government provides roughly eight percent of state education budgets.[3] Both state and federal governments usually distribute funds using a combination of per-pupil and per-program bases.

However, financing education on a state-wide level is complicated. Each state has a different formula for raising and distributing funds to the K-12 system. Most states use formulas that split the responsibility for funding education between the state and local districts. The precise formulas vary drastically, however, and the amount of money available to fund school districts fluctuates from state to state and even from district to district.

For example, the National Center for Education Statistics found that per-pupil expenditure was $10,754 in 2007. However, this average represents disparate amounts ranging from $6,648 in Idaho to $16,163 in New Jersey.[4]

Furthermore, experts disagree vehemently on how much money is necessary to provide each student with a satisfactory education.[5] One critical aspect of school finance, then, is the concept of financial equity: are all schools receiving the funding to provide sufficient education to the students in their care?

The challenges that local districts face to raise revenues for their schools complicate this equity issue further. Because most local revenue comes from local property taxes, communities with lower property values are at a disadvantage. The current national economic crisis has significantly lowered housing and property values, directly affecting school district budgets. If school districts are able to rely on more stable revenue sources, they will be in a better position to provide financial equity and stability.

Until recently, per-student spending has increased every year on a national level. However, in 2008, 36 states had cut or proposed cuts to K-12 and higher education spending.[6] The Center for Budget and Policy Priorities estimates that since that year,  states have faced cumulative average annual budget shortfalls of over $350 billion.[7]  Most states spend more on education than on any other component of their budgets except for health care, making it a likely target for cuts when state governments experience a financial crunch. In light of these reductions in revenue streams, school districts nationwide are scrambling to adjust their budgets.

Additionally, traditional public schools have increased competition for the limited funds available. As the general public becomes disillusioned with their local public schools, they turn to different public education options, including alternative and charter schools. Most charter schools and alternative schools receive their funding from the local  school district as well, putting these schools into direct competition with each other for per-pupil funding.[8]

The current focus in school choice has been on charter schools. Charter schools are “nonsectarian public schools of choice that operate with freedom from many of the regulations that apply to traditional public schools.”[9]   The intent of most charter school legislation is to: (i) provide choice for parents and students, (ii) create a system of accountability for educational results, and (iii) encourage community and parent involvement. The first charter school law was passed in Minnesota in 1991. Since that time, charter school laws have been established in 40 states, Puerto Rico, and the District of Columbia.

Federal financial support of the charter school movement was first promised in 1994 under President Bill Clinton. More recently, President George W. Bush sought $200 million to aid charter schools in 2002.[10]   Upon taking office in 2008, President Barack Obama promised to double funding for the charter school movement. As of September 29, 2010, the US Department of Education announced that it had granted $256 million to charter organizations, and the 2011 budget intends to increase the Charter Schools Grants Program to $310 million.[11]  While there has been some debate regarding the extent of charter schools’ financial impact on traditional schools, recent analysis shows that their short-term financial impact can be significant.[12]

All of these issues indicate that to raise the necessary funds to educate their students properly, school districts cannot rely solely on existing funding mechanisms; rather, they must find new ways to fund their schools effectively.

Connecting Education and the Non-Profit Sector

Both the charter school and the school choice movements break the traditional link between school attendance and geographic location. Because public school funding in the US is often determined on a per-pupil basis, the recruitment and retention of students is vital for the sustainability of educational institutions. Schools can no longer expect the surrounding community to supply them with enough students; instead, schools must be proactive and reach out to society by improving their public relations and increasing community buy-in.

Schools and school districts need to be more aggressive in fundraising and would benefit from diversifying their funding sources, especially given the current financial state of many public education institutions. As cash inflows have stagnated or regressed, the public education sector can look to the best practices of the non-profit sector for ideas on capturing capital during challenging economic times.

Like it has in public schools, the economic crisis has also negatively affected the non-profit sector. A 2009 report in The Non-Profit Times stated that individual giving, which represents three-fourths of all giving to non-profits, experienced a two percent, or $6.4 billion, reduction in 2008.[13]   Foundation grants, another source of funding for non-profits, were also affected; in 2009, 75 percent of foundations expected to see their endowments decrease by 25 percent or more.[14]  Efficiency is clearly critical for non-profits.

According to Charity Navigator, which evaluates the financial situation of large non-profits, the most successful non-profits generally keep overhead at less than 15 percent and focus on program outreach and effectiveness.[15]

Without a predetermined financial support system, non-profits operate without sufficient cash reserves. The competitive atmosphere prevalent in the non- profit sector causes a perpetual search for innovative fundraising methods. Public education can learn financial and public relations lessons by developing a deeper understanding of the non-profit sector’s recent fundraising advances.

The Need for Increased Fundraising

Successful non-profits incorporate a diverse set of tools in their fundraising plans.  The  largest  portion  of  financial  support  comes  from individual donations,  which  non-profits usually solicit through direct mail, telemarketing, or face-to-face  inquiries.[16] Although fewer in quantity, gifts from major donors (e.g., corporate partnerships, planned giving, foundation grants, and government grants) provide significant revenue. Additionally, non- profits use special events throughout the year to bring in support and cultivate donors through education and celebration.[17]

Well-designed  fundraising  budgets  allow  for  a  strategic  increase of   fundraising  efforts  during  economic  downturns.  With  businesses  and individuals giving less, successful non-profits rethink how to solicit gifts and increase the reach to possible donors. In a recent survey, the Colorado Non- Profit Association found that 32.5 percent of  Colorado non-profits increased their face-to-face solicitations in 2009, 42.5 percent  increased requests for foundation grants, 31.8 percent increased government grant  requests, and 27.5 percent increased soliciting board members.[18] When allocating resources to  fundraising  activities it is important to try to diversify revenue streams. Overreliance on one large source, such as a grant, is risky as the capacity of the organization is severely reduced in the event that the resource disappears. Organizations should also vary their investments,[19]  such as savings and mutual fund accounts. Figure 1 illustrates the composition of non-profit revenue in a 2007 Johns Hopkins study. Their study, which covered Australia, Belgium, Canada, the Czech Republic, Japan, and New Zealand, illustrated how non- profits spread out risks, with roughly a third of their revenue coming from each of three sources: government payments, fees and charges, and private philanthropy.[20]

Figure 1: Non-Profit Revenue Streams

Source: Author’s tabulation of Johns Hopkins data

Successful non-profits maintain their diversified funding flows by fostering transparent, positive relationships with their donors. Communication with potential donors is more than just a plea for financial support; it emphasizes the impact the organization is making in the community.[21]    According to fund-raising consultant Rick Dunham,  “donors don’t mind frequency [of solicitations];  they  mind  irrelevancy.”[22] Lastly, in today’s increasingly fast- paced culture, donors need options on how they can contribute. Successful non-profits allow their supporters to give online, in person, via direct mail, or through volunteering their time or talents.[23]

Recommendation 1: Schools should move away from complete dependence on state funding by diversifying their sources of revenue

Public education as a major component of government spending is at risk in the current economic climate. In Managing Schools in a Period of  Global Economic  Meltdown,  Martins  Fabunmi  and  Emmanuel  Aileonokhuoya  Isah suggest that schools evaluate and expand revenue sources from Parent Teacher Associations (PTAs), community contributions, internally generated funds, or by providing services for a fee. [24]

California public schools have a history of receiving voluntary private contributions. In California between 1992 and 2001, the number of  PTAs giving to their local school more than doubled from 654 to 1,463. The total PTA contributions during this time rose from just over $45 million to over $83 million.[25] Aggregate voluntary contributions to public education in California– including those from PTAs, education foundations, booster clubs, and other school-sponsored organizations – totaled over $238 million in 2001.[26]

Although asking for community financial donations in the current economic environment may not be fruitful, in-kind giving can also be a potential source of funds. Every year schools spend a significant amount of money on paper, markers, decorations for events, before- and after-school supervision, and financial management experts, amongst other things. By making their needs transparent to the community, schools can receive some of these items as gifts.

Moreover, schools may not be fully capitalizing on their existing practices. Instead of providing a band concert for just the parents, they can use community connections to make it a larger event. Parents can still receive complimentary tickets, while the larger community receives local entertainment at a reasonable price. School classes or clubs that generate products can be offered at a reasonable price to the general public. Schools can organize an art show/sale where parents and art-lovers can buy artwork, providing students with a sense of accomplishment and the school with additional revenue. Although revenue streams generated by single events may not be large, the associated costs of such events are miniscule and the accumulation of funding from events aggregate over time. Skills can also be marketable, as illustrated by the Junior Engineering and Technician Club at a secondary school in Nigeria. This club provides a needed service for the community at a modest price by preparing solar energy for homes.[27]

Providing a service for a fee can also help diversify revenue streams. Fee-for-service programs may be initiated and implemented by the school, utilizing the skills of staff and students to offer events for the community. One example of fee-for-service is after-school education. Many community members are eager to learn new skills and schools can try to meet that demand. For example, schools could create an adult English class or a computer software class, teaching applications such as Microsoft Excel or  Quickbooks. These types of initiatives would provide a service for the community, extra income for a staff member, and a new steady source of revenue for the institution.

Many states exhibit successful examples of school districts providing fee-for-service adult and community education. In Montana, for example, the Billings Public  School District’s Adult Education and Career Advancement program  has  self-paced  classes  that  last  eight  weeks  in  subjects  such  as business, math, science, and social studies. The district also offers certification and certification prep courses, ranging from accounting to paralegal, with class fees starting at $115.[28]  In Virginia, the Fairfax County School’s Adult and Community Education program provides similar offerings. These programs include a wide selection of classes, including English for speakers of other language (ESOL). Program courses last 11 weeks and basic tuition starts at $299 per class.[29]

The Role of Partnerships

Partnering with both private and non-profit organizations is a way to gain stability and resources while dispersing financial risks among multiple actors. In their report entitled How to Weather the Recession as a Nonprofit, the consultants at LarsonAllen, LLP make it clear that “going it alone won’t work.”[30] Many non-profits are heeding this advice. In response to the economic downturn, two-thirds of foundations are increasing their partnerships,[31] and in Colorado 46.8 percent of non-profits collaborate around program delivery.[32]

The successful non-profit evaluates its strengths and weaknesses, shifts its resources to where they are most efficiently implemented, and reaches out to those organizations that best complement it. This assessment gives the non- profit the opportunity to focus on what it does well, thus providing the greatest benefit at a reasonable cost.[33] According to the Association for Fundraising Professionals,  the  three  keys  to  flourishing partnerships  or  mergers  “are (i) collaboration, (ii) communication and planning, and (iii) an over-riding imperative to keep a focus on the mission.”[34]   The partnership approach is becoming a central theme in the creation of strong non-profits.

Recommendation 2: Schools should look for opportunities to advance partnerships with private and non-profit organizations

Partnerships can be a source of consistent revenue and community goodwill without the need to privatize an institution or district. In her policy brief  Public private partnerships in education: Some policy questions, Geeta Gandhi Kingdon[35]   uses Program for  International Student Assessment (PISA) data to support her claim that privately controlled public institutions are the most effective. She claims that such institutions harness the “expertise, energy, and financial management skills of the private sector to give better value for taxpayers’ money.”[36]   Instead of pushing policymakers to abandon public control of their own schools, these findings should encourage public servants to learn and acquire the skills necessary to be competitive. The overall goal is not to create a private institution but to “foster an organizational structure that, to the greatest extent possible, aligns personal incentives and the public missions.”[37]

The joint use of public schools is perhaps the most enticing and underused source of revenue. In contrast to providing a service for a fee, which generally involves school staff and students initiating and implementing programs with the surrounding community, joint use allows the community to use the school and share the school’s available physical resources. In the United States, there are more public school buildings than any other public facility, consisting of 6.6 billion square feet of space and more than one million acres of land.[38]  Educational leaders need to recognize the resource they have available to them and use this resource accordingly. The school could provide gymnasium space for the city sports league or cafeteria space for a non-profit event. The building as a whole could be used for meetings and conferences. School buildings, often the central facility in a community, are frequently closed at the end of the school day, for the weekend, and during the summer. Allowing the community to use school facilities can increase revenue while fostering strong relationships with citizens.

Recently, public schools have begun housing an ever-growing number of churches, providing congregations with an inexpensive space to worship while giving financial support for the schools involved. Mosaic Manhattan, a New York-based church, has made its home at Public School 89. Pastor Gregg Farah turned to his children’s school after realizing that alternative locations for his church, such as hotel lobbies, were too costly at $1,500 per service. By contrast, the partnership with New York Public Schools included rental of the gym and auditorium for $300 per service. Mosaic Manhattan currently holds two services per week, providing the district with profits of over $30,000 per year.[39]   According to the University of California-Berkeley’s Center for Cities and Schools, “public school facilities can become more vibrant public spaces where public education is the primary – but not only – user.”[40]

Emphasizing and Improving Public Relations

Client Retention and Recruitment

Non-profit organizations would dissolve without the support of their donors. Although always important, cultivating and maintaining donor relations becomes more pressing during times of economic downturn. Responsive organizations treat their donors like people, not institutions.[41]  This provides space for open dialogue between the non-profit and donor as well as an opportunity for the non-profit to appeal to the donor’s sense of humanity.

One option is to use a personal story to appeal to funders. For example, an orphanage in Uganda was created when a woman infected with AIDS and her two children approached the organization’s soon-to-be founder.  The woman was depressed and seeking poison to kill herself and her family. Instead, the founder denied the request, adopted the two children, and established the orphanage. Both children are now healthy adults.[42] The organization shares this information with their funders; the direct impact illustrated in this example is what smaller donors are looking for when deciding to give.[43]

CARE International, a leading humanitarian organization that fights to reduce global poverty, uses images and stories of people that have been impacted by their programs to encourage individuals to donate. Abay, an Ethiopian woman, is featured in CARE’s “I Am Powerful” campaign. As a young girl, Abay refused to take part in her tribe’s tradition of female genital cutting. Now an adult, Abay has returned to her tribe to shed light on the damaging effects of the practice with the hope of eradicating the centuries-old tradition of female genital cutting.[44]

Effective organizations are open with their donors. They are transparent about the needs of the organization and provide examples of essential funds that must be maintained. [45, 46] Large donors are interested in the sustainability of the non-profit, in addition to the  organization’s current impact on the community, and they want to see an organized plan for the future.[47] Savvy non- profits also recognize that it may be necessary to request that some donors loosen the restrictions on their giving,[48] providing additional funding the non- profit can direct to areas of high need.

Finally, regardless of      the size of       the contribution, successful organizations thank their donors frequently, making them feel appreciated.[49]

Lions Club International Foundation provides an example of a well-developed donor recognition program. Their program includes an initial thank-you letter as well as appreciation pins and patches and recognition on the club’s honor roll. Long-term and higher level donors also receive awards, such as the LCIF Helping Hands Award and the Friends of Humanity Award.[50]

Community Relations

Non-profits and their surrounding community have a symbiotic relationship that is vital to the former’s success. In addition to what individual donors can do to support the non-profit, successful non-profits recognize how the organization can add value to people’s lives by contributing to a person’s “holistic identity:”[51]   through action that is “visible, tangible, and promising in  communities  where  the  recession  is  undermining  families,  incomes, neighborhoods, and jobs.”[52]

Two concrete ways to incorporate the community into the non-profit’s mission are through education and volunteerism. A non-profit needs to educate the community and  donors  about the issues the organization is trying to address.[53] The organization should stress its positive impact on the community and place itself in the community’s hierarchy of  needs.[54]   For example, on a national scale, Feeding America found its market niche by focusing on the unmet needs of those that go hungry. Between 2005 and 2009, the number of clients served by soup kitchens increased by 65.4 percent and those served by shelters increased by 54.5 percent. To meet the needs of these individuals more efficiently, Feeding America created an organizational framework that centralized food production, distribution, and service.[55]

Providing opportunities for community members to volunteer increases community buy-in and allows individuals to make an impact through the organization. For the non-profit, it also reduces overhead. During the recession, 43.7 percent of Colorado non-profits have increased their use of volunteers, and 33.9 percent said they were considering the action.[56]   At the national level, the percentage of Americans over the age of 16 that volunteered for non-profits increased from 27.4 percent in 2002 to 28.8 percent in 2003.[ 57]

Recommendation 3: Schools should cultivate stronger relationships with their respective communities

With the increased competition between public schools and the connection between school enrollment and government funding, educational institutions must approach students and families as clients, selling them the school’s mission and effectiveness. By cultivating stronger relationships with the community through education and volunteerism, schools provide families with the opportunity to learn about the successes of the institution and to develop a vested interest in the school’s achievements. As previously stated, fundraising  activities  –  such  as  community  concerts,  after-school  classes, and  partnerships – allow for the diffusion of  the school’s mission while giving something back to the community. Additionally, recruiting volunteers to provide supervision or tutoring or to be guest speakers can enhance relationships with adults in the community while reducing associated costs for the school. In a review of the American Association of Administrators annual conference, Dennis Pierce acknowledged that one of the main ways to encourage community commitment is by active participation of local citizens in the success of the school. [58]

Parents and community members can contribute to the school in a variety of ways with mutually beneficial results. Marin County Schools in California was able to encourage a healthy lifestyle while addressing their depleted transportation budget through the implementation of the Safe Routes to School Program. Volunteers walk common student routes and act as crossing guards. In the first two years of the program, the percent of students that walked or biked to school nearly doubled.59   Parent volunteers have also been effective in various schools as tutors, mentors, computer technicians, and hall monitors. Others have worked with English Language Learners or aided with clerical work.[60]  Furthermore, parent volunteers are not simply a financial asset. In their work on parent involvement, Sandra Machen, Janell Wilson, and Charles Notar found that stronger parent-school relationships had a positive impact on student achievement.[61]   By providing significant ways for the community to be involved in the school, the school increases transparency and improves the buy-in of their stake-holders.

Conclusion

Given decreasing government funding and increasing competition for students and resources due to structural evolutions, educational institutions should turn to the lessons of the non-profit sector to ensure their financial viability. Schools can use these lessons to increase the amount of funding they receive and to use their resources more efficiently. Schools can improve their efficiency by evaluating their current resources and acting in a manner that benefits both themselves and their surrounding communities. Additionally, schools must diversify overall revenue sources and re-evaluate their policies regarding the use of their facilities by the general public. A potential source of increased funding can be generated by involving the community and fostering positive relationships with it. As these relationships solidify, citizens will be more likely to enroll their students in those institutions. Due to the per-pupil funding used in American public education, a large student population leads to increased government financial support.

Potential challenges for the implementation of these recommendations vary by state.  School districts may experience legal restrictions if states mandate what schools should invest in and how schools can use their facilities. Moreover, encouraging private or church involvement with public services can be a potential source of conflict, in particular regarding the contentious issue of church-state relations. However, states are increasingly allowing schools to rent out their facilities to religious organizations, indicating that this can be a viable alternative.[62]

Most importantly, given budget restrictions, funding change is an overarching concern. It may be difficult to convince over-worked educators to endorse programs that alter the status quo and elevate expectations. School personnel should shift their focus on working smarter, not harder, and using their human capital efficiently to benefit the school.  Training should be provided to encourage, educate, and prepare employees for these changes. Teachers specifically, and the school in general, should re-evaluate how they use the material and human (including volunteer) resources they have available. Working smarter to address the changing nature of public education requires prescriptive thinking. This transition will be easier in smaller school districts and charter schools that have more decision-making autonomy.

Even at these institutions, however, implementing all of the suggestions given in this article may not be feasible. Instead, the broader lesson is that schools must be creative in analyzing their current position and in applying suitable measures, given their unique situation and available human capital.

 

Endnotes

[1]           “(FUNDING TIPS) Stretching the School Dollar Means Getting More Brains for the Buck,” Children & Youth Funding Report (October 29, 2010): 4.

[2]           “(FUNDING TIPS),” 4.

[3]           Lei Zhou and Frank Johnson, “Revenues and Expenditures for Public Elementary and Secondary Education: School Year 2006-2007,” National Center for Education Statistics, US Department of Education, (February 2009), http://nces ed.gov/pubs2009/2009337.pdf.

[4]           Zhou and Johnson, “Revenues and Expenditures.”

[5]           Patrice Iatorola, Amy Ellen Schwartz, Leanna Stiefel, and Colin C. Chellman, “Small Schools, Large Districts. Small-School Reform and New York City’s Students,” Teachers College Record 110 no. 9 (September 2008): 1837-1878.

[6]           Nicholas Johnson, Phil Oliff, Phil and Jeremy Koulish, “Most States are Cutting Education,” Center on Budget and Policy Priorities, (February 2008), accessed October 15, 2010, http://www.cbpp.org/cms/index.cfm?fa=view&id=2220.

[7]           Johnson et al., “Most States.”

[8]           Michael W. Krist “Politics of Charter Schools: Competing National Advocacy Coalitions Meet Local Politics,” Peabody Journal of Education (0161956X) 82 no. 2/3 (2007): 184-203. Education Research Complete, EBSCOhost, accessed March 22, 2011.

[9]          US Charter Schools, “Overview,” accessed October 20, 2010, http://www.uscharterschools.org/pub/uscs_docs/o/index.htm.

[10]         US Charter Schools, “History,” accessed October 20, 2010, http://www.uscharterschools.org/pub/uscs_docs/o/history.htm.

[11]         “Education Secretary Arne Duncan Announces Twelve Grants for $50 Million to Charter School Management Organizations,” US Department of Education, (September 29, 2010), http://www.ed.gov/news/press-releases/education- secretary-arne-duncan-announces-twelve-grants-50-million-charter-school.

[12]         Thomas Toch, “Expansion, Survival, and Impact,” Education Week 29 no. 9 (October 28, 2009): 32-37.

[13]         Mark Hrywna, “2008: Giving Dropped $6.4 billion; Largest Decline on Record,” The Non-Profit Times, June 11, 2009, http://www.nptimes.com/09Jun/bnews givingusa.- 090610.html.

[14]         Debra Sheets, Michael Marcus and John Migliaccio, “Foundation Giving and the Nonprofit Sector: Turning the Economic Downturn into Opportunity,” Generations – Journal of American Society on Aging, 33 no.3 (2009): 81-85.

[15]         “How Do We Rate Charities?” Charity Navigator, accessed October 15, 2010, http://www.charitynavigator.org/index.cfm?bay=content.view&cpid=35.

[16]         Barbara Ciconte and Jeanne Jacob, Fundraising Basics: A Complete Guide (Boston: Jones and Bartlett Publishers, 2005).

[17]         Ciconte and Jacob, Fundraising Basics.

[18]         “Weathering the Storm: Challenges and Opportunities Facing Colorado Nonprofits

During the Recession,” Colorado Nonprofit Association, accessed October 18,

2010, http://www.coloradononprofits.org/WeatheringStormII/WeatheringStormIIpdf.

[19]         “Navigating the Financial Crisis,” Nonprofit Finance Fund, accessed October 15,

2010, http://nonprofitfinancefund.org/files/docs/2010/Recession_Tips.pdf.

[20]         Lester M. Salamon, Megan A. Haddock, S. Wojciech Sokolowski, and Helen S. Tice, “Measuring Civil Society and Volunteering: Initial Findings from Implementation

of the UN Handbook on Non-profit Industries,” Working Paper No. 23 (Baltimore: Johns Hopkins Center for Civil Society Studies, 2007), http://www. ccss.jhu.edu/pdfs/ILO/Measuring_Civil_Society.pdf.

[21]         “Weathering a Financial Storm,” The Chronicles of Philanthropy, September 23, 2008, http://philanthropy.com/article/Weathering-a-Financial-Storm/63254/.

[22]         “Weathering a Financial Storm,” Question 26.

[23]         Joan Flanagan, Successful Fundraising: A Complete Handbook for Volunteers and

Professionals (New York: Contemporary Books, 2002).

[24]         Martins Fabunmi and Emmanuel Aileonokhuoya Isah, “Managing Schools in a Period of Global Economic Meltdown,” European Journal of Social Sciences, 8 no.4 (2009): 653-664, http://www.eurojournals.com/ejss_8_4_12.pdf.

[25]         Eric Brunner and Jennifer Imazeki, “Private Contributions and Public School Resources,” San Diego State University Center for Public Economics Discussion Paper 07-03 (2003), http://www-rohan.sdsu.edu/dept/econ/WPSeries/ WorkingPaper0307.pdf.

[26]         Brunner and Imazeki, “Private Contributions.”

[27]         Fabunmi and Isah, “Managing Schools.”

[28]         “Adult Education and Career Advancement Program,” Billings Public Schools, accessed December 5, 2010, http://www.billings.k12.mt.us/adulted/adulted/index.html.

[29]         “Adult and Community Education Program,” Fairfax County Public Schools, accessed December 5, 2010, http://www.fcps.edu/DIS/OACE/.

[30]         LarsonAllen, LLP, “How to Weather the Recession as a Nonprofit: Meeting the Challenge Head On,” White Paper, (January 2009):1, www.larsonallen.com/ publicservice/RecessionNonprofitwhitepaper.pdf.

[31]         Sheets, Marcus, and Migliaccio, “Foundation Giving and the Nonprofit Sector.”

[32]         Colorado Nonprofit Association and Community Resource Center, “Weathering

the Storm.”

[33]         LarsonAllen, LLP, “How to Weather the Recession as a Nonprofit.”

[34]         “Nonprofit Mergers and Partnerships: Lessons and Advice,” Association of Fundraising Professionals, October 20, 2009, accessed October 18, 2010, http:// www.afpnet.org/ResourceCenter/ArticleDetail.cfm?ItemNumber=4196.

[35]         Geeta Gandhi Kingdon, “Public private partnerships in education: Some policy questions,” Research Consortium on Educational Outcomes and Poverty, Policy Brief No. 1, (April 2007), http://recoup.educ.cam.ac.uk/publications/pb1.pdf.

[36]         Kingdon, “Public private partnerships,” 1.

[37]         Gary W. Ritter, Roberto Maranto, and Stuart Buck, “Harnessing Private Incentives in Public Education,” Review of Public Personnel Administration, 29 no.249 (2009): 253, http://rop.sagepub.com/content/29/3/249.full.pdf+html.

[38]         Mary Filardo, Jeffrey M. Vincent, Marni Allen, and Jason Franklin, “Joint Use of Public Schools: A Framework for a New Social Contract,” University of California- Berkeley Center for Cities and Schools, accessed October 20, 2010, http:// citiesandschools.berkeley.edu/reports/2010_JU_Concept_Paper.pdf.

[39]         Ronda Kaysen, “Church in Public School,” Downtown Express 17 no.21 (October 15-

21, 2004), http://www.downtownexpress.com/de_75/churchinpublic.html.

[40]         Filardo et al., “Joint Use of Public Schools,”1.

[41]         “Weathering a Financial Storm.”

[42]         Kivi Leroux Miller, “Two great nonprofit marketing lessons on NBC Nightly

News,” The Nonprofit Marketing Guide, February 19, 2008,  accessed October 18,

2010, http://www.nonprofitmarketingguide.com/blog/2008/02/19/two-great- nonprofit-marketing-lessons-on-nbc-nightly-news/.

[43]         “Weathering a Financial Storm.”

[44]         “One woman’s story of empowerment.” CARE International, accessed March 5, 2011, http://www.care.org/features/flash/fgc/index.asp.

[45]         “Navigating the Financial Crisis.”

[46]         “How to weather the recession as a nonprofit.”

[47]         “Weathering a Financial Storm.”

[48]         Ibid.

[49]         “Navigating the Financial Crisis.”

[50]         “Donor Recognition.” Lions Club International, accessed March 5, 2011, http:// www.lionsclubs.org/EN/lci-foundation/supporting-our-work/donor-recognition/ index.php.

[51]         Sharon Schneider, “Nonprofit’s guide to surviving a recession.” The Philanthropic Family, June 10, 2009, accessed October 15, 2010, http://thephilanthropicfamily. com/2009/06/10/nonprofits-guide-to-surviving-the-recession/.

[52]         Rick Cohen, “Recession-fighting ideas for philanthropy.” The Nonprofit Times, accessed October 15, 2010, http://www.nptimes.com/webex/08aug/c3-8-1-08. html.

[53]         Starr, “Recession and the social economy.”

[54]         “Weathering a Financial Storm.”

[55]         Starr, “Recession and the social economy.”

[56]         “Weathering the storm.”

[57]         “Quick facts about non profits,” National Center for Charitable Statistics (NCCS),

accessed March 5, 2011, http://nccs.urban.org/statistics/quickfacts.cfm.

[58]         Pierce, “Saving school budgets in a recession.”

[59]         Catherine Staunton, Deb Hubsmith, and Wendi Kallins, “Promoting Safe Walking and Biking to School: The Marin County Success Story,” American Journal of Public Health 93 no.9 (2003).

[60]         Jeffrey L. Brudney, “The Effective Use of Volunteers: Best Practices for the Public Sector,” Law and Contemporary Problems 62 no.4 (1999), https://www.law.duke.edu journals/lcp/downloads/LCP62DAutumn1999P219.pdf.

[61]         Sandra Machen, Janell Wilson, and Charles Notar, “Parental Involvement in the Classroom,” Journal of Instructional Psychology 32 no.1 (2005), http://www.questia. com/googleScholar.qst?docId=5009425797.

[62]         Kaysen, “Church in Public School.”

 

 

‡  William Smith has worked in and researched the field of  education for eight years. His primary interests  lie in education and economic development. Previous publications include: Testing the Harrod-Domar  Model:  A  comparative  study  of  economic  growth  in  Haiti  and the Dominican Republic and The impact of  a changing economy on education in Argentina: 1990-2006. Smith earned his Master of Arts in Teaching from Western Oregon University and is currently a Master in International Development candidate at the University of Denver.

 

David Lange has been working in the field of education as a teacher and administrator for 15 years. He earned his Master of  Education in Educational Leadership from Regis University in 2009 and his Master of Arts in English from Concordia University in 2002. He is currently a doctoral candidate at Grand Canyon University, focusing on Organizational Leadership with an emphasis on higher education.

Dealing with a State Budget Crisis: An Interview with Jim Johnson

Interviewed by Gray Wilson

Jim Johnson is a Visiting Professor of the Practice at the Sanford School of Public Policy at Duke University. Mr. Johnson is also a partner in Blount Street Advisors, a Raleigh-based government relations and business consulting firm that he founded in 2006. Until December 2005, he was the Director of the North Carolina General Assembly’s Fiscal Research Division, which is the legislature’s nonpartisan budget and finance policy staff. Before becoming director in 1999, he worked at the Division on budgetary and policy issues in K-12 education and in health and human services. Mr. Johnson is a graduate of the University of North Carolina-Chapel Hill, where he earned a Bachelor of Arts in political science, and of North Carolina State University, where he earned a Master of Public Administration. He has also participated in the Program for Senior Executives in State and Local Government at the Harvard Kennedy School of Government.

* * * * *

I recently spoke with Mr. Johnson about his insights into the budget crises currently facing North Carolina and other states across the country. In the following excerpts, he discusses government employee pension funds, revenue-side solutions, the effects of the crisis on local governments, the role of the federal government in dealing with the crisis, and privatization.

 

—Government Employee Pension Funds[i]

 

GW: Dealing with state employee retirement plans seems to be a relatively universal problem across states.

JJ: Well, I think the problem isn’t the same in all the states, number one. It’s not the same in North Carolina as in, say, Illinois. North Carolina’s pension fund is currently funded at approximately 95-100 percent of its projected liabilities to current and future retirees–and there’s a story about how it got to this level of funding. There were decisions made a couple of decades ago to reduce the unfunded liability, and successive Governors and the legislature stayed on that path. The reason we’re somewhat below 100 percent right now is very straightforward. Number one, the stock market went down. Number two, a very conscious decision was made in 2001 to reduce the contribution to the pension fund, because at that time the system was funded in excess of its liabilities, at 104-105 percent. I was the director at the Fiscal Research Division at that time and agreed with the decision.  The legislators saw temporarily reducing the funding as a trade off against cuts in other areas of the budget, specifically education and human services. The problem is that the state did not return to a higher contribution rate after recession ended and revenues increased again.

JJ: I think the issue of defined-benefit versus defined-contribution is somewhat of a separate policy question from the funding of liabilities.[i] There are good reasons . . .  to argue that you ought to go to defined-contribution. The major reason is that it’s portable, and [young professionals don’t] think you’re going to work anywhere more than five years in a row, and you can’t take a defined-benefit with you to the next job. So there’s an argument that the defined-contribution plan benefits your younger employees. In the long run a defined contribution plan gives you better control over your costs because the employer’s liabilities do not exceed the dollar amount provided to the employee – there is no guaranteed benefit.

JJ: If you actually run the numbers in NC the transition costs to a defined- contribution would probably be greater in the intermediate term than the cost of the defined benefit plan alone, because of the need to fund both plans. Now that might be an expense you want to incur, for good policy reasons, but the transition costs have to be funded. If you cap the defined benefit retirement system and say that nobody can qualify for that plan who is not currently vested, then you are operating two programs until all of the beneficiaries of the defined benefit plan die. When I came to work for the General Assembly in the mid 1970’s the state operated a retirement home for the widows and daughters of Confederate Veterans. Liabilities can last a long time.

GW: Do you think NC’s experience in dealing with the pension plan has been different because its state employees don’t have collective bargaining rights?

JJ: Probably. . . . The legislature has maintained tight control over COLAs [Cost-of-Living Adjustments], so there is no statutory right to an automatic COLA increase in the state retirement system. There are two explanations for that. You might say “Oh, well that’s just great budgeting.” True. Well it’s also great politics. Why is that? Because if you create by statute an automatic COLA, the employees are going to be back saying, “Well, what have you done for me lately?” And they forget that you’ve given them the COLA. On the other hand – some very clever retail politicians figured this out – if we make the employee groups come to us every year, (a) we don’t have to give them as much because the first thing they’ll have to do is to spend their political effort to get the COLA, and the second thing is that we can control the cost. But it was as much political as it was good budgeting. But it’s good politics not to give away the COLA, so that you can give something away every year – or not give it away every year to control your costs. It also turns out that these same politicians created in statute and in the House and Senate rules a system that requires two actuarial estimates for the cost of any bill that makes changes to the state or local government retirement systems. These actuarial fiscal notes must be complete before the bill is considered.

COLAs also lead to a very interesting question in North Carolina and in a number of other states about implied contracts in the public sector. The legal theory of implied contracts in North Carolina is present in something called the Bailey case.[ii]   The N.C. Supreme Court said there was an implied contract that  retirement benefits would not be taxed, and therefore the benefits of employees who were fully vested in 1989 were exempt from state income tax. In my opinion the Court should not have injected itself into what is essentially a tax policy issue that properly was the responsibility of the General Assembly and the Governor.

The doctrine of implied contracts is not unique to North Carolina. In Colorado, where the legislature has tried to take back the COLA statute, apparently attorneys for employees are arguing against the statute on the basis that once you have granted a COLA by statute that the legislature cannot repeal that statute. So I think that what [the North Carolina legislature] avoided having to deal with that doctrine on COLA. There’s a debate this year as to whether retirees and employees can be required to pay for some portion of their health insurance cost. If the bill passes there will probably be litigation based on the implied contract doctrine.

But I think if North Carolina had collective bargaining, there would probably have been bargaining around things like automatic COLAs. That would have been very logical for the employees’ associations – teachers, state, employees, and retirees. The legislature so far has resisted, and I think that’s pretty well dead now, maybe for the next decade.

 

—Revenue-Side Solutions—

 

GW: What’s the role of revenue-side solutions in solving the state budget crisis?

JJ: Well, let’s go back to the question of what caused the crisis. The problem clearly is that the revenue has dropped–especially sales and personal income taxes. It’s not just all spending.

With the sales tax one of the big issues in every state is whether you tax services, and how you might do that. Some states currently tax services more than others. North Carolina does it only a little. Some states like Florida attempted it unsuccessfully. Texas applies the sales tax to a fair amount of services. So I think that the restructuring of the state sales tax to broaden the base is going to be a continuing issue. . . . Interestingly enough, some Republicans are beginning to talk about it, and they talked about it during the last election. They think about it as broadening the revenue base, but setting the rate so that it is revenue-neutral. The projection of a revenue-neutral rate for services that are not currently taxed that is a very serious technical challenge. The current majority in the North Carolina legislature doesn’t see increasing taxes as an option. It’s possible that in the next elections in some states one of the issues will be tax reform, including a sales tax on services. We will also likely see a continued debate on a sales tax on internet purchases, with the on-line sellers like Amazon continuing to resist this effort, and the retail merchants with a bricks and mortar presence supporting the application of the sales tax to decrease the on-line seller’s comparative price advantage.

 

— Local Governments—

 

GW: Are local governments getting the short end of the stick in all of this?

JJ: Yes. A couple of things are going to happen.

Since most of the state budget is in education, as state aid to public schools and community colleges is cut, it will be the local school boards–because of the way that education is governed in this state– who are going to be responsible for firing teachers. . . . The buck will stop at the local level with the school boards and the county commissioners.

At the local level the values of commercial and residential property that are subject to the property tax have dropped dramatically. The mantra on Wall Street was “Housing prices have never dropped more than five percent two years in a row since the Great Depression.” Well they did. What’s happening now is that–and it’s just beginning to play out in different counties in North Carolina, and across the country–as property is revalued over the next few years, the property tax base, which makes up most of the local government revenues in this state, is going to shrink. If you look at Florida, Nevada, and some of the beach communities in North Carolina there is going to be less local government revenue coming from the existing property tax base. The choice will be cutting services or raising the property tax rate, never an easy decision. County and city property tax revenues are used to fund schools, community colleges, health departments, parks, and some streets and roads, and other municipal service. This decline in property tax revenue is lagging the revenue declines at the state level, because of this revaluation cycle, that’s usually three to seven years.

GW: So between losing money on property revaluation and losing funding from the state government, how are local governments going to be able to sustain the public schools?

JJ: Well let’s put it another way. Even with the sales tax rebounding, which it is, it’s not enough to close the gap. I happen to think that it’s going to be very challenging for the public schools. Local money is mostly in teachers and buildings. At the state level it’s probably 80 percent plus when you add in the fringe benefits, retirement, and health benefit costs. So I think it’s going to be very challenging. We are likely to see bigger class sizes in K-12, like we’re already seeing in the universities and community colleges. We’re also probably going to have fewer assistant principals, guidance counselors and personnel that many legislators do not see as classroom-related positions.

An interesting question that I’m thinking about is when does the impact of the cuts become so great that the issue goes to court? In almost every state in the country there have been lawsuits based on the state constitutions–not the federal–around the rights of students. In North Carolina . . . it’s the right to a sound basic education.

Similar questions arise in the mental health systems around the country, which are primarily funded by the states. Cutting funding is not a federal budget question, but if you ask the question from a legal standpoint “where did all of these patients rights in the mental health system come from?” starting in the early 1970s, many of the rights of the mentally ill have their roots in case law in the federal courts, deeply embedded in an entire string of cases that have been litigated through the appellate courts. It’s very difficult to imagine the Roberts Court undoing what is 25-30 years worth of case law in this area. And when I say mental health, I’m grouping a number of things together–the mentally ill, the developmentally disabled and substance abuse. In the public schools, there are certain rights attached to special ed[ucation], and those are tied to both federal and state law. Both federal and state money support special education.

So I think that with all of these systems, questions will now arise on the legal side as to–GW: What’s the floor?–JJ: Yes what’s the floor, that’s a good way of saying it, or has the floor now become the basement?

GW: How can states reform their budget processes to insulate themselves the next time something like this comes around?

JJ: Well, they can’t . . . . in a downturn of this magnitude you can’t insulate yourself, but there will be a good deal of conversations going forward about the size of reserve funds.

 

—The Role of the Federal Government—

 

GW: What’s the role of the federal government in helping states through this? Does it have a role? Should it have a role?

JJ: Well the answer is they should, in my opinion, but that’s a value judgment. If you look at the biggest item in state budgets–in total dollars, not just state dollars–it’s the Medicaid program. In every state in the country now, with a couple of exceptions somewhere, the Medicaid budget is bigger in total than your school budget. Education generally is the biggest state expenditure, but in total Medicaid is bigger. And I think the debate is now, how much flexibility– and we’ve been through this before–the state should be given to manage the Medicaid program, how does that fit in with what happens with the National Health Program. There are folks . . . who think that Medicaid at some point should be shifted upstream to the national level. . . . On the other hand, [shifting responsibility for Medicaid to the federal government would] probably leave [states] with less room for experimentation. If the states don’t have any skin in the game there’s not much incentive to the governors to experiment. And there’s always, given the diversity among the fifty states, a good reason to think about experimentation in the US.

 

—The Role of Privatization—

 

GW: What’s the role of privatization in dealing with the budget crisis?

JJ: Well, and I’ll say I have a vested interest in this,[ iii]  there are a lot of different places that you might think about privatization, and the record is mixed as far as I can tell, and I don’t know that we’ve necessarily created a set of best practices. We tried it in the prison system in North Carolina and it just didn’t work very well, and we wound up taking them back over. Maybe the state picked the wrong company, who knows. On the other hand the state has successfully outsourced a number of IT services for years. The question is whether you have systems in place where you really can judge what the costs and outcomes of privatization. It’s kind of geeky, but those systems need to be in place to determine if you’re getting good value for the taxpayer. In my opinion, there is a role for the private sector in providing various services. I think that it’s very difficult, especially in the area of infrastructure (transportation, technology, water and waste water) for the government to mobilize the capital that’s needed without engaging the private sector.

 

—A Piece of Advice—

 

GW: What advice do you have for the next generation of policy-makers?

This is a great time to be in the public sector, and a great challenge. I think that what I see right now is, especially among many of the people that I’ve worked with who are now in key positions across state government,  this continued budget crisis is burning them out. And that’s not unexpected. Public managers have been dealing with a budget crisis since 2000. There was a short interlude of a year or two about mid-decade, and then problems begin again in 2008. So keep your optimism is my first piece of advice, bring that with you to your new position. Optimism, new ideas, and different ways of looking at problems are ways you can impact the lives of people. I think trying to make a difference is why we all got in this business.

 

Endnotes

 

[i] Explanatory note: A defined-benefit pension plan is one in which a retired employee’s benefits are determined by a set formula, and do not depend on investment returns. A defined-contribution plan is one in which an employee pays into an individual account during his or her career, and benefits upon retirement depend on investment returns from that account.  The employer may also make a contribution to the individual account, but has no financial liability beyond that amount.

[ii] Bailey v. State, 348 N.C. 130 (1998). The North Carolina Supreme Court held that the State impermissibly violated government employees’ contractual rights by imposing a tax on previously tax-exempt retirement benefits.

[iii] In his government relations consulting work, Mr. Johnson represents Aqua America, a publicly traded water company.

 

Gray Wilson is a Master of Public Policy candidate at the Sanford School of Public Policy, and a Juris Doctor candidate at the Duke University School of Law. He earned his Bachelor’s degree in Environmental Studies and Spanish from the University of North Carolina-Chapel Hill in 2008. At the urging of Mr. Johnson, he served as a research assistant at the North Carolina General Assembly’s Fiscal Research Division in the summer of 2010.

Waiting for “Superman”: How We Can Save America’s Failing Public Schools

Edited by Karl Weber

Reviewed by Laura Howard‡

 

This collection of essays, edited by Karl Weber, serves as a companion to the highly acclaimed documentary Waiting for “Superman,” which debuted in January 2010. The book’s stated purpose is to contribute to the national education debate and examine in more depth the issues raised by the film. The essay authors paint a bleak picture of the public schools as a failing system that continues to deteriorate despite policy initiatives, federal commissions, new state and federal laws and programs, and billions of dollars devoted to the system’s development and improvement.

While compelling, this work misses the mark from a policy perspective. Many of the chapters incorporate grave statistics about the realities of public education in America, but the data source is rarely identified. Throughout the book, several contributors fail to provide support for their arguments, while making broad generalizations that gloss over the nuances of  a system that employs more than 3.5 million teachersi  and serves over 56 million students,[ii] approximately one-fifth of the total US population.[iii]Furthermore, even when the authors present potential policy initiatives (for example, merit pay for teachers based on student performance), they fail to provide a realistic plan for implementation. Overall, the book offers some insightful perspectives and even a few legitimate proposals for reform, but the lack of cohesion, empirical evidence and comprehensive analysis limit its effectiveness as an examination of education policy.

The  book  consists  of  fourteen  chapters,  all  written  by  different stakeholders in the conversation about what is happening in our K-12 public schools.  Contributors   include  Davis  Guggenheim  and  Lesley  Chilcott, producers of the Waiting for “Superman” documentary, and leaders in school reform like Michelle Rhee, Geoffrey  Canada, and Bill and Melinda Gates. Randi Weingarten, president of the American Federation of Teachers, offers a response to the anti-union rhetoric that is often voiced in education reform debates. Eric Schwarz, CEO of Citizen Schools; Bill Strickland, founder of the Manchester Craftsmen’s Guild; Eric Hanushek, a research fellow at the Hoover Institution; and Jay Matthews, education columnist at the Washington Post also contribute. In its final three chapters, the book provides steps that students, parents, educators and business leaders can take to get involved at the local, state and national level.

Although each writer brings his or her own agenda and experiences to the conversation, one theme that resonates from cover to cover is that the traditional public school model is broken. Several authors suggest that charter schools, which combine the benefits of public funding with the freedom to develop curricula and internal policy, are the only hope for children in the public schools. The message endorsed in the book, both implicitly and explicitly, is that public school children who do not get into a charter school–who do not win the school “lottery”–have no hope for a high-quality education, a good job, or a bright future. There are brief references to successful public schools, but these are presented as anomalies and are overshadowed by the focus on poorly performing schools. While this focus is understandable given the book’s objectives and the serious implications for children and communities when schools chronically underperform, the reluctance to acknowledge that children can get an excellent education at a traditional,  non-charter public school is misleading and counterproductive.

The opening chapters written by Guggenheim and Chilcott explain the backstory, motivations, and objectives for the film. As they introduce the stories and issues that the proceeding chapters address, the producers refer to “failing schools” and “good public schools,” “bad teachers” and “great results,” but do not define any of those terms or explain how they are measured. Chilcott does acknowledge, however, that “[p]ractically everyone who has attended school has an opinion about what is right and (more important) what is wrong with our educational system.”iv Acknowledging this facet of education policy subtly reminds the reader that Guggenheim and Chilcott have researched the issues extensively but are not educators or policy analysts.

Readers will find Michelle Rhee’s contribution to the book especially fascinating.  She speaks to her experience as chancellor of the District of Columbia Public Schools and to the implications of policies put into place before and after her appointment. Rhee writes of low expectations, limited resources, and school violence,[v]  but also offers examples of positive change. Rhee tells how new principal Dwan Jordan turned around  Sousa Middle School  in  Washington,  DC,  a  high-poverty  school  with  proficiency rates below 16 percent in reading and math. After the first year of Jordan’s tenure at Sousa, those proficiency rates (which represent the number of students at the school who score at or above grade level on standardized tests) nearly doubled in reading and nearly tripled in math. Rhee also writes of Brian Betts, principal of Shaw-Garnet-Patterson Middle School, whose belief that low-income students could and should go to college transformed a school and a community. Sousa and Shaw-Garnet-Patterson are traditional public schools, not charter schools. Their success was grounded in their focus on accountability and high expectations for all students, regardless of race, class or previous academic performance. While there is still progress to be made in these and other schools across the country, these stories give hope that we can provide a great education to all students, at every school, and in every district in the United States.

However, Rhee’s suggestion that more standardized testing is necessary to ensure student learning and teacher effectiveness is disconcerting. Given that state governments spent an estimated $1.1 billion in 2007-2008 on assessments–compared to $423 million spent in 2001, the year before No Child Left Behind was enacted[vi]–it stands to reason that additional testing will mean less money set aside for construction and maintenance of school properties, fewer  resources  for  the  purchase  of  technology,  textbooks,  and  other classroom supplies, and restricted funds to pay teacher salaries (or implement a performance-based salary structure, of which Rhee is a staunch supporter). The disconnect between policy proposals and practical implementation plans frustrates the reader throughout most of the book.

The strongest policy contribution to this compilation is written by Eric Hanushek, the Paul and Jean Hanna Senior Fellow at the Hoover Institution of Stanford University.  Hanushek’s research focuses on economic analysis of education policy, and his subject area expertise is evident. His portion of the book defines effective teaching and how it can be measured, explains the  implications  for  student  learning  when  comparing  effective  teachers with  ineffective  teachers,  and  reveals  the  broader  economic  implications of  current education policy and practice. He then proposes several policy solutions, providing comprehensive data and clear explanations to support his recommendations.

With its myriad of contributors and viewpoints, disjointed chapters, and overall deficiency of empirical evidence to support its claims, Waiting for “Superman” leaves readers who approach it from a policy standpoint dissatisfied. With the exception of  Hanushek’s  chapter, policy recommendations lack practical and realistic implementation plans, and  contributors focus far too much  on  student  “performance”  or  “achievement”  rather  than  student learning and positive outcomes for children and families. Some will find the book interesting and, with any luck, will be inspired to become agents of change in their communities, but Waiting for “Superman” will leave many readers wanting, and waiting, for more.

 

Endnotes

[i] US Department of Labor, Bureau of Labor Statistics, Occupational Outlook Handbook, 2010-2011 Edition, Teachers–Kindergarten, Elementary, Middle, and Secondary. http://www.bls.gov/oco/ocos318.htm (accessed March 24, 2011).

[ii] “USA Statistics in Brief–Education,” US Census Bureau,  http://www.census.gov/compendia/statab/2011/files/edu.html (accessed March 24, 2011).

[iii] According to the US Census Bureau (http://www.census.gov/), the total US population is estimated at 308 million; students and teachers in American public schools total approximately 60 million, which is roughly 20 percent of the total population.

[iv] Lesley Chilcott, “The Road to Super Tuesday,” in Waiting for “Superman”: How We Can Save

America’s Failing Public Schools, ed. Karl Weber (New York: Public Affairs, 2010), 50.

[v] Ibid., 133-35.

[vi] While a portion of this increase may reflect a rise in general education expenditures, the increase in spending on assessments from 2001 to 2011 is not proportional to the increase in total expenditures. In 2001-2002, state governments spent $207.4 billion on education; in 2007-2008, state education spending increased 74 percent to $280.9 billion. US Census Bureau. 2002 Census of Governments, Vol. 4, No. 1, Public Education Finances: 2002. Washington: Government Printing Office, 2004, 1. http://www2.census.gov/govs/school/02f33pub.pdf (accessed March 24, 2011); US Census Bureau. Public Education Finances: 2008. Washington: Government Printing Office, 2010, 1. http://www2.census.gov/govs/school/08f33pub.pdf (accessed March 24, 2011). In contrast, spending attributed to standardized testing increased by more than 160 percent during the same period, from $423 million in 2001 to an estimated $1.1 billion in 2008. Pauline Vu, “Testing the System: Do All States Make the Grade?” in State of the States 2008, (Washington: Pew Research Center, 2008), 53. http://archive.stateline.org/flash-data/StateOfTheStates2008.pdf (accessed March 24, 2011).

 

‡    Laura Howard is a Fellow in Duke University’s Program in Education.  She holds a Bachelor’s degree in Public Policy Studies from Duke University and a Juris Doctor from Indiana University Maurer School of  Law.  Howard taught 1st, 5th, and 6th grades in the Chicago Public Schools and practiced school law at the law firm of Bose McKinney & Evans, LLP, in Indianapolis before returning to Duke fall of 2010.