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Mexico Recovery On track But Reforms Needed

Mexico Recovery On track But Reforms Needed

Paris, 17 May 2011 - Mexico is recovering strongly from the global recession, helped initially by booming exports and more recently, by a pick-up in private consumption and investment, according to a new OECD report.

The OECD Economic Survey of Mexico says after rising by a sharp 5.5% in 2010 in the wake of the recession, Mexico’s GDP growth is expected to slow to a more sustainable pace of around 4.4% this year and around 3.8% in 2012. Given low levels of inflation, the Central Bank can support recovery by waiting to increase interest rates at least until mid-year 2011.

But inequality remains high and Mexico’s long-term growth potential needs to be strengthened, the report adds. Mexico needs to increase its resistance to future shocks and to ensure living standards climb closer to the OECD average. Key to these challenges will be deeper structural reforms to stabilise the volatility of economic output, increase competition, in particular in services sectors, and address weaknesses in the education system. Strengthening Mexico’s comparatively low tax revenues will ensure that the country can sustainably finance vital investments in infrastructure, education and in social policies. It would also make public finances less dependent on volatile oil revenues.

“Mexico has introduced important reforms to strengthen competition and public revenues,” said OECD Secretary-General Angel Gurría. “Now is the time to build on this momentum and push through reforms in vital areas, such as education, taxes and the labour market, that will help Mexico realise its full potential.”

Even with oil revenues included, Mexico has the lowest tax revenues as a share of GDP of all OECD countries and much of Latin America. Broadening the tax base, by withdrawing some of the most distortive exemptions and special regimes, would increase revenues and make the system easier to administer. Exemptions and zero rates within the VAT system benefit to a large extent higher-income households. Using targeted cash transfers instead would be much more efficient to reduce poverty, the report says. The same holds for large energy subsidies, which accounted for around 1½ per cent of GDP on average each year over the 2005 09 period. The government has been increasing gasoline and diesel prices regularly over recent months, but it should speed up this process to reduce inefficient subsidies, which are also harmful for the environment.

“Mexico has ambitious targets to reduce greenhouse gas emissions,” said Mr Gurría. “The country needs a forceful strategy to eliminate its energy subsidies and find better ways to protect the poor.”

The survey also calls for continued improvement in tax enforcement and tackling Mexico’s large informal economy. It recommends reducing the costs and enhancing the benefits for businesses and workers operating in the formal economy. Among the incentives to enter the formal sector should be higher quality government services, such as more integrated healthcare insurance. A larger part of workers’ social charges should go to pensions, rather than to housing subsidies or childcare facilities. These are often not available for poorer or rural workers, who still have to pay for them, reducing incentives to participate in the formal economy. These services would be better financed via taxes, says the report. Passing the labour reform proposal currently discussed in Congress would also help, the report adds. The introduction of probationary and training periods would make it easier for young and inexperienced workers to find a job in the formal economy.

With the average Mexican family spending close to a third of its budget on products produced in monopolistic or highly oligopolistic markets, the OECD argues for increased competition in a number of sectors. This would lead firms to lower prices, become more efficient and encourage innovation. The report looks in particular at increasing competition in air transport, regional bus services, retail banking, pharmaceuticals and telecommunications. It welcomes the recent competition law reform aimed at strengthening enforcement of anti-cartel regulations.

“The approval of the competition policy reform is a major step ahead for Mexico,” said Mr Gurría. “This will make it much easier to detect cartels and impose sanctions that are sufficiently severe to deter anti-competitive behaviour, with benefits for consumers and Mexico’s ability to increase the living standards of its population.”

More competition and greater scope for market entry would also help Mexico achieve a stronger and more modern consumer services sector, which tends to be more stable than manufacturing and related services. This would help make the economy more resilient against shocks.

Education reform is also needed. The quality of teaching could be further improved through stronger performance standards, better teacher training, more professional recruitment and school management and a recurrent, objective evaluation of all of the above.

An Overview of the Survey is freely accessible in pdf format (in English, French and Spanish) on the OECD’s website: www.oecd.org/eco/surveys/mexico.

ENDS

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