Mexico

   

Economic Policies

#36
Key Findings
Facing growing worries related to U.S. politics, Mexico scores relatively poorly (rank 36) with regard to economic policies. Its score on this measure has declined by 0.1 point relative to 2014.

Capable management has led to comparative economic and financial stability in recent years. However, declines in oil prices and uncertainty regarding the relationship with Trump’s United States have led to a slowdown in growth, greater inflation and rising debt. Budgetary reforms aimed at reducing dependence on oil have not been successful.

Tax reforms have improved government collections, but the tax-to-GDP ratio remains very low due in part to widespread evasion and the large size of the informal sector. Unemployment rates have fallen despite economic headwinds. Labor-market regulations have been significantly loosened.

The decline in oil prices has prompted tax shifts and a reduction in energy subsidies. A problematic opacity in public spending has been partially addressed through new anti-corruption laws. Debt has increased by more than 10% under the current administration. Dealing with financial inflows from illegal drug-related activities remains a major challenge.

Economy

#37

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
5
Economic and financial stability in the last decade represents a real achievement given the frequency and depth of macroeconomic crises in the 1980s and 1990s. The Finance Ministry and the central bank (Banco de México) benefit from a considerable wealth of technical expertise with many Mexican officials having internationally recognized qualifications in economics. However, inflation rates increased as the November 2017 resignation of the central bank governor, Agustin Carstens, brought uncertainty about the future of monetary policy in the country.

Investors regained confidence in the Bank as Alejandro Diaz de Leon, an economist with a long and reputable career at the bank, was named as Carstens’s successor. Diaz is expected to continue Carstens’s policies and both the private and public sectors welcomed his designation. The challenge for the new Bank’s administration is to control an inflation rate that has just begun to slow down after a 6-year high. The phasing out of gasoline subsidies, and the subsequent liberalization of prices since 2016, raised concerns about inflation in 2017. From November 2016 to November 2017 the index of consumer prices increased 6.63%. This is possibly the combined effect of the exchange rate fluctuations and the increased prices of gasoline.

Mexico has the OECD’s lowest tax-to-GDP ratio. For decades, low fiscal capacity was compensated for with oil revenues. The 2014 tax reform aimed to reduce the country’s dependency on oil revenues by cutting expenditures and raising non-oil revenues. The public debt proposed in the reform, however, assumed an ambitious GDP growth rate that did not materialize. Furthermore, it contemplated an increase in oil prices to compensate for any revenues not collected. While this was a reasonable assumption at the time of the reform, it did not accomplish the goal of increasing fiscal autonomy from oil revenue and contributed to increasing the debt-to-GDP ratio. This year, the government debt reached 53.3% of GDP.

The fall in international oil prices and increasing uncertainty about the future of economic relations with its northern neighbor largely explain Mexico’s GDP growth deceleration in the past year as well as national and international organizations’ downward revision of economic growth forecasts. Donald Trump’s election motivated a renegotiation of the North American Free Trade Agreement (NAFTA). So far, the negotiation rounds have not resulted in an overall reorganization of the agreement, but there is uncertainty about particular issues. These include the U.S. government demand for increasing the participation of U.S. companies in the provision of components for manufacturing and the inclusion of an article stipulating the automatic end of the agreement. This context has further increased uncertainty among investors and workers in both the U.S. and Mexico.

Despite ongoing reforms geared toward boosting productivity, the microeconomic picture is less positive. The economy lacks competition in key domestic sectors. Mexico remains a low-skilled, export-oriented economy tied to the North American market. The uneven distribution of income is among the worst in the OECD; despite sound macroeconomic reforms, inequality was not reduced in 2017. High levels of corruption and violence are also severe impediments to inclusive economic development.

Citations:
https://www.bloomberg.com/news/articles/2017-11-28/mexico-president-taps-diaz-de-leon-to-head-central-bank
https://www.eleconomista.com.mx/economia/Diaz-de-Leon-es-el-nuevo-gobernador-del-Banxico-20171129-0014.html
http://www.banxico.org.mx/SieInternet/consultarDirectorioInternetAction.do?accion=consultarCuadro&idCuadro=CF373
https://www.coneval.org.mx/SalaPrensa/Comunicadosprensa/Documents/Comunicado-09-Medicion-pobreza-2016.pdf

Labor Markets

#25

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
5
The crucial challenge for Mexico’s labor economy is the division of the labor market into formal and informal sectors. The informal sector consists of companies and individuals that are not legally registered for taxation and national insurance, and that largely escape both the advantages and disadvantages of legal regulation. According to government estimations, this segment of the workforce accounts for 57% of the economically active population. By OECD standards, the size of the informal sector is very large. Moreover, Mexico is the only OECD country without a national system of unemployment insurance. Many small companies inhabit a twilight world in which they have both lawful and extra-legal features. Informality is also heterogeneous across regions, with the southern regions of the country generally performing worse. As of last year, there were no significant changes in the overall divisions between formal and informal sector employment: six in 10 workers are employed informally in Mexico.

According to the OECD, the unemployment rate in April 2017 was 3.6%, signaling a recovery from the financial and global economic crisis of 2008. However, employed people as a share of the population was 2.2 percentage points below pre-crisis levels of 2007, and unemployment rates are significantly higher among youth and elders.

A 2012 labor reform attempted to increase market flexibility and reduce hiring costs. Although eventually watered down with regard to union transparency, supporters of the law claim that it has the potential to increase productivity, boost employment and improve competitiveness. In 2015 and 2016, unemployment was reduced even amidst a challenging international environment. The new law reforms Mexico’s labor regulations and allows employers to offer workers part-time work, hourly wages and gives them the freedom to engage in outsourcing. The left-wing Party of the Democratic Revolution opposed the bill, but was not able to block it. It deplores the ease with which employers can now hire and fire workers, outsource jobs, side-step giving workers health benefits and hire part-time workers for a fraction of the pay they would otherwise receive. On the other hand, the new law contains provisions to outlaw gender-based discrimination. By lifting the ban on part-time employment, it will be easier for some, including single parents and students, to find work. Until recently, Mexican labor law was based exclusively on Article 123 of the constitution, as well as the 1931 labor law. The Mexican labor system was organized on principles that were fundamentally corporatist for insiders and exclusionary for the rest.

However, a more modern philosophy did not replace the old system, and in turn, the labor legislation became cumbersome and anachronistic. The new law has thus updated Mexico’s labor legislation to some extent. However, the new law is unlikely to produce major changes. Durable long-term change is notably hard to achieve due to Mexico’s chronic labor surplus and its large informal sector of the economy. The government is facing entrenched interests – particularly from the trade-union sector – who maintain a strong following and will try their best to halt reform. Despite the trade unions’ relative loss of influence in the past two decades, they are still influential, particularly compared to other Latin American countries, but less so when compared to several OECD countries.

Citations:
https://www.oecd.org/mexico/Employment-Outlook-Mexico-EN.pdf

Taxes

#41

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
5
Tax policy, tax reform and the insufficiency of tax collection have been on the political agenda in Mexico for at least the past 50 years. During this long period there has been little progress either in collecting more tax revenue or making the tax system more equitable. While some may argue that the low level of taxation has been helpful for Mexico’s international competitiveness, increasing taxation is necessary for improving public good provision by the Mexican government.

While some taxes are collected at the state and municipal levels, the most important tax collector is the federal government. A new tax-reform law was passed under President Peña Nieto and took effect on 1 January 2014. While well-targeted and effective within its limited scope, the reform was rather modest given the challenges that Mexico faces. The government expected the new law to increase the national government’s tax revenues by around 2.5% of GDP. According to a new OECD study, the reform did indeed increase tax collection by 3% in 2015 and 2016, thus contributing to a reduction in the borrowing requirements of the public sector.

Nonetheless, according to observers, Mexican tax collection remains between six and eight percentage points of GDP short of where it should be given the country’s current level of development. Tax evasion and tax avoidance in the formal sector is one cause, as is the large size of the informal sector, which is notoriously tax resistant. Most Mexicans distrust their government and do not believe that money paid in taxation will be spent wisely. Additionally, the market-reforming economists who have run Mexico over the past 30 years have not prioritized raising revenue, putting more emphasis on controlling government spending in order to decrease the size of government. Many also assert that as an oil-exporting country, Mexico should earn a significant amount of public revenue by taxing oil income. However, Mexico’s exportable oil surplus has declined due to falling production, a collapse in global oil prices and an increase in domestic oil consumption. Overall, further efforts are needed to better coordinate income tax collection with social security, improve the use of property taxes and broaden the overall tax base.

As of 2017, possible changes in the tax policy of the U.S. have increased pressure on Mexico’s tax policy. The corporate tax advantages that the new U.S. laws might provide have raised concerns about companies and firms fleeing from Mexico – and this puts pressure on its tax policy.

Citations:
http://www.americasquarterly.org/content/why-us-tax-reform-threatens-mexicos-financial-future

Budgets

#28

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
6
Given the country’s history of severe macroeconomic imbalances until the 1990s, fiscal stability has been a very strong policy priority for the past several administrations. Just as Germany would do anything to avoid a repetition of the hyperinflation of the 1920s, Mexico badly wants to avoid repetition of its debt crisis of 1982 or the “Tequila Crisis” of 1994. Southern Europe’s recent financial difficulties have also been a cautionary tale to the Nieto administration of the dangers of fiscal profligacy. Consensus among the major political actors is significant on this matter. In fact, all the major parties in Mexico support policies of fiscal stability. In 2008, Mexico accepted a domestic recession as the necessary price to pay for avoiding inflation.

However, Mexico’s fiscal stability continues to be under threat as a result of the collapse in global oil prices through 2014 and 2015. Although most oil production is consumed domestically, oil exports are a significant source of public revenue given the state-owned structure of Mexico’s oil industry. The recent fall of oil prices have motivated tax changes and the reduction of energy subsidies. This has been partially relieved with financial instruments that guarantee a minimum price. This strategy was applied in 2017 and will continue in 2018, with a minimum price of $46 per barrel, though prices have increased slowly. Around 56% of debt has been allocated to long-term investment. The current government started with 80% in 2012.

One key shortcoming of the current administration is the lack of consistency between planning and implementation. In 2015, the government announced a spending cut but actual spending increased 5% in real terms. There are few reasons to believe that spending cuts for the coming years will be implemented: according to Mexican researchers, public spending has increased more than 4% every year in real terms since 2012. Even when the goal has been to maintain a primary surplus at the beginning of the year, the trend is reversed by the end of the same year. That is, spending surpasses revenues even before interest payments.

Government debt has increased more than 10% during the Peña Nieto administration. Moreover, not all debt is clearly accounted for: there are items classified as “non-oil revenues,” non-tax revenues, and “returns” (aprovechamientos), ambiguous categories that include worker pensions and Pemex assets. These spending patterns along with growth deceleration have increased the value of sovereign debt as a share of GDP. Rating agencies lowered Mexico’s sovereign credit outlook from stable to negative in 2016, which will further increase the country’s interest payments. In 2017, Mexico paid more toward debt interest payments than toward capital.

A second key shortcoming of Mexican budgetary policy is the opacity surrounding spending decisions. More than half of spending increases have gone to subsidies and transfers, surpassing the amount approved by Congress by more than 10%. Of this increase, around 40% was spent in programs without monitoring, audits or impact evaluations. This opacity allows for the political use of resources, which may partly explain state-level variations on per-capita spending that seem to be associated with changes in the party holding the executive office. Opacity in public spending was partially addressed in 2016 with the creation of the National Anticorruption System, a set of laws that constrains federal and local authorities to prosecute and punish acts of corruption. In 2017, the Ley General de Responsabilidades Administrativas (General Law of Administrative Responsibilities) was published, and it increases sanctions and oversight on private actors that participate in public biddings. However, it remains to be seen if public officials will adequately enforce this law in the coming years, especially as next year’s election campaigns will further reduce the transparency around public budget allocations.

Citations:
http://mexicocomovamos.mx/new/md-multimedia/1476288726-748.pdf
https://www.eleconomista.com.mx/economia/Para-el-2018-tambien-se-tendran-coberturas-petroleras-Hacienda-20171016-0118.html
http://www.cnbc.com/2016/08/23/sp-lowers-mexicos-sovereign-credit-outlook-to-negative.html
http://mexicoevalua.org/2016/11/15/las-dos-caras-de-tu-moneda/
http://mexicoevalua.org/2014/04/14/descifrando-la-caja-negra-del-gasto/
http://mexicoevalua.org/2017/09/14/por-cada-peso-en-deuda-solo-0-56-centavos-van-a-inversion/

Research and Innovation

#41

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
3
Overall, national spending on research and development (R&D) continues to be very low in comparison with other OECD countries and is inadequate for an economy the size of Mexico. While public spending on R&D has increased in recent years, private sector spending on R&D has not, mostly relying on large companies across a small number of sectors. A very large number of “micro” firms have little or no institutionalized access to state R&D spending, while large and efficient firms undertake their own R&D spending. There is growing awareness of this problem within Mexico itself, but it still ranks below most OECD member countries on indices relating to R&D. The OECD has stated that R&D spending in Mexico is quantitatively and qualitatively inadequate.

In 2017, Mexico was ranked 49th out of 190 countries on the World Bank’s Ease of Doing Business index, featuring low performance in components such as paying taxes, registering property, getting credit and having access to electricity. These conditions play against the attractiveness to create and fund startups in the new economy.

The 2016 election of Donald Trump and his anti-immigration policies motivated speculation about increased opportunities in Mexico for starting innovative businesses in the IT sector, offering the economic and political environment to attract startups and human capital. Though the number of venture capital institutions and other organizations have generally increased (especially in Guadalajara and Monterrey), most of the country has yet to see the potential benefits of IT investments.

Citations:
http://www.doingbusiness.org/data/exploreeconomies/mexico
https://www.ft.com/content/7fe8f64c-4c74-11e7-a3f4-c742b9791d43

Global Financial System

#26

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
6
Given its experience with severe financial crises, Mexican governments over the last two decades have been keen to improve the regulation of the domestic financial sector. As a consequence, domestic financial regulation improved substantially, though it remains far from optimal. Mexican governments have also embraced an international effort to halt financial flows related to illegal drug production and trafficking. As part of its anti-drug smuggling policies, for example, money laundering has become more difficult. Yet as the prevalence of destabilizing domestic drug-related conflicts shows, the government is far from achieving its internal goals related to drug production and money laundering.

Despite government efforts, dealing with major financial inflows from illegal drug-related activities remains a major challenge in Mexico. On the positive side, the performance of Mexican banks (e.g., regarding the percentage of non-performing loans or banks’ risk-weighted assets) is currently well above the OECD average, according to IMF statistics. There may indeed be a danger of going too far the other way, since the lending policies of the country’s largest financial institutions have sometimes been criticized as being too conservative, constraining domestic economic growth.

The government has also more actively participated in international trade negotiations in an attempt to diversify the Mexican economy and reduce its dependence on the United States. While the government has had some success in this respect, the Mexican economy remains heavily dependent on its northern neighbor, an issue that is seen as increasingly problematic due to the Trump administration’s threats to withdraw from NAFTA.
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