Mexico

   

Economic Policies

#39
Key Findings
Having taken a restrained approach to pandemic support, Mexico falls into the bottom ranks internationally (rank 39) with regard to economic policies. Its score on this measure has declined by 0.4 points relative to 2014.

GDP fell sharply by 8.3% in 2020, but the growth rate returned to above 6% in 2021. The government engaged in far less pandemic spending than most OECD peers, and indeed has pursued a conservative fiscal course despite its left-leaning credentials. Nevertheless, total debt reached an all-time high of 57.6% of GDP.

The pandemic caused more than 10 million people, mostly employed in the informal sector, to lose their jobs. The official unemployment rate rose to 4.53% in mid-2020. Tax collection is widely viewed as insufficient, with tax evasion, tax avoidance and the large informal sector all cited as contributors. The government did not provide firms with tax relief during the pandemic.

R&D spending is very low. Abrupt decisions by the current government have undermined the country’s investment climate. 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
In comparison with most other OECD countries, Mexico’s GDP growth over the last decade has been rather slow. This situation was due to the fall in international oil prices and the increasing uncertainty over Mexico’s future of economic relations with the United States. In particular, the renegotiation of the North American Free Trade Agreement (NAFTA) added major doubts to this difficult situation. These doubts were finally addressed when Mexico reached a trilateral agreement with the United States and Canada in the summer and fall of 2018. In June 2019, Mexico ratified the new United States, Mexico and Canada Agreement (USMCA), which came into force on 1 July 2020.

López Obrador (commonly known as AMLO), who is a proponent of economic nationalism, pledged to achieve an average growth rate of 4% in each year of his presidency until 2024. Halfway through his term, this goal can be seen as unrealistic and impossible to meet. The coronavirus crisis hit the country hard. While GDP fell massively by 8.31% in 2020, the Mexican economy was able to grow again by 6.25% in 2021. However, this is still short of the level seen before the coronavirus pandemic. However, AMLO has already made it clear that his government will not focus so much on economic growth, but on improving the quality of life of the people in general. He described his motto as a departure from “growing for the sake of growing, but rather growing with well-being.”

Mexico has the OECD’s lowest tax-to-GDP ratio. For decades, the country’s low fiscal capacity was mitigated by 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 anticipated in the reform, however, assumed an ambitious GDP growth rate, which did not materialize. Furthermore, the government assumed that an increase in oil prices would 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. The debt-to-GDP ratio reached an all-time high of 57.6 %. However, this increase was mainly due to the additional expenditures resulting from the coronavirus pandemic. These expenditures were much lower in Mexico than in other countries. Under Lopez Obrador’s government, an unexpectedly conservative course in spending policy was thus pursued.

Despite ongoing reforms geared toward boosting productivity, the microeconomic picture is less positive. There is a lack of competition in key domestic economic sectors. Mexico remains a low-skilled, export-oriented economy tied to the U.S. market. The uneven distribution of income is among the worst in the OECD. High levels of corruption and violence are also severe impediments to inclusive economic development. However, the travel and tourism sectors, which account for a significant share of GDP, are growing despite the high rate of violence in some parts of the country.

Citations:
http://www.oecd.org/eco/outlook/mexico-economic-forecast-summary.htm
https://www.forbes.com.mx/los-retos-economicos-e-industriales-para-mexico/
https://www.ceicdata.com/en/indicator/mexico/government-debt–of-nominal-gdp

Labor Markets

#35

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
4
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 more than 50% 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.

The coronavirus pandemic caused more than 10 million people, mostly employed in the informal sector, to lose their jobs temporarily. According to the national statistics institute, the unemployment rate in the second quarter of 2020 was 4.53%, up from 3.65% in 2019. Furthermore, average pay in Mexico is the lowest among the 35 OECD countries. During the coronavirus pandemic, the Mexican government was criticized for doing too little to protect jobs, due to its general focus on austerity.

A labor market reform has been initiated as a major project of the Mexican government. Its intentions are to strengthen workers’ rights and democratize workers’ organizations. The adoption of such a reform was a U.S. condition in the negotiations for the USMCA. However, the AMLO administration has focused primarily on the fight against labor outsourcing, which is not required by the USMCA. Outsourcing affects 23% of all jobs, and according to a study by the Colegio de Mexico, mainly has the effect of reducing the informal sector. After employer associations complained about the government’s plans, they were able to reach an agreement with the government that reduces the scope of the reform to the worst examples of outsourcing.

Citations:
https://www.elsoldemexico.com.mx/finanzas/hay-potencial-en-plan-laboral-de-amlo-manpower-1983094.html
https://www.latinnews.com/component/k2/item/81319.html?archive=33&Itemid=6&cat_id=818858:tracking-trends
https://www.latinnews.com/component/k2/item/88055.html?archive=1&Itemid=6&cat_id=825119:mexico-a-rare-example-of-consensus-politics
https://www.latinnews.com/component/k2/item/86681-mexico-negotiating-over-outsourcing.html

Taxes

#41

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

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
4
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.

Despite some reform measures, 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.
It has been asserted 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. Furthermore, López Obrador announced that the government would reduce the fiscal burden on Pemex, the state-owned oil company, which is highly in debt.
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.

During the coronavirus crisis, the Mexican government showed itself unwilling to help companies severely affected by the pandemic by providing tax relief. This set the government apart from most others in the world, and did not strengthen state legitimacy or trust in government during this period of severe crisis.

Citations:
https://www.tmf-group.com/en/news-insights/articles/2018/april/mexico-tax-environment/
https://www.latinnews.com/component/k2/item/81747.html?archive=33&Itemid=6&cat_id=819449:mexico-herrera-drops-first-hint-of-tax-increases
https://www.latinnews.com/component/k2/item/81521.html?archive=33&Itemid=6&cat_id=819153:mexico-lopez-obrador-s-first-budget-disappoints
https://www.latinnews.com/component/k2/item/83883.html?archive=800373&Itemid=6&cat_id=822116:mexico-economic-rescue-plan-falls-flat

Budgets

#15

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, primarily in order to avoid a repetition of the 1982 debt crisis or the “Tequila Crisis” of 1994. Consensus among the major political actors is significant on this matter.

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.

In September 2019, the new government announced its first self-drafted budget plan for 2020. Under the new plan, Finance Minister Arturo Herrera promised to “generate macroeconomic stability, financial certainty and to strictly adhere to fiscal discipline.” This statement is representative of a general policy of austerity that continues to be maintained by the Mexican government. Although President AMLO belongs to the left-wing political camp, his government has pursued a course of fiscal conservatism, or what it calls “republican austerity.”

When, during the coronavirus crisis, even governments with a responsible spending discipline abandoned their austerity course and invested huge sums to rescue their economies, often substantially increasing social spending, the Mexican government responded with only minor additional spending.
Autonomous institutions and local and regional administrations have been particularly affected by the austerity course, and have demanded a halt to the government’s strict austerity course. For this reason, the AMLO administration has been accused of pursuing a course of recentralization with the goal of allocating more power to central government agencies.

Citations:
https://www.latinnews.com/component/k2/item/81521.html?archive=33&Itemid=6&cat_id=819153:mexico-lopez-obrador-s-first-budget-disappoints
https://www.latinnews.com/component/k2/item/86516.html?archive=33&Itemid=6&cat_id=824116:mexico-facing-another-year-of-austerity

Research, Innovation and Infrastructure

#40

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. Over recent years, public spending remained stable but the more important private sector spending on R&D has been very low and is the lowest of any OECD country. The private spending is dominated by large companies in a small number of sectors. Mexico has by far the lowest number of researchers per 1,000 employees of any OECD country.

In 2020, Mexico was ranked 60th 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.

In a non-binding referendum in October 2018, a majority voted against the continued construction of the already partially built Mexico City Texcoco Airport. Following the referendum, the project was canceled by AMLO, despite opposition from the business sector. These and other sometimes abrupt decisions by the AMLO administration have led to a significant deterioration in the country’s investment climate.

In April 2019, the president presented plans for the construction of a new airport at the Santa Lucía air base, 50 kilometers from Mexico City. This project, the construction of the Dos Bocas refinery by the state-owned oil company Pemex and the construction of the Tren Maya, a new 1,525-kilometer train line in the southeast of the country, are flagship projects of the Mexican government. The three projects are seen as exemplifying the “fourth transformation” announced by AMLO, and are to be carried out regardless of difficulties. According to AMLO, they are at the center of “public interest and national security.”

Citations:
https://www.doingbusiness.org/en/rankings
https://elpais.com/internacional/2019/06/14/mexico/1560472397_790021.html
https://www.latinnews.com/component/k2/item/87309-mexico-lopez-obrador-tables-incendiary-energy-reform.htmlene-widerstand
https://amerika21.de/2021/11/255688/mexiko-regierung-pusht-infrastruktur

Global Financial System

#19

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 System
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 in the midfield of 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. Following doubts regarding the continued existence of the North American free trade area (which have subsequently been dispelled with the new announcement of a revised free trade agreement between Mexico, the United States and Canada), this situation will not change in the foreseeable future.

President López Obrador said in March 2019: “We formally declare the end of neoliberal policy, coupled with its economic policy of pillage, antipopular [action] and surrender. Both things are abolished.” While such a statement could be interpreted as meaning a substantial reversal in Mexico’s relationship with international markets, there has as yet been no sign of a turnaround in practice.

Citations:
http://www.anterior.banxico.org.mx/sistema-financiero/indexEn.html
https://elpais.com/internacional/2019/05/31/mexico/1559259379_299890.html
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