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OECD Secretary-General

Presentation of the 2019 Economic Survey of Mexico

 

Remarks by Ángel Gurría

OECD Secretary-General

2 May 2019 - Mexico City, Mexico

(as prepared for delivery)

 

 



Dear Minister Urzúa, Deputy Ministers, Representatives of the media, Ladies and Gentlemen,


I am proud delighted to present launch the OECD’s 2019 Economic Survey of Mexico. This survey is one of the few works by the OECD that are not presented under the responsibility of the Secretary-General, but under the responsibility of the Economic & Development Review Committee, or EDRC.


It is the result of a long process which has included as constant interaction between the Mexico team of the OECD Economics Department and Mexican government officials, two expert missions to Mexico, a meeting in Paris to discuss the Survey between the Deputy Finance Minister, senior Mexican government officials with and representatives of OECD Member countries by the Deputy Finance Minister and senior Mexican government officials, followed by an intense revision process and finalisation of the text.


The OECD carries out these surveys on around 50 countries every two years. This is the 16th survey of Mexico, but the first to be presented to the new administration. I would like to thank Minister Urzúa, Deputy Minister Herrera and their teams for the excellent support which support that we received during the preparation of the Survey.

 

This survey comes at a time of change

This survey is being published at a time when Mexico's economic performance is being affected by three major changesdevelopments:

 

  • Firstly, the slowdown in an international economic environment undermined by escalating trade tensions, political uncertainty in many countries, worsening financial conditions in others, and the consequent decline in companies' business’ investment plans.

  • Secondly, the uncertainty in Mexico's relations with its main trading partner, marked by a lack of clarity in the new rules of the game. The delay in the ratification of the USMCA and declarations by members of both the Executive and the U.S. Congress calling for a withdrawal from the trade agreement are affecting both economies.

  • Thirdly, political transition in Mexico, which is introducing substantial changes in decision-making systems and economic policy priorities.

 


This is the complex environment in which we are presenting this report. I would like to highlight some of its findings and recommendations.

 

Mexico’s macroeconomic situation is solid

Just like theAs in the global economy, growth in the Mexican economy has slowed down in recent years, from 2.3% in 2017 to 2% in 2018, and 1.6% in 2019. By 2020, we expect a recovery to about 2%.


Fiscal policy is focused committed toon stabilising debt. Monetary policy, with its emphasisfocused on price stability, is ensuresing that inflation expectations remain anchored. Core inflation is in the range of 2-4%, the target set by a strong and independent Central Bank. At the same time, the flexible exchange rate has allowed the economy to adjust to external shocks without major imbalances.


The survey highlights a risk that could jeopardise this stability. I am referring to PEMEX. Today, PEMEX is jeopardising Mexico's credit rating in the sovereign debt markets. PEMEX's weakness is affecting Mexico's public debt, and could lead to a downgrade of the country's rating. This would result in Mexico paying higher interest on its debt, and consequently there would be fewer resources to invest in health, education, infrastructure, and social policies to reduce poverty.


That is why it is essential to resolve the PEMEX issue. This involves restoring the financial health of the company, increasing its productivity and profitability, with a credible business plan for investors, giving it access to cutting-edge technologies, with quality management based on international best practices. PEMEX should be a source of stability for the country, not of vulnerability.


Maintaining macroeconomic stability is essential to ensure a solid foundation on which households and firms can make long-term decisions. But this is not enough to promote the inclusive and sustainable growth that Mexicans deserve.

 

Mexico needs stronger and more inclusive growth

Mexico is one of the OECD countries which has pushed for still more reforms in recent years. Some have already begun to deliver results. However, after dozens of reforms, growth in the Mexican economy remains weak and not very inclusive.


Mexico continues to have still has the lowest per capita GDP per capita and the highest poverty levels in the OECD. The gap in living standards with respect to other richer countries has been narrowing, but progress has been very slow, affected by low productivity, low educational attainment and high levels of poverty and inequality.


Income inequality among Mexicans is huge. The average income of the richest 20% is 10.3 times higher than that of the poorest 20%. This inequality is also visible in the large regional gaps that divide the country. For example, in Nuevo León the poverty rate is under 20%, while it exceeds 60% in states such as Veracruz, Guerrero, Oaxaca and Chiapas.


Another weakness in the Mexican economy is the high level of informal itylabour, which affects about 60% of Mexicans. Informal workers do not have social security, do not contribute to a pension and are not entitled to maternity or paternity leave.


Major health challenges also represent an obstacle to the country's development. Mexico is one of the worst performers in the OECD in terms of healthcare coverage, life expectancy, mortality from cardiovascular disease, obesity and childhood diabetes. Low public spending on health and high out-of-pocket expenses for individuals generate inequality in access to quality services. Despite some progress, the system remains highly fragmented, with spending concentrated in the wealthier states and urban areas.


This ties in with the enormous challenge concerning pensions. While the 1997 and 2007 reforms helped improve the ability to finance pensions, workers in the so-called "transition generation" have been allowed to choose whether to move to the defined contribution scheme or to remain in the Pay-As-You-Go (PAYGO) system, which will put great pressure on the budget from 2030, when these workers begin to retire (with very precarious pensions).


This is a purely mathematical problem. If the rate of contribution is only 6.5% of salary, then the pension will only cover 25% of the last salarypay bill, even assuming that the worker has paid the full contribution throughout his or her career. Factor in the issue of informality, and we have an imminent danger: old poor people. Possible solutions may include doubling (ideally tripling) the contribution rate, raising the retirement age, or a combination of both. Combining the resources of the private pension funds (AFOREs) with those of the National Housing Fund Institute for Workers (INFONAVIT) could also reduce the deficit.


Finally, the survey highlights another key factor holding back the country's development: the low labour participation of Mexican women. Although it has increased substantially in recent years (from 36% in 1990 to 47% in 2017), it is still the second lowest in the OECD and significantly lower than the rate for men (82%).

 

The survey makes recommendations for addressing these challenges

To address these and other challenges, the Economic Survey of Mexico which that we are presenting today identifies a series of priority areas and makes concrete recommendations for promoting a more inclusive growth.


For example, Mexico can significantly improve its fiscal policy to make it more progressive. The survey argues that the tax-to-GDP ratio can be increased in a more inclusive wayly by broadening the tax base, strengthening the fight against tax evasion, and building the capacity of federal and state tax administrations. It is also important to reduce income tax exemptions, raise property tax, reduce exemptions and subsidies for the state tax on motor vehicles, and increase the efficiency of state payroll tax collection.


Mexico also needs to improve its productivity. The report recommends implementing a global productivity promotion strategy to help increase competition, improve the competitiveness and formality of Mexican companies, resolve infrastructure bottlenecks, and raise the quality of education across the boardfor all.


It is crucial that Mexico improve the quality and equity of education. The survey recommends concentrating spending on education in early childhood, pre-primary, primary and secondary education. And we emphasisze early childhood care and education, because it is decisive in the educational development of all human beings, and it would also increase the participation of mothers in the employment market.


The survey also highlights the need to increase support for schools in the most disadvantaged areas; simplify budget allocations to schools; develop standardised practices for states presenting their education budgets; and strengthen vocational education and guidance programmes. In this regard, we welcome the fact that the new Education Reform, approved by the Deputies a few days ago, retains some of the features of the 2012-2013 Constitutional Reform, in particular the crucial issue of the performance evaluation of teachers as a condition of access to the system and to promotions.


Another key recommendation is to improve the quality and effectiveness of social programmes. The survey warns that the Mexican government's more than 5,000 and more social programmes suffer from severe fragmentation and do not always reach the poorest sectors. One of the actions we propose is to compare the Integrated Social Information System (SISI) database with the social census to ensure that all beneficiaries meet the requirements and avoid duplication of beneficiaries and programmes. Another obvious suggestion is to consolidate the programmes and co-ordinate their action among the different levels of government.


To address the pension challenges, the survey suggests keeping commitments related to "transition generation" workers in the PAYGO system, and as well as implementing an assessed mechanism whichmechanism that preserves vested rights and switches to the new defined-contribution (DC) system on a predetermined date. Contributions to the DC system should be gradually increased to improve pension adequacy, and the minimum contribution period required for pension entitlement should also be reduced. In this wayThis would increase, incentives to formalise employment would also be increased.


The study report also points to one of Mexico's most urgent requirements: improve the quality of its institutions and strengthen the rule of law. To this end, it is crucial to see through the implementation of the National Anticorruption System and of the local systems, to ensure budget adequacy, the autonomy and independence of the judiciary, and to continue to strengthen the autonomy and capacity of competition authorities and sector regulators, as well as improve the quality of public service. Mexico urgently needs to improve the professionalisation of its public administration, especially at the state and municipal levels, by providing civil servants with the remuneration, knowledge and technological resources required to both prevent and combat corruption as well as and to improve the quality of services.

 

Minister, Ladies and Gentlemen,


Mexico is facing major structural challenges. To solve them, it will be necessary to continue to design and implement key reforms, to continue to confront the de facto powers, to continue to improve and strengthen the quality of public administration, to intensify efforts to combat corruption and to promote the rule of law. The OECD is ready to help Mexico design, promote and implement better policies for better lives. Thank you very much.

 

 

See also:

OECD work on Economy

OECD work with Mexico

 

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