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OECD Secretary-General

ITAM Seminar: 2016 Economic Outlook - Mexico in the International Setting: Challenges and Opportunities

 

Remarks by Angel Gurría,

Secretary-General, OECD

Mexico City, 8 January 2016

(As prepared for delivery)

 

 

Ladies and gentlemen,

 

It is a great pleasure for me to take part in the ITAM seminar on the 2016 Economic Outlook. I am grateful to Arturo Fernandez Perez, to Lorenzo Meade, and to Benito Solís for their kind invitation.

 

Allow me to share some thoughts with you about how we at the OECD view the international economic context and the situation and trends in Mexico.

 

 

A difficult international economic context

 

After seven years of crisis, the world economy is still experiencing serious problems of recovery. According to our review, the OECD Economic Outlook, which we presented in November, recovery in the world economy remains halting and uneven, complicated by rising geopolitical tensions.

 

Emerging economies, which until recently were the principal engine of the world economy, have slowed with the fall in international commodity prices, the shift to more moderate rates of growth in China (6.8% in 2015, 6.5% in 2016, and 6.2% in 2017) and the recessions in Brazil and Russia.

 

While growth in the United States has rebounded strongly (2.4% in 2015), Europe has yet to take off (euro area 1.5%), while Japan still presents a complex landscape, with growth of only 0.6%. This setting, together with the slowing of emerging economies and anaemic growth in international trade, investment and credit, explains the world economy’s paltry growth in 2015, at 2.9% (the lowest rate since 2009), as well as our forecast of a moderate increase in 2016 (3.3%), with a slightly better performance in 2017 (3.6%). All of these forecasts are lower than the pre-crisis growth rate of 4%.

 

In this complicated and uncertain international economic setting, Mexico is undertaking the most ambitious structural changes of its recent history.

 

 

Mexico is doing things right

 

Mexico is taking significant steps to improve its economic performance. Backed by a responsible macroeconomic policy and a prudent monetary policy, the country is already reaping the first fruits of the reforms that the Government of President Peña Nieto has been driving.

 

The labour reform has more than doubled the number of new jobs created in the first 25 months of its application (compared with the previous 25 months). The education reform is already evaluating and training teachers and boosting their incentives. The telecommunications reform has opened the sector to foreign investment to the extent of 100%, and the broadcasting sector to 49%, and it has strengthened both regulation and the regulatory body. The financial reform has made other sectors, such as insurance and exchange houses, more accommodating to foreign investment. The energy reform has reduced industrial electricity prices by around 30% (between December 2014 and December 2015), and is already achieving highly favourable outcomes in terms of attracting foreign investment to the sector, despite current low oil prices. Investors are now thinking for the medium and long term.

 

Thanks to measures and signals of this kind, foreign direct investment (FDI) flows to Mexico during the first nine months of 2015 were 41% higher than those for the same period in 2014, reaching $21.5 billion. For these and other reasons, we expect Mexico to grow by more than 3% in 2016 and 2017.

 

Of course, much remains to be done to guarantee that these reforms are fully implemented and that they produce benefits for the most vulnerable population groups. But the important thing is that the reforms are already bringing about substantive changes in the Mexican economic and political system. This is crucial, because we must improve – we have a lot of ground to make up, and the challenges facing us are enormous.

 

 

Big challenges lie ahead

 

Let me describe four challenges that we think are crucial for Mexico's development:

 

First, low productivity levels. Mexico still has the lowest productivity levels in the OECD, 60% below the average. This gap has widened over the last two decades. In fact, total factor productivity in Mexico fell by an annual average of 1.4% between 2000 and 2014. We are backsliding.

 

This is the result of the deficits we have accumulated in terms of investment, our education system, the low levels of skills and abilities, but also the levels of R&D, in our business sector and in the public sector alike.

 

Second, high levels of inequality. Mexico has one of the highest levels of inequality in the OECD. The average income of the wealthiest 10% of Mexicans is 30 times that of the poorest 10% (the OECD average is 10 times).[ix] The current system of pensions covers only a small proportion of the labour force and results in substitution or replacement rates so low as to threaten pensioned workers with poverty, and the treasury with great fiscal pressures. These levels of inequality are a source of social and political tension and an obstacle to growth.

 

Third, high levels of informality. Mexico has the highest level of labour informality in the OECD, at around 58%. Informality limits productivity, weakens the revenue capacity of the Mexican government, and reproduces and entrenches inequalities. It also works against a functional, effective and fair pensions system.

 

And fourth, corruption. The perception of corruption in our country is very high, and the perception of adherence to the rule of law is very low. This has a political and social impact, but also an economic one. A poorly functioning judicial system impedes contract enforcement and bankruptcy proceedings, and this tends to reduce the size of firms and their capital intensity.

 

To deal successfully with these challenges, Mexico needs to step up implementation of the reforms undertaken in 2012-2014. But it also needs to launch a new wave of reforms and policies targeted particularly at strengthening the rule of law and combating inequality and informality. It is encouraging to see that progress is being made in strengthening integrity and transparency and in combating corruption as well as in improving the justice system.

 

It is crucial to implement reform of the judicial system. The reform of the Prospera and Seguro Popular programmes, the creation of the Special Economic Zones (in Chiapas, Guerrero, Michoacán, Oaxaca and Veracruz), and the unification and redefinition of the minimum wage are all important steps toward more inclusive growth. The development of a national skills and strategy (Estrategia Nacional de Competencias, Destrezas y Habilidades) for the country's entire workforce will be another great plus. The OECD can help Mexico in this area, as it is doing with Spain, Korea, Portugal, Norway, Italy and other countries. This is a key element for productivity.

 

But there is another crucial element for fostering more solid, more inclusive and more sustainable growth that I would like to mention, especially in the centre of learning that is this university: I refer to a change in Mexico's economic mentality. By this I mean the need to revise and modernise the economic thinking of our institutions, our universities, and our decision-makers.


 

New Approaches to Economic Challenges: NAEC in Mexico

 

This crisis has highlighted the great weaknesses of economics as a social science and the shortcomings of many policies based on conventional economic thinking. We thought we knew it all, and that we could project, simulate, model and anticipate everything accurately. Today we know this is not the case. But the crisis has also opened the way to updating our concepts and theories. Our universities cannot continue teaching the same economics from 30, 20 or even 10 years ago. Our institutions and the international organisations themselves have the duty to look in the mirror and question themselves, and to change those approaches that have not worked.

 

With this in mind, three years ago the OECD launched the New Approaches to Economic Challenges initiative (NAEC) as a way of questioning, reviewing and re-thinking our analyses and recommendations on economic, social and environmental policies and on good governance, in order to promote that more solid, inclusive and sustainable growth to which I referred earlier.

 

This effort, of which Mexico is part, is re-thinking the precepts of orthodox economic policy, boosting the focus on social well-being, fostering the integration of the financial system into the productive economy, taking greater account of uncertainty and complexity, of indirect and undesired effects, of systemic risks and network effects, while promoting a longer-term perspective and a new, inclusive concept of productivity. Indeed, this is precisely the theme of our annual ministerial meeting in 2016, to be held next June under the chairmanship of Chile. I invite ITAM to contribute to that initiative.

 

Ladies and gentlemen, dear friends:

 

Mexico is making adjustments that are indispensable for improving its economic performance. The reforms sponsored by the Government of President Peña Nieto are already yielding results. It is essential now to maintain the effort to implement those reforms, in order to generate benefits for the 55 million Mexicans who are still living in poverty.

 

To achieve this it is essential to work with the national, state and municipal authorities, to help them enhance their capabilities, their regulations, their institutions and their forms of governance. The OECD is working closely with many of these subnational governments, with full support from the federal government, in areas such as education, occupational skills, territorial development, regulatory improvement, gender equality, combating poverty, and protecting the environment. States, municipalities, communities, cities, delegations – these are the vanguard in the struggle to achieve greater, more inclusive and more sustainable growth. They are the core of our society. We must work together to strengthen them. Let me leave you with this: you can count on the OECD, you can feel comfortable with the OECD. The OECD stands ready to continue its support in the design, promotion and implementation of better policies for better lives.

 

Thank you.