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Contents | Executive summary | How to obtain this publication | Additional info
The following OECD assessment and recommendations summarise chapter 1 of the Economic survey of Mexico published on 4 October 2007.
Click here to read the addendum to the Economic Survey of Mexico 2007.
Contents
Mexico’s growth remains insufficient to narrow the income gap
Mexico has implemented a wide range of reforms to liberalise the economy and open it to foreign trade and investment, starting in the late 1980s. Its macroeconomic performance has improved significantly and GDP growth averaged 3.6% per year since the 1995 peso crisis. In 2006, growth reached a robust rate of 4.8%, underpinned by buoyant exports and strong investment. However, activity is expected to slow this year and next, with GDP growth around its potential rate, estimated to be between 3½ and 4%. This growth rate, given population growth of around 1.3% per year, is too low to allow convergence of Mexico’s income per capita towards the living standards of the more advanced OECD countries. In 2005, the average income of the Mexican population was still one of the lowest in the OECD and only about one fourth that of the United States (in purchasing power parity). While labour utilisation is not far from the OECD average, labour productivity has grown at too slow a pace to catch up from its initial low level.
Mexico's growth performance in comparison
1. The average growth rate of GDP per capita is calculated on the basis of volumes data.
2. The level of GDP per capita is calculated on the basis of 2005 PPPs.
Source: OECD, National Accounts database, Going for Growth 2007.
Mexico’s macroeconomic policy framework is generally sound
Sound monetary and fiscal policies have contributed to macroeconomic stability. On the monetary policy front, the Bank of Mexico has achieved a high degree of credibility and inflation expectations have converged towards the Bank’s target. However, a series of supply shocks since the middle of 2006 have led to an upturn in inflation. Headline consumer price inflation has been hovering at just over 4% (year on year) since September, above the central bank’s target of 3% and at the top of its variability interval of plus or minus 1 percentage point. Core inflation also increased, while inflation expectations remained broadly unchanged at 3½ per cent. The bank responded with a pre emptive move by raising its interest rate in April, in order to prevent the upturn in inflation from feeding into inflation expectations. The projected slowdown in activity is likely to ease inflationary pressures. Until this occurs, a tight monetary stance should be maintained. On the fiscal policy front, Mexico has achieved a good track record in attaining budget targets for many years. Higher oil-related revenues since 2002 helped bring the public sector borrowing requirement to below 1% of GDP in 2006. Moreover, the Budget and Fiscal Responsibility Law, which came into effect in 2006, has contributed to further strengthening the fiscal framework. However, the underlying situation of public finances is not yet comfortable because of the heavy reliance of the budget on oil revenue, part of which is volatile and uncertain. At the same time, the budget is exposed to growing demands for essential spending in education, health, poverty alleviation and infrastructure.
The key policy objective is to foster productivity gains and put the economy on a higher growth path…
Mexico can count on several assets to boost productivity and output growth: a relatively young population; geographical proximity to – and a free trade agreement with – the largest market in the OECD; a solid macroeconomic policy framework; and a healthy financial system. However, a number of structural weaknesses have to be addressed, in particular, the low level of human capital, a large informal sector, and widespread poverty. Furthermore, poor physical infrastructures (including transport, telecommunications, energy and water), restrictive regulations and insufficient competition in some sectors are hindering productivity growth. Large firms are likely to find a way around costly administrative burdens and manage to overcome infrastructure lags. But many smaller firms face severe constraints to investment and expansion. The benefits that the economy at large can draw from trade openness and spill-over effects from foreign direct investment (FDI) can be further enhanced. The reform process, which slowed in recent years, should be stepped up, in particular by further opening the economy to reap the full benefits from international integration and taking complementary measures that enhance infrastructure, improve the business environment and improve the prospects for workers to move to more productive jobs.
… by acting forcefully on a broad front
In its agenda for structural reform, the new administration has identified ensuring fiscal sustainability and strengthening economic growth as priorities. Indeed, the underlying weakness of public finances requires a broad strategy with corrective actions on both the spending and tax sides. Boosting Mexico’s growth potential is also a challenging task that requires taking action in all areas of public policy, including education, which was covered in the special chapter of the 2005 Economic Survey. Stronger economic growth will help reduce poverty, but targeted programmes for poverty alleviation are also needed to pull people out of the poverty trap. This report focuses on four main challenges that Mexico needs to address in order to lift per capita GDP growth, raise living standards and reduce poverty faster:
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Strengthening public finances;
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Maximising the gains from integration in the world economy;
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Strengthening competition and improving infrastructure;
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Enhancing the adaptability of the labour market while providing effective social protection.
These policy priorities are among those identified as key drivers of growth across OECD countries in the Going for Growth exercise.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
Una versión para imprimir de la síntesis en Español, en formato pdf, también puede ser descargada. Esta incluye la “Evaluación y recomendaciones” de la OCDE, pero no incluye todas las figuras que aparecen en las paginas anteriores.
The complete edition of the Economic survey of Mexico 2007 is available from:
- SourceOECD for subscribing institutions and many libraries
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OLISnet, under "Publication Locator", for government officials with accounts ( subscribe)
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Additional information
For further information please contact the Mexico Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by Bénédicte Larre, David Haugh and Bruno Rocha under the supervision of Stefano Scarpetta. Research assistance was provided by Roselyne Jamin.
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