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The following is the Executive Summary of the OECD assessment and recommendations, taken from the Economic Survey of Mexico 2005 published on 12 September 2005.
Prospects are for continued economic expansion, but important challenges remain.
After a strong recovery in 2004, output growth is expected to average a little more than 4% over the next two years. Mexico has been pursuing sound macroeconomic policies and has been making some progress with structural reforms to open the economy, improve the functioning of product markets and strengthen the financial sector. However living standards are lagging far behind the OECD average and, although decreasing in the last 4 years, poverty is still widespread. Potential GDP growth is too slow to narrow the income gap. The proximate cause of Mexico's persistent lag is the low level and slow growth of labour productivity. The key medium-term challenge is to step up growth through a deepening of the reform process, drawing synergies from acting simultaneously on a wide front and ensuring effective implementation. Yet, recent years have seen several important missed opportunities for reforms. Action is needed on the education front and to facilitate business operations. The fiscal policy framework should also be strengthened to ensure that development needs are financed on a sustainable basis.
Improving the performance of the education system is a priority.
Human capital is the lowest in the OECD and the education system does not perform well enough to reduce the lag at an acceptable pace. Mexicans children still spend comparatively few years in formal education, and do not profit from it as much as they should, so that poor educational attainment is reproduced from one generation to the next, and with it poverty. Inefficiencies and misallocation of spending have to be addressed. It implies resisting pressure for unjustified rises in teachers’ real wages while spending more on indispensable non-wage items; training better teachers and school principals; introducing credible sanctions/reward mechanisms; and giving more responsibilities to schools. The generalisation of preschool that is diverting resources away from the necessary expansion of secondary schooling has to be limited to the last grade or to children from low-income families who need it most. On the positive side, there are promising programmes intended to accelerate information and technology systems at school (the so called Enciclomedia programme).
Improving conditions for business and investment will also help achieving higher productivity growth.
Private investment and the development of the formal sector are constrained by the combination of still restrictive product market regulation and cumbersome administrative burdens (including for firm creation), strict formal employment protection, a deficient rule of law and ineffective judicial processes. Many promising measures have already been taken; the key is to ensure effective implementation. Business creation has become a priority. New programmes to ease the administrative burden for starts-ups should be extended throughout the country. The removal of legal obstacles to private investment in the electricity sector and the effective application of a non-discriminatory and competition-enhancing regulatory framework in other network industries would also facilitate business and investment. The abandonment of labour market reform is regrettable; the reform should be put back on the agenda.
The authorities are also facing several fiscal challenges.
Although budget discipline is generally good, the current medium-term fiscal framework should be strengthened and raised to a law. Efforts have been made to assign the oil windfall to investment and saving, but stricter guidelines are needed to deal with the current situation of oil revenue that is high but not necessarily on a permanent basis. These extra resources should be saved or spent wisely, by building up a sizeable Oil Stabilisation Fund, reducing public debt and financing investment. There are also development priorities (basic education, health, infrastructure, poverty alleviation) that require predictable additional funding. A tax reform which enhances revenue, while reducing distortions, is the key to addressing these needs.
The division of powers and responsibilities between levels of government should be reformed to get the most out of the public sector decentralisation.
The federal level has retained most taxing powers, while states have had core spending responsibilities transferred to them and have substantial borrowing autonomy. The key challenges are to ensure a cost-effective delivery of, and equity in access to, public services. This would require enhancing sub-national government accountability by clarifying the assignment of spending responsibilities across levels of government and better matching spending responsibilities and revenue-raising powers. A reform of the grant system is needed to improve incentives for efficiency and reduce wide disparities in financial resources across jurisdictions. Mechanisms to discipline sub-national government fiscal behaviour should be strengthened.
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A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
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For further information please contact the Mexico Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by Bénédicte Larre, Stéphanie Guichard and Isabelle Joumard under the supervision of Nicholas Vanston.
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