Economics Department

Economic Survey of Mexico 2009

 

Contents | Executive summary | How to obtain this publication

Additional information |

 

The next Economic Survey of Mexico will be prepared for 2011.

 

   

 

 

An Economic Survey is published every 1½-2 years for each OECD country. Read more about how Surveys are prepared.

The OECD assessment and recommendations on the main economic challenges faced by Mexico are available by clicking on each chapter heading below.

 

 

Bookmark this page : www.oecd.org/eco/surveys/mexico

 

Contents

 

Chapter 1 Overcoming the financial crisis and the macroeconomic downturn

Despite improved fundamentals Mexico is being hit by the financial turmoil and world economic downturn. As in other emerging markets, there has been a reduction in net capital inflows, which contributed to a large depreciation of the peso in the last quarter of 2008 and in the first months of 2009, although since then the peso has stabilized at a lower level. Access to foreign capital has become more restricted and costly. With a relatively small and well regulated financial sector Mexico has been able to weather the initial shock. The global recession has, however, hit the real sector through the trade channel, reflecting the heavy dependence on the US market. Another shock is the collapse of oil prices, which is depressing fiscal revenues, though these prices have recovered with respect to the minimum levels observed at the end of 2008. Business and consumer confidence have fallen considerably. The outbreak of influenza is also likely to contribute to the downturn. Growth is set to drop substantially this year and start to recover slowly next year. The authorities have responded with liquidity measures, foreign currency interventions, lower interest rates, external borrowing and fiscal stimulus. There might be some room for more monetary easing, if the economy deteriorates further, while fiscal stimulus should be better targeted. The scope for further fiscal measures is limited by uncertainties of future oil revenues, higher cost of funding and the risk of inefficient spending. Although banks remain sound, the authorities should closely monitor bank portfolios, which may be adversely affected by the worsening economic outlook.

Chapter 2 Managing the oil economy – can mexico do it better?

Fiscal policy is highly dependent on volatile oil income. The balanced budget rule can create a bias for spending oil revenues as they are earned, especially as transfers to the stabilization funds are limited by caps at low levels. This can potentially lead to a pro-cyclical bias in fiscal policy. Revenues have also been lower than they could have, if gasoline prices had adjusted with international prices instead of a price smoothing mechanism for the domestic price. The system also benefits mostly well-off consumers and has important environmental costs. To better manage budget cycles and oil wealth, Mexico should establish a structural deficit fiscal rule. To improve transparency oil revenues should be reported in gross terms in the budget. A price mechanism that leads to a closer alignment between domestic and international gasoline prices should be adopted and other energy subsidies eliminated and an energy excise tax introduced. To reduce dependence on oil revenues and prepare for the exhaustion of oil reserves, further tax reform is needed to cut exemptions and broaden the tax base. A rapid and adequate implementation of the reform of the state oil company is required to boost oil revenues, increase efficiency and investment in future exploration. While the recent reform passed by congress is expected to improve governance and allow foreign participation using performance based contracts, its implementation is key.

Chapter 3 Achieving higher performance: enhancing spending efficiency in health and education

Despite progress over the past two decades Mexico’s health and education indicators remain well below the average of the OECD and some of its Latin American emerging market peers. Health insurance coverage is incomplete, especially for low-income families, and access to health services is highly uneven. There are several separate vertically integrated insurance networks, which increases administrative costs and results in an inefficient use of facilities. In education, lower secondary schools enroll only two thirds of the relevant age group and the quality of education is low, as indicated by poor PISA scores. This reflects poor teaching quality, a consequence of non-transparent teacher selection processes until recently, and limited school autonomy in budgeting, instruction and personnel decisions. Accountability to the government and parents is also low as there is no national exit exam after secondary education and the existing evaluation schemes are fragmented. Recent health and education reforms have started to address these issues, but more needs to be done to increase the efficiency of spending by increasing the coverage of health insurance, reducing the fragmentation of the health system, increasing enrolment in lower secondary education, and improving the quality of teaching.

Chapter 4 Pedal to the metal: structural reforms to boost long-term growth and spur recovery from the crisis

While Mexico’s growth performance has gradually improved over the past decades, its convergence toward OECD countries has been less rapid than in several other emerging markets. The recent significant reductions in import tariffs should help the economy take fuller advantage of trade and investment integration, which could be a relative strength for Mexico given its geographic location. Reforms introduced in the past two years, including those to promote competition and transparency in the financial sector and, to a lesser extent in telecommunications, will also stimulate the dynamism of the economy. Despite this progress, further reforms are needed to boost overall and within-sector productivity. Relative weaknesses in education, infrastructure, financial development, the rule of law, as well as a lack of competition come out in various studies as explaining why Mexico has not grown as fast as other countries. Focusing attention now on reforms in areas with rapid pay-offs such as improving competitiveness and infrastructure could yield double benefits in supporting the recovery from the current recession and longer-term growth. This can be achieved by increasing competition, especially in network industries, liberalizing further the foreign investment and trade regimes, and improving education coverage and trade-related infrastructure.

 

How to obtain this publication

 

The complete edition of the Economic Survey of Mexico is available from:

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.

 

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 Nicola Brandt, Cyrille Schwellnus and Tonje Lauritzen under the supervision of Patrick Lenain and Piritta Sorsa. Research assistance was provided by Roselyne Jamin.

 

 

 

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