Remarks by Angel Gurría

OECD Secretary-General

Mexico City, Mexico - 10 January, 2020

(As prepared for delivery) 

 

 

 

Ladies and gentlemen,

It is a pleasure to participate once again in this Seminar on Economic Perspectives that is organised every year by ITAM and ITAM's Alumni Association. Thank you Rector, thank you Benito, for the invitation.

Let me begin, as I do every year, with some remarks about the international situation. The OECD recently presented its Economic Outlook report in December and, frankly, the prospects are worrying.

Even though the global economy continues to grow and there are some positive aspects to highlight, such as an adequate and responsible monetary policy stance in the major central banks, the international economic landscape looks very complex.

I will try to describe this complexity using four words.

The first word is deterioration. The fact is that the global economic landscape has deteriorated considerably. World growth slowed to 2.9% in 2019 and we estimate that it will remain the same at 2.9% in 2020, and 3% in 2021. These are the lowest growth rates since the 2008 crisis. In fact, we have had to revise the growth forecasts for almost all G20 economies in 2019 and 2020, especially for the countries most exposed to the decline in international trade and investment flows. Our forecast of a slight slowdown in US economic growth in 2020 and 2021 (to 2%) is of particular relevance for Mexico.

The second word is tension. Escalating trade tensions are having an increasing impact on business confidence and investment plans. These tensions have already shaved 1% of growth off global GDP. In fact, the volume of international trade in goods and services stagnated at the end of 2018 and is now falling.

The third word is uncertainty. While we are seeing some signs that the tension between the United States and China might be easing, we are not sure that it will diminish in the short term. There are also increasing levels of uncertainty in the political arena, with a significant number of OECD governments facing crises of governance and confidence. These accumulated uncertainties are hitting investment hard: aggregate investment growth in G20 economies has slowed from an annual rate of 5% at the start of 2018 to only 1% in the first half of 2019.

The fourth word is risk. We can also see some significant downside risks on the horizon, including continued or worsening trade tensions, a no-deal Brexit, continuing political uncertainty in Europe, a sharper slowdown in China, economic, political and social unrest in Latin America, and financial vulnerabilities from the tensions between slowing growth, high debt and deteriorating credit quality.

In order to address this situation and revive certainty and growth, a collective effort is urgently required to end tariff increases and trade subsidies and to restore a more transparent system, based on fair and clear rules, so as to encourage companies to invest. Monetary policy should remain accommodative in advanced economies, but should be complemented by stronger fiscal stimuli. We are convinced that fiscal policy should play a greater role in promoting inclusive and sustainable growth. Public investment should trigger private investment and innovation, by investing in digital and physical infrastructure, energy transition and disruptive innovation.

We also recommend that governments embrace more ambitious structural reform projects focused on the empowerment and inclusion of the vast majority, and the transformation of the ecological transition into a driver of green growth.

 

How do we see Mexico’s position in this complicated context?

First and foremost, the OECD acknowledges and welcomes the fact that the Government of Mexico has continued to implement a sound macroeconomic policy, with a prudent fiscal policy, focused on maintaining public debt at a constant level. This has helped retain the markets’ confidence. Monetary policy has remained responsibly restrictive, helping to keep inflation expectations anchored. The flexibility of the exchange rate acts as a line of defence against unexpected shocks, thus helping the economy to adapt without turbulence.

Another positive aspect is that social spending, which is among the lowest in the OECD, has begun to rise. We also believe that the strategy of redirecting spending towards infrastructure modernisation in the southeast of Mexico could have a positive impact on social inclusion and reducing inequalities.

Unfortunately, despite these achievements, the Mexican economy has been losing its strong momentum. After growth of 2% in 2018, there was almost no growth in 2019 (0.2% if anything), as a result of both internal and external uncertainty, restrictive monetary conditions, and slow budget implementation, typical of a first year of government. The OECD forecasts a slight improvement for 2020 and 2021, when GDP growth should rise to around 1.2% and 1.6% respectively.

While this growth would be welcome, it would definitely not be enough for Mexico.

To move Mexico forward, reforms are needed to generate more inclusive and sustainable growth. For the OECD, it is important to advance along five major lines:

 

1. 1. First and foremost, inclusion. Mexico has the highest levels of inequality in the OECD and some of the highest in the world. According to 2019 data from UNAM's Institute of Social Research, the richest 10% of Mexicans receive 36% of the country's income, while 50% of the population receives 20%. According to OECD data, the average income of the richest 20% is 10.3 times higher than that of the poorest 20%. These inequalities have become a drag on growth itself.
   - It is therefore crucial to push for: a reform of the tax system in order to enhance its impact on reducing inequalities; a reform aimed at labour market inclusion, reducing informality and increasing wages; a reform of the pension system, to avoid a generation of elderly poor people; a thorough review of the effectiveness of anti-poverty programmes; and an effort to improve the quality of public spending and services. 
   
   
2. Productivity. Mexico still has very low productivity levels. This is mainly due to high levels of informality, complex business and labour regulations, credit markets which are still in their infancy, low competition in key sectors, low educational performance, large infrastructure lags, low investment in science and technology, and the poor internationalisation of Mexican companies, in addition to record levels of obesity.
   - In order to improve its productivity, Mexico needs a national plan for reducing informality. It is also essential to strengthen the competition authorities, encourage entrepreneurship and innovation, and engage in thorough educational reform. A national skills and abilities strategy for the digital age must be promoted, the pace of infrastructure and logistics modernisation must be stepped up, the rule of law further strengthened, and a national crusade against obesity launched.
   
   
3. Integrity. Mexico still has the highest corruption perceptions among OECD countries. The level of insecurity, closely linked to the level of corruption and shortcomings in our rule of law, is generating increasing uncertainty among investors.
   - Strong action is required in this area. It is crucial to push forward with the full implementation of the National Anti-Corruption System; to introduce the ethics function (providing each public institution with a unit specialised in defining and managing ethical guidelines and dilemmas); to consolidate effective career management in the civil service; to pursue reforms of the disciplinary and oversight systems to make them more effective; and to foster a culture of integrity in private enterprise, civil society, young people and children.
   
   
4. Digitisation. Mexico needs to be better prepared for digital transformation. Even if progress has been made, it still has the lowest level of connectivity in the OECD, with only 64% of the population connected to the Internet. 50% of households do not have an Internet connection. While only 45% of the population over the age of six uses a computer.
   - Mexico needs to improve the digital competencies, skills and abilities of its population; to further strengthen expertise in telecommunications; to continue with the installation of Red Compartida (the shared network); to reduce the digital divide between urban and rural areas; and to facilitate the use of electronic banking. 
   
   
5. Sustainability. Mexico also faces significant environmental challenges. Mexico is the fifth-largest GHG emitter in the OECD. It is one of the OECD countries using the least amount of renewable energy in electricity production and, despite its efforts, has one of the lowest carbon taxes.
   - Our country needs to better plan infrastructure investments so as to link them to a low-emission future; to better align tax and budgetary incentives with climate objectives; to rework the financial system so that long-term climate risks and opportunities are part of its decision-making process; to rethink development financing, bearing in mind environmental preservation and the fight against climate change; and these are just some examples.

 

These are five areas in which the OECD considers that major structural reforms are urgently required, either by pursuing the changes launched by previous administrations or by spearheading new transformations.

 

Ladies and gentlemen,

The dynamism of our economy and the job creation required by our citizens depend on an essential factor that we must boost: confidence. Confidence is the mother of investment and investment is the driver for economic growth, growth that has to be inclusive and sustainable.
The ability to build confidence and certainty in Mexico depends on our effectiveness in fighting corruption and insecurity; on the quality of government policies and decisions; on the certainty that we will not change the rules of the game. Confidence in Mexico, and throughout the world, is built on political and economic stability, underpinned by high technical performance, and prime competencies and skills. And, naturally, on a cutting-edge business sector, internationalised and committed to the well-being of society as a business incentive and a driver for long-term development.

I hope that these insights and recommendations will help to gain the confidence that is fundamental for building a better present, and above all, a better future for Mexico. Thank you very much.

 

 

 

See also:

OECD work in Economy

OECD work with Mexico