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Mexico

Mexico's economic outlook in the international context

 

Faculty of Economics of the Universidad Autónoma de Baja California

Remarks by Angel Gurría, Secretary-General, OECD

Tijuana, Mexico, 10 November 2016

(As prepared for delivery)

 

 

Rector, Director of the Faculty of Economics and International Relations, Professors and Students, Ladies and Gentlemen,

 

It is a real pleasure to be in Tijuana to share with you the OECD's outlook on the Mexican economy in the international context. I would like to thank Dr. Juan Manuel Ocegueda and the authorities of the Universidad Autónoma de Baja California for giving me the opportunity to engage in this dialogue with all of you.

 

The international economy and the low-growth trap

 

Eight years after the onset of the crisis, the world economy finds itself in a "low-growth trap". The persistently sluggish pace of growth is affecting the capacity for future production. Trade and investment at the international level remain weak, and this is holding back improvements in productivity and wages.

 

More pessimistic long-term growth expectations and an excessive emphasis on monetary policy have conspired to create an atmosphere where low interest rates have inflated asset prices and heightened financial risks.

 

The world's growth this year, at around 3%, has been particularly slow and the next two years are expected to see only a modest recovery. Among OECD economies, growth is even weaker, at slightly less than 2%. The Latin American economy is expected to shrink by between -0.9 and -1% in 2016, with a slight recovery of 1.5% in 2017.

 

Mexico: progress and challenges on the road to inclusive growth

 

Against this difficult backdrop, Mexico has stood up relatively well. The Bank of Mexico has raised interest rates several times this year to counter the inflationary pressures flowing from the peso’s depreciation, and to keep inflationary expectations from taking off. GDP growth in Mexico is expected to be around 2% in 2016, slightly above the OECD average, and to rise in 2017 and 2018 to somewhere above 2.5%.

 

Domestic demand has been the main driver of economic activity, and this has been supported by the introduction of structural reforms. These reform measures have fostered greater competition in the energy and telecommunications sectors, and they have given the competition authorities greater clout in combating collusion, monopolies and other anticompetitive practices. This in turn has brought about a 25% cut in telecommunications rates, to the benefit of consumers and businesses alike.

 

Another encouraging sign is the growth of multifactor productivity, which has recently recovered from its downward trend and since 2014, has turned positive. The auto parts sector, for example, is a well-known success story here in Tijuana, and it has enabled Mexico to become the biggest producer of automobiles in Latin America. These changes have helped to create jobs and to boost wages. In order to maintain and strengthen these positive trends, it will be essential to pursue implementation of the full set of reforms that have been adopted in the areas of education, labour regulation, finance, transparency, and combating corruption.

 

Nevertheless, there are still glaring differences among sectors, states and firms. The most productive Mexican firms are performing well, but the majority of enterprises are still struggling to improve, and they are not always meeting with success. As a result, there is growing divergence in productivity, with only a few sectors leading the advance.

 

This trend shows that Mexico still faces the great challenge of reducing inequalities and achieving more inclusive growth. Income remains concentrated in very few hands, levels of poverty and insecurity remain very high, and children often have little chance to achieve a standard of living better than that of their parents. The richest 10% of Mexicans earn 20 times as much as the poorest 10%, while the average gap for the OECD is around 10 times. These discrepancies also show up at the regional level.

 

Although social spending has increased from 2% of GDP in 1985 to nearly 8% at the present time, it remains the lowest among OECD countries, for which the average is 22% of GDP. Cash transfers represent less than 3% of GDP, and spending on active employment policies and unemployment insurance is among the lowest in the OECD.

 

Promoting more inclusive growth in Mexico

 

We must pursue our efforts to achieve more inclusive growth in Mexico. Higher spending on social programmes is essential if we are to eradicate extreme poverty. The safety net for seniors could also be reinforced by increasing the amount of the minimum pension, and universal social security could be financed through an increase in the taxpayer base. Mexico could also boost growth by making public spending more efficient and by giving priority to combating poverty and to promoting health, infrastructure, and education and training.

 

Another priority area for action must be to combat the various forms of gender discrimination, which are not only morally reprehensible but also entail a high economic cost. Women are Mexico's most under-appreciated economic asset. The gap in work force participation rates between men and women in Mexico was 35% in 2014, compared to 21% in Brazil and 17% as the average for the OECD. Virtually half of Mexican women of working age are not part of the workforce.

 

Although Mexico is already taking steps to reduce these differences, it will be essential to improve access to quality child care services for mothers with young children and to promote responsible practices in both the public and the private sectors that will foster inclusion and support for women, and do away with gender discrimination of all kinds.

 

These are just a few of the areas of action on which Mexico should focus in order to promote more inclusive growth. Other aspects are equally crucial, such as reducing the informality that continues to afflict the majority (57%) of workers in Mexico, and breaking the vicious circle of job insecurity, where unproductive and poorly trained workers are paid low wages with no type of social protection. The OECD has calculated that aggregate growth could rise by nearly one percentage point if informality were to be reduced by 10 percentage points, from the current 57% to 47%.

 

Other measures that could help Mexico achieve more inclusive growth have to do with regulatory improvement at the local level, strengthening legal certainty together with the rule of law, a head-on attack on corruption, and the development of responsible instruments for accessing finance and credit.

 

Faced with a complicated international setting, the Mexican economy has shown that it has solid foundations. However, we must continue our efforts to ensure that growth is inclusive and that its fruits are distributed fairly. This will be the great challenge that you, as future economists, will have to cope with. As the British statesman and writer Benjamin Disraeli once said, "The youth of a nation are the trustees of posterity."

 

Thank you very much.