Presentation of the OECD 2019 Economic Survey of Mexico

OECD ECONOMIC SURVEYS: MEXICO 2019

Towards stronger and more inclusive growth Mexico City, 2 May 2019 http://www.oecd.org/economy/surveys/mexico-economic-snapshot/

OECD Economics OECD

Key Messages • Continue pursuing strong macroeconomic policies to maintain resilience to shocks. • Strengthening institutional quality will be key to making all other reforms effective, boosting growth and improving well-being and equity.

• Many policies will allow for more robust and inclusive growth.

2

Growth has decelerated

3

Oil production is weighing on economic activity GDP by sector 2013Q1=100 130

130 GDP

Agriculture

Mining

Manufacturing

Services

Construction

120

120

110

110

100

100

90

90

80

80

70 2013 Source: INEGI.

2014

2015

2016

2017

2018

70

4

Investment is low 2013Q1=100 GDP

Consumption

Investment

Exports

140

140

135

135

130

130

125

125

120

120

115

115

110

110

105

105

100

100

95

95

90 2013

2014

2015

2016

2017

2018

90

Source: INEGI. 5

Growth will remain moderate % change

2018

2019

2020

2.0

1.6

2.0

Private consumption

2.2

1.3

2.2

Government consumption

1.4

-0.6

0.3

Gross fixed capital formation

0.6

-1.8

2.2

Exports of goods and services

5.7

2.9

4.9

Imports of goods and services

6.2

4.2

4.5

Consumer price index

4.9

3.8

3.6

Current account balance (% GDP)

-1.8

-1.9

-1.8

Gross domestic product (GDP)

Source: OECD. 6

Growth has not been strong enough to allow for convergence to higher living standards % of OECD avg

% of OECD avg 48

115 GDP per capita (LHS)

Labour productivity (LHS)

Labour utilisation (RHS)

47

113

46

111

45

109

44

107

43

105

42

103

41

101

40

99

39

97

38 95 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Note: GDP per capita and labour productivity relative to the OECD average in constant PPP-adjusted USD terms. Labour productivity is GDP per hour worked. Labour utilisation is hours worked per capita.

Source: OECD Productivity Database.

7

Growth has mainly reflected a population bonus Decomposition of potential GDP growth % per year 4.0

4.0 Capital per worker

Employment rate

Participation rate

3.5 3.0

3.5 Working-age population

TFP

Potential growth

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

-0.5

-0.5

-1.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

-1.0

Source: OECD Analytical Database; OECD Demography and Population Database.

8

Female labour market participation remains low %

% of 15-64 year old women, 2017

% 90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0

TUR MEX CRI ITA CHL LAC4 KOR GRC BRA POL BEL COL HUN PEER SVK LUX IRL FRA USA CZE ISR OECD JPN ESP SVN PRT AUT AUS GBR DEU LVA LTU FIN EST CAN NLD NOR DNK NZL CHE SWE ISL

90

Note: LAC4 is an unweighted average of Brazil, Chile, Colombia, and Costa Rica. PEER is an unweighted average of the 10 non-Latin American OECD countries with the lowest PPP-adjusted GDP per capita: Estonia, Greece, Hungary, Latvia, Lithuania, Poland, Portugal, Slovak Republic, Slovenia, and .

Turkey.

Source: OECD Social Protection and Well-Being Database.

9

70 70

60 60

50 50

40 40

30 30

20 20

10 10

0 0

Source: CONEVAL (Consejo Nacional de EvaluaciĂłn de la PolĂ­tica de Desarrollo Social).

Chiapas

Oaxaca

Guerrero

Veracruz

Puebla

Michoacan

Tlaxcala

Tabasco

Hidalgo

Morelos

Zacatecas

State of Mexico

Poverty

San Luis Potosi

Campeche

Guanajuato

Yucatan

Nayarit

Durango

Colima

Tamaulipas

Jalisco

Queretaro

Sinaloa

Chihuahua

Quintana Roo

Aguascalientes

Sonora

Mexico City

Coahuila

Baja California

Baja Calif. Sur

Nuevo Leon

Poverty rates are high and differ greatly across states Poverty and extreme poverty per state %, 2016

80 Extreme poverty 80

10

Well-being varies greatly across states Well-being indicators for Mexico and OECD countries 2014 or latest available year

Unemployment rate

Life expectancy at birth 10

Disposable income per capita

8 S80/S20 disposable income quintile ratio

Gini (at disposable income, after taxes and transfers)

6 4

Share of labour force with at least secondary education

2

Homicide rate

0 -2

Poverty rate after taxes and transfers, Poverty line 50%

Employment rate

Air pollution, level of PM2.5

Voter turnout in general elections

Gini before taxes and transfers Standardised mortality rate

OECD

Mexico

Share of households with internet broadband access Perception of corruption

MEX - Best

Note: Indicators are normalised to a range of 0 (worst) to 10 (best) computed over OECD countries and Mexican states.

Source: OECD Regional Well-being database.

MEX - Worst

11

Infant mortality rates are the highest in the OECD Probability of dying between birth and age 1 per 1000 live births, 2017

14

12

12

10

10

8

8

6

6

4

4

2

2

0

0

ISL SVN FIN JPN EST LUX NOR SWE CZE ESP KOR AUT ISR ITA AUS IRL BEL DEU PRT NLD LTU FRA LVA OECD DNK CHE GBR HUN POL PEER GRC NZL CAN SVK USA CHL CRI ARG LAC5 TUR MEX PER COL BRA

14

Source: World Health Organisation.

12

Mexico has one of the highest rates adult obesity in the OECD Obese or overweight population Measured or self-reported, %, 2017 or latest available year 45

45 Obese

Overweight 40

35

35

30

30

25

25

20

20

15

15

10

10

5

5

0

0

JPN KOR ITA NOR SWE NLD AUT SVK DEU LTU POL ESP DNK FRA GRC BRA EST BEL CZE COL ISR FIN ISL SVN LUX IRL LVA OECD CRI PEER GBR AUS CAN PRT TUR HUN NZL MEX CHL USA

40

Note: Data for Mexico refer to 2016.

Source: OECD Health Statistics Database.

13

Spending on health is low Total expenditure per capita on all healthcare services PPP-adjusted current USD, 2017 or latest available year 12,000

10,000

10,000

8,000

8,000

6,000

6,000

4,000

4,000

2,000

2,000

0

COL MEX TUR CRI LAC5 BRA LVA CHL POL LTU HUN EST PEER SVK GRC CZE SVN ISR PRT KOR ESP ITA NZL OECD FIN GBR AUS ISL JPN BEL CAN FRA DNK NLD AUT IRL SWE DEU NOR LUX CHE USA

12,000

Source: OECD Health Statistics Database.

0

14

Air pollution is high, impacting on health and labour productivity Mean population exposure to PM2.5 emissions Micrograms per

m3

Micrograms per m3 of air

of air

35

35 Paris

London

Tokyo

Mexico City

New York (Greater)

30

30

25

25

20

20

15

15

10

10

5

5

0 2010

2011

2012

2013

2014

Note: Refers to the mean number of microgrammes of PM2.5 per cubic metre of air people are exposed to.

Source: OECD Environment Database.

2015

2016

0 2017

15

The macroeconomic framework is strong

16

Inflation has moderated % 13

Headline inflation

Core inflation

Inflation target

% 13

Non-core inflation

12

12

11

11

10

10

9

9

8

8

7

7

6

6

5

5

4

4

3

3

2

2

1

1

0 2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

0

Note: The grey area in represents the inflation target range.

Source: Banco de MĂŠxico.

17

Monetary policy is appropriately tight % 10

% 10 Neutral nominal interest rate

Policy rate

Real interest rate (policy rate - 1 day)

9

9

8

8

7

7

6

6

5

5

4

4

3

3

2

2

1

1

0

0

-1

-1

-2 2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Note: The (ex-ante) real interest rate is calculated as the policy rate minus inflation expectations for the next 12 months. The grey area represents the neutral nominal interest rate range.

Source: Banco de MĂŠxico.

-2

18

Fiscal performance has improved % of GDP

% of GDP 5

30 PSBR

Primary balance

Revenue (RHS)

Expenditure (RHS)

3

25

1

20

-1

15

-3

10

-5

5

-7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Note: The primary balance in 2017 is net of one-offs. PSBR: Public sector borrowing requirement.

Source: Secretaría de Hacienda y Crédito Público.

0

19

Fiscal prudence needs to be maintained Public debt scenarios, % of GDP 70

70 Low oil prices

High growth

Low growth

High interest rate

Baseline

65

65

60

60

55

55

50

50

45

45

40 40 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Source: OECD Secretariat estimates based on data from SHCP (Secretaría de Hacienda y Crédito Público).

20

Finding resources for more equitable growth

21

Tax revenue collection is low Total tax revenue % of GDP 40

% of GDP 40 OECD

35

35

30

30 LAC

25

25

20

20

15

15 MEX

10

10

5

5

0 2012

2013

2014

2015

2016

0 2017

Source: OECD Global Revenue Statistics Database.

22

The tax and transfer system does little to reduce inequality 0.70

0.70 Gini (market income, before taxes and transfers)

Gini (disposable income, post taxes and transfers) 0.60

0.50

0.50

0.40

0.40

0.30

0.30

0.20

0.20

0.10

0.10

ISL CHE KOR SVK NOR TUR CAN SWE ISR NLD CZE DNK SVN HUN EST POL NZL AUS PEER OECD LVA MEX LUX CHL BEL AUT DEU JPN FIN GBR USA LTU FRA ESP ITA PRT CRI GRC IRL

0.60

Source: OECD Income Distribution and Poverty Database.

23

The VAT revenue ratio is the lowest among OECD countries VAT Revenue Ratio 100

100

90

90

80

Increasing share of potential VAT revenues collected

80 70

60

60

50

50

40

40

30

30

20

20

10

10

0

0

MEX ITA TUR COL ESP GRC GBR POL CRI ARG CAN BEL FRA PRT SVK AUS IRL LAC5 LTU NLD PEER FIN ISL PER LVA DEU OECD NOR HUN SVN AUT DNK SWE CZE ISR CHL CHE KOR JPN EST LUX NZL

70

Source: OECD Consumption Tax Trends; OECD Revenue Statistics in Latin America and the Caribbean.

24

There is room to increase revenues and the progressivity of Personal Income Tax Income threshold where single taxpayers start paying the top statutory PIT As a multiple of the average wage, 2017 30

25

25

20

20

15

15

10

10

5

5

0

0

HUN LVA EST CZE BEL ISL NZL DNK NLD SWE NOR FIN IRL CRI POL AUS ARG ESP ITA BRA LUX TUR CHE SVK KOR GBR GRC CAN ISR OECD SVN DEU CHL AUT USA IND JPN COL FRA PRT MEX

30

Source: OECD calculations based on the Taxing Wages models; OECD Taxing Wages in Latin America and the Caribbean (2016), OECD Taxing Wages (2018), OECD Tax database.

25

Recommendations to increase tax collection

Measure

Change in the fiscal balance (percentage points of GDP)

Reduce exemptions in CIT

Up to 0.52

Reduce exemptions in PIT

Up to 0.97

Broaden the VAT tax base

Up to 1.36

Raise property taxes to the LAC average (0.6%)

0.30

Reduce exemptions and subsidies in the state tax on motor vehicles (tenencia)

0.05

Raise the efficiency of state payroll tax collection (nómina) Potential increase in fiscal revenues of implementing all tax recommendations

Source: World Bank (2016) and Secretaría de Hacienda y Crédito Público (2018).

0.15-0.20 3.4

26

Social spending is low Social spending % of GDP, 2017 or latest year available 35 30

35 Old age

Health

Other

Labour market

30 25

20

20

15

15

10

10

5

5

0

0

MEX KOR CHL TUR AUS IRL CHE LTU ISR ISL LVA SVK CAN NLD EST USA OECD POL NZL CZE HUN LUX JPN SVN GBR PRT ESP GRC DEU NOR ITA SWE AUT BEL DNK FIN FRA

25

Source: OECD Social Expenditure Database.

27

Recommendations to improve social spending Measure

Reduction in spending (percentage points of GDP)

Reduce administrative and insurance costs in the health sector from 9% of total current expenditures to the OECD average of 3%

0.15

Eliminate beneficiary overlaps across the different health insurance schemes

0.15

Eliminate leakages in social assistance programmes benefiting the top 40% of the income distribution

0.10

Potential reduction in spending of implementing all social spending recommendations

0.4

Source: World Bank (2016) and SecretarĂ­a de Hacienda y CrĂŠdito PĂşblico (2018).

28

Reforms to re-ignite productivity and achieve stronger and equitable growth

29

There is large potential for policy reforms to raise living standards % difference from baseline GDP per capita (no policy change) scenario by policy area 12

10

Rule of law

Educational attainment and inequality

Product market reform

Investment

R&D spending

Total

12

10

8

8

6

6

4

4

2

2

0

0

-2

2020

2025

Source: Estimates based on “OECD Long-Term Scenarios for the World Economy� database.

2030

-2

30

Institutions

31

The quality of Mexico’s institutions is low Control of corruption, 2018 Index, -2.5 to 2.5 (best)

-0.2

-0.2

-0.4

-0.4

-0.6

-0.6

-0.8

-0.8

-1.0

-1.0

OECD

0.0

CHL

0.0

PEER

0.2

CRI

0.2

LAC5

0.4

MYS

0.4

IDN

0.6

ARG

0.6

CHN

0.8

DAE

0.8

COL

1.0

PHL

1.0

BRA

1.2

MEX

1.2

Note: LAC5 is a simple average of Argentina, Brazil, Chile, Colombia and Costa Rica. DAE is a simple average of People’s Republic of China, Indonesia, Malaysia, the Philippines, Thailand and Viet Nam. Source: World Bank World Governance Indicators.

32

Recommendations to improve institutional quality • Complete the implementation of the National and Local Anticorruption Systems reforms and monitor the results.

• Consider introducing a specialist, independent anticorruption agency that takes into account the federal structure of the government.

• Continue efforts to reduce impunity.

• Ensure that the competition authorities and sector regulators have adequate resourcing and independence to carry out their mandates effectively.

33

Strengthening financial inclusion and competition in the banking sector

34

Competition in the banking sector is low Spread between lending and deposit rates, 2017 %

% 16

16

14

14

12

12

10

10

8

8

6

6

4

4

2

2

0

ISR FIN BEL DNK AUT EST PRT ITA LTU DEU NOR AUS LVA SVK POL CZE TUR GRC BRA MEX ARG

Source: Bankscope and Orbis Bank Focus, Bureau van Dijk (BvD); IMF, Financial Soundness Indicators database.

0

35

Mexican SMEs face high borrowing costs

25

25 Spread between interest rate for SMEs and large enterprises

Interest rate for SMEs

20

15

15

10

10

5

5

0

0

POL BEL FRA KOR SWE AUT NLD SVN LUX ESP CZE GRC CHE USA EST ISR GBR PEER DNK PRT ITA LVA OECD FIN HUN SVK AUS IRL CAN NZL CHL COL MEX BRA

20

Source: OECD (2018), Financing SMEs and Entrepreneurs 2018: An OECD Scoreboard.

36

Financial inclusion remains low Share of adults holding an account %, 2017 100

100

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

PHL

MEX

PER

COL

IDN

TUR

ZAF

BRA

CHL

HUN

RUS

IND

CHN

THA

MYS

POL

0

Source: World Bank, Global Findex database (2017).

37

Recommendations to strengthen financial inclusion and competition in the banking sector • Accelerate the current initiatives to enhance financial inclusion, financial literacy and competition. Monitor outcomes.

• Move towards making all government transfers to households through bank accounts or electronic means.

38

Lowering high informality rates

39

Informality remains high %

%

As a share of the total employed population

70

70 Formal

Informal

Source: OECD calculations based on data from INEGI (ENOE).

2018Q4

2018Q3

2018Q1

2017Q3

2017Q1

2016Q3

2016Q1

2015Q3

2015Q1

2014Q3

2014Q1

2013Q3

2013Q1

30

2012Q3

30

2012Q1

35

2011Q3

35

2011Q1

40

2010Q3

40

2009Q3

45

2009Q1

45

2008Q3

50

2008Q1

50

2007Q3

55

2007Q1

55

2006Q3

60

2006Q1

60

2005Q3

65

2005Q1

65

40

Informal but legal firms account for a large share of workers Distribution of workers by firm size (number of workers) and type % share, 2013 30

30 Legal and formal

Mixed

Legal and informal

Illegal and informal

25

25

20

20

15

15

10

10

5

5

0

1-5

6-10

11-50

51+

0

Note: 'Legal and formal' firms employ only legal, salaried workers. 'Mixed' firms employ some legal, salaried workers and some non-salaried, informal workers.

'Legal and informal' firms employ non-salaried, informal workers. 'Illegal and informal' firms hire illegal salaried workers.

Source: Levy (2018), Under-rewarded Efforts: The Elusive Quest for Prosperity in Mexico.

41

Informal but legal firms have the lowest productivity levels Revenue productivity by firm size (number of workers) and type % difference in revenue productivity relative to legal informal firms with 1-5 workers, 2013 90

90 Legal and formal

Mixed

Legal and informal

Illegal and informal

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0

-10 -20

-10 1-5

6-10

11-50

51+

-20

Note: 'Legal and formal' firms employ only legal, salaried workers. 'Mixed' firms employ some legal, salaried workers and some non-salaried, informal workers.

'Legal and informal' firms employ non-salaried, informal workers. 'Illegal and informal' firms hire illegal salaried workers.

Source: Levy (2018), Under-rewarded Efforts: The Elusive Quest for Prosperity in Mexico.

42

Employers’ social security contributions are high for low-income earners Single-earner married couple, 2 children % of total labour cost 15

15 MEX

OECD

14

14

13

13

12

12

11

11

10

10

9

9

8

50

55

60

65

70

75

80

85

90

95

100 105 110 115 120 125 130 135 140 145 150

8

% of average worker's earnings Source: OECD Public Sector, Taxation and Market Regulation Database.

43

Tax compliance costs are high Postfiling index Score from 0 to 100 (best)

30

20

20

10

10

0

0

EST

30

LVA

40

DEU

40

USA

50

ESP

50

CRI

60

OECD

60

PEER

70

CHL

70

TUR

80

LAC5

80

COL

90

ARG

90

MEX

100

BRA

100

Note: LAC5 is an unweighted average of Argentina, Brazil, Chile, Colombia, and Costa Rica. PEER is an unweighted average of the 10 non-Latin American OECD countries with the lowest PPP-adjusted GDP per capita: Estonia, Greece, Hungary, Latvia, Lithuania, Poland, Portugal, Slovak Republic, Slovenia, and Turkey.

Source: World Bank Doing Business 2019.

44

Recommendations to incentivise informality • Implement a coordinated approach to reduce informality, comprising:

– Lower administrative burdens to doing business – Lower tax compliance costs – Lower dismissal costs – Stepping up social protection.

• Lower social security contributions for low wage earners • Set minimum protection standards for all type of labour relationships

• Step up enforcement • Lead by example and progressively reduce the number of informal workers in the public sector

45

Improving access to and the quality of education

46

Education outcomes are low 2015 PISA results Score

%

500

70

480

60

460

50

440

40

420

30

400

20

380

10

360

Mexico

OECD

Overall PISA score

Source: OECD PISA Database.

Mexico

OECD

0

% low performers

47

Youth not in education, employment or training are predominantly women (NEETs) % of young people aged 20-24 who are not in education, training or work by gender, 2016 50

50 Women

45

Men

45

Source: OECD Education at a Glance Database.

TUR

MEX

COL

CRI

ITA

GRC

ESP

FRA

PEER

ISR

PRT

HUN

POL

OECD

SVK

LVA

0

EST

0

GBR

5

NZL

5

USA

10

CZE

10

FIN

15

BEL

15

CAN

20

AUS

20

LTU

25

AUT

25

DEU

30

NOR

30

SVN

35

NLD

35

DNK

40

ISL

40

48

Recommendations to improve access to and the quality of education • Raise the quality and coverage of early childhood education and care programmes and delink them from parents’ labour market status.

• Ensure that funding resources are distributed equitably among schools.

• Provide additional support to students from lower socio-economic backgrounds.

• Clarify fiscal federal relationships in the delivery of education services, simplify funding mechanisms and increase transparency in the allocation of resources at the state level.

• Continue efforts to step up monitoring and evaluation at the subnational level.

• Continue to expand VET coverage, assess the results of the internship programmes and encourage female participation.

49

More information‌ http://www.oecd.org/economy/surveys/mexico-economic-snapshot/

Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

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