TBY talks to José Antonio Ardavín, Director of the Center for the Organization for Economic Cooperation and Development (OECD) in Mexico for Latin America, on the impressive growth of the economy, the reduction of labor informality, and the organization’s recommended reforms.
TBY What factors have driven the Mexican economy’s recovery over the last two years?
JOSÉ ANTONIO ARDAVÍN In May 2011, we published an economic survey of Mexico. The publication analyzes the economic recovery of Mexico, clearly showing that exports have been the main driver of the economy and its recovery, growing 24% in 2010, while imports grew 22%. Internal demand also grew and product consumption increased by over 5%. In 2011 we estimated moderate GDP growth of around 4.4%, but with all the uncertainties in the world driven by the debt crisis in Europe and the US, this figure may change. It is a moderate figure even in light of the uncertainty.
What GDP expectations do you have for 2012?
In November 2011, the OECD published the latest version of its Economic Outlook. In this document, a three-case scenario analysis on the world’s economic situation is presented, having the European debt crisis and the US fiscal tightening as its main determinants. The moderate and realistic scenario plots a growth slowdown for Mexico, but at a much better level than the rest of the OECD countries estimating the Mexican GDP growth rate at 3.3% for 2012. The average in the eurozone is expected to grow by 0.2% and the US by 2%.
What is being done to reduce informality in the economy?
It is a huge and complex issue. There are a number of ways to make the formal sector more attractive. Part of this has to do with labor law regulations, which in Mexico don’t encourage the employment of young people. This is due to uncertainty about whether any given young person would be a good asset for a company or not. Mexico does not have introductory contracts, and temporary contracts are very restricted, so most contracts have to be permanent. This can result in high costs if the employee turns out to be unsuitable. This is an issue the authorities are trying to solve through a revision of the labor law, which is before Congress. Another recommendation the OECD makes is to continue efforts to reduce the bureaucracy facing firms, and generally reduce the costs incurred by firms in the formal sector. Healthcare packages are also an important feature. The system is fragmented into public, private, and popular packages. It could be better integrated in order to allow the movement of labor between sectors, thus reducing costs and facilitating integration into the formal market.
What reforms should be made to promote long-term economic stability?
Mexico has advanced significantly in terms of long-term macroeconomic stability thanks to reforms over the last 20 years. Some of the population refuses to believe that the path chosen was the right one, but the way in which Mexico has dealt with the global economic crisis has proven that the country is on the right path. However, the Mexican economy dropped significantly in 2009, meaning that more could be done to reduce volatility in productivity. First, the fiscal policy framework must be improved, with a structural balance rule netting out the cyclical component of tax and oil income. This would help because Mexico is deeply influenced by the global price of oil. If a structural balance rule like the one implemented in Chile were introduced, it would allow Mexico to save more during boom periods and this would allow the country to pass through recessions in better shape. We would also like to see more competition, because it would help monetary policy in the sense that Mexico had a relatively high level of inflation even during the recession due to price rigidities. If there were stronger competition then prices would come down. The OECD has also recommended reforms related to financial supervision and a modernization of the service sector.
What sectors of the economy do you believe need more investment?
Infrastructure is a key issue. This needs to be tackled through a mix of public and private involvement, and this is a sector that still has to see significant development. Savings rates also need to increase in order to improve investment rates. On the private sector side we believe Mexico has huge potential in transport, energy, and telecommunications. There are estimates that the doubling of the broadband penetration rate from 10% to 20% might imply an additional 1% growth rate in overall GDP in Mexico. Another sector is energy, and it can be a sector in which private investment can generate more capacity and growth. It is also a sector with a huge multiplier effect on the economy. Additionally, tourism has been growing and continues to have great potential.
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