“Peter Pan” to Powerhouse: Mexico, 2015 -2040 Prepared by: Lior Bechar, Dheeraj Chinthalapelly, Perryne Desai, Subhash Ganga, Jonah Lowenfeld, Juan Gonzalez Paris
Mexico faces many obstacles… Failing Low Labor Education Productivity System Capital is not Inefficient Contracts not Deep Enough Labor Markets Enforced Monopolies & Specialization Oligopolies in in Key Sectors Manufacturing Manufacturing Inadequate Crime and Dependence infrastructure Violence on the US Lack of Rule of Corruption Law
...but history suggests Mexico has great potential for growth, which can be unleashed with reforms in 8 key areas… GDP per Capita Evolution Over Time Radical Reforms Source: World Bank, FRED, OECD (2012-) 260 - Kickstart and get out of “Middle Income Trap” 240 The Lost Decade (1980-1990) - Oil dependence 220 - High leverage Growth Accounting - MXN 500% devaluation Mexican Miracle Oil Price 200 (1945-1970) Boom Source: World Bank, FRED, OECD - Education reforms a K/L Period Y/N L/N TFP 180 - Relaxation in import of 3.17 1.43 -0.24 1.99 capital goods 1961-1969 - Increased Infrastructure NAFTA 1970-1979 3.27 0.30 2.24 0.73 160 Spending Oil Price 1980-1989 -1.14 0.10 1.38 -2.62 Normalization 1990-1999 0.83 0.24 0.79 -0.20 140 1.62 1.16 0.28 0.18 2000-2014 120 TFP Decline (1980-2010) 100 - Low savings and investment rate - Input-driven growth 80 60 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 GDP per capita TFP
An improved education system coupled with a more efficient labor market will support sustained economic growth 1 Education Reforms Teacher Compensation and Investment PISA Test Results • Evaluations of teachers 100 Portugal Cur. Expenditures (%) Canada 518 Colombia Belgium 98 Austria United Kingdom • Autonomous regulators Italy Germany 514 96 Mexico Sweden Spain Denmark 94 Argentina OECD 494 EU21 Slovak Canada OECD Ireland 92 Republic United States 481 Finland Switzerland 90 United States Mexico 413 Czech France 88 Korea Republic Latam 393 86 40 50 60 70 80 90 PISA 2012 - Mathematics Teacher Compensation / Cur. Expenditures (%) 2 Labor Efficiency Reforms Labor Productivity • Increase flexibility with the 136 th Norway 135.1 G7 countries 86.0 Federal Labor Law Euro area 82.5 OECD Total 72.9 • Challenge union bosses Greece 53.7 Rank in ‘Employing • Easier to hire and fire, and to Turkey 45.0 workers’ - Doing Chile 42.5 Business 2010 settle disputes Mexico 29.9 GDP per hour worked as % of USA (USA=100) Source: OECD
Key sectors have are controlled by few big firms increasing input costs for the economy, while an increasing share of SMEs lost 6.5% in productivity 3 Competitive Landscape Reforms Broadband Prices Key Industries with few competitors • New competition authorities Mexico Chile • Ending monopolies United States Poland • Increased competitiveness Britain Czech Rep. South Korea Japan 0.0 0.5 1.0 1.5 2.0 Broadband prices (Sep/2012 $/Mbps) 4 Business Informality Reforms The Peter Pan System at work SMEs with Low Access to Credit • Fiscal reform to bring SMEs SME % 13.0% 12.3% 12.0% 13.0% 13.3% 16.1% Greece 96.9 Mexico 95.5 into formal economy 1400 Business Loans (MXN bn.) France 87.8 1200 Spain 83.0 1000 • Increase financial access 800 Portugal 82.3 600 United Kingdom 77.8 400 • Increase credit rights Brazil 64.6 200 United States 0 59.2 protection 2007 2008 2009 2010 2011 2012 Ireland 55.3 SMEs other % of Manufacturing Businesses with 1-9 employees Source: OECD Entrepreneurship at a Glance, The Economist
Upcoming FTAs should diversify Mexico’s output while spending in infrastructure will surge 5 Trade Reforms Mexico’s Trade Deficit U.S. Share of Exports from Mexico • Pacific Alliance 0 14% 17% 20% • Trans Pacific Partnership, -5 US$ bn. 86% 83% 80% invited by U.S. -10 -15 1994 2004 2014 -20 US Non-US 2000 2002 2004 2006 2008 2010 2012 6 Infrastructure Reforms Projected Infrastructure Spending • Significant increase in 69 47 spending (already being US$ bn. implemented across sectors) 596 out of 57 in IMD’s out of 133 in the WEF infrastructure World 243 competitiveness Competitiveness index Index 2007-2012 2013-2018 Source: WEF, IMD, PwC, Gridlines Summer 2013, Mexican Economic Secretariat
But… How should Mexicans reconcile the recent corruption scandals and weak law enforcement? 7 Crime and Rule of Law Reforms • Small claims court to enforce 95% 80% contracts • Unified national code for of the offenses are of homicides criminal proceedings not solved or are not solved or punished punished • More police Protests following the killing of 43 students in state of Guerrero 11/2014 8 Governance and Corruption Reforms • Anti-corruption authority • Administrative sanctions on officials • New rules to incentivize officials President’s wife apartment related to scandal 11/2014 Source: Vision for Mexico
Mexico is at an inflection point and its government has initiated reforms aimed at boosting the economy’s productivity and making it more competitive Solow Model GDP per Capita Projection Source: World Bank, FRED, OECD, own calculations 40,000 35,000 $33,049 30,000 TFP: Base Improved (1.5%) $27,097 + Reform Effect(DTF+RLI) (Note 1) 2005 US$ per capita 25,000 TFP: Base(+1%) + Reform Effect (DTF + RLI) (Note 1) 20,000 $19,565 TFP: Base (1%) 15,000 10,000 5,000 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 Note: 1: A regression of TFP growth on the Rule of Law Index (CFS and WEF) and the Distance to Frontier(World Bank Doing Business) on 26 upper middle income countries was performed to estimate the reform effects. Substantial improvement on business environment, infrastructure and labor force in 2016-2019 (represented by DFT) and in governance and rule of law (RLI) in 2017-2020.
Conclusion and Recommendation • Probability of Success – Government has failed many times in the past – Current administration’s reforms are sincere and thorough • Our thoughts – Even the progress to date is worth investment – Invest in Mexico now given the reform to date & trajectory of future reform “Deserve what you dream” Octavio Paz Mexican Nobel Literature Laureate 1990
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