Mexico needs a new strategy to boost growth, fight poverty and improve well-being for all

Mexico

San Miguel de Allende (Mexico Jezael Melgoza, Unsplash)

This article is brought to you in association with OECD.


The Mexican economy is expanding at a moderate pace, underpinned by a strong macroeconomic framework and robust exports tied to the country’s deep integration into global value chains. A new strategy is now needed to boost growth, reduce high levels of poverty and inequalities, and improve well-being for all Mexicans, according to a new report from the OECD.

The latest OECD Economic Survey of Mexico discusses the links between low living standards and stagnant productivity, poor educational outcomes, weak rule of law, obstacles to competition and widespread informality. The Survey projects growth of about 1.6% this year and 2.0% in 2020, in the context of a slowing world economy and persistent trade tensions that risk disrupting exports, private sector investment and global value chains.

The Survey, presented in Mexico City by OECD Secretary-General Angel Gurría and Mexican Finance Minister Carlos Urzúa discusses the need to address the growing divide between the more modern and productive economy in the north and centre of the country and the more traditional economy in the south, which is a source of both inequalities and poverty. It also looks at how implementation of recent reforms, institutional improvements and changes to the tax and transfer system can better support more inclusive and sustainable growth.

“The Mexican economy has performed well in recent years, but is now facing serious headwinds from the external environment and important structural challenges at home,” Mr Gurría said. “The only response is to continue designing and implementing new reforms to  instill confidence, improve the quality of public administration, increase opportunities, reduce inequalities and bring about a stronger and more inclusive society for all Mexicans.”

 

Improving institutional quality would have the largest growth benefits among all structural reforms and would increase the impact of all other policy reforms, according to the Survey. Implementation of recently created national and local anti-corruption systems should be completed, alongside consideration of the introduction of a specialised, independent anti-corruption agency, taking into account the federal structure of government. Efforts are needed to ensure the continued strength and independence of new competition authorities and sectoral regulators.

A new tax reform is needed to improve collection, limit evasion and ensure financing for infrastructure investment and policies to reduce poverty and inequality. The Survey suggests a comprehensive medium-term tax and benefits reform should seek to broaden the value-added tax base, by cutting exemptions and abolishing reduced rates while compensating low-income households with targeted subsidies. It also suggests adding greater progressivity to the personal income tax system, via a lower income threshold for the top rate and further cutting back tax allowances and making better use of taxes on immovable property. Continuing efforts are needed to reduce duplication of social programmes and beneficiary overlaps while expanding coverage to the poor not already receiving benefits, the Survey said.

 

Reforms are also needed to reduce Mexico’s persistently high informality, which constrains productivity growth and the government’s fiscal capacity to provide public benefits and redistribute. A coordinated approach to reducing informality should ease the administrative burdens of doing business. Lowering tax compliance costs, reducing the cost of creating new jobs and reduced social security contributions for low-wage earners are all identified as desirable and possible.

Better educational outcomes will help fight persistent inequalities and boost productivity growth. Education spending should be re-focused on early childhood, pre-primary, primary and secondary education, and more should be done to increase the capacity of schools in poor neighborhoods and to support students from disadvantaged backgrounds, the Survey said.

Integrating environmental and metropolitan governance concerns into policy making has wide scope to improve both economic and environmental outcomes. Reforms in the governance of large metropolitan areas would enable local governments to plan land use, public transport and housing in an integrated manner, boosting productivity and lowering congestion and air pollution, which affects low-income households the most.

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