Peter Pan to Powerhouse: Mexico, 2015 -2040 Prepared by: Lior Bechar, - - PowerPoint PPT Presentation

“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…

Capital is not Deep Enough Manufacturing Dependence

• n the US

Contracts not Enforced Lack of Rule of Law Inefficient Labor Markets Failing Education System Monopolies & Oligopolies in Key Sectors Corruption Inadequate infrastructure Low Labor Productivity Specialization in Manufacturing Crime and Violence

60 80 100 120 140 160 180 200 220 240 260

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

GDP per capita TFP

...but history suggests Mexico has great potential for growth, which can be unleashed with reforms in 8 key areas…

Mexican Miracle (1945-1970)

• Education reforms
• Relaxation in import of

capital goods

• Increased Infrastructure

Spending The Lost Decade (1980-1990)

• Oil dependence
• High leverage
• MXN 500% devaluation

TFP Decline (1980-2010)

• Low savings and

investment rate

• Input-driven growth

Radical Reforms (2012-)

• Kickstart and get out of

“Middle Income Trap”

NAFTA Oil Price Boom Oil Price Normalization

GDP per Capita Evolution Over Time

Source: World Bank, FRED, OECD Period Y/N aK/L L/N TFP

1961-1969 3.17 1.43

• 0.24

1.99 1970-1979 3.27 0.30 2.24 0.73 1980-1989 -1.14 0.10 1.38

• 2.62

1990-1999 0.83 0.24 0.79

• 0.20

2000-2014 1.62 1.16 0.28 0.18

Growth Accounting

Source: World Bank, FRED, OECD

An improved education system coupled with a more efficient labor market will support sustained economic growth Education Labor Efficiency

• Increase flexibility with the

Federal Labor Law

• Challenge union bosses
• Easier to hire and fire, and to

settle disputes

• Evaluations of teachers
• Autonomous regulators

1 2

Reforms Reforms

Teacher Compensation and Investment PISA Test Results

393 413 481 494 514 518 Latam Mexico United States OECD Germany Canada PISA 2012 - Mathematics

Source: OECD

29.9 42.5 45.0 53.7 72.9 82.5 86.0 135.1 Mexico Chile Turkey Greece OECD Total Euro area G7 countries Norway

GDP per hour worked as % of USA (USA=100)

136th

Rank in ‘Employing workers’ - Doing Business 2010 Labor Productivity

Austria Belgium Canada Czech Republic Denmark Finland France Ireland Italy Korea Mexico Portugal Slovak Republic Spain Sweden Switzerland United Kingdom United States OECD EU21 Argentina Colombia 86 88 90 92 94 96 98 100 40 50 60 70 80 90

• Cur. Expenditures (%)

Teacher Compensation / Cur. Expenditures (%)

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 Competitive Landscape Business Informality

• Fiscal reform to bring SMEs

into formal economy

• Increase financial access
• Increase credit rights

protection

• New competition authorities
• Ending monopolies
• Increased competitiveness

3 4

Reforms Reforms

Source: OECD Entrepreneurship at a Glance, The Economist

0.0 0.5 1.0 1.5 2.0

Japan South Korea Czech Rep. Britain Poland United States Chile Mexico

Broadband prices (Sep/2012 $/Mbps)

Broadband Prices The Peter Pan System at work SMEs with Low Access to Credit Key Industries with few competitors

55.3 59.2 64.6 77.8 82.3 83.0 87.8 95.5 96.9 Ireland United States Brazil United Kingdom Portugal Spain France Mexico Greece % of Manufacturing Businesses with 1-9 employees 13.0% 12.3% 12.0% 13.0% 13.3% 16.1% SME % 200 400 600 800 1000 1200 1400 2007 2008 2009 2010 2011 2012 Business Loans (MXN bn.) SMEs

• ther

243 596

2007-2012 2013-2018

US$ bn.

Upcoming FTAs should diversify Mexico’s output while spending in infrastructure will surge Trade Infrastructure

• Significant increase in

spending (already being implemented across sectors)

• Pacific Alliance
• Trans Pacific Partnership,

invited by U.S.

5 6

Reforms Reforms

Source: WEF, IMD, PwC, Gridlines Summer 2013, Mexican Economic Secretariat

Projected Infrastructure Spending U.S. Share of Exports from Mexico

83% 86% 80% 17% 14% 20% 1994 2004 2014 US Non-US

• 20
• 15
• 10
• 5

2000 2002 2004 2006 2008 2010 2012

US$ bn.

Mexico’s Trade Deficit

69

• ut of 133 in the

WEF infrastructure competitiveness index

47

• ut of 57 in IMD’s

World Competitiveness Index

But… How should Mexicans reconcile the recent corruption scandals and weak law enforcement? Crime and Rule of Law Governance and Corruption

• Anti-corruption authority
• Administrative sanctions on
• fficials
• New rules to incentivize
• fficials
• Small claims court to enforce

contracts

• Unified national code for

criminal proceedings

• More police

7 8

Reforms Reforms

Source: Vision for Mexico

Protests following the killing of 43 students in state of Guerrero 11/2014

95%

• f the offenses are

not solved or punished

80%

• f homicides

are not solved or punished

President’s wife apartment related to scandal 11/2014

5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040

2005 US$ per capita

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

TFP: Base Improved (1.5%) + Reform Effect(DTF+RLI) (Note 1) TFP: Base(+1%) + Reform Effect (DTF + RLI) (Note 1) TFP: Base (1%)

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.

$33,049 $27,097 $19,565

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