Trade and Structural Reforms in Mexico Alejandrina Salcedo Cisneros*/ October 5th 2017
*/ The opinions expressed herein are those of the author and do not necessarily represent those of Banco de MĂŠxico.
Content 1
Introduction
2
Trade Openness
3
Sound Macroeconomic Framework
4
Structural Reforms
5
Challenges to Growth 1
NAFTA
has allowed member countries to boost growth and to attain important productivity and efficiency gains that have led to welfare improvements for both producers and consumers across the whole region. o Furthermore, to the extent that we live in a very competitive global economy, NAFTA has meant that the North American region is better prepared to compete with the rest of the world.
Mexico has proved to be trusted partner in the quest for growth and prosperity in the region.
o In particular, Mexico has enacted several reforms that:
strengthen its macroeconomic framework. improve its microeconomic structure.
2
Content 1
Introduction
2
Trade Openness
3
Sound Macroeconomic Framework
4
Structural Reforms
5
Challenges to Growth 3
NAFTA is much more than a tariff-reduction scheme. It can be viewed as a set of institutional rules that govern foreign trade and investment between Canada, Mexico, and the United States with the aim of promoting both types of flows across the region in order to attain productivity gains through deeper economic integration.
As such, NAFTA should be understood as a production-sharing agreement.
North America has developed intricate regional supply chains and close-knit economic relationships that exploit the comparative advantages of member countries. 4
NAFTA has given way to a sustained growth of intra-industry trade across countries. In that sense, rather than trade partners, MĂŠxico and the US have become production partners. Mexico: Manufacturing exports and intermediate imports Index, 1994=100 770 China enters WTO
NAFTA
Exports
Financial Crisis
670 570 470
Imports
370 270 170
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
70
Source: Banco de Mexico.
5
Mexico is currently the second most important source for US imports and the second most important destination for US exports. Top five countries of origin of US imports 2017 Percentage of total imports
Top five destination countries of US exports 2017 Percentage of total exports 18.4
20.6
15.7
13.5
13.1
7.9
5.9
China
Mexico
Canada
Note: Data correspond to the period January-July 2017. Source: US Department of Commerce.
Japan
4.4
5.0
Germany
3.6
Canada
Mexico
China
Japan
United Kingdom
Note: Data correspond to the period January-July 2017. Source: US Department of Commerce.
6
For both Mexico and the United States, trade liberalization can be associated with a positive effect on GDP growth. GDP Annual percentage change, s. a. Mexico
United States 9
9
Average = 3.63
7
Average =2.29
Average = 2.36
Average = 2.88
7
Average = 4.04 Average = 2.11
Average = 2.13
Average = 1.48
5 3
3
1
1
-1
-1
-3
-3
China enters WTO
Financial crisis
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
NAFTA
-7
GATT
NAFTA
China enters WTO
-5
Financial Crisis -7
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
-5
GATT
5
s. a./ Seasonally adjusted figures. Note: The red line denotes the simple average over the sample period. Source: Elaborated by Banco de Mexico with data from INEGI and Federal Reserve Economic Data, Federal Reserve Bank of St. Louis.
7
This higher growth, in turn, can be associated with a period of relatively high growth in total factor productivity. Total factor productivity Average annual percentage change 4
East Asia Latin America Excl. Mexico European Four NAFTA U.S.A. Mexico China
China enters WTO
Financial Crisis
2
0
-2
-4 1990-1995
1996-2000
2001-2006
2007-2012
2013-2016
Note: The regions were estimated as a weighted average according to the regional population. The regions are made up of: 1. East Asia: South Korea, Hong Kong, Malaysia, Singapore and Thailand; 2. Four Europeans: Spain, Greece, Ireland and Portugal and 3. Latin America Excl. Mexico: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, Guatemala, Uruguay and Venezuela. Source: Elaborated by Banco de MĂŠxico with data from The Conference Board Total Economy Database and World Bank Development Indicators.
8
ď Ž NAFTA has allowed for improvements in consumer welfare across the region:
o Consumers now have access to a larger variety of goods.
o Consumers face lower prices due to the market discipline effects of trade openness.
9
Content 1
Introduction
2
Trade Openness
3
Sound Macroeconomic Framework
4
Structural Reforms
5
Challenges to Growth 10
Mexico has developed a sound macroeconomic framework over the years through a prolonged effort of reform. ❶Price stability and exchange
rate flexibility ❷Fiscal discipline ❸Well-capitalized banking
system ❹International reserves
❺Sustainable external accounts
11
Since 1994, Banco de Mexico has been institutionally independent and, by law, its mandated main goal is to keep a low and stable inflation. This focus has lead to a significant reduction of the level, volatility and persistence of inflation.
Headline inflation Percentage 60 1F-March Aug. 2017 50
40
The Central Bank has adopted an inflation targeting framework, which is complemented by Mexico’s fully flexible exchange rate regime.
30
20
10
1995 1995 1996 1997 1998 1999 2000 2000 2001 2002 2003 2004 2005 2005 2006 2007 2008 2009 2010 2010 2011 2012 2013 2014 2015 2015 2016 2017
0
Source: Banco de México and INEGI.
12
Mexico’s sound macroeconomic framework ❶Price stability and flexible
exchange rates
o Improvement of the fiscal responsibility framework.
❷Fiscal discipline ❸Well-capitalized banking
system
o Fiscal reforms that have allowed the Federal Government to increase its revenue from tax sources.
❹International reserves
❺Sustainable external accounts 13
Mexico’s sound macroeconomic framework ❶Price stability and flexible
exchange rates ❷Fiscal discipline ❸Well-capitalized banking
system ❹International reserves
o Currency mismatches in the balance sheet of financial institutions have been reduced.
o Capital requirements that comply with Basel III guidelines are already mandatory in Mexico.
❺Sustainable external accounts 14
Mexico’s sound macroeconomic framework ❶Price stability and flexible
exchange rates ❷Fiscal discipline ❸Well-capitalized banking
system
o International reserves are at high levels.
❹International reserves
❺Sustainable external accounts
o Flexible Credit Line with the IMF.
15
Mexico’s sound macroeconomic framework ❶Price stability and flexible
exchange rates ❷Fiscal discipline ❸Well-capitalized banking
system ❹International reserves
❺Sustainable external accounts 16
Content 1
Introduction
2
Trade Openness
3
Sound Macroeconomic Framework
4
Structural Reforms
5
Challenges to Growth 17
Structural reforms ď Ž While macroeconomic stability is a necessary condition for growth, it is not sufficient.
o In particular, a well-functioning microeconomic structure is also necessary.
18
Structural reforms ď Ž Mexico
is currently implementing an ambitious agenda of structural reforms that should increase its productivity and competitiveness. o The reforms are expected to have broad effects in the way in which the Mexican economy operates as they cover many sectors that provide inputs of generalized use and because they regulate sectors that behave like natural monopolies due to their network structure. o The structural reforms seek to improve human capital, enhance infrastructure, boost competition in domestic input and products markets, and strengthen institutions.
19
Structural reforms ❶ Telecommunications
Has increased market competition in the telecom sector.
❷ Competition ❸ Labor
❹ Financial ❺ Energy
❻ Education
20
Structural reforms ❶ Telecommunications ❷ Competition
The strengthening COFECE’s attributions will boost market competition.
❸ Labor
❹ Financial ❺ Energy
❻ Education
21
Structural reforms ❶ Telecommunications ❷ Competition ❸ Labor
❹ Financial
Has enhanced the flexibility of the labor market.
❺ Energy
❻ Education
22
Structural reforms ❶ Telecommunications ❷ Competition ❸ Labor
❹ Financial
Designed to promote financial inclusion and to strengthen the financial system.
❺ Energy
❻ Education
23
Structural reforms ❶ Telecommunications ❷ Competition ❸ Labor
o
The oil and gas reform opens the whole production chain to the private sector.
o
The electricity reform allows for private participation in all phases of the industry.
❹ Financial ❺ Energy
❻ Education
24
Structural reforms ❶ Telecommunications ❷ Competition ❸ Labor
❹ Financial ❺ Energy
Seeks to improve education quality in
❻ Education
the long-term through a comprehensive
evaluation process of teachers and students. 25
Structural reforms ❶ Telecommunications ❷
Competition
❸
Labor
❹
Financial
❺
Energy
❻
Education 26
Content 1
Introduction
2
Trade Openness
3
Sound Macroeconomic Framework
4
Structural Reforms
5
Challenges to Growth 27
2017-2018
2010-2011
2017-2018
2010-2011
2017-2018
2010-2011
Market size
2017-2018
2010-2011
Financial market 2010-2011 development 2017-2018
Macroeconomic 2010-2011 environment 2017-2018
Business 2010-2011 sophistication 2017-2018
Innovation
Infrastructure
Goods market 2010-2011 efficiency 2017-2018
Technological 2010-2011 readiness 2017-2018
Health and 2010-2011 primary education 2017-2018
Higher education 2010-2011 and training 2017-2018
Labor market 2010-2011 efficiency 2017-2018
Institutions
Global 2010-2011 Competitiveness Index 2017-2018
The recent structural reforms have improved Mexico’s competitiveness. Global competitiveness index 2010-2011 and 2017-18 Mexico's position in each of the 12 pillars of competitiveness and in the global index
Countries better ranked than Mexico Countries worse ranked than Mexico Mexico's Position
51
65
Positions range from 1 to 129 and include only countries that were evaluated in both reports. Source: Global Competitiveness Index, FEM 2010-2017, Global Competitiveness Report.
28
2017-2018
2010-2011
Market size
2017-2018
2010-2011
94
Financial market 2010-2011 development 2017-2018
55
Macroeconomic 2010-2011 environment 2017-2018
Business 2010-2011 sophistication 2017-2018
51
2017-2018
2010-2011
70
Innovation
2017-2018
2010-2011
65
Infrastructure
98
Goods market 2010-2011 efficiency 2017-2018
Technological 2010-2011 readiness 2017-2018
Health and 2010-2011 primary education 2017-2018
Higher education 2010-2011 and training 2017-2018
Labor market 2010-2011 efficiency 2017-2018
Institutions
Global 2010-2011 Competitiveness Index 2017-2018
Some improvements are already being reflected in competitiveness indicators. Global competitiveness index 2010-2011 and 2017-18 Mexico's position in each of the 12 pillars of competitiveness and in the global index
Countries better ranked than Mexico Countries worse ranked than Mexico Mexico's Position 35
49
66
77 94
114
Positions range from 1 to 129 and include only countries that were evaluated in both reports. Source: Global Competitiveness Index, FEM 2010-2017, Global Competitiveness Report.
29
2017-2018
2010-2011
65 75
2017-2018
2010-2011
Market size
2017-2018
2010-2011
51
Financial market 2010-2011 development 2017-2018
Countries better ranked than Mexico Countries worse ranked than Mexico Mexico's Position
Macroeconomic 2010-2011 environment 2017-2018
Business 2010-2011 sophistication 2017-2018
Innovation
2017-2018
2010-2011
70 71
Infrastructure
Goods market 2010-2011 efficiency 2017-2018
Technological 2010-2011 readiness 2017-2018
78 80
Health and 2010-2011 primary education 2017-2018
68
Higher education 2010-2011 and training 2017-2018
Labor market 2010-2011 efficiency 2017-2018
Institutions
Global 2010-2011 Competitiveness Index 2017-2018
However, competitiveness measures of education and infrastructure have been stagnant. Global competitiveness index 2010-2011 and 2017-18 Mexico's position in each of the 12 pillars of competitiveness and in the global index 12 11
27 43
61
74
Positions range from 1 to 129 and include only countries that were evaluated in both reports. Source: Global Competitiveness Index, FEM 2010-2017, Global Competitiveness Report.
30
2017-2018
2010-2011
2017-2018
2010-2011
2017-2018
2010-2011
Market size
2017-2018
2010-2011
Financial market 2010-2011 development 2017-2018
Macroeconomic 2010-2011 environment 2017-2018
Business 2010-2011 sophistication 2017-2018
Innovation
Infrastructure
Goods market 2010-2011 efficiency 2017-2018
Technological 2010-2011 readiness 2017-2018
Health and 2010-2011 primary education 2017-2018
Higher education 2010-2011 and training 2017-2018
Labor market 2010-2011 efficiency 2017-2018
Institutions
Global 2010-2011 Competitiveness Index 2017-2018
Now Mexico’s most urgent priority is to strengthen its institutional framework. Global competitiveness index 2010-2011 and 2017-18 Mexico's position in each of the 12 pillars of competitiveness and in the global index
Countries better ranked than Mexico Countries worse ranked than Mexico Mexico's Position
51
65 101 116
Positions range from 1 to 129 and include only countries that were evaluated in both reports. Source: Global Competitiveness Index, FEM 2010-2017, Global Competitiveness Report.
31