Trade and Structural Reforms in Mexico

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