Interview: Ángel Gurría
What are the OECD predictions for Mexico’s economic growth in the near term?
ÁNGEL GURRÍA: Forecasts have been downgraded due to weaker-than-expected growth at the end of 2018 and in the first half of 2019. The economy experienced negative growth in the first quarter of 2019 and grew only slightly in the second quarter due to both external and internal factors. Some of these factors are transitory, such as the disruptions in fuel supply or the labour strikes at the beginning of 2019. Looking ahead, we expect economic activity to pick up, with GDP growth of around 1% in 2019 and 1.8% in 2020. Consumption is set to strengthen on the back of robust remittances, lower inflation and higher social transfers, but policy uncertainty and trade tensions will continue to restrain private investment and exports. Indeed, to boost Mexico’s growth prospects, it is crucial to reduce policy uncertainty, which is dampening investment sentiment. Internally, enhancing the rule of law, reducing violence and boosting competition are key to increasing business confidence and investment.
Prospects would improve if the trade agreement with the US and Canada was ratified by those countries. Trade tensions between the US and China, along with weak growth in the global economy – including in the US – is denting exports and growth. Uncertainties related to migration and trade tariffs could also weigh on investment and growth. In addition, Mexico is being affected by market turbulence in other emerging economies, leading to capital outflows, asset repricing and increases in sovereign financing costs that could deteriorate its fiscal situation. Nonetheless, Mexico’s macroeconomic fundamentals remain solid, which should help the authorities navigate this turbulence.
With the lowest tax revenue as a share of GDP in the OECD, how can Mexico improve collection?
GURRÍA: First, tax bases are very narrow in Mexico, mainly because there are many exemptions. These exemptions limit fiscal resources and, importantly, are very regressive, so they tend to benefit the most affluent individuals. Gradually eliminating exemptions in corporate income tax, value-added tax and personal income tax would help not only collect more revenue, but do so in a more fair way. There is also scope to improve the property tax system, by building a nationwide property register, for example.
Second, tax avoidance and evasion continue to be very high. Further strengthening the tax administration with adequate staffing and funding would pay off, as it would help raise more revenue. However, this effort has to be accompanied by a parallel effort to improve public spending by making it more transparent and accountable, raise the quality of public services, and strengthen the rule of law and the fight against corruption.
To what extent can the country’s labour market competitiveness be improved?
GURRÍA: When looking at talent attractiveness rankings, Mexico ranks particularly low on indicators related to quality of life and inclusiveness. Concerning quality of life, violence and corruption weighs heavily on Mexico’s ability to attract talent. Ongoing efforts to improve the rule of law would enhance Mexicans’ quality of life and thus increase the country’s ability to attract more talent. Labour regulations can also be improved to reduce the regulatory burden on firms. Progress has been achieved in reducing regulatory burden at the federal level, but regulations remain burdensome at the state and municipal levels.
Another contributing factor is the country’s low levels of investment in research and development (R&D), which are among the lowest in the OECD. Improving investment in R&D, boosting the quality of higher educational institutions, enhancing the skills of the workforce, providing workers lifelong learning opportunities, and public support for science and technology will be crucial to attracting international talent to Mexico.
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