It gives me great pleasure to present this second edition of Getting it Right for Mexico. As never before, Mexico has a historic opportunity to build consensus in a number of areas that will make it possible to embark on far-reaching structural reforms, representing a qualitative leap in the country’s development. The 13 Presidential decisions for Mexico, contained in President Enrique Peña Nieto’s Message to the Nation on taking office on 1 December in the National Palace, laid the foundations for promoting those changes. These commitments have been supported and developed in greater depth by the 95 commitments of the Pact for Mexico (Pacto por México), which was signed by the leaders of the main political parties. The challenge now will be to turn those historical agreements into decisions and practical policies. This study aims to support Mexico tackling that challenge, contributing analysis, comparisons, and recommendations in the reform areas.

It is now five years since the onset of the worst economic and financial crisis in decades, and the main scenario continues to be one of high risk – including the so-called fiscal cliff in the United States and unresolved financial, fiscal and institutional agendas in Europe. The majority of OECD countries are still facing the consequences of the crisis: high public debt, sluggish or even negative growth, record high unemployment, and fragile banking systems. The deterioration of confidence only adds to the downside in this scenario.

Slow income growth in Mexico has prevented its convergence to the average income levels of OECD countries. To strengthen growth potential, structural reforms are needed that will boost investment and reverse the trend of negative productivity growth that has undermined gains in well-being. Key reforms called for include boosting human capital, making labour markets more flexible and more formal, removing restrictive barriers to entry to different economic sectors, and improving the quality of the judiciary. Strengthening competition is an urgent objective that could likely yield the most front-loaded benefits. Also needed are institutions capable of ensuring that the reforms agreed are effectively implemented. This will require improvements in the legal framework and political commitment to reform. Many of the commitments contained in the Pact for Mexico pursue these purposes, but their full and coherent implementation is a requisite for greater growth.

Major policy efforts have helped Mexico reduce extreme poverty and improve access of the poorest to basic services, including health and education. Poverty and inequality in Mexico remain high in international comparisons, not only with other OECD countries but also with emerging economies. They continue to be a challenge of utmost priority for Mexican policy makers. Meeting that challenge requires a comprehensive strategy that includes labour market reforms to facilitate the expansion of the formal sector, measures to improve productivity in the agricultural sector, and policies to improve the quality of education and health services. In addition, social spending needs to be expanded, but also be made more efficient and better targeted to the most vulnerable groups.

Mexico’s public finances are sound, but do not permit a smooth financing of social or growth-enhancing policies. For fiscal policy to support better, more sustainable and inclusive growth, serious reforms are needed – starting with reforms to strengthen the delivery of quality public services. Though innovative programmes have been developed to address poverty, social expenditure remains low and less well directed than needed to substantially reduce inequality. Spending efficiency could also be improved. Large subsidies on energy consumption and many substantial tax expenditures still need to be withdrawn. Although tax policies have been reformed, the tax base needs to be broadened and distortions removed. Increasing states’ revenues and fiscal responsibilities, combined with sufficient fiscal equalisation, is another key challenge that would make the fiscal system sounder and help reduce regional disparities.

The economic transformation of Mexico during the 1980s and 1990s led to a deep transformation of the role of the state in the economy. While Mexico has now become a highly globalised economy, its public management and governance system has had to adapt and modernise in a context of limited fiscal revenues. Significant progress has undoubtedly been made, but improvements have been uneven and advances at the federal level have not always translated into better capacity to design and implement policy across all levels of government. The Pact for Mexico announces a wide range of commitments that will further test the capacity of the public sector to deliver.

The Mexican labour market has recently performed relatively better than those of most other OECD countries. A number of policy initiatives have been taken that should further improve its performance. Nevertheless, there is still much scope for raising Mexico’s overall employment rate, in particular that of women and youth, while promoting greater formal employment and providing better social protection. Major reforms are needed for the labour market to contribute more effectively to higher living standards and inclusive growth. It will be important that the provisions of the new labour reform law governing the hiring and firing of permanent workers and the use of temporary contracts are enforced effectively. Further action could also be taken to strengthen training measures and, as envisaged in the Pact for Mexico, adjust and rationalise Mexico’s social security schemes to encourage formal employment.

Despite a challenging environment, Mexico has scored important achievements in expanding and strengthening its education system over the Past decade. Nevertheless, the system is still faced with major challenges regarding students’ enrolment, performance and transition to the labour market. This calls for further significant reforms, in particular: improving support to schools and teachers so they can accomplish their tasks; developing vocational education and training; and making tertiary education more relevant and accessible to more students. Past measures have not always achieved the expected results because of structural weaknesses. These include a lack of consensus and capacity, and an unclear distribution of responsibilities in a decentralised system. Capacities need to be improved and expanded, not only at the federal level but also in the states and schools themselves. The decisions announced by President Peña Nieto during his inaugural Message to the Nation, the education commitments of the Pact for Mexico, as well as the initiative of constitutional reform and the administrative changes announced regarding the management of the education system and the organization and supervision of teachers are encouraging signs that change may be coming to this important sector. Key focus on effective implementation should follow through.

Mexico has made significant progress in the health sector over the past few years. Through its innovative programme Seguro Popular, Mexico has virtually attained universal coverage for the population, bringing it in line with most other OECD countries. However, despite dramatic improvements in life expectancy and infant mortality, it remains below the OECD average on basic indicators of health status. While health expenditure has grown fast in the past decade, it remains much below other OECD countries. More importantly the level of public spending is particularly low and out-of-pocket payments are very high. The health system is also fragmented, leading to wasteful spending, and access to health care still varies considerably across states. Improving the country’s health services will require addressing the problems of the poorer states, targeting services where they can deliver the highest value for money, and improving the efficiency of health delivery. These changes will help Mexico deliver on the commitment contained in the 2012 Pact for Mexico to equalise quality and coverage across different health coverage schemes. This aspiration should guide further reforms to expand access to care services, with policy guided by the development of targets including the services covered and the actual utilization of services by different socio-economic groups and across regions.

Over the past two and a half decades, Mexico has progressively integrated into the world economy and become a regional economic powerhouse. Yet, the country has the potential to realise even larger dynamic, growthenhancing gains from trade. It would benefit from developing trade flows to new destinations, especially those that can allow a greater integration with fast-growing economies. Likewise, the sophistication of export activities towards higher-valued tasks would foster productivity. In this context, the development of its services sector would offer new opportunities for trade and for the development of a knowledge-intensive economy. This requires developing strong, innovative and flexible supply chains that can feed into global specialisation and distribution systems. Here, improving competitiveness and easing regulatory barriers – notably restrictions on foreign investment and on competition in “backbone services” of the economy – is essential. This would both help promote exports of goods and services, and support the overall competitiveness of the Mexican economy

Telecommunication is an important driver of productivity and growth. Reforms in this area are critical for Mexico’s growth potential to be realised, and to improve competitiveness and livings standards. Inefficient telecommunication markets impose a significant cost on the Mexican economy and on the welfare of the population. Although some progress has been made in recent years through regulatory reform, that progress has been insufficient; a number of measures are still needed to ensure that effective competition develops in telecommunication markets. The OECD Review of Telecommunication Policy and Regulation in Mexico (January 2012) put forward a number of recommendations for reform and, partly as a response to the review, Mexican authorities have indeed embarked on some of these reforms. In its inaugural Message to Nation, President Enrique Peña Nieto announced the decision to promote greater competition in the sector, which was formally included in the Pact for Mexico in a number of commitments to improve efficiency in the telecommunications sector that are fully compatible with the recommendations put forward in the OECD Review.

Small and medium-sized enterprises (SME s) account for a large share of employment in Mexico, but their contribution to value-added remains limited. The framework conditions for SME s and entrepreneurship have improved in recent years, thanks to reforms such as regulatory simplification, expansion of the national loan guarantee programme, and the integration of the micro enterprise sector into the public business support system. Nonetheless, administrative burdens on start-ups remain high, and SMEs still face restricted access to credit and limited new opportunities in innovative sectors. More needs to be done to reduce informality, improve access of SME s to financing, and generate greater numbers of mediumsized companies able to innovate and become international businesses. Despite recent increases in budgets, the reach of many public programmes remains small compared to the target population of SME s, particularly with respect to micro enterprises and innovative SME s and start-ups. It is encouraging that the new administration has put strong priority in supporting the entrepreneur sector as reflected by the announcement in its first week of the forthcoming creation of the Institute of the Entrepreneur and significant reforms to the SME fund. These reforms should be oriented, besides increasing the size of the Fund, to strengthening the capacities of intermediary organisations; providing business support services on behalf of the government; and simplifying its operating rules and procedures.

Mexico has to confront difficult trade-offs in pursuing its economic, social and environmental goals. In recent years, environmental issues have been placed higher on the political agenda. Significant progress, for example, has been made in adopting voluntary targets for reducing emissions of greenhouse gases. However, there is still considerable scope to rebalance the policy mix and to promote the transition to a socially inclusive form of green growth in a more effective, efficient and equitable manner. A key challenge is to reform the subsidies to energy and agriculture, which represent a heavy burden on the government budget and are highly regressive. The new administration has shown commitment to reviewing and reducing these distortive subsidies which could make resources available to support the poor much more effectively. Moreover, Mexico is one of the most important countries globally in terms of biological diversity; successful management of the country’s natural assets is important not only for the sustainability of its economy and the well-being of its people, but also for the planet.

The energy sector in Mexico has great potential to foster economic growth and job creation. The extent to which this will be realised depends on the reforms that the new Mexican government decides to implement in the years to come. In this sense, the commitments included in the Pact for Mexico of pursuing an energy reform, oriented to increase the exploration and production capacity of PEMEX and facilitating competition in refinery, petrochemical sector and transportation of hydrocarbons, as well as supporting development of renewable energy and energy efficiency, are welcome. Emphasis should be placed on increasing investment in the energy sector, in order to enable development of new resources and the deployment of cutting-edge technologies. It is equally important to reform the system of energy subsidies, which the new administration has also shown commitment to revise and reduce. Without such reform efforts, Mexico will find it difficult to reap the huge benefits that energy efficiency can provide.

Over the past decades, Mexico has implemented major reforms in the agriculture sector that have resulted in economic and social gains of considerable significance. These changes, however, have also reduced the relative importance of the sector in the economy. Despite the progress, further efforts are needed to tackle numerous challenges involving sector competitiveness and rural poverty. Competitiveness and efficiency could be enhanced by shifting from a subsidies approach to one that favours targeted investments in innovation and infrastructure, improving the focus and the transparency of PROCAM PO, developing a broad risk management strategy that differentiates catastrophic from normal risks, and integrating policy-making institutions. As social policies focusing on the poor in rural areas are developed, agricultural policies and land tenure systems should be further reformed to facilitate innovation, structural adjustment, and social development. During the first weeks of his government, President Enrique Peña Nieto has signaled the priorities for this sector with a focus on increasing productivity and production to ensure food security and reduce poverty in the sector, in line with the issues discussed in this chapter.

In 2011, Mexico launched an ambitious 2030 Water Agenda to achieve, within the next 20 years, clean water bodies, balanced supply and demand for water, universal coverage, and settlements safe from catastrophic floods. This strategic planning exercise is an example of clear political leadership to design a long-term vision for the sector. But making water reform happen is always challenging, especially in Mexico where past experience has shown the difficulty of translating policy objectives into action. Mexico does have a well-developed policy framework for water resource management, with a number of institutions and policy instruments in place. However, policy implementation is still uneven; river basin councils are not fully operational twenty years after their creation; the regulatory framework for drinking water and sanitation is scattered across multiple actors; and harmful subsidies in other sectors (energy, agriculture) clearly work against water policy objectives. Efforts are particularly needed to increase water productivity and the cost-efficiency of water policies; to address multi-level and river basin governance challenges (in particular bridging inconsistencies between federal and basin priorities); to sequence and prioritise reform needs; and to support greater policy coherence with agriculture and energy.