This Survey is published on the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examination of the economic situation of member countries.The economic situation and policies of Mexico were reviewed by the Committee on 19 February 2013. The draft report was then revised in the light of the discussions and given final approval as the agreed report of the whole Committee on 8 March 2013.The Secretariat’s draft report was prepared for the Committee by Sean Dougherty, Aida Caldera Sánchez and Carla Valdivia de Richter, under the supervision of Patrick Lenain. Statistical assistance was provided by Roselyne Jamin.The previous Survey of Mexico was issued in May 2011.

The new government has set an ambitious course of economic and social reforms (a key element of which is its recent Pacto por México), for which it has obtained broad political support. The policies of the past several years have positioned the country well in terms of macroeconomic and financial performance, but economic growth remains insufficient and more needs to be done to improve well-being. This Economic Survey puts forward reforms aimed to achieve higher income levels and better social conditions in Mexico.

The important structural reforms that have been carried out over the past few years have improved Mexico’s economic performance and increased its resilience in the face of external shocks. However, there remains significant scope for reform in a number of key institutional areas, both to fully implement already-legislated measures and to undertake new steps, with the aim of accelerating the pace of convergence towards higher living standards and improving social conditions among the large numbers of households living in poverty. The Pacto por México (Pact) multi-partisan agreement of 95 major reform commitments that was signed by the new Administration and representatives of the major political parties is therefore welcome. The commitments include the essential policy priorities that are needed to secure stronger growth and material well-being, as well as to promote sustainability. Moreover, the Pact is supported by ruling, legislative and technical co-ordination councils, incorporating monitoring mechanisms and timetables that should help to ensure that the commitments are actually followed through upon. Many of the Pact’s proposed legal and policy measures were identified as policy priorities in previous Economic Surveys of Mexico, and cover nearly all policy domains addressed in outstanding OECD recommendations(see , Progress in structural reform).

Mexico’s economic growth has been insufficient to generate convergence towards the income levels of the wealthiest OECD economies. The main reason is poor productivity growth, which highlights the importance of continuing reforms to improve education, competition and the business environment. These reforms, however, are heavily influenced by widespread informal employment and weak legal institutions that diminish the effectiveness of policies and hold back gains in productivity. In order to lift long-term economic growth, structural policy reforms will be required across multiple institutional domains, as many of the problems are interlinked. A broad effort to follow through with secondary stages of ongoing reforms is required to address informality and improve the legal system, and thereby release the shackles that restrain economic growth.

As Mexico seeks to boost economic growth, pressures on its natural resources and environmental outcomes may intensify, jeopardizing the sustainability of that growth and the well-being of the population. Costs of environmental degradation were estimated at approximately 5% of GDP in 2011, primarily from the health impact of air pollution, while overexploitation of natural resources – such as water – threatens their sustainability. Subsidies and prices do not reflect environmental externalities or cost of providing natural resources, including scarcity costs. They result in poor environmental outcomes, represent a heavy burden on the government budget and, contrary to their original objective, have not efficiently tackled poverty and inequality. Such subsidies should be gradually removed. In the energy sector, reforms are needed in order to allow the state-owned oil company PEMEX to become more efficient operationally and environmentally, and to better provide fiscal revenues.

Mexico has achieved a high degree of decentralisation in public services, but the Mexican fiscal federal system has important shortcomings. States and municipalities have become heavily dependent on federal transfers to finance a growing share of public spending. This leaves the burden of raising tax revenues falling almost exclusively on the federal government and reduces incentives for efficient spending and active tax collection at the subnational level. It can also lead to moral hazard and fiscal slippages. The federal government should harden the budget constraint on sub-national governments by limiting further increases in transfers and avoiding extraordinary transfers. Promoting the implementation of stronger fiscal rules, such as rules on deficits and debt ceilings, could also help to harden budget constraints and to ensure greater fiscal discipline. States should be given more taxing powers, if they are to collect a larger share of total revenues. Greater accountability and clarification of spending responsibilities could also contribute to improve the efficiency of spending among states and municipalities.