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Why Do Reforms not help deliver growth in México?

Why Do Reforms not help deliver growth in México?. MEXICO: How to tap progress November 2, 2012 Federal Reserve Bank of Dallas Fausto Hernández Trillo/ CIDE. The most common graph about Mexico’s economic growth. Country. Rates of Economic Growth ( selected countries & periods ).

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Why Do Reforms not help deliver growth in México?

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  1. Why Do Reformsnothelpdelivergrowth in México? MEXICO: Howtotapprogress November 2, 2012 Federal Reserve Bank of Dallas Fausto Hernández Trillo/ CIDE

  2. ThemostcommongraphaboutMexico’seconomicgrowth Country

  3. Rates of EconomicGrowth(selectedcountries & periods) Kehoe (2011): China is in anotherpath

  4. GDP PC Growthrate (SourcePennWorldTables)

  5. GrowthFactors 1983-2009 1950-1970 1971-1982 Source: García-Verdú (2007). Buzio and Fazio (2011): updated 2010 and samedirectionforthelastperiod

  6. Formal Employment DEFICIT 1995-2011 Migration in period: 6 millionsaprox

  7. Labor Deficit: annualdisaggregation

  8. High informality in firms

  9. High informality: Labor Force(private), 2008* *Thousands of workers; **Distribution by size not available. • Census underestimates economic activity • Even in the census, informality is high • Informality is inversely correlated with firm size • Most un-captured information is informal (panels B and C). • 72% of private employment is informal, • This table complements the previous one and suggests informal employment takes place in establishments with no specific location

  10. In sum:

  11. Reasons: Mostmentioned in literature, amongmanyothers • Highvulnerabilitytoexternal shocks • Volatility of “PublicPolicy” and pro-ciclical • Lowrates of savings and investment (public & private) • Deficientinfrastructure • Lowquality of education, whichnegativelyaffects labor productivity and incomedistribution • Deficient legal and intitutionalframeworks (Judicial Systemveryprocedurial); propertyrightsprotection • Weakeconomiccompetition • InfluentialPressuregroups, whichdeterreforms • Weak social capital, whichgenerateslack of trust in government and civil institutions (Putnam, 2001, IADB) • Lack of creditaccess, especiallyfor Small and mediumfirms • Labor marketdistortions, • “Structural” Reforms (Fiscal, Energy and Labor) • Etc. All of themwouldcallfor more Reforms

  12. Why have reforms not delivered?Most recurrent arguments Reforms have been incomplete and furthermore insufficient Reforms have gone too far and they have been unable to remove the power of pressure groups (private, public or unions) Those were not the appropriate ones in the first place Reforms were introduced in the middle of a crisis, then they were not planned adequately. They were poorly implemented They were designed to just meet the “international recommendation” (thus introduced as a movie set) Some other reforms were not even recognized and thus attempted (such as the judicial –with an economic sense) Sequence was incorrect Divided governments became an obstacle. There has never been a consensus about the direction of the reforms

  13. Why have reforms failed? The truth is that society suffers from a “Reform Fatigue Disease” (Esquivel & Hdez, 2010). Around 400 “reforms” have been introduced in Mexico during the period 1988-2010.

  14. Can Mexico formulate more reforms? It depends. If they are clearly stated, addressing tangible benefits & costs, not that optimistic (one sole reform is not a panacea), and attending the real root of the problem (TFP), they may have a chance

  15. Let’s use Fiscal Reform as anexample:Itis a mean notanend (itisjustaninstrumenttoaccomplish “something”)

  16. Whyis a Fiscal Reformnecessary? • The positive aspect: it has beeneffective in keeping macro stability, thoughthis has beenpossiblethankstooilrevenues • “Capital-Sins” OF FISCAL POLICY: • Prociclical • Lowtaxcollection, giventheresposabilities of thegovernment • No redistributive • Furthermore, opaque, notsubjecttoaccountability in a broadsense (performance and transparency)

  17. Whyis a Fiscal Reformnecessary?

  18. Why is a Fiscal Reform necessary? Primary Balance: includingoilrevenues, %GDP

  19. Whyis a Fiscal Reformnecessary? Primary Balance: excludingoilrevenues %GDP

  20. “But” every fiscal reform should have a raison d’etre • Reiterating: It is just an intrument, not a final objective (not an end itself)

  21. Sole VAT increase Source: Antón, Hdez & Leal (2012)

  22. Let’sconsider Social Policy as anexample of anintentiontochangepublicpolicy (as theend)Ifpreviouslywell-designed, then a fiscal reformwouldbeonlytheinstrumenttofinanceit(Levy, 2008)

  23. Status Quo versus Social ReformProposal

  24. What is the allegededSocial Policy Consecuence? Informal Sector (Salaried worker) Formal Sector (Salaried worker) Mmmm… I have to pay contributions to have access to health system, a pension system, day care and so on… Gee… I do not have to pay any contribution and still will have access to health system, pension, day care, etc… Look! She is walking out, She just resigned to her formal, salaried job!

  25. The cost of a prevailing dual social policy Here there are two conflicting objectives: Social Equity (through social services coverage) Financial Equity This reduces financial gap between them and thus reduces the incentives to participate in the contributive-formal system (Levy, 2008)

  26. Empirical Results • Recent literature: • Juárez, Scott, Parker, Pagés, Bosch, Campos, Duval, Heckman, Morales, etc. • Mixed results. However as time goes by, results have a tendency to support the hypothesis, though no that high • Antón, Hdez, Levy (2011); Harding y Pagés (2011); Morales (2011) Unger and Unger (2012) provide a positive impact. • Pagés (2012) surveys all literature and conclusion is that there is a marginal (but statistically significant) effect (1 per cent, i.e. 400,000 per year! That is, marginal in % terms but in absolute terms is one third of the jobs Mexico needs to create yearly). • We need, however, further evidence

  27. Proposal*: • IMSS-Type Universal Health Care • Universal minimum (2mmw) Pension NO-CONTRIBUTIVE *Essentiallysame as Narro (2009), Cordera (2006) & Jusidman (2009) thejustificationisormightbedifferentbutthereissomeconsensusabouththis

  28. How to finance it?:VAT and…? • Uniform VAT • This time, as thereis tangible benefit, theproposalmightbeapproved @ Congress • Tangible Benefits (amongmanyothers) • Anton et al (2011) show thatwage in formal and informal sector (thoughmuchlargerforthefirstone) rises • As thehealthcarewillbe IMSS-type, benefitsincreaseforallpopulation (as oppossedto SP) • Gasolineprices (free mktprice) • Specialtretamentscorporate and personal tax

  29. TFP effects: USS with VAT increase Source: Antón, Hdez & Leal (2012)

  30. Total Balance SSU

  31. PossibleBenefits • Wageincreasefor formal and informal workers • Financialresourceschanneledto Afores gofrom72.4 a 192.8 mmp (or 166%), equivalentto 1% of GDP. • Productivityincrease (workingonthis…) • Preliminaryestimates: extreme povertyisreducedbyhalf and moderateby 30 % (from 45 to 33%) and • Reduce incomeinequatlity (Scott, 2012)

  32. Thankyouverymuch !!!

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