In March, the Organization for Economic Co-operation and Development (OECD) released its interim global economic outlook through 2020. Forecasts for the United States called for the economy to grow 2.6% this year and 2.2% next year. Forecasts for Mexico called for growth of 2.0% this year and 2.3% in 2020.
In nominal dollars, Mexico’s gross domestic product, the 15th in the world, is expected to be about one-20th ($1.243 trillion) the size of US GDP ($21.482 trillion) in 2019. Although Mexico’s economy grows more quickly, the pace of growth should almost double to propel the country into the ranks of the world’s top 10 economies in five years.
It is unlikely to happen. In his Economic Study of Mexico released on Thursday, the OECD lowered its estimate of Mexico’s economic growth for 2019 to 1.6% and its estimate for 2020 to 2.0%, largely due to a slowing global economy and trade tensions that disrupt – and could continue to disrupt – exports, private sector investment and global value chains.
According to the OECD, improving Mexico’s institutional quality would bring the most benefits to growth of all the structural reforms proposed by the agency, having an impact on all the other reforms recommended in the report. Mexico’s anti-corruption initiatives are a good start but need to be expanded by creating an independent anti-corruption agency at the federal level. New competition officials and economic sector regulators would also help.
Among the country’s strengths are the macroeconomic framework that has resulted in strong export growth while increasing wages, remittances (cash sent to Mexican citizens from abroad), and consumer credit growth. The OECD suggests that investment in infrastructure projects, increased domestic consumption and exports will continue to support the Mexican economy, but at a slower rate of growth.
The bad news is that the country’s oil production has declined, limiting economic growth and reducing government revenues. The oil industry needs significant investment, mainly from foreign sources, but the outlook for new investment is “moderate, reflecting political uncertainty both domestically and abroad, but also fiscal consolidation, which helped stem the rise in public debt in a generally weak environment.” redistributive role of fiscal policy.
Mexico’s tax revenue as a percentage of GDP is about half the OECD average of around 34%. Low tax revenues limit what the country can spend on social services and improving infrastructure. The OECD suggests raising the tax-to-GDP ratio “by broadening the tax base and continuing to fight tax evasion and evasion, including by strengthening federal and state tax administrations.”
What the OECD calls “informality” refers to a labor market that does not offer workers some or all of the usual legal protections that come with being a “formal” employee. Mexico’s high level of informality reduces productivity growth at the same time as it prevents the government from providing public benefits and sufficient tax revenue to pay for these redistributive benefits.
OECD Secretary-General Angel Gurria warned that Mexico is currently facing international headwinds as well as internal structural challenges: “The only response is to continue designing and implementing new reforms to build trust, improve the quality of public administration, increase opportunities, reduce inequalities and a stronger and more inclusive society for all Mexicans.
A cynic might say that Gurria’s observation could apply to virtually any country. At the word “Mexicans” in his comment, replace “Brazilians” or “Chinese” or “Americans”. Easy to say, hard to do.