Thanks to sound macroeconomic policies, the Mexican economy has been stable and resilient over the last decades. Yet, growth has been elusive, despite Mexico’s large growth potential. Over the last two decades, Mexico’s GDP grew by around 9% while Chile grew by 68% or Dynamic Asian economies grew by 110%[1]. The ongoing redrawing of global value chains makes Mexico an attractive nearshoring destination and opens new growth opportunities. Grasping these opportunities requires several reforms, such as advancing digitalization, reducing regulatory burden or shifting to renewable energies, as detailed in the recently published 2024 Economic Survey of Mexico (OECD, 2024). But there is one reform that will have a particularly large growth pay-off: setting a comprehensive early childhood and education network. This reform would simultaneously and cost-effectively renew two growth engines: female labour participation and skills.
Early childhood education and care is key to facilitate that Mexican women can pursue employment opportunities, as domestic and care responsibilities fall disproportionally on them, hampering their prospects to complete education or be in the labour force. At a moment when Mexican firms report difficulties to retain and find workers with the appropriate skills, taping on Mexico’s female talent would significantly boost Mexico’s growth. Female labour market participation has recently increased to 50%, its historical high, but is still the second lowest participation rate in the OECD (Figure).
Figure: Female labour force participation is low % of female population aged 15-64, 2022
Note: LAC is a simple average of Chile, Colombia, Costa Rica, Argentina, and Brazil. Data for Argentina refer to the year 2021. Source: OECD Labour Force Statistics.
Enhancing early childhood education and care coverage would also improve education outcomes at a moment when skills availability is becoming more central in firms’ decisions about where to invest. Mexico has a relatively young population, with significant potential to adapt to global trends that are reshaping skill needs, such as digitalization or decarbonization. But it also has two substantial challenges. First, still too many students leave the education system without completing secondary education. Second, there is room to increase education quality. Boosting early childhood education would help with both challenges by mitigating the impact of socioeconomic disparities on educational outcomes. Positive results will materialise in the medium-term, facilitating that more Mexicans gain the necessary skills to access formal jobs, widening the talent pool from which domestic and foreign firms can draw.
An early education network that would cover all children under 6 years old throughout Mexico would only cost 1.2% of GDP annually, a bit more than double what Mexico spends today (0.5% of GDP). Mexico will need to find extra revenues to finance this reform, but the 2024 OECD Economic Survey (OECD, 2024) suggests that there are viable options, such as enhancing the collection of taxes on immovable property and of those related to the purchase, ownership and use of vehicles.
[1] Growth in real PPP-adjusted GDP per capita from 2000 to 2022. Source: World Bank World Development Indicators. Dynamic Asia includes India, Indonesia, Malaysia, Philippines, Thailand, and Viet Nam.
Reactivar la inversión: un reto pendiente para México
Por Alberto González Pandiella y Alessandro Maravalle, Departamento de Economía de la OCDE
México se está recuperando gradualmente de la recesión inducida por la pandemia. Se espera que la economía crezca un 2,3 % este año y un 2,6 % en 2023. Las exportaciones seguirán beneficiándose del fuerte crecimiento de Estados Unidos. Con una proporción cada vez mayor de la población vacunada y la mejora gradual en el mercado laboral, el consumo también será un motor clave del crecimiento. Sin embargo, un desafío clave pendiente para México es reactivar la inversión. La inversión ha estado apagada desde 2015 y en caída desde 2019 (Gráfico 1).
Gráfico 1. La inversión ha sido débil
Formación bruta de capital fijo, índice, 2015-1T = 100
Fuente: OCDE, base de datos de Perspectivas Económicas.
El último Estudio Económico de México argumenta que hay espacio para crear mejores condiciones tanto para la inversión pública como para la privada. México ha sido fiscalmente prudente a lo largo de los años, cumpliendo sus objetivos fiscales y asegurando la sostenibilidad fiscal a pesar de tener la relación impuestos/PIB más baja de la OCDE, con solo el 16 % del PIB. Pero esto se ha logrado en gran medida recortando el gasto, en particular la inversión pública. La pandemia ha exacerbado las necesidades de inversión pública, ya que los sistemas de salud y educación están bajo presión. Las brechas en la infraestructura también siguen siendo significativas. Por ejemplo, el aumento de la inversión pública necesaria para cerrar la brecha de infraestructura en México se estimó en 1.3 puntos porcentuales del PIB al año (Woetzel et al., 2017). Un aumento gradual de los ingresos tributarios ayudaría a responder a las necesidades de inversión pública y fortalecer la recuperación, manteniendo el compromiso con la sostenibilidad fiscal. Efectuar análisis costo-beneficio rigurosos y transparentes aseguraría una buena selección de proyectos y ayudaría a responder a las necesidades de inversión pública de manera costo-efectiva.
La inversión privada se ha visto obstaculizada por la gran incertidumbre sobre la configuración de las políticas internas. La incertidumbre aumentó especialmente tras las propuestas de reforma del mercado eléctrico. El potencial para que la inversión se reactive vigorosamente es alto, impulsado por el acuerdo comercial actualizado y la fuerte recuperación en los Estados Unidos. Las tendencias de nearshoring, mediante las cuales es probable que las empresas busquen reducir los riesgos de interrupciones en la cadena de suministro ubicándose más cerca de sus mercados finales, también brindan a México oportunidades históricas. Convertir estas oportunidades en realidad requerirá brindar a los inversores, tanto nacionales como extranjeros, certeza sobre los contratos existentes y estabilidad regulatoria. Mejorar las regulaciones empresariales a nivel estatal y municipal, que en algunos casos siguen siendo costosas y complejas, también ayudaría al facilitar la creación y el crecimiento de empresas.
Woetzel, N. et al. (2017), “Bridging infrastructure gaps: Has the world made progress?”, McKinsey Global Institute.
Reviving investment: A pending challenge for Mexico
By Alberto González Pandiella and Alessandro Maravalle, OECD Economics Department
Mexico is gradually recovering from the pandemic-induced recession. The economy is expected to grow by 2.3% this year and by 2.6% in 2023. Exports will continue to benefit from strong growth in the United States. With an increasing share of the population vaccinated and the gradual improvement in the labour market, consumption will also be a key growth driver. However, a key pending challenge for Mexico is to revive investment. Investment has been muted since 2015 and falling since 2019 (Figure 1).
Figure 1. Investment has been weak
Gross fixed capital formation, index, 2015Q1 = 100
Source: OECD Economic Outlook database
The new Economic Survey of Mexicoargues that there is room to create better conditions for both public and private investment. Mexico has been fiscally prudent over the years, broadly meeting its fiscal targets and ensuring fiscal sustainability despite having the lowest tax-to-GDP ratio in the OECD, at only 16% of GDP. But this has been largely achieved by cutting spending, particularly public investment. The pandemic has exacerbated public investment needs, as the health and education systems are strained. Gaps in infrastructure remain also significant. For example, the increase in public investment needed to close the infrastructure gap in Mexico was estimated to be 1.3 percentage points of GDP a year ((Woetzel et al., 2017). A gradual increase in tax revenues would help to respond to public investment needs and strengthen the recovery, while maintaining the commitment with fiscal sustainability. Conducting rigorous and transparent cost-benefit analysis would ensure sound project selection and help to respond to public investment needs in a cost-effective manner.
Private investment has been hindered by high uncertainty about domestic policy settings. Uncertainty particularly increased following proposals to reform the electricity market. The potential for investment to restart vigorously is high, spurred by the updated trade agreement and the strong recovery in the United States. Nearshoring trends, by which companies are likely to seek reducing supply chain disruptions risks by locating closer to their final markets, also provide Mexico with historic opportunities. Turning these opportunities into realities would require providing investors, both domestic and foreign, with certainty about existing contracts and with regulatory stability. Improving business regulations at state and municipal, which in some instances remain costly and complex, would also help by facilitating firms creation and growth.
Woetzel, N. et al. (2017), “Bridging infrastructure gaps: Has the world made progress?”, McKinsey Global Institute.
Financial inclusion: challenges in OECD countries
By Fozan Fareed, Patrick Lenain, Enes Sunel and Douglas Sutherland, OECD Economics Department
Access to financial services is taken for granted by most people. Amenities such as bank accounts, credit cards, cash dispensers, consumer credit and mortgage loans – all essential to our daily lives – are widely available in OECD countries. When individuals face financial hardship, having access to savings set aside in a bank, or obtaining a consumer credit, is particularly useful. Also, digital payments have proved essential during the COVID-19 pandemic to observe safe distancing rules.
However, not everybody enjoys this kind of financial access. Worldwide, about 1.7 billion people did not have access to basic formal financial services in 2017. In OECD countries, many vulnerable people have insufficient knowledge to go beyond rudimentary transactions or are unable to accumulate savings. Not having access to money management can be a serious problem. People facing emergencies, like a large healthcare bill, may not be able to come up with the funds and remain untreated for their illness. Being unable to make online payments and contactless transactions will be a growing problem in the post-pandemic world. Governments often use electronic payments to make rapid social transfers during recessions (Duenwald et al., 2020), such as the US$1,200 payment sent to all U.S. citizens during the first wave of COVID-19, but may be unable to reach some people. The literature finds that financial inclusion matters for access to employment and income generation (Bruhn and Love, 2014), entrepreneurship creation (Fareed et al., 2017) and women empowerment (Karlan et al. 2017; Pitt et al. 2006). This blogpost highlights several insights from our recent research on three countries: Costa Rica [1] (Sunel, 2020), Mexico (Fareed et al, 2017) and the United States (Azzopardi et al. 2019).
Costa Rica: almost one third of adults without financial access
Despite progress made during the past decade, more than 30% of Costa Ricans aged over 15 do not have an account with a financial institution. Insurance penetration is also very limited and stagnant. This low level of financial access is partly explained by the high cost of banking services, which act like a tax on financial transactions. The lack of competition between banks has impaired the reduction of banking costs and intermediation margins seen in other countries, and Fintech have not been allowed to operate fully to provide low-cost solutions to (especially underbanked) consumers.
To get a sense of regional disparities, we built an index summarising the prevalence, at the level of counties, of financial access points, credit operations, bank accounts and financial transactions (Figure 1). Access to financial services is typically low in counties where the population is not dense, but some highly-populated counties, such as Alajuelita and Desamparados in the province of San José and San Rafael and San Pablo in the province of Heredia, also display very low financial inclusion scores. For micro-entrepreneurs, this makes business operations very challenging, especially for women entrepreneurs. Priority groups such as Indigenous people also suffer more than others from financial exclusion. In response, the authorities have launched a National Financial Education Strategy to boost financial literacy of vulnerable populations and linked conditional cash transfer programme beneficiary accounts to debit card accounts to increase financial account ownership.
Figure 1: Financial inclusion disparities in Costa Rica
Source: Banco Central de Costa Rica; Instituto Nacional de Estadística y Censos; and Superintendencia General de Entidades Financieras.
Mexico: over half of Mexicans without a formal bank account
Financial inclusion is even lower in Mexico: more than half of Mexicans aged 15 and over do not have a formal bank account. The penetration of credit, insurance and mobile banking also remains low as compared to regional peers. About 7 million people (6% of the country’s population) live more than 4 miles from the nearest financial access point such as a bank or an ATM according to the financial regulator CNBV. Outside large urban areas, access to financial services is limited and there are prominent regional disparities as highlighted by our financial inclusion index (Figure 2). This is a particular problem for women, who lack access to the banking system and therefore face challenges to launch an entrepreneurship project.
Lack of trust in banks, financial literacy and product design are significant barriers for the many unbanked in Mexico. High commissions and interest rates and poor financial infrastructure are highlighted as some of the main reasons that impede financial inclusion. Addressing these challenges would enable Mexicans, especially women entrepreneurs, to gain access to formal financial services and therefore benefit from new economic opportunities. The authorities have launched a number of actions to address these challenges, for instance the National Financial Inclusion Strategy (NFIS) provides a roadmap to accelerate access to financial services for the currently unbanked segment of the population.
Figure 2: Financial inclusion disparities in Mexico
Source: Author’s Calculations based on CNBV’s data at the municipality level. Note: Financial inclusion index ranges from 0 (low) to 1 (high). See Fareed et al. (2017) for details.
United States: 28% of Americans are financially vulnerable
Although financial inclusion is high in the United States, financial vulnerability remains a severe problem for many people, especially low-income households, racial groups, and remote locations. Instead of using an arbitrary definition of financial vulnerability or a single indicator, such as indebtedness, we apply a hierarchical ascending clustering (HAC) and K-means clustering analysis to the Federal Reserve’s Survey of Consumer Finance. The analysis identifies clusters of households with high financial vulnerability: about 28% of the households in 2016 can be classified as financially vulnerable.
Our econometric estimates show that Black and African Americans and Hispanics are financially more vulnerable than non-Hispanic white Americans, after controlling for other characteristics. A higher education level of the household head also appears to be statistically significant and is negatively linked with financial vulnerability. On average, having a college degree decreases the probability of being financially vulnerable. Financial literacy is also an area of concern: only 57% of adults in the United States can be considered financially literate according to the Global Financial Literacy Survey. Moreover, an increase in the age of the household head decreases the chances of being financially vulnerable. Such large differences among clusters of households reflect on the social disparities that affect the U.S. population.
Conclusion
Financial inclusion disparities exacerbate existing wealth inequalities and make it extremely difficult for the financially vulnerable to catch up, threatening social cohesion. Our research on Costa Rica and Mexico shows that access to financial services remains a challenge for many people, while large groups of U.S. households can be characterized as financially vulnerable. Since our research was conducted, it is possible that the COVID-19 pandemic has worsened these difficulties: many households have lost their jobs and micro-entrepreneurs have been impacted by government shutdown orders, increasing their financial difficulties. Because low-income households are being hit the hardest, it is more important than ever to facilitate access to financial instruments and encourage money management skills. Our findings suggest that the focus needs to be on closing gender and racial gaps, improving financial literacy, using Fintech responsibly to reach out to financially excluded people, and conducting further research to understand why some households are more at risk than others.
[1] Costa Rica was invited to join the OECD as its 38th member in May 2020.
REFERENCES
Azzopardi, D., F. Fareed, P. Lenain and D. Sutherland (2019), “Assessing Household Financial Vulnerability: Empirical evidence from the U.S. using machine learning”. https://dx.doi.org/10.1787/75c63aa1-en
Bruhn, M. and I. Love (2014). “The Real Impact of Improved Access to Finance: Evidence from Mexico”. Journal of Finance, 69 (3): 1347-1376.
Fareed, F., M. Gabriel, P. Lenain and Julien Reynaud (2017), “Financial Inclusion and Women Entrepreneurship : Evidence from Mexico”, OECD Economics Department Working Papers, No. 1411, OECD Publishing, Paris, https://dx.doi.org/10.1787/2fbd0f35-en.
Karlan, D., Savonitto, B., Thuysbaert, B., and Udry, C. (2017). “Impact of savings groups on the lives of the poor”. Proceedings of the National Academy of Sciences, 114(12), 3079-3084.
Mathai, K., Duenwald, C., Guscina, A., Bukhari, H., Chaudry, A., El-Said, M., Fareed, F., Gerling, K., et al. (2020), “Social Spending for Inclusive Growth in the Middle East and Central Asia” IMF Departmental Papers. No. 20/12.
Pitt, M. M., Khandker, S. R., and Cartwright, J. (2006). “Empowering women with micro finance: Evidence from Bangladesh”. Economic Development and Cultural Change, 54(4), 791-831.
Sunel, E. (2020), “Boosting access to credit and ensuring financial inclusion for all in Costa Rica”, OECD Economics Department Working Papers, No. 1623, OECD Publishing, Paris, https://doi.org/10.1787/86037778-en.
Reaching out to informal workers in Latin America: Lessons from COVID-19
By Jens Arnold, Paula Garda, Alberto Gonzalez-Pandiella, OECD Economics Department
Social distancing has led to sharp declines in mobility and activity across Latin America. Widespread informality creates particular challenges for the livelihoods of many workers. As their activities are shut down to contain the spread of COVID-19, informal workers or small entrepreneurs are usually not covered by social protection. Largely out of reach of the public sector, they easily fall through the cracks of emergency income support measures. This has highlighted a major need to rethink and strengthen social protection mechanisms in Latin America. Providing more complete social safety nets that are not tied to formal employment and that can react rapidly to income losses would be one solution. In many countries in the region, such safety nets could be built on the basis of existing conditional cash transfer programmes.
Informal workers and small entrepreneurs account for a significant share of the workforce across Latin America (Figure 1). Most of them have no access to social protection, and almost no savings to carry them through the trough. Informal employees were the first to lose their jobs, while self-employed entrepreneurs such as street sellers and small service providers were left with no source of income as streets became empty. Working from home may be a solution for educated middle-class workers, but it is out of reach for the most vulnerable (Mongey and Weinbergy, 2020).
The crisis has exposed shortcomings in existing social protection mechanisms
Governments in Latin America responded swiftly to the unprecedented challenges posed by COVID-19. Many countries designed temporary support measures, building on existing instruments such as formal-sector unemployment insurance and cash transfers. Formal-sector employees benefitted from more flexible access to unemployment benefits, for example in Brazil and Chile, while temporary short-time work schemes, wage subsidies or lower labour contributions helped to preserve formal labour contracts Brazil, Colombia, Costa Rica and several Mexican states. Cash transfer schemes targeted to low-income households play important roles in Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico and Uruguay, among others. These cash transfer schemes are typically based on large locally-maintained registries of low-income households that can consider both formal and informal incomes. Providing additional resources to these schemes allowed to raise benefit levels and/or expand coverage, including by eliminating previous enrolment waiting lists, as in the cases of Brazil, Chile, Colombia and Peru.
The COVID-19 policy response, however, has also exposed significant gaps in existing social safety networks. Amid policy support for formal workers and for the poor, vulnerable households whose livelihoods depend on informal activities are often left without any social protection mechanism to fall on. Before the pandemic, many of these had successfully escaped poverty and gained incomes above the threshold where they would qualify for cash transfers, but without gaining access to the kind of social protection in place for formal employees. As distancing measures led to unprecedented declines in demand, many of these households were left without any income.
Reaching informal workers is a challenge for public policies and has required innovative ideas. Beyond the grasp of income tax systems, and with no access to social benefits, many informal workers have traditionally been outside the radar of the state. In addition, they often lack access to banking services, so governments had to respond creatively and ensure the creation of basic bank accounts for emergency benefit recipients. More than 50 million Brazilians used a smartphone application to receive an emergency benefit established after the outbreak. Colombia has been similarly successful, paying out benefits to 1.5 million households previously not covered by social benefits, and including free digital banking products. Chile is supporting more than 2 million vulnerable and informal households through different cash transfers, handing out debit cards to those without a bank account. Costa Rica’s new cash transfer also offers the creation of a bank account. Such programmes have replaced significant shares of pre-crisis incomes for low-income households (Busso et al., 2020).
Lessons for the future
Building more effective universal social safety nets that include informal workers and entrepreneurs emerges as one of the main lessons from the COVID-19 crisis and the social unrest during 2019. Given their wide reach in many countries, existing cash-transfer programmes would be the most straightforward basis for effective social safety nets (Figure 2, Panel A). In several countries, eligibility is in principle universal, but in practice, enrolment processes are too slow or cumbersome to help people in the face of sudden income losses. An important step would therefore be to make cash transfer programmes more agile, so that they can disburse quickly when people lose their livelihoods, following the examples of the UK’s Universal Credit or Malaysia’s BSH programme. More universal social safety nets based on means-tested cash transfers could also help to reduce the widespread fragmentation of social programmes, and strengthen their effectiveness.
Financing universal social safety nets will require additional resources, but building on existing programmes may make the cost manageable. Cash transfer schemes are among the most cost-efficient social expenditure programmes, and they cost relatively little (Figure 2, Panel B). Brazil’s successful Bolsa Família programme, for example, currently only costs 0.5% of GDP, compared with 12% spent on formal social security schemes. During the COVID-19 pandemic, additional spending of 0.04% of GDP was enough to eliminate an accumulated queue of 1 million benefit applicants. Building on existing citizen identification systems and digital technologies could further reduce costs.
Social protection for informal workers should go along with efforts to foster formalisation. Reviewing non-wage labour costs can help to reduce informality, as illustrated by Colombia’s 2012 tax reform. Costly and complex business regulations, including those for starting a formal business, also hamper the formalisation of firms and jobs. Expanding the use of one-stop shops for business regulations would be one way forward. Social programmes could increasingly integrate training and lifelong learning for informal workers. This could create a virtuous circle between formal employment, growth and equity.
Informality and weak competition – a deadly cocktail for growth and equity in emerging Latin America
By Piritta Sorsa, Jens Arnold and Paula Garda, OECD Economics Department
Why is growth persistently low and so unevenly distributed in emerging Latin America compared to emerging Asia despite a huge potential? Potential growth is ranging around 2-3% in the region. Some refer to dependence on commodities, poor education, weak business environments or corruption as possible causes. But the question is deeper and more complex. A crucial factor for Latin America is low productivity, often related to a poor use of available resources. Across the region, many workers and significant amounts of capital are stuck in activities that are not efficient. The reasons for this are many, but two important forces stand out: high informality and weak competition.
High and persistent informality in the region leaves workers more vulnerable and deprives them from social protection, thus contributing to inequality. For example, old age poverty in Colombia is high as low-skilled workers spend much of their working lives in informal employment, without pension contributions (OECD, 2019[1]). In Brazil and Argentina, informal workers retire later than others for the same reason, until they eventually reach the age to benefit from a non-contributory pension (OECD, 2019[2]; OECD, 2018[3]). In Mexico, poverty and informality are highly correlated among regions (OECD, 2019[4]). Informality also tends to maintain companies small with often low productivity as growing would face high costs of formalisation. Indeed, informal-sector productivity in the average LAC country is only between 25 and 75 percent of total labour productivity, and productivity decreases as informality rises (Loayza, 2018[5]). Informality also reduces the tax base for corporate and personal income taxes, reducing the capacity of the public sector to boost productivity and reduce inequality, and requires a higher tax burden on larger formal companies.
Weak competition is a second reason behind low productivity and is often reflected in high concentration (Figure 2). Entry barriers can protect existing activities that have little future growth potential at the cost of new dynamic and productive firms. Weak competition creates rents and lowers the share of wages in value-added worsening income distribution. Higher prices for consumers reduce purchasing power, affecting disproportionally low-income households.
Reducing informality for productivity and equity
The causes of informality are multiple. Informality is often a consequence of high costs of hiring formal workers, both wage and non-wage, especially in relation to labour productivity, given low educational outcomes.
Where high informality and weak competition coincide, as is the case in many Latin American countries, the consequences for both growth and equity can be particularly severe. For emerging Latin America to grow stronger and better share the fruits of growth, dealing with informality and competition should be priority.
Labour informality is often caused by rigid labour regulation. High firing costs of workers can discourage formal-sector hiring and promote inequality (Loayza, 2018[5]; OECD, 2018[6]; Heckman and Pages, 2000[7]). In Mexico, a labour reform in 2012 reduced hiring and firing costs, introduced different models of contracting and brought changes to the resolution of labour conflicts. Formal salaried jobs increased in the aftermath (OECD, 2019[4]). Minimum wages can be high compared to productivity or average wages keeping most workers informal. In Colombia, the minimum wage is close to the median wage and two thirds of workers earn less than that (OECD, 2019[1]). High payroll taxes can also have a detrimental effect on informality rates (Bobba, Flabbi and Levy, 2018[8]). Antón and Rastaletti (2018[9]) show how lowering employer social security contributions could lead to a substantial increase of labour formalisation. At a minimum, lower employer contributions could be offered temporarily for hiring low-skilled workers that enter the formal sector for the first time (OECD, 2017[10]). Lowering payroll taxes in Colombia helped reduce informality after the 2012 reform (Kugler et al., 2017[11]; Morales and Medina, 2016[12]; Fernández and Villar, 2016[13]; Bernal et al., 2017[14]). While incentives are crucial, better enforcement also needs to be part of any formalisation strategy.
Cumbersome administrative barriers and high taxes can keep companies informal. Latin America stands out in this respect (Figure 3). The tax burden on formal companies is also high compared to the OECD and positively associated to informality rates (Figure 4). To promote formalisation, regulatory and tax systems should be simple, with gradual increases in the tax burden as firms grow, so as not to discourage growth, and keep marginal tax rates as low as possible (Loayza, 2018[5]). These characteristics are crucial to encourage investment and employment in growing and larger companies.
Many countries in the region have implemented simplified schemes and reduced costs for small taxpayers with the aim of reducing informality. For example, Mexico introduced a special simplified regime for SMEs (Regimén de Incoporación Fiscal, RIF) in 2014, which induced 1.5 million informal firms to join the tax system (OECD, 2018[15]). In Brazil, a special tax regime for microenterprises (Microemprendedor Invididual, MEI) reduced the cost of formalisation and contributions to social security as of 2008. This regime helps explain the rising formalisation of the self-employed, including of women (OECD, 2012[16]). In Argentina, a simplified tax regime called Monotributo helped formalise self-employed workers. In Colombia, the tax reform in 2018 introduced a new simplified tax scheme (Simple) for small firms, and there are signs of positive impact on firm formalisation during 2019. At the same time, these regimes have to be designed carefully. When participation thresholds for special SME tax regimes are set too high, the effectiveness for formalisation declines while fiscal cost and threshold effects rise, as in the case of Brazil’s Simples Nacional (OECD, 2018[3]). At times, simplifying the general tax regime may be preferable over creating exceptions.
Education and skill levels are also linked with informality. Countries with lowest informality rates tend to have significantly higher levels of human capital (Docquier, Müller and Naval, 2017[17]). It is not a coincidence that the decrease in informality over recent decades in Latin America went hand in hand with steady progress towards universal education. Evidence shows that improvements in education have been an important driving force behind falling informality in Colombia and Brazil (International Monetary Fund, 2018[18]; OECD, 2018[3]).
Increasing competition for productivity and equity
In Latin America, the same complex rules that discourage formal job creation often coincide with overly strict regulations that stifle competition. Competition is affected by how easily firms can enter or exit markets, by the extent of license requirements for starting or expanding a business and by competitive pressures from imports. Relatively high trade protection adds to this in a number Latin American countries, shielding domestic producers from international competition (OECD, 2018[3]). All of this tends to raise prices for consumers and keep resources in low-productivity activities where informality is widespread, for both workers and firms.
These circular relationships suggest that it is important for the public sector to take stock of burdens that even well-intended regulations and codes can impose on private activity. Disincentives for firms to go formal will inevitably preclude workers from the benefits of formal jobs, while unnecessary barriers to competition will keep more jobs in activities with limited potential for productivity and wage growth. To foster formal job creation, all parts of a country’s regulatory framework should be simple and clear, promote competition, and facilitate both market entry and exit of firms (Loayza, Oviedo and Serven, 2005[19]).
Getting there
A comprehensive strategy is needed to deal with both informality and competition. It involves simplifying labour regulations, keeping administrative burdens and license requirements for companies as easy as possible, facilitating market entry and reducing trade barriers. Bringing more workers and firms into the formal sector would bring about broader social and labour protection, fairer wages, a more even tax burden and higher potential growth. Many of these policies are politically difficult as they involve dealing with vested interests and require appropriate sequencing. But that is not an excuse for inaction. These reforms should be accompanied with training and other active labour market policies for affected workers, as the informal sector often fulfils the function of absorbing excess labour supply, especially during transitions or economic recessions. Reforms to improve quality and relevance of education to raise worker productivity and policies that can raise investment and boost firm productivity should be also part of the strategy.
References
Antón, A. and A. Rasteletti (2018), Imposición al trabajo en contextos de alta informalidad laboral: Un marco teórico para la simulación de reformas tributarias y de seguridad social, Inter-American Development Bank, Washington, D.C., http://dx.doi.org/10.18235/0001467.
Bernal, R. et al. (2017), “Switching from Payroll Taxes to Corporate Income Taxes: Firms’ Employment and Wages after the Colombian 2012 Tax Reform”, IDB Technical Note, No. 1268, Inter-American Development Bank.
Bobba, M., L. Flabbi and S. Levy (2018), “Labor Market Search, Informality and Schooling Investments”, Interamerican Development Bank, https://publications.iadb.org/en/publication/12928/labor-market-search-informality-and-schooling-investments.
Docquier, F., T. Müller and J. Naval (2017), “Informality and Long-Run Growth”, The Scandinavian Journal of Economics, Vol. 119/4, pp. 1040-1085, http://dx.doi.org/10.1111/sjoe.12185.
Fernández, C. and L. Villar (2016), “The Impact of Lowering the Payroll Tax on Informality in Colombia”, No. 72, Fedesarrollo, http://hdl.handle.net/11445/3300.
Heckman, J. and C. Pages (2000), “The Cost of Job Security Regulation: Evidence from Latin American Labor Markets”, NBER working paper, No. 7773, National Bureau of Economic Research, http://dx.doi.org/10.3386/w7773.
International Monetary Fund (2018), “Colombia: Selected Issues”, Country Report, No. 18/129, http://www.imf.org.
Kugler, A. et al. (2017), “Do Payroll Tax Breaks Stimulate Formality? Evidence from Colombia’s Reform”, NBER Working Paper Series, http://www.nber.org/papers/w23308.
Loayza, N. (2018), “Informality : Why Is It So Widespread and How Can It Be Reduced?”, Research and Policy Briefs, No. 20, World Bank, http://documents.worldbank.org/curated/en/130391545228882358/Informality-Why-Is-It-So-Widespread-and-How-Can-It-Be-Reduced.
Loayza, N., A. Oviedo and L. Serven (2005), “The impact of regulation on growth and informality – cross-country evidence”, Policy, Research working paper World Bank 3623, http://documents.worldbank.org/curated/en/212041468134383114/The-impact-of-regulation-on-growth-and-informality-cross-country-evidence.
Morales, L. and C. Medina (2016), “Assessing the Effect of Payroll Taxes on Formal Employment: The Case of the 2012 Tax Reform in Colombia”, Borradores de Economia, Banco de la Republica, http://www.banrep.gov.co/en/borrador-971.
Fortalecer las instituciones para mejorar la prosperidad de los mexicanos
Por Sonia Araujo y Lisa Meehan, sección para México, Departamiento de Economía de la OCDE
¿Por
qué algunos países son más ricos que otros? Es cada vez más reconocida la importancia
de las instituciones fuertes y eficaces para el éxito económico de las naciones
(ver, por ejemplo, Acemoglu y Robinson, 2012). Las instituciones proporcionan
un marco que da forma a los incentivos económicos, lo que influye en las
decisiones en una multitud de áreas, tales como educarse, iniciar un negocio,
invertir, etc. El éxito de las reformas políticas en todas las áreas depende,
por lo tanto, de la capacidad de las instituciones para crear los incentivos
adecuados. Las instituciones de calidad también crean certidumbre y un campo de
juego nivelado en el que las personas pueden construir, brindando así más
equidad y mayor acceso a las oportunidades. En general, las instituciones de
calidad son de importancia fundamental para los resultados económicos.
Por lo tanto, es preocupante que numerosos indicadores sugieran que la calidad institucional es baja y está disminuyendo en México (Figura 1). Por ejemplo, sintomático de instituciones débiles, la corrupción percibida es la más alta en la OCDE y no ha mejorado con el tiempo. También son preocupantes los niveles ya altos de crimen y violencia y que han todavía aumentado. México tiene la tasa de homicidios más alta en la OCDE, y el número de asesinatos ha aumentado considerablemente en la última década (OCDE, 2019; Figura 2). La impunidad también es alta, con más del 90% de los delitos no denunciados y solo una pequeña fracción de los casos denunciados llegan al sistema judicial (Le Clercq y Rodríguez Sánchez Lara, 2016).
La
corrupción es un serio obstáculo para la prosperidad de todos los mexicanos y
su abordaje ocupa un lugar destacado en la agenda del nuevo gobierno. La
corrupción es una fuga de los recursos fiscales, socava la capacidad de prestar
servicios públicos y también tiene un efecto adverso en la estabilidad
política, el entorno empresarial, la inversión privada y el crecimiento
inclusivo. El Estudio Económico de México 2019 de la OCDE destaca que mejorar
la calidad institucional tendría los mayores beneficios en términos de
crecimiento económico entre todas las reformas estructurales y también
facilitaría la implementación efectiva de todas las demás reformas de
políticas. Para combatir la corrupción y mejorar la transparencia, en 2016 se
promulgó el ambicioso Sistema Nacional Anticorrupción (SNA) de México (OCDE,
2019). Además de establecer un sistema federal anticorrupción, requiere que los
estados creen sistemas locales anticorrupción. Sin embargo, la implementación
está retrasada. Por ejemplo, se suponía que los sistemas locales anticorrupción
debían estar implementados a mediados de 2017, y aunque se han logrado
importantes avances, no todos los estados han completado este proceso. La
administración actual se compromete a acelerar la implementación del (SNA) y ha
tomado medidas inmediatas. Por ejemplo, ahora se están llenando puestos clave,
en particular, el primer Fiscal Especial Anticorrupción fue nombrado
recientemente.
Las
experiencias de otros países resaltan que es un gran desafío abordar con éxito
la corrupción de una maniera sistemática e integral. Hacia adelante, será
importante monitorear y evaluar los resultados de SNA, y abordar las
debilidades identificadas, especialmente a nivel regional, para evitar
exacerbar las disparidades geográficas ya marcadas, y tomar medidas adicionales
si es necesario.
México
también ha emprendido otras reformas en los últimos años para llevar la calidad
de las instituciones y la supervisión económica hacia las mejores prácticas
internacionales. Esto incluyó la creación de nuevos reguladores sectoriales
independientes que se crearon como parte de las reformas energéticas de 2013 y
dos nuevas autoridades de competencia autónomas y tribunales de competencia
especializados establecidos en 2014. Asegurar la independencia y los recursos
adecuados de estas entidades autónomas serán cruciales para el fortalecimiento
continuo de la competencia en México.
Referencias:
Acemoglu, D. and J.A.
Robinson. (2012). Why nations fail: The origins of power, prosperity,
and poverty. New York: Crown Publishers.
Le Clercq, J. and G. Rodríguez Sánchez Lara (2016), Global
Impunity Index Mexico IGI-MEX 2016, Center of Studies on Impunity and Justice
(CESIJ), http://www.udlap.mx/cesij.
Strengthening institutions to improve the prosperity of all Mexicans
By Sonia Araujo and
Lisa Meehan, Mexico Desk, OECD Economics Department
Why are some countries wealthier than others? There is
increasing recognition that the economic success of nations depends on well-functioning
institutions (see, for example, Acemoglu and Robinson, 2012). Institutions
provide a framework that shape economic incentives, thus influencing decisions
in a multitude of areas, such as whether to become educated, start a business,
invest and so forth. The success of policy reforms in all areas therefore
hinges on the ability of institutions to create the right incentives. Quality
institutions also create certainty and a level playing field on which people
can build, thus bringing more fairness and greater access to opportunities. Overall,
quality institutions are of fundamental importance to economic outcomes.
It is therefore concerning that numerous indicators suggest that institutional quality is low and declining in Mexico (Figure). For example, symptomatic of weak institutions, perceived corruption is the highest in the OECD and has not improved over time. Also worringly, the already high levels of crime and violence have been increasing. Mexico has the highest homicide rate in the OECD, and the number of murders has risen sharply in the past decade (OECD, 2019; Figure). Impunity is also high, with over 90% of crimes going unreported, and just a small fraction of reported cases making it to the court system (Le Clercq and Rodríguez Sánchez Lara, 2016).
Corruption is a serious drag on the prosperity of all Mexicans and tackling it features high in the new government’s agenda. Corruption is a drain on fiscal resources, undermines the ability to deliver public services and also has an adverse effect on political stability, the business environment, private investment and inclusive growth . The OECD Economic Survey of Mexico 2019 highlights that improving institutional quality would have the largest growth benefits among all structural reforms and would also facilitate the effective implement of all other policy reforms
To fight corruption and improve transparency, Mexico’s
ambitious National Anticorruption System (NACS) was enacted in 2016 (OECD,
2019). As well as establishing a federal
anticorruption system, it requires states to create local anticorruption
systems. However, implementation is behind schedule. For example, local
anticorruption systems were supposed to be in place by mid-2017, and while
important progress has been made, not all states have fully completed this
process. The current administration is committed to accelerating the
implementation of the NACS and has taken immediate actions. For example, key
positions are now being filled – in particular, the first Special
Anticorruption Prosecutor was recently appointed.
The experiences of other countries highlight that it is very
challenging to successfully tackle corruption in a wholesale manner. Going
forward, it will be important to monitor and evaluate the outcomes of NACS, and
address identified weaknesses, especially at a regional level, in order to
avoid exacerbating already stark geographic disparities, and take further
action if necessary.
Mexico has also undertaken other reforms in recent years to move the quality of institutions and economic oversight towards international best practice. This included the creation new independent sector regulators were created as part of the 2013 energy reforms and two new autonomous competition authorities and specialist competition courts were established in 2014. Ensuring the independence and adequate resourcing of these autonomous entities will be crucial to the continued strengthening of competition in Mexico.
References:
Acemoglu, D. and J.A.
Robinson. (2012). Why nations fail: The origins of power, prosperity,
and poverty. New York: Crown Publishers.
Le Clercq, J. and G. Rodríguez Sánchez Lara (2016), Global
Impunity Index Mexico IGI-MEX 2016, Center of Studies on Impunity and Justice
(CESIJ), http://www.udlap.mx/cesij.
A renewed strategy to boost growth and well-being in Mexico
by Sonia Araujo and Lisa Meehan, Mexico Desk, OECD Economics Department
The Mexican economy has benefited from strong fundamentals. A strong macroeconomic policy framework has underpinned moderate growth, in the face of a number of shocks the economy has experienced in the recent past. Monetary policy has successfully tamed inflation and prudent fiscal policy has halted the rise in the debt-to-GDP ratio. The financial system is strong and a number of financial buffers in the form of stabilisation funds and international reserves cushion against tail risks.
The macro framework has brought stability to the economy but
it has not been enough to deliver strong growth. GDP growth has been moderate,
particularly compared with other emerging market economies, averaging only 2.2%
a year since 2009. The relatively modest growth that has occurred chiefly
reflects a demographic bonus, as Mexico’s young population entered the labour
market. Mexicans work far longer days than anyone else in the OECD. But owning to low productivity, Mexico’s GDPpc
remains the lowest in the OECD as the country has not converged to higher
living standards (Figure 1). Mexico has the macro right, now it is time to work
on the micro.
Maintaining macroeconomic stability is key to
smooth adjustment to shocks in the context of heightened uncertainty and to
provide confidence to economic agents in the medium term.
Implementing a comprehensive strategy to boost
productivity and inclusiveness calls for an integrated package of reforms
across several policy areas as policy complementarities matter.
Increasing equity and providing opportunities
for all, including women, indigenous populations, and lagging regions should be
an integral element of the reform agenda to solve Mexico’s stark disparities in economic dynamism, poverty and
well-being (Figures 2 and 3).
Many reforms are able to simultaneously lift growth and
share the benefits more widely. These are: raising educational outcomes,
enhancing women’s participation in the labour market, improving incentives to
job and business formalisation, improving regulations to spur competition,
boosting infrastructure, further enhancing trade and participation in global
value chains, particularly SMEs. The redistributive role of fiscal policy also
needs strengthening.
Stronger institutions are key to attaining stronger growth and increasing fairness and opportunities for all. Reducing corruption, insecurity and crime would boost economic activity and especially benefit the poor and underprivileged. They are also an integral ingredient to making all other reforms work. Mexico should continue efforts to reduce crime and impunity and complete the implementation of the National and Local Anticorruption Systems reforms and monitor the results, especially focusing on the capacity of the different states to strengthen their institutional arrangements.
Una estrategia renovada para impulsar el crecimiento y el bienestar en México
por Sonia Araujo y Lisa Meehan, OCDE
La economía
mexicana se ha beneficiado de fuertes fundamentos. Un marco de política
macroeconómica muy sólido ha sustentado un crecimiento moderado, frente a una
serie de choques que la economía ha experimentado en el pasado reciente. La
política monetaria está controlando con éxito la inflación y la política fiscal
prudente ha detenido el aumento de la relación deuda / PIB. El sistema financiero
es sólido y varios fondos de estabilización y las reservas internacionales
actúan como colchones financieros que protegen la economía contra los riesgos de
cola.
Se bien que
el sólido marco macroeconomico ha traído estabilidad a la economía, esto no ha
sido suficiente para generar un fuerte crecimiento. El crecimiento del PIB ha
sido moderado, particularmente en comparación con otras economías emergentes,
con un promedio de solo 2.2% al año desde 2009. El crecimiento relativamente
modesto que se ha observado refleja principalmente un bono demográfico, a
medida que la población joven de México fue ingresando al mercado laboral. Los
mexicanos trabajan jornadas más largas que todos los demás países en la OCDE.
Pero debido a la baja productividad, el PIB percápita de México sigue siendo el
más bajo en la OCDE, y por lo tanto el país no ha convergido a niveles de vida
más altos (Figura 1). México tiene buenos fundamentos macroeconómicos, ahora es
el momento de trabajar en los fundamentos microeconómicos.
• El
mantenimiento de la estabilidad macroeconómica es clave para un ajuste suave a
los choques en un contexto de una mayor incertidumbre y para brindar confianza
a los agentes económicos en el mediano plazo.
• La
implementación de una estrategia integral para impulsar la productividad y la
inclusión requiere de la implementación de un paquete integrado de reformas en
varias áreas, ya que existen complementariedades imporantes en las medidas de política
económica.
• Aumentar
la equidad y brindar oportunidades para todos, incluidas las mujeres, las
poblaciones indígenas y las regiones rezagadas, debe ser un elemento integral
de la agenda de la reforma para resolver las enormes disparidades de México en
materia de dinamismo económico, pobreza y bienestar (Figuras 2 y 3).
Muchas
reformas pueden aumentar simultáneamente el crecimiento y compartir los
beneficios más ampliamente. Las principales prioridades de política pública son:
mejorar los resultados educativos, aumentar la participación de las mujeres en
el mercado laboral, mejorar los incentivos para la formalización laboral y
empresarial, mejorar las regulaciones para estimular la competencia, impulsar
la infraestructura, incentivar aún más el comercio y la participación en las
cadenas de valor mundiales, en particular las PYME. Hay también que fortalecer
el papel redistributivo de la política fiscal.
Instituciones
más fuertes son clave para lograr un crecimiento más fuerte y aumentar la
equidad y las oportunidades para todos. La reducción de la corrupción, la
inseguridad y el crimen estimularían la actividad económica y beneficiarían
especialmente a los pobres y desfavorecidos. También son fundamentales para que
todas las demás reformas sean exitosas. México debe continuar los esfuerzos
para reducir el crimen y la impunidad y completar la implementación de las
reformas de los Sistemas Anticorrupción Nacional y Local y evaluar? los
resultados, especialmente enfocándose en la capacidad de los diferentes estados
para fortalecer sus marcos institucionales.
