Juan Pardinas, Director-General, Mexican Institute for Competitiveness: Interview

Interview: Juan Pardinas

What can be done to improve Mexico’s global ranking in terms of the ease of doing business?

JUAN PARDINAS: The cost of electricity and the procedures related with registering property are two of the main obstacles affecting the country’s competitiveness. The government is hoping that the energy reform will lead to cheaper electricity and a more competitive market. If the energy reform is to be successful in reducing prices, the country needs to overcome at least two obstacles. First, the government must promote, without restrictions and with a higher degree of legal certainty, private investment in the sector.

Second, the country has to improve prices and electricity tariffs and end cross-subsidies so that productive plants may have better access to the service with more efficient prices. Having a consolidated, efficient and modernised system of property records is another requisite for improving the business environment. There are no worthwhile property rights in any country if they can be modified by disorder or corruption. Modernising public property records is a crucial task for any economy aiming to become more competitive.

Will those measures be enough to attract more foreign direct investment (FDI)?

PARDINAS: Those are far from sufficient to attract the optimal levels of investment. It is essential to implement structural reforms in the three levels of government. For example, on paper, education reform accomplishes the requirements to form a competent teacher base. In practice, however, vested interests in some states make the reform simply not applicable. In addition, the federal government must continue with the important task of guaranteeing increased economic competition, legal security and an effective rule of law. It is essential to strengthen and improve governance and public security. The freedoms of the market and the inherent rights of a democratic regime cannot survive if you do not have the rule of law and sufficient enforcement to carry out the good ideas contained in the energy, telecommunications, competition, tax, financial, fiscal, labour, education, justice and transparency reforms. This is the key to attracting more FDI.

What levels of state inequality exist in Mexico?

PARDINAS: We define competitiveness as the country’s ability to attract and retain talent and investment. Without doubt, the disparity between the states impacts competitiveness. Mexico City had a GDP per capita of MXN247,845 ($16,680) in 2012, while in Chiapas and Guerrero GDP per capita was MXN42,409 ($2854) and MXN53,126 ($3575), respectively, around four to five times less than in Mexico City. Baja California, Aguascalientes, Nuevo León and Querétaro present remarkable performance in terms of competitiveness. This means that they have a stable economy, with a functional political system, efficient governments and pioneering sectors with good performance. Some states have begun to implement structural reforms while other entities seem sceptical about any type of change.

What effect will lower oil prices have?

PARDINAS: Mexico’s public finances depend largely on oil revenues. According to the Secretariat of Finance and Public Credit, in the past five years (2009-13) oil revenues represented an average of 32.9% of the federal government’s income, with an annual average price of $86.30 per barrel. Given low oil prices and assuming production levels remain more or less constant, revenues of the federal and state governments will be notably reduced, forcing them to adjust their spending levels and/or to revert to internal and/or external funding. Public debt is not a good or bad mechanism of funding in and of itself. It depends on the management, use and administration of such an instrument.

It seems that small adjustments in public spending or national and subnational debt will be presented in 2015, but the main challenge will be in the following years. If low prices persist, the government will have to apply smart taxes that encourage development.