OBG talks to José Ángel Gurría, Secretary-General, Organisation for Economic Cooperation and Development (OECD)

Interview: José Ángel Gurría

What should the government’s priorities be in 2014?

JOSE ANGEL GURRÍA: Despite the difficulties that have been witnessed during this economic cycle, the government of President Enrique Peña Nieto has successfully pursued structural reforms that should boost Mexico’s growth potential in the coming years. For example, major reforms have been implemented in the labour market, education sector, the tax and benefits system, competition and telecoms policies, the financial sector, and energy policy. These policy changes are wide-ranging and profound, and have put Mexico at the forefront of the OECD as a top reformer. Yet there is still much to do in order to consolidate and complete these reforms.

Following up on implementation is the next step. Most reforms require subsidiary legislation, the creation of new bodies and the enforcement of rules. While this will not be easy, it is essential to ensure that the benefits are enjoyed by the population at large as soon as possible. Most promising in this respect are energy reforms. Once a solid regulatory framework has been applied in these sectors, we should begin to see the impact on investor confidence. However, the largest economic effects are likely to be realised only in the longer term, depending largely on their effective implementation by local governments. Therefore, commitment and patience will be required to see them through.

I would like to commend policymakers for pursuing these reforms with as broad a political consensus as possible. Indeed, the ambitious and multi-partisan approach of the Pact for Mexico is admired around the world, and other countries are already seeking to learn from it. While the Pact ran into some difficulties during the debate over energy reform, there remain important commitments still to be delivered.

In particular, there is one pending reform that will prove essential, namely the reform of the legal system. Improving the quality of courts will be important in consolidating security as well as to further develop economic outcomes, through ensuring the reliable enforcement of competition laws and investor contracts.

In 2013 Mexico’s GDP grew by less than 2%, the lowest rate in four years. How can the country reach and sustain its sought-after 5% rate?

GURRÍA: Mexico’s economy slowed abruptly in the first half of 2013. This can be attributed principally to the delayed effects of weak export demand from North America spilling over to the rest of the economy, thereby hurting consumer and investor confidence. This was further aggravated by problems in the construction sector, and recovery has been slower than expected. We now estimate that GDP growth was only 1.2% in 2013, but 2014 should be much stronger.

Stable inflation expectations have allowed the central bank to cut policy interest rates to a record low, which is now helping to boost investment. Fiscal policy has also become stimulatory, with a temporary increase in the budget deficit at the end of 2013 and planned in 2014. With external demand improving and government expenditure stepping up, there are already clear signs of growth strengthening, and we expect to see a rebound in 2014 and 2015.

As confidence returns, stimulus spending can be tapered back, while monetary conditions will have to be adjusted to take account of the withdrawal of exceptional policy measures in the US and the higher growth potential resulting from recent structural reforms.

Finally, to boost growth even further, I would encourage policymakers to give greater attention to strengthening sources of long-term sustainable growth, such as entrepreneurship and innovation. Mexico has benefitted enormously from its openness to trade as well as the increased integration of global production networks. However, Mexico’s value-added in most sectors currently remains limited for the time being.

Greater attention to policies that could boost venture capital and innovation activity while reducing administrative burdens on firms will thus be of the utmost importance. Based on our estimates, we think that growth potential is currently just over 3%, although it should be boosted substantially with ongoing reforms.