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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 ). - PowerPoint PPT Presentation
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Why Do Reforms not help deliver growth in México?
MEXICO: How to tap progressNovember 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)
Kehoe (2011): China is in another path
Mexico Brazil Peru Spain China Hong Kong South Korea Taiwan Chile0.00
2.00
4.00
6.00
8.00
10.00
12.00
1991-2010 2001-2010
195019521954195619581960196219641966196819701972197419761978198019821984198619881990199219941996199820002002200420062008
7
7.5
8
8.5
9
9.5
10
GDP PC Growth rate(Source Penn World Tables)
Growth Factors
1950-1970 1983-20091971-1982
Source: García-Verdú (2007).Buzio and Fazio (2011): updated 2010 and same
direction for the last period
Formal Employment DEFICIT 1995-2011
Migration in period: 6 millions aprox
Jobs Created Necessary Total Jobs Created Formal Labor Deficit
-15,000,000.00
-10,000,000.00
-5,000,000.00
0.00
5,000,000.00
10,000,000.00
15,000,000.00
20,000,000.00
4,506,560.00
17,000,000.00
5,413,485.00
-11,586,515.00
Labor Deficit: annual disaggregation
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
-600,000.00
-400,000.00
-200,000.00
0.00
200,000.00
400,000.00
600,000.00
800,000.00
1,000,000.00
1,200,000.00
Creadosnecesarios
High informality in firms
• 90% of firms in Census employ less than 5 workers, 96% less than 10 & only 1% more than 50;• High evasion in registering before IMSS; the most in small firms pequeños.
Size of Firms (# of
workers)
Census IMSS IMSS/Census
Total % in Census
1 – 56 – 1011 – 50
51+
3,312,092224,086149,96837,873
542,064101,231113,45838,713
0.160.450.761.02
0.890.060.040.01
Total 3,724,019 795,466 0.21 1.0
High informality: Labor Force(private), 2008*Size of Firms Formal Informal Total
Panel A: Urban employment in Census 1 – 5 596 8,174 8,770 6 – 10 733 981 1,714 11 – 50 2,731 1,060 3,791 50+ 4,665 687 5,352 Total 8,725 10,902 19,629
Panel B: Urban Employment not captured in Census Self-employment 9 4,064 4,073 2 – 5 213 6,015 6,228 6 + 1,517 1,403 2,920 Total 1,739 11,482 13,223
Panel C: Rural Employment not captured in Census ** 283 5,354 5,638
Total 10,747 27,738 38,485
*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
In sum: The Fact The question The Answer
Mexico does not growth
according to its level of
development
Why? No one knows…there is no consensus,
economists and analysts all
disagree
High vulnerability to external shocks Volatility of “Public Policy” and pro-ciclical Low rates of savings and investment (public & private) Deficient infrastructure Low quality of education, which negatively affects labor productivity and income
distribution Deficient legal and intitutional frameworks (Judicial System very procedurial);
property rights protection Weak economic competition Influential Pressure groups, which deter reforms Weak social capital, which generates lack of trust in government and civil
institutions (Putnam, 2001, IADB) Lack of credit access, especially for Small and medium firms Labor market distortions, “Structural” Reforms (Fiscal, Energy and Labor) Etc.
Reasons: Most mentioned in literature, among many others
All of them would call for more Reforms
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
Why have reforms not delivered?Most recurrent arguments
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.
Why have reforms failed?
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
Can Mexico formulate more reforms?
Let’s use Fiscal Reform as an example:
It is a mean not an end (it is just an instrument to accomplish “something”)
The positive aspect: it has been effective in keeping macro stability, though this has been possible thanks to oil revenues
“Capital-Sins” OF FISCAL POLICY:
1. Prociclical2. Low tax collection, given the resposabilities of the
government 3. No redistributive 4. Furthermore, opaque, not subject to accountability in a
broad sense (performance and transparency)
Why is a Fiscal Reform necessary?
Why is a Fiscal Reform necessary?
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%19
8019
8119
8219
8319
8419
8519
8619
8719
8819
8919
9019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
10
Ingresos tributarios GF Gasto neto GF
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-0.1
%
-2.3
%-0
.7%
2.0%
1.6% 2.
0%
2.7%
4.7% 5.
2%
5.9%
5.1%
6.8%
6.5%
2.5%
1.9%
2.5%
3.0%
2.1%
0.8% 1.
1% 1.6% 1.7%
0.2%
0.9%
0.9%
0.8%
0.1%
-0.2
%
0.1%
-0.0
4%
-0.7
%
Why is a Fiscal Reform necessary?
Primary Balance: including oil revenues, %GDP
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1.87
%
3.77
%
3.71
%
-0.0
2%
-0.0
8%
-0.6
8%
-0.7
8%
-1.4
0%
-1.3
2%
-0.6
8%
-1.6
9%
-1.2
9%
-1.8
7%
-2.4
7%
-3.2
5%
-4.3
1%
-5.4
4%
-5.1
3%
-7.3
9%-4
.16%
-5.1
%
Primary Balance: excluding oil revenues %GDP
Why is a Fiscal Reform necessary?
Reiterating: It is just an intrument, not a final objective (not an end itself)
“But” every fiscal reform should have a raison d’etre
Source: Antón, Hdez & Leal (2012)
Sole VAT increase
Let’s consider Social Policy as an example of an intention to change public policy (as the end)If previously well-designed, then a fiscal reform would be only the instrument to finance it (Levy, 2008)
Status Quo versus Social Reform Proposal
ItemStatus quo
SSUFormal Informal
Medical Insurance XXXXX XXX XXXXX
Life and disability
Insurance yes No yes
Work risk yes No Contribution
Pensions All
All in Opotrunidades
registries and some
states
All
Childcare Yes yes No
Housing yes Yes No
What is the allegeded Social Policy Consecuence?
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…
Formal Sector (Salaried worker)
Informal Sector (Salaried worker)
Look!She is
walking out,
She just resigned to her formal,
salaried job!
Here there are two conflicting objectives:
1. Social Equity (through social services coverage)
2. Financial Equity
This reduces financial gap between them and thus reduces the incentives to participate in the contributive-formal system (Levy, 2008)
The cost of a prevailing dual social policy
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
Proposal*: IMSS-Type Universal Health Care
Universal minimum (2mmw) Pension
NO-CONTRIBUTIVE
*Essentially same as Narro (2009), Cordera (2006) & Jusidman (2009) the justification is or might be different but there is some consensus abouth this
How to finance it?:VAT and…? Uniform VAT
◦ This time, as there is tangible benefit, the proposal might be approved @ Congress
◦ Tangible Benefits (among many others) Anton et al (2011) show that wage in formal and
informal sector (though much larger for the first one) rises
As the health care will be IMSS-type, benefits increase for all population (as oppossed to SP)
Gasoline prices (free mkt price)
Special tretaments corporate and personal tax
Aggregate Effects of the Levy (2008) proposalVariable Value relative to benchmark
Main AggregatesY 1.025K 1.015
TFP 1.02Occupational choices
Employee share 1.128Self-employment share 0.736Full entrepreneur share 0.811
EarningsWage informal 1.148Wage formal 1.212
Av. earnings Self-emp. 1.135rK/Y 0.99
RevenueRevenue VAT 1.247Revenue CSI 0
Total Revenue 0.835Price of sector 1
p1 1.051
TFP effects: USS with VAT increase
Source: Antón, Hdez & Leal (2012)
Total Balance SSU
AlternativeCost Total 4.99What it is already spent 1.76Extra amount needed 3.23Extra VAT collection 3.42Compensations to 1st quintil 0.24Balance -0.05
Wage increase for formal and informal workers
Financial resources channeled to Afores go from 72.4 a 192.8 mmp (or 166%), equivalent to 1% of GDP.
Productivity increase (working on this…) Preliminary estimates: extreme poverty is
reduced by half and moderate by 30 % (from 45 to 33%) and
Reduce income inequatlity (Scott, 2012)
Possible Benefits
Thank you very much !!!
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