Transcript MEXICO: How to tap progress November 2, 2012 Federal Reserve Bank of Dallas Fausto Hernández Trillo/ CIDE.

MEXICO: How to tap progress
November 2, 2012
Federal Reserve Bank of Dallas
Fausto Hernández Trillo/
CIDE
Country
12.00
10.00
8.00
6.00
4.00
2.00
0.00
Mexico
Brazil
Peru
Spain
1991-2010
China
Hong Kong South Korea
Taiwan
Chile
2001-2010
Kehoe (2011): China is in another path
GDP PC Growth rate
(Source Penn World Tables)
10
9.5
9
8.5
8
7.5
7
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
1950
Growth Factors
1950-1970
1971-1982
1983-2009
Source: García-Verdú (2007).
Buzio and Fazio (2011): updated 2010 and same
direction for the last period
20,000,000.00
17,000,000.00
15,000,000.00
10,000,000.00
5,000,000.00
5,413,485.00
4,506,560.00
0.00
Jobs Created
Necessary
Total Jobs Created
Formal Labor Deficit
-5,000,000.00
-10,000,000.00
-11,586,515.00
-15,000,000.00
Migration in period: 6 millions aprox
1,200,000.00
1,000,000.00
800,000.00
600,000.00
400,000.00
200,000.00
0.00
-200,000.00
-400,000.00
-600,000.00
Creados
necesarios
Size of Firms
(# of workers)
1–5
6 – 10
11 – 50
51+
Total
Census
IMSS
IMSS/Census
3,312,092
224,086
149,968
37,873
3,724,019
542,064
101,231
113,458
38,713
795,466
0.16
0.45
0.76
1.02
0.21
Total % in
Census
0.89
0.06
0.04
0.01
1.0
• 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
1–5
6 – 10
11 – 50
50+
Total
Self-employment
2–5
6+
Total
Formal
Informal
Panel A: Urban employment in Census
596
8,174
733
981
2,731
1,060
4,665
687
8,725
10,902
Panel B: Urban Employment not captured in Census
9
4,064
213
6,015
1,517
1,403
1,739
11,482
Total
8,770
1,714
3,791
5,352
19,629
4,073
6,228
2,920
13,223
Panel C: Rural Employment not captured in Census
**
Total
283
10,747
5,354
27,738
5,638
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
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.
All of them would call for more
Reforms
Why have reforms not delivered?
Most recurrent arguments










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 failed?
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.
Can Mexico formulate more reforms?


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


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.
2.
3.
4.
Prociclical
Low tax collection, given the resposabilities of the government
No redistributive
Furthermore, opaque, not subject to accountability in a broad
sense (performance and transparency)
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
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Ingresos tributarios GF
Gasto neto GF
-0.2%
0.2%
2010
2009
2008
2007
-0.7%
-0.04%
0.8%
2005
0.1%
0.1%
0.9%
2004
2006
0.9%
2003
2002
1.7%
1.1%
2.1%
2001
-3.0%
1.6%
0.0%
2000
1999
0.8%
1.0%
1998
1997
3.0%
2.5%
1.9%
2.5%
4.0%
1996
1995
1994
1993
1992
1991
1990
1989
2.7%
5.1%
5.2%
4.7%
6.8%
6.5%
5.9%
6.0%
1988
2.0%
5.0%
1987
1986
1985
2.0%
1.6%
2.0%
1984
-0.7%
3.0%
1983
-2.3%
-2.0%
1982
1981
-0.1%
-1.0%
1980
7.0%
Primary Balance:
including oil revenues,
%GDP
-6.0%
-8.0%
-5.13%
2007
-7.39% -4.16%
-5.1%
2009
2010
2008
-5.44%
-1.29%
-1.69%
-2.47%
-1.87%
-3.25%
-4.31%
2006
2005
2004
2003
2002
2001
2000
-0.68%
-1.32%
1998
1999
-1.40%
-0.78%
1996
1997
-0.68%
-0.08%
1994
1995
-0.02%
1993
3.71%
-4.0%
1992
-2.0%
3.77%
0.0%
1991
1.87%
2.0%
1990
4.0%
Primary Balance:
excluding oil revenues
%GDP
 Reiterating:
It is just an intrument,
not a final objective (not an end
itself)
Sole VAT increase
Source: Antón, Hdez & Leal (2012)
Item
Status quo
SSU
Formal
Informal
XXXXX
XXX
XXXXX
Insurance
yes
No
yes
Work risk
yes
No
Contribution
Medical Insurance
Life and disability
All in Opotrunidades
Pensions
All
registries and some
All
states
Childcare
Yes
yes
No
Housing
yes
Yes
No
Formal Sector (Salaried
worker)
Mmmm… I have to
pay contributions to
have access to
health system, a
pension system, day
care and so on…
Look!
She is
walking out,
She just
resigned to
her formal,
salaried job!
Informal Sector (Salaried
worker)
Gee… I do not
have to pay any
contribution and
still will have
access to health
system, pension,
day care, etc…
The cost of a prevailing dual social
policy
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)

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

IMSS-Type Universal Health Care

Universal minimum (2mmw) Pension
NOCONTRIBUTIVE
*Essentially same as Narro (2009), Cordera (2006)
& Jusidman (2009) the justification is or might be
different but there is some consensus abouth this
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
TFP effects: USS with VAT increase
Aggregate Effects of the Levy (2008) proposal
Variable
Value relative to benchmark
Main Aggregates
Y
1.025
K
1.015
TFP
1.02
Occupational choices
Employee share
1.128
Self-employment share
0.736
Full entrepreneur share
0.811
Earnings
Wage informal
1.148
Wage formal
1.212
Av. earnings Self-emp.
1.135
rK/Y
0.99
Revenue
Revenue VAT
1.247
Revenue CSI
0
Total Revenue
0.835
Price of sector 1
p1
1.051& Leal (2012)
Source: Antón, Hdez
Cost Total
What it is already spent
Extra amount needed
Extra VAT collection
Compensations to 1st quintil
Balance
Alternative
4.99
1.76
3.23
3.42
0.24
-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)