Regional Policy and Fiscal Reform in Mexico

OECD Encounter with Mexican Legislators on Fiscal Policy and Public Finance

Regional Competitiveness and Governace Division, OECD

March 2007

Economic GrowthInvestment

Public Investment

Private Investment

Revenues

+

+

++

+

FISCALREFORM

The general argument: A fiscal reform is needed to foster economic growth

+

+

Economic Growth driven bysectors a, b, c... and by

regions x, y, z...Investment

Public Investmentin areas i, ii, iii...

in regions x, y, z...

Private Investmentin sectors a, b, c...

in regions x, y, z

Revenues

+

+

++

Local RevenuesFederal Revenues

++

FISCALREFORM

+ +

RegionalDisparities

-

Competitiveness+

+

Is growth reducingDisparities?

Is growth buildingregional competitiveness?

But, the issue is not straight forward, there are several details that can influence the outcome

+

+ +

++

Driven by which sectors?By which regions?

Is the current federal / local

distributionadequate?

In which sectors?In which regions?

In which areas?In which regions?

Economic Growth driven bysectors a, b, c... and by

regions x, y, z...Investment

Public Investmentin areas i, ii, iii...

in regions x, y, z...

Private Investmentin sectors a, b, c...in regions x, y, z

Revenues

+

++ +

Local RevenuesFederal Revenues

++

-

REGIONALPOLICY

FISCALREFORM

+ ++

-

+

RegionalDisparities-

Public Policies (Education,Health, Labour, Poverty

Alleviation...)

+

-

+

Competitiveness

+

-

+

+

+

-

Regional Policy can be a powerful complement to Fiscal Reform to strengthen the dynamics conducive to higher growth, reduce regional

disparities and increase competitiveness

Economic Growth driven bysectors a, b, c... and by

regions x, y, z...Investment

Public Investmentin areas i, ii, iii...

in regions x, y, z...

Private Investmentin sectors a, b, c...in regions x, y, z

Revenues

+

++ +

Local RevenuesFederal Revenues

Informality

++

-

REGIONALPOLICY

FISCALREFORM

+ +

-

+

-

+

RegionalDisparities-

Public Policies (Education,Health, Labour, Poverty

Alleviation...)

+

-

+

Competitiveness+

+

+

+

+

-

Summing up…

Regional Policy as a Regional Policy as a tool to strengthen tool to strengthen Fiscal Federalism Fiscal Federalism (Institutional (Institutional Arrangements and Arrangements and Sub-national Finance)Sub-national Finance) Regional Policy as a tool to orient Regional Policy as a tool to orient

policies to reduce regional disparities policies to reduce regional disparities (Place based approaches)(Place based approaches)

Regional Policy as a tool to foster Regional Policy as a tool to foster regional economic growth and regional economic growth and

competitivenesscompetitiveness

Supporting Slides

Central/Local Taxation Distribution (2000)

0%

20%

40%

60%

80%

100%

Mex

ico

Aus

tral

ia

Aus

tria

Uni

ted

Sta

tes

Can

ada

Bel

gium

Sw

itzer

land

Ger

man

y

New

Zea

land

Irel

and

Uni

ted

Kin

gdom

Icel

and

Kor

ea

Tur

key

Gre

ece

Luxe

mbu

rg

Por

tuga

l

Den

mar

k

Hun

gary

Nor

way

Ital

y

Pol

and

Sw

eede

n

Net

herla

nds

Fin

land

Spa

in

Cze

ch R

epub

lic

Fra

nce

Japa

n

Central Share of Tax Revenues Social Security State Local

Federal Countries Unitary Countries

Central/Local Tax Revenue Distribution, 2000

Source: OECD 2001, Tax and the Economy, A comparative assessment of OECD countries

Is the current federal / local

distributionadequate?

HighVery High

Source: OECD based marginalisation data from CONAPO

Orienting public investment to specific regions, the case of Microrregiones

Index of Marginalisation

In which areas?In which regions?

MonterreyGlassCementSteelChemicalsBeveragesBiotechnology

ChihuahuaAutoparts

SaltilloAutoparts

TijuanaElectronics

GuadalajaraElectronicsTransportationGarmentsWomen footwear

Ciudad JuarezElectronics

TorreonDairy Products

Puerto VallartaTourism

LeonFootwear

Cancun, Costa MayaTourism

Mexico CityPharmaceuticalsJalisco

Tequila

Los CabosTourism

Most developed clusters in MexicoIn which sectors?In which regions?

-2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5

Coahuila

Tamaulipas

Nuevo León

Chihuahua

Durango

Baja California

Baja California Sur

Sonora

Sinaloa

Aguascalientes

Querétaro

Guanajuato

San Luis Potosí

Zacatecas

Michoacán

Colima

Jalisco

Nayarit

Tlaxcala

Puebla

México

Morelos

Hidalgo

Distrito Federal

Quintana Roo

Yucatán

Campeche

Chiapas

Veracruz

Tabasco

Oaxaca

Guerrero

No

rth

ea

st

No

rth

we

st

Ce

nte

r-W

est

Ce

nte

rS

ou

the

ast

State GDP growth relative to national growth, 1994-2004

Percentage point deviation from the national average

Source: INEGI, “Producto interno bruto por entidad federativa; Cifras anuales del periodo 1993-2004”

Driven by which sectors?By which regions?

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Tur

key

Mex

ico*

Slo

vak

Rep

ublic

Bel

gium

Hun

gary

Pol

and

Kor

ea

Irel

and

Uni

ted

Kin

gdom

Can

ada*

Aus

tria

OE

CD

(26

) av

erag

e

Por

tuga

l

Uni

ted

Sta

tes*

Ital

y

Ger

man

y

Spa

in

Cze

ch R

epub

lic

Den

mar

k

Nor

way

Fra

nce

Fin

land

Net

herla

nds

Aus

tral

ia*

Gre

ece

Japa

n

Sw

eden

1998 2003

Territorial disparities in OECD countries, 1998 and 2003

Gini index of inequality in GDP per capita across regions within each country

Note: * Denotes Territorial Level 2 (states), the rest is at the lower level, TL 3 Source: OECD Regions at a Glance 2007 (forthcoming)

Is growth reducingDisparities?

51.2 – 58.044.5 – 51.237.7 – 44.531.0 – 37.7

Source: OECD based on competitiveness data from the Mexican Institute for Competitiveness (IMCO-EGAP)

Disparities in Regional Competitiveness, 2005

Index of Regional Competitiveness

Is growth buildingregional competitiveness?