Product market reforms to boost productivity growth and living standards

Product market competition is weak in many sectors in Mexico, and this often hurts efficiency, productivity and consumer welfare. State-owned monopolies provide and distribute electricity and produce oil, but concentration is high in many other sectors. analysis conducted jointly by the Mexican competition authority (Comision Federal de Competencia, cFc) and the oecD suggests that the average Mexican household spends close to a third of its budget on products that are produced in monopolistic or highly oligopolistic markets; the share is even higher for the lowest-income households. in a number of sectors, current regulations help market incumbents prevent the entry of new firms or effective competition from existing competitors. By drawing on the OEcD’s expertise as well as the CFC’s and other domestic analyses, Mexico has undertaken a project supervised by the Ministry of Economy intended to identify any obstacles to competition, to improve regulatory quality, and to propose reforms based on the international best practices.

Better-quality regulation and easier entry to the market, through streamlining the processes for opening new firms through one-stop-shops, would increase the competition that incumbent firms face from new entrants. While major reforms in this area have been done at the federal level, many states still need to make greater efforts (OECD, 2012b). This would lead to lower prices, increased efficiency and innovation, and enhanced aggregate productivity growth - all of which promote consumer welfare.

The OECD’s three recent Mexican bid rigging/procurement studies (involving IMSS, the State of Mexico and ISSSTE) provide solid research and analysis for changes in procurement regulation and practices. If the recommendations of the OECD reports on IMSS, State of Mexico and ISSSTE procurements (and subsequently the cFE report) are implemented, the substantial savings generated could help fund some of the projects/initiatives that will boost growth (education and infrastructure).

Improving regulation can have a significant impact on productivity growth by enhancing competition

OECD research suggests that promoting more competition, cutting red tape and streamlining regulations could help in reducing Mexico’s regulatory burdens increasing the country’s productivity significantly. The OECD product market regulation indicator (PMR) shows that major progress has occurred in recent years, though more reforms are still needed (Figure 1.3). This is mainly due to barriers to entry and foreign investment in services and network industries, including telecommunications, transport and electricity. OECD simulations

Figure 1.3. Mexican product market regulation has declined

Index scale of 0-6, from least to most restrictive

Source: OECD (forthcoming a), Economic Policy Reforms: Going for Growth 2013, OECD, Paris.

from the 2011 Economic Survey suggest that if Mexico brought its regulations in line with OEcD best practice, productivity could be as much as 18% higher in 10 years. Productivity could be 9% higher in a more moderate reform scenario, whereby Mexico’s regulatory reform reached a PMR indicator score close to the OEcD average. A breakdown of the effect of different reform efforts suggests that reforms in network industries could bring particularly high productivity payoffs, even higher than those obtainable through a broad administrative simplification, already highly desirable. While these estimates must be interpreted with caution, they nevertheless convey an idea of the scale of productivity improvements possible if Mexico succeeds in implementing urgent administrative and competition regimen reforms.

Competition in Mexico’s network industries is limited either by restrictions on foreign and private investment - such as in the production and distribution of energy, two cases where the industry is dominated by a single state-owned firm - or by the overwhelming dominance of the private market incumbent in the telecommunications sector. The simulation exercise suggests that the impact on productivity would be especially sweeping if thorough reforms were undertaken across a number of sectors. At the same time, far-reaching reforms in these sectors face political difficulties because there are powerful vested interests in preserving the status quo, and in some cases these interests are represented in the different decision-making instances. Strong communication of the benefits of proposed structural reforms is therefore very important in order to gain public opinion’s and political parties’ support for their implementation.

Mexico has pursued various reforms in network industries for some time, and there have been both successes and failures. The privatisation of airports has enhanced competition in the sector and domestic air travel was liberalised, although there are still barriers to entry worth addressing. the merging of Luz y Fuerza del Centro - a highly inefficient state-owned company- back into the main electricity producer, CFE (Comision Federal de Electricidad), was meant to enhance the efficiency of the electricity sector. Among other benefits, this has helped to reduce the time that customers in Mexico city have to wait for electricity service - from an average of 10 to 4 months. The concession of fibre optic networks with national coverage, together with new radio spectrum allocations, will allow for infrastructure competition in the telecommunications sector.

However, the most ambitious and far-reaching reforms in the electricity, gas and telecommunications sectors have been limited by the need to mobilise large political majorities to change the constitution or - in the telecommunications sector - by regulatory and judicial weaknesses regarding de facto powers. Reforms to ease administrative burdens on start-ups can help, even though their impact is not as sizeable. These include reforms implemented to foster one-stop-shops and address the issue of regulatory burdens at state and municipal levels. They could help improve Mexico’s weak productivity performance. On the other hand, administrative reforms are relatively easier to implement than far-reaching reforms of network industries, as less legislative changes are required and de facto powers have somewhat lesser influence (Figure 1.4).

Figure 1.4. Administrative burdens on start-ups

Index scale of 0-6 from least to most restrictive

Source: OECD, Going for Growth, 2013.

Mexico needs to reduce entry barriers for new firms and facilitate the development of innovative firms

Mexico has made significant progress in easing procedures to start up a business, but should consider further easing the regulatory environment, especially at the state and municipal levels. one way the country is working to reduce the time, costs and administrative details that starting up a business entails is through the SARE (Sistema de Apertura Rapida de Empresas). Launched a decade ago, SARE has streamlined procedures at the municipal level, halving the time needed for low-risk businesses to register to 72 hours. reform could be taken further by integrating that initiative with, an internet one-stop-shop developed with the support of the oecD to ease compliance with federal business start-up regulations and procedures. oecD research suggests that helps bring down the costs for entrepreneurs to comply with start-up formalities, from 16% of per capita GDP to 5.5%. Even though use of the website is growing, as yet it is not the most widely used mechanism to start a business; more effective publicity and interconnection with state and municipal portals for business start-ups would help build its user base. the federal ministry of Economy and sub-national governments should co-operate in this effort, and engage a wide set of stakeholders to support the platform.

Mexico is engaged in a regulatory review process called Base Cero, supported by the oecD, which aims to identify and simplify regulations that are overly burdensome. a first set of five procedures for exporters and start-ups has already been simplified. the government has recently simplified tax declaration formalities, and plans further measures in the realm of taxes and foreign trade and technical regulations. this will facilitate technology absorption. overall savings are projected to reach around MxN 20 billion. in addition, the oecD has helped Mexico strengthen its regulatory impact assessment (ИА) for new regulations, allowing regulators to concentrate their attention on those that are particularly costly. this allowed the development of a lighter ША version for low- impact regulations, thus freeing resources and enhancing Mexico’s capacity to improve regulations where they imply significant costs and risks. Mexico should continue working to facilitate implementation of the new RIA framework through enhanced training for its personnel.

there is a need to simplify and improve regulation at the state and municipal level as well; it is important, for instance, to reduce the overlap between different levels of government. the oECD worked with the federal ministry of Economy and the Mexican Institute for Competitiveness (IMCo) to identify particularly burdensome regulations at the sub-national level, and proposed a reform agenda for nine Mexican states. It also developed a toolkit to simplify sub-national regulations, i.e. for business start-ups, construction permits, property registration, and procurement. the federal government should


getting it right, strategic agenda for reforms in Mexico © oecd 2013

encourage states and municipalities to apply the toolkit, to monitor results, and to co-ordinate regulation across different government levels. iMco published a report in September 2011 that evaluated state procurement regulations and the promotion of competition.

Beyond the explicit barriers to setting up new firms, Mexico’s innovation environment remains weak and not conducive to the development of high-tech companies. R&D expenditure in Mexico’s business sector is the lowest of all OECD countries, and overall R&D intensity is less than 0.5% of GDP. The innovation policy mix has recently changed, and could be usefully strengthened. Though tax incentives were eliminated in 2009, the allocation of public funding to the business sector has been made direct and competitive. An R&D and innovation stimulus package was introduced with a strong emphasis on SMEs and linkages with research institutions, and complemented by innovation programmes financed by the Ministry of Economy. As part of the Pact for Mexico, the new government has committed to raising R&D intensity to 1% of GDP in the coming years (commitment 46). Indeed, boosting direct funding, further extending successful initiatives and considering possible tax relief for investors in startups would be helpful in strengthening venture capital funds and improving the environment for SMEs - especially those with linkages to research institutions, which could help boost business R&D (see Chapter 10).

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