Economy

Mexico is well integrated into global value chains (GVCs). Its exports as a share of GDP have tripled since 1988. Mexico’s participation in GVCs is mainly driven by backward linkages, i.e. the share of foreign value added in Mexico’s total exports is large, which reflects Mexico’s importance in assembling processes in some manufacturing sectors. Conversely, forward participation, i.e. to what extent trading partners exports incorporate Mexico’s value added, remains low. Ongoing nearshoring trends provide opportunities to strengthen and improve Mexico’s participation in GVCs, and to move up in the value chain and develop stronger forward linkages, which are associated to higher productivity growth. This paper zooms into the most recent developments to assess whether Mexico is already benefiting from these trends. The empirical analysis suggests that Mexico’s wide trade agreements and low tariffs, will help, but improving the business environment and the rule of law, a better educated workforce, or increasing female labour participation would also facilitate deepening forward GVCs linkages.

Continuing the recent fall in income inequality and poverty will necessitate stepping up efforts to both address pressing social issues and bolster economic growth. Redoubling efforts to improve education outcomes would help Mexicans gaining the skills needed to participate in an evolving job market and boost Mexico’s growth potential. Mexico has much to gain from closing gender participation gaps, as it would lead to stronger growth overall and to a more equitable distribution of income and opportunities. Reducing informality would not only ensure greater job security and social protection for workers but also stimulate economic growth.

Mexico has large potential to boost its productivity and attract investment from companies looking to relocate their operations to North America. It also has an historic opportunity to spread the benefits of trade throughout the country, integrate SMEs more forcefully into value chains and to create more and better value chain linkages. Nearshoring is also an opportunity to step up efforts to address and mitigate climate change. Fully realising these opportunities will require addressing long standing challenges related to transport and digital connectivity, regulations, the rule of law, renewable energy and water scarcity.

Access to adequate housing remains challenging in Mexico as many low- and middle- income households cannot afford purchasing a house because of high housing prices and limited access to credit. An underdeveloped housing rental market and insufficient supply of social and affordable housing force many households to resort to self-build or to reside in informal settlements. Administrative fragmentation and lack of coordination across levels of government favours a disordered urban development that provokes residential segregation, with vulnerable groups often living in peripheral areas with limited access to jobs, transport and urban services. Housing policies have recently become more targeted towards low-income households, which is commendable. Expanding the range of housing subsidies and fostering the development of a social rental housing sector would be valuable additional steps to improve access to housing for low-income households. Reforming the fiscal and legal framework to encourage private investment into rental housing and promoting public-private partnerships could boost the supply of affordable housing. Tasking states with ensuring that municipalities comply with federal and state urban and housing legislation and improving coordination across urban, housing and transport infrastructure could ease the implementation of national policies and reduce residential segregation.

This paper estimates the pass-through of monetary policy rates into five lending rates in Mexico using auto regressive distributed lags models (ARDLs) and taking into account several financial market characteristics. Results show that the pass-through of monetary policy into the average short-term lending rate is full and fast, as it takes around 3 months to be fully transmitted. However, the pass-through is heterogeneous across credit markets, being especially weak in the mortgage and automotive credit markets. A higher market concentration in the credit sector is associated with a higher level of the corresponding lending rate. Other financial market characteristics, such as the measure of bank profitability and the ratio of capital to bank assets, are also found to affect the long-run level of one or more lending rates. Higher competition in credit markets and reducing asymmetric information would improve the transmission of monetary policy and contribute to reduce the level of lending rates.

Individuals’ access to finance is particularly low in Mexico. Widening access to finance would boost growth and inclusion. This paper uses microdata from the National Survey for Financial Inclusion to assess the drivers of and the barriers to people’s financial inclusion in Mexico. Results show that working in the formal sector, the level of wealth and income, educational attainment, and age are the socio-economic characteristics that most affect the likelihood of holding any formal financial product. The relative importance of these characteristics, however, varies across financial products. Economic barriers to individuals’ financial inclusion are strongly associated with widespread informality and a low level of education and income. These results suggest that financial education programmes and credit registries considering a wider set of data to assess informal workers' credit worthiness would be promising avenues to help more Mexicans access financial services.

The access to formal financial services in Mexico is particularly low. Access is also significantly unequal across income levels, gender, between rural and urban areas and across regions. SMEs access to bank credit is low, hampering firms’ ability to grow and innovate. The use of cash and informal credit is still widespread, especially in rural areas, where financial infrastructure is underdeveloped. The diffusion of digital financial services is slowly advancing but remains low, hindered by a relatively low level of financial literacy and a digital divide. Expanding access to finance would enable Mexican households to invest in education and health, and better manage income shocks and smooth consumption. It would also enable Mexican firms to invest more, increase productivity and create formal jobs. Low-income households, small firms and more disadvantaged regions would particularly benefit, as it would unlock new economic opportunities for them. Boosting competition in the banking sector would facilitate SMEs access to credit by lowering interest rate margins. Upgrading the regulatory framework of the financial system would help increase competition and quality of financial services. The potential of the fintech sector is yet to be materialised, which would further increase competition and bring financial services to wider segments of the population. Strengthening financial education and digital literacy would facilitate a larger and better use of traditional and digital financial services.

This report compiles comparable tax revenue statistics over the period 1990-2020 for 27 Latin American and Caribbean economies. Based on the OECD Revenue Statistics database, it applies the OECD methodology to countries in Latin America and the Caribbean to enable comparison of tax levels and tax structures on a consistent basis, both among the economies of the region and with other economies. This publication is jointly undertaken by the OECD Centre for Tax Policy and Administration, the OECD Development Centre, the Inter-American Center of Tax Administrations (CIAT), the Economic Commission for Latin America and the Caribbean (ECLAC) and the Inter-American Development Bank (IDB).

The COVID-19 crisis has had a profound impact on SME access to finance. In particular, the sudden drop in revenues created acute liquidity shortages, threatening the survival of many viable businesses. The report documents an increase in demand for bank lending in the first half of 2020, and a steady supply of credit thanks to government interventions. On the other hand, other sources of finance declined, in particular early-stage equity. This paper, a special edition of Financing SMEs and Entrepreneurs, focuses on the impacts of COVID-19 on SME access to finance, along with government policy responses. It reveals that the pre-crisis financing environment was broadly favourable for SMEs and entrepreneurs, who benefited from low interest rates, loose credit standards and an increasingly diverse offer of financing instruments. It documents the unprecedented scope and scale of the policy responses undertaken by governments world-wide, and details their key characteristics, and outlines the principal issues and policy challenges for the next phases of the pandemic, such as the over-indebtedness of SMEs and the need to continue to foster a diverse range of financing instruments for SMEs.