1 1

Mexico: The Growth that Was Not and a few thoughts on finance

Mexico Day

Session 2: Unleashing Productivity Growth

Washington, DC 18 October 2011

Chief Economist Office Latin America and the Caribbean The World Bank

2

100 years of solitude for LAC, and even more for Mexico

Notes: High Performance EAP includes Korea Rep., Taiwan, Hong Kong, and Singapore; LAC6+URY includes the following countries: Argentina, Brazil, Chile, Colombia, Peru, Uruguay, and Venezuela. The weights are calculated using the 2007 nominal GDP. Source: Penn World Tables.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1900

1905

1910

1915

1920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

GDP Per Capita Relative to the USWeighted Averages

High Performance EAP LAC6+URY Mexico

WashingtonDissensus

Gold Standard Period

Interwar Period Import Substitution WashingtonConsensus

LostDecade

WashingtonDissensus

Gold Standard Period

Interwar Period Import Substitution WashingtonConsensus

LostDecade

3

Mexico was among the worst growth performers in LAC in the past ten years

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%19

50

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Semi-Converging CountriesGDP Per capita relative to US

Chile Dominican Republic Mexico Brazil

4

Is it a problem of accumulation? S &I are low, but not lower than the LAC average

0%

5%

10%

15%

20%

25%

30%

35%

1960's 1970's 1980's 1990's 2000's

% o

f G

DP

Gross Domestic SavingsDecade Average

LAC-7EAPMexico

0%

5%

10%

15%

20%

25%

30%

35%

40%

1960's 1970's 1980's 1990's 2000's%

of

GD

P

Investment Decade Average

LAC-7EAPMexico

Is it a problem of accumulation? Tertiary education increased more than LAC average…

5 Source: Author’s calculation based on Household datasets.

19.3

40.9

29.7

10

East Asian Tigers1990

16.4

51

23.1

9.5

LAC-71990

9.7

29.3

40.7

20.3

East Asian Tigers2010

7.9

40.3

37.5

14.2

LAC-72010

22

47.4

22.8

7.8

Mexico1990

No SchoolPrimarySecondaryTertiary

7.6

33.6

41.9

16.8

Mexico2010

Is it a problem of accumulation? … but the quality of education seems to be a problem

6 Sources: OECD, UNESCO, and World Bank.

ARG

AUSAUT

AZE

BEL

BRA

BGRCHL

COL

HRV

CZE DNKEST

FIN

FRADEU

GRC

HKG

HUN

ISL

IDN

IRL

ISR

ITA

JPN

JOR

KOR

KGZ

LVALTU LUX

MAC

MEX

NLDNZL

NOR POL

PRT

ROM

SVK

SVN

ESP

SWE

CHE

THA

TUN

TUR

GBR

USA

URY

300

350

400

450

500

550

0 5 10 15 20 25 30

Mat

hem

atic

s sco

re in

PIS

A 2

006

Expenditure per student, primary (% of GDP per capita)

Education Gap

7

Is it a problem of accumulation? Physical capital: electricity & road density – not that bad

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Electricity Installed CapacityIn thousands of KW per 1000 people, simple averages

EAP

LAC-6 + Uruguay

Mexico

Source: For Panel B, International Energy Agency (IEA) 2010 and Federal Electricity Commission of Mexico.

90.0

93.4

84.2

97.696.5 96.8

99.0 99.399.4 99.4

75

80

85

90

95

100

2005 2009

Electricity Access In % of the Population

rest of LAC

Vietnam

Mexico

Thailand

China

0.0000

0.0010

0.0020

0.0030

0.0040

0.0050

0.0060

0.0070

0.0080

0.0090

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Road DensityIn thousands of KM per 1000 people, simple average

LAC-6 + Uruguay Mexico

8

Is it a problem of productivity? It appears so…

40

60

80

100

120

140

160

180

200

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

Total Factor Productivity in LAC-7Index base 100=1960

LAC-7BrazilChileMexicoVenezuela

9

Is it a problem of productivity? Logistics & shipping connectivity – not obvious

2.582.68

2.802.89

2.80

3.04

3.313.16

3.61 3.64

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

2006 2009

Logistic Performance Index

rest of LAC

Vietnam

Mexico

Thailand

OECD

Source: For Panel B, World Development Indicators & Global Development Finance 2010 .

ArgentinaBrazil

Dominican Rep.

MexicoPanama

3.00

3.20

3.40

3.60

3.80

4.00

4.20

4.40

10.00 20.00 30.00 40.00In

GD

P pe

r cap

ita

Liner Shipping Connectivity

GDP and Shipping Connectivity2009

10

Is it a problem of productivity? Innovation – getting warm…

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

4 5 6 7 8 9 10 11

Log GDP per Capita

Pred

icte

d &

Obs

erve

d R

&D

/GD

P

IndiaArgentina

China

Costa Rica

IsraelFinland

Korea

Mexico

South Africa

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

4 5 6 7 8 9 10 11

Log GDP per Capita

Pred

icte

d &

Obs

erve

d R

&D

/GD

P

IndiaArgentina

China

Costa Rica

IsraelFinland

Korea

Mexico

South Africa

Source: Lederman & Maloney (2007)

11

Is it a problem of productivity? Institutions – possibly an important part of the story

Source: Daniel Kaufmann, Aart Kraay and Massimo Mastruzzi (2010). The units in which governance is measured follow a normal distribution with a mean of zero and a standard deviation of one in each period. This implies that virtually all scores lie between -2.5 and 2.5, with higher scores corresponding to better outcomes.

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

Voice and Accountability

Political Stability

Government Effectiveness

Regulatory Quality

Rule of Law Control of Corruption

LAC6+URY Mexico

Or is it simply that Mexico is missing the growth boat because of its lack of complementarity with China…

12 Notes: For Panel B, the sample of UE15 includes: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal , Spain, Sweden, and the United Kingdom; the sample of LAC countries includes: Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Grenada, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad and Tobago, Uruguay, and Venezuela. Sources: WITS and World Bank World Development Indicators (WDI).

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Para

guay

Chile

Peru

Braz

ilCo

sta R

ica

Uru

guay

Arg

entin

aVe

nezu

ela

Ecu

ador

Mex

ico

Colo

mbi

aG

uate

mal

aBo

livia

Pana

ma

Surin

ame

Nic

arag

uaJa

mai

caE

l Sal

vado

rG

rena

daH

ondu

ras

TTO

Beliz

e

% o

f To

tal T

rade

Main Trade Partners2009

RoW

EU15

USA

LAC

CHN

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1980 1984 1988 1992 1996 2000 2004 2008

Output Co-Movement Between LAC and China20 years rolling correlation of the Real GDP Growth

Brazil Chile ColombiaMexico Peru ArgentinaPanama Dom. Rep.

13

… compounded with a de facto inability to compete on the basis of low wages?

Notes: Yearly wages are manufacturing wages from LABORSTA (ILO) in 2002. Uruguay and Argentina are in 2001 and Venezuela in 1997. Labor force size is from WDI 2002. Years of schooling is the average number of years of school attainment of the population with 25 yeas or more from Barro and Lee 2000.

Argentina

Brazil Chile

China

Colombia

Mexico

Peru

Uruguay

Venezuela

0

2000

4000

6000

8000

10000

12000

0 2 4 6 8 10 12

Yea

rly

Wag

es in

Man

ufac

turi

ng

Years of Schooling

Labor Force Size(millions of people)

China 752,410 LAC-8 198,183

Labor Force Size(millions of people)

China 752,410 LAC-8 198,183

One slide on finance

14

15

The big gaps are in the banking and equity markets, not in the local bond market

Outstanding Domestic Private Debt Securities as % of GDP

0

5

10

15

20

25

Argentina Brazil Chile Colombia Mexico Peru Uruguay

Private Credit as % of GDP

0

20

40

60

80

100

120

Argentina Brazil Chile Colombia Mexico Peru Uruguay

Source: De La Torre, Feye, and, Ize (2011).

Stock Market Capitalization as % of GDP

0

20

40

60

80

100

120

Argentina Brazil Chile Colombia Mexico Peru Uruguay

Stock Market Turnover Ratio (%)

0

10

20

30

40

50

60

70

80

90

Argentina Brazil Chile Colombia Mexico Peru Uruguay