Knowledge Dispenser

How has Mexico’s fiscal dependence on oil revenue and the US market changed or improved over the past year?

On those two points I would note some positive momentum. On the fiscal front the government has presented a reform package that explores alternative sources of revenue to limit the nation’s oil dependence. The proposal that was approved by congress was more conservative, but I think it raised awareness nonetheless. In fact, while this step toward reform did not completely address the issue, it made it clear at least that more needs to be done. Structural changes in the economy take time, and you will not see major changes from one year to the next. We observe policies, proposals, and signals that are going in the right direction. On the trade front, the relationship with the US is well established and long standing. One of the first signals that the administration was aware of the importance of this issue was when the Minister of Finance became the Minister of Foreign Affairs. He has been much more engaged in sourcing trade partners and looking for ways to begin firmer partnerships with other countries.

What are your expectations for the impact of the fiscal reform?

Many areas need addressing for reforms to have effect. I think that the positive aspect of this administration is its recognition of the need and willingness to work in parallel on several fronts. They seem capable of going further than their predecessors on this occasion, although it’s not fully within their power to do so as they require congressional approval.

What was the reason for the contraction of the Mexican economy in 2013, and what needs to be done to expedite economic growth?

A difficult external environment and certain domestic issues created this contraction. Fortunately, we are projecting growth of between 3% and 4% for 2014. There are determining factors that lead to the acceleration of the trade relationship with the US and these have been slower than expected recently, which has impacted exports. Internal issues are to be expected for the first year of an administration. Public investment has been slower. There has been a gradual deceleration of the construction sector because of issues within the sector itself. For 2014, higher growth is forecast for the US, which will impact trade. Clearly there is movement in terms of public investment, and there is an infrastructure plan in place that will assist the process. As the macroeconomic climate itself remains healthy, and there is flexibility on the fiscal and monetary sides and the exchange rate, we are optimistic.

What are your most important projects in poverty alleviation and rural development in Mexico?

The engagement model that we have with countries of the World Bank encompasses more than loans. We start with the national development plan and agree with the government on priority areas. Based on that we develop a program to establish the optimum instrument in support of the country. This is usually a combination of financial and knowledge products, and the dissemination of global experience. There are four areas on which we are focused and our strategy for Mexico for the next six years starts with productivity. We are working with the financial sector, competition, and innovation. The focus is on how to support smaller companies. The second area is related to increasing social prosperity. We are working with the government on offering second-generation social protection, and Mexico is known to be proactive on this issue. The third major area concerns strengthening public finances and government efficiency. This is closely related to enhancing service delivery, particularly at the local level, and to working with states. Integrated risk management, which includes not only traditional fiscal risk management, but also disaster risk management, will come to the fore. We feel that when disasters occur the poor are hurt the most. The fourth area has to do with sustainability and promoting green and inclusive growth. We are working on specific sectors like water and solid waste, once again with a focus on poverty, especially in poorer states. For example, we have a comprehensive program with the state of Oaxaca. We want to focus the next six years on working with Guerrero and Chiapas.

What is the importance of disaster relief and climate change for economic development?

It is very important particularly in the case of Mexico because it has an impact on the economic side, specifically on GDP. Mexico is one of the countries in the world most prone to natural disasters. Around 40% of its territory and 30% of its population are exposed to hurricanes, storms, floods, earthquakes, and volcanic eruptions. This, in economic terms, translates into about 70% of GDP considered to be at risk. A number of studies we’ve done show that 70% of the poorest 125 municipalities are highly prone to disaster. This is a huge burden for the government so we are working not only on financing, but also on prevention. We have been working with the government on non-traditional products. An innovative example is the bond we developed for catastrophes to cover risks, focused on bringing in global expertise. The insurance market remains undeveloped in Mexico, which is why the financial burden falls on the government.

What are your expectations for education reform and its likely consequences for future generations?

There are two main issues to address here: the quality of education and the links between the education system and the labor markets. Implementation will be very important, and highlights government recognition that education plays a major role in reducing poverty. We share the government’s concern that national labor productivity has risen by just by 2% over the past 20 years, compared to more than 60% among its competitors. Up to 40% of Mexican employers say they have difficulties in filling job vacancies for want of qualified people. The education sector must urgently play a role in filling these gaps. Most of these reforms will take some time to take effect, but it’s important that this administration is willing to start the process.

Considering the global crisis, what are the particularities of Colombia as a market suited to foreign investment?

Colombia has been experiencing very solid growth and really has become one of the main Latin American investment hot spots. One factor is the stabilization of internal security, as well as recent policy reforms in Colombia over the past three years. Notable, too, is stable macroeconomic management. This is a country of considerable flexibility in fiscal monetary policy in response to shocks, and also one that has high commodity prices. This has allowed it to sustain higher GDP growth than the Latin American average. For 2013, we project growth of 3.9%, while the Latin America average is 2.8%. For 2014 we project a growth rate of 4.3%, while the overall average growth rate of Latin America is projected at 3%. One of the other important elements that has lead to this investment interest in Colombia is that, since 2010, President Santos’ administration has made continuous efforts to open up the economy. The recent trade and investment agreement has strengthened the environment, brining a sense of confidence to foreign investors. There is a long list of stand-alone agreements and bilateral investment treaties that Colombia has worldwide. The government has also done a very good job of diversifying its markets between the US, the EU, and Asia. There are still challenges ahead, but the fact that investors have been willing to enter has helped considerably.

What are the main factors behind Colombia’s sustainable advance?

Colombia’s economy has been able to withstand external shocks thanks to four shock absorbers: the flexible exchange rate, a very manageable public debt, modest deficits, and a solid financial system. One of the main impacts of the crisis in many emerging countries has been a decrease in the credit extended to the private sector. Yet the robustness of Colombia’s financial system has prevented a duplication of this. The high commodity prices have also helped.

What is your outlook on future World Bank support in Colombia, and in which areas are further reforms required?

We also have the flexibility, amid volatile conditions, to come in and support the country. Thus, we have a very stable lending relationship. Our business model combines finance with knowledge, and we are focused on expanding opportunities for social prosperity. The reason is that, notwithstanding the advances in Colombia, it is still a very unequal society. The coefficient in inequality, compared to other countries in Latin America, is among the lowest. We are improving education, citizen security, and social services. We focus on improving sustainable urban development and have also been focusing on innovation agenda. Both the government and the private sector are very interested because they need to lower their dependence on commodity exports in the future. They need to innovate so that more high-value products are available for production.

© The Business Year – January 2014