2009 OECD Economic Surveys: Mexico 2009

image of OECD Economic Surveys: Mexico 2009

Despite improved macroeconomic fundamentals, this 2009 edition of OECD's periodic survey of the Mexican economy finds that Mexico is being hard hit by the financial crisis and world economic downturn.  In addition to a chapter examining how to overcome the crisis, this edition also includes chapters on managing the oil economy, achieving higher performance in health and education, and structural reforms to boost long term growth.

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Managing the oil economy

Can Mexico do it better?

Fiscal policy is highly dependent on volatile oil income. The balanced budget rule can create a bias for spending oil revenues as they are earned, especially as transfers to the stabilization funds are limited by caps at low levels. This can potentially lead to a pro-cyclical bias in fiscal policy. Revenues have also been lower than they could have, if gasoline prices had adjusted with international prices instead of a price smoothing mechanism for the domestic price. The system also benefits mostly welloff consumers and has important environmental costs. To better manage budget cycles and oil wealth, Mexico should establish a structural deficit fiscal rule. To improve transparency oil revenues should be reported in gross terms in the budget. A price mechanism that leads to a closer alignment between domestic and international gasoline prices should be adopted and other energy subsidies eliminated and an energy excise tax introduced. To reduce dependence on oil revenues and prepare for the exhaustion of oil reserves, further tax reform is needed to cut exemptions and broaden the tax base. A rapid and adequate implementation of the reform of the state oil company is required to boost oil revenues, increase efficiency and investment in future exploration. While the recent reform passed by congress is expected to improve governance and allow Pemex to use performance based contracts, its implementation is key.

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