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Better Business Environment for Enhanced Growth in Mexico

October 10, 2013

This US$751.9 million fast-disbursing development policy loan (DPL) operation supported 14 policy actions of the federal government aimed at strengthening the microeconomic foundations of the business environment. These actions addressed the need to strengthen market competition, lower the cost of doing business, accelerate the adoption of new technologies, and expand investment in infrastructure. The private sector and financial reform program improved the sustainability of the economy’s solid recovery and employment generation that followed the sharp drop in output of 2009 (-6.3%).
PROJECT MAP

Challenge

Given Mexico’s lackluster growth performance since the mid-1990s, the unprecedented global financial crisis of 2008, and the AH1N1 influenza outbreak of 2009, improving competitiveness and productivity has gained in importance. Thus, renewed efforts to strengthen the business environment and improve access to a more resilient financial sector complemented the successful application of counter-cyclical policies to reverse the 2009 downturn in real gross domestic product (GDP).

Both efforts were crucial for enhanced growth and employment generation. In addition, the government confronted the pressing need to protect social expenditure at a time when access to international credit markets remained subject to high volatility.

Solution

The Bank demonstrated its capacity to respond promptly and flexibly to the requirements of an important development partner, striking a balance between its desire to support measures that strengthen the private sector and Mexico’s demanding 2011 fiscal financing requirements. The operation encompassed four policy areas:

  • Strengthening market competition, particularly in telecommunications and public sector procurement.
  • Streamlining business regulations to lower the cost of doing business and accelerate the adoption of new technologies.
  • Improving financial regulation to foster financial market access, stability and transparency.
  • Promoting public-private partnerships to expand investment in infrastructure. 


Results

Actions supported by this DPL are having a lasting development impact on Mexico’s business environment and the institutions that sustain it. They are contributing to lasting gains in competitiveness and productivity in, thereby fostering growth and reducing inequality. For example, the establishment of the Financial Stability Council and the creation of the Single Trade Window platform are important institutional innovations that are helping to mitigate financial systemic risk and reduce the cost of doing business in Mexico.

The use of reverse auctions and framework agreements in public sector procurement has brought about significant fiscal savings and important gains in market competition and transparency. Finally, the simplification and reduction in the number of tax declarations and payment procedures by businesses is benefiting the private sector with substantial time (40%) and cost savings (over 0.1% of GDP).

In the telecommunications sector, the large increases in radio spectrum available for mobile telephones drastically expanded the supply of services and competition in that market, at both regional and national levels. Meanwhile, the addition of a national fiber-optic network operated by a new provider has drastically eroded the monopoly power of the previous single wholesale supplier of digital data transmission.

Other measures represented first steps and important paradigm changes. These included the added flexibility introduced into public-private partnerships that develop and operate infrastructure projects, and the acceptance of U.S. and Canadian technical norms and product standards for imported electronic appliances and data processing equipment. Similarly, the massive adoption of low-risk, small-transaction mobile bank accounts will result in important gains in financial inclusion.

Bank Group Contribution

This operation is part of the rich and active Bank engagement with Mexico in support of the country’s enduring efforts to strengthen the foundations for sustained economic growth. Based on this strong partnership and as part of its crisis response program, the Bank in recent years has contributed an unprecedented level of resources to Mexico—a long list of financial, knowledge and convening services. This support is illustrated by the fact that by mid-2011 and prior to the disbursement of this sizable DPL, the Bank’s portfolio in Mexico was the fourth largest among all Bank borrowers.

Partners

Mexico’s policy actions to mitigate the negative impact of the global crisis and resume the path of sustained economic growth have also relied on increased support from other multilateral credit institutions, such as the International Monetary Fund and the Inter-American Development Bank. The Bank has cooperated and coordinated closely with them in order to accommodate Mexico’s demanding external financing, knowledge, and fiscal needs.

Moving Forward

While there are no additional phases to this DPL in the current lending program, the Bank remains actively engaged in the policy areas supported by this operation through knowledge services, including the Financial Sector Assessment Program, and policy notes on such themes as sound financial development, fostering competition, enhancing the business environment, and procurement reform.