To increase productivity and ensure that such gains are widespread, focus should be placed on policies and programs that primarily benefit Small and Medium enterprises, foster new enterprise creation and innovation, and upgrade infrastructure. To these ends it is essential to:
- foster sound financial sector development to facilitate access to finance to businesses and financial inclusion for individuals;
- generate a competitive business environment to propitiate new enterprise creation in all sectors of the economy, specially network sectors shielded from competition;
- foster innovation for productivity and competitiveness; and
- upgrade infrastructure.
Fostering sound financial sector development
Mexico needs to broaden and deepen its financial system without compromising the financial stability gains of the last decade. Using the financial payments system to promote financial inclusion, improvements in financial infrastructure and capital market development are sound ways to broaden access and deepen the financial system. However, experience in several countries has shown that accelerated (or forced) expansion of credit can harm rather than benefit customers. If financial institutions do not follow sound practices, they can fail, harming borrowers and depositors alike and creating social unrest, with substantial fiscal cost. An oversight system (both micro- and macro-prudential) that encourages prudent risk-taking and facilitates prompt resolution of failed institutions ensures that strategies for financial deepening do not compromise financial stability.
The WBG will continue supporting reforms to foster sound financial sector development, including the recently draft financial reform initiative.
- The World Bank will provide support for the implementation of the financial reform initiative through a programmatic knowledge engagement. The package envisions the reform of 34 laws and numerous secondary regulations in the areas of capital markets, public banks, financial infrastructure, and financial oversight.
- The Bank will also work with telecommunications industry to evaluate a pilot to bring the use of mobile phone operated electronic wallets to isolated rural communities, which currently lack wireless phone access. Scale-up of the pilot is contingent on the evaluation results.
- IFC plans to increase its investment portfolio for financial institutions focused on MSME lending, niche banks and further penetrating non-bank financial markets (pension funds, insurance, capital markets).
- IFC is also seeking to support financial infrastructure through alternative channels such as mobile banking, and will continue to assist in the development of the capital markets enabling companies to access the local debt market.
- MIGA can provide guarantees to increase cross-border lending to local clients, including MSMEs.
Toward a more competitive business environment
Strengthening competition and streamlining key regulations for firms are key to increasing Mexico’s competitiveness and unleashing productivity. Firm-level productivity and business entry for formal enterprises in Mexico are low, relative to international peers. Low productivity is associated to firm size, with larger firms having much higher productivity levels than small ones. The large proportion of micro, small, and medium-size enterprises (about 98 percent of all firms), together with the fact that they are not growing in size, is a drag on Mexico’s productivity. Factors that hinder productivity include burdensome business regulations, concentrated markets with dominant firms in strategic sectors, and lack of effective pro-competition regulations. Such restrictions limit both firm entry and the growth of existing firms, increase the price of inputs, and reduce the overall economy’s competitiveness. Lack of competition reinforces existing inequities by affecting low-income households disproportionally.
To contribute to unleashing productivity, the WBG will increasingly focus on supporting policies that favor SME growth through regulatory simplification and removal of regulatory competition barriers.
In the next years, efforts will focus on the provision of a comprehensive package of services to improve regulatory frameworks at the national and subnational level with a special emphasis on eliminating anti-competitive regulations.
Fostering innovation for productivity and competitiveness
Several factors explain Mexico’s innovation shortfall. Mexico’s less than adequate competition, labor market rigidities, serious gaps in human resources, very limited financing for startups, lack of long-term financing to large companies, and weak links between the productive sector and knowledge institutions have all contributed to the innovation shortfall. Federal initiatives to promote innovation at the subnational level have not yielded all the desired results due to lack of capacity.
WBG contribution to this topic concentrates in improving the coordination of policies aiming at taking innovations to firms in the productive sector and supporting private investments that boost innovation and productivity.
IBRD has been supporting the Consejo Nacional de Ciencia y Tecnología (CONACYT) for a doctoral fellowship program and programs to encourage public–private collaborative research. Going forward, the Bank’s focus will shift to:
- supporting the newly created SME agency (INADEM) to improve the effectiveness of programs to foster SME productivity and growth, with a focus on high-growth potential firms; and
- supporting states with lower GDP per capita to develop a regional innovation strategy and regional capacities to access existing innovation funds and programs. From a sectoral perspective, the focus would be on improving innovation and technology extension in the manufacturing and agricultural sector.
IFC will continue to support companies that innovate through technology, products, or processes, giving priority to investments related to the production of value-added products in underdeveloped sectors in which Mexico has a competitive advantage and in companies with strong impact in the development of SMEs through the supply chain.
Agribusiness is also a priority for IFC given its linkages and strong impact on SMEs in rural areas and because of its potential effect on the global food security problem. IFC also expects to increase its financing for Mexican companies investing overseas to achieve knowledge transfer, regional development, and growth.
Finally, IFC, together with INADEM, is evaluating a pilot to set up a management company to invest and provide technical support to innovative early stage SMEs. MIGA can provide guarantees to foreign investors in local enterprises, which can act as a catalyst for local entrepreneurship.
Raising the country’s productivity would require a comprehensive strategy to improve efficiency of key infrastructure services. This includes the rail and port sectors, public management arrangements and the role of Public-Private Partnerships (PPPs), and rules and procedures governing the entire breadth of the supply chain. Sector and institutional reforms, and substantial infrastructure investment should also be included in this program.
To contribute to the competitiveness of the country, the IFC aims to continue supporting sectors that are opening further to the private sector, such as telecommunications where IFC can bring its global experience. In the case of the energy initiative currently under discussion, if the conditions are established, IFC could be a financing option to support long-term investments and local companies in the sector.