The document summarizes a presentation given by Alejandro Díaz-Bautista on Mexico's structural reforms and economic growth. It discusses reforms in fiscal policy, the energy sector, telecommunications, and the financial system enacted by Mexico's current administration. The reforms aim to increase competition, investment, and credit availability to boost long-term economic growth. Mexico and the US have deep economic ties as trading partners, with the border region representing the largest binational economy in the world.

1. ““A Model of Structural Reform and EconomicA Model of Structural Reform and Economic
Growth in Mexico”.Growth in Mexico”.
Alejandro Díaz-Bautista,Alejandro Díaz-Bautista, Ph.D.Ph.D.
Professor of International Economics at Colef
and
Distinguished Researcher
National Council of Science and Technology
adiazbau@gmail.com
Presenting at the Annual Meetings of the Association of Borderlands
Studies and the 56th Annual Conference of the Western Social
Science Association.
April 5, 2014, Albuquerque, New Mexico, USA.
Hyatt Regency Albuquerque.

2. IntroductionIntroduction
 Since President Peña Nieto took office last year, Mexico hasSince President Peña Nieto took office last year, Mexico has
been pushing for an ambitious agenda of structuralbeen pushing for an ambitious agenda of structural
reforms. Mexico recently enacted a structural reform of itsreforms. Mexico recently enacted a structural reform of its
telecommunications and broadcasting industries aimed attelecommunications and broadcasting industries aimed at
increasing competition and investment. A fiscal reform andincreasing competition and investment. A fiscal reform and
a comprehensive financial reform aimed at boosting credita comprehensive financial reform aimed at boosting credit
was proposed by the current administration.was proposed by the current administration.
 The Mexican government recently announced the energyThe Mexican government recently announced the energy
reform that is expected to include significant changes toreform that is expected to include significant changes to
Mexico’s current oil and energy sector, partly aimed atMexico’s current oil and energy sector, partly aimed at
attracting foreign investment.attracting foreign investment.

3. IntroductionIntroduction
 The reforms are a result of the Pact for Mexico, by whichThe reforms are a result of the Pact for Mexico, by which
the current administration and the major political partiesthe current administration and the major political parties
pledged to pass structural reforms in such sectors aspledged to pass structural reforms in such sectors as
telecommunications, financial, energy, education and atelecommunications, financial, energy, education and a
fiscal reform.fiscal reform.
 The conference analyzes the impacts of the structuralThe conference analyzes the impacts of the structural
reforms in Mexico’s economy during 2014, twenty yearsreforms in Mexico’s economy during 2014, twenty years
after the passage of the NAFTA agreement. Mexico’safter the passage of the NAFTA agreement. Mexico’s
structural reforms in the areas of telecommunications,structural reforms in the areas of telecommunications,
financial, fiscal and energy sectors are expected to improvefinancial, fiscal and energy sectors are expected to improve
long-term economic growth prospects.long-term economic growth prospects.

4. Fiscal ReformFiscal Reform
 TAX REFORM HIGHLIGHTSTAX REFORM HIGHLIGHTS
 The Social and Tax Reform has several components worthThe Social and Tax Reform has several components worth
mentioning:mentioning:
 1. The health related tax1. The health related tax
 2. Continuing zero percent tax to food and medicines2. Continuing zero percent tax to food and medicines
 3. Harmonization of VAT (Value Added Tax) in all of Mexico at3. Harmonization of VAT (Value Added Tax) in all of Mexico at
16%.16%.
 4. Elimination of special treatment and preferential tax regimes4. Elimination of special treatment and preferential tax regimes
 5.Establishment of limits on personal tax exceptions and5.Establishment of limits on personal tax exceptions and
deductionsdeductions
 6. Tax on stock and capital profits6. Tax on stock and capital profits
 7. Elimination of IETU (Special Tax on Production and Services),7. Elimination of IETU (Special Tax on Production and Services),
IDE (CashIDE (Cash
 Deposit Tax) and new ISR (Revenue Tax) lawDeposit Tax) and new ISR (Revenue Tax) law
 8. Changes to the customs regulation8. Changes to the customs regulation

5. Energy ReformEnergy Reform
 The reforms would allow outside companies to participate in oil, gas andThe reforms would allow outside companies to participate in oil, gas and
natural gas liquids (NGLs) production in Mexico. Right now, production isnatural gas liquids (NGLs) production in Mexico. Right now, production is
limited to the state energy producer, Pemex.limited to the state energy producer, Pemex.
 By allowing more participation in the country's energy sector, the reformsBy allowing more participation in the country's energy sector, the reforms
could increase oil production in the country and reduce the trade deficitcould increase oil production in the country and reduce the trade deficit
that Mexico has in every other hydrocarbon and derivative, such as naturalthat Mexico has in every other hydrocarbon and derivative, such as natural
gas, oil products and petrochemicals.gas, oil products and petrochemicals.
 By allowing third parties to fractionate natural gas, the reforms could evenBy allowing third parties to fractionate natural gas, the reforms could even
provide the foundation for a petrochemical resurgence along the lines ofprovide the foundation for a petrochemical resurgence along the lines of
what is already occurring in the US.what is already occurring in the US.

6. Telecommunications ReformTelecommunications Reform
 The reforms would raise or eliminate limits on foreign investment, createThe reforms would raise or eliminate limits on foreign investment, create
two new national television channels and form a new independenttwo new national television channels and form a new independent
regulatory commission along the lines of the U.S. Federal Communicationsregulatory commission along the lines of the U.S. Federal Communications
Commission, with the power to unilaterally punish non-competitiveCommission, with the power to unilaterally punish non-competitive
practices, including withdrawing corporations' licenses. A secondpractices, including withdrawing corporations' licenses. A second
independent commission would be able to order firms to sell off assets inindependent commission would be able to order firms to sell off assets in
order to reduce their market dominance.order to reduce their market dominance.
 The existing commissions that oversee competition andThe existing commissions that oversee competition and
telecommunications have no independent ability to alter permits, ordertelecommunications have no independent ability to alter permits, order
divestment or issue fines. Those powers sit with a Cabinet secretary, adivestment or issue fines. Those powers sit with a Cabinet secretary, a
position that in the past frequently has been accused of bowing toposition that in the past frequently has been accused of bowing to
telecommunications firms.telecommunications firms.
 The reforms would require TV networks to provide their programming freeThe reforms would require TV networks to provide their programming free
to most cable operators, and require cable operators to carry all broadcastto most cable operators, and require cable operators to carry all broadcast
channels, measures seen as essential for opening television markets tochannels, measures seen as essential for opening television markets to
competition. The changes would also block telecommunications andcompetition. The changes would also block telecommunications and
broadcasting companies from indefinitely freezing regulatory decisionsbroadcasting companies from indefinitely freezing regulatory decisions
simply by obtaining a private injunction, a peculiarity of Mexican law thatsimply by obtaining a private injunction, a peculiarity of Mexican law that
has thwarted dozens of attempts to regulate media and communicationshas thwarted dozens of attempts to regulate media and communications
firms.firms.

7. Financial ReformFinancial Reform
 President Enrique Peña Nieto promulgated the financial reform law, sayingPresident Enrique Peña Nieto promulgated the financial reform law, saying
that it will promote responsible lending which will create true economicthat it will promote responsible lending which will create true economic
growth and greater productivity in Mexico.growth and greater productivity in Mexico.
 He promised that changes to the lending rules would have a favorableHe promised that changes to the lending rules would have a favorable
impact on the national economy by making credit more easily available toimpact on the national economy by making credit more easily available to
Mexicans and local companies, as well as increasing and democratizingMexicans and local companies, as well as increasing and democratizing
productivity, which will facilitate entrepreneurs’ access to much neededproductivity, which will facilitate entrepreneurs’ access to much needed
resources. With “more and cheaper credit,” President Peña Nieto said thatresources. With “more and cheaper credit,” President Peña Nieto said that
small- and medium-sized companies will be able to grow, modernize andsmall- and medium-sized companies will be able to grow, modernize and
generate more jobs for Mexicans.generate more jobs for Mexicans.
 The four central objectives of the new banking law, according to PresidentThe four central objectives of the new banking law, according to President
Peña Nieto, are to boost the Mexican development bank; to improve thePeña Nieto, are to boost the Mexican development bank; to improve the
judicial framework providing more credit at lower interest rates; tojudicial framework providing more credit at lower interest rates; to
increase competition in the financial sector multiplying and improvingincrease competition in the financial sector multiplying and improving
credit options for Mexicans; and to strengthen the soundness of thecredit options for Mexicans; and to strengthen the soundness of the
financial system.financial system.

8. U.S.-Mexico Relations, a ShiftU.S.-Mexico Relations, a Shift
from Security to Economyfrom Security to Economy
 Economics is at the center of the relationEconomics is at the center of the relation
between both countries in 2013 and 2014.between both countries in 2013 and 2014.
 The United States is Mexico’s largestThe United States is Mexico’s largest
trading partner, and the two countriestrading partner, and the two countries
engaged in nearly 500 billion dollars worthengaged in nearly 500 billion dollars worth
of trade in 2012. Much of that trade is inof trade in 2012. Much of that trade is in
what are known as intermediate inputs,what are known as intermediate inputs,
referring to semi-finished U.S. goods thatreferring to semi-finished U.S. goods that
are finalized with Mexican resources, aare finalized with Mexican resources, a
process seen as increasing theprocess seen as increasing the
competitiveness of both countries.competitiveness of both countries.

9. United States - Mexico Border States
Description:
• 10 border states.
• Nearly 2,000-mile (3,169 km or 1,969 miles) of international
border.
• Population: more than 83 million.

10. The United States- Mexico border regionThe United States- Mexico border region
 The ten Border States represent the largest binational regional economy inThe ten Border States represent the largest binational regional economy in
the world, with over 83 million people and a combined economy rankedthe world, with over 83 million people and a combined economy ranked
estimated at number four in the world in economic terms.estimated at number four in the world in economic terms.
 This region has 51 border crossings, 32 bridges and seven federal railwayThis region has 51 border crossings, 32 bridges and seven federal railway
routes, placing it as the busiest border in the world, with over 350 millionroutes, placing it as the busiest border in the world, with over 350 million
people cross the border each year.people cross the border each year.
 The economic slowdown and unemployment are among the issues thatThe economic slowdown and unemployment are among the issues that
currently affect the people on both sides of the border.currently affect the people on both sides of the border.
 The state of Arizona had an unemployment rate of 9.4 percent, Texas, 8.4The state of Arizona had an unemployment rate of 9.4 percent, Texas, 8.4
percent; New Mexico, 6.7 percent, and California, 12 percent (thepercent; New Mexico, 6.7 percent, and California, 12 percent (the
highest), according to the figures from July 2011, compared to anhighest), according to the figures from July 2011, compared to an
unemployment rate of 9.1 percent in the United States during July 2011.unemployment rate of 9.1 percent in the United States during July 2011.
 In July 2011, the northern border states of Mexico were also showing highIn July 2011, the northern border states of Mexico were also showing high
unemployment rates. The state of Baja California had an unemploymentunemployment rates. The state of Baja California had an unemployment
rate of 5.05 percent, Sonora, 5.65 percent; Chihuahua, 6.81 percent;rate of 5.05 percent, Sonora, 5.65 percent; Chihuahua, 6.81 percent;
Coahuila, 6.27 percent; Nuevo Leon, 6.49 percent; and Tamaulipas, 8.81Coahuila, 6.27 percent; Nuevo Leon, 6.49 percent; and Tamaulipas, 8.81
percent (the highest).percent (the highest).

11. The United States MexicoThe United States Mexico
BorderBorder
 People cross the United StatesPeople cross the United States
Mexico border every day to doMexico border every day to do
business, go shopping, visit familybusiness, go shopping, visit family
members, or simply to enjoy eachmembers, or simply to enjoy each
other’s tourism.other’s tourism.
 This results in around 350 millionThis results in around 350 million
crossings and almost $400 billion incrossings and almost $400 billion in
trade each year, making it the mosttrade each year, making it the most
important border region in the world.important border region in the world.

12. Economic Growth ModelEconomic Growth Model

13. To understand economic growth model, let’s look at the
sources of economic growth….where does production come
from?
( )LKAFY ,,=
Real
GDP
“is a function of”
Productivity Capital
Stock
Labor
Real GDP = Constant prices (Inflation adjusted) value of all
goods and services produced in the country.
Capital Stock = Constant price value of private, non-
residential fixed assets.
Labor = Private and Public Sector Employment.
Productivity = Production unaccounted for by capital or
labor.

14. A convenient functional form for growth accounting is the Cobb-
Douglas production function. It takes the form:
βα
LAKY = where 1=+ βα
With the Cobb-Douglas production function, the
parameters have clear interpretations:
Capital’s share of income (what
% of total income in the
country accrues to owners of
capital).
Labor’s share of income (what
% of total income in the
country accrues to owners of
labor).
Elasticity of output with respect
to capital (% increase in output
resulting from a 1% increase in
capital).
Elasticity of output with respect
to labor (% increase in output
resulting from a 1% increase in
labor).
α β

15. 3
2
3
1
LAKY =
Suppose we have the following Cobb-Douglas
production function:
A 1% rise in
employment raises
GDP by 2/3%
A 1% rise in capital
raises GDP by
1/3%
We can rewrite the production function in terms of
growth rates to decompose GDP growth into growth of
factors:
( ) ( ) ( )LKAY ∆+∆+∆=∆ %
3
2
%
3
1
%%
Real GDP Growth
(observable) Employment
Growth
(observable)
Capital Growth
(observable)
Productivity
Growth
(unobservable)

16. Our model of economic growth begins with a production
function.
Real
GDP
Productivity Capital
Stock
Labor
Given our models production function,
economic growth can result from
• Growth in labor
• Growth in the capital stock
• Growth in productivity
3
2
3
1
LAKY =

17. We are concerned with capital based growth. Therefore,
growth in productivity and employment will be taken as given
Productivity
grows at
rate
Ag Pop
Pop
LF
LF
L
L 











=
Population
grows at
rate
Lg
Employment
Labor Force
= Employment Ratio
( Assumed Constant)
Labor Force
Population
= Participation rate
( Assumed Constant)
3
2
3
1
LAKY =

18. 3
1
Aky =
Again, the key property of production is that capital
exhibits diminishing marginal productivity – that is as
capital rises relative to labor , its contribution to production
of per capita output shrinks
y
k
Capital stock pe
capita
Output per capita

19. Lets assume that households save a constant fraction of their
disposable income.
( )TYS −=θ
Saving
s
Income Less
Taxes
Constant between zero
and one
Again, convert everything to per capital terms by
dividing through by the labor force






−=
L
T
L
Y
L
S
θ ( )tys −=θ

20. c
time
Is a higher steady state worth the transitions structural
reforms?
Growth of per capita
consumption under old
policy regime = 1.5%
Immediate drop
in consumption
as economy
responds to
policy change
Growth of per capita
consumption increases
during transition
periodduring structural
reforms.
Growth of per capita
consumption returns to
1.5%

21. ““A Model of Structural Reform and EconomicA Model of Structural Reform and Economic
Growth in Mexico”.Growth in Mexico”.
Alejandro Díaz-Bautista,Alejandro Díaz-Bautista, Ph.D.Ph.D.
Professor of International Economics at Colef
and
Distinguished Researcher
National Council of Science and Technology
adiazbau@gmail.com
Presenting at the Annual Meetings of the Association of Borderlands
Studies and the 56th Annual Conference of the Western Social
Science Association.
April 5, 2014, Albuquerque, New Mexico, USA.
Hyatt Regency Albuquerque.

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