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"Assessing the Foundations of Mexico's Competitiveness: Findings from the Global Competitiveness Index 2007-2008 White Paper Irene Mia, World Economic Forum Emilio Lozoya Austin, World Economic Forum Assessing the Foundations of Mexico's Competitiveness: White Paper © 2008 World Economic Forum Contents Part I: Assessing the Foundations of Mexico’s Competitiveness: Findings from the Global Competitiveness Index 2007-2008 by Irene Mia and Emilio Lozoya Austin (World Economic Forum) 3 Part II: Country Profiles List of Countries How to Read the Country Profiles Mexico Competitiveness Profile Comparator Countries Competitiveness Profiles 29 31 33 37 43 Assessing the Foundations of Mexico's Competitiveness: White Paper © 2008 World Economic Forum Part I 1 Assessing the Foundations of Mexico's Competitiveness: White Paper © 2008 World Economic Forum Assessing the Foundations of Mexico's Competitiveness: White Paper © 2008 World Economic Forum CHAPTER 1 Assessing the Foundations of Mexico’s Competitiveness: Findings from the Global Competitiveness Index IRENE MIA, World Economic Forum EMILIO LOZOYA AUSTIN, World Economic Forum Mexico has come a long way since the “lost decade” of the 1980s and the ensuing instability associated with recurring financial crises.The country has emerged as the second largest economy in Latin America,1 after Brazil, and as the region’s top destination for foreign direct investment (FDI) in 2006.2 Since the 1995 “Tequila” crisis that rocked the country’s financial and exchange markets, Mexico has made significant progress toward establishing a solid macroeconomic foundation for sustained growth. It adopted an effective stabilization program that included the restructuring of its external debt, a prudent monetary policy, and a flexible exchange rate.These were coupled with the privatization of important companies. One result has been single-digit inflation (3.6% in 2006). Public debt and the current account deficit both stand at manageable levels -20% and 0.2% of gross domestic product (GDP).The government even enjoys a modest budget surplus (0.11% of GDP in 2006). Also, Mexico has started to leverage its unique geographic position between two oceans and between North and South America.With an already large internal market of over 100 million people,3 it has entered into an extensive network of trade agreements that provide preferential access to markets that include North America, Japan and Europe.The North American Free Trade Agreement (NAFTA), which established a free trade area between Mexico, the United States and Canada, helped triple intra-regional trade during the first decade after it took effect in 1994.4 NAFTA has significantly contributed to the diversification of Mexico’s productive and export structure, especially thanks to the maquiladora system of assembly factories and increased FDI.The United States accounted for 84.7% and 50% of Mexican exports and imports, respectively, and Mexico’s exports consisted mainly of manufactured products (81% of total) in 2006 according to the Economist Intelligence Unit (EIU). Notwithstanding these achievements and positive developments, Mexico does not display the same dynamism in terms of growth rates as other leading emerging markets such as India and China. Annual GDP growth rates in Mexico averaged 2.8% from 2002 to 2006, unimpressive compared to 10.1% and 7.8% for China and India, respectively, for the same period.5 Mexico’s economy continues to appear particularly vulnerable to external downturns, given its close association with the US business cycle and the heavy dependence on oil revenues to fund the public sector.The slowdown of the US economy sparked by the recent sub-prime mortgage crisis will likely stunt Mexico’s growth, now forecast at 1.9% for 2008 and 3% for 2009. The authors would like to thank Eva Trujillo Herrera for her excellent research assistance for this paper. Assessing the Foundations of Mexico's Competitiveness: White Paper © 2008 World Economic Forum Chapter 1 – Assessing the Foundations of Mexico's Competitiveness 3 Chapter 1 – Assessing the Foundations of Mexico’s Competitiveness The Mexico Competitiveness Report 2008 will try to cast some light on the impediments to Mexico’s growth and sustained competitiveness. It aims to provide a neutral platform for dialogue among policymakers, business people and other relevant stakeholders and help them identify effective policies and strategies that will improve the country’s competitiveness and lead to lasting prosperity for all Mexicans. In that spirit, this paper will assess the current state of Mexico’s competitiveness and its potential for sustained growth using the broad methodological framework offered by the Global Competitiveness Index (GCI), developed for the World Economic Forum by Professor Xavier Sala-i-Martin of Columbia University. Besides identifying the drivers of competitiveness, the GCI offers a unique tool that can help prioritize policies and actions according to a country’s specific stage of development.Through the lens of the GCI, this paper will take a comprehensive snapshot of Mexico’s competitive landscape and suggest areas that should be given priority in the design of a national competitiveness strategy. The paper will start by briefly outlining the methodological framework of the GCI. It will then assess Mexico’s performance in the different pillars of competitiveness, with a special focus on those factors considered crucial for the country given its stage of development. Introducing the Global Competitiveness Index The World Economic Forum has been studying national competitiveness for almost three decades. During that period it worked with leading academics, always taking into account relevant new ideas, literature and evidence. Developed in cooperation with Professor Xavier Sala-iMartin, an eminent growth economist from Columbia University, the GCI was introduced in 2004.The index provides a state-of-the-art methodological framework to assess “the set of institutions, policies, and factors that determine the level of productivity of a country” and identifies a large number of macro and microeconomic drivers of growth.6 The GCI builds on the awareness that competitiveness is an extremely complex phenomenon that cannot be explained by one or two causes; rather, competitiveness and sustained growth are determined by the interrelationships among several and diverse factors. Figure 1 shows the 12 pillars of competitiveness identified by the GCI and listed below: • Institutions: fairness of public institutions, government efficiency, security and its costs to businesses, and corporate governance; • Infrastructure: quality and development of general and specific infrastructure; • Macroeconomic stability: quality of the macroeconomic environment; • Health and primary education: health of the population and the quality of and access to basic education; • Higher education and training: quality of and access to secondary and higher education and the effectiveness of job training; • Goods market efficiency: the extent of domestic and foreign competition in a given market and the quality of demand conditions; • Labor market efficiency: flexibility of the labor market and whether it ensures the efficient use of talent; • Financial market sophistication: sophistication, efficiency, soundness and trustworthiness of financial markets; • Technological readiness: penetration of information and communication technologies (ICT) and the extent to which countries leverage technology and knowledge from abroad (notably through FDI), by adopting and adapting it in their production systems; • Market size: the size of the domestic and foreign markets; • Business sophistication: at the firm level, the degree of sophistication of operations and company strategies and the presence and development of clusters; • Innovation: potential to generate endogenous innovation. The 12 pillars (analyzed in more detail in the following section) play a crucial role for all countries as drivers of competitiveness, but their importance differs according to each country’s stage of development. Different pillars affect different countries in different ways.The elements driving productivity, and therefore competitiveness, change as countries move along the development path. Accordingly, the GCI classifies countries into three specific stages of development: factor-driven, efficiency-driven and innovation-driven.7 In the factor-driven stage, countries compete on the basis of their factor endowments, primarily unskilled labor and natural resources, and their economies are centered on commodities and/or basic manufactured products. At this stage of development, competitiveness rests mainly on efficient and transparent public and private institutions (pillar 1), well-developed infrastructure (pillar 2), good macroeconomic fundamentals (pillar 3), and a healthy and literate labor force (pillar 4). As countries move up the development path to the efficiency-driven stage, productivity can be improved not only by fostering the efficiency of the factor markets but also by improving the efficiency of production processes and practices at the firm level. Key factors include: higher education and training (pillar 5), efficient markets for goods and services (pillar 6), flexible and well-functioning labor markets (pillar 7), sophisticated financial markets (pillar 8), a large domestic and/or foreign market that allows for economies of scale (pillar 9) and the ability to leverage existing technologies, notably ICT, in the production system (pillar 10). In the third and most advanced -innovation-drivenstage of development, countries cannot continue to grow if they simply rely on efficient markets and production processes; they must start to compete by producing new, unique value-added goods. At this point, the capacity to generate endogenous technology (pillar 11) and to use sophisticated production processes (pillar 12) becomes critical. 4 Assessing the Foundations of Mexico's Competitiveness: White Paper © 2008 World Economic Forum Figure 1 The 12 Pillars of Competitiveness Basic requirements • Institutions • Infrastructure • Macroeconomic stability • Health and primary education Key for factor-driven economies Efficiency enhancers • Higher education and training • Goods market efficiency • Labor market efficiency • Financial market sophistication • Technological readiness • Market size Key for efficiency-driven economies Innovation and sophistication factors • Business sophistication • Innovation Key for innovation-driven economies Table 1 lists the 131 economies covered by the latest GCI included in the Global Competitiveness Index 20072008 by stage of development.8 The countries falling in between two of the three stages are defined as “in transition”. Mexico is currently placed in the efficiencydriven stage, together with regional neighbors Argentina, Brazil, Costa Rica and Peru and other relevant countries such as Russia,Thailand and Turkey. The GCI integrates the concept of development stages in two ways: a) by organizing the 12 pillars into three subindexes, according to their importance for each of the stages of development referenced above: pillars one to four are considered basic requirements of competitiveness, key for countries in the factor-driven stage but also fundamental preconditions for any competitive economy; pillars five to 10 represent efficiency enhancers, crucial for economies in an efficiency-driven stage; pillars 11 and 12 are defined as innovation and sophistication factors and are considered particularly relevant for countries in the innovation-driven stage (see Figure 1). b) by assigning a different relative weight to each subindex in the overall GCI computation according to the specific development stage of a country.Table 2 provides full details of the weighting of the subindexes based on stages of development.9 In the case of Mexico, for instance, the overall GCI score is the result of a weighted average of the three subindexes, as follows: 40% for basic requirements, 50% for efficiency enhancers, and 10% for innovation and sophistication factors. The GCI builds on a combination of hard and survey data in order to capture, in the most comprehensive way possible, all determinants of competitiveness. Hard data means quantitative factors, such as inflation rates, personal computer penetration and life expectancy that are collected by international organizations, including the International Monetary Fund (IMF), the World Bank and various United Nations agencies. Survey data capture fundamentals that tend to be qualitative in nature and for which hard data are often not available for a large number of countries.They include crucial factors such as the protection of property rights, independence of the judiciary and the quality of the educational system. These data come from the Executive Opinion Survey, conducted by the Forum annually in more than 130 economies that accounted for 98% of global GDP in 2007.10 For a detailed description of the more than 110 variables included in the GCI, see Annex 1: Structure of the Global Competitiveness Index 2007-2008 at the end of this paper. An appraisal of Mexico’s competitiveness landscape through the lens of the Global Competitiveness Index This section draws on the findings of the most recent GCI, featured in the Global Competitiveness Report 20072008.To provide benchmarks relevant to Mexico’s progress and challenges, comparisons will be made with selected neighboring and/or relevant countries and regions;11 the GCI figures for Mexico for the last three years will also be included.This analysis will provide a useful starting point from which to identify areas of focus and corrective policies and actions. Figure 2 provides a snapshot of Mexico’s competitiveness by pillar in the GCI for 2007-2008. Figure 3 highlights the evolution of the country’s performance for 2005-07 in comparison only to economies included in the 2005-06 sample.12 5 Assessing the Foundations of Mexico's Competitiveness: White Paper © 2008 World Economic Forum Chapter 1 – Assessing the Foundations of Mexico’s Competitiveness Chapter 1 – Assessing the Foundations of Mexico’s Competitiveness Table 1 List of economies by stage of development Transition from 1 to 2 Albania Azerbaijan Bosnia and Herzegovina Botswana China Colombia Ecuador El Salvador Guatemala Jordan Kazakhstan Kuwait Libya Oman Saudi Arabia Tunisia Ukraine Venezuela Stage 2 Algeria Argentina Brazil Bulgaria Chile Costa Rica Dominican Republic Jamaica Latvia Lithuania Macedonia, FYR Malaysia Mauritius Mexico Montenegro Namibia Panama Peru Poland Romania Russian Federation Serbia South Africa Suriname Thailand Turkey Uruguay Transition from 2 to 3 Bahrain Barbados Croatia Czech Republic Estonia Hungary Malta Qatar Slovak Republic Taiwan, China Trinidad and Tobago Stage 3 Australia Austria Belgium Canada Cyprus Denmark Finland France Germany Greece Hong Kong SAR Iceland Ireland Israel Italy Japan Korea, Rep. Luxembourg Netherlands New Zealand Norway Portugal Puerto Rico Singapore Slovenia Spain Sweden Switzerland United Arab Emirates United Kingdom United States 6 Stage 1 Armenia Bangladesh Benin Bolivia Burkina Faso Burundi Cambodia Cameroon Chad Egypt Ethiopia Gambia, The Georgia Guyana Honduras India Indonesia Kenya Kyrgyz Republic Lesotho Madagascar Mali Mauritania Moldova Mongolia Morocco Mozambique Nepal Nicaragua Nigeria Pakistan Paraguay Philippines Senegal Sri Lanka Syria Tajikistan Tanzania Timor-Leste Uganda Uzbekistan Vietnam Zambia Zimbabwe Table 2 Weights of the three subindexes per stage of development Factor-driven stage (%) 60 35 5 Efficiency- driven stage (%) 40 50 10 Innovation- driven stage (%) 20 50 40 Pillar group Basic requirements Efficiency enhancers Innovation and sophistication factors Assessing the Foundations of Mexico's Competitiveness: White Paper © 2008 World Economic Forum Figure 2 Mexico competitiveness performance at glance GCI 2007-2008 ranks (out of 131 economies) Labour market efficiency Institutions Higher education and training Innovation Financial market sophistication Infrastructure Goods market efficiency Technological readiness Health and primary education Business sophistication Macroeconomic stability Market size 0 13 10 20 30 40 50 60 70 80 90 100 35 55 54 61 61 60 67 72 71 85 92 Source: World Economic Forum 2007 Figure 3 Mexico’s evolution in the GCI ranking, 2005-07 54 53 53 52 51 51 50 49 48 48 47 46 45 2005-06 note: ranks are in a constant 2005-06 sample 7 2006-07 2007-08 Tables 3 to 6 show rankings and scores for Mexico and selected countries/regions in the overall GCI 20072008 as well as for each subindex and pillar. Mexico ranked 52nd among 131 countries in the most recent GCI computation (48th in the constant 2005-06 sample, as shown in Figure 3). It placed among the most competitive economies in Latin America13 and better than four of the 10 countries in the comparative sample, namely Brazil (72nd), Russia (58th), Indonesia (54th) and Turkey (53rd). In addition, Figure 3 shows how Mexico’s competitiveness has been following an encouraging upward trend over the last three years, with an improvement of five positions. Nevertheless, Mexico’s performance in each of the 12 pillars (Figure 2) reveals a series of important flaws. These problems must be tackled if the country is to fulfill its competitive potential. Rankings in labor market efficiency (92nd), institutions (85th) and higher education and training (72nd) would seem particularly alarming given Mexico’s stage of development. Indeed, as explained above, countries in the efficiency-driven stage derive their competitiveness from efficiency enhancers and, to a slightly lesser extent, basic requirements. Accordingly, Mexico’s relatively poor 71st place in innovation is not as worrisome as its 72nd place in higher education and training; the country can continue to grow without generating much endogenous knowledge but it must be able to count on a pool of qualified and skilled labor to respond to its current challenges. The rest of this section will focus on Mexico’s performance in the three subindexes of the GCI and will assess its main shortcomings in each area. Basic requirements As described above, transparent institutions, a sound macroeconomic environment, well-developed infrastructure and a healthy and literate workforce are basic requirements for national competitiveness.They play a crucial role for Assessing the Foundations of Mexico's Competitiveness: White Paper © 2008 World Economic Forum Chapter 1 – Assessing the Foundations of Mexico’s Competitiveness Chapter 1 – Assessing the Foundations of Mexico’s Competitiveness Table 3 GCI 2007-2008 and its sub-indexes: Mexico and selected countries/regions Basic requirements Rank Score 101 3.82 33 5.17 44 4.80 55 4.54 74 4.22 82 4.14 14 5.67 68 4.36 61 4.45 63 4.44 56 4.53 4.18 5.38 Efficiency enhancers Rank Score 55 4.12 28 4.58 45 4.26 40 4.34 31 4.52 37 4.43 12 5.28 48 4.19 36 4.44 51 4.16 50 4.17 3.72 4.93 Innovation factors Rank Score 41 3.99 36 4.06 50 3.89 43 3.98 26 4.36 34 4.10 7 5.42 77 3.50 33 4.16 48 3.90 60 3.66 3.42 4.77 Country/Region Rank Brazil 72 Chile 26 China 34 Hungary 47 India 48 Indonesia 54 Korea, Rep. 11 Russian Federation 58 South Africa 44 Turkey 53 Mexico 52 Latin America & the Caribbean average OECD average Source: World Economic Forum 2007 Score 3.99 4.77 4.57 4.35 4.33 4.24 5.40 4.19 4.42 4.25 4.26 3.89 5.00 Table 4 Basic requirements: Mexico and selected countries/regions Macroeconomic stability Rank Score 126 3.66 12 5.86 7 6.03 107 4.22 108 4.21 89 4.59 8 6.00 37 5.35 50 5.08 83 4.66 35 5.36 4.63 5.19 Health and primary educ..."

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