Speech

Dare to Dream—Structural Reforms in Mexico, Remarks by Christine Lagarde, Managing Director, IMF

June 25, 2014

As prepared for delivery

Good evening—Buenas noches.

Muchas gracias Señor Ministro por invitarme a esta cena y por sus cálidas palabras.

I would like to thank Governor Agustín Carstens for hosting a lunch earlier today, rich with excellent food and a lively discussion of global events. I would also like to pay tribute to Undersecretary Fernando Aportela for taking the lead in organizing tomorrow’s important event on financial inclusion. I am pleased to be in the company of renowned guests who are dedicated to promoting financial inclusion. I salute you all for these efforts.

Octavio Paz once said: “Merece lo que sueñas”—a quote from his poem “Haciendo el poema—punto de partida.”The poem is about the process of creation and innovation that inspires poetry.

Mexico abounds with examples of creativity and innovation. Earlier today I had the privilege of meeting with President Peña Nieto, who I would like to thank for graciously inviting me to visit Mexico, in the beautiful and historic Palacio Nacional. There you have a wonderful example of this creativity—of a dream if you will—in the magnificent mural of Mexico’s history, painted by one of the most renowned artists of the 20^th century, Mexico’s own Diego Rivera.

In late 2012, the country had a similar moment of inspiration with the Pacto por Mexico—the decision by the major political parties to work together and agree on many far-reaching structural reforms. Mexico needed to kick its growth into higher gear, from the slow pace of 2.3 percent it had seen for the past 15 years.

However, this may already be in the past. Mexico is now looking to the future. As Carlos Fuentes said: “ya que el pasado es irreversible y el futuro incierto -- los hombres y las mujeres se quedan sólo con el escenario del ahora -- si quieren representar el pasado y el futuro.”

This is indeed the spirit that captures Mexico’s prospects. Mexican men and women are turning their wishes for future prosperity into action today, by supporting the comprehensive package of reforms approved last year. These reforms reflect a commendable effort to tackle structural barriers that are holding back growth.

In fact, Mexico is the only emerging market country that has passed such number of sweeping reforms, in such a short time, and with such broad political support. Perhaps more impressive is that it did not take an economic or financial crisis to invoke these reforms. Instead it took a great deal of leadership, resilience, and determination on the part of the Mexican people to accomplish this. I congratulate you for this major first step.

The reforms are broad-based. Tonight I would like to focus on four areas—labor and products markets, financial system, energy sector and education—because they hold large promise in unleashing Mexico’s growth potential. Think of them as the four pillars.

The first pillar is labor market reforms. These can go a long way in boosting growth. Barriers that aim at protecting workers often work against them in the long run. Why? Because they raise the cost of hiring and firing for firms, pushing them instead toward measures that perpetuate high levels of informality.

The removal of these barriers can inject dynamism in the labor market and avoid the risk of a lost generation. Mexico is already moving in this direction, with a reduction in formal hiring barriers potentially creating 400,000 new jobs—annually.

By the same token, product market reforms are just as important in boosting growth and trade. The telecom and antitrust reforms promise to remove barriers to competition and increase investment to provide broader and cheaper telecommunications services. Research suggests that higher internet use can increase exports in emerging and developing economies.

How about the second pillar—financial sector reform? There is great potential to be tapped from reforms to expand financial services to the “unbanked”—typically the poor, small and new firms, and women. These groups are the most affected by information problems, high cost of service, and lack of collateral.

In Mexico, only 12 percent of the population in the bottom 40 percent of the income distribution is served by a formal financial institution. This is compared to 25 percent in Latin America and Caribbean, and 41 percent for the world as a whole. There are clear gains from expanding financial access to under-served groups, especially small entrepreneurs—in terms of higher innovation, job creation, and inclusive growth.

To this we add the impressive energy sector reforms—the third pillar. Opening the energy sector to private investment can bring new technologies to exploit unconventional fields. It can also improve infrastructure and increase the efficiency of electricity generation and distribution. These reforms can significantly reduce energy costs for the country.

Not less critical is the fourth pillar, the education reform. Access to education is an important means to increase access to opportunity. But access to basic education is not enough—it needs to be high quality education. We now know that when children of poor families have access to high quality education, their opportunities for better jobs and higher income are magnified. Their prospects for breaking out of the vicious cycle of poverty are lifted. Measures considered in the current reforms, including those related to teachers’ evaluation and selection process, can pave the way for higher quality education in the future.

Let me come back to the quote by Octavio Paz “Merece lo que sueñas.” The words of poets can take on many different meanings. I could interpret his words as saying: “Dare to dream.”

In embarking on this trajectory of structural reforms, Mexico has dared to dream. And it is now experiencing the creative—and transformative—process of building a new stronger economy. This process does take time. Diego Rivera’s famous mural was painted over many years. Yet we now all admire it as an extraordinary, lasting achievement.

I am confident that Mexico will see the benefits of these reforms in far less time than it took Rivera to finish his mural. But patience is essential. And if the country sees this process through to the end, an even greater number of Mexicans will be able to live their own dreams. Mexico can become the inspiration for the rest of the world to “dare to dream.”

Gracias.