1. THE ECONOMY OF – 27

Chapter 1

The economy of Morelos

This chapter provides an assessment of the economy of Morelos identifying strengths and challenges for economic development. The analysis starts with the macroeconomic context which affects the economy of Morelos and then turns to a discussion of the regional trends of output per capita and labour productivity. The performance of Morelos is compared with the average performance of OECD TL2 regions and the Mexican average. Furthermore, the performance of Mexican states similar to Morelos is used as a benchmark to assess the competitiveness of Morelos’ economy. The analysis then turns to the factors of production that can boost the performance of Morelos, with particular emphasis on labour productivity. The level of skills of the labour force is analysed considering both the quality of and the level attained by the labour force. Other important factors of production are formation, including transport infrastructures, and labour supply. Finally, the role of informality is considered as it represents a bottleneck to development and, at the same time, a signal of structural problems. The chapter concludes with an assessment of some well-being indicators for Morelos.

The statistical data for are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

OECD TERRITORIAL REVIEWS: MORELOS, © OECD 2017 28 – 1. THE ECONOMY OF MORELOS

1.1 Introduction

This chapter provides an assessment of the socio-economic conditions of Morelos, highlighting current challenges and the strengths to build upon for a resilient and inclusive economy. It sets the policy targets that will be pursued in detail in the following chapters of the review. Morelos is a small state located in the centre of Mexico, one hour and a half from the Mexican capital, . Its economy is specialised in the manufacturing sector (automotive and chemicals), with the presence of large multinational firms (e.g. and Saint-Gobain) but, at the same time, it is quite diversified with the presence of large agricultural and service sectors, as well as prominent research centres linked to technical universities. The territory is also rich in natural amenities and in the recent past was the top destination for people in Mexico City who wanted to take a weekend break. Despite these potential strengths, the economy has been suffering in terms of low productivity growth and, as a consequence, flat growth of GDP per capita in the period 2003-13. This sluggish performance is partly linked to the global financial crisis that reduced international demand and affected many exporting countries, such as Mexico. The sluggish performance of Morelos however was evident also before the financial crisis, thus suggesting the presence of structural bottlenecks to development. Boosting labour productivity is probably the biggest and most important challenge, as it will not only increase GDP per capita over the long run but also contribute to a more inclusive economy. Two other important challenges are: low-skilled labour force and a large share of informality. The former represents a bottleneck to increase the value-added content of firms’ production, which will require the adoption of new technologies and new production processes. It is also a concern for well-being as low-skilled workers tend to be employed in the informal sector with scarce access to health insurance and social security. Indeed, the large share of informality represents an obstacle to economic growth as firms tend to rely on cheap labour conditions, avoid paying taxes and complying with regulations, rather than investing in innovative technology and production processes that can result in a higher value-added content of their products, and better economic conditions for their workers. Despite improvement in recent years insecurity is still higher than the Mexican average, negatively affecting the business environment. The ease-of-doing- business survey ranks (the capital of Morelos) amongst the lowest in Mexico in terms of ease of doing business, with challenges represented by the low enforcement of contracts and difficulties in obtaining construction permits. The chapter is organised as follows. The next section presents an introduction to the state of Morelos including some general figures that contextualise the state within Mexico. Then the macroeconomic framework is considered, highlighting the challenges that it presents for the economy of Morelos. In the following sections, the analysis focuses on Morelos’ demographic and economic trends. The strengths of Morelos are analysed considering the productivity potentials, physical capital, and the labour market. The following section presents several aspects of the economy linked to well-being, such as income inequality and , the environment, and safety. A final section summarises the results of the analysis and provides final remarks.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 29

1.2 The state of Morelos

The state of Morelos is one of the 32 states and federal entities that constitute the of Mexico. It is located in the centre of the country, bordering the Federal District (Mexico City) to the south (Figure 1.1). The state is one of the smallest in Mexico, with a population of 1.9 million in 2015 corresponding to 1.6% of the national population, and a surface area of 4 892 square kilometres making it the third smallest state in Mexico (Figure 2) (INEGI, 2015). It consists of 33 municipalities with an average population size of 57 497 inhabitants in 2014, with the smallest municipality counting 7 073 people and the largest municipality (Cuernavaca) reaching a population of 382 773 inhabitants.

Figure 1.1. The state of Morelos is in the centre of Mexico

Source: Map based on INEGI (2010a), “Marco Geoestatistico 2010 versión 5.0”, Censos de Poblation y Vivienda, Instituto Nacional de Estatistica y Geografía.

Morelos is among the most urbanised states of Mexico. The share of population living in predominantly urban regions in the state is 74%, which is significantly higher than the national and OECD averages. There are only three Mexican states with a larger share of population living in predominantly urban regions. These are: Federal District, Mexico and Nuevo Leon. The predominantly urban regions make up 36% of

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 30 – 1. THE ECONOMY OF MORELOS

the total land area of Morelos, compared to the national average of 5.7%. The share of Morelos’ population living in intermediate regions and in predominantly rural regions is 19% and 7% respectively. Like in other Mexican states, such as and , there are no predominantly rural remote regions in the state of Morelos (Figure 1.2).

Figure 1.2. Distribution of population and area by type of region, 2010

Predominantly urban Intermediate Predominantly rural close Predominantly rural remote Population Area Federal District (MX) Federal District (MX) State of Mexico Nuevo Leon Nuevo Leon Morelos Morelos Quintana Roo Aguascalientes Tlaxcala Tlaxcala Jalisco Queretaro Queretaro Yucatan Yucatan Baja Norte Norte San Luis Potosi San Luis Potosi Puebla Puebla Colima Guanajuato Nayarit Chihuahua Michoacan Michoacan Coahuila Tabasco Guerrero Hidalgo Baja California Sur Campeche Chiapas Durango Oaxaca Sinaloa Sonora Tamaulipas Veracruz Zacatecas OECD OECD Mexico Mexico 0 20406080100 0 20406080100 % %

Source: OECD (2016a), “Regional demography”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/a8f15243-en (accessed 3 November 2016).

Morelos is characterised by high population density. The state of Morelos is one of the smallest within Mexico; however in terms of population density is third only behind the Federal District (MX) and the state of Mexico. In 2014 there were 388 inhabitants per square kilometre in Morelos compared to an average across states (excluding the Federal District) of 114 inhabitants per square kilometre (Figure 1.3). The population (1.9 million inhabitants according to census data in 2015) is concentrated in two metropolitan zones in the north of the state, the metropolitan area of Cuernavaca and the metropolitan area of Cuautla. The former is the biggest, consisting of seven contiguous municipalities, representing almost half of the population the state of Morelos (49.24% in 2014). However in absolute terms it is not a big metropolitan area compared to other Mexican cities (OECD, 2015a). With a population of less than a million inhabitants (934 244 in 2014), it is among a group of medium- sized metropolitan zones.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 31

Figure 1.3. Morelos is one of the most densely populated Mexican states Population density measured in 2014

800

700

600

500

400

300

200

100

0

Note: Federal District (MX) is excluded (5 980 inhabitants per square kilometre). Source: OECD (2016a), “Regional demography”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/a8f15243-en (accessed 3 November 2016).

In 2013, Morelos registered a GDP per capita of USD 11 613. This level is lower than the national average (USD 17 230), and even excluding the state of Campeche the level of Morelos is below the average (USD 14 717).1 For a comparison, the GDP per capita in the Federal District is three times higher than in Morelos, USD 34 223 (Figure 1.4).

Figure 1.4. GDP per capita across Mexican states, 2013 USD 100 000 90 000 80 000 70 000 60 000 50 000 40 000 30 000 20 000 10 000 0

Note: GDP is calculated in terms of (PPP) and expressed in constant 2010 USD. Source: Own calculation based on data from OECD (2016b), “Regional economy”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/6b288ab8-en (accessed 3 November 2016).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 32 – 1. THE ECONOMY OF MORELOS

1.3 Macroeconomic framework

The national macroeconomic framework provides an indication of the general economic trends that affect all regions within Mexico, thus representing the external factors within which the regional economy operates. The macroeconomic conditions are stable and sound, with a low debt to GDP ratio, stable , and declining long-term interest rates, which provide plenty of room for the fiscal and the monetary policy to accommodate growth and respond to shocks. Nevertheless, the Mexican economy is not catching up with OECD countries, and its productivity growth is among the lowest. This economic setting is complicated by a challenging institutional framework, where people’s trust in the public administration is half of the OECD average, with surveys showing that corruption negatively affects the expectation of citizens and firms of a fair relationship with the public administration.

Sound policy environment Since 2000, Mexico has managed to reduce inflation to a level that can be considered physiological for the Mexican economy (Figure 1.5, bottom frame). The federal government’s budget has incurred a period of protracted deficit that led to the build-up of federal debt which increased from 17.9% of GDP in 2006 to 29.5% in 2014 (Figure 5). The level of the debt to GDP ratio however remains much lower than the average across OECD member countries. These healthy indicators reflect a solid macroeconomic framework which allows the government to pursue (i) an expansionary fiscal policy (an infrastructure programme has been launched for the period 2014-18), and (ii) an accommodating monetary policy with base interest rates of around 3% (OECD 2015b).

Figure 1.5. Fiscal and financial trends Fiscal balance Net federal government debt

Mexico Total OECD % of GDP 35 % of GDP 0 30 -1

-2 25

-3 20 -4 15 -5

-6 10

-7 5 -8 0 -9 2006 2007 2008 2009 2010 2011 2012 2013 2014

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 33

Consumer price index and core inflation

CPI Core inflation Long term interest rate

12

10

8

6

4

2

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Note: The fiscal balance is based on the borrowing requirements of the central government and public enterprises. Source: OECD (2015b), OECD Economic Surveys: Mexico 2015, http://dx.doi.org/10.1787/eco_surveys-mex-2015-en; OECD (2016c), “Main Economic Indicators – complete database”, Main Economic Indicators (database), http://dx.doi.org/10.1787/data- 00052-en (accessed 31 August 2016).

Sluggish economic growth The evolution of real GDP in Mexico follows the average trend in OECD countries, with sustained growth in the period 2003-07, a big drop in 2009 due to the global financial crisis, a rebound in 2010 and a subsequent decline of growth rates. In terms of GDP per capita, the trend over the period 2000-15 shows an increasing gap with the OECD average, but also that the country’s over ’s GDP per capita has dwindled – the latter however is likely to have lost ground given the economic crisis that has heavily hit the country since 2015 (Figure 1.6). Figure 1.6. Mexico is losing ground in terms of GDP per capita Real GDP per capita Difference with OECD and Brazil

Mexico OECD total Brazil Gap with OECD Lead on Brazil Constant Constant 2010 USD 2010 USD 40 000 21 000 3 500 20 500 35 000 3 000 20 000 30 000 19 500 2 500 25 000 19 000 2 000 20 000 18 500 1 500 15 000 18 000 17 500 1 000 10 000 17 000 500 5 000 16 500 0 16 000 0

Note: GDP per capita is calculated in terms of purchasing power parity (PPP) and expressed in constant 2010 USD. The gap with the OECD is calculated as the difference between the OECD values and the Mexican values; the lead with respect to Brazil is calculated as the difference between the Mexican values and the Brazilian values. The GDP per capita of Brazil is available until 2011. Source: Own analysis based on data from OECD (2016d), “Aggregate National Accounts, SNA 2008: ”, OECD National Accounts Statistics (database), http://dx.doi.org/10.1787/data-00001-en.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 34 – 1. THE ECONOMY OF MORELOS

Productivity in Mexico, measured as GDP per hour worked, increased over the 2000-15 period. However, the gap with the OECD average has grown. The difference between the labour productivity in Mexico and OECD countries rose from USD 18 in 2006 to almost USD 29 in 2014. Benchmarking productivity growth in Mexico with OECD member countries in the period 1995-2014, puts the Mexican economy at the bottom of the ranking, just above . Although the financial crisis and the subsequent recession negatively affected the growth rate of all OECD countries, the annual growth of productivity in Mexico dropped from an average of 1% in the period 1995-2007, to a very flat growth of 0.1%, in the period 2007-14 (Figure 1.7).

Figure 1.7. Labour productivity growth, 1995-2014 GDP per hour worked, total economy, percentage change at annual rate

1995-2014 1995-2007 2007-2014

8 7 6 5 4 3 2 1 0 -1

Note: Figures refer to the average of the annual growth rate in the period considered. Source: OECD (2016e), “GDP per capita and productivity growth”, OECD Productivity Statistics (database), http://dx.doi.org/10.1787/data-00685-en (accessed 21 July 2016).

This subdued economic performance represents a challenge for the , especially if compared with trading partners like , the United States and other Latin American countries. It also represents an unfavourable framework for Morelos.

Low quality of institutions Formal and informal institutions are important determinants of economic growth. They provide the framework conditions within which economic activity unfolds. Institutions of poor quality hinder economic development while preserving monopolistic rents and inequality (North, 1990; Acemoglu,et al. Johnson and Robinson, 2004). The World Bank has tackled the difficult job of quantitatively assessing the quality of institutions through a project to collect information about governance indicators all around the world. The World Bank provides an interesting benchmark of most countries in terms of governance indicators. Its Worldwide Governance Indicators (WGI) project covers 200 countries over a period of 15 years. It provides information on six broad dimensions of governance: (1) voice and accountability; (2) political stability and absence of

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 35

violence/terrorism; (3) government effectiveness; (4) regulatory quality; (5) rule of law; (6) control of corruption. These indicators are based on the perception of the current state of affairs by several groups of stakeholders, from citizens to enterprises, from international organisation experts to academic professors (Kauffman, Kraay and Mastruzzi, 2010). Therefore the indicators depend on the feelings and perceptions of people rather than hard data. There is however a widespread acceptance of those indicators by the international community of academics and policy makers, as they are the result of the of several types of stakeholders. Thus, they should provide an informative view of the situation in each country. The first two indicators refer to the political environment, the possibility of citizens to freely express their opinion and hold policy makers accountable for their choices. The third and fourth indicators provide a general assessment of the functioning of the government and governmental agencies that are in charge of implementing policies and regulations. Finally, the last two indicators refer to the relationship of citizens and firms with the public administration, which requires effective law enforcement via an efficient judiciary system and control of corruption. The Mexican economy fares quite below OECD average on all domains. Comparing it to Brazil, Mexico lags in the areas of rule of law and control of corruption. These are elements that negatively affect the expectation of citizens and firms of a fair relationship with the public administration. It also undermines trust in public institutions that are seen as pursuing their own interests rather than social . Figure 1.8 shows that, in 2014, the perception of the rule of law and control of corruption ranked well below the Brazilian level. These indicators are changing slowly, as they are rooted in deep features of the economic system that are difficult to change. Between 1996 and 2014, Mexico improved on all indicators except control of corruption.

Figure 1.8. Governance quality in Mexico compared to OECD and Brazil, 2014

OECD Brazil Mexico

1.5

1

0.5

0

-0.5

-1 Voice and accountability Political stability Government Regulatory quality Rule of law Control of corruption effectiveness

Note: OECD represents the average of the indicators across OECD member countries. Indicators range between a minimum of -2.5 and a maximum of 2.5. Source: Own analysis based on data from Kaufmann D., A. Kraay and M. Mastruzzi (2010), “The Worldwide Governance Indicators: A Summary of Methodology, Data and Analytical Issues”, World Bank Policy Research Working Paper, No. 5430, The Worldwide Governance Indicators are available at www.govindicators.org (accessed 10 November 2016).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 36 – 1. THE ECONOMY OF MORELOS

These findings are also supported by indicators constructed by other organisations. For instance, Transparency International, a non-governmental organisation based in Berlin that promotes initiatives to combat corruption worldwide, publishes a survey of corruption in public administration in several countries. Their survey indicates that the level of perceived corruption of the public administration in Mexico is much higher than the average across OECD countries. Figure 1.9 ranks countries according to the perceived trust in the public administration (measured as the inverse of the perceived level of corruption), and shows that Mexico is at the bottom of the ranking, along with and the Plurinational State of , and just above the Russian Federation, Paraguay, and Bolivarian Republic of (hereafter ‘Venezuela’).

Figure 1.9. Trust in the public administration in Mexico is low, 2014 Index of perceived control of corruption in public administration

100 90 80 70 60 50 40 30 20 10 0

Note: The index rages from 0 to 100 with the highest value indicating the absence of corruption. The index is a perception-based indicator reflecting the opinion of citizens on their public administration, provided by Transparency International for 2014. Source: Own analysis based on data from OECD (2015b), OECD Economic Surveys: Mexico 2015, http://dx.doi.org/10.1787/eco_surveys-mex-2015-en.

The low performance in terms of control of corruption and enforcement of the rule of law undermines the business environment which is not dynamic and tends to protect incumbent firms at the expense of new (and potentially more productive) firms. The low institutional quality can also explain the high level of informal jobs in the country and the difficulty to move the economy towards formal (La Porta and Shleifer, 2014). When public administrations are not efficient and perceived as corrupt, workers and firms may prefer to remain in the shadow, as a second-best solution. This solution, however optimal for workers and firms, tends to reduce incentives for long-term investments – such as innovation – and reduces access to formal credit, thus harming long-term growth (Dougherty and Escobar, 2013).

1.4 Demographic trends in the state of Morelos

After describing the macroeconomic and institutional framework within which the Mexican economy operates, the analysis shifts its focus to the economy of Morelos.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 37

This section deals with one of the most important factors of production: labour. It does so from the long-term perspective of demographic trends, as the large share of young people in the overall population represents a source of growth for the future. Although the active population (aged more than 15) does not necessarily translate into labour force, it is nevertheless an indication of the potential expansion of the labour force. Young cohorts dominate the age structure. Morelos’ age shows a large base that gets thinner at the top (Figure 1.10). This is remarkably different from the age structure resulting from the average across OECD member countries. The OECD pyramid has its largest cohort in correspondence to the age range 40-44. Moreover, in Morelos the oldest cohort of the population represent only a small part of the total population, while it represents a substantial part of the OECD average population, particularly for females. The age structure of Morelos is similar to the age structure of Mexico – pictured in the central frame of Figure 1.10.

Figure 1.10. Age structure, comparison of Morelos with the national and the OECD average Morelos National average OECD average

Males Females Males Females Males Females

80+ 80+ 80+ 75-79 75-79 75-79 70-74 70-74 70-74 65-69 65-69 65-69 60-64 60-64 60-64 55-59 55-59 55-59 50-54 50-54 50-54 45-49 45-49 45-49 40-44 40-44 40-44 35-39 35-39 35-39 30-34 30-34 30-34 25-29 25-29 25-29 20-24 20-24 20-24 15-19 15-19 15-19 10-14 10-14 10-14 5-9 5-9 5-9 0-4 0-4 0-4 -100 000 -50 000 0 50 000 100 000 -6 000 000 -3 000 000 0 3 000 000 6 000 000 -50 000 000 -25 000 000 0 25 000 000 50 000 000

Source: OECD (2016a), “Regional demography”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/a8f15243-en (accessed 3 November 2016).

Morelos records a high youth dependency ratio and a low elderly dependency ratio. The share of population under 15 in the working age population is considerably higher than the OECD average. In 2014, the Morelos’ youth dependency ratio was 41.25% compared to the OECD average of 27.51%. On the other hand, the share of population aged over 65 in the working age population was only 11.38%, while the OECD average was 24.17%. The specific population structure of Morelos represents both an opportunity and a challenge. A low elderly dependency ratio facilitates the provision of social security and elderly care services, which would not represent a big financial burden – contrary to most OECD member countries. A high youth dependency ratio represents an opportunity of growth for the future labour force which can help sustain economic development. However, such a potential also represents a challenge for Morelos. The youth population represents a resource that can be transformed into a qualified

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 38 – 1. THE ECONOMY OF MORELOS

workforce if the provision of high quality basic education is ensured for all young people across the state (see the next sections and Chapter 2). Moreover, a high youth ratio weighs on public finances, raising the challenge of providing childcare services so as to reduce the burden on parents, especially women, who may exit the labour force to take care of their family. Morelos’ population is ageing. Similar to other OECD countries, the population of Morelos is ageing. Over time, the youth dependency ratio of Morelos has decreased, moving from 53.7% in 2001 to 41.2% in 2013 – closer to the OECD average (Figure 1.11, left panel). At the same time, the elderly dependency ratio has increased from 9.38% in 2001 to 11.38% in 2014. These trends mean that the average age of the population has increased, converging toward the OECD average. Compared to the national average, however, the state of Morelos has a slightly lower youth dependency ratio and a slightly higher elderly dependency ratio.

Figure 1.11.Youth and elderly dependency ratio, 2001-13 Youth dependency ratio Elderly dependency ratio

Morelos Mexico OECD Morelos Mexico OECD

60 30

50 25

40 20

30 15

20 10

10 5

0 0 2001 2004 2007 2010 2013 2001 2004 2007 2010 2013

Note: Youth dependency is calculated as the ratio between the population of less than 15 years and the total population; elderly dependency is calculated as the ratio between the population over 65 and the total population. Source: OECD (2016a), “Regional demography”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/a8f15243-en (accessed 3 November 2016).

The activity rate has steadily increased in the period 2001-14. The production capacity of the economy depends on the activity rate, i.e. the share of population of working age (more than 15 years of age) with respect to the total population. The activity rate in Morelos increased faster than the national trend, moving from a value of 58.9% in 2001 up to 65.5% in 2014 (Figure 1.12). Such a trend can potentially lead to a great boost in the regional economy, if the workforce is well trained and well integrated into the labour market. On the contrary, if there are not enough incentives to bring the working age population into the labour force, the increasing number of people of working age will hamper economic growth rather than boost it.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 39

Figure 1.12. Increasing activity rate in Morelos, 2001-14

Mexico Morelos OECD

68

66

64

62

60

58

56 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Note: The activity rate is the ratio between the working age population (+15) and the total population. Source: OECD (2016a), “Regional demography”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/a8f15243-en (accessed 3 November 2016). 1.5. Economic trends and performance of the state of Morelos The main indicators of economic performance are the trends in GDP, GDP per capita, and GDP per worker. The latter is particularly important as it is a proxy of productivity which ultimately determines the competitiveness of the economy. The indicators are compared through time to assess their evolution and trend, and with respect to the national average and the OECD average, to assess the competitiveness of the state of Morelos. Moreover, the analysis will also benchmark the performance of Morelos with a subset of Mexican states that may represent direct competitors for Morelos.

Box 1.1. Factors to promote growth in Morelos The analysis is conducted at the OECD TL2 level. Six Mexican states are included as case studies: • Durango, Jalisco, Potosi are classified as dynamic regions • State of Mexico, Zacatecas, and Chiapas as lagging regions Information in the case studies may be useful to make a preliminary assessment of the state of Morelos. According to the indicators developed in this report, does Morelos qualify as a dynamic or lagging region? Regions included in the analysis display either catching-up potentials (CUP) if their initial (1995) level of real GDP per capita is between 75% and 100% of the national level, or large catching-up potentials (LCUP) if their initial level of real GDP per capita is below 75% of the national level. Regions from a selection of OECD countries are then classified into dynamic, if their average growth rate in the period 1995-2007 is above the national average (and, thus are catching up), and less dynamic if their average growth rate in the same period is below the national average (and, thus are not catching up). The work compares regions according to a set of indicators of growth, which cover physical and human capital, innovation and agglomeration benefits. In particular, the indicators cover infrastructure, human capital measured both in terms of education attainment of the labour force and quality of education (PISA), as well as labour market conditions, innovation, agglomeration and connectivity. Note: OECD’s large regions (TL2) represent the first administrative tier of subnational government. Source: OECD (2012), Promoting Growth in All Regions, http://dx.doi.org/10.1787/9789264174634-en.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 40 – 1. THE ECONOMY OF MORELOS

Morelos is not catching up to the Mexican average per capita GDP. The level of real GDP per capita in 2013 was USD 11 613. This level was 66% below the average across OECD TL2 regions and 33% below the average across all Mexican states (the gap was still 21% if we exclude the state of Campeche). There is therefore room for improvement as the low level of GDP per capita indicates catching-up potentials to, at least, the richer Mexican states. Comparing the level of GDP in different years, however, shows that these catching-up potentials have not translated into actual growth yet. Figure 1.13 actually shows that the gap with respect to the national average has increased since 2003. The GDP per capita of Morelos was 10.25% lower than the Mexican average (excluding Campeche) in 2003, grew to 19.75% in 2007 and reached 21.1% in 2013 (Table 1.13).

Figure 1.13. Real GDP per capita: Comparing Morelos with the OECD and Mexican average

Morelos Mexican average (without Campeche) Mexican average OECD average

40 000

35 000

30 000

25 000

20 000

15 000

10 000

5 000

0 2003 2007 2013

Note: GDP data are expressed in PPP constant 2010 USD; the OECD average represents the average across TL2 regions in 32 OECD countries; the Mexican average represents the average across Mexican states. Source: Own analysis based on data from the OECD (2016b), “Regional economy”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/6b288ab8-en (accessed 3 November 2016).

In 2003 Morelos ranked 17th out of 32 states in terms of GDP per capita, thus in the middle of the pack. Unfortunately, this rank worsened and in 2013 it ranked just 23rd. The gap with the Mexican economy grew in the period 2003-09, and Morelos has not been able to catch-up since. In the period 2003-09 the growth of GDP per capita was flat. It was USD 11 737 in 2003 and USD 11 604 in 2007. In the same period, average per capita GDP grew by 11% (or 2.65% annually), rising from USD 13 372 to USD 15 513. Figure 1.14 shows that Morelos experienced sluggish growth even before the global financial crisis in 2007 hit the global economy, which accentuated the fall in per capita GDP. In the period 2009-13 the economy was able to recover, growing at similar rates as the Mexican average. However, the gap created in the previous period remains, with a level of per capita GDP measured in constant 2010 USD lower in 2013 than in 2003.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 41

Figure 1.14. GDP per capita trend in Morelos and Mexico

Morelos Mexico OECD Average

120

115

110

105

100

95

90

85

80 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Note: OECD average corresponds to the average of GDP per capita of TL2 regions within 32 OECD countries. The trend for Mexico corresponds to the trend of national GDP per capita. All figures are evaluated in constant 2010 USD, using SNA2008 classification. Values are normalised to 100 in 2003. Source: Own analysis based on data from the OECD (2016b), “Regional economy”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/6b288ab8-en (accessed 3 November 2016). The poor performance of the economy of Morelos in the period 2003-07 was linked to positive population growth which outpaced the growth of GDP. Although GDP per capita remained stable in the period 2003-07, the output of Morelos (GDP) grew by 4.3%. The problem is that in the same period population grew even faster, 5.5% (see Figure 1.15). This trend shows a problem of productivity as the average output per person did not increase.

Figure 1.15. Population growth outpaced GDP growth

GDP GDP per capita Population

120

115

110

105

100

95

90

85

80 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Note: Values are normalised to 100 in 2003. Source: Own calculation based on data from the OECD (2016b), “Regional economy”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/6b288ab8-en (accessed 3 November 2016). Labour productivity decreased in the period 2003-13, although since 2010 the trend has reverted and started to catch-up with the Mexican average. Labour productivity measures the average output produced by each worker in the economy. Morelos experienced a downward trend until 2010. The level of gross value added (GVA) per

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 42 – 1. THE ECONOMY OF MORELOS

worker, which is the indicator used to measure labour productivity, decreased from USD 31 628 in 2003 to USD 25 396 in 2013. In the same period, the average level of Mexican productivity remained unchanged, experiencing positive growth until 2007 and then a downward trend. In the last period (2010-13), Morelos’ labour productivity increased and the gap with the Mexican average got smaller (Figure 1.16). In 2010, labour productivity in Morelos was 37% lower than the Mexican average, while in 2013 the gap shrunk to 33%. The gap in 2013, however, was still larger than in 2003, when the labour productivity of Morelos was 23% lower than the national average.

Figure 1.16. Trend in labour productivity, Morelos compared to Mexican and OECD average

Morelos Mexican average OECD average

120

110

100

90

80

70

60 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Note: GVA is calculated at PPP constant 2010 USD, employment is measured at place of residence. The “average” refers to the average productivity trend across all Mexican states. Source: Own calculations based on data from OECD (2016b), “Regional economy”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/6b288ab8-en (accessed 3 November 2016). Benchmarking Morelos The economic trend of the Mexican average might be influenced by the Federal District, which is included although it is not formally a state and it mainly consists of the capital city, Mexico City. It is important therefore to benchmark Morelos with states that are similar in terms of economic structure and size. Those states represent potential competitors in domestic and international markets. For this reason, a subset of states with similar share of GVA in manufacturing is use as benchmark. The selected states are: Aguascalientes, Guanajuato, Mexico, Tlaxcala. These states present a share of GVA in manufacturing between 24% and 29% (Table 1.1).

Table 1.1. Benchmarking Morelos with other Mexican states, 2012

State Manufacturing GVA share Population Surface area (km2) Population density Aguascalientes 29% 1 270 180 5 625 226 Guanajuato 28% 5 769 530 30 621 188 Morelos 24% 1 897 390 4 892 388 Mexico 24% 16 618 900 22 333 744 Tlaxcala 29% 1 260 630 3 997 315 Note: Manufacturing refers to the share of GVA in total GVA at the state level; population density is the ratio between population and surface area. Source: Own calculation based on data from OECD (2016b), “Regional economy”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/6b288ab8-en (accessed 3 November 2016).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 43

Additionally, OECD TL2 regions have been selected to benchmark Morelos with OECD regional economies. These include regions from the following countries: Belgium, , , , Italy, , and the . These regions have a share of GVA in manufacturing between 15% and 30%, a total population of roughly 1 to 20 million, and a number of inhabitants per square kilometre between 278 and 791. The indicators have been chosen in order to grasp similarities in terms of structural characteristics rather than performance. For instance, similar levels of population density should imply similar opportunities in terms of agglomeration economies and population provides an indication of the size of the economy. In the OECD, the smallest TL2 region (Åland, Finland) has only 28 666 inhabitants, and the largest (California, United States) has 38 802 500 inhabitants. The population threshold excludes those economies that are not comparable with the size of Morelos. Finally, as previously outlined, it is also relevant to take into account the share of GVA in manufacturing to compare Morelos with potential competitors. Table 1.2. OECD TL2 regions benchmark, 2012

TL2 Region Manufacturing GVA share Population Surface area (km2) Population density Flemish Region 19% 6 429 060 13 360 481 Metropolitan 12% 7 228 580 15 403 469 North Rhine-Westphalia 21% 17 571 900 34 092 515 Saarland 27% 990 718 2 569 386 Central Hungary 15% 2 965 410 6 916 429 Lombardy 20% 9 973 400 22 800 437 Kansai region 20% 20 750 000 26 232 791 Mexico 24% 16 618 900 22 333 744 Gelderland 14% 2 019 690 4 969 406 North Brabant 21% 2 479 270 4 914 505 Limburg (NL) 18% 1 120 010 2 150 521 North West England 14% 7 115 250 14 105 504 West Midlands 14% 5 687 060 12 998 438 Hesse 19% 6 045 430 21 115 286 Veneto 23% 4 926 820 17 571 280 Northern-Kanto, Koshin 30% 9 825 000 35 355 278 Kyushu, Okinawa 15% 14 480 000 43 712 331 Tlaxcala 29% 1 260 630 3 997 315 Overijssel 18% 1 139 700 3 324 343 Morelos 24% 1 897 390 4 892 388 20% 7 026 211 15 640 442 Note: Manufacturing refers to the share of GVA in total GVA at the state level; population density is the ratio between population and surface area. Source: Own calculation based on data from OECD (2016b), “Regional economy”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/6b288ab8-en (accessed 3 November 2016). Morelos’ performance is among the worst across the regions in the benchmark. Morelos’ GDP per capita was substantially unchanged in the period 2003-13, representing the worst performance apart from two Italian regions (Lombardy and Veneto). Figure 1.17 provides a clear picture of the challenge that the trend in GDP per capita poses for the economy of Morelos. Its growth is not only lower than most OECD regions, but more alarmingly is lower than the benchmark of Mexican regions. In fact, even the other Mexican states are not catching up to the OECD regions, as their growth

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 44 – 1. THE ECONOMY OF MORELOS

is similar to that of most OECD regions, therefore the differences in terms of level of productivity are likely to persist. The challenge for Morelos is at least to catch-up with the productivity growth of its Mexican competitors. Figure 1.17. Morelos’ per capita GDP growth is lower than in comparable Mexican states

Selected OECD TL2 regions Morelos Selected Mexican TL2 regions GDP per capita growth 2003-13 5%

4% Santiago

3%

2% Aguascalientes State of Mexico 1% Tlaxcala Guanajuato

0% Morelos -1%

-2% 5 000 10 000 15 000 20 000 25 000 30 000 35 000 40 000 45 000 50 000 GDP per capita 2003 Note: GDP is calculated at constant PPP and expressed in 2010 USD. Per capita GDP growth refers to the average annual growth rate in the period considered. For Japanese regions, GDP per capita growth refers to the period 2003-12. Source: OECD (2016b), “Regional economy”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/6b288ab8-en (accessed 3 November 2016). The negative output trend has been reverted since 2010. A less gloomy picture emerges from the sub-period 2010-13. In the last years for which data are available, the trend of productivity in Morelos was slightly better, in line with comparable TL2 Mexican regions (Figure 1.18), and higher than the OECD TL2 regions. Figure 1.18. The performance of Morelos improved in the period 2010-13

Note: GDP is calculated at constant PPP and expressed in 2010 USD. Per capita GDP growth refers to the average annual growth rate in the period considered. For Japanese regions, GDP per capita growth refers to the period 2003-12. Source: OECD (2016b), “Regional economy”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/6b288ab8- en (accessed 3 November 2016).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 45

Morelos’ labour productivity decreased between 2003 and 2013 at an average annual rate of 1.2%. The region of Morelos is not the only one in Mexico that had negative productivity growth: the regions of Aguascalientes and Tlaxcala also experienced a decrease in labour productivity, and the state of Mexico had growth of virtually zero. This may indicate common bottlenecks or a country effect restraining labour productivity. However, it should also be noted that Morelos’ GDP per worker growth was remarkably lower than in the selected Mexican states, which points to additional regional challenges specific to Morelos. Moreover, labour productivity growth in Morelos was lower than in all other OECD TL2 regions selected for the benchmark. In fact, labour productivity decreased in only three regions out of the 17 non-Mexican regions selected: Lombardy and Veneto (Italy) and Hesse (Germany). Taken together, these trends indicate that Morelos has latent growth potential that requires current regional development policies to be strengthened further. In the following section, the focus shifts to the strengths of the economy of Morelos that could translate into productivity growth.

Figure 1.19. Negative labour productivity growth in the period 2003-13

Selected OECD TL2 regions Morelos Selected Mexican TL2 regions GDP per worker growth 2003-13 3.5% 3.0% 2.5% Santiago Metropolitan 2.0% North Brabant 1.5% 1.0% Aguascalientes 0.5% State of Mexico Lombardy 0.0% Guanajuato -0.5% Tlaxcala Veneto Hesse -1.0% Morelos -1.5% 0 20 000 40 000 60 000 80 000 100 000 120 000 GDP per worker 2003 Note: GDP is calculated at constant PPP and expressed in 2010 USD; employment is measured at place of residence. GDP per worker growth refers to the average annual growth rate in the period considered. For Japanese regions, GDP per worker growth refers to the period 2003-12. Source: OECD (2016b), “Regional economy”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/6b288ab8-en (accessed 3 November 2016).

Morelos is specialised in tradable sectors The structure of the economy provides an indication of the competitiveness of the regional economy. In general, an economy that specialises in tradable sectors – i.e. producing goods that can be sold in other markets – tends to be more vulnerable to competition from other regions both within the country and internationally (Box 1.2). However, this “competitive” pressure represents an incentive to boost productivity in order to keep or increase market share and thus contribute to a dynamic regional economy. High shares of value added from tradable sectors seem also to be the main cause of regional catching up within OECD countries. The most significant difference

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 46 – 1. THE ECONOMY OF MORELOS

between converging and diverging regions within a country is the share of value added from manufacturing, tradable services, and resource extraction (OECD, 2016f).

Box 1.2. Tradable sector and economic convergence

Economic theory posits that countries that have access to the same production technologies have the potential to grow towards a common level of wealth. This “absolute” or “unconditional” convergence means that less-developed economies with initially lower levels of per capita income should experience faster growth than economies that have already reached higher income levels. But growth experienced by many countries is often less in line with absolute convergence, and rather supports “conditional” convergence towards different levels of GDP per capita. While conditional convergence is predominant among economies as a whole, the tradable (industry) sector deviates from the pattern and shows absolute convergence across economies. Based on a sample of more than 100 countries, Rodrik (2013) finds absolute convergence in labour productivity in the manufacturing sector across the world. But the strong push of the tradable sector that aids less-developed economies to catch up to their peers does not translate into absolute convergence for the economy as a whole, as the contribution of manufacturing to the economy tends to be small in less-developed economies. Recent evidence (Rodrik, 2016) suggests that the current shift away from manufacturing is not only a challenge for most OECD countries but for some developing countries, which seem to experience deindustrialisation at relatively low levels of wealth and might prematurely reduce growth opportunities in the tradable sector. Notably, the shift away from manufacturing is strongest for Latin American countries and largely absent in Asian countries. Several characteristics of the tradable (manufacturing) sector give rise to its special role for economies. First, it tends to be an innovative and dynamic sector, which adapts to and pushes the technological frontier. Second, manufacturing has traditionally employed not only the highly skilled, but also a large number of medium- and low-skilled workers at relatively high wages, which sets it apart from other high-productivity sectors such as or finance (Rodrik, 2016). Third, the growth and success of the tradable sector is not limited by the size of the local market, which decouples its growth, to a certain degree, from the rest of the economy. Fourth, the tradable sector creates significant spillovers to other – localised – sectors. In the United States, Moretti (2010) finds substantial job creation multipliers associated with the tradable (manufacturing) sector. For each job created in manufacturing, the number of local jobs in non-tradable goods and services increases by 1.6. For , Moretti and Thulin (2013) find a smaller multiplier, with estimates ranging from 0.4 to 0.8 jobs. Sources: Moretti, E. (2010), “Local Multipliers”, American Economic Review, Vol. 100(2), pp. 373-77; Moretti, E. and P. Thulin (2013), “Local multipliers and human capital in the United States and Sweden”, Industrial and Corporate Change, Vol. 22(1), pp. 339-362; Rodrik, D. (2016), “Premature deindustrialization”, Journal of Economic Growth, Vol. 21(1), pp. 1-33; Rodrik, D. (2013), “Unconditional Convergence in Manufacturing”, Quarterly Journal of Economics, Vol. 128(1), pp. 165-204.

The indicator of sector specialisation compares the importance of each economic sector within a given state with the importance of the same sector at the national level. In the following section the analysis looks at the specialisation in terms of GVA and employment. The sector disaggregation of employment is available only since 2010, thus only the last available data (2013) is reported. Morelos has an edge in manufacturing with respect to other regions. In terms of GVA, Figure 1.20 shows Morelos’ sectoral specialisation at the one-digit industrial classification, comparing data for 2003 with data for 2013. The edge Morelos has in manufacturing with respect to other regions means that the share of GVA produced by

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 47

the manufacturing sector in Morelos is higher than the share of GVA produced by manufacturing at the national level. Interestingly this specialisation edge does not apply to the whole industry, signalling the importance of the manufacturing sector for the performance of the regional economy. The specialisation has even increased from 2003 to 2013, signalling the presence of large investments in the region in manufacturing activities. This is, in all likelihood, linked to car manufacturing, chemistry, and processing, which represent the sectors that have attracted most FDI in the past.

Figure 1.20. Morelos is increasingly specialised in manufacturing Specialisation index

2003 2013

0.4 0.3 0.2 0.1 0 -0.1 -0.2 -0.3 -0.4 -0.5 -0.6

Note: The specialisation index is calculated for each sector as the share of GVA in Morelos divided by the share of GVA in Mexico. Sectors correspond to the ISICrev4 classification: agriculture, forestry, and fishing; construction; distributive trade, repairs, transport, accommodation, food service activities; industry, including energy, manufacturing; financial and insurance activities; information and communication; other services; professional, scientific, and technical activities, administration, support service activities; public administration, education, and health; real estate activities. Source: Own calculation based on data from the OECD (2016b), “Regional economy”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/6b288ab8-en (accessed 3 November 2016).

Specialisation is higher than the national average (i.e. higher than 0) also in the service sector, the public administration sector, and the real estate sector. By contrast the economy is less specialised than the national average in the finance sector, the sectors linked to professional, scientific, and technical activities, and to a lesser extent, in the agriculture and ICT sectors. The lower contribution to the regional GVA of the finance and professional activities may be the result of the low agglomeration economies since the small size of the metropolitan areas and the proximity of Mexico City tends to attract most of the financial and intellectual activities. The share of GVA by sector reveals a diversified economy. Looking at the actual share of GVA by sector (Figure 1.21) reveals the importance of the retail and the construction sectors for the economy of Morelos. Although the share of GVA coming from these sectors is in line with the national average, the retail sector represented almost a quarter of the total GVA in Morelos in 2013, while another quarter was generated by the manufacturing sector.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 48 – 1. THE ECONOMY OF MORELOS

Figure 1.21. Sectoral contribution to Morelos’ GVA

2003 2013

0.30

0.25

0.20

0.15

0.10

0.05

0.00

Note: Percentage of GVA in each sector with respect to total GVA in Morelos. Source: Own calculations based on data from OECD (2016b), “Regional economy”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/6b288ab8-en (accessed 3 November 2016).

The manufacturing sector seems to be driving the trend of GDP per capita. The importance of the manufacturing sector for the economy of Morelos is also shown by similarities with the trend of GDP per capita in the period 2003-13. While the share of construction and agriculture were quite flat, the share of GVA in the manufacturing sector presented a downward trend between 2003 and 2009 in line with the decline of GDP per capita and labour productivity in the same period (Figure 1.22). The manufacturing sector, therefore, represents a core sector for the performance of the economy.

Figure 1.22. GVA in agriculture, construction, and manufacturing sector, trend 2003-14

Agriculture Construction Manufacturing

0.25

0.20

0.15

0.10

0.05

0.00 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Note: The shares are with respect to the total GVA produced in Morelos. Source: Own analysis based on data from INEGI (2016), INEGI data bases, http://www.inegi.org.mx/ (accessed 7 November 2016).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 49

Electrical equipment drove the recovery after the global financial crisis. Within manufacturing, the most important sectors are: chemicals, electric equipment, food products, rubber plastic and other non-metallic products (Figure 1.23). Their trend shows that the recovery of GVA in manufacturing after 2009 was mainly due to the electrical equipment sector.

Figure 1.23. Trends in selected manufacturing sectors

Chemicals Electrical equipment Food products Rubber, plastic and other non-metallic products

35

30

25

20

15

10

5

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Note: The vertical axis corresponds to the share of the sector with respect to GVA in manufacturing. Source: Own analysis based on data from INEGI (2016), INEGI data bases, http://www.inegi.org.mx/ (accessed 7 November 2016).

The value of GVA produced by a sector however is not the only indicator of the importance of a sector for the local economy. Another important indicator is the employment generated by the sector. Like for GVA, employment specialisation refers to the share of people employed in a sector with respect to the national aggregate level. Figure 1.24 shows employment specialisation for Morelos in 2013. Data are only available since 2010, therefore only the value for 2013 is considered in the analysis. Employment specialisation is high in the construction sector, the service sector, and the real estate sector (Figure 1.24). Interestingly, in Morelos there is a lower share of workers employed in the manufacturing sector compared to the national share. This represents a challenge but also an opportunity for Morelos; the manufacturing sector is quite dynamic in terms of GVA contribution, and policies should be put in place to increase employment in this area. The lower specialisation in the manufacturing sector may also signal a better use of resources in Morelos than at the national level, since advanced manufacturing sectors are usually characterised by automated production processes that increase their productivity but not necessarily employment.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 50 – 1. THE ECONOMY OF MORELOS

Figure 1.24. Employment specialisation of Morelos, 2013

0.4 0.3 0.2 0.1 0 -0.1 -0.2 -0.3 -0.4 -0.5 -0.6

Note: Sectors correspond to ISIC4 classification. The vertical axis represents the specialisation index for each sector, with zero being the level corresponding to the national share. Therefore, sectors with a score above zero are more specialised than the national average, and sectors below zero are less specialised than the national level. Source: Own calculation based on data from the OECD (2016b), “Regional economy”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/6b288ab8-en (accessed 3 November 2016).

1.6 Main drivers of economic performance

Long-term trends in GDP per capita define the economic performance of an economy in terms of the share of output each person can dispose of – in the long run GDP should trickle down to people as disposable income. The relationship between output and population depends on labour productivity (how much each worker is able to produce), on the employment rate (what share of the population is participating in the production process), and the activity rate (measuring the percentage of working age population, usually between 15 and 65 years of age). While the latter factor depends on slow moving demographic trends, which are difficult to change in the short to medium term, both productivity and employment are affected by other factors, such as the quality of education and skills of workers, and the innovation activity – as well as structural changes in the economy. The output trend depends also on the availability of physical capital which is an integral part of any production process. Physical capital includes transport infrastructure that ensures access to markets and the supply chain. An important element contributing to physical capital is foreign direct investment (FDI), which represents the main source of investment for relatively poor economies. In this section we look at the main determinants of economic output. The analysis will focus on productivity which is the main source of long-term growth as well as factors such as agglomeration economies, quality of education, and innovation activity that can affect the level of productivity. The analysis will then look at the two main inputs into the production function: physical capital (including infrastructure), and labour (labour force). The final section will discuss the role of the informal sector in the Mexican economy and the consequences for economic growth.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 51

Productivity trends The main driver of economic performance is productivity. This is a concept which is linked to the efficient use of the factors of production and their combination with technology to produce increasing amounts of output. Increasing productivity represents the main path towards a sustainable and inclusive process of development. The OECD is promoting the creation of a network among stakeholders of OECD member countries to promote productivity growth. This initiative stems from the acknowledgment that productivity growth in most OECD countries has slowed markedly in the last decade, with some countries experiencing a flat trend in productivity (e.g. Italy).

Box 1.3. The future of productivity

Productivity growth has slowed in most OECD countries over the past decade. The persistence of this phenomenon and the wide range of countries involved have ignited a lively debate about the future of productivity. It is possible to classify the main thesis into two streams: a pessimistic view and an optimistic view. The former believes that the low hanging fruits of innovation have already been picked, and that the availability of electricity and the introduction of sanitation had an impact on productivity of a much higher magnitude than recent ITC innovations. The latter view is more optimistic, pointing out that the impact of ICT innovation in the economy has not fully materialised yet and that with appropriate policies the rate of productivity growth can expand further. The OECD report on the future of productivity illustrates the complexity of the issue by looking at firm level data. While the aggregate productivity level is stagnating, the analysis conducted at the firm level shows that some firms still display high rates of productivity growth, which are referred to as frontier firms. The problem is the lack of growth in the rest of the economy, with a growing gap in terms of productivity growth between frontier and lagging firms. The increasing gap raises questions about the diffusion of technology and knowledge from the frontier to the rest of the economy. The OECD report concludes that the scope for diffusion depends on four key factors: 1. Global connections, fostered by participation in global value chains and the international mobility of labour. 2. Easing barriers to entry, so new firms can enter the market faster, bringing new ideas, advanced technologies, and innovative business models. 3. The Schumpeterian process of creative destruction, facilitating the reallocation of scarce resources from low productive firms to high productive firms. 4. Investment in R&D, the skills of existing and future workers, and organisational know- how, which can favour the absorption of new technologies into the economy. Source: OECD (2015c), The Future of Productivity, http://dx.doi.org/10.1787/9789264248533-en.

Productivity is also important for explaining differences in GDP per capita across countries and within a country. For Mexico the differences of GDP per capita across states is mostly explained by differences in labour productivity (Figure 1.25). Therefore it is crucial for the competitiveness of the economy of Morelos to increase labour productivity.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 52 – 1. THE ECONOMY OF MORELOS

Figure 1.25. Differences in productivity drive regional disparities Coefficient of variation of each factor, contribution to total variation, 2010

Productivity Employment rate Activity rate

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Note: The variation of regional GDP per capita is broken down into the contributions of labour productivity (GDP per worker), labour resource utilisation (those employed as a share of the active working population) and the activity rate (percentage of the active working population in total population). Since the relationship between GDP and its components is multiplicative, the variability of each component does not exactly add up to the variability of GDP per capita. Source: Bartolini, D., S. Stossberg and H. Blöchliger (2016), “Fiscal Decentralisation and Regional Disparities”, OECD Economics Department Working Papers, No. 1330, http://dx.doi.org/10.1787/5jlpq7v3j237-en.

Among the main factors that can foster productivity growth are agglomeration economies, which comes from the close proximity of people and firms; innovation which is based on the activity of research centres and their link with firms; the level of skills of the labour force, which depends on both education and training of workers; the presence of a healthy business environment, which requires rules and regulations that facilitate the entry into the market of new firms and the growth of existing firms.

Agglomeration forces The connection between firms and workers, as well as the close proximity of people living and working in a city may increase productivity. First of all there are services that require a large scale of production in order to be economically feasible, e.g. cultural activities, conferences, etc. Second, the close proximity of firms and people allows for cross-fertilisation and specialisation. Furthermore the presence of a large share of people and firms allows a better match of demand and supply of skills. The OECD has conducted several studies on the productivity gains due to agglomeration economies, comparing metropolitan areas of different sizes (OECD, 2015d). The main conclusion is that larger metropolitan areas tend to be more productive.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 53

Box 1.4. Understanding agglomeration economies The mechanisms that create agglomeration benefits can be broadly split into three groups: sharing, matching and learning. The outline below follows Duranton and Puga’s contribution to The Handbook of Regional and Urban Economics (2004) and builds on a long history of research, with early discussion of the concept of agglomeration benefits dating back to the 19th-century economist Alfred Marshall’s Principles of Economics. Sharing of facilities or inputs by a large number of firms is one way of creating critical . The provision of goods or facilities requires a critical mass of beneficiaries. For example, diverting a river to provide a constant stream of fresh water for an industrial site involves high fixed costs that are only worth paying if enough firms can benefit from the investment. A similar argument applies to the provision of specialised goods and services. Specialisation creates gains, but also requires sufficiently high demand to sustain the business model. Larger labour markets result in better matches between employers and employees. A better match means that the person hired for a job is better suited for his or her position and hence more productive. Most people tend to look for jobs primarily within their city. In larger cities, they have a better choice between different potential employers and are more likely to find a suitable one. Another cause often considered relevant is the so-called technology spillover. Businesses tend to learn about the latest production methods from businesses located in its vicinity. Larger cities with more businesses offer more opportunities to learn about the most efficient production methods and to adapt accordingly. Agglomeration benefits are also considered to be related to the higher “connectivity” of individuals in larger cities, and to higher levels of “knowledge-based capital”, or intangible assets, in enterprises located in larger cities. Lastly, the presence of a larger number of businesses increases the level of competition within a city. Fiercer competition ensures that unproductive businesses leave the market, increasing the average level of productivity in a city and raising its GDP. Source: Duranton, G. and D. Puga (2004), “Micro-foundation of Urban Agglomeration Economies”, in V. Henderson and J.-Thisse (eds), Handbook or Regional and Urban Economics, Vol. 4, pp. 2063-2117 and Marshall, A. (2006), Principles of Economics, Cosimo Classics, (originally published by Prometheus Books in 1890).

The state of Morelos is characterised by the presence of three metropolitan areas (Zona Metropolitana, ZM), although only two have obtained an official recognition, namely the metropolitan area of Cuernavaca and the metropolitan area of Cuautla. Although not yet officially constituted, the municipalities of Zacatepec, and have implemented some of their public policies as a metropolitan area, under the name of metropolitan area of Jojutla. For this reason, the third “unofficial” metropolitan area is also included in the analysis. Metropolitan areas are defined as the conjunction of contiguous municipalities with a high population density and, for the periphery, municipalities with substantial commuting patterns towards the core of the ZM. The metropolitan area of Cuernavaca which accounts for more than 49% of the state population, the metropolitan area of Cuautla which accounts for 25% of the population, and the newly established metropolitan area of Jojutla which accounts for 7% of the state population (Table 1.3). In the period 2010-14, the population of the metropolitan area of Cuautla was the fastest growing in Morelos, with an average annual growth of 1.5%. Overall the three metropolitan areas account for more than 80% of the population in Morelos, encompassing 16 municipalities out of the 33 present in the state of Morelos. Even though these metropolitan areas can be classified as medium and small (OECD, 2015a), especially compared to Valle de Mexico (which includes Mexico City), there is still scope to exploit synergy and some kind of agglomeration benefits. In this respect a better connection between the three metropolitan areas, as well as an integrated management of each metropolitan area is necessary to take advantage of the economies

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 54 – 1. THE ECONOMY OF MORELOS

of agglomeration and avoid problems of congestion and (administrative) fragmentation that can reduce the impact and efficiency of economic policies (OECD 2015e). Table 1.3. Metropolitan areas in Morelos, 2014

Number of municipalities Population Percentage of total population Fragmentation Cuernavaca 8 934 244 49.24% 0.75 Cuautla 6 467 904 24.66% 1.28 Jojutla 3 127 680 6.73% 2.35 Morelos 33 1 897 393 80.63% 1.74 Note: The metropolitan area of Jojutla is not officially recognised at the time of publishing this report. Source: Own analysis based on data from CONAPO (2016), Consejo National de Población, www.conapo.gob.mex/es/CONAPO/Proyecciones (accessed November 2016). Regarding administrative fragmentation, the presence of many municipalities within the same metropolitan area may hinder economic growth. Bartolini (2016) shows that fragmentation hinders growth in urban regions, as workers’ and firms’ outreach are likely to cross administrative borders, requiring, for instance, a common/integrated transport programme. By contrast in rural regions the likelihood that people cross administrative borders in their daily life is smaller, thus fragmentation is a problem mainly for metropolitan areas. Innovation activity in Mexico and Morelos Investment in research and development activities represents one of the main sources of innovation that can improve the competitiveness of the economy. Figure 1.26 presents an overview of expenditures in 2012 across OECD countries, showing a high variability, with Mexico being at the bottom of the distribution with 0.42%, Korea scoring highest with 4.36% of national GDP, and an OECD average of 2.34%. Disentangling the sources of expenditure in R&D shows that the business sector is the main driver. Countries with the highest overall level of R&D intensity, such as Finland, Israel and Korea, all present a share of business investment higher than 68%, with Israel topping 84%. Figure 1.26. R&D intensity is quite low in Mexico, 2012 R&D expenditure as a share of GDP, 2012

Private non-profit expenditure on R&D Government intramural expenditure on R&D Higher education expenditure on R&D Business enterprise expenditure on R&D

5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

Source: OECD (2015b), OECD Economic Surveys: Mexico 2015, http://dx.doi.org/10.1787/eco_surveys-mex-2015-en.

The poor score of countries such as Mexico and Chile could be a consequence of a large share of multinational companies in the economy which tend to conduct research

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 55

and development activities in their country of origin, leaving only the manufacturing and assembly activities in the country. This is the case of Nissan in Morelos, where investments are mainly in physical capital, including the acquisition of sophisticated machines, but little research and development activity. Nevertheless, the state of Morelos presented a level of patent intensity higher than the Mexican average in the period 2000-11, and much higher than potential competitors such as the states of Aguascalientes, Guanajuato, Mexico and Tlaxcala (Figure 1.27). This performance shows the presence of a dynamic research sector (mainly public) in Morelos that could represent a source of competitive advantage with respect to other Mexican states. The poor performance of the economy in terms of productivity growth, however, indicates a problem of absorption by the business sector of the innovation produced by the research activity. Seeking a better integration between research facilities and firms should help translate the innovation achievements into productivity gains. The presence of large multinational firms in Morelos can also be leveraged in order to gain from their experience regarding absorption of innovation. Figure 1.27. Patent intensity, average 2000-07 and 2008-11

2000-07 2008-11

2.5

2.0

1.5

1.0

0.5

0.0 Morelos Mexico Aguascalientes State of Mexico Guanajuato Tlaxcala Note: Patent intensity is measured as the number of patent applications per million inhabitants. Source: OECD (2016g), “Regional innovation”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/1c89e05a-en (accessed 3 November 2016). Education and skills of the labour force Education attainment provides an indication of the level of skills of the labour force. Although skills are not necessarily or solely linked to formal education, the fact that 60% of the workforce only attained an education level below upper secondary represents a challenge for economic development in Morelos. This share is much higher than the average across OECD countries, where workers below secondary education accounted for less than 30% in 2010. The regional accounts do not distinguish between lower and upper secondary education, thus every worker who did not achieve the full (upper) secondary education is classified as holding only primary education (Figure 1.28) and these are the statistics used throughout the work for comparison with the OECD average. The lower level of education of the workforce in Morelos is also reflected in the smaller share of workers with tertiary education (around 20% in 2010 against an OECD average of almost 30%). Education attainment in Morelos however is in line with the Mexican average. In fact, Morelos displays a slightly smaller share of workers with primary education than the Mexican average (Figure 1.28). Increasing the share of workers with secondary and tertiary education

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 56 – 1. THE ECONOMY OF MORELOS

requires specific education policies and will pay off in the long run. For the existing workforce the upgrading of skills should be pursued through training programmes. Investments in education and in improving skills are among the structural policies that could provide inclusive growth (OECD, 2016h). This would contribute to not only output growth but also increasing the participation and contribution of people to the national output. Figure 1.28. Primary and tertiary education attainment Primary education Tertiary education

Mexican average Morelos OECD average Mexican average Morelos OECD average

80 30

70 25 60 20 50

40 15

30 10 20 5 10

0 0 2000 2003 2007 2010 2000 2003 2007 2010 Note: Bars represent the share of the labour force according to education level. Primary education includes anybody with below upper secondary education. Source: Own calculation based on data from the OECD (2016b), “Regional economy”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/6b288ab8-en (accessed 3 November 2016). The distribution of population according to education attainment shows progress at the top and bottom of the education levels. The share of people with no education has decreased since 2000 in all Mexican states, while the share of people with tertiary education has increased. In 2010, 7.3% of the population in Morelos had no formal education (Figure 1.29). This value was 10.3% in 2000. Despite this improvement, the state of Morelos ranks 21 (out of 33), a position largely unchanged since 2010. Although it is in line with the national average (7.2%) it is above the value of Aguascalientes (4%), the state of Mexico (5%), and Tlaxcala (5.3%). Figure 1.29. Share of population with no formal education by Mexican states

2000 2010

% 25

20

15

10

5

0

Note: The percentage was based on the population of 15 year old and older. Source: INEGI (2000, 2005, 2010a), Censos de Poblation y Vivienda, Instituto Nacional de Estatistica y Geografía.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 57

Apart from the certified level of education attained by the workforce, the skills of the workforce depend on the quality of the education system. The OECD PISA statistics provide an indication of the quality of students by conducting tests on student samples at different stages of the education system. This ranking shows the gap between Mexico and the average across OECD countries, indicating that the lagging skills levels are an issue for the development of the whole Mexican economy. The disaggregation of PISA scores at the state level reveal a north-south regional pattern, with students in the northern states displaying a higher test score than students in the central and southern regions. Figure 1.30 portrays a ranking of states according to the PISA scores in mathematics for the year 2012; Morelos is above average, ranking 9th out of 32 Mexican states.

Figure 1.30. PISA scores in mathematics

2012 2003

Average score 500 450 400 350 300 250 200 150 100 50 0

Source: OECD (2014a), PISA 2012 Results: What Students Know and Can Do (Volume I, Revised edition, February 2014): Student Performance in Mathematics, Reading and Science, http://dx.doi.org/10.1787/9789264208780-en.

Overall the level and quality of education in Morelos is low with respect to OECD standards but it is higher than the Mexican average. In order to upskill the workforce more attention should be paid to the education system and training programmes.

Territorial aspects of education Aggregate data tend to conceal the presence of disparities in the quality of education across the country and within states. The national assessment of academic achievements in schools, ENLACE, provides data on the test score of pupils in primary and secondary education by schools. The survey is conducted every year, the latest available is Enlace 2014 which provides data on test scores for 2013. School quality in Morelos is better than the average national level with a distribution that lays to the left of the density distribution of Mexico (Figure 1.31).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 58 – 1. THE ECONOMY OF MORELOS

Figure 1.31. Distribution of test scores across schools, Morelos and Mexican average

Morelos Mexico

Density 0.006

0.005

0.004

0.003

0.002

0.001

0 300 350 400 450 500 550 600 650 700 750 800 Test scores

Note: The distribution of test scores is computed according to a kernel density distribution. Source: Own analysis based on data from Enlace (2014), Evaluacion Nacional del Logro Academico en Centros Escolares, http://www.enlace.sep.gob.mx/ (accessed 3 November 2016).

Figure 1.31 is based on statistics that consider all types of schools from all municipalities in Morelos as well as in the other Mexican states. The distribution of test scores for Morelos has a larger mean value than the Mexican average and it is shifted to the right with respect to the distribution for Mexico. The lower density in the left tail (low scores) and the higher density on the right tail (high scores) with respect to the Mexican average, indicates that the quality of schools is slightly better in Morelos. In terms of type of schools, most of the primary schools are general public schools, except for the state of Oaxaca where all primary schools are CONAFE, which are special schools designed to address the specific problems of marginalised areas across the country. In Morelos, the share of general primary schools is 68.28%, against an average across Mexican states of 71%. By contrast secondary education is dominated by televised schools ().2 Apart from a few states (e.g. the Federal District where the televised schools represent just 3.6% of secondary schools), televised schools seem to be the main type of secondary . In some large states like Oaxaca and Veracruz the share of televised schools is above 70% and although they also account for the highest share (34.3%) of secondary schools in Morelos, this is not as high as in other larger states. In fact, Morelos displays a large share of private schools compared to other Mexican states (Figure 1.32). In Morelos 26.77% of all primary schools and 32.31% of all secondary schools are private, putting Morelos in the second highest place among Mexican states only behind the Federal District, where 36.3% of primary and 36.8% of secondary schools are private. Another feature of the Mexican secondary education system is the dearth of technical schools. On average they represent around 11% of all schools. In Morelos the share is a bit higher (13%) but they still represent a minority of schools. This could be a problem as technical schools may attract students

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 59

who prefer to get a more specialised education in an attempt to enter the labour market sooner.

Figure 1.32. Morelos presents a high percentage of private schools

Primary schools Secondary schools

Private General Private General CONAFE Indigenous Technical Telesecundaria

Federal District Federal District Morelos Morelos Baja California Coahuila Tlaxcala Baja California Quintana Roo Michoacan Michoacan Querétaro State of Mexico Nuevo León Baja California Sur Baja California Sur Querétaro Tamaulipas Aguascalientes Quintana Roo Coahuila Aguascalientes Yucatán Yucatán Nuevo León Sonora Tamaulipas Jalisco Puebla Tlaxcala average of states Sonora State of Mexico Jalisco Guanajuato Average dataset Campeche Colima Colima Guanajuato Average dataset Chihuahua Chihuahua Hidalgo Puebla Campeche Sinaloa Sinaloa Tabasco San Luis Potosi Hidalgo Nayarit Veracruz Tabasco San Luis Potosi Zacatecas Nayarit Veracruz Durango Guerrero Zacatecas Durango Guerrero Chiapas Chiapas Oaxaca Oaxaca 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100%

Source: Own analysis based on data from INEGI (2016), INEGI data bases, http://www.inegi.org.mx/ (accessed 7 November 2016).

The share of students (both primary and secondary) who attend private schools is smaller than the share of private establishments, indicating that private schools are less crowded than other types of schools (Figure 1.33). Figure 1.33 however shows that most students are enrolled in public schools (this is in line with the situation in other OECD countries). In Morelos, the sample of students who took part in the evaluation mainly attended public schools (72%), while 11% were enrolled in private schools. The large number of private schools could explain the good performance of Morelos in terms of quality of education with respect to other states. There is indeed

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 60 – 1. THE ECONOMY OF MORELOS

a positive correlation between the share of private schools and the test score average of each state for both primary and secondary education (Figure 1.33).

Figure 1.33. Positive correlation between test scores and share of private schools

Primary Secondary Test score 600 y = 1.712x + 510.93 580

560 Federal District

540 Morelos 520 Federal District 500 Morelos

480 y = 0.5084x + 498.91

460

440

420

400 0 5 10 15 20 25 30 35 40 Share of Private schools

Source: Own analysis based on Enlace (2014), http://www.enlace.sep.gob.mx/ (accessed 3 November 2016).

The performance of students is affected by the location of their school. Students in larger cities may perform better than students in rural areas, because of the concentration of educated people and financial resources in cities. There is however no clear correlation of test scores and population size of the municipality in which the school is located (Figure 1.34). In particular, in the range of municipalities with less than 5 000 inhabitants there are both the best and worst performers. However, the analysis reveals a pattern within metropolitan areas, with lower scholastic performance being located in the periphery of the metropolitan areas. In cities like , Tepoztlan and Xochitepeca the percentage of underperforming schools is much higher than in Cuernavaca and – i.e. the core cities of the metropolitan area. The same is true for the metropolitan area of Cuautla. Rather than portraying a rural urban divide, the analysis shows that particular attention should be directed towards the periphery of metropolitan areas and selected rural municipalities, rather than all rural municipalities.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 61

Figure 1.34. Correlation between test scores and municipal size Test scores in mathematics, 2013 Primary school

Jojutla Cuernavaca Cuautla Non-metropolitan Linear (Cuernavaca) Linear (Cuautla)

100%

Huitzilac Emiliano 90% 80% Jiutepec

70%

60% Cuernavaca 50% Tepoztlan Yautepec 40% Cuautla 30% Ayala

20% 0 50 000 100 000 150 000 200 000 250 000 300 000 350 000 400 000 Population

Secondary school

Jojutla Cuernavaca Cuautla Non-metropolitan Linear (Cuernavaca) Linear (Cuautla)

100% Huitzilac 90% 80% Yecapixtla Yautepec

70% Ayala 60% Tepoztlan Xochitepec 50% Jiutepec 40% Temixco Cuautla Cuernavaca

30%

20% 0 50 000 100 000 150 000 200 000 250 000 300 000 350 000 400 000 Population

Note: Schools are weighted by the number of students who took the test. The vertical axis indicates the share of schools in the municipality that are below the average score for Morelos. Curnavaca, Cuatla, and Jojutla correspond to the respective metropolitan areas. The metropolitan area of Jojutla is not officially recognised at the time of publishing this report. Source: Own analysis based on Enlace (2014), http://www.enlace.sep.gob.mx/ (accessed 3 November 2016).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 62 – 1. THE ECONOMY OF MORELOS

Business environment The business environment represents an indicator of how easy it is doing business in the region and thus an indicator of the growth potentials of the economy. The more favourable the business environment the higher the creation of new firms and FDIs. The World Bank provides an indicator comparing countries and regions in this domain. The ease of doing business is measured using four indicators that refer to four different stages in the life of small to medium-size enterprises: starting a business, dealing with construction permits, registering property and enforcing contracts. Each of the four indicators is in turn constructed by three to four sub-indexes. In 2014, Colima was found to be the state where it is easiest to do business, followed by Aguascalientes and Guanajuato. Morelos ranks very low in the ranking, losing one position compared to the 2009 ranking (Figure 1.35). This low performance was mostly the result of poor scores in the categories “enforcing contracts” and “dealing with construction permits”. In fact, in 2014 Morelos ranked respectively last and second to last in these areas. On the other hand, Morelos scored well in “starting a business” (14th out of 32).

Figure 1.35. Ease of doing business Percentiles

2014 2009

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0

Note: The index represents a combination of four domains: ease of starting a business; ease of dealing with construction permits; ease of registering property; and ease of enforcing contracts. Source: World Bank (2014), Doing Business in Mexico, www.doingbusiness.org (accessed November 2016).

Capital and labour

Physical capital and infrastructures Physical capital is one of the main factors of production. Both the level and the change in physical capital, i.e. the net investment, are important determinants of economic growth. Gross capital formation represents the amount of fixed assets added from one year to the next without taking into consideration the depreciation of the existing capital. It is one of the main determinants of GDP growth and can explain the performance of the economy of Morelos with respect to other states, as well as its growth potentials.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 63

Figure 1.36. Gross capital formation and stock, 2013

Gross capital formation (LHS) Stock of capital (RHS) % % 16 120 14 100 12 80 10 8 60 6 40 4 20 2 0 0

Note: Gross capital formation (left axis) is calculated as the annual variation of physical capital over GDP; likewise the stock of capital (right axis) is measured with respect to the regional GDP. Source: INEGI (2014a), Micro, Pequeña, Mediana y Gran Empresa: Estratificación de los Establecimientos, Censos Económicos 2014, Instituto Nacional de Estatistica y Geografía.

Compared to other Mexican states the stock of capital in Morelos in 2013 was among the smallest with a ratio of physical capital over GDP of 37.26% which was much lower than the average across all Mexican states of 54.67% and a median of 47.67% (Figure 1.36). In particular, the stock of capital in Morelos was lower than in potential competitors, such as Aguascalientes (52.41%), Tlaxcala (40.7%), and the state of Mexico (38.69%). In addition to the stock of capital, it is important to consider its trend (i.e. the net investment), when assessing economic growth potentials. In this respect, the state of Morelos is faring better. With a rate of gross capital formation of 3.6%, Morelos was above the median value of 3.14% and doing better than most potential competitors, except the state of Aguascalientes, which is performing better than Morelos also in terms of capital formation, with a rate to GDP equal to 5%. Besides the formation of capital, the type of capital is also important for growth. At the regional level, it is particularly important to invest in transport infrastructures, which is an important component of the competitiveness of the regional economy. Being able to reach domestic and international markets is crucial in developing a flourishing tradable sector. The government of Morelos is supervising investments in a new rail connection between the state of Morelos and the state of Veracruz which would link the regional economy to the Atlantic coast. The creation of a new electricity production facility (Termoeléctrica de Huexca) in the municipality of Yecapixtla represents an important asset for the development of the manufacturing sector by providing it with a stable and cheaper supply of electricity. Figure 1.37 provides a visual representation of transport infrastructure in the state of Morelos. It shows the presence of a north-south axis, which connects Mexico City to the pacific coast and passes through the city of Cuernavaca and an east-west axis, which links the metropolitan areas of Cuernavaca and Cuautla, and continues further east towards the state of Puebla and the Atlantic coast. The map also shows a substantial lack of transport infrastructure in the southern part of the state.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 64 – 1. THE ECONOMY OF MORELOS

Figure 1.37. Transport infrastructures in Morelos

Source:Ministry of Finance (2016), Administrative Registries.

In comparison with other Mexican states, Morelos has more roads per square kilometre than most other states, ranking 4th out of 32 states (Figure 1.38). However, there are reported problems of congestion and a need to improve the existing infrastructure. This would improve connections between the two metropolitan areas of Cuernavaca and Cuautla and with the eastern part of the state as well. It would also connect the main business areas to the state of Puebla, strengthening Morelos’ access to the Atlantic coast.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 65

Figure 1.38. Road density in Morelos compared to other Mexican states, 2012 Kilometres of roads per surface area Index 0.7

0.6

0.5

0.4

0.3

0.2

0.1

0

Note: The index refers to the ratio of kilometres of roads to surface area for each state. Source: Secretaria de Comunicaciones y Transportes (2012), Informe de Estadistica Basica, last available data, disaggregated by state and type of infrastructure.

In addition to transport infrastructures, internet access is a pre-requisite for firms seeking to operate in modern markets and connect to customers. In Mexico, access to broadband Internet is below the average of OECD member countries with 33% of households having access in 2014, against an OECD average of 53%. Within Mexico, the state of Morelos is above the national average, with 38.44% of households having broadband access, which gives Morelos the 10th place in the ranking of Mexican states.

Figure 1.39. Household broadband access, 2014

60

50

40

30

20

10

0

Note: Share of households with broadband access (as a percentage of total households). The OECD average refers to the average of data from 2010 to 2014 according to the availability of data for each OECD member country. Source: OECD (2016b), “Regional economy”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/6b288ab8-en (accessed 3 November 2016).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 66 – 1. THE ECONOMY OF MORELOS

Federal funds and FDIs represent the main sources for investment in physical capital in Morelos. The former mainly finances infrastructure programmes, while the latter mainly finances the creation of new plants and the acquisition of new machinery in manufacturing plants. In 2015 Morelos received FDI of USD 325 million, which is 86% higher than the total FDI received in 2006. Like the state of Guanajuato, Morelos’ FDI had a peak in 2007 and 2013. Compared to the selected Mexican states, Morelos’ FDI have increased faster than in Tlaxcala and Mexico, but slower than in Aguascalientes. Three OECD countries make up more than three quarters of Morelos’ FDI. In particular, Japan and the United States alone accounted for more than half of Morelos’ FDI in 2015 (Japan: USD 113.8 million; United States: USD 77 million; : USD 66.3 million). France, Belgium and are also important contributors to Morelos’ FDI. More than 50% of FDIs were invested in manufacturing (USD 191.7 million), followed by construction (USD 56.3 million) and retail trade (USD 29.2 million).

Figure 1.40. FDIs in Morelos: Mainly from OECD countries and in the manufacturing sector Trimestral FDI by country of origin, 2015 (millions of USD) Trimestral FDI by sector, 2015 (share of total FDI)

Mining Others ICT United Spain Financial States 66.3 services 77.0

France Trade 27.9

Manufacturing Belgium Japan 15.5 113.8 Switzerland Construction 10.5 Others 13.7

Note: The category “others” (in the left pie chart) include: Argentina, Austria, Brazil, Canada, Germany, Italy, Korea, Netherlands, United Kingdom and Venezuela. Source: Elaboration from the Ministry of Economy of the State of Morelos, with information from the National Registry of Foreign Investments, from the Federal Ministry of the Economy.

Trade agreements determine location patterns of FDI – losing an absolute competitive advantage Trade agreements determine the conditions under which trade with foreign countries takes place, including the regulatory framework for FDIs. These agreements have repercussions at the regional level. They tend to benefit regions with the highest amount of competitive firms. However they can also give a competitive advantage to regions closer to countries with which trade agreements are sealed. Therefore, a trade agreement can affect the location decision of firms, investment and FDIs. This is the case for Morelos.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 67

Until the 1990s Morelos enjoyed a competitive advantage due to its proximity to the metropolitan area of Valle de Mexico, which includes Mexico City, representing the main domestic market. This absolute advantage with respect to Mexican states further away from Mexico City, led to the decision of many multinational companies to establish plants in Morelos in order to serve the Mexican market. In the 1960s Nissan established in Morelos its first production plant outside Japan. The competitive advantage of Morelos was a direct consequence of its convenient location close to Mexico City. Moreover, high trade barriers forced foreign firms to manufacture on Mexican soil goods they wished to sell to the domestic market – a similar strategy was adopted to enter the Brazilian market. This competitive advantage, however, faded when the North American Free Trade Agreement (NAFTA) was signed in 1994. The far-ranging trade deal established strong economic ties between Mexico and the United States and to a lesser extent Canada. The agreement made it easier to export manufactured products from Mexico to the United States, creating a shift in the business strategy of multinational firms. With the removal of trade barriers, multinational firms realised the advantages, including cheaper factors of production, of serving the North American market by manufacturing in Mexico. The agreement, therefore, triggered a geographic shift of production from regions with easy access to Mexico City to regions with easier access to the United States. Morelos lost its competitive advantage in favour of states such as Aguascalientes which is much closer to the United States’ border. Although the main Mexican export market is the United States, the Mexican government is also active in strengthening trade links with other Latin American countries. The is a regional integration initiative established in 2011 among four Latin American countries: , Chile, Mexico and . The main aim is to promote deeper trade integration among these countries and co-ordinate efforts to attract FDIs. Greater integration of the Mexican economy with South America would rebalance the current exposure to the U.S. economy. In terms of geographic impact, it represents an opportunity for the economy of states, such as Morelos, which suffered from overdependence on the United States’ economy as their main export market.

Labour market Labour represents a crucial factor of production and increasing the labour force is necessary to ensure sustained growth. The active participation of the population in the labour market, together with the quality of jobs, represents one of the main elements of well-being. Policies that reduce skills mismatch and increase the labour-force participation (especially among women) can lead to both inclusive growth and increased well-being. The employment rate in Morelos is quite low when compared to the OECD average. In 2014, the employment rate in Morelos was 63.1%, which was lower than the OECD average of 67.3%, and the gap has widened considerably since 2012 (Figure 1.41). On the other hand, the unemployment rate of Morelos in 2014 was 4.1%, which is 3.2 percentage points lower than the OECD average of 7.3%. The gap with the OECD average has decreased compared to 2008 levels, when the unemployment rate of Morelos was 60% lower than the OECD average.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 68 – 1. THE ECONOMY OF MORELOS

Figure 1.41. Employment rate

Morelos Mexico OECD

68

67

66

65

64

63

62

61

60

59 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: OECD (2016i), “Regional labour markets”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/f7445d96-en (accessed 3 November 2016).

Morelos’ labour market is performing well compared to the national average, but has worsened in recent years. The employment rate of Morelos was higher than the national average for the whole period considered, between 2004 and 2014. However, while the gap with the national average increased until 2009, up to 4.5%, it decreased afterwards and in 2014 the employment rate in the state of Morelos was only 0.2% higher than the Mexican average. Morelos’ unemployment rate, while being relatively low, increased between 2012 and 2014, reducing the gap with the Mexican average. Finally, in 2007 the participation rate of Morelos was 2.7% higher than for Mexico, but has moved to values lower than the national average since 2011. Figure 1.42. Participation rate

Morelos Mexico OECD average

67

66

65

64

63

62

61

60

59 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: OECD (2016i), “Regional labour markets”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/f7445d96-en (accessed 3 November 2016).

Despite a slowdown since 2010 the employment rate in Morelos is higher than in similar Mexican states. The employment rate in Morelos has been higher than in

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 69

Aguascalientes, Guanajuato, Mexico (state) and Tlaxcala since 2004 (Figure 1.43). However, between 2012 and 2014 the employment rate in Morelos decreased, moving to similar values as in the selected Mexican states. The unemployment rate was consistently lower than in the selected states for the whole period considered (2004-14). Unlike the unemployment trends in the selected states, the unemployment rate in Morelos decreased significantly after the crisis. However, this could have been the result of unemployed persons dropping out of the labour force, as Figure 1.43 shows a decrease in the participation rate from 2010 to 2011, and no recovery afterwards. Figure 1.43. Employment rate, Morelos and selected states 2004-14

Morelos Aguascalientes Guanajuato State of Mexico Tlaxcala

68

66

64

62

60

58

56

54 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: OECD (2016i), “Regional labour markets”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/f7445d96-en (accessed 3 November 2016).

The slowdown of employment since 2010 is mirrored by a similar slowdown in the participation rate (Figure 1.44), which indicates that most people who lost their job decided to exit the labour force. This means that they either stopped looking for a job (maybe enrolling in some training course) or entered the informal sector. Figure 1.44. Participation rate, Morelos and selected states 2004-14

Morelos Aguascalientes Guanajuato State of Mexico Tlaxcala

68

66

64

62

60

58

56

54 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: OECD (2016i), “Regional labour markets”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/f7445d96-en (accessed 3 November 2016).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 70 – 1. THE ECONOMY OF MORELOS

The participation rate of female workers displays a positive trend in the period 2001-14. The participation rate of women has been overall higher in Morelos than in the states of Aguascalientes, Mexico, Tlaxcala and Guanajuato. In 2014, the female participation rate was 47%, which was also higher than the national average of 45.6%. In the same year, the youth unemployment rate of Morelos was 7.7%, lower than in the four selected similar states, and also lower than the Mexican average of 9.6%.

Figure 1.45. Female participation rate

Morelos Aguascalientes Guanajuato State of Mexico Tlaxcala

51

49

47

45

43

41

39

37

35 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: OECD (2016i), “Regional labour markets”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/f7445d96-en (accessed 3 November 2016).

To summarise, although the employment and participation rate in Morelos are below the OECD average, both indicators are above the Mexican average and a selection of similar Mexican states. Further promotion of labour participation and employment is paramount for any regional development strategy that seeks an inclusive path of economic development.

Informality, firm size and productivity Large firms operating in the formal sector are more productive than other types of firms. There is fairly established evidence that links together two concepts: firm size and the type of working relationship (Amin and Islam, 2015). In general larger firms tend to be formal while small firms tend to operate in the informal sector. The higher productivity of larger firms could therefore be the result of lower informality as well as the effect of size (for instance, economies of scale). The relationship between low productivity and small size however is not that strong. Start-ups in high-tech industries can be more productive than large incumbent firms operating in protected markets. Indeed, increasing the size of small informal firms may not lead to an increase in their productivity, as a study by the World Bank on a sample of African states shows (Amin and Islam, 2015). The size of the informal sector is important in the Mexican economy, and in the state of Morelos the share of workers classified as informal is larger than the national average. At the same time, the share of workers in small firms is also larger than the

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 71

national average. In the following sections the analysis looks first at informality and then at firm size.

Informal sector The Mexican economy is characterised by a high level of informality. More than 60% of employed people work in the informal sector. This high level of informality may represent a bottleneck for economic development and for firm size growth (OECD, 2015b; Dougherty and Escobar, 2016). As pointed out in Dougherty and Escobar (2013), there is large variability on both the level and the change of labour informality across Mexican states. Informality showed an upward trend after the global financial crisis of 2007, remaining quite high for the period 2010-13, before inverting the trend in 2012 (Figure 1.46). This shows that the trend depends on the performance of the economy: it grows when the economy is slowing down and it shrinks as the economy picks up again (Loayza, Serven and Sugawaraet al., 2009). This phenomenon mimics the relationship of unemployment and economic growth. Indeed, entering the informal sector in Mexico (where unemployment benefits are reserved for a very small minority of workers) may be akin to becoming unemployed in most advanced OECD countries.

Figure 1.46. Evolution of the informal sector in Mexico Share of the labour force employed in informal jobs % 61

61

60

60

59

59

58

58

57

57

56 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Note: The vertical line indicates a change in the trend and roughly corresponds to the start of the global financial crisis. Source: OECD (2015b), OECD Economic Surveys: Mexico 2015, http://dx.doi.org/10.1787/eco_surveys-mex-2015-en.

The level of informality in 2014 ranged from less than 40% in the state of Chihuahua to more than 80% in the state of Oaxaca. Morelos situates amongst the states with a high informal sector with 66.48% in the first quarter of 2014, 8.29 percentage points above the national level of 58.19% (Figure 1.47). The level of informality is likely to distort the relevance of other labour indicators such as the unemployment rate which tends to be very low in Mexico (4.9% in 2014, compared to an OECD average of 7.3% in the same year).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 72 – 1. THE ECONOMY OF MORELOS

Figure 1.47. Informality in Mexican states, 2005 and 2014

2005 2014

90 80 70 60 50 40 30 20 10 0

Note: Informality is measured as the share of employed people who indicate they work in the informal sector. Source: Own analysis based on data from INEGI (2016), INEGI data bases, http://www.inegi.org.mx/ (accessed 7 November 2016).

Informality seems to be linked to the predominance of the agricultural sector, low density, and low levels of education (OECD, 2015f). The relationship between the share of total employment in the manufacturing sector and the level of informality in the economy seems to follow an inverted U-shape pattern (Figure 1.48). Mexican states that present the highest level of informality are characterised by a share of employment in the manufacturing sector on the average of Mexican states. However, as the share of workers employed in the manufacturing sector rises above 15%, any further increase in manufacturing employment drives down informality.

Figure 1.48. Inverted-U relationship between informality and the size of the manufacturing sector Share of informal workers with respect to share of workers in manufacturing, year 2013

90 Oaxaca Chiapas 80 Puebla Guerrero Michoacan 70 Veracruz Yucatan Hidalgo Tlaxcala Zacatecas Morelos State of Mexico 60 Campeche Jalisco Nayarit Tabasco Colima Guanajuato San Aguascalientes 50 Durango Sinaloa Coahuila Quintana Federal District Tamaulipas 40 Sonora Chihuahua Baja California Sur Baja California Norte Nuevo 30

20

10

0 0 0.05 0.1 0.15 0.2 0.25 0.3 Note: The vertical axis represents the share of informal workers; the horizontal axis represents the share of employment in the manufacturing sector over total employment. Source: Own elaboration on data from INEGI (2016), INEGI data bases, , http://www.inegi.org.mx/ (accessed 7 November 2016).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 73

The correlation between informality and economic sectors is particularly strong for the agricultural sector and the ICT sector. States with a large agricultural sector (in terms of employment) tend to have higher informality, while informality drops quite quickly with the share of employment in information, communication and technology (ICT) (Figure 1.49).

Figure 1.49. Informality increases with employment in agriculture but decreases with employment in ICT Year 2013 Agriculture and forestry Information Communication Technology (ICT)

90 90 OaxacaGuerrero Oaxaca 80 Tlaxcala 80 70 Chiapas 70 Hidalgo Morelos 60 Morelos Veracruz 60

50 50 Campeche Federal 40 40 District 30 Federal 30 District 20 20

10 10

0 0 0 0.1 0.2 0.3 0.4 0.5 0.00 0.01 0.01 0.02 0.02 0.03 0.03 Note: The vertical axis represents the share of workers informally employed. The horizontal axis the share of workers employed in the sector with respect total employment. Source: Own analysis based on data from INEGI (2016), INEGI data bases, , http://www.inegi.org.mx/ (accessed 7 November 2016).

Besides the sectorial influence on the amount of informal workers, Dougherty and Escobar (2013) show that, when controlling for state and industry characteristics, the level of tertiary education reduces informality as does FDI, measured as the regional stock of FDI with respect to the regional GDP. The latter is an indicator of the presence of big firms which tend to provide workers with formal contracts. Labour informality may represent a bottleneck for economic development. Firms tend to remain small in order to escape controls on informal workers. Relying on informal workers also reduces incentives to adopt and invest in new productive technologies, and tax revenues are reduced (Dougherty and Escobar, 2016). Informality however can also be a symptom of structural problems in the economy, such as the presence of weak institutions and corruption, and firms may find it difficult to grow because of a lack of access to credit or availability of skilled workers. The discussion of labour informality seems to lead to a circular argument: small firms with low productivity tend to hire informal workers, and the presence of informal workers constrains those firms to remain small and not to adopt new technologies. In economic terms, an evaluation of the impact of informality should take into consideration the alternative scenario. Informality represents the only source of income

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 74 – 1. THE ECONOMY OF MORELOS

for many workers and contrasting it without complementary policies that boost firms’ productivity would just lead to an increase in unemployment. Although from a utilitarian point of view social welfare may increase – if the contribution to welfare of the new formal workers is larger than the loss from new unemployed workers – in terms of inclusiveness and full exploitation of available human resources it is never an optimal solution. The discussion about informal jobs is akin to the discussion about unemployment benefits. In both cases there is a trade-off between ex-ante and ex-post incentives. In the case of unemployment benefits the trade-off is between the ex-ante safety net for workers who lose their job and the ex-post incentive to look for a job. In the case of informality the trade-off is between the ex-ante possibility of jobless workers to get a (informal) job and the ex-post incentive of firms to invest in new technology and growth.

Firm size The Mexican economy presents a higher share of employment in small and medium- sized enterprises (SMEs) than the (EU) average. Although the share of SMEs in Mexico (99.8%) is similar to the average across EU countries (99.8%), the share of workers is lower, 71.2% in Mexico compared to 67% in EU countries. The economy of Morelos is even more skewed towards micro firms than the Mexican average (Figure 1.50). The large firms are mainly the result of foreign direct investments (FDI) in the manufacturing sector, which also represent the biggest employers in Morelos. The low presence of medium-sized firms could be the outcome of a rigid economic system where it is difficult for companies to grow.

Figure 1.50. Size of manufacturing firms in Morelos, 2013 Morelos Morelos versus national average (employment)

Establishments Employment GVA Morelos National average

100 100

80 80

60 60

40 40

20 20

0 0 Micro Small Medium Large Micro Small Medium Large

Note: Establishment (employment) refers to the number of firms (employees) as reported in the economic census; GVA refers to gross value added produced in the manufacturing sector by size of firm. Size of firms as a percentage of all firms. Source: INEGI (2014a), Micro, pequeña, mediana y grande empresa: estratificacion de los establecimentos, Censos Economicos 2014.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 75

To sum up, the analysis lends support to the idea that informality is not only a problem per se but also the result of an economy that is based on small firms operating in low-tech sectors. Improving, the supply of skills and the demand-side in a smart way can help overcome the productivity trap and take full advantage of the opportunities of development in Morelos.

1.7 Well-being in Morelos

The ultimate goal of regional development policies is to improve people’s well- being. This is determined by a multidimensional set of indicators that affect the life of people. From indicators linked to income and jobs, to security, health, and environmental conditions. These factors are actually also important for a resilient and inclusive economy. For instance, access to services such as sanitation and , represent basic conditions for people to take full advantage of their potential and raise productivity in the local economy. An overview of well-being in Morelos is provided by the collection of indicators on education, jobs, income, safety, health, environment, civic engagement, access to services and housing (OECD, 2014b).

Figure 1.51. Morelos well-being indicators

Education

Housing Jobs

Access to services Income

Civic engagement Safety

Environment Health

Mexico OECD Morelos

Note: Each well-being dimension is measured by one or the average of two indicators. Indicators are normalised to range between 10 (best) and 0 (worst) according to the following formula: (indicator value – minimum value across all OECD regions)/(maximum value across all OECD regions – minimum value across all OECD regions) multiplied by 10. In the cases where high values of an indicator mean worse well- being (for example unemployment), the indicator is normalised with the same formula subtracted by 10. Source: OECD (2016j), “Regional well-being”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/data-00707-en (accessed 7 November 2016) OECD (2014b), Regional Well- Being (database).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 76 – 1. THE ECONOMY OF MORELOS

Morelos seems to be in line with the Mexican average on many dimensions, except environmental indicators (Figure 1.51). However, well-being in Morelos is lower than the OECD average in all dimensions but jobs. In this section the analysis looks at four domains of well-being that have an important impact on the potential for economic growth: income inequality, poverty, the environment, and safety.

Income inequality Inequality has been rising in most OECD countries in recent years. The difference between the top earners and the bottom is an indicator of how the economy performs in terms of distribution of the gains of economic growth. In Mexico, income inequality is larger than in most OECD member countries. Data on income inequality at the subnational level that allow international comparison are scarce. The OECD collected data on the household income of OECD TL2 regions, creating a comparable set of indicators for the year 2010. For instance, this dataset allows comparison of the average regional Gini between countries. The average of all regional Gini for Mexico appears to be the highest amongst OECD countries, closely followed by Chile (Figure 1.52).

Figure 1.52. Gini index of OECD TL2 regions, 2010 Average by country

Gini Maximum value

60

50

40

30

20

10

0

Note: The Gini index refers to regional household disposable income averaged by country. The Gini index ranges from 0 (perfect equality) to 100 (maximum inequality). The “maximum value” corresponds to the region with the highest level of Gini within each country. Source: Own analysis based on data from OECD (2016j), “Regional well-being”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/data-00707-en (accessed 7 November 2016).

Within Mexico, the state with the highest inequality is Guerrero with a Gini index of 53.1 in 2010 and 51.0 in 2014 (0 being perfect equality, and 100 maximum inequality). The level of disposable income inequality in Morelos was amongst the lowest in 2010, but it has increased since from 42.1 to 44 in 2014 (Figure 1.53). In 2014, Morelos represented the median value across the 32 Mexican states.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 77

Figure 1.53. Morelos’ inequality has increased between 2010 and 2014

2010 2014 OECD (28 median)

60

50

40

30

20

10

0

Note: Gini is calculated on household disposable income for each state. The Gini index ranges from 0 (perfect equality) to 100 (maximum inequality). OECD median refers to the median value in 2014 across regions. Source: Own analysis based on OECD (2016j), “Regional well-being”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/data-00707-en (accessed 7 November 2016).

Poverty has increased in Morelos In addition to the distribution of income, it is important to consider the share of people living in poverty. This is certainly a serious social problem, but it is also a sign of exclusion from the economy. The share of households under the poverty line in Morelos was above the federal level in 2014 (Figure 1.54). The state of Morelos registered a share of households under the poverty line equal to 52.27%, more than 6 percentage points higher than the national average of 46.16%. Figure 1.54. Poverty rate across Mexican states, 2014

2014 National average % 90 80 70 60 50 40 30 20 10 0

Source: Own elaboration based on data from CONEVAL (2014), Medición de la pobreza, Anexo Estadístico de Pobreza en México, www.coneval.org.mx/Medicion/MP/Paginas/AE_pobreza_2014.aspx (accessed 7 November 2016).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 78 – 1. THE ECONOMY OF MORELOS

Morelos displayed a worrying increase in the poverty rate in the period 2010-14. Indeed, Morelos was the Mexican state with the highest increase in poverty rate in the period considered (Figure 1.55). Figure 1.55. Highest increase in poverty rate in the period 2010-14 % 25 20 15 10 5 0 -5 -10 -15 -20

Source: Own elaboration based on data from CONEVAL (2014), Medición de la pobreza, Anexo Estadístico de Pobreza en México, www.coneval.org.mx/Medicion/MP/Paginas/AE_pobreza_2014.aspx (accessed 7 November 2016). Looking inside the state of Morelos, the indicators of social backwardness show that social problems are higher in municipalities outside of metropolitan areas (ZM), and mostly concentrated in the eastern part of the state. The indicator however shows that there are no municipalities in which social backwardness is very high (Alto and Muy Alto). Figure 1.56. Social backwardness by municipality, 2010

Source: Ministry of Social Development (2016), Annual report on the situation of poverty and social backwardness in Morelos.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 79

The indicator of poverty and social deprivation in Morelos confirmed an increase in the poverty rate while the indicators of social deprivation recorded an improvement from 2010 to 2014 (Table 1.4). Table 1.4. Poverty and social deprivation in Morelos

Percentage Thousands of people Indicators 2010 2012 2014 2010 2012 2014 Poverty Population in poverty 43.2 45.5 52.3 782.2 843.5 993.7 Population in moderate poverty 36.3 39.1 44.4 656.7 726.3 844.5 Population in 6.9 6.3 7.9 125.4 117.2 149.3 Vulnerable to social deprivation 33.6 32.0 25.7 608.4 594.7 489.4 Income vulnerable population 5.8 4.6 6.1 105.6 85.4 116.8 Not poor and not vulnerable 17.3 17.9 15.8 312.7 332.2 301.2 Social deprivation Population with at least one source of social deprivation 76.9 77.5 78.0 1 390.6 1 438.2 1 483.1 Population with at least three sources of social deprivation 26.9 25.8 24.0 486.1 479.1 456.0 Indicators (sources) of social deprivation Educational backwardness 19.3 19.2 16.6 348.5 356.0 314.8 Lack of access to health services 29.9 22.3 16.6 541.4 413.8 316.1 Lack of access to social security 64.6 64.4 66.2 1 168.3 1 194.8 1 258.4 Lack of quality and housing spaces 15.7 14.8 13.4 284.7 274.5 255.2 Lack of access to basic housing services 20.6 18.6 24.6 371.8 345.5 467.9 Lack of access to food 22.0 30.7 26.9 397.3 570.0 510.4 Well-being Population with income below the minimum well-being line 13.9 15.0 20.5 251.6 278.8 390.3 Population with income below the well-being line 49.1 50.1 58.4 887.8 928.9 1 110.5 Source: CONEVAL, estimations based on INEGI (2010b, 2012 and 2014b), Módulo de Condiciones Socioeconómicas de la ENIGH (MCS-ENIGH), http://www.inegi.org.mx/ (accessed 7 November 2016). In terms of geographic concentration most of the population in poverty is outside of the main metropolitan areas, living in the peripheral (mainly rural) areas.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 80 – 1. THE ECONOMY OF MORELOS

Figure 1.57. Poverty in Morelos, 2010 Share of poor people in the population

Source: CONEVAL estimation based on INEGI (2010a), Censos de Poblation y Vivienda, Instituto Nacional de Estatistica y Geografía, Mexico and INEGI (2010b), Módulo de Condiciones Socioeconómicas de la ENIGH (MCS-ENIGH), http://www.inegi.org.mx/ (accessed 7 November 2016).

Environmental quality Environmental protection is one of the main pillars of well-being. The sustainable use of natural resources, such as water, green areas and air quality, is crucial for a sustainable development path. Furthermore, the abundance of natural amenities is a source of competitive advantage for the sector and the economy of rural areas. The ecological capital of Morelos, 52.5% of natural areas, should be preserved and strengthened to ensure environmental quality and economic opportunities in the future. Its position in the centre of Mexico, precisely in the transition zone of both the Nearctic and Neotropical provinces, as well as its differences in altitude (500-870 metres above sea level), has provided the conditions to have temperate forests in the northern part of the state, and low deciduous forest in the central and southern parts. The proximity to Mexico City, together with the climate and environmental amenities, make Morelos a popular destination for people living in the capital. This represents a potential for the economic development for the state and for the well-being of its citizens. In order to exploit this potential, it is necessary to consider the conservation of the major environmental resources and amenities in the policy agenda. This section will focus on air quality and greenhouse gas (GHG) emissions, and water and waste management, while land use and related policies to preserve the territory will be analysed in Chapter 3. Air quality and GHG emissions have attracted much attention in recent years. The ratification by Mexico of the Paris Agreement on Climate Protection (COP21) puts the state governments and city on the frontlines of the fight against climate change. They also play a central role in reaching the goals of the country’s National Determined Contributions (NDC’s). In spite of the importance of air quality and control of GHG emissions, there is still a lack of comprehensive monitoring systems. In Morelos, there is only one monitoring

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 81

facility established in 2000 and located in the capital city, Cuernavaca. Furthermore, it was only in 2014 that a continuous monitoring programme was implemented. This situation has led to the lack of long-term “ground” data that can be used for comparison and inform decision making (Semarnat, 2015). Indeed, the OECD produced a report on well-being in Mexican states, where air quality in Morelos was based on information from satellite images (OECD, 2015f). The lack of comprehensive and comparable data represents a problem for the evaluation of the state of air pollution in the country, with different reports reaching very different conclusions. In the OECD report on well-being (OECD, 2015f), Morelos emerged as the state with 3 the highest exposure to PM2.5 fine particles. This indicator is obtained from a study conducted in the period 1998-2012 by a group of researchers that used satellite images of 10 by 10 square kilometre areas to assess the impact of such particles on the population living in such areas (van Donkelaar et al., 2015). In other words the indicator provides an estimation of the amount of fine particles to which the population is exposed. Figure 1.58 shows the average level of PM2.5 particles across Mexican states. Although Morelos showed an improvement between 2003 and 2013, reducing the level of fine particles from 27.8 to 24.2, it is still the state with the highest concentration of particles in both years. This level is also higher than the average across OECD TL2 regions (13.1 in 2013). Other studies, however, provide a somewhat different picture. A study focusing on environmental conditions in the main metropolitan areas of Mexico, shows that the level of PM2.5 in Cuernavaca is below other large metropolitan areas (CAMe, 2015). Comparing the share of PM2.5 emissions in Morelos with other states in the centre of Mexico, it emerges that Morelos, with 6 855 tonnes per year (TN/y), emits less pollutants than Hidalgo (27 014 TN/y), Puebla (24 882 TN/y) and the state of Mexico (22 883 TN/y), but more than the Federal District (1 876 TN/y). In fact, considering also the share of population with respect to those states, it emerges that Morelos’ share of both PM2.5 and NO2 emissions is larger than Morelos’ population share (Figure 1.59). This means that in terms of pollution per capita, Morelos is doing worse than the state of Mexico. Figure 1.58. Exposure of the population of Morelos to fine particles is quite high

Average PM2.5 levels

2003 2013 OECD average 2013

30

25

20

15

10

5

0

Note: The values provide the average level of air pollution in each state. The state average is obtained by weighting 2 the observed levels of PM2.5 by the population in 1 km grids and summing the values within each state. Source: OECD (2016k), “Regional social and environmental indicators”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/e6adb759-en (accessed 7 November 2016).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 82 – 1. THE ECONOMY OF MORELOS

Figure 1.59. Morelos’ share of air pollution is larger than its population share Share of the aggregate value for six central states, year 2010

45 degree line PM2.5 NO2

Air pollutant share 60

50

40

30 Hidalgo State of Mexico

20 Morelos Tlaxcala 10 Federal District Puebla 0 0 102030405060 Population share

Note: The share is calculated on the total level of pollution and population of the five states in the centre of Mexico plus the Federal District: state of Mexico; Hidalgo; Puebla; Morelos; Tlaxcala; Federal District.

Source: Own analysis based on data from CAMe (2015), Diagnóstico PM2.5 en la Megalópolis, Coordination Ejecutiva de la Comisión Ambiental de la Megalópolis. The main source of fine particles in Morelos is business and commercial activities (e.g. industrial plants, restaurants, etc.) with 62%, while the share produced by automobile combustion is quite small, just 4%. These figures are similar for the other central Mexican states, except the Federal District where the share stemming from motor vehicles is much higher (45%).

Also in terms of carbon emissions (CO2) Morelos is not the worst polluter. In terms of kilotonnes registered in 2008, Morelos is below the Mexican average and amongst the states with the smallest level of CO2 emissions (Figure 1.60). Figure 1.60. Morelos has low levels of carbon emissions

CO2 emissions, kilotonnes 2008

CO2 Mexican average

60 000

50 000

40 000

30 000

20 000

10 000

0

Note: The Mexican average is calculated as the simple average level of emissions across Mexican states (including the Federal District). Source: OECD (2016k), “Regional social and environmental indicators”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/e6adb759-en (accessed 7 November 2016).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 83

The low contribution of Morelos to CO2 emissions can be the consequence of the relatively small size of the region compared to other Mexican states. In order to better assess the performance of Morelos in this dimension, Figure 1.61 reports the level of CO2 per capita in each Mexican state. Also according to this weighted measure of CO2 emission, the state of Morelos is among the least polluting. The level of pollution per capita is below the OECD average. Within Morelos, the main contributors to carbon emissions are the metropolitan area of Morelos and the municipalities in the north of the state. This reflects congestion and heavy traffic linked to the main motorway crossing the state of Morelos and linking Mexico City to (Figure 1.62).

Figure 1.61. Per capita carbon emissions in Mexican states

CO2 emissions, kilotonnes per capita

CO2 per capita Mexican average OECD Average

20 18 16 14 12 10 8 6 4 2 0

Source: OECD (2016k), “Regional social and environmental indicators”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/e6adb759-en (accessed 7 November 2016).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 84 – 1. THE ECONOMY OF MORELOS

Figure 1.62. Carbon emissions in Morelos, 2008

CO2 kilotonnes Per capita CO2 kilotonnes

1 200 18

16 1 000 14

800 12

10 600 8

400 6

4 200 2

0 0

Note: The territory of Morelos is divided into seven zones, corresponding to the OECD TL3 regions. The metropolitan area of Jojutla is not official recognised at the time of publishing this report. Source: OECD (2016k), “Regional social and environmental indicators”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/e6adb759-en (accessed 7 November 2016).

In Morelos the production of energy represents the main source of GHG emissions, contributing to 63% in 2010. Transport in this case assumes a prominent role contributing to 42% of GHG emissions in 2010, according to a report from the Mexico Low Emissions Development Program (MLED) financed by USAID agency (USAID, 2014). The report (USAID, 2014) provides also a forecast of the level of GHG emissions which are expected to grow by 80% in the twenty year period 2010-30, if no policies are adopted to attenuate this trend. The construction of a gas pipeline and the subsequent use of natural gas for electricity production represent an important improvement in terms of GHG emissions. It also represents an opportunity to substitute gasoline as the main source of energy for public transportation, with a clear improvement in the quality of air in metropolitan zones. Important is the experience of Querétaro where the entire taxi fleet of the city of Queretaro switched from gasoline to natural gas. To sum up, although the picture in terms of air quality is not clear – high levels of PM2.5 registered by some studies but low level of CO2 emissions – data seem to support the conclusion that air quality is a challenge for the main metropolitan areas and it is complicated by the presence of the motorway connecting Mexico City to Acapulco, with its heavy traffic of commercial trucks. The OECD case study on well-being in Morelos (OECD, 2014) highlighted two other major environmental issues in Morelos: the scarcity and pollution of water, and waste disposal. Waste management represent a challenge for Morelos, only 10 out of 33 municipalities in the state, accounting for 27% of the state population, provide collection, disposal and treatment of waste. This is a concern for health and safety and can damage the soil and underground water resources of the sites where material are improperly disposed of. A national survey conducted in 2013 on the quality of

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 85

government (ENCIG), reports that 57.1% of the population in Morelos was satisfied with the waste collection service, against a national average of 67.3%. The survey on satisfaction and the figures about the waste management cover indicate that waste management reaches half of the population. Waste management can become a big problem for the process of urbanisation and expansion of the metropolitan areas, as more concentration of people require more efficient waste disposal and the identification of the sites and the proper treatment of waste is crucial for preserving the environment, including underground water basins. Water and waste management are related, since bio-waste discharges in open areas, as well as wastewater discharge without any treatment, contribute to water pollution. Regarding water treatment, in Morelos, all or at least a fraction of wastewater is treated in one-third of the municipalities. Contrary to the case of waste management, the national survey on the quality of government (ENCIG) reveals that the share of people satisfied with water management in Morelos is higher than the national average. Data from the 2013 ENCIG show that 74.2% of the population of Morelos were satisfied with water purity and clarity and 37.1% were satisfied with drinkable water. At the national level, these shares were 63.6% and 26.3%, respectively. An effective treatment of wastewater is essential for the conservation of the ecosystems, biodiversity and human health, affecting the well-being of residents today and in the future.

Security Personal and property security are important factors in creating a sound business environment. Insecurity tends to reduce trust and social cohesion, reducing incentives to make long-term investments, which are important elements of any development strategy. Despite efforts to reduce the level of insecurity, it remains a major challenge for Morelos. In the period 2010-15, the indicators of crime improved, in particular the extortion rate dropped from 33.9% in 2010 to 8.9% in 2015 and the rate of automobile robbery decreased from 94.6% to 58.9% in the same period (Table 1.5). Compared to the national average, however, the crime rate is still very high in almost all areas, therefore compromising the competitiveness of Morelos with respect to other Mexican states. Table 1.5. High-impact crimes in Morelos, 2010-15 Number of crimes per hundred inhabitants

Intentional homicide rate Kidnapping rate Extortion rate Automobile robbery rate

Morelos National Morelos National Morelos National Morelos National 2010 31.00 18.10 1.55 1.07 33.94 5.35 94.60 53.69 2011 30.43 19.75 1.42 1.24 12.48 3.97 104.37 62.23 2012 46.57 18.57 4.97 1.21 14.05 6.22 103.31 53.30 2013 31.85 15.48 8.00 1.42 21.34 6.92 93.80 48.07 2014 21.92 13.08 6.06 1.17 18.82 4.82 59.40 40.06 2015 25.78 14.06 1.67 0.87 8.96 4.17 58.84 37.31 Source: Registry of charges filed in the 32 Mexican states and population projections from the National Board on Population (CONAPO) (2016), National Board on Population, Mexico.

Within Morelos, crime is concentrated in metropolitan areas. Figure 1.63 shows that in the metropolitan area of Cuernavaca crime is highest (3.4 crimes per hundred

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 86 – 1. THE ECONOMY OF MORELOS

inhabitants), and mainly concentrated in the municipality of Cuernavaca (5.5 crimes per hundred inhabitants in 2015).

Figure 1.63. Crime rate is higher in metropolitan areas Number of crimes per hundred inhabitants in 2015

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0 Cuernavaca ZM Cuautla ZM Jojutla ZM Non-metropolitan Note: Figures refer to all acts recorded as criminal; the crime rate is obtained as the ratio between the total number of crimes in the municipalities constituting each metropolitan area and the population of the metropolitan area. The metropolitan area of Jojutla is not officially recognised at the time of publishing this report. Source: Crime per municipality 2011-15, Executive Secretariat of the National system of Public Security (CONAPO) (2016), National Board on Population, Mexico.

1.8 Concluding remarks

Morelos’ economy is diversified, with an important service sector benefiting from its proximity to Mexico City and a strong manufacturing sector. Morelos’ prominent research centres and technical universities represent an important asset for innovation that adequate policies can transform into a boost for productivity. There are however several challenges. The analysis reveals a disappointing performance of the economy of Morelos in the period 2000-13. In particular, per capita GDP shows a declining trend well before the global financial crisis that rocked the world economy in 2007-08. It was only in 2009 that a slow recovery began: it took until 2013 for real per capita GDP to return to the level of 2000. This sluggish performance is partly due to low performance in terms of labour productivity, which declined in the period considered. The low-skilled workforce (60% of current workers with below upper secondary education), weighs on productivity growth and development. The informal sector is a “natural solution” to low education, but it tends to perpetuate low productivity. Policy responses should be targeted to activate the untapped sources of growth present in Morelos, which include a high percentage of young people, the manufacturing legacy and the prominent research centres and technical universities (Table 1.6). The next chapters look at the policy response in more detail, discussing also the governance arrangements for their implementation.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 87

Table 1.6. Challenges, opportunities and policy response

Challenges Opportunities / strength Policy Response Slow productivity growth High percentage of young people Human capital (council) Low skilled labour force, and high Manufacturing legacy and a diversified - education and training informality economy Prominent research centres and Insecurity - innovation technical universities Environmental and cultural amenities - smart specialisation

Mild climate Spatial planning and land use

Integrated rural policy Governance – co-operation amongst

subnational institutions

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 88 – 1. THE ECONOMY OF MORELOS

Notes

1 . The state of Campeche is characterised by the presence of a large extractive industry which being capital-intensive produces very high GDP with respect to the small population of the state. 2. The English translation of “telesecundaria” into “televised” follows the approach adopted in Santiago et al.(2012).

3. Fine particles are referred to as PM2.5, as they represent particulate matter of a diameter of maximum 2.5 micrometres. These particles are produced from all types of combustion, including motor vehicles, residential heating, and power plants.

Bibliography

Acemoglu, D., S. Johnson and J. Robinson (2004), “Institutions as the Fundamental Cause of Long-run Growth”, NBER Working Paper, No. 10481. Amin, M. and A. Islam (2015), “Are Large Informal Firms More Productive than the Small Informal Firms? Evidence from Firm-Level Surveys in Africa”, World Development, 74, pp. 374-385. Bartolini, D. (2015), ”Municipal Fragmentation and Economic Performance of OECD TL2 Regions”, OECD Regional Development Working Papers, No. 2015/02, OECD Publishing, Paris, http://dx.doi.org/10.1787/5jrxqs60st5h-en. Bartolini, D., S. Stossberg and H. Blöchliger (2016), “Fiscal Decentralisation and Regional Disparities”, OECD Economics Department Working Papers, No. 1330, OECD Publishing, Paris, http://dx.doi.org/10.1787/5jlpq7v3j237-en.

CAMe (2015), Diagnóstico PM2.5 en la Megalópolis, Coordination Ejecutiva de la Comisión Ambiental de la Megalópolis, Mexico. CONAPO (2016), Consejo National de Población, www.conapo.gob.mex/es/CONAPO/Proyecciones (accessed 7 November 2016). CONEVAL (2014), Medición de la pobreza, Anexo Estadístico de Pobreza en México, www.coneval.org.mx/Medicion/MP/Paginas/AE_pobreza_2014.aspx (accessed 7 November 2016).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 89

Dougherty, S. and O. Escobar (2016), “Could Mexico Become the New ? Policy Drivers of Competitiveness and Productivity”, OECD Productivity Working Papers, No. 2016-04, OECD Publishing, Paris (forthcoming). Dougherty, S. and O. Escobar (2013) “The Determinants of Informality in Mexico’s States”, OECD Economics Department Working Papers, No. 1043, OECD Publishing, Paris, http://dx.doi.org/10.1787/5k483jrvnjq2-en. Duranton, G. and D. Puga (2004), “Micro-foundation of Urban Agglomeration Economies”, in V. Henderson and J.-F. Thisse (eds), Handbook or Regional and Urban Economics, Vol. 4, pp. 2063-2117. Enlace (2014), Evaluacion Nacional del Logro Academico en Centros Escolares, Secreteria de Educacion Publica, Mexico http://www.enlace.sep.gob.mx/ (accessed 3 November 2016). INEGI (2016), INEGI data bases, http://www.inegi.org.mx/ (accessed 7 November 2016). INEGI (2015), Censos de Poblation y Vivienda, Instituto Nacional de Estatistica y Geografía, Mexico. INEGI (2014a), Micro, Pequeña, Mediana y Gran Empresa: Estratificación de los Establecimientos, Censos Económicos 2014, Instituto Nacional de Estatistica y Geografía, Mexico. INEGI (2014b), Módulo de Condiciones Socioeconómicas de la ENIGH (MCS-ENIGH), http://www.inegi.org.mx/ (accessed 7 November 2016). INEGI (2012), Módulo de Condiciones Socioeconómicas de la ENIGH (MCS-ENIGH), www.Vol..org.mx/est/contenidos/proyectos/encuestas/hogares/modulos/mcs/mcs2012/defau lt.aspx (accessed 7 November 2016). INEGI (2010a), Censos de Poblation y Vivienda, Instituto Nacional de Estatistica y Geografía, Mexico. INEGI (2010b), Módulo de Condiciones Socioeconómicas de la ENIGH (MCS-ENIGH), www.Vol..org.mx/est/contenidos/proyectos/encuestas/hogares/modulos/mcs/mcs2012/defau lt.aspx (accessed 7 November 2016). INEGI (2005), Censos de Poblation y Vivienda, Instituto Nacional de Estatistica y Geografía, Mexico. INEGI (2000), Censos de Poblation y Vivienda, Instituto Nacional de Estatistica y Geografía, Mexico. Kaufmann D., A. Kraay and M. Mastruzzi (2010), “The Worldwide Governance Indicators: A Summary of Methodology, Data and Analytical Issues”, World Bank Policy Research Working Paper, No. 5430, The Worldwide Governance Indicators are available at www.govindicators.org (accessed 9 November 2016). La Porta, R. and A. Shleifer (2014), “Informality and Development”, Journal of Economic Perspectives, Vol. 28(3), pp. 109-126. Loayza, N.V., L. Serven and N. Sugawara (2009), “Informality in Latin America and the ”, Policy Research Working Paper series, No. 4888, World Bank. Marshall, A. (2006), Principles of Economics, Cosimo Classics, New York, NY (originally published by Prometheus Books in 1890).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 90 – 1. THE ECONOMY OF MORELOS

Ministry for Economy (2016), Administrative Registries, unpublished material. Ministry of Finance (2016), Administrative Registries, unpublished material. Ministry of Social Development (2016), Annual report on the situation of poverty and social backwardness in Morelos. Moretti, E. (2010), “Local Multipliers”, American Economic Review, Vol. 100(2), pp. 373-77. Moretti, E. and P. Thulin (2013), “Local multipliers and human capital in the United States and Sweden”, Industrial and Corporate Change, Vol. 22(1), pp. 339-362. North, D. (1990), Institutions, Institutional Change, and Economic Performance, Cambridge University Press, New York. OECD (2016a), “Regional demography”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/a8f15243-en (accessed 3 November 2016). OECD (2016b), “Regional economy”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/6b288ab8-en (accessed 3 November 2016). OECD (2016c), “Main Economic Indicators – complete database”, Main Economic Indicators (database), http://dx.doi.org/10.1787/data-00052-en (accessed 31 August 2016). OECD (2016d), “Aggregate National Accounts, SNA 2008: Gross domestic product”, OECD National Accounts Statistics (database), http://dx.doi.org/10.1787/data-00001-en (accessed 3 November 2016). OECD (2016e), “GDP per capita and productivity growth”, OECD Productivity Statistics (database), http://dx.doi.org/10.1787/data-00685-en (accessed 21 July 2016). OECD (2016f), OECD Regional Outlook 2016: Productive Regions for Inclusive Societies, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264260245-en. OECD (2016g), “Regional innovation”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/1c89e05a-en (accessed 3 November 2016). OECD (2016h), OECD Economic Outlook, Volume 2016 Issue 1, OECD Publishing, Paris, http://dx.doi.org/10.1787/eco_outlook-v2016-1-en OECD (2016i), “Regional labour markets”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/f7445d96-en (accessed 3 November 2016). OECD (2016j), “Regional well-being”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/data-00707-en (accessed 7 November 2016). OECD (2016k), “Regional social and environmental indicators”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/e6adb759-en (accessed 7 November 2016). OECD (2015a), OECD Territorial Reviews: Valle de México, Mexico, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264245174-en. OECD (2015b), OECD Economic Surveys: Mexico 2015, OECD Publishing, Paris, http://dx.doi.org/10.1787/eco_surveys-mex-2015-en. OECD (2015c), The Future of Productivity, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264248533-en.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017 1. THE ECONOMY OF MORELOS – 91

OECD (2015d), The Metropolitan Century: Understanding Urbanisation and its Consequences, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264228733-en. OECD (2015e), Governing the City, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264226500-en. OECD (2015f), Measuring Well-being in Mexican States, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264246072-en. OECD (2015g), Education at a Glance 2015: OECD Indicators, OECD Publishing, Paris, http://dx.doi.org/10.1787/eag-2015-en. OECD (2014a), PISA 2012 Results: What Students Know and Can Do (Volume I, Revised edition, February 2014): Student Performance in Mathematics, Reading and Science, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264208780-en. OECD (2014b), “State of Morelos (Mexico)”, in How's Life in Your Region?: Measuring Regional and Local Well-being for Policy Making, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264217416-11-en. OECD (2012), Promoting Growth in All Regions, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264174634-en. Rodrik, D. (2016), “Premature deindustrialization”, Journal of Economic Growth, Vol. 21(1), pp. 1-33. Rodrik, D. (2013), “Unconditional Convergence in Manufacturing”, Quarterly Journal of Economics, Vol. 128(1), pp. 165-204. Santiago, P. et al. (2012), OECD Reviews of Evaluation and Assessment in Education: Mexico 2012, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264172647-en. Secretaria de Comunicaciones y Transportes (2012), Informe de Estadistica Basica, last available data, disaggregated by state and type of infrastructure. Semarnat (2015), Informe Nacional de Calidad del Aire 2014, Mexico, http://www.inecc.gob.mx/descargas/calaire/2015_Informe_nacional_calidad_aire_201 4_Final.pdf. USAID (2014), Actualización del Programa Estatal Morelense de Acción ante el Cambio Climático, Mexico Low Emission Development Program (MLED). van Donkelaar, A., R.V. Martin, M. Brauer and B.L. Boys (2015), “Use of Satellite Observation for Long-Term Exposure Assessment of Global Concentration of Fine Particulate Matter”, Environmental Health Perspectives, Vol. 123(2), pp. 135-143. World Bank (2014), Doing Business in Mexico, www.doingbusiness.org (accessed 7 November 2016).

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017

1. THE ECONOMY OF MORELOS – 93

Annex 1.A1

Territorial structure Almost half of the Mexican population lives in predominantly urban areas. In 2010, 46% of the population was living in predominantly urban regions, 36.6% in predominantly rural regions and 17.4% in intermediate regions. The geographical distribution of the population in Mexico is similar to, for example, the one in Chile and Greece. However, only 9.2% of the Mexican population lives in predominantly rural remote regions, which is considerably lower than in Greece and higher than in Chile. Compared to the OECD average, Mexico has a smaller share of the population living in intermediate regions and a larger share of population living in predominantly rural regions. The share of the Mexican population living in predominantly urban regions is in line with the OECD average. As in many OECD countries, most of the national territory is predominantly rural (83.3%). Roughly half of the Mexican rural territory is predominantly rural close to a city. Predominantly urban regions make up 5.7% of the total surface and intermediate regions the remaining 11%. Among the OECD countries, the Mexican territorial structure is similar to the one of France.

Box 1A1.1 OECD Territorial Classification The OECD typology classifies TL3 regions as predominantly urban, predominantly rural and intermediate. This typology, based on the percentage of regional population living in rural or urban communities, allows for meaningful comparisons between regions of the same type and level. The OECD regional typology is based on three criteria. The first identifies rural communities according to population density. A community is defined as rural if its population density is below 150 inhabitants per square kilometre (500 inhabitants in Japan, to account for the fact that its national population exceeds 300 inhabitants per square kilometre). The second criterion classifies regions according to the percentage of the population living in rural communities. Thus, a TL3 region is classified as: • predominantly rural (rural), if more than 50% of its population lives in rural communities • predominantly urban (urban), if less than 15% of the population lives in rural communities • intermediate, if the percentage of population living in rural communities is between 15% and 50%. The third criterion is based on the size of the urban centres. Thus: • A region that would be classified as rural on the basis of the general rule is classified as intermediate if it has an urban centre of more than 200 000 inhabitants (500 000 for Japan) representing no less than 25% of the regional population. • A region that would be classified as intermediate on the basis of the general rule is classified as predominantly urban if it has a urban centre of more than 500 000 inhabitants (1 million in Japan) representing no less than 25% of the regional population. Source: OECD (2016), OECD Regions at a Glance 2016, OECD Publishing, Paris, http://dx.doi.org/10.1787/reg_glance-2016-en.

OECD TERRITORIAL REVIEWS: MORELOS, MEXICO © OECD 2017

From: OECD Territorial Reviews: Morelos, Mexico

Access the complete publication at: https://doi.org/10.1787/9789264267817-en

Please cite this chapter as:

OECD (2017), “The economy of Morelos”, in OECD Territorial Reviews: Morelos, Mexico, OECD Publishing, Paris.

DOI: https://doi.org/10.1787/9789264267817-4-en

This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of OECD member countries.

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgment of OECD as source and copyright owner is given. All requests for public or commercial use and translation rights should be submitted to rights@.org. Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Center (CCC) at [email protected] or the Centre français d’exploitation du droit de copie (CFC) at [email protected].