Assessment and Recommendations

ASSESSMENT AND RECOMMENDATIONS – 17

Assessment and recommendations

Assessment

1. Morelos’ economy is relatively diversified

The geographic position of Morelos in the centre of Mexico is an asset for development

The state of Morelos, with its population of 1.9 million inhabitants, is one of the smallest in Mexico. The state is located in the centre of the country just south of the metropolitan area of Valle de Mexico, within close reach of the capital Mexico City. GDP per capita, however, is below the Mexican average and less than half of the GDP per capita in Mexico City. Most of the state’s population, more than 80%, lives in metropolitan areas, making it one of the most urbanised states in Mexico, with a population density of 388 inhabitants per square kilometre. The largest city, Cuernavaca, however represents only one-fifth of the state’s population.

Proximity to Mexico City is a benefit to the economy, but it is also a challenge

The proximity to Mexico City, one and a half hours by bus from the centre of Cuernavaca (the capital of Morelos) to the centre of Mexico city, provides easy access to business services and facilities (e.g. international airports) that Morelos cannot offer, and represents an important market for the tourism sector reliant on the abundance of natural and cultural amenities. The natural landscape together with good climate conditions are among the major drivers of a vast second-home market for residents of Mexico City. Nevertheless, the proximity to Mexico City could also be a challenge for economic development by contributing to pollution and transport congestion in the region as the main motorway connecting Mexico City to the pacific coast (Acapulco) crosses the state from north to south. It also represents a bottleneck for the access to North American markets, as the only road corridor is through the very congested Federal District.

In addition to services, the state has a well- developed manufacturing sector, and…

The economy of Morelos remains specialised in the manufacturing sector. The share of GVA produced by the manufacturing sector in Morelos is larger than the share at the national level, denoting the relative importance of this sector for the economy. The specialisation index doubled since 2003, and the share of GVA produced by the manufacturing sector reached 23.4% in 2013. This manufacturing legacy is reinforced by the increase in FDI over the period 2011-15. More than three-quarters of FDI comes from OECD member countries, with the United States alone accounting for more than half of FDI in 2015. This stream of investments and the presence of a long established

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manufacturing sector represent an opportunity for improving the competitiveness of the economy of Morelos.

…youth demographic premium is a potential asset for the economy

The population structure in Morelos presents a pyramid-shape with more people under 19 than over 65. The share of the population under 15 over the total working age population (youth dependency ratio) is considerably higher than the OECD average (41.2% compared to 27.5% respectively in 2014). In contrast, the elderly dependency ratio (population over 65 divided by the working age population) stands at 11.38%, compared to 24.17% in the OECD on average. The large share of young people in Morelos represents a workforce potential that can be deployed in the future development of the regional economy. However, realising this workforce potential will depend on access to, and the provision of, high quality basic education for all young people across the state.

The presence of prominent research facilities has not been fully exploited yet

The Mexican economy underperforms in terms of innovation activity. The share of research and development expenditure as a share of GDP in 2012 was 0.42%, much lower than the OECD average of 2.34%, with countries like Korea topping the ranking with 4.36%. Within this framework, Morelos records a level of patent intensity not only above national average, but also above the level of comparable regions such as the state of Aguascalientes. This prominent research activity is mainly financed by public funds and conducted in public research institutes and universities. The private sector is latent, as reflected in low private R&D investments, and rarely collaborates with research institutes. This may be a reason why Morelos’ public research activity has not translated into productivity growth.

2. Morelos faces some development challenges

Morelos’ declining productivity constrains opportunities for inclusive growth, but productivity is picking up in recent years…

The economy of Morelos is not performing to its potential, both in terms of GDP per capita and labour productivity growth. GDP per capita was USD 11 613 in 2013, unchanged from USD 11 737, the value in 2003. Labour productivity decreased at an annual average rate of 1.2% over the same period. Other Mexican states experienced a negative or null growth of labour productivity in the same period, which may indicate the presence of common bottlenecks or a country-wide effect. However, Morelos’ productivity performance has been remarkably lower than that of similar Mexican regions such as the states of Aguascalientes (+0.6%), thereby suggesting the presence of bottlenecks in the state of Morelos. Since 2010, the productivity trend started to recover, positioning Morelos as one of the fastest catching-up states in Mexico in the period 2010-13. This trend needs to be further sustained in order boost the competiveness of the regions over the medium and long term.

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…a low skilled labour force and large informal economy represent bottlenecks to growth…

In 2010, 59.3% of the labour force in Morelos attained below upper secondary education. Although this level is slightly below the Mexican average of 60.7%, it is considerably higher than the OECD average, 28.3%. Low levels of education can be a drag on labour productivity and the capacity to adapt to new economic conditions. Moreover, in a country such as Mexico, low education increases the likelihood of people being employed as informal workers. The state of Morelos is characterised by a large share of informality which reached 66.5% in 2014. This represents a bottleneck to growth as firms tend to remain small in order to avoid paying taxes and complying with labour regulations, furthermore small size reduces incentives to invest in and adopt new productive technologies. Informality is also a symptom of structural problems in the economy, such as the presence of weak public institutions, corruption, difficult access to credit, and a low educated workforce. Informality represents both a bottleneck for development to be tackled swiftly and effectively, and a signal of deeper (structural) problems.

…as well as a business environment restricted by high-levels of insecurity and difficulty of enforcing contracts

According to the “ease of doing business” indicator of the World Bank, Morelos ranks among the bottom performers in Mexico. In 2014, the World Bank’s indicator shows that in Cuernavaca (the capital of Morelos) businesses finds it particularly difficult to enforce contracts and deal with construction permits. Furthermore, Morelos has a negative record on security, which undermines the overall business environment. While improvements in security have been noted, Morelos still shows a much higher crime rate than the national Mexican average. In 2015, the state registered 25.78 intentional homicides per hundred thousand inhabitants, compared to a national average rate of 14.06. Although crimes tend to be concentrated in the main metropolitan areas, the whole region is affected by this negative trend. For instance, the tourism sector and related services like restaurants have been severely affected.

3. Policy responses should activate untapped sources of growth

Improve the quality of basic education and training with particular attention to peripheral areas

While the state of Morelos shows above national average performance levels in basic education, the overall quality of education is low compared to OECD peers. The programme for international student assessment (PISA) provides a benchmark to compare the performance of 15 year old students in Mexico (including Morelos) with students of a similar age in other OECD countries. In Morelos, low performing schools tend to be located in municipalities at the periphery of metropolitan areas and in lagging rural areas. In 2014, the drop-out rate in upper secondary education was 20.3% in Morelos, compared to a Mexican average of 13.1%, which placed Morelos at the bottom of national rankings in this dimension. Improvements were noted in 2015 as drop-outs reduced to 14.4%

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(against 12.4% nationally) and preliminary data for 2016 shows further progress with below national average figures. To address the challenge of early school drop-outs, the state of Morelos created the Beca Salario pilot universal scholarship programme, implemented since 2013/14, to provide financial support to students to stay in education until the completion of undergraduate studies. Young graduates tend to lack the technical skills and knowledge expected in their respective fields of studies. According to surveys conducted among employers, 26% reported that they could not find a suitable candidate for their vacancies despite receiving applications for the post. This skill mismatch raises questions about the relevance of current education programmes for the local labour market. In the state of Morelos, as in all Mexican states, vocational programmes can represent tools to improve the alignment of skills supply with skills demand. However, the technical vocational education and training (TVET) system is quite complex and not always in line with the rapidly changing business environment. Many workers and economic activities fall into the category of informality. Policies that seek to reduce the share of informality in the economy face a complex situation between workers and businesses that would not survive within a more formal relationship, and workers and entrepreneurs that prefer the advantages of a more flexible and less regulated informal relationship. The incentives for the two categories are different. The following recommendations focus mainly on the former category.

Innovation is critical to boost productivity and demand for high skills

Focusing on the supply of skills alone will not generate positive labour market results. Policies should also focus on fostering the demand for skills. Innovation policies are necessary for businesses to become more productive, more competitive and to create jobs. Large public investments on tangible and intangible knowledge-based capital reflect a strong willingness of Morelos to build a regional innovation ecosystem. However, this ecosystem is incomplete. While it gathers the infrastructures for effective knowledge generation, Morelos is weaker when it comes to knowledge diffusion and exploitation.

The Council for Human Capital represents an important initiative to co-ordinate policies on education, training and innovation

Education policies seeking to upgrade the skills of the labour force and innovation policies aimed at fostering the demand for higher level skills share strong complementarities and would require an integrated guidance. The state government has established the Council for Human Capital with the aim of providing a platform where local administrators, representatives from the private sector and educational institutions can meet to devise policies for education, training, and innovation. A major challenge for the Council is to develop a coherent framework for human capital development based on a multidimensional approach, from education and training to matching skills with firms’ demands.

Accessibility and spatial planning should seek co-ordinated solutions

The state of Morelos is located in the centre of Mexico, south of the Federal District. The main transport infrastructure is the road system, with a major highway crossing the

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region along the axis north-south. The connection away from this axis is however underdeveloped and plagued by congestion. In addition, the railroad network needs to be improved to facilitate access to markets and business supply chains as well as improve the mobility of people, thereby directly benefiting the development of tourism. Spatial planning and land use represent one of the main policy tools for the economic development of the region. In Morelos, the creation of spatial plans and their implementation involve a wide range of actors, including congressional representatives, municipalities and conurbation commissions. The actions of these tend to follow different and sometimes conflicting interests, making it difficult to reach co-ordinated solutions. Furthermore, the presence of several actors with different technical capacity hinders the implementation of any state plan. The implementation of urban and spatial planning is challenged by the presence of communal land with a special status, “ejidos”, which account for 77% of urban territory. The ejidos enjoy a special constitutionally granted status which limits the jurisdiction of state laws and regulations.

Rural policy is mainly focused on agriculture but should consider synergies with other sectors, such as tourism

The current rural development policy is mainly sectoral, focusing on agriculture, and missing any long-term strategy for job creation and business development in rural areas. The support that is provided to enhance production and producers is unidirectional whereas rural policy should look at the rural territory holistically adapting to the conditions imposed by a competitive food chain in open markets, and taking into account the technological evolution of materials and production processes. There is a need to develop strategies for job creation not directly linked to agriculture, such as tourism. Natural amenities, cultural and gastronomic attractions are assets for tourism in Morelos. The opportunities to strengthen the tourism sector in this region are numerous. Rural tourism for instance has the potential to give a new dynamism to rural areas and provide economic opportunities to marginalised communities (e.g. agro- tourism, eco-tourism, gastronomy, etc.).

The quality of the environment represents an important asset for Morelos

The preservation of the environment is one of the main pillars of well-being. The sustainable use of natural resources, such as water, green areas and air quality, are crucial for a sustainable development path. Furthermore, the abundance of natural amenities is a source of competitive advantage for the tourism 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. The state of Morelos is engaged in a number of programmes and initiatives to mitigate climate change. The quality of the air in Morelos is within the average of Mexican states, but improvements to reduce the impact of CO2 emissions should be put in place to avoid their increase by about 80% in the next 25 years. These actions should also be co- ordinated and encompass waste management and the quality of water, which affects the quality of the soil and underground water basins in addition to greenhouse gas emissions.

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Managing subnational funds and transfers is complicated by vertical fiscal imbalances

Despite being a federal country which has undergone a decentralisation process in the 90s, Mexico remains strongly centralised. Two main functions were decentralised to the subnational governments during that process: education and health. The transferred responsibilities for these sectors have been financed by fiscal transfers from the central government, mostly earmarked. Meanwhile, subnational government own revenues have not increased proportionally to their new expenditure levels, thus creating a strong vertical fiscal imbalance with state governments dependent on national transfers. As a result, the central government remains the main decision maker in many sectors, particularly in the conception of policies, but also in its implementation decisions via earmarked transfers, which thus reduces the leeway of subnational governments. The current transfer system is also characterised by horizontal imbalances both at the state and municipal level, mostly caused by the nature of the transfer system. Although current vertical fiscal imbalances are difficult to correct, the state of Morelos should implement policies to increase its own revenues and prompt local governments to increase their revenues. State governments have some margin of manoeuvre on transfers to municipal governments and in the use of some of the transfers from the central government. This slack can be channelled towards better equalisation between municipalities but also to create a structure of incentives rewarding improvements in public service provision from municipal governments and on own revenue collection. Clarifying the rules of the transfer system would also contribute to the provision of better outcomes. The state administration can, together with local administrations, take action to improve the governance of their territory.

The state administration should steer co- operation with municipalities and other states

The state of Morelos suffers from low levels of trust and efficiency in public administration. These should be tackled by improving the quality of public servants, increasing accountability, and seeking further co-operation between state and local administrations. Co-operation with and between municipalities is important for the definition and implementation of policies that spill over municipal borders and for those where economies of scale can be achieved, such as transportation and spatial planning. The co-operation with the local governments can also serve to fill the competence gap in small municipalities, as in the case of the maintenance of an updated cadastre with an effective property tax collection mechanism at the municipal level. Other concrete management actions can be taken to improve the efficiency of the state government. The state of Morelos lags behind in terms of evidence-based policy making and in monitoring the outcome of public policies. Such mechanisms coupled with long-term planning would help improve efficiency, but also consensus around policies, accountability and policy continuity. A strengthened and properly resourced State Council for the Evaluation of Social Development and for the Commission for Regulatory Improvement would help improve public policies and the business climate of Morelos. Finally the adoption of the national anti-corruption regulation and the creation of a one-stop shop for the funds transferred to the population and municipal government would help improve transparency and trust in the state authorities.

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Key recommendations

1) Improve the quality of i. Centralise the collection of information/data about schools basic education, especially in and student performance in Morelos. peri-urban areas and lagging ii. Introduce measures to identify low performing students at rural communities, and early stages and mobilise specialised school staff for increase participation in remedial support in schools located in municipalities at the upper secondary and tertiary periphery of metropolitan areas, but also lagging rural areas education where a high share of underperforming schools are located. iii. Revise the “universal” dimension of the Beca Salario scholarship programme available from lower secondary up to tertiary education (postgraduate studies excluded) in order to better target students at high risk of dropping-out for financial reasons. The resources of the current programme go to all students independently of their socio-economic conditions and risk of dropping out.

2) Ensure training i. Increase private sector involvement in the updating of programmes are more training programmes and the provision of work-based responsive to the needs of the learning opportunities for young people. economy and target the ii. Promote entrepreneurial skills development early in the informal sector too education system. The integration of current curricula with business insights would promote entrepreneurship and a closer relationship between education institutions and the private sector. iii. Establish a monitoring framework for the regional labour market training and entrepreneurship support programmes of the National Employment Service and ICATMOR. iv. Make a better use of the process of validation of previous learning and certification of skills acquired in informal and informal environments, to increase the possibility to access formal employment, while also boosting incentives for individuals to pursue further education.

3) Improve knowledge i. Supporting the development and emergence of innovative creation, diffusion and companies by creating structures which can provide legal exploitation and business advice for the commercialisation of innovative ideas. ii. Improve access to capital for knowledge-based start-ups. The public administration can help new firms access financial institutions, providing guidance and sharing part of the business risk by providing collateral for credit. iii. Bridging the existing gap between public research facilities and the business sector, by promoting platforms of co- operation between public and private stakeholders.

Key recommendations (continued)

4) Strengthen the role of the i. Better define the Council’s mission and operating model. Council for Human Capital The council should define its role, functions, and tasks, to promote the upskilling of including the mutual goals of the involved stakeholders. the labour force and an ii. The council should work closely with state labour market integrated vision of regional training agencies to define its priorities. development iii. Ensure a more varied composition of sectoral representatives. Officials from the state government and the education sector are currently over-represented to the detriment of business professionals. iv. Adopt a demand-led approach to training content by involving the private sector into the early definition of programmes. v. The definition of sectoral groups should not preclude cross- fertilisation. Organising sectorial and thematic areas around a matrix may ensure that sectors and thematic areas meet. Working groups of thematic areas should participate in all sectorial activities in order to develop a common vision. For instance insights from the high-tech working group should inform the activity of working groups in tourism and the agro-industry. vi. The outcome of the Council should be measured and evaluated according to agreed targets.

5) Spatial planning requires i. Build more accountability into the spatial planning system to a better implementation reduce discretion in the implementation of policies and ensure strategy the continuity of territorial and urban development plans. ii. Create an independent council, with technical competences, to assure continuity and effective implementation to long term spatial planning. This is important to integrate short term projects into long term goals. For instance, with regards to urban planning, the council could help the alignment of local projects with the state urban development vision.

6) Urban policies should i. The governance of metropolitan areas in the state of Morelos design and implement relies on a large number of actors. The State Ministry for policies at the metropolitan Mobility and Transport should be integrated into the co- scale ordinating agency of the metropolitan areas to ensure policies tackle metropolitan-wide challenges in a harmonised way. ii. The Metropolitan Fund should respond to a comprehensive urban development plan that prioritises the needs of the broader metropolitan areas.

Key recommendations (continued)

7) Rural policy must go i. Adopt a multi-dimensional territorial approach to rural beyond agriculture and areas, which goes beyond the agricultural sector and develop further synergies with looks at opportunities for other sectors of the rural the tourism sector economy to develop and contribute to growth. For instance, the natural and agricultural landscape can be integrated in agro-tourism activities. It is important that the policy content is open to the contribution of all involved stakeholders, avoiding a top-down type of approach. Finally financial resource should be channelled towards productive investment projects rather than compensate for lost income. ii. Develop tourism policies in accordance to environmental preservation, but first and foremost complementary to other policy areas. iii. Elaborate and deliver appropriate training to upskill workers in the tourism sector. Develop support to tourism entrepreneurship.

8) Accessibility of the region i. Investments in railroad and road networks should should strengthen both a) continue to improve the accessibility of the region to connections to external Mexico City, neighbouring states of Puebla, State of markets in neighbouring Mexico and Guerrero and to external markets in the states and export routes and Pacific and Atlantic coasts. b) internal connectivity. ii. Improve urban mobility while taking into account the environmental dimension. iii. Strengthen internal connectivity by better connecting marginalised municipalities. These initiatives should be integrated and aligned with policies improving education and capacity at the municipal level.

9) Preserving the i. Design and implement a comprehensive plan for environment by co-ordinating environmental protection, which includes greenhouse gas and implementing policies to emissions, waste management, and quality of water. mitigate climate change ii. Foster the connection of state programmes to national and international environmental programmes, such as the Climate and Clean Air Coalition (CCAC). iii. Promote the substitution of fossil combustion with gas for public transportation, exploiting the newly constructed gas pipeline and national programmes fostered by SEMARNAT.

Key recommendations (continued) 10) Foster co-ordination of i. The state of Morelos should seek strategic alliances with neighbouring the state administration regions on business development issues (such as with the state of with municipalities, and Puebla on the automotive industry) as well as infrastructure provision, with neighbouring states such as highways or railroads. The CONAGO forum among state governors represents an opportunity for greater interstate co-operation, but it should be integrated with technical groups of analysis that could provide support to regional governments and exchange good practices in addition to representing states at the national level. ii. Strengthen the roles of the COPLADES so that it becomes a real forum for strategic co-ordination and partnerships between state and local administrations. Develop further mechanisms between the state and local administrations. 11) Improve governance i. Develop a public service administration that can fully conceive and mechanisms and the implement long-term planning and evidence-based policy making and business climate their corollary: policy monitoring and evaluation. ii. Restore trust in the public administration by adopting the national anti- corruption policy, providing public information on policies namely on expenditures, and creating a single-stop shop to clarify the rules and regulations of the myriad of transferred funds. iii. Strengthen the State Council for the Evaluation of Social Development by providing it with proper funding and human resources to evaluate public policies in the state of Morelos at a larger scale. iv. Improve the business climate by strengthening resources for the Commission for Regulatory Improvement effectively evaluating the current stock of regulation, measure the broader impact of newly proposed regulations and assess the cost/benefit to the business environment. 12) Morelos should i. Undertake an audit of both the tax base and the tax collection improve the management mechanisms to improve own revenue collection in the state of Morelos. of its own funds, including ii. Improve property tax revenue by following a two-step action: first transfers to municipalities updating cadastres, and then effectively collecting taxes. The state should support municipalities (especially small ones) through technical assistance efforts to update the cadastre. With regards to enforcement, the state administration could collect property taxes on behalf of smaller municipalities with low capacity and on the basis of contractual agreements. iii. The state administration should support local governments in increasing revenue from services such as water provision, street lights or garbage collection. A transitory period should be considered to reduce resistance to price increase, and allow the quality of the service to improve. iv. Reform the transfer formulas to create incentives based on needs and policy outcomes. v. Resources for productive investments should have a results-oriented assignment mechanism conditional on co-ordination between municipalities.

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

Please cite this chapter as:

OECD (2017), “Assessment and recommendations”, in OECD Territorial Reviews: Morelos, Mexico, OECD Publishing, Paris.

DOI: https://doi.org/10.1787/9789264267817-3-en

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