OECD Territorial Reviews: Hidalgo, Mexico

Assessment and recommendations

Assessment

Hidalgo’s economic performance is improving but it needs to accelerate

Hidalgo’s economy is closing up the gap with national standards but income and productivity remain low

Hidalgo’s economy is growing faster than the national average. Between 2003 and 2015, Hidalgo’s gross domestic product (GDP) per capita grew (2.4% annual average) above the national average (1.1%). The growth rate of labour productivity (gross value added [GVA] per worker) (3%, 2010-15) was the 6th highest amongst Mexican states and in line with the comparison group of OECD regions. FDI has also grown in the last years with a relatively lower reliance on US investment (23% of FDI between 2008 and 2017) than the national level (43%). Nevertheless, Hidalgo’s productivity level is at 40% of the median of OECD regions and it ranks as the 12th lowest among Mexican states and in the bottom 5% across OECD regions (2014). In 2015, the state contributed to only 1% of Mexico’s national GVA and generated 1.6% of national employment; while accounting for 2.4% of the country’s total population and 2,2% of its working age population.

Hidalgo’s economy is slightly less concentrated on tradable activities (35.7% of GVA) than the national average (37.7%). Manufacturing activities account for most of the tradable sector in Hidalgo (58% of tradable activities), while other tradable sectors such as financial services or information are less prominent as value-added activities. Overall, Hidalgo’s economic structure has a higher share of manufacturing activities (20.6% of GVA) than the national average (16.1%). The largest contributor to manufacturing in the state is, however, the subsector of production and refinery of petroleum (43%), which not only lacks the capacity for job creation but is concentrated in very few companies.

Hidalgo has hence untapped opportunities to increase its transition towards tradable and productive activities in the service sector such as information or logistics. The state can further move up in the global value chains by better linking its local business with the new international firms.

Hidalgo has a large stock of young, working-age population, albeit low-skilled and experiencing high labour informality

The population structure of Hidalgo ensures a relatively large stock of working-age population (65%). The elderly dependency ratio (population over 65 divided by the working age population) stands at 10.9% (2015), far below the average of OECD regions (14.8%). Likewise, the share of the young population (under 15 years old) in Hidalgo (28% in 2016) is higher than the Mexican average (27.3%) and far above the OECD average (17.9%). The large share of the working-age population translates into opportunities for utilising human capital in production.

Nevertheless, Hidalgo needs to increase the levels of educational attainment among its working-age population. Most of its labour force has only elementary education (60%) and its share of labour force with secondary and tertiary education (39%) is lower than the average of Mexican states (46%) and far below the benchmark of OECD regions (74%).

In addition, labour informality in Hidalgo is high for national and Latin American standards and has not significantly decreased in the past decade. Hidalgo’s informality rate (73.8%) is the 4th largest in Mexico (average 57.2%) and higher than the average rate across Latin American countries (47%). The informality gap with the national average (16.6 percentage points) has not significantly improved since 2005. Young, less educated individuals living in low-density municipalities have a higher probability of being informally employed. While the agriculture and construction sectors experience the highest share of informal to formal workers, businesses, institutions and government sector present an important concentration of informal workers (20.8%).

The state is experiencing a rapid urbanisation in the south, but the lack of policy co‑ordination across sectors and levels of government is hampering the performance of cities

Hidalgo’s urban population has been growing faster (2.7% annual average between 1990 and 2015) than the average in Mexico (2%) and Latin American countries (1.9%). Hidalgo’s proximity with Mexico City along with its topographic characteristics has led the people’s agglomeration around mainly three urban poles in the south (Pachuca, Tulancingo and Tula).

The urbanisation process, however, has followed a low-density urban growth with high sprawl. During 2000 and 2015, Pachuca registered the fastest growth of built-up area (43%) among Mexican (23%) and OECD metropolitan areas (15%). In turn, by 2015 Pachuca’s population density (406 inhabitants/km²) ranked below the average of Mexican metropolitan areas (640). For the same period, 43% of inhabitants of Pachuca lived in the urban core, far below the average of both Mexican metropolitan areas (84%) and OECD metropolitan areas (70%). Urban sprawl and low-density cities move population away from jobs and services, hampering urban attractiveness and reducing well-being (congestion, environmental costs and challenges for mobility and provision of public services).

Underdeveloped and outdated territorial and land use plans also threaten urban development. While Hidalgo’s law framework acknowledges the importance of developing and updating territorial planning instruments, the law enforcement remains low. The state of Hidalgo still relies on an outdated urban plan from 1979 and at the local level; just 7 out of 84 municipalities have conducted an urban development plan (2017). In addition, almost one-third of municipalities (26) are not covered by an ecological management plan and just one-fifth of municipalities have updated their cadastres.

The former problems underline the lack of co‑ordination in urban governance. Urban projects are often conducted without following environmental guidelines (e.g. half of housing projects between 2001 and 2016 did not have an environmental impact assessment). Additionally, urban areas in Hidalgo need a comprehensive urban policy that works hand in hand with other strategic sectors and across different state secretaries (e.g. between the Secretary of Transport and Mobility and the Secretary of Public Works and Territorial Planning) as well as municipal governments.

Hidalgo should focus on improving the enabling factors to maintain a sustained growth over the long term

Hidalgo’s geographic location, safety and environment are competitive advantages for the state

The location of Hidalgo, in close proximity to the national capital, represents an important opportunity to benefit from agglomeration effects. Hidalgo is located in the centre-east of the country, just north the state of Mexico and in close proximity to Mexico City. Its capital Pachuca is less than 100 km distance from the heart of Valle de Mexico Metropolitan Area. This position and the location within Mexico’s main north-south road and rail axes allows for logistical savings relative to more peripheral, less connected states.

Hidalgo has been able to preserve its environmental and security conditions, despite such proximity to the biggest Mexican city. Hidalgo’s environmental quality remains relatively high, experiencing a lower level of air pollution (14.8 µg/m³) than the average of states in the centre of the country (16 µg/m³, in average). Additionally, the state benefits from a safe environment that makes it attractive for people and business. Hidalgo’s homicide rate in 2015 was the 3rd lowest in the country (8 homicides per 1 000 people) and it ranked 4th across Mexican states in terms of security perception.

To make the most of these advantages and raise productivity and well-being over the medium term, the state needs to improve key enabling factors

The new economic plan of the state aims to make Hidalgo more dynamic and attractive for carrying out business. This strategy is based on improving the current business environment, promoting new local and foreign investment and supporting innovation in specific strategic sectors. It has also undertaken modernisation of the public sector (lean management, decreasing red tape and implementing a one-stop shop for investors) as well as improvement in the conditions for public-private partnerships, clusters and special economic zones. Some positive results are already visible, particularly with respect to the attraction of new foreign firms.

Nevertheless, Hidalgo’s economic plan can better link the competitive advantages with local realities. It also requires further clarification on how to produce complementarities among the new FDI projects, the existing socio-economic and the institutional conditions of the territory. Hence, the state needs to focus on improving key enabling factors, notably skills, accessibility and its capacity to innovate.

The state faces challenges in education and the level of innovation

While the state of Hidalgo performs better in basic education than the national average (according to the national evaluation PLANEA), Hidalgo’s quality of higher education is low. Hidalgo occupies the 94th position amongst 133 regions worldwide and the 20th in the country in terms of the share of students with the lowest PISA scores in mathematics. Additionally, there is an over-representation of social sciences and underrepresentation of computer science (4%), agronomy (2.4%) and services (1%) in the current curriculum of tertiary education, which underlines the mismatch between academia and the needs of the local industry and the new FDI investment.

Hidalgo is lacking a holistic innovation policy that goes beyond science and technology and sets strategic priorities. The innovation performance of Hidalgo in the national and international context is relatively poor and has not improved over time. The number of patents per million inhabitants in Hidalgo was 0.5 in 2015 falling from the 0.8 in 2002, while the average of Mexican states increased from 1.2 in 2002 to 2.8 patents per million inhabitants. In addition to this, while Hidalgo has designed policies to support the whole life cycle of local SMEs and entrepreneurship, the programmes to support SMEs are scattered and require better linkages with FDI projects and global value chains (GVCs).

There are large gaps in accessibility to services and information and communications technology (ICT) infrastructure, especially for northern areas

While the south part of Hidalgo is well connected through physical infrastructure, northern municipalities lack paved roads and rail connections. Overall, most of the state’s road network is unpaved (62%), above the average figure for Mexican states (53%). There is also a stock of more than 500 km of roads frequently affected by floods, which represents as a major problem in preserving good quality infrastructure.

The state faces great challenges in access and provision of services. In 2017, 67% of households in Hidalgo lacked an Internet connection, a higher percentage than the national average (49.1%). On top of that, about six out of ten households in the state reported not having a computer at home. 18% of the population does not have access to a hospital within a 1-hour drive and 53 263 people do not have access to a health facility within a 60-minute car journey. In terms of education, young people in some localities in northern municipalities cannot access any school within a 1-hour drive, while young people in localities with high access can access up to 148 secondary schools within a 1‑hour drive.

Hidalgo faces challenges on well-being and inequalities powered by a large north-south divide

A strong north-south territorial divide feed the socio-economic disparities in the state

Recent economic gains are not evenly distributed across the territory. The south of the state, where the three metropolitan areas are located, concentrates most of the economic activity and jobs in Hidalgo. The biggest share of the employed population (42%) and economic activity (48% of economic establishments) are concentrated in the south of the state, where the 3 metropolitan areas are located (Pachuca, Tulancingo and Tula). In contrasts, many municipalities in the north of the state have only a marginal engagement in the economy, with total output per head below one‑fifth of the value of the best performing municipality (Tepeapulco in the south). The municipalities in the north do not have direct access to the ports in the Gulf, with a higher share of unpaved roads and a deficient road connection with the south of the state. Overall, the population in the northwest municipalities require on average more than 2 hours to reach a city, far above the 30-60 minute journey in southern municipalities or the ones bordering other states (e.g. Veracruz).

Hidalgo ranks below all dimensions of well-being except one (jobs) when compared to OECD regions. According to the 11 dimensions measured in the 2016 OECD Regional Well-Being Framework, the largest gaps in Hidalgo appear in education, access to services, income and housing, which in turn are larger in the north of the state. With half of its population in poverty, Hidalgo also has the ninth largest poverty rate across Mexican states. The north concentrates the municipalities with the highest poverty rates. Extreme poverty in non-metropolitan areas stands at 13% of the population, far above the 3% in metropolitan areas.

Rural policy mainly focuses on agriculture and relies on subsidies, with little consideration for complementarities among sectors or levels of government

Despite the ongoing rapid urbanisation, a large share of Hidalgo’s population still lives in rural areas (46%) and most of the territory is classified as rural (97% of localities are rural areas). Rural areas in Hidalgo tend to have high poverty rates related to both social and income dimensions, low population density, high specialisation in primary production activities, high labour informality rates and a large share of indigenous people and elderly population. The 10 municipalities with the highest poverty rates in the state have an average of 45% of their working population in agriculture activities, above the agriculture share within the 10 municipalities with the lower poverty rates (7%).

Rural policy in Hidalgo mainly focuses on the agricultural sector, following an assistantship approach and lacking consideration for synergies with other sectors. The support provided to producers and farmers are unidirectional and based on subsidies and in-kind contributions.

There is a need to develop an integrated territorial approach with a long-term strategy for business development in rural areas. It involves developing policy complementarities for job creation not directly linked to agriculture. Natural amenities, cultural and gastronomic attractions are assets for growth that can benefit from alignment of environment, agriculture and tourism policies.

The state of Hidalgo has a low own revenue collection that limits its investment autonomy

Despite advancing on decentralisation in Mexico, states are still limited in their financial portfolio. There is a misalignment between responsibilities allocated to subnational governments and the resources available to them, and the Federal government still controlling large spending areas.

Hidalgo needs to increase its own income. The state has the fourth lowest level of own revenues collection in Mexico and its dependency on federal transfers (90% of the state income) is above the national average. The share of the state tax collection (2.8%) is below the country average (4.1%). Property taxes are especially low at the municipal level where the share of the land use tax (3%) is half the average of Mexican municipalities.

High informality rates, low institutional capacity at local level coupled with a small tax base and relatively low levels of tax rates and fees hamper the own fiscal revenues in the state. There is also a need to enforce development and update cadastres and public registry of property at the municipal level in order to boost property tax collection.

The low revenue collection generates a lack of accountability and low incentives for an effective fiscal policy. In 2016, Hidalgo ranked as the state with the sixth lowest level of public investment per capita in Mexico and the existing investments do not target the strategic sectors for the state. There is scope to increase the quality and level of public investment by promoting public-private partnerships as well as evaluating the cost-benefit of new funding mechanisms.

Hidalgo elaborated a comprehensive development plan but lacks complementarities and definition of long-term priorities

The State Development Plan’s objectives are too broadly defined, with no clear prioritisation and differentiation between short, medium and long term. This leads to weaker monitoring and refocusing of public policies. The strategic pillars also bear cross‑cutting issues without promoting sharing responsibilities.

The monitoring and evaluation of the State Development Plan is made through a mechanism of indicator performance that lacks alignment with budget and presents various challenges:

• The indicators tend to duplicate across secretaries and their transversality and complementarity can be enhanced. This hampers the scope for vertical or horizontal co‑ordination and reduces clarity over the attribution of responsibilities to each secretary and level of government.

• Performance indicators often reflect outputs rather than outcomes. Indicators should then measure the specific objectives (outcomes) that the government wants to achieve.

• Indicators lack a clear criterion on fulfilling objectives based on a benchmark with comparable regions, past objectives, or a baseline value.

Additionally, the implementation of the state’s economic plan is heavily reliant on promoting the industrial activity in the south. As Hidalgo is faced with a highly imbalanced distribution of its economic activity, the implementation of the plan should be accompanied with a place-based approach and a social plan to reduce such a divide.

The Law on Regulatory Improvement is a step forward in improving the business climate in the state but can be further improved

The State of Hidalgo developed a Law on Regulatory Improvement that seeks to improve regulatory quality and is consistent with many of the practices adopted by OECD countries. However, it is still missing the elaboration of the subordinating regulation – El Reglamento –, the instruments to analyse draft regulation and more clarity on the set up of the State Commission on Regulatory Improvement.

The main efforts of Hidalgo on regulatory improvement focus on administrative simplification, with more than 700 processes to be simplified and digitalised. However, it requires developing an overarching policy on administrative simplification to articulate the several current individual efforts by better integrating it with the one-stop shop and reducing administrative burdens. Alongside this, the institutional co‑ordination between ministries and agencies with the current office in charge of regulatory improvement needs to be strengthened.

Key recommendations

 

1. Accelerating Hidalgo’s economic convergence
1. Reducing informality in the state	Informality is multidimensional and should be addressed by different levels of government. While it has a structural dimension, there are some aspects that can be addressed by the state government such as: i. Increase participation in tertiary education and move people away from subsistence agriculture. ii. Decrease labour informality in the public sector at the state and municipal level. iii. Include the reduction of informality as a priority objective in the State Development Plan. This should involve a horizontal performance indicator to co‑ordinate the different secretaries towards this goal.
2. Promote training programmes for the workforce	i. Create new programmes of vocational training, language and IT training for the working-age population. ii. Improve and create new programmes to retrain existing and past entrepreneurs. This should involve awareness and mentorship led by the Hidalgo’s Institute for Entrepreneurial Competitiveness. iii. Facilitate the entry of women into the labour force by supporting woman-led business (beyond credits).
3. Improve the performance of cities to raise the quality of life and service sector productivity	If well planned and managed, urban agglomerations are key drivers to improve well‑being and service sector productivity. The following actions would help: i. Create an integrated urban development policy that works hand in hand with other strategic sectors and across different state secretaries. It should include a clear mandate for the Secretary of Mobility and Transport (SEMOT) and the Secretary of Public Works and Territorial Planning to co‑ordinate urban policies and reduce urban sprawl. ii. Establish a Metropolitan Planning Institute that can lead the elaboration of the metropolitan plan. It should also improve the co‑ordination of urban policies among metropolitan areas and across the level of governments. iii. Update urban and land use plans for all municipalities inside the three metropolitan areas. The Metropolitan Commission along with Secretary of Public Works and Territorial Planning should be instrumental in attaining this goal.
4. Update and develop territorial and ecological plans to improve the business environment and attain sustainable growth	i. Provide technical assistance and financial support to municipalities outside metropolitan areas to prepare urban and ecological development plans and update cadastres. ii. Prioritise partnerships with the poorest municipalities to ensure the implementation and enforcement of the land use plans. iii. Involve the society to advise and control the development and update of territorial and environmental plans. iv. Improve the coverage of digitalisation of urban plans and exchange of digital information about cadastres.
5. Strengthen linkages between local business and new foreign direct investments (FDI)	i. Use the National Entrepreneur Fund as a vehicle to link local SMEs into global value chains. This can support quality accreditation, technological upgrades, and events organisation to connect transnational companies and local companies. ii. Adapt training programmes to match local skills with the demand created by new FDI. iii. Develop a strategic vision based on the economic plan that integrates funding for SMEs, local incubator programmes and new FDI. Local funding networks should also be integrated with federal schemes.
2. Improving enabling factors to boost productivity
6. Establish a co‑ordinated policy on innovation by linking government and academia to current and future business needs	i. Create an institutional framework to formalise the link between higher education institutions, the private sector and government. ii. Develop a holistic innovation strategy that fosters an open innovation ecosystem with knowledge creation, diffusion and exploitation. iii. Assign a governance body to co‑ordinate and monitor the holistic innovation strategy, seeking a demand-led approach for innovation projects and skills. iv. Reduce the mismatch between the curriculum of the education system and the needs of the industry and labour market. For this, the state should adapt the curricula of public universities and enhance the coverage of the Dual Model of Academic Training. v. Create technical councils including school directors, professors and parents in order to decrease dropout rates.
7. Create a co‑ordinated mechanism to support SMEs	i. Develop a mechanism to better align federal programmes and SMEs at the state level. ii. Improve programmes that target SMEs from the more disadvantaged groups and northern municipalities to ensure a higher participation in the economic activity of the state. iii. Create programmes to support internationalisation of local SMEs and entrepreneurs. iv. Strengthen the brand for the state of Hidalgo. The brand should be comprehensive and based on the characteristics and potential of the region.
8. Improve the accessibility to public services and the infrastructure connectivity with internal and external markets	i. Develop better connectivity of northern municipalities with neighbouring states that can facilitate access to the ports of the Gulf. This can be done through a partnership with neighbouring states. ii. Increase coverage and penetration of ICT infrastructure across the territory. These initiatives should be complemented with other programmes that improve the skills and capacity of local communities to make the most of broadband connectivity. iii. Increase accessibility to public services across the territory by consolidating them in areas of higher density and using technology and partnerships with other states to deliver them in remote areas. iv. Reduce the share of unpaved roads (currently 62%) to improve the connectivity of remote municipalities and accelerate the expansion of the road that connects Huejutla in the north with Pachuca.
3. Attaining inclusive growth through better governance
9. Prioritise objectives in the State Development Plan (SDP), deliver integrated implementation and strengthen monitoring mechanism	i. Prioritise objectives of the state over the short, medium and long term and identify attainable strategies to implement them. ii. Implement multi-year or medium-term budgets to tighten the link between programming and spending and thus support the implementation of the SPD. iii. Create a co‑ordination mechanism that can attain complementarities and shared responsibilities among secretaries. Special cabinets by areas or other forms of joint work can be implemented. The outcomes should be monitored through horizontal performance indicators. iv. Improve the monitoring mechanism by establishing a hierarchal structure with a selected number of outcome indicators and a lower level of output indicators. v. Strengthen co‑ordination mechanisms for the social and economic programmes to build complementarities in the poorest areas. vi. Promote in rural areas the modernisation of agriculture and off-farm activities including tourism and other sectors that can provide formal jobs.
10. Improve the collection of own financial resources and the efficiency of investment and transfers	i. Expand the state tax base and audit rate levels of the payroll tax and water fees to ensure alignment with the quality of public services. ii. Assist the municipalities with the lowest institutional capacities in their efforts to collect the property taxes. iii. Establish mechanisms to incentivise joint spending among municipalities. iv. Develop a naming and shaming mechanism to encourage municipalities to increase own resources and link investments with strategic sectors. v. Seeks ways to increase the level and quality of public investment by promoting public-private partnerships as well as evaluating the cost-benefit of new funding sources. vi. Link budget allocation with strategic programmes of the SDP. Outcomes of performance indicators should be used to reassess future budget allocation. vii. Enforce updates of the cadastre and public registry of property at the municipal level in order to boost property tax.
11. Strengthen governance and co‑ordination mechanisms as well as the capacity of public servants	i. State programmes and projects must include the creation of formal mechanisms for inter-sectorial co‑operation. It can be done through joint authorities, special task forces or inter-secretary working group. ii. Replicate the model of the Water and Sewerage Commission of Intermunicipal Systems (CAASIM) for a co‑ordinated delivery of public services among different municipalities. A regional commission of this type in northern municipalities can be beneficial to improve delivery of water, electricity and other public services. iii. Promote inter-state collaboration to attain joint projects with neighbouring states (e.g. Mexico or Veracruz). The co‑operation initiative south-south-eastern region within CONAGO can guide Hidalgo in this process. iv. Implement strategies to transition towards a merit-based recruitment process for public sector workers. It involves revising the selection tests for public officials and the scope to increase the level of public spending on personal services. v. Use contracts between levels of government in order to align public investments and establish fiscal responsibilities.
12. Continue improving the regulatory policy in Hidalgo	i. Develop the norm (“Reglamento”) of the State Law on Regulatory Improvement and create a state commission to oversee the implementation of regulatory improvement. ii. Prepare a work agenda with specific objectives and goals on regulatory improvement with municipalities in the short and long run, and make it public. iii. Revisit the strategy of the one-stop shop at state and municipal level in order to make it an effective tool to facilitate business opening by taking inspiration from international best practice. iv. Improve co‑ordination between secretaries and the current office in charge of regulatory improvement. This can be done by appointing a representative from each public entity to follow up on the issues related to regulatory.