About 50 years ago, it appeared that Mexico had found the recipe for economic growth that it needed. The import substitution model generated an average GDP growth of 6.8% annually between 1960 and 1981 (World Bank 2014). However, that model resulted unstable. The active participation of the state in the production of several good and services, the closed economy, the high bureaucratization and the regulation generated an inefficient economy incapable of providing the incentives to foster competition. The fact that the model was exhausted was hidden by the discovery of important oil deposits that allowed the government to increase public spending and acquire international loans. When the prices of oil fell, the economy collapsed. Without any other choice, Mexican elites were force to adopt an aggressive liberalization. In several occasions, Mexico has been used as an example that such liberalization does not necessarily imply more competition and efficiency. Where is Mexico now in terms of economic performance and what lessons can be draw from the transformation that this Latin American country has experienced in the last 20-25 years?
The Mexican Economy has changed considerably. The country left behind a closed economy to become the 9th largest importer and exported in the world. It ceased to be an exporter of raw materials to become an exporter of manufactured products and started its specialization in higher valueadded products such as automobiles, pharmaceutical products and the aerospace industry. Mexico also left behind high inflation rates, which could reach 100%, to have on average an inflation of 4% between 2003 and 2013 (INEGI 2014). In the same period the budget has been balanced and the exchange rate does not show that volatility that used to have some decades behind. Additionally, Mexico has increased its federal reserves to reach more than US $186 billion in 2013 (Banco de México 2014), which shows a country with the maneuverability to face possible economic crises. All these conditions have decreased the risk in Mexico and have made international agencies to improve Mexico’s risk grades. Today the country can obtain cheaper finance with longer maturity and it has become, together with China, India, Russia, Brazil and Saudi Arabia, a major attractor of foreign direct investment.
Currently, the Mexican economy is mainly driven by the trade sector. With its free trade agreements with 44 countries, Mexico has one of the largest free trade agreement networks in the world. However, liberalization and privatization have not translated in sufficient economic growth. During 1982 and 2013, Mexico has grown, on average, slightly more than 2% annually (World Bank 2014). Other important problems present in the Mexican economy such as inequality, low fixed capital formation, monopolies, high concentration of exports and stagnated purchasing power, to name a few, tend to be related with the new model. I would argue that several of these have been problems historically. The high concentration of trade is due to the more than three thousand kilometers of the border with the largest world economy. Inequality has been a problem that Mexico has suffered historically since the Spanish colony. The monopolies existed before privatization and were sold as monopolies.
Finally, regarding purchasing power, capital formation and economic growth, the main problem was to believe that liberalization alone could do the work. Mexican elites believed that leaving almost everything to the market was going to bring growth automatically. Today Mexico lacks of an industrial policy and the strategy to develop the SMEs has been insufficient and has not have continuity.There is no clear definition of the strategic sectors in which the state is allocating its energy and resources.The result is many uncoordinated efforts without a clear objectivefrom national and subnational entities.Liberalization has transformed the Mexican economy and has given to it strong fundamentals; however, it has to be complemented. Economic growth needs of both, a strong market related with the international economy and a strong internal market too.Undoubtedly, the Mexican case presents a reminder to India: liberalization can translate into benefits for the economy, yet the state still has a role to play.
Banco de Mexico. Banco de Mexico official site.2014. http://www.banxico.org.mx/ (accessed May 28, 2014).
Fund, International Monetary. World Economic Outlook Databases. April 2014. http://www.imf.org/external/index.htm (accessed May 29, 2014).
IMCO, Instituto Mexicano de la Competitividad. Más allá de los BRICS. México: IMCO, 2011.
Instituto Nacional de Estadística y Geografía (INEGI). INEGI official site.2014. http://www.inegi.org.mx/ (accessed May 28, 2014).
Organization of American States. Foreign Trade Information System. 2014. http://www.sice.oas.org/ (accessed May 29, 2014).
The World Bank. The World Bank Official Site. 2014. http://data.worldbank.org/indicator (accessed May 27, 2014).
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Fernando Posadas Paz
Masters in Public Administration, Columbia University