ESTUDOS E PESQUISAS Nº 284
The Mexican Economy in the Context
of the World Economic Crisis
Carlos Elizondo Mayer-Serra*
XXI Fórum Nacional - Na Crise Global, o Novo Papel Mundial
dos BRICs (BRIMCs?) e as Oportunidades do Brasil
(Crise como Oportunidade, Através do Plano de Ação)
18 a 21 de maio de 2009
* CIDE.
Versão Preliminar – Texto sujeito à revisões pelo(s) autor(es).
Copyright © 2009 - INAE - Instituto Nacional de Altos Estudos. Todos os direitos reservados. Permitida a cópia desde que citada a
fonte. All rights reserved. Copy permitted since source cited.
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“¿BRICs without M? On the political economy of Mexican growth” 1
Carlos Elizondo Mayer-Serra2
Introduction
From 1953 to 1970 Mexico enjoyed what was then called the Mexican economic miracle, or
stabilizing development. From 1953 to 1970 the average annual GDP rate of growth was 6.6
percent with an average inflation of 4.13 percent.3
The country was so successful in creating an image of a society moving towards the level
of well being of developed societies, that Mexico City was granted the responsibility of hosting
the Olympic games in 1968, first time ever in a developing country. This was only 4 years after
Tokio´s Olympics, and 40 years before the 2008 Beijing Olympic Games.
The Mexican political and economic strategy was seen as a sort of model of how to
manage a complex and backwards society, without real democracy, but within certain liberties. It
also avoided the military coups that plagued the rest of the region in the sixties and seventies.
The economic model combined markets and private property, with a strong state, both in terms
of its regulatory capacity and its direct control of strategic areas of the economy.
The Mexican miracle proved, however, to be unsustainable. In 1976 first, when newly
discovered oil allowed the country to postpone reforms, and then more dramatically in 1982, the
country entered into a period of devaluation, inflation, and low growth. Even though the
economy was finally stabilized after 1995 and a new model of development was implemented,
Mexico has been incapable of achieving high growth.
Mexico has the size to be one of the BRICs. In 2007 it had a population of 105.3 millions
and a GDP of US $1,022.8 bn. In the same year Brazil had a population of 191.6 millions and a
GDP of US $1,313.4 bn.4 Mexico exports more than all Latin America together and has a
privileged geographic position. It is one of the leading exporters in world merchandise trade. In
2007 its exports had a total value of US $272 bn. Brazil’s exports were US $160 bn.5 In several
interviews, Jim O’Neill, who invented the acronym BRICs has argued that Mexico should
probably be included within the BRICs.6 However, in order to fulfill its potential Mexico needs
to grow much more. In order to achieve that growth some key reforms are needed.
This paper will first say a few words on the political economy of growth. In the second
section it will describe Mexico´s growth performance, providing some comparison with other
relevant countries. It starts with a long perspective, but then focus on the current moment. In the
third section it will analyze why Mexico is stuck in a low growth equilibrium. Finally, this paper
will address the reasons behind this mediocre performance and the likely strategies to confront
the obstacles of doing the reforms that would allow the country to grow faster and therefore
become one of the BRICS.
On growth
Institutions are crucial in understanding the political and economic development of societies.7
However, institutions are not exogenous. They are the consequence of the political equilibriums
of the past. Moreover, institutions are not only the formal rules, but the informal ones that derive
from history and culture, and from the capacity certain actors have to shape in its favor existing
institutions. Therefore a mere change of institutions modeled on a successful country in terms of
economic and political development will not transform the country that import those institutions.
Institutions promote certain behaviors and hinder others; they impose restrictions,
diminish uncertainty, and channel conflict. They are never neutral. They favor certain actors and
behaviors and impose costs to others.
They cannot be neutral because they are the result of power struggles that have well
defined objectives. They can be suboptimal in terms of promoting growth, but institutions that
hinder growth are difficult to change because any reform will affect powerful actors that profit
from the institutions they helped shaping.
Even when certain institutions are obviously hindering development, there is no
agreement with respect to the optimal reform needed to foster growth or promote democracy.
Reforms that might work in a certain country and world conditions, might not work in a different
country or in another world context. However, some of the institutions that do not work are
obvious, such as having state own firms that lose money, unregulated monopolies that extract
rents from consumers, arbitrary expropriation, and extended criminal activity
Economic neoclassical models suggest that the level of well being of countries that trade
should converge. The poorer countries have more space to grow; they have lower wages and can
import technology and capital from richer countries. However, even in economies that are open,
they can end being stalled in low growth equilibrium. Institutions that protect inefficient
behavior can survive because those that gain from them are powerful. This is even more likely to
happen in very unequal societies, as gainers of current distribution of power have a lot of
comparative resources to defend their position.
Paradoxically, however, a very unequal society can assemble a large group of excluded
demanding a better distribution of social good, and if they pose a real threat, elites can opt to
yield something, in order to defend the bulk of their privileges. The phantom of a revolution, for
example, can be a very powerful incentive for a reform that shares privileges.8
However, there is no assured outcome. Many times elites do not agree on how to share
privileges. Nor it is evident that without that agreement the necessary outcome is some sort of
revolution that will destroy by force the status quo. In an unequal society, those with resources
have a lot of organizational and political resources to defend their position.
Even in a democracy, although in principle this regime should empower majorities, it is
not automatic that privileges will be eroded. The institutions of democracy can also be a safe
harbor for some of the privileged, precisely because they have a lot of resources.
The Mexican Economy in Perspective
From a long term perspective, growth in Mexico has been mediocre compared with other
countries. (See graph 1). It is worth underscoring, however, that this is not an exclusive Mexican
problem. There are even less successful cases.
China, perceived correctly today as a miracle, performed worst than Mexico in the past
two centuries. Argentina and Chile also performed poorly. However, now Chile and China are
clearly converging toward the levels of per capita income of the US. Argentina continues its
secular decline, while Mexico is stagnated. Brazil is a very similar case to Mexico, although
recently it has performed much better.9
We expect economies to grow. If other societies have done it, why should not all be
capable of increasing their productivity and well being? However, moving toward high growth
equilibrium is not easy, there are many restrictions. That explains of course why only a few
countries in the history of the world have managed to do it.10
It is worth having in mind that graph number 1 compares the per capita GDP with the one
of the US, which is a mobile target. The per capita GDP of the United States had an average
annual growth between 1820-70 of 1.34%; from 1870-1913 of 1.82%; from 1913-50 of 1.61%;
from 1950-73 of 2.45%; and from 1973-2001 of 1.86%.11 This has been a quite stable and
remarkable performance.
In order to grow, countries have to solve a variety of problems. The first one is of course
learning to govern itself. Mexico was a relatively rich country at the beginning of its
Independence. However, the problems to pacify the country after the independence necessarily
had to affect our ability to grow. The independence war affected the principal economic activity
of the colony, the mining industry. It also destroyed the tax collection system of the colony.12
After this war ended, a new independent state was born, but it was too unstable. This is partially
explained by the low tax collection that Mexico had during that period. Without a certain degree
of peace and stability there is no stable growth. The same happened during the more destructive
years of the Mexican revolution.
Mexico has had two periods with higher GDP per capita growth than the United States,
therefore converging with the level of income of that country. These two periods were from 1855
to 1910 with the pacification of the country, the institutional development and the infrastructure
of the Porfiriato, and from 1950 to 1981 with the institutionalization of the revolution and a
process of development that protected the Mexican economy from imports. These two periods of
high growth, however, did not turned out well, the first one ended with the revolution and its
consequences, the second with a long economic crisis form which we have not fully recovered.
Graph 1. Comparison of the GDP per capita between China and Latin America compared
to the United States
(1850-2006; International Dollars, 1990)
100%
90%
80%
70%
China 60%
Brazil 50%
Mexico 40%
Chile 30%
Argentina 20%
10%
0%
1850
1870
1890
1900
1910
1917
1930
1940
1950
1960
1970
1980
1990
2000
2006
Source: Constructed by the author with information from Angus Maddisson, Statistics on
World Population, GDP and Per Capita GDP, 1-2006 AD
If comparing the GDP per capita of developing countries with that of the United States is
aiming to high, ¿how do Mexico compares with other developing economies? With information
from the Growth Report (not comparable with the ones we used from Maddison) we can see that
Mexico is at the middle of the table, even in the unproductive period of 1980 to 2006.13 In
contrast to other Latin America countries, Chile stands out in this period. Brazil and Mexico
have a very similar trajectory.
Table 1. Growth in Developing Countries*
GDP Growth Rate
1960-2006
1980-2006
China
Brazil
India
Mexico
Russian Federation
Argentina
Turkey
Indonesia
Chile
Peru
Real GDP
2006
2092
765
703
666
373
340
261
219
96
71
Share in
total
25.4
9.3
8.5
8.1
4.5
4.1
3.2
2.7
1.2
0.9
Real Per capita
9.8
2.2
6
2.6
-0.4
1.8
4.4
5.2
4.9
2.3
8.6
0.5
4.1
0.9
-0.2
0.5
2.5
3.6
3.3
0.4
Real Per capita
7.7
4.4
4.9
4.3
2.5
4.3
5.5
4.3
3.2
6.1
2.3
2.8
2
1.1
2.2
3.6
2.5
0.9
Rank
1960
5
2
4
3
1
8
12
10
Real
GDP1960
70
105
77
94
108
18
14
16
* Selected countries
Source: The Growth Report. Strategies for Sustained Growth and Inclusive Development.
Statistical Appendix.
On the lost miracle and its implications
The Mexican miracle started having problems in the seventies but finally collapsed with the 1982
economic crisis. This crisis was particularly surprising and harsh because it came after the
country had become a large oil exporter. The dilemma Mexico had with the newly discovered oil
wealth was how to “manage abundance”, in the infamous words of President López Portillo.
His remarks were not really understood. He was not bragging about being rich, but trying
to address the risks implied with the recently discovered gold pot. The problem with oil is that
you start having social pressures to use not only the present income, but the future one. The
expectations of future resources make creditors very generous, so you are left with even more
resources than the stream derived from oil exports. It is easy to plan no to use these new arrived
resources, but in a poor and unequal country it is difficult to contain expenditure pressure. If oil
prices follow the expected price trajectory the strategy might work, but when you face at the
same time a decrease in the price of oil, and a steep increase in interest rates, the whole strategy
becomes very vulnerable.
Although oil made it possible to postpone difficult decisions that first surfaced in the
1976 crisis, the 1982 crisis was much more severe because of the way oil had hidden the
structural problems that resulted from a system based on commercial protection that permitted
accelerated industrialization, but that lead to an inefficient economy. The low quality of Mexican
goods and the increasing demand of imported inputs resulted in a chronicle need of hard
currency.
Politically, the so called Mexican miracle was based on the discretionary distribution of
rewards and punishments. This gave the system stability. Even though it was an authoritarian
system where power was controlled from above, it respected all formalities, including regular
elections, thus claiming to be a democracy in a subcontinent of military coups. However, this
political strategy was increasingly costly to the public purse. The need of hard currency and of
public resources was financed through public external debt, but when interest rates went up in
the late 1970’s and the price of oil started to go down in mid 1982, the system collapsed.
Table 2. Foreign Debt of the Mexican Public Sector: 1970-1982
(Millions of dollars)
Year
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
Total
3,762
4,564
5,064
1,071
9,975
14,449
19,600
22,912
26,264
29,737
33,813
32,961
64,100
Annual Increase
782
802
500
2,007
9,904
4,474
5,151
3,312
3,352
3,493
4,056
19,148
11,139
Source: Rosario Green, "El Arranque," in La deuda externa de México: 1973-1987 de la
abundancia a la escasez de créditos, México: Nueva Imagen, 1988: 47.
The most evident sign of this collapse was the contraction of the economy and rise in the
price level. The economy went from a growth of 8.8 percent in 1981 to -0.6 percent in 1982, and
in 1983 it dropped to -4.2 percent.14 Inflation went from 32.58 percent15 in 1977 to 27.93% in
1981, 57.49 percent in 1982 to 125.43 percent in 1988. It was till 1989 that the economy started
to stabilize when the inflation reached 20.32 percent and 26.54 percent in 1990.16
Graph 2. CPI General Index
(Annual)
180
160
140
120
100
80
60
40
20
Source: Constructed by the author with information from Banco de México.
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
0
As the crisis could not be solved just by contracting the economy, the government
decided in 1985 to open the economy and privatize a great number of state owned firms.
Although the immediate objective was dealing with the economic crisis, the ultimate aim of
these reforms was political. The group in power was facing an economy in crisis that went
beyond the financial bankruptcy of 1982 and threatened their chances of remaining in power, as
growth had been one of the reasons that allowed the government to simulate elections. What was
at stake was the survival of the government and the group that controlled it, and this group was
already facing serious doubts about its legitimacy as a result of successive devaluations, inflation
and the lack of growth.17 Moreover, the government’s relationship with investors had been
seriously damaged following the nationalization of the banks.18
Even though the reform process was intense and painful and inflation was stabilized,
although after a new crisis in 1994, the government was unable to boost the economy to the rates
of growth expected. Productivity and growth rates in per capita income have remained low: from
1987 to 2004, growth rates in GDP per hour worked fluctuated between 0.3 and 0.9 percent
(table 3).
Table 3. Growth Rates in Per Capita Income and productivity (1987-2004)
GDP per capita
Ireland
Spain
Estonia
Mexico
India
China
1987-1995
5.1
2.5
0.4
3.9
5.7
1995-2004
6.6
3.2
6.6
2.2
4.5
6.6
GDP per hour worked (productivity)
2000-2004
4
2.6
7
-0.5
5.2
7.7
1987-1995
4
2.1
0.6
3.7
4.7
1995-2004
4.7
0
7.1
0.3
3.9
6.1
2000-2004
3.5
0.2
6.6
0.9
3.1
6.8
Source: Banque de France, Productivity, Competitivity and Globalization, Paris: Banque de
France, EUROSYSTÈME, November 2005.
If we compare Mexico´s growth in the last years to key developing countries it is evident
we are being left behind, making it difficult to claim being one of the BRICS. Throughout the
last years Brazil had a far better performance than Mexico’s (Table 4).19
Table 4. Real GDP (Annual percent change)
Brazil
China
India
Mexico
Russian Fede
2007
5.7
13
9.3
3.3
8.1
2008
5.1
9
7.3
1.3
5.6
2009 est.
–1.3
6.5
4.5
–3.7
–6.0
2010 est.
2.2
7.5
5.6
1
0.5
Source: International Monetary Fund, World Economic Outlook Database, April 2009.
To the low level of growth of these past years we have to add the complexities derived
from the world crisis and more recently, the influenza which affected severely the Mexican
economy. During the first trimester of 2009 the real GDP of Mexico dropped -8.2 percent,20 The
collapse was deeper than what the IMF was forecasting in April. The expected growth for this
year for Mexico is of -5.5 percent21 and for the next one is of 2 percent,22 but some economists
have even more negative forecasts.
This crisis has severely affected the Mexican economy, but Mexico is not as vulnerable
as it was in the 1994 or 1988 crisis (see Graph 3), Mexico’s current account deficit as a percent
of the GDP in 2008 was of -1.67 percent, the predicted one for 2009 is -1.92 percent. If we
exclude oil from the current account the deficit is still not comparable with past crisis.
Graph 3. Current Account Deficit as a % of the GDP
Source: Raúl Feliz, “Análisis Económico,” CIDE.
There have been some inflationary pressures, the inflation rate in December of 2008 was
of 6.53 percent; the highest Mexico has had in the last couple of years. However, the rate of
inflation decreased during the first trimester of 2009 and it is expected to remain within the
Central Bank’s (Banxico) superior limit in June of 2010 (see Graph 4).
Graph 4. Inflation
Source: Raúl Feliz, “Análisis Económico,” CIDE.
Just as other emerging economies, it has accumulated high international reserves (Graph
5) compared to those in December of 1994 (US $5bn)23, and low public debt (Graph 6). For the
first time ever in a crisis, the Mexican government has been able to take counter cyclical
measures to counteract the crisis. For example, it has approved a program for employment and
work benefits (US $1.5 bn), one for households (US $7bn), business and industry (US $11bn)
and a new fund for infrastructure investment (US $36 bn). These packages amount to 2.8 percent
of GDP,24 although it was yet been fully spent.
Graph 5: International Reserves
(Log) Billions of U.S. dollars
10000
1000
100
10
2001
2002
Brazil
2003
China
2004
2005
India
2006
Mexico
2007
2008
2009p
2010p
Russian Federation
Source: International Monetary Fund, World Economic Outlook Database, April 2009.
Graph 6. Mexico’s Public Sector Debt: 1990-2010
Source: Raúl Feliz, “Análisis Económico,” CIDE.
Employment has been severely affected by the crisis. In Mexico only in the first trimester
of 2009 more than 2 million works were lost.25 The loss is expected to be greater in the following
months (Graph 7), affecting the capacity to use internal demand as a substitute for the collapse of
external demand.
Graph 7. Income and Employment Growth
Source: Raúl Feliz, “Análisis Económico,” CIDE.
The severity of the current crisis is basically the result of the integration with the US
economy, the epicenter of this world crisis. Just as we have seen with other major exporters, like
Germany of Japan their problems have been more severe than less open economies.
Although the current crisis comes abroad, the low growth of the years previous to the
crisis is domestic, basically explained by the many reforms the country still needs.26 The most
evident ones are opening the energy sector, liberalizing labor markets, strengthening the capacity
to regulate dominant players in key sectors such as telecommunications, a stronger and less
distortive tax structure and a stronger rule of law.
An urgent reform is fiscal reform. As Graph 9 shows the price of oil has dropped
drastically. If in 2009 is not yet a serious problem it is because the Mexican government bought
insurances in case that the crude oil price per barrel went below $70 dollars. Next year the
pressure will be unavoidable, if prices do not recuperate to its levels of 2008, the most likely
scenario.
Tax recollection is low compared to other countries. Oil income has compensated this
weak tax capacity, (Graph 8) helped by high oil prices (Graph 9). In the first four months of 2009
(Graph 8.1) oil income of the government has gone down, even more than tax income, thus
decreasing its percentage, but at the expense of weaker public finances.
Graph 8.Budgetary Income of the Public Sector, Mexico.
2000-2008. (% of total)
80%
70%
67%
70%
70%
67%
64%
65%
63%
62%
63%
60%
50%
40%
36%
33%
37%
38%
35%
37%
33%
30%
30%
30%
20%
2000 2001 2002 2003 2004 2005 2006 2007 2008
Oil Incomes
Non Oil Incomes
Graph 8.1 Budgetary Income of the Public Sector, Mexico.
January – April, 2006-2009. (% of total)
80%
73%
70%
66%
68%
67%
60%
50%
40%
34%
32%
33%
30%
27%
20%
2006
2007
Oil Income
2008
2009
Non Oil Income
Source: “Estadísticas oportunas de finanzas públicas,” Secretaría de Hacienda y Crédito
Público.
But the problem is more than just a fiscal one. The trade balance of oil and its derivatives
has deteriorated recently (see Graph 10). And production is declining (Graph 11).
Graph 9. Average Realized Price of Crude Oil Exports
Source: Petróleos Mexicanos, “Indicadores petroleros a marzo de 2009,” www.pemex.com
Graph 10. Pemex Trade Balance
Source: Petróleos
www.pemex.com
Mexicanos,
“Indicadores
petroleros,
marzo
de
2009,”
Graph 11. Mexican Oil Production by Type
(thousands barrels daily)
Source: Pemex, “Petroleum Statistics,” Investor Relations.
Mexico is not only in need of a fiscal reform, it also needs to regulate dominant firms in
key sectors, such as telecommunication. In Mexico Telmex and America Movil dominate fix and
mobile markets. (See Graph 12). Both are owned by Carlos Slim, the richest man in Latin
America and one of richest in the world. The telecommunication market in Mexico can be
considered to be a monopoly because it has a Herfindahl-Hirschman index of concentration of
8,868 (see Graph 13).
The result of this lack of options is that even though Mexico is a poor country, Mexicans
pay per capita for telecommunications fees (fixed, mobile and Internet) more than in rich
countries as Switzerland, United Kingdom and United States (Graph 14).
Graph 12. Cellular Mobile Competition in the OECD, 2005
Mobile operator market share according to number of subscribers (%)
100
90
80
70
60
50
40
30
20
10
0
Operator 1
Operator 2
Operator 3
Operator 4
Operator 5
Source: OECD, Communications Outlook 2007, París: OECD.
Otro
Graph 13. Supply Concentration in Telephony (at end 2005)
Herfindahl-Hirschman Index, by segment
Note: The Herfindahl-Hirschman concentration index is constructed as the sum of market
shares in each segment expressed in percentages: 0 corresponds to an atomistic market, 10
000 to a monopoly.
Source: OCDE, “Latin American Economic Outlook 2008”
Graph 14. Monthly household expenditure on communications
in selected OECD countries
280
260
240
220
200
180
160
140
120
100
80
60
40
20
0
Monthly expenditures on communications (USD)
Internet
Mobile
Fixed
Total
Source: OECD, Communications Outlook 2007, París: OECD.
On the political economy of pending reforms27
Many reforms were not done or were limited, but there were errors in the implementation of
those reforms that actually took place. The most visible one was the crisis of 1994. This broke
with the premises of economic reform: that liberalization and privatization would provide
stability and growth.
This failure made the modernizing reforms not any longer popular. In October 1994, at
the end of President Salinas’s six-year term, 52.2 percent of those interviewed for a survey were
in favor of privatization, 38.2 percent were against it, and the remaining 9.6 percent were
indifferent. After the 1994 crisis, when the peso was devalued from $3.37 peso/dollar (annual
average 1994) to $6.17 peso/dollar (annual average 1995), the economy contracted -4.7 percent
(in 1994 the GDP growth rate was of 3.5%)28 and inflation jumped to 34.77 percent in 1995 (in
1994 it was of 6.97 percent).29 Only one year into Ernesto Zedillo’s government, the perception
of privatization had changed. In April 1995, the percentage of those in favor of privatization had
fallen below 28.1 percent (that is, slightly more than half the earlier level), 35.7 percent were
against it and 36.2 were indifferent.
The legislators confronting the current president, Felipe Calderón, in his attempts at
fiscal, energy, and labor reform, now that the three most visible reforms, fiscal, labour and
energy, are not popular. Public opinion perceives these reforms not as favorable to the interests
of the majority, but as part of a sinister plan to erode its interests. According to the national poll
Serie Nacional Parametría done by the polling company Parametría, 73 percent of those
surveyed believe that the government should control the economy and 55 percent are opposed to
any increase in private capital in the oil and electricity industries. By the same token, a 2007
Mitofsky poll shows that more than half the population is opposed to private investment in
energy. The lost of legitimacy of economic reforms derived from these crisis, plus the power of
potentially affected groups in case of further reforms, and the distribution of votes, have led to no
major economic reforms in the last 15 years.
Not only are pending reforms not popular. Transition came to Mexico in a context where
the president’s party no longer had an overall majority in either of the two chambers. Divided
governments have made it difficult for the executive branch to assume the short-term cost of
certain legal reforms and then to enjoy the medium- to long-term potential benefits, although it is
worth having in mind that all the reforms still needed were not passed during the years of unified
government, and thus the causality of divided government having less capacity for action is not
clear.30
Graph 14. Divided Government
Chamber of Deputies
Source: CIDAC (http://www.cidac.org) and Cámara de Diputados
(http://www.diputados.gob.mx)
Senate
Source: Alonso Lujambio, El Poder compartido. Un ensayo sobre la democratización
mexicana, México, Océano, 2000, p.75. and Cámara de Senadores
(www.senado.gob.mx)
The opposition is currently in the hands of two parties who are heirs to the ideological
principles, revolutionary nationalism, and political practices of the PRI governments. In the case
of the PRD, rejection of the most important outstanding reforms is almost automatic, because the
PRD arose out of opposition to Salinas’s reform agenda. In the case of the PRI, the relationship
is more ambiguous; however, after the 1994 crisis, a lot of power was lost by the modernizing
stream that had come from the high bureaucracy controlling the party that was not really a
product of PRI traditional cadres, closer to the rank and file of the party.
This dispersion of power has helped those against reforms to avoid changes. The main
actors benefiting from this lack of reforms and making reforms difficult are big businesses in
sectors where there is limited competition and the trade unions of the public sector.
These two groups are two sides of the same problem: sectors with scant competition that
extract rents from the consumer or from the taxpayer. In the first case, business people do this
through relatively high prices and low personal taxes. Significantly for a country with such
marked inequality, the idea of an inheritance tax is not even up for consideration, something that
reflects the power of those who stand to be affected. Quite apart from whether an inheritance tax
is a good tax (given that it brings in little and can be evaded), it is surprising that the idea is not
part of the debate, because the proportion of wealth in the hands of billionaires is greater in
Mexico than in many other countries, including some of the countries in the region with the
greatest inequality, and because most of Mexico’s billionaires inherited their wealth.
Big businesses have always been able to affect government actions. For many decades,
big businesses concentrated their actions on the executive branch with considerable success. This
was the case from 1940 to 1970, years that were also called the alliance for profit. The governing
principle was support for making money in exchange for noninterference in politics.31
In a democratic world, the playing field is much bigger. Businesses seeking to influence
all players in the policy process have had to create departments to handle relationships with the
government, especially Congress, and also to influence public opinion. Some business people
have actively sought the presidency, as was the case with Fox. Others have played an active role
in elections by contributing money and other forms of support. Given the absence of regulation
on lobbying the room for action is wide open and there are cases of notable success for special
interests.
The unions also extract rents in the form of very good pensions, no accountability, and
low productivity.32 In general, the public sector trade unions are unaffected by low product
quality or losses their employers’ suffer. Even though the income public sector workers earn is
miniscule compared with the salaries of owners of large businesses, and even though these
workers continue to earn less than the upper-middle class, they still enjoy better working
conditions and income compared to workers with similar education and are very costly to the
public purse. This situation reduces the possibility of instituting more progressive and better
quality social spending and saddles the economy as a whole with expensive, poor quality
services. Proposing greater public spending that would narrow the inequality gap via focused
transfers and better public services in education and health is difficult if one part of such
spending has been captured by the trade unions and if the capacity to provide a good quality
service is limited because of labor agreements that do not promote productivity.
One extreme case is Luz y Fuerza del Centro, a state-owned electricity utility company. It
supplies electricity to a territorially concentrated market, central Mexico, where per capita
income levels are high compared with the rest of the country. The company does not sell its
electricity cheaply, but is still losing a good deal of money. In 2008, transfers and subsidies to
the company to avoid bankruptcy will amount to some Mex$32.5 billion, which is equivalent to
157 percent of the budget of Mexico’s largest public university.33
The inefficiencies in the public sector are manifold. Some efforts have been made to
quantify the problem34, but even anecdotal evidence reveals sizable productivity problems,
which are the result of a politicized corporate system that tolerates deadwood in personnel and
low productivity.35 In Petróleos Mexicanos (PEMEX), for example, 11,450 workers on the
payroll do absolutely nothing, because the collective contract makes it impossible to dismiss
personnel whose jobs no longer exist. The cost to the company is Mex$4 billion per year. These
numbers do not include excess staff in many processes that are also effectively doing nothing.36
One study of PEMEX has identified potential annual savings of Mex$17,600 million, but part of
this would come only at the expense of confronting the trade union.37
Trade unions have served their members well. Their average wages are higher than in the
rest of the economy. Between 1998 and 2001, that is, during the end of Zedillo’s term and the
beginning of Fox’s administration, a teacher’s basic salary rose by 52.4 percent and fringe
benefits rose by 9.1 percent. Indeed, since 1993, teachers’ wages have risen more in real terms
than GDP.38 Even though their salaries continue to be low compared with what teachers earn in
more developed countries, they are high in comparison with Mexico’s per capita GDP. In
general, despite the commonly held perception, primary school teachers in the public education
system earn more than those in other professions with comparable levels of qualifications.39 In
addition, they have much better working conditions: more vacation days, more flexible work
schedules that allow them to hold second jobs, and greater job security. No wonder that selling
job placements is a profitable business.
The most extreme case is that of the Sindicato Mexicano de Electricistas to which Luz y
Fuerza del Centro workers belong. This is probably the most democratic and independent of the
public sector workers’ unions. It has also achieved the best working conditions for its members,
including retirement pensions at a level not found in any developed country.40
Because public sector firms are not subject to competition and do not live off income
earned from the market, they are in a position to perpetuate inefficient union agreements that
continue to be paid for out of the public purse. This is very different from what happens in the
manufacturing sector, where productivity has improved dramatically, even without reform to
Mexico’s burdensome Labor Law. In sectors open to competition, the trade unions are limited as
to what they can demand. They understand what is at stake, and most have moderated their
stance accordingly. Even a combative trade union such as that of Volkswagen of Mexico knows
that the company can take its investment say to Brazil or back to Germany.
The Labor Law imposes many restrictions, but the biggest problems occur in sectors that
face little competition or that cannot go bankrupt because they are subsidized by the government.
Given the political clout of the trade unions, withdrawing subsidies that allow the firms to
survive is difficult. Even when this appears to have been achieved, a trade union can always
renege on its decision. Luz y Fuerza del Centro was already in the hands of liquidators when
Salinas halted the process and the government ended up absorbing the company’s liabilities. This
was apparently in compensation for a close relationship that had proved useful to his candidacy
when the oil workers union withdrew its support.
Conclusions
The challenges ahead are particularly complex, now having to confront also an unprecedented
world crisis and the short term costs of the influenza. Even if the US economy were to rebound
fast, which is not evident it will take place soon, the US will not have the spending capacity of
the last decades for some time. Mexico will need to diversify its markets and strengthen its
domestic markets. This is easy to say, but requires to make the economy more competitive. This
can only be achieved by following those major reforms pending, such as energy, labor,
regulatory, fiscal and educational, to mention the most conspicuous.
To make thinks more difficult, the country will be facing a dual challenge as a result of
the collapse of the price of oil, and the decreasing Mexican oil production. The first challenge is
fiscal. In 2008 oil income was slightly under 40 percent of total government income. This year
the government can cope with lower price, because it bought a hedge in case the price went
below 70 dollars per barrel. But next the fiscal pressure will require a reform capable of raising
at least 2 points of GDP, and not only prices will probably remain lower than in 2008, but
production is declining. Moreover, the decline in GDP is also pushing tax income down.
The second challenge is a more limited oil surplus. This will oblige the Mexican
economy to export more, although less oil income will lead to less currency appreciation.
Although oil prices might remain lower than in 2008, they are still high in comparative terms.
Transport costs are likely to remain high. This should help Mexico in its capacity to export to the
United States.
But to confront the challenges and capture any opportunity opened by the crisis, Mexico
has to pursue a series of reforms. This will not take place as long as Mexico is not prepared to
confront powerful interest groups. Trade unions and big businessmen are happy with the status
quo.
How can Mexico build a political coalition that will break with the prevailing equilibrium
that is obstructing greater growth and unduly favors those who have resources and organizational
power? Democracy should serve to unite the public against the special interest groups and can
propagate reforms beneficial to the majority in the medium term. This calls for strong leadership
with a clear strategy for standing up to these well-organized groups and with solid information
that would enable that leadership to justify its actions. It also calls for citizens ready to get
involved in the public policy debate and to take a stand in defense of their own interests.
In a democracy one tends to have the government one deserves. A lot can be said of
strengthening our political institutions to have more responsive authorities. However, at the end,
a more mobilized and informed society that punishes irresponsible politicians is the only way
out.
The current institutions, however, do not help. There is no immediate reelection in the
legislative and it is absolutely banned for governors and president. How can people punish the
elected ones? They can change the party they vote for, but it is an indirect punishment.
Reforming political institutions is thus also needed.
In the past Mexico proved it could organize itself to create an economic miracle. But this
was achieved in a non democratic political system that was trapped in a costly net of interest
groups that made the miracle unsustainable. This net of interest groups still haunts Mexico. Now
in a democratic society, tough decisions that are of general interest should be easier to undertake,
although this will require a more organized, well informed, and demanding society. But the
example of countries like Brazil show this is possible. If Mexico were to pursue successfully the
needed reforms, it would add the M to the BRICs acronym.
1
A draft of this paper was presented at: “In the Midst of a World Crisis, the New Global Role of the Brics
(BRIMCs?), and Brazil’s Opportunities (Crisis as an opportunity, using the action plan),” XXI National Forum,
Bndes, Río de Janeiro, May 18-21 of 2009.
2
Professor at the Political Studies Faculty of the Centro de Investigación y Docencia Económicas, Carretera
México-Toluca 3655, col. Lomas de Santa Fe, C.P. 01210, México, D.F. Email: [email protected]. The author
thanks Oscar Mendoza for his help. All errors are of course the author’s responsibility.
3
Pascual García Alba Iduñate and Jaime Serra Puche, “El financiamiento del desarrollo en México,” in Causas y
efectos de la crisis económica en México, México: Centro de Estudios Económicos, Colegio de México, 1984: 28..
4
. “Key Development Data & Statistics”. WTO, 2008.
5
WTO, “Table 2.B. Leading exporters and importers in world merchandise trade, 2007,” in International Trade
Statistics 2008
6
See http://reflexioneslibertarias.blogspot.com/2009/04/para-su-creador-los-bric-pueden.html and
http://www.esmas.com/finanzaspersonales/576088.html
7
Daron Acemoglu, Simon Johnson and James A. Robinson “Institutions as the Fundamental Cause of Long-Run
Growth,” American Economic Review, 95, 546-79, 2005; Stanley L. Engerman y Kenneth L. Sokoloff “Factor
Endowments, Institutions, and Differential Paths of Growth among New World Economies” NBER Working Paper,
2002; Stephen L. Parente and Edward C. Prescott “Barriers to Riches” Cambridge, MIT Press, 2000. Douglass C.
North y Robert Paul Thomas, The Rise of the Western World: A New Economic History, Cambridge University
1973.
8
Daron Acemoglu, “The Form of Property Rights: Oligarchic Versus Democratic Societies” NBER Working Paper
10037, 2003. El caso paradigmático de una élite que reparte beneficios para no ser rebasada es probablemente la
Alemania de Bismark, véase Otto Pflanze, Bismarck and the Development of Germnay. The Period of Unification,
1815-1871, USA: Princeton University Press, 1971.
9
Such a long time series might have a problem of confidence. In this case we have used the series constructed by
Maddison, probably the most accurate.
10
World Bank, The Growth Report: strategies for Sustained Growth and Inclusive Development.
11
Elaborado con base en los datos presentados en Angus Maddison, The World Economy: Historical Statistics
(2003), París: OCDE.
12
Carlos Marichal, “Imperial Tax State,” en Bankruptcy of Empire: Mexican Silver and the Wars between Spain,
Britain and France, Cabridge: Cambridge University Press, 2007.
13
World Bank, The Growth Report: strategies for Sustained Growth and Inclusive Development.
14
Lawrence R. Klein and Alfredo Coutiño, “The A Mexican Adjustment Scenario,” in Ensayo sobre aspectos
macroeconómicos de México, Mexico City: Instituto de Investigación Económica y Social Lucas Alamán, A.C.,
2000: 88.
15
Pascual García Alba Iduñate and Jaime Serra Puche, “El financiamiento del desarrollo en México,” in Causas y
efectos de la crisis económica en México, México: Centro de Estudios Económicos, Colegio de México, 1984: 39.
16
Centro de Estudios de las Finanzas Públicas de la H. Cámara de Diputados, con datos del Banco, México:
Inflación Anual, 1980 - 2009 (Base segunda quincena de Junio de 2002=100).
17
Miguel Angel Centeno, Democracy within Reason: Technocratic Revolution in Mexico. Pennsylvania: The
Pennsylvania State University Press University Park, 1997.
18
Carlos Elizondo, La importancia de las reglas: gobierno y empresarios después de la nacionalización de la
banca. Mexico City: Fondo de Cultura Económica, 2001..
19
International Monetary Fund, World Economic Outlook Database, April 2009.
20
“Producto interno bruto trimestral”, in INEGI, Servicio de Información Estadística de Coyuntura (SIEC).
21
Gustavo de la Rosa e Iván Sosa, “Se acerca del desempleo al peor nivel,” en Reforma , 16 de mayo de 2009.
22
Secretaría de Hacienda y Crédito Público
23
Lawrence R. Klein and Alfredo Coutiño, “The Mexican Financial Crisis of December 1994 and Lessons to be
Learned,” in Ensayo sobre aspectos macroeconómicos de México, Mexico City: Instituto de Investigación
Económica y Social Lucas Alamán, A.C., 2000: 58.
24
Secretaría de Hacienda y Crédito Público
25
Inegi, Encuesta nacional de ocupación y empleo, 2009.
26
Fabrice Lehoucq, Why Is Structural Reform Stagnating in Mexico? Mexico City: Centro de Investigación y
Docencia Económicas, 2006.
27
This section is a synthesis from: Carlos Elizondo, “Perverse Equilibria: Unsuitable but Durable Institutions,” in
No Growth Without Equity? Inequality, Interests and Competition in Mexico, ed. Santiago Levy & Michael Walton,
United States: World Bank Publications, February 26, 2009.
28
Lawrence R. Klein and Alfredo Coutiño, “The Mexican Financial Crisis of December 1994 and Lessons to be
Learned,” in Ensayo sobre aspectos macroeconómicos de México, Mexico City: Instituto de Investigación
Económica y Social Lucas Alamán, A.C., 2000: 61-2.
29
Centro de Estudios de las Finanzas Públicas de la H. Cámara de Diputados, con datos del Banco, México:
Inflación Anual, 1980 - 2009 (Base segunda quincena de Junio de 2002=100).
30
José AntonioCheibub, Presidentialism, Parliamentarism, and Democracy. Cambridge, U.K.: Cambridge
University Press, 2007.
31
Clark W.Reynolds, The Mexican Economy, Twentieth Century: Structure and Growth. New Haven, CT: Yale
University Press, 1970.
32
See Isabel Guerrero, Luis Felipe López-Calva, and Michael Walton, “The Inequality Trap and Its Links to Low
Growth in Mexico,” in No Growth Without Equity? Inequality, Interests and Competition in Mexico, ed. Santiago
Levy & Michael Walton, United States: World Bank Publications, February 26, 2009.
33
“Presupuesto de Egresos de la Federación para el Ejercicio Fiscal 2008”. Secretaría de Haciendia y Crédito
Público. http://www.shcp.gob.mx/.
34
Fabrice Lehoucq, Why Is Structural Reform Stagnating in Mexico? Mexico City: Centro de Investigación y
Docencia Económicas, 2006.
35
World Bank. Mexico: Institutional and Governance Review. Report 37293, MX. Washington, DC: World Bank,
2006.
36
Alma Hernández, “Mantiene Pemex a ociosos.” Reforma, December 28, 2006.
37
Alma Hernández, “Detecta Pemex posibles ahorros.” Reforma, December 29, 2006, Negocios.
38
World Bank. Mexico: Institutional and Governance Review. Report 37293, MX. Washington, DC: World Bank,
2006.
39
Gladys López Acevedo, “Teachers’ Salaries and Professional Profile in Mexico,” Working Paper 3394, World
Bank, Washington, DC, 2004.
40
The secretary general of the trade union is 41 years old and has belonged to the union for 22 years. According to
the collective labor contract, Article 64: “Any worker can request and obtain retirement provided he has completed
twenty-five years of service and is fifty-five years old, or provided that he has completed thirty years of service
regardless of age. By the same token, women workers can request and obtain retirement with 100% (a hundred
percent) of their basic salary, when they have completed twenty-five years of service regardless of age.” Thus in 10
years’ time, the secretary general will be able to retire on his full salary, which each year includes a Christmas bonus
equivalent to 50 days’ pay
(http://www.sme.org.mx/construccion_frame/UntitledFrameset-3.htm).
The Mexican Economy in the
Context of the World
Economic Crisis
Carlos Elizondo Mayer-Serra
[email protected]
XXI National Forum
Rio de Janeiro, Brazil
May 18, 2009
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Index
The Mexican Economy in Perspective
The Mexican Economy and the Crisis
The Immediate Reaction
Challenges and opportunities
Comparison of per capita GDP in China
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Porcentaje
Porcentaje
and Latin America with that of the United States 1820 – 2000*
*International dollar (1990).
Source: Maddison, Angus, The World Economy: Historical Statistics (2003), París: OCDE
Comparison of per capita GDP in China
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Porcentaje
Porcentaje
and Latin America with that of the United States 1820 – 2000*
*International dollar (1990).
Source: Maddison, Angus, The World Economy: Historical Statistics (2003), París: OCDE
Comparison of per capita GDP in China
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Porcentaje
Porcentaje
and Latin America with that of the United States 1820 – 2000*
*International dollar (1990).
Source: Maddison, Angus, The World Economy: Historical Statistics (2003), París: OCDE
Comparison of per capita GDP in China
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Porcentaje
Porcentaje
and Latin America with that of the United States 1820 – 2000*
*International dollar (1990).
Source: Maddison, Angus, The World Economy: Historical Statistics (2003), París: OCDE
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Growth in Developing Countries
GDP growth rate
1980-2006
Real GDP Share in
2006
total
1960-2006
Real
Per capita
Real
Per cápita
Rank
1960
Real GDP
1960
China
2092
25.4
9.8
8.6
7.7
6.1
5
70
Brazil
765
9.3
2.2
0.5
4.4
2.3
2
105
India
703
8.5
6
4.1
4.9
2.8
4
77
Mexico
Russian
Federation
666
8.1
2.6
0.9
4.3
2
3
94
373
4.5
-0.4
-0.2
-
-
-
-
Argentina
340
4.1
1.8
0.5
2.5
1.1
1
108
Turkey
261
3.2
4.4
2.5
4.3
2.2
-
-
Indonesia
219
2.7
5.2
3.6
5.5
3.6
8
18
Chile
96
1.2
4.9
3.3
4.3
2.5
12
14
Peru
71
0.9
2.3
0.4
3.2
0.9
10
16
Source: The Growth Report . Strategies For Sustained Growth and Inclusive Development. Statistical Appendix.
* Selected Countries
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
The Last Three Years
Consumer Prices 1
Real GDP
Current Account Balances
2
2007
2008
2009
est.
2010
est.
2007
2008
2009
est.
2010
est.
2007
2008
2009
est.
2010
est.
Brazil
5.7
5.1
–1.3
2.2
3.6
5.7
4.8
4
0.1
–1.8
–1.8
–1.8
China
13
9
6.5
7.5
4.8
5.9
0.1
0.7
11
10
10.3
9.3
India
9.3
7.3
4.5
5.6
6.4
8.3
6.3
4
–1.0
–2.8
–2.5
–2.6
Mexico
Russian
Federation
3.3
1.3
–3.7
1
4
5.1
4.8
3.4
–0.8
–1.4
–2.5
–2.2
8.1
5.6
–6.0
0.5
9
14.1
12.9
9.9
5.9
6.1
0.5
1.4
1
Movements in consumer prices are shown as annual averages.
2 Percent
of GDP.
* Source:
International Monetary Fund, World Economic Outlook Database, April 2009.
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Index
The Mexican Economy in Perspective
The Mexican Economy and the Crisis
The Immediate Reaction
Challenges and opportunities
Mexico´s perspectives
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
• U.S. contraction likely to sharply curtail Mexico's
growth
• Mexico faces global crisis, but from far stronger
position than in past
• Decline in remittances and lower international oil
prices
• Problems agravated by the influenza
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
United States & Mexico’s Growth
Annual Average
EEUU
México
2008
1.13%
1.38%
2009
-1.80%
-3.38%
2010
1.50%
3.00%
2011
2.66%
3.36%
2012
2.66%
3.36%
Predictions
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Current Account Deficit as a % of the GDP
Pronósticos
Predictions
Public Sector Debt: 1990-2010
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Predictions
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Income and Employment Growth
Inflation
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Mexico´s Growth
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
• In 2008: 1.3%1
• Expected GDP growth for the Mexican economy
in 2009: -3.8% 2
• After swine flu it could be between -4.3% to
-4.6% 2
• Expected GDP growth for the Mexican
economy in 2010: 2%3
1
Source: “Banco de Información Económica,” INEGI.
Source: Moody’s Weekly Credit Outlook, May 4, 2009.
3 Source: SHCP
2
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Index
The Mexican Economy in Perspective
The Mexican Economy and the Crisis
The Immediate Reaction
Challenges and opportunities
What Has Been Done?
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
• Mexico’s financial authorities have taken
measures to address liquidity strains in the
financial markets
• The financial system remains well
capitalized
Source: http://www.imf.org/external/pubs/ft/survey/so/2009/car032009a.htm
What Has Been Done?
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
• The flexible exchange rate has helped the
economy to adjust to the global crisis
http://www.imf.org/external/pubs/ft/survey/so/2009/car032009a.htm
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Counter-Cyclical Measures
Adopted by the Mexican Government
•
Employment and work benefits (US$1.5bn)
• Flexible use of retirement funds and increased government
contributions (US$1bn)
• Extended time coverage of social security health care for laid-off
workers (US$200m)
• Budget increase of the Temporal Employment Program
(US$170m)
• Employment Preservation Program (US$150m)
•
Households (US$7bn)
• Increased finance for housing acquisition and improvement
(US$6.5bn)
• Food Support Program (US$410m)
• Gasoline price fixation and 10% cut on LP Gas prices
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Counter-Cyclical Measures
Adopted by the Mexican Government
•
Business and Industry (US$11bn)
• Increased financing by development banks (US$9bn)
• Industrial electricity price cuts (US$620m)
• Discount on employers’ dues for social security (US$600m)
• Financing for Small and Medium enterprises (US$500m)
• Income tax incentives and discounts (US$500m)
•
Infrastructure investment (US$36bn)
• National Infrastructure Fund (US$25bn, five-year plan)
• PEMEX infrastructure (US$9bn)
• Finance from Development Banks (US$2bn)
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Counter-Cyclical Measures
Adopted by the Mexican Government
•
The overall government stimulus effort for
2008 and 2009 amounts to 2.8% of GDP.
•
BUT, no new structural reform.
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Index
The Mexican Economy in Perspective
The Mexican Economy and the Crisis
The Immediate Reaction
Challenges and opportunities
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Is the Crisis an Opportunity?
• Structural reforms needed
– Energy reform
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Mexican Oil Production by
Type (thousands barrels daily)
* Source: Pemex, “Petroleum Statistics,” Investor Relations.
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Is the Crisis an Opportunity?
• Labour reform
• Regulatory reform
• Tax reform
Structural Reforms?
• Reforming is not easy
– Divided government
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Divided Government
Chamber of Deputies, Mexico
Source: CIDAC (http://www.cidac.org) y Cámara de Diputados ( http://www.diputados.gob.mx)
Divided Government
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
Mexican Senate
Source: Alonso Lujambio, El Poder compartido. Un ensayo sobre la democratización mexicana, México, Océano, 2000,
p.75. y Cámara de Senadores (www.senado.gob.mx)
Mediocre Growth
CARLOS ELIZONDO MAYER-SERRA
May 18, 2009
• Without reforms
– Low growth equilibrum
– Complex but achievable tax balance
The example of Brazil