CEPR – CENTER FOR ECONOMIC AND POLICY RESEARCH
By Mark Weisbrot, Lara Merling, Rebecca Watts, and Jake Johnston*
In December 2012, leaders of Mexico’s then most prominent political parties agreed on the “Pact for Mexico” in the Chapultepec Castle in Mexico City. It was billed as charting a new path for Mexico and its economy, and was signed by the largest political parties at that date: President Enrique Peña Nieto of the Institutional Revolutionary Party (PRI); Jesús Zambrano Grijalva, national president of the Party of the Democratic Revolution (PRD); María Cristina Díaz Salazar, interim president of the Executive Committee of the PRI, and Gustavo Madero Muñoz, national president of the National Action Party (PAN).1
This paper briefly examines whether there has been progress toward the Pact’s goals since it was signed, and whether any measures taken since then — including current economic policies — are likely to help Mexico break out of its long economic slump. In the twenty-first century, Mexico has ranked 18th out of 20 Latin American countries in the growth of its income per person.
It is clear from the available data that there is little, if any, progress toward the goals put forth in the Pact. For example:
• The Pact promised to increase growth to more than 5 percent annually. Real GDP growth averaged just 2.4 percent annually, and does not appear to be making progress toward the 5 percent goal. Over the same period, real per capita GDP growth averaged only 1.4 percent annually.
• The Pact promised to increase investment to over 25 percent of GDP. Gross fixed capital formation fell from 22.3 percent of GDP in 2012 to 20.5 percent in 2017.
• The Pact also promised to reduce inequality: the income share of the top 10 percent, already high at 34.9 percent in 2012, increased to 36.3 percent in 2016. Meanwhile, the share of income received by the poorest 10 percent remained the same at just 1.8 percent
• The Pact promised to reduce poverty. The national poverty rate has seen a slight drop between 2012 and 2016, from 45.5 percent (of population) to 43.6 percent. However, this was not enough to lower the absolute number of people living in poverty, which rose very slightly to 53.4 million in 2016, from 53.3 million in 2012.
• Public investment in state oil company Pemex was about 2.0 percent of GDP (312 billion pesos) in 2012, and fell to 0.9 percent of GDP (191 billion pesos) by 2017.
• The government’s oil revenue collapsed, falling from 1,386 billion pesos in 2012 to only 827 billion pesos in 2017, a fall from 8.8 percent of GDP to 3.8 percent of GDP. This is a very large negative fiscal shock.
• On the positive side, underemployment has come down somewhat from 8.4 percent in 2013 (yearly) to 6.8 percent in the first quarter of 2018. (In Mexican statistics, underemployment is a much better measure of the state of the labor market than unemployment — see below.) However, the economic growth that reduced underemployment was driven mainly by consumption, which accounted for an average of 76.9 percent of real GDP growth from 2013 to 2017.
There are a number of reasons to believe that the failure to achieve any significant progress toward the Pact’s goals in the first five years is not simply a result of insufficient time, but rather the continued application of a flawed set of policy choices. Among the reasons:
• The government engaged in a fiscal consolidation plan in which spending fell from 24.8 percent of GDP in 2014 to 20.1 percent of GDP (projected for 2018). This is a very large decline in government spending, something not seen for example in the last 70 years in the United States.
• The cyclically adjusted primary fiscal balance, which attempts to adjust for the business cycle, tightened by 2.6 percentage points during this time.
• The government’s commitment to further fiscal consolidation makes it very difficult for it to make the public investments it might need in infrastructure, education, and research and development in order to deliver on the Pact’s promises to increase growth or reduce inequality or poverty. All of these levels of public investment are currently quite low.
• Beginning in December 2015, the Mexican Central Bank raised interest rates quite aggressively, more than doubling the rate of 3 percent to 7.5 percent by February 2018. There is evidence (see below) that this may have been much more monetary tightening than needed.
• Mexico’s hyperliberalization of its financial markets has made it particularly vulnerable to contagion and economic shocks from the world economy, and especially from the United States — upon which it also depends for 80 percent of exports.
Mexico was once a fast-growing developing economy, with its income per person nearly doubling between 1960 and 1980. It thereafter went into a long slump and has never come close to recovering its prior rates of growth and development. This paper argues that vitally important policy choices have been responsible for this long-term failure.
Mexico currently faces serious downside risks from the global economy, as the US Federal Reserve is on track to raise interest rates four times this year, and more in 2019. The Fed’s interest rate hikes can have a severe impact on the Mexican economy if it draws away sufficient capital flows. This was seen in the 1994–95 peso crisis, where Mexico lost 9.5 percent of GDP in a downturn that was triggered by the Fed’s cycle of interest rate hikes at the time; and in 2013, when the country’s hyperliberalization of financial markets also made it vulnerable to the Fed’s tapering of quantitative easing in 2013. These hyperliberal financial markets make Mexico more vulnerable than it otherwise would be to turbulence in international financial markets that may already be beginning in this Fed tightening cycle.
Thus Mexico, under the current long-term policy regime described above, is committed to paying down the public debt when growth picks up even slightly; and when there are storm clouds on the horizon (which also include the turbulence of current relations with the United States, and the uncertainty of NAFTA renegotiation), fiscal and monetary policy become even more of a drag on economic growth. Mexico is therefore caught in a trap of low investment and low growth, without making the necessary public investments in infrastructure, research and development, or education. Without such investment, it cannot maintain its international competitiveness (even in US markets with respect to China), boost long-term productivity growth, or even maintain the necessary fiscal revenues from Pemex — not to mention reducing poverty or inequality.
1 The only major party that isn’t associated with the Pact is Morena, which was only formally created in 2014. Andrés Manuel López Obrador, the 2018 presidential candidate for Morena, has criticized the Pact and advocated for a more developmentalist economic program, including some industrial policy and a somewhat expanded social safety net.