The Mexican Economy: Poised for Take-Off?

Mexico’s new president, Vicente Fox, assumed office this month with an enormous accomplishment already under his belt: the end of the ruling party’s 71-year monopoly on power. Fortunately, Fox knows that the fall of Mexico’s “Berlin Wall” will not by itself address his country’s economic and social needs. “The only way to eliminate poverty,” the new leader rightly insists, “is to generate wealth.” In short, Mexico needs high growth.

If Fox manages to achieve the 7 percent growth he is promising, it will contrast sharply with the 1990s. That decade may have seen widespread economic reforms, but per capita growth averaged a meager 1.5 percent. And the high poverty rate remains virtually unchanged at about 38 percent of all households. The sorry performance is largely due to the disastrous fall of the peso in 1994-95 — from which Mexico is still recovering — which was itself due to the ruling party’s irresponsible monetary and fiscal policies.

The rise of a more transparent and accountable political system may help curb the abuses that have created the country’s stubborn poverty rates. More promising still is Fox’s apparent recognition that self-sustaining high growth rates can only be achieved through greater economic freedom. Numerous studies support a pro-reform, high-growth vision for Mexico. The most comprehensive is the Fraser Institute’s “Economic Freedom of the World” report, which finds a strong relationship between wealth and economic freedom. Out of 125 countries, the 25 most free earn an average per capita income of $19,644, compared with $2,518 for the 25 least free. Likewise, freer economies grow faster than less free economies.

The dramatic impact of economic freedom and growth cannot be understated. To illustrate, Harvard economist Robert Barro notes that per capita income in the United States grew at an average 1.75 percent per year from 1870 to 1990, making Americans the richest people in the world. Had this country grown just one percentage point slower during that time period, U.S. per capita income levels would be about the same as Mexico’s. Had the growth rate been just one percentage point higher, average U.S. income would be $60,841 — three times the actual level.

The silver lining of underdevelopment today is that high growth rates allow poor countries like Mexico to achieve within one generation the kind of economic progress that it took rich countries 100 years to achieve. A country that grows at 7 percent, for instance, doubles its income every 10 years.

Growth based on economic freedom, rather than on development planning or wealth redistribution, especially benefits the poor. That recipe has helped Chile do more to reduce poverty than most other developing countries. From 1987 to 1998, 7 percent growth allowed Chile to reduce its poverty rate from 45 percent to 22 percent. A recent World Bank study covering 80 countries over four decades also found that growth is the most powerful way to reduce poverty.

Economic freedom is strongly related to other measures of progress as well. The Fraser Institute study found that people living in the top 20 percent of countries in terms of economic freedom tend to live about two decades longer than people in the bottom 20 percent. Lower infant mortality, higher literacy rates, lower corruption and greater access to safe drinking water are also correlated to increases in economic liberty. Indeed, the United Nations’ Human Development Index, which measures various aspects of standards of living, correlates positively with greater economic freedom.

Because this may be the first time since the 1970s that Mexican election-year politics did not produce a currency crisis, Fox can take advantage of a stable and growing economy to initiate a series of high-growth reforms. For example, the state-owned electricity monopoly, which faces an annual investment deficit of $5 billion, has become a bottleneck for development. To meet his high-growth promise, Fox should at a minimum deregulate that sector. The oil industry, also run as a government monopoly, should be deregulated as well.

Other major reforms — including establishing property rights for the poor, reducing the informal economy and labor costs through deregulation, strengthening the rule of law, reforming the tax system, and reducing wasteful spending — would vastly increase the wealth of Mexico and dramatically improve the living standards of the poor.

If Fox can accomplish those goals, the 21st century really will be “the century of Mexico,” as he asserts.