One of Mr. Fox’s most celebrated commitments during the campaign was to target high growth with price stability as the recipe for raising living standards. But now the president elect’s chief economic adviser and front-runner for finance minister, Luis Ernesto Derbez, has qualified those promises with a gradualist approach all too familiar to Mexicans. Mr. Derbez insists that the earlier projection of productivity-driven 7% annual growth will not be possible until 2004.
Mr. Fox’s political honeymoon provides a once-in-a-lifetime opportunity to immediately embark on the big-bang structural reforms required to lay the basis for sustained growth rates of 7% or more during the six-year term of his administration. The rhetoric of “it cannot be done” until later, and only if everything else remains equal, is a prescription for economic policy failure.
Mr. Derbez shares the conventional wisdom that Mexico is growing too fast and that internal demand must be quelled to avoid future imbalances. Mexico’s economy grew 7.8% in the first two quarters of this year — with consumer demand hitting an unprecedented growth rate of 11.9% — and is likely to close the year well above the 4.5% target. At the same time, inflation continues a mild downward trend, while the exchange rate has been stable partly as a result of new capital inflows. Fixed capital formation has increased by 11% on a year-to-year basis, as new plants and commercial facilities are erected. Foreign direct investment is projected to top $12 billion in 2000, compared to $10.6 billion in 1999.
The new administration’s official targets project a growth rate of 4% to 4.5%, a (non-adjusted) fiscal deficit of 0.5% of GDP, and an inflation rate of 7%, reflecting classic “austerity” logic designed to cool down the economy for fear of “overheating.” The champions of austerity claim that the fiscal gap must be eliminated come what may. Typically, this means new taxes and more vigorous tax collection, with the goal of wiping out the fiscal deficit. Mr. Derbez’s brand of “adjustment” advocates mechanisms to redistribute consumption patterns, via an elimination of tax exemptions on food and medicines, in order to target more funds toward social spending and a new program of micro-credit.
The source of fears surrounding “overheating” is the claim, heard everywhere from the central bank to IMF quarters to flashy analysts, that “private consumption surpasses the supply capacity of the productive plant.” If this trend continues, says this anti-growth chorus, imbalances will ensue. Well, so what? New capital flows feed into consumption, and investment-driven demand in excess of supply, in an open economy, translates into more imports and a rise in real purchasing power, which is exactly what’s happening. Reviving fears of trade deficits would condemn the country to mediocre growth in the name of false, albeit trendy, macroeconomics. As Manuel Sanchez, chief economist of BBVA-Bancomer, says, “Mexico needs good economic times, and this undoubtedly means running a trade deficit.”
The myth of overheating would have some basis in reality if Mexico’s current growth were the outcome of expansionary fiscal and monetary policies. But inflation seems in check. In fact, if by fiscal adjustment Mr. Fox’s advisers mean a decrease in public spending and largess, economic growth is not likely to cool at all. Such a course would lower Mexico’s country risk and attract new investment, while also freeing resources, which can then find productive destinations in the private sector. What then would the austerity proponents suggest to head off those dreaded “imbalances?” New taxes? Or perhaps a weaker currency?
A monetary policy designed to aggressively lock in price stability would fuel new investment, reduce interest rates and invigorate credit markets, all of which translate into growth opportunities. So far, however, Mr. Fox’s economic team has bowed to the anti-growth gradualism of the central bank and has also abandoned earlier enthusiasm for radical monetary reform. Indeed, occasional talk is heard of targeting a parity that “stabilizes external performance” — whatever that means.
The policy challenge is not to construe good times as evidence of bad things to come, but to enhance the supply-side capacity of the economy via a second wave of reforms: wholesale tax reform, liberalization of the electricity and energy sectors, and labor law deregulation, all amid a climate of credible price stability. But the first target of Mr. Derbez’s agenda suggests merely a reorganization of tax policy to enhance public coffers and hence facilitate a spending spree on social programs.
This may strike the right political chords of an anti-poverty tune, but it is a departure from the high-growth and aggressive structural reform framework proposed in the long 1,000-day campaign to the presidential residence at Los Pinos. A recent study by the World Bank suggests that the most effective policies to mitigate poverty are high, sustained growth and rapid disinflation. Indeed, implementing the large list of pending reforms could arguably double annual foreign direct investment to $24 billion — as Mr. Fox has also proposed. Yet this would set off alarm bells for those concerned about external statistics, currency appreciation, a rise in real salaries, and more of that nasty consumer demand that ultimately reflects a higher standard of living. Perhaps convincing Standard & Poor’s to postpone imminent investment grade status would help the cause of austerity.
Of course, Mr. Fox and his team could be posturing conventional economics to facilitate a smooth transition of power and seal approval for the 2001 budget. So one hopes. So far, however, mixed policy signals and a dangerous rhetoric of austerity have tempered early enthusiasm for a bold statement in favor of high growth and price stability — a combination that Mexicans have not seen in the past 30 years. This explains the historic, popular clamor that the president-elect heard in his first public appearance after winning the elections: “don’t fail us.”