The Mexican Economy: Poised for Take‐​Off?


Mexico's new president, Vicente Fox, assumed office this month with anenormous accomplishment already under his belt: the end of the rulingparty's 71-year monopoly on power. Fortunately, Fox knows that the fall ofMexico's “Berlin Wall” will not by itself address his country's economic andsocial needs. "The only way to eliminate poverty," the new leader rightlyinsists, "is to generate wealth." In short, Mexico needs high growth.

If Fox manages to achieve the 7 percent growth he is promising, it willcontrast sharply with the 1990s. That decade may have seen widespreadeconomic reforms, but per capita growth averaged a meager 1.5 percent. Andthe high poverty rate remains virtually unchanged at about 38 percent of allhouseholds. The sorry performance is largely due to the disastrous fall ofthe peso in 1994-95 -- from which Mexico is still recovering -- which wasitself due to the ruling party's irresponsible monetary and fiscal policies.

The rise of a more transparent and accountable political system may helpcurb the abuses that have created the country's stubborn poverty rates. Morepromising still is Fox's apparent recognition that self-sustaining highgrowth rates can only be achieved through greater economic freedom.Numerous studies support a pro-reform, high-growth vision for Mexico. Themost comprehensive is the Fraser Institute's “Economic Freedom of the World”report, which finds a strong relationship between wealth and economicfreedom. Out of 125 countries, the 25 most free earn an average per capitaincome 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. Toillustrate, Harvard economist Robert Barro notes that per capita income inthe United States grew at an average 1.75 percent per year from 1870 to1990, making Americans the richest people in the world. Had this countrygrown just one percentage point slower during that time period, U.S. percapita income levels would be about the same as Mexico's. Had the growthrate 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 allowpoor countries like Mexico to achieve within one generation the kind ofeconomic progress that it took rich countries 100 years to achieve. Acountry that grows at 7 percent, for instance, doubles its income every 10years.

Growth based on economic freedom, rather than on development planning orwealth redistribution, especially benefits the poor. That recipe has helpedChile do more to reduce poverty than most other developing countries. From1987 to 1998, 7 percent growth allowed Chile to reduce its poverty rate from45 percent to 22 percent. A recent World Bank study covering 80 countriesover four decades also found that growth is the most powerful way to reducepoverty.

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 ofcountries in terms of economic freedom tend to live about two decades longerthan people in the bottom 20 percent. Lower infant mortality, higherliteracy rates, lower corruption and greater access to safe drinking waterare also correlated to increases in economic liberty. Indeed, the UnitedNations' Human Development Index, which measures various aspects ofstandards of living, correlates positively with greater economic freedom.

Because this may be the first time since the 1970s that Mexicanelection-year politics did not produce a currency crisis, Fox can takeadvantage of a stable and growing economy to initiate a series ofhigh-growth reforms. For example, the state-owned electricity monopoly,which faces an annual investment deficit of $5 billion, has become abottleneck for development. To meet his high-growth promise, Fox should at aminimum deregulate that sector. The oil industry, also run as a governmentmonopoly, 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 reducingwasteful spending -- would vastly increase the wealth of Mexico anddramatically improve the living standards of the poor.

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