Swimming with sharks in Mexico

Denise Dresser is Professor of Political Science, Instituto Tecnológico Autónomo de México.

This article was received from Project Syndicate, an international not-for-profit association of newspapers dedicated to hosting a global debate on the key issues shaping our world.

By Denise Dresser

MEXICO CITY – As the saying goes: when the tide goes out, you find out who has been swimming without a bathing suit. Few countries have emerged as naked from the receding waters of the global economic crisis as Mexico. Saddled with an economic contraction of 8% of GDP, higher than any other Latin American country, Mexico is also slipping in the global competitiveness index, lags behind in key social indicators, is being downgraded by investment ratings agencies, and faces the prospect of declining oil revenues, owing to a dramatic drop in production.

According to recent official data, 50.1 million Mexicans – out of a total population of 104 million – live below the poverty line, and 17.5 million do not have enough money to eat. So a country that has managed to produce Carlos Slim, reckoned to be the second wealthiest man in the world, produces millions of others who scrape by on two dollars a day. Mexico has long considered itself the leader of Latin America, but Chile, Colom-bia, and the rising regional giant, Brazil, are increasingly leaving it behind.

Over the past 20 years, oil functioned as a type of life jacket for Mexico’s economy. It hid economic distortions, allowing successive governments to postpone needed structural reform as it financed the status quo. Mexico was able to float along, buoyed by billions of dollars of oil revenue, without having to swim more quickly or forcefully than its competitors in the sea of emerging markets.

But now that oil production at Pemex, the state owned oil monopoly, is plummeting, the country faces some hard truths that the oil bonanza obscured. The government had become too dependent on a non-renewable resource, and therefore did little to deepen or widen the tax base. Moreover, the manufacturing sector had become too dependent on US-driven export demand, and the population had become too dependent on remittances from emigrants working in the US.
The global financial crisis thus revealed the Mexican economy’s inability to innovate, promote investment, create jobs, or provide conditions for social mobility. The fault does not lie exclusively in President Felipe Calderón’s timid counter-cyclical measures, or in the country’s social policy, or in the drop of manufacturing exports, or in the US financial crisis. Mexico’s essential problem in achieving accelerated economic growth lies elsewhere.

Over the past 20 years, the usual culprits seem to be low labour productivity, bad macroeconomic management, and divided governments that make legislative consensus almost impossible. But the fundamental explanation lies in a crony capitalist system with too many vested interests to maintain. Government after government has prioritized the preservation of corporatist loyalties over the promotion of economic growth and emphasized clientelist distribution over entrepreneurial innovation and creation of a level economic playing field.

Mexico is trapped by a dense network of rent-seekers and monopolies in sectors that are crucial for economic growth, including telecommunications, energy, transportation and financial services. This network operates on the basis of political favours, collusion, regulatory capture, and the maintenance of privileges that the government offers in public-sector unions in return for political support.

As the new book No Growth Without Equity? Inequality, Interests and Com-petition, edited by the prominent economists Santiago Levy and Michael Walton, argues, vested interests are capable of blocking changes that would make the economy more productive and efficient. There are too many unions, monopolists, and bureaucrats that behave like hungry sharks, accustomed to feeding off oil revenues and appropriating the extraordinary wealth that Mexico produces but does not share in an equitable and democratic way.

Regrettably, the promotion of economic growth has not been a priority for either the Calderón administration or that of his predecessor, Vicente Fox. For too long, government officials have tinkered with Mexico’s economic structure through piecemeal reforms that seek to ensure political stability, but that do not address the key obstacles to greater innovation and competitiveness.

The results have become increasingly obvious and painful: an economy that has suffered more severely in the global crisis than its neighbours to the south; a rent-seeking business elite that is unaccustomed to competition; public and private monopolies that no one seems to have the political will to dismantle; and corporatist pacts that siphon off public resources to unproductive unions, thwarting productivity and growth.

What the current crisis has proved is that Mexico cannot continue to float, ignoring its nakedness. It needs to rethink the fundamentals of an economy and political system in which entrenched interests have become ‘veto centres’ for reform. Otherwise, when the tide comes back in, Mexico will find itself struggling to survive in shark-infested waters.

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