Latin American Perspectives: blog: Political Report # 1351 On the Eve of National Elections, Mexico's Economy Struggles to Emerge from Decades of "Economic Failure," Report Concludes

by Center for Economic and Policy Research (CEPR)

Washington, DC - Five years after leaders of Mexico's then most prominent political parties agreed on a "Pact for Mexico," Mexico's economy is mired in a "trap of low investment and low growth," and imperiled by liberalization of financial markets that makes it especially vulnerable to the effects of interest rate increases by the US Federal Reserve, as well as global turbulence in financial markets.

These are some conclusions of a new research paper from the Center for Economic and Policy Research (CEPR) being released just ahead of Mexico's national elections on Sunday, July 1. The report, "The Pact for Mexico After Five Years: How Has it Fared?" concludes: "the country's persistent sluggish growth, poverty, and inequality are rooted in a set of important economic policy choices that have been made consistently for a long time."

"It is clear that the Pact for Mexico has failed to produce the economic gains that were promised," CEPR co-director and lead author of the report Mark Weisbrot said. "But it's worse than that: the current government and policymakers are committed to a set of economic policies that have failed for decades and don't look any more likely to succeed going forward."

The report looks at overly restrictive fiscal and monetary policies, as well as a lack of public investment, as important contributors to Mexico's long-term economic failure. In the twenty-first century, Mexico's growth in real income per person has placed it 18th of 20 Latin American countries.

The report examines Mexico's economic progress under the Pact, and finds "that there is little, if any progress toward the goals put forth in the Pact." Real GDP growth averaged just 2.4 percent annually instead of the over 5 percent goal in the Pact. While the Pact promised to increase investment to over 25 percent of GDP, Gross Fixed Capital formation actually fell from 22.3 percent of GDP to 20.5 in 2017. Inequality increased, with the income share of the top 10 percent going from 34.9 percent in 2012 to 36.3 percent in 2016. The share of the bottom 10 percent remained at a meager 1.8 percent of income. And the absolute number of people living in poverty ticked up slightly, from 53.3 million in 2012 to 53.4 million in 2016.

While Mexico's close economic ties have long made it vulnerable to any US economic misfortunes, the new CEPR report notes that even without a US recession, the Fed's interest rate hikes can have a severe impact on the Mexican economy if it draws away sufficient capital flows. This happened with the 1994-95 peso crisis, when Mexico lost 9.5 percent of its GDP in an economic downturn triggered by the Fed's cycle of interest rate hikes. The report also notes that Mexico's hyperliberalization of financial markets made it vulnerable to the Fed's tapering of quantitative easing in 2013.

The CEPR report traces Mexico's disappointing economic progress back to decades of policy choices, including NAFTA, which it says "helped lock in a set of inappropriate economic policies that began in the 1980s, and added new ones."

"Mexico is caught in a trap of low investment and low growth," Weisbrot said. "When economic growth picks up even slightly, the government is committed to paying down the public debt; and when it faces downside risks, as it does today, fiscal and monetary policy become even tighter.

"Mexico will likely remain stuck in this trap until it makes the necessary public investments in infrastructure, research and development, and education that will enable it to restore normal economic growth and development. Mexico's next government, whoever heads it, should consider a new policy regime."