A
Trial for Mexico: Free Markets or Fair Prices
By Kenneth Emmond
The growing demand for corn in
the making of ethanol has caused a price surge. And this month the effect spread to Mexican low-income families as the cost
of tortillas shot skyward.
To clamp a lid on their indignation
just days after they were saddled with a minimum wage increase that barely covers inflation, President Felipe Calderón intervened.
Last week he promised to release
government corn stocks at prices well below the market, and pressured the states to impose an 8.5-pesos-per-kilo price cap.
Tortillas, at least, must be affordable to all.
The tortilla incident shows that
even a rightwing government can be persuaded to improve fairness instead of allowing markets to determine all prices.
It’s a classic illustration
of society’s tradeoff between market efficiency and social equality. As tortilla consumers know, efficiency isn’t
always fair.
Market worshippers don’t
talk much about the equity-efficiency tradeoff, as economists call it, but its tentacles reach products ranging from tortillas
to houses. It moves beyond pure economics to what the discipline’s originators called “political economy,”
a term that recognizes implicitly that markets cannot solve all of society’s dilemmas.
Many wealthy people and conservative
economists prefer to focus only on marketplace economics.
The rich feel insulated from
any need for a more equitable system, and many conservative economists have simply dropped the “political” and
focus on the “economy.” They relegate government actions and other factors that interfere with free markets to
the status of “externalities” and “second-best solutions.”
The attractiveness of the market
approach lies in its efficiency but, just as you are more than the sum of your bank account, a nation is more than the sum
of its gross domestic product.
If the number of spaces available
in a top-flight university is limited, the market can decide who gets to attend — the highest bidders — with minimal
fuss. That leaves behind those who cannot bid high, even if their ability is superior to that of their wealthier competitors.
Worse, it’s not only frustrated
high-ability students who lose. Society loses, because it foregoes the superior contribution these people could make if given
the chance.
When the government intervenes
policy starts to get messy — and fairer. It might lower tuition rates, set high scholarly standards, or provide scholarships
to enable impecunious but gifted students to make full use of their talents.
That same tradeoff can be applied
to health care, interest rates, and many other socio-economic issues, including globalization.
If an economy is untrammeled
by regulation, money-laden foreign bidders will come in and buy up a nation’s most lucrative wealth-generating sectors.
Their success may help the economy grow but the new wealth will likely end up in few hands — unless it’s redistributed
by an equitable tax system.
That’s what happened to
Mexico’s banks. After the 1994-95 crisis the entire banking system was insolvent. Foreigners bought 90 percent of the
sector and, judging by reported returns, have done well.
Social policy can go to either
extreme. Markets play an important role in economic development. Stifling them with protectionism and excessive regulation
can discourage growth.
The plight of Petroleos Mexicanos
(Pemex), Mexico’s beleaguered government-owned oil monopoly, is a showcase of a sector so distorted by politics that
it cannot operate to reflect the realities of the petroleum market. Pemex desperately needs a dose of market efficiency, though
no one has found a way to administer it.
At the other extreme, allowing
the market to function without some “social engineering” can concentrate wealth, cripple the social structure,
and widen the rich-poor gap.
The equity-efficiency tradeoff
figures prominently in the argument over the minimum wage. The efficiency argument is that a hike in base pay distorts the
labor market, raises production costs, and even increases unemployment. The equity argument is that workers have a right to
decent remuneration for services rendered.
Often there is a short-term and
a long-term effect.
Returning to the university entrants,
many talented students whose education was subsidized will succeed, sometimes spectacularly, years after graduating, contributing
to society’s well-being and breaking down class barriers in the process.
Should a national government
favor the marketplace or equality? Some of each is needed. The Calderón government must decide where the market should rule
and where intervention serves society better.
Whether it’s trying to
help business compete in global markets or to ensure that more Mexicans have a better life, government must seek the best
policy mixture in business, education, health policy – and in the price of tortillas.
——————————
Kenneth Emmond, an economist,
market consultant and journalist who has lived in Mexico since 1995, is also a columnist with MexiData.info. He can be reached via e-mail at Kemmond00@yahoo.com.
