Monday, May 21, 2007

World Bank Diagnoses Mexican Economic Problems

By Allan Wall

Economic growth in Mexico is in just about everybody's interests. It would benefit Mexico and its people, the Mexican political system, and the United States as well.  

Though the fundamentals of the Mexican economy are solid, a greater dynamism that would provide more and better-paying jobs seems to elude the country's economy.

The World Bank has just concluded a diagnosis of Mexico's economy, and its problems. The study, entitled "Democratic Governance in Mexico: Beyond the Capture of the State and Social Polarization," was headed up by the Bank's Yasuhiko Matsuda.

The document lists 11 problems in the Mexican economy that impede the country's development.      

1.   The Competitive Environment — Mexico's economy has bottlenecks that impede economic growth, with public and private monopolies that limit economic competition. So the World Bank recommends curbing the influence of interest groups that promote such monopolies. It's a good suggestion. However, as the Bank document itself points out, there are "untouchable" interest groups in the country that don't want that to happen. 

2.   Taxes and Tax Law — Mexico has a complex tax system and tax bureaucracy. Nevertheless, tax evasion is rampant — it's been estimated the country has a 40 percent tax evasion rate. So the system clearly is not working. The government makes up the shortfall by utilizing the oil monopoly PEMEX as a source of revenue — which in turn takes funds away from oil development.

3.   Regulatory and Investment Environment — It costs a lot of time and money to start a business. This in turn encourages corruption and discourages entrepreneurship.

4.   Education — The Bank report recommends more funds for education.  Of course, just throwing money at a problem doesn't solve it, because there are other problems in Mexican education such as the SNTE, the teacher's union, said to be the most powerful union in the Western Hemisphere.  As happens in many countries, teachers' unions are more concerned with protecting their own privileges than truly reforming education.

5.   Commerce and Transport — The Bank document points out that Mexico has high costs in importation and exportation, and for transportation.  Reducing such costs would help economic development.

6.   Corruption — Corruption is a part of Mexican society, and on one level it exists to grease the wheels of progress.  Corruption is a shortcut used to speed up a bureaucratic process.  But in the long run, widespread corruption is a detriment to the economy.  Long and costly bureaucratic procedures need to be reduced anyway (see number 3 above).

7.   Innovation — Investment in technology is low in Mexico. And this is related to problem #1. Generally, Mexican businessmen get rich through political connections, not technical innovation.

8.   Finance — The report states that monopolies impede healthy competition. Well, that gets us back to problem #1 again, doesn't it?

9.   Energy — According to the World Bank, the costs of natural gas, electricity and gasoline are among the highest in the world. And this in a country that is constitutionally dedicated to the proposition that mineral wealth is the property of "the people”! 

10.  Labor Market — Mexico's labor law is rigid, and counterproductive. It's hard to fire workers. Rather than protecting workers, as the law was designed to do, it discourages employment and encourages employers to come up with ingenious tricks to save money. For example, some schools dismiss their teachers each semester and rehire them the next, so they won't accumulate seniority.

11.  Macroeconomic Environment — On this question, the Bank says Mexico needs continuity in its policies.

This World Bank report is a good summary of Mexico's obstacles to greater growth. Though it's a new study, it repeats the same problems analysts have been pointing out for quite some time.

The Mexican government has failed to deal with these problems. Though the solutions are rather clear, enacting them would be difficult due to strong vested interests and deep-rooted political traditions.

No monopolist wants to lose his monopoly, so powerful entrenched interests can be expected to oppose reforms.

Mexico's liberal constitutional traditions militate against reform in the areas of petroleum and labor law.

Rather than deal with these big problems, the Mexican elite has taken shortcuts to keep Mexico's economy afloat — such as encouraging never-ending emigration to the U.S., a policy that causes more problems than it solves for both nations.

Nevertheless, problems presented in the World Bank report are there and await resolution.  One might quibble about the details, but that's what political debate is for. The fundamentals are sound.

What are needed are courageous and pragmatic Mexican politicians who are willing to take the bull by the horns and do what's right for Mexico.

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Allan Wall, a MexiData.info columnist, recently returned from a tour of duty in Iraq.  He currently resides in Mexico, where he has lived since 1991. He can be reached via e-mail at allan39@prodigy.net.mx.