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Mexico Must Boost Investment and Reduce Inequality to Get Out of the Rut of Slow Growth

A study published by ECLAC’s Subregional Headquarters in Mexico explores the long-term trends in that country’s economy.

1 September 2016|News

The Mexican economy must significantly increase investment, especially public investment, and reduce inequality if the country wants to get out of the rut of slow growth in which it has been stuck for decades, according to a recent study published by ECLAC’s Subregional Headquarters in Mexico.

In the report, entitled Trends and Cycles of Fixed Capital Formation and Productive Activity in the Mexican Economy, 1960-2015 (in Spanish only), ECLAC consultants Juan Carlos Moreno-Brid, Jamel Kevin Sandoval and Ismael Valverde analyze investment and its relationship to productive activity from a long-term perspective, and offer policy recommendations to invigorate economic growth.

The authors distinguish two stages in the evolution of the Mexican economy: one lasting from 1960 to 1981, in which the development model was centered on State-led industrialization, and another from 1988 to 2015, marked by a series of reforms oriented towards prioritizing nominal macroeconomic stabilization and reducing the State’s role in the economic sphere.

The study indicates that 30 years after the economic reforms that the government of Miguel De la Madrid (1982-1988) carried out to tackle the fiscal and balance-of-payments crisis stemming from an oil market collapse in the early 1980s and closed access to international financial circuits, important achievements have been made—such as low inflation, a narrow fiscal deficit and a rise in manufactured exports. But serious shortcomings persist.

These include slow economic growth, greater income and wealth concentration, the deterioration of the labor market, and little progress in the fight against poverty. This has translated into poor conditions of material well-being and high vulnerability for a vast majority of the population.

In relation to Mexico’s Gross Domestic Product (GDP), the document states that in the 1960s and 1970s the economy grew at an average annual rate of more than 6%. In 1982-1987 it stagnated as a result of the dual balance-of-payments and fiscal crisis and the fiscal adjustment measures taken to confront it. Its rebound has been weak and, in addition, has been losing strength over time. During 1988-1994, real GDP grew 3.1% annually; this figure fell to 2.7% in 1995-2000, and 2% in 2000-2008, well below the high rates experienced in Southern Cone economies due to the commodities boom. In 2009, Mexico’s drop in growth (-4.7%) was the steepest in the region. Although the following year it expanded 4.5%, it soon lost steam. The annual average rise was barely 2.6% in 2010-2015, and 2016 growth will be lower than that.

Meanwhile, investment grew in 1960-1981 at an average annual rate of 8%, a couple of points above that of GDP. In 1982-1987 it suffered a severe decline (-7%), with a solid recovery (6.9%) between 1988 and 1994, but that pace was not sustained. During the rest of the 1990s investment increased by an annual average of 3.9%, and in 2000-2008, by 3.6%. This figure plunged -9.3% in 2009 and in 2010-2015 investment grew at an average annual rate of 2.4%, below the pace of GDP.

According to the authors, two fundamental changes in the country’s economic policy are needed to reinvigorate growth and investment: first, a fiscal reform based on a social commitment to a renewed orientation towards the modernization and expansion of infrastructure; and second, a repositioning of the State as a legitimate and central political actor, in coordination with the private sector, in the design and implementation of an economic policy for development.

In addition, the specialists stress that, as ECLAC has reiterated, economic growth and reduced inequality are complementary, rather than opposed or sequential, goals. To achieve them, it is crucial to simultaneously implement policies to transform the productive structure and to redistribute income in a more progressive way in favor of those who have the least, they add.

The document concludes saying that in the global economy’s current conditions—marked by the slow growth of international trade—the fight against inequality is an essential instrument for strengthening the domestic market and providing another engine to drive growth in the country’s productive activity and in employment. “Putting inequality at the center of macroeconomic policy concerns and forging a commitment to investment for development requires a new fiscal compact, which cannot continue to be the eternal pending matter in our society,” it concludes.

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