Thursday,20 September, 2018
Current issue | Issue 1282, (11- 17 February 2016)
Thursday,20 September, 2018
Issue 1282, (11- 17 February 2016)

Ahram Weekly

The Mexican model

Al-Ahram Weekly

INVESTMENT in infrastructure and human capital, the rule of law and trade openness are three areas that former president of Mexico Felipe Calderon says have made a difference to the Mexican economy.

Calderon held office between 2006 and 2012. Speaking this week at a business conference organised by the American Chamber of Commerce in Cairo, he referred to a book authored by Daron Acemoglu and James Robinson, Why Nations Fail. The book argues that nations fail or succeed not because of their geography, culture, resources or value systems. Instead, it is the practices within society that create incentives for poverty or prosperity.

The book says it is political institutions that determine economic institutions. The authors divide political institutions into “extractive,” in which there is concentration of power, no rule of law and corruption, and “inclusive,” which involve society as a whole, thereby diminishing the possibility of exploitation and adding to transparency and freedom.

As far as the economy is concerned, an extractive economy would be one where income is extracted from society in favour of a particular group, where monopolies are rampant, where there is heavy bureaucracy and where there is organised crime. Inclusive institutions, on the other hand, would create incentives, reward innovation, and allow everyone to participate in economic opportunities.

For Calderon, the rule of law is an essential component of growth. He said that there is a 3.4 per cent difference annually in economic growth between countries that enforce the rule of law and those that do not.

Calderon spoke of how Mexico had implemented countercyclical policies following the financial crisis in 2009 because this had sharply reduced Mexican exports to the US. The countercyclical policies, which increased the budget deficit by three per cent, were aimed at expanding spending on social programmes and increasing health insurance coverage, Calderon said.

“We needed to do it to protect the poor,” he said, adding that the country also implemented a programme to preserve jobs in which the government had contributed a third of employees’ salaries. Once the crisis started to ease, Calderon said, there was a search for an exit strategy to lower the public deficit. New loans were declined and work was carried out to reduce the deficit by reducing expenditure and increasing revenues. Expenditures were lowered by eliminating petrol subsidies and closing down ministries and inefficient state companies. Taxes were also increased.

“It was imperative to provide signals to the market that Mexico was serious about reducing its deficit,” Calderon said. Many of the policies did not sit well with the wider population and had a high political price. “If we are paying a high political price, let us go all the way,” he said, adding that he had “bet on trade” and had signed dozens of free trade agreements reducing tariffs. He stressed that the core of international trade was inputs, not final products. “If you want to attract investors, do not put up barriers to inputs,” he said.

The Mexican government also focussed on boosting infrastructure through public-private partnerships. “The government alone could not do it, so the private sector was a crucial player in infrastructure development,” Calderon said, adding that such partnerships had resulted in increased investment in infrastructure, from three to five per cent of GDP. The government also focussed on investment in health care, expanding coverage from 60 million to 106 million people and offering better coverage packages.

Calderon said that he had worked to improve the business climate, making it more attractive by streamlining regulations and doing away with 16,000 laws, as well as reducing the time needed to start a business from 58 days to nine. He also gave greater opportunities to small and medium enterprises (SMEs), not by giving them money, but by putting up government funds as collateral so that the banks felt safe in lending to them. This had resulted in a 600 per cent increase in the loans given to SMEs in Mexico, he said.

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