Mexico: Accelerated Growth with Equity for the XXI Century
A New Partnership with the Private Sector
Vicente Fox Quesada
- Mexico is an interesting country where different policies to economic development have been tried, and then abandoned when their costs become simply unsustainable. Hence, along the past 50 years we have passed from economic models which predicated growth with stability, growth with distribution, administration of wealth, neoliberal policies, to the current stabilization-cum-semi/neoliberal program .
- Heralded as succesful for brief periods of time, our pattern of economic development has proven the maxima that "you can fool all the people for a short period of time, some of the people for all time, but not all the people for all of the time" Indeed, after early successes, the incapacity of the political class system to let go their privileges, created conditions which demonstrated that the wrong economic system was being applied in Mexico, and changes were required to return to the pattern of growth needed to maintain political stability in the country .
- With particular force, the past 17 years have witnessed the inability of the ruling political class« economic and social policies to provide Mexico with a pattern of social and economic betterment for the mexican family which was emphasized as the objective of the Government in turn. Indeed, as we are all aware, the country has been unable to reach a pattern of sustainable growth which enables it to resolve its unemployment and poverty levels.
- Once again, and to my surprise, Mexico«s economic program is being heralded as the model to be followed by other emerging economies despite its results in the past six years:
- low real GDP growth averaging only 2.1% per annum,
- 1/3 of Mexico«s population in conditions of extreme poverty (less than i dollar per day),
- income distribution which has severly deteriorated, and
- an informal sector substantially larger than in 1994 because whereas the government claims that its policies have about 500,000 jobs per year, we claim that they have generated about 500,00 unemployed persons per year (most of them working in informal or US provided jobs), as the annual entrants into the labor foce close to 1 million persons in our nation.
- This is the reason why, we have concluded that Mexico has to find the set of economic policies which will ensure that a target of 7% annual growth rate of GDP can be achieved in a sustainable manner. We believe it possible because:
- In the same period of our "neo-liberal" policies (1982-1999), many countries in East Asia have demonstrated that growth rates of 7% are possible if the right partnership between private and public sectors is established and,
- Because we are convinced that the reason why Mexico has only reached 2% average annual growth since 1982 and increased dramatically its poverty and unemployment levels, can be attributed to the lack of a credible framework of economic and social policies which consider the private sector as a partner in development.
Allow me to explain the reasons fo this latter belief:
Nothwithstanding their explicit statements, Mexico«s "reformist" governments of the past two decades have:
- demonstrated an ambivalence towards the role of the private sector, which has affected the country«s capacity to attract levels of investment required to maintain a sustained growth path.
- failed to support education programs which could have put Mexico«s educational standards at the level of our major competitors, rather than at the current levels of just an average of 7 years of formal education, and
- brought about political instability as the result of increased corruption levels, lack of committment to combat organized crime, and their stubborness to hold to power, rather than to propitiate a stable democratic transition which is the norm in our major partners in the continent.
- We are ready to demonstrate our committment to create a new partnership which will bring for Mexico accelerated growth with equity in the 2000-2006 period.
II. Our Objectives
I adhere to the new thought that the correct economic and social model of development is one in which the correct synergy between public and private sectors is attained. A synergy which utilizing the dynamism of markets promotes private sector activities, but with the public interst in mind.
Such a program of policies must envision:
- a balance between competitive market operation of private sector firms and its regulation by the public sector (not interference by the public sector),
- a balance between the economic rights to be granted to our private sector and the social rights to our community, and
- a frontal attack to corruption and insecurity in our daily life.
To fight poverty and unemployment, and bring about the creation of sustainable jobs in the private sector we have set to ourselves the following objectives:
- Implement a program of economic and social policies which will provide the required incentive framework to attain growth rates of 7 % per year
- Create an enabling environment for the private sector which will permit the latter to create sustainable jobs in the economy
- Increase private enterprises productivity by improving labor«s technical capacity, providing public infraestructure in support of private sector activities, and enhancing the economy«s capacity to absorb and utilize better and newer technology
- Establish a new partnership between private and public sectors in which the first one plays the role of engine of the economy, while the second one ensures the framework for efficient market operation
III. Our Program
The new partnership which I propose is based on five major policy programs:
- A credible macroeconomic framework which will guarantee that the fundamentals of our economy will remain solid and stable, and a level of international reserves which will guarantee our international solvency
- A program of structural reforms which will complete the sectorial transformation needed to improve the economy«s competitiveness
- An improved legal and regulatory framework under which the private and public sectors interact with clear and transparent rules
- Creation of opportunities to incorporate the informal sector into the market economy
Definition of a new role for the public sector apparatus
- Centrality of Fiscal Discipline
Mexico«s fiscal discipline is based upon a fragile combination of unsustainable fiscal revenues dependent on petroleum prices, strong reductions in expenses and a total disregard for the public sector«s responsibility to provide adequate social and physical infraestructure in support of Mexico«s long-term growth.
The fiscal policies of the past 17 years, have left the country with :
- an unstable fiscal equilibrium subject to the vagaries of international petroleum prices
- a debt service level which takes 4 % of GDP and 18 % of total public sector expenditures in 1999, and
- an infrastructure deficit which affects the competitiveness of the private sector
To make a credible partnership with the private sector, the next Government of Mexico will need to create the internal restraints which assure that fiscal discipline will be maintained and made independent from the vagaries of external events in the petroleum industry, while at the same time that this fiscal discipline will not impede the Government from fulfilling its responsibility of providing an adequate human and physical infraestructure which will create the conditions to ensure the country«s competitiveness in a global environment and better standards of living for all mexicans.
My administration will:
- promote a tax reform whose objectives are:
- to simplify tax rates
- increase incentives to private saving and investment, and
- reduce the weight of the debt service on public sector finances
- Maintain fiscal discipline and improve tax administration to
- reach a fiscal surplus in the fourth year of the administration, and
- simplify the tax collection process through administrative simplifications of the current tax code to encourage larger participation of all mexicans in the fulfillment of their tax obligations
- Become a true partner in development by defining a program of public expenditures which
- provides the essential elements to help private sector activities compete in a global environment by addressing the infrastructure gap which the country currently faces in the areas of tellecommunication, roads, ports and energy sectors, and
- implements an eduaction program geared to reduce present low levels of formal education, and helps increase the human capital base which will permit Mexico attain rates of labor productivity higher than those of its present trading partners and competitors
- Importance of financial stability
The events of the past three years have demonstrated the need to have monetary discipline and an exchange rate policy which permits financial stability in the economy. They have also highlighted the curcial issues yet to be resolved in the banking sector if this is to fulfill efficiently its crucial role of financial intermediation between savings and investment needs of Mexico.
My administration will:
- demand from the Central Bank the fulfillment of its constitutional obligation to fight inflation following a monetary program whose objective will be support of the fiscal policies earlier mentioned in its objective to reach as quickly as possible single digit inflation rates,
- an exchange rate policy whose objective will be to create the conditions to bring domestic interest rates to levels comparable with international market conditions, and
- a financial support program to provide the basis to capitalize productive firms as an essential piece of the required financial program to solve the current banking crisis which Mexico faces.
The ambivalence of Mexico«s Administrations in the past 16 years towards private sector participation as a full partner in Mexico«s development has left the country with:
- Unfulfilled investments in sectors such as electricity, petrochemicals and the transportation network which now threaten Mexico«s future growth and competitiveness in a global environment
- A weak financial sector which cannot fulfill its role to mobilize savings efficiently and hampers private sector investment
- Lower than expected levels of Foreign Direct Investment which would complement in a stable manner, the country«s saving needs for sustainable growth
To make a credible partnership, the next Government of Mexico will need to finalize the truncated reform program in sectors where business opportunities exist, and to provide the investment framework to attract increasing levels of Foreign Direct Investment.
Our policies will be:
- To take to term the program initiated by prior administrations, particularly addressing the challenges posed to open the petrochemical and electricity sectors of the economy, transforming State-owned companies into public market companies to be owned in participation with its employees, but regulated in its market behavior by the public sector
- To finalize the financial sector reform, providing the required incentive and legal framework to attract new investment which will capitalize the commercial banks of the country, promote the development of new financial instruments to develop Mexico«s capital markets, and to put the development banks in the right framework to support sustainable lonbg-term growth in the economy.
- To promote reforms in the legal framework for labor relations, which will protect the rights of mexican workers while bringing our labor legislation up to the standards of our NAFTA trading partners
Legal and regulatory reforms
The existence of a stable and efficient legal and regulatory framework is a prerequisite for the credibility of the new government«s program of economic policies. Investment, commercial, and labor codes need to be updated, as they are crucial ingredients in promoting investment stability and private sector credibility. In addition, appropriate measures to improve the effectiveness of the judicial system are indispensable.
My administration will be committed to:
- improve the legal and regulatory framework by reviewing and updating Mexico«s commerce, investment and trade codes, and competition legislation
- enact transparent and efficent regulatory codes which will provide a clear "modus operandi" to minimize discretional powers in the public sector agencies regulating trade, investment and labor relations in the country, such as the Antimonopoly Commission, Telecommunications Commission, and Banking Commission.
- streamline procedures for the establishment of business in the country, to reduce entry and exit costs of doing business in Mexico
- fight corruption in the public sector by establishing rules and regulations to increase public servants« accountability, greater transparency in the administration of public services and limiting the discretional powers of the administration, and
- stop organized crime and the proliferation of narcotraffic activities in México
Opportunities for all
It has been said that "like social exclusion at the top, exclusion at the bottom tends to be self-reproducing. I like to say that the vanguard must be responsible to ensure that the retaguard remains within close limits of distance in order to avoid such an situation of social injustice that Mexico«s political stability would be jeopardized.
The model applied in Mexico during the past decade, by putting an excessive trust in market forces but not reviewing that the conditions for a competitive environment existed, impeded the creation of conditions under which a real private sector/public sector partnership would flourish.
Worse yet, because it did not create the conditions to include all segments of Mexico«s entrepreneurs, it forced many mexicans into the ranks of the informal sector as the only means to find ways to support themselves and their families. Working in the informal sector has thrown many mexicans into a life of meager existence without opportunity to enter into the formal market structure which should be the right way to permit private sector entrepreneurship to fluorish to achieve our stated goal of creating sustainable formal jobs.
The current economic model has proven its incapacity to provide the correct environment to bring those in the informal sector into formal, market-oriented private investments. A new model is needed. One which will build the new partnership I propose. The only one which by forging the private/public sector partnership will be capable of achieving the twin objectives of accelerated growth with equity.
To bring these mexicans into the market oriented economy where private sector activity will fluorish, my government will:
- provide a program of market based credit with integrated support services which will help transform informal activities into formal ones, and which will permit the mainstreaming of those activities into a market-oriented economy
- implement a program of fiscal and administrative reforms to simplify and eliminate barriers which currently difficult the entry of those working in the informal sector into the formal market, as well as to fulfill their fiscal and legal obligations
- support the growth and expansion of micro- and small-enterprises to guarantee better job opportunities to all mexicans, and
- balance regional opportunities to ensure that the fruits of our international integration are equally spread around all México
Reengineering of the Public Sector
A true partnership for development implies that the role of Government is one in which this actively participates in the promotion of private sector competitiveness to help the latter face the international challenge of an open economy. In addition to maintaining economic stability to reduce inflation and interest rates, my Government will implement WTO-friendly policies.
Four important ones which immediately come to mind are:
- incentives to promote non-traditional exports taking advantage of WTO acceptance of these instruments until the year 2003
- support to private sector trade with incentives to provide required credit and technical knowledge elements,
- support for the globalization of medium- and small-sized firms, and
- the most important one, support to technology transfer which will permit Mexico compete in equal terms in the new global economy dominated by the presence of cybernetic aspects by providing the incentive framework that will increase education and technology investments to 9 % of GDP by the middle of my administration«s term
The package of policies outlined before, intends to create a new partnership with the private sector interested in investing in Mexico. Its intended impact is to achieve as a minimum, rates of economic growth of 7 % per annum within a context of sustainable production in an increasingly globalized economy. The target rate is ambitious, I know. It is also the minimum required to make substantial progress in reducing Mexico«s unacceptable high levels of unemployment and poverty as we enter the XXI century.
I believe that such an ambitious target is not outside our grasp, if we can forge the new partnership between private and public sector which I propose. But I also know that if a reform package is not credible, it will not achieve its intended impact. That is why I propose a partnership based in market rules, clear and transparent legislation to regulate our interaction, and above all, the correct incentive framework to provide real international competitiveness to private enterprises operating in Mexico.
Establishing the credibility of an economic package proposed by a new Government in Mexico will not be an easy task. The "sexenio" crisis which have marked the last political transitions work against such credibility. Worse yet, the fact that my administration will be the first one to come from Mexico«s opposition may add skepticism to an already biased feeling of potential crisis in the transmission of power.
In evaluating the credibility of the reform program I have just proposed to you, I encourage you to look at the following three factors which should make of it a credible one:
- the reputation we have achieved along almost four years of governing the State of Guanajuato during which we have
- helped the private sector create 142,000 new formal jobs in the State, the largest jobs increase in the country, reducing in the process the unemployment rate to 1.4%, one of the lowest in the nation
- implemented a guarante of education program through which each and every citizen of the State has been given equal opportunities to finish the level of education to which he or she formally aspires, and
- reduced the Criminality Index in the State by 40% in relation to the level we found at the start of our Governorship
- the fact that we are aware of the failure of past economic policies and the need to reform many of them to provide an enbling environment for private sector partnership in development, and
- our origin from outside the system which has left the legacy of inefficiency and corruption hard to combat unless you have no attachements to the past
Thanks for your attention