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Why Mexico's Economy Needs More Than Just A Balanced Budget

Policymakers have, for the most part, learned to avoid fiscal deficits. And yet, growth numbers (with the exception of certain states) have been stagnant at best.

A street vendor in Mexico
A street vendor in Mexico
Luis Rubio


MEXICO CITY — The big lesson from Mexico's crises from the 1970s to the "90s was that economic stability depends on balanced public finances. Every time there was disorder in the government's fiscal accounts — usually because of overspending that fueled public debt — the peso lost value and the public as a whole paid the price.

Most politicians of the period came to accept that you just can't play around with public finances. Indeed, economic stability is an essential precondition for the sustained and elevated growth that creates wealth, jobs and income. But what hasn't been recognized is that there's also been an odd contradiction in Mexico between fiscal responsibility and economic growth.

To different degrees, all of the administrations that have governed Mexico since the 1980s focused on creating conditions for high growth levels: by liberalizing imports, for example; opening the energy sector; and trying to improve the regulatory framework. And yet, the average growth rate continues to be a pathetic 2%.

The rate hides more than it reveals.

The rate hides more than it reveals, as some Mexican states — like Guanajuato, Querétaro and Aguascalientes — have enjoyed "Asian-style" growth rates, while others are stagnant at best. The overall lesson, nevertheless, is that for all their efforts, successive governments have failed to boost the country's economic performance, especially in those regions or entities, typically in southern Mexico, with an anti-developmental predisposition. The big question, then, is why?

My hypothesis is that two factors coincide to create this circumstance. On the one hand, in spite of so many reforms, the government has become an enormous drag in its role as regulator and purveyor of permits. Every day there are more regulations, red tape expands, administrative requirements multiply and inspectors prosper as never before.

Paying taxes is becoming increasingly complicated and for firms in general, the processes of paying taxes, meeting obligations or obtaining permits have become an enormous source of extortion from them. There are (practically) no politicians here without their "little sums' put aside for the next election campaign (in slipped into their own pockets), and who have not turned their positions into sources of extortion from anyone nearby trying to start a business, develop an investment or — God forbid — generate some wealth or jobs.

The other factor affecting the economy's poor performance is macroeconomic, and can be summed up in just one line: Fiscal stability has not coincided with economic growth. Specifically, the form the state has used to balance fiscal accounts has not favored either savings or investments. Instead of canceling useless, excessive or counterproductive projects and programs, the governments chose instead to kept extracting resources from society. In other words, instead of balancing the books by reducing spending, it has successfully boosted its revenues.

Rather than being a way to redistribute wealth within a context of vigorous economic growth, taxes have ultimately become a way of preserving the status quo and an impediment to significant growth. Add to that the dismal level of public investments and their low profitability, and the government becomes a drag on the economy, not a source of growth.

Taxes have become a way of preserving the status quo.

Behind this perversity, there's also the reality of our political system. Economic professionals — except those who have used, or abused, fiscal instruments and public taxes to further their political aspirations — have acted within the limits imposed by surrounding conditions. But the politicians, in contrast, exist for their own interests, and wield enough power to systematically preserve and feed these interests, regardless of the cost for the population. As such, the economic professionals — or technocrats as they used to be termed with disdain — can work to improve the economy only to the degree that political conditions allow it.

This is how bureaucratic and fiscal interests clash with economic development. While ordinary people have experienced less growth and worse development opportunities due to bureaucratic interests — and the extortion and corruption that is our daily fare — the state has imposed more and more complicated taxes just to function.

The incoming government, under president-elect Andrés Manuel López Obrador, promises a complete paradigm shift. Whether or how it fulfills that promise remains to be seen. But as a starting point, it would do well to address the issues outlined above and thus revisit the inefficient, tax-heavy, status-quo formula for balancing the budget.

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