Mexico's new heights

There are a lot of promising trends happening in Mexico in the last couple of years. I have stumbled upon more positive texts on the changes in Mexico than in any other country. Thomas Friedman wrote in the New York Times a couple of weeks ago: 

"Something happened here. It’s as if Mexicans subconsciously decided that their drug-related violence is a condition to be lived with and combated but not something to define them any longer. Mexico has signed 44 free trade agreements — more than any country in the world — which, according to The Financial Times, is more than twice as many as China and four times more than Brazil. Mexico has also greatly increased the number of engineers and skilled laborers graduating from its schools. Put all that together with massive cheap natural gas finds, and rising wage and transportation costs in China, and it is no surprise that Mexico now is taking manufacturing market share back from Asia and attracting more global investment than ever in autos, aerospace and household goods."

I wrote about Mexico's trade policies once before, comparing them to the protectionism in Brazil and some other Latin American countries, and even though I warned that major institutional reforms are still to be done, their expansion of trade, rising oil production and booming manufacturing are sending positive signals on increasing levels of relative wealth and rising living standards in Mexico. And these positive spirits seem to be justified when one looks at the big picture of a once drug war stricken country.  

A particularly positive change was the one in office, even though it happened only a few months ago (December 2012). The win of Enrique Peña Nieto as the new President is certainly favourable in shaking up Mexico's unsustainable political concessions, corruption, and huge government orchestrated monopolies. Furthermore it will continue the predetermined path of a strong trade-oriented economy. It is a good example of what I emphasized back in April last year for Greece - political stability as the first pre-assumption for reforming an unsustainable economy. The second is a strong rule of law, and it is here where Pena Nieto is trying the most.

Several recent events point out to the changes in that perspective. One was the recent arrest of Mexico's leader of the Teacher's Union, Elba Esther Gordillo, one of the most politically influential and powerful figures in Mexico. She was accused of embezzling millions of dollars of the Union's funds for personal luxuries.  Even though this kind of news would trigger initial worry over worker's rights, it was a known fact in Mexico that the Union's President and chief officers were committing these types of frauds. The new regime has put a stop to this, which largely came as a surprise to the population who got used to seeing powerful persons escaping their punishment. 

The second example is an attempt to curb one of the countries biggest monopolies: telecommunications  thereby directly affecting the World's richest man, Carlos Slim. It plans to open it up to competition and break up the telecom empires controlled by Mr Slim. OECD has estimated that the lack of competition in the telecommunication sector is costing Mexico's economy $25bn per year due to high prices (see graph below). Acemoglu and Robinson divide a certain amount of attention to the success of Mr Slim, and all those alike him in their groundbreaking book "Why Nations Fail". They emphasize the difference in approaches that led to the enrichment of Mr Slim and his government initiated monopoly, in opposed to for example the enrichment of people like Bill Gates. While both Gates and Slim had similar incentives to control most of the market and establish monopolies, institutions in one country (the US) did not let that happen. Even when Slim tried to penetrate the US market in a similar way he does in Mexico, the US legal system prevented him from doing so. This example was a case in point how Mexico's failures are mostly institutional, meaning that Mr Pena recognized the right place of where to start. 

On the way to reforms

Source: Heritage foundation Freedom Index; Mexico

On the freedom index Mexico has improved mostly on open markets, meaning trade freedom and investment freedom, whilst still stagnating on the rule of law category (property rights and corruption). It is here where Mr Pena Nieto's government is expected to do the most. It's still a moderately free economy, but having a look at other similar reports, the trends seem to be positive. 

Its relatively high grades of investment and trade freedom are visible in the World Bank Doing Business Report, where it is ranked 48th (compared to the Latin American average of 97; in additional comparison  China is ranked 91st, Brazil 130th). It's business environment is relatively favourable, particularly in time it takes to start a business (doubling in efficiency from 2012 to 2013; only Chile is ranked higher) and get a construction permit. The problems still lay in registering the property and getting electricity, something that's mostly due to poor infrastructure. Overall in most of the categories Mexico seems to be improving. 

A similar pattern is visible in the WEF Competitiveness Report, where Mexico improved in ranking in the past few years, from 66th to 53rd. Corruption and high crime rates are still the most problematic factors recognized for doing business, in addition to inefficient bureaucracy, access to finance and restrictive labour regulations. There is still a lot of work left to be done and a lot of challenges left for Mexico and its President, particularly in the institutional environment (rule of law, property rights, fight against corruption and crime), but from the looks of it things are in motion. 

Source: The Economist

In the following video from the Economist, they praise his pace of reforms and welcome it as a big change from the previous administration particularly with respect to the accomplishments in the first three months in power. The government has focused on passing the "easier" reforms first, while leaving the tougher ones for later (which seems like a sound political strategy, as they first need to prove to the people that they are capable of reforming the system, and then ask once again for support to finish them and reach a new, more inclusive level of institutional development). 

The education reform and the breaking up of the telecommunication monopoly are the two reforms that people will respond to with highest praise. And it makes perfect logical sense to get public support for reforms first, before moving on to the really tough ones (like the fiscal reform).

The important factor is a broad-based public support in favour of reforms and against the vested interests. This looks like a good start of a new, strong Mexico. Let's just hope there Pena Nieto will have the courage and will to finish what he started, and maybe in a couple of years (more likely decades) we might see the reversed immigration from the US to Mexico.