Oscar Wilde famously wrote that “to lose one parent may be regarded as a misfortune, but to lose both looks like carelessness”. It would be worthwhile to ask what the famous Irish writer and poet would have said of the investment levels that characterize the Mexican economy. If there is something that unites all Mexicans beyond parties and beliefs, it is the urgency for achieving high and sustained economic growth rates. Similarly, most economists coincide that investment is key, if not its only source, for growth. For this problem not to have been duly attended to, something must be rotten in Denmark. Or, as Wilde would have said, for such carelessness.
But it has not been due to lack of effort. In reality, from the end of the sixties –when the economy began to decelerate after nearly four decades of sustained growth-, all incumbents presidents have attempted to raise the growth rate. Some did this by getting into debt and exacerbated public expenditure, others through liberalizing the economy, and yet others, by means of diverse political reforms oriented toward consolidating sources of trust and confidence for entrepreneurs and investors. Many of these attempts and efforts are exceedingly commendable and some have become solid and reliable sources of growth, as illustrated by the export sector, which two decades ago simply did not exist. But, despite these successes, it is evident that the growth problem has not been resolved.
It wouldn’t be something new to affirm that there persists a world of obstacles to investment, impediments that surely explain one part, perhaps an important part, of the low levels of private investment. Some of these appertain to history, property rights, arbitrary acts by the government, lack of leadership, and, primarily, an irrepressible tendency to change the rules every time something bugs a government official. Allthisrevealsan acute institutional weakness that lies at the heart of the six-year cycles of yore: when presidents (and now, governors) achieve winning over the confidence of the population, their period of governance yields better economic returns. This story is well documented, but there are limits to the explicative capacity of the theme of credibility, above all because with the North American Free Trade Agreement (NAFTA) its relevance waned.
NAFTA’s core objective was to consolidate the credibility of rules in investment matters. That is, the government that promoted it understood that private investment did not flow precisely due to the problem of trust, which generates an institutional weakness that allows all civil servants to re-invent the wheel when they get up on the wrong side of the bed. With the clear and permanent rules inherent in NAFTA, as well as its credible dispute-solving mechanisms, investment would flow without surcease and growth would be sustained. At least that’s what the theory was.
In practice it’s been twofold: on the one hand, investment has flowed with no end in sight, which explains, to a great degree, the strength of the export sector. On the other hand, export-oriented investment benefits the internal market very little; thus, its economic impact is much less that it could be. That is, NAFTA resolved the problem of the economy with respect to the exterior, but did modify its internal dynamic. There we find the persistence of ways of producing and distributing goods and services that have nothing to do with what is happening in the rest of the world. There the Mexican economy continues to be closed and protected, products and services tend to be highly priced and inferior in quality, and businesses continue not adapting themselves to world-class competition.
This is not the moment to enter into the causes of this dichotomy, but the tangible fact is that we have two very different economies. The main consequence of this is that there is no liaison between the export sector’s hypercompetitive economy and that of the internal market. In contrast with other countries, the multiplier effect of exports on internal economic growth is much less in Mexico than in the U.S. or in Brazil: while every exported dollar adds 1.3 dollars of growth in Mexico, the number is 2.3 dollars in Brazil and 3.3 dollars in the U.S. The question is why.
When one hears innumerable business leaders speak of productive chains, it is evident that they are talking, at least conceptually, about this circumstance: the need to link the internal with the export economy. However, almost three decades after the liberalization of imports, we inevitably have to conclude that these chains to which private sector personages refer no longer exist and are not those that are required today. Without doubt, liberalization broke with the then-existing productive chains because it allowed new suppliers to enter the system. These new suppliers made it possible for many companies to become competitive, and thus capable of competing with the imports and to export. Domestic suppliers who did not regroup lost out because they were incapable of competing due to lack of the ability or desire to attempt it.
From this perspective, it would appear evident that an erroneous focus has prevailed in economic policy throughout this entire time: the hope has been that the Mexican private sector will do what it has not been able to accomplish in decades. The theory that the industrialists would become the suppliers of the exports, as occurred in Korea, simply did not happen in Mexico, for whatever reason. We can continue to regret what does not happen, or we can recognize the nature of the problem.
But the concept continues to be valid: Mexico urgently needs an industry of suppliers. This “new” industry must develop and be promoted under the rules that exist at present: that is, without protection, but with the express objective of raising the national content in order to generate more growth and more jobs. The greater the amount of goods produced in Mexico, the greater our capacity for export diversification, because we then will find ourselves within the possibility of complying with the rules of origin inherent to the free trade agreements with Europe and Asia that, currently, we do not. The evident implication of this is that the industrialists of the future will not be, in general terms, those of the past: they will be those who invest in order to become hypercompetitive and to connect with the large exporters. Many of these will be domestic, many foreign. The point is to produce in Mexico to make Mexico rich.
Investment is indispensible to growth. The missing ingredient is the adequate emphasis of the economic policy in order to achieve it.