I have noticed that most people without a direct connection to Mexico don't get how the Mexican economy works. They assume that it is more or less just like the American with problems caused by corruption and poverty. So many Americans from the right and the left offer solutions that cannot apply to Mexico. It is even more ironic when the proposed solutions have been Mexican policy for years, and in some cases, sometimes decades.
Mexico has been a free-market country for about 20 years now. The policy has failed mainly because free-market thinking ignores politics and the power of monopolies or quasi-monopolies.
Mexico has been historically poor. Towards the end of the Colonial period, in the late 18th century, Mexico enjoyed an economic boom. The affluence from this period encourage criollos, children of Spaniards in the Americas, to seek independent. After independence, most of the 19th century was spent in a constant state of civil war, which produced a big foreign debt. Mexico's fortune changes with WWII. Since the U.S. industry was focused on the war effort, Mexico's had to substitute for products that were no longer coming from the U.S. This industrialized the the country. The post-war world economic boom brought Mexico into a period of prosperity from the 1940 to 1970s known as the "Mexican Miracle."
The era of prosperity ended in the 1970s with the world recession. The next two presidents of Mexico, governing from 1970 to 1982, made massive economic mistakes. Besides the world economic recession, these two presidents were trying to secure political control of the country through spending programs and nationalizations. The reckless and unsustainable spending created conditions that exploded in the 1980s, strongly devaluing the Mexican currency and triggering hyperinflation, which at one point was beyond 100%.
A new political class of economists rose in the 1980s to take care of the dire economic situation. Most of them were educated in Ivy League schools in the U.S., and most of them believed in free-market or neoliberal solutions. In Mexico this translated into keeping inflation low through price control of salaries, privatization of state companies, courting foreign investors, and arranging free-trade agreements such as NAFTA. Poor tax collection, a feature of Mexico since its independence, was never seriously addressed since it was an informal way of granting low taxes. These have been the economic policies of Mexico for about 20 years now.
According to theory, Mexico should be thriving now, but in reality it isn't. What went wrong?
One of the biggest problem with the free market theory is that it consistently ignores the role of politics and economic power in their models. It assumes competition. It assumes endless capacity for investment whenever there is an opportunity. And most importantly, it ignores the power of quasi-monopolies in the market and in politics.
The Mexican reality doesn't ignore this. Let me illustrate how the power of money Let's meet Carlos Slim, the owner of Telefonos de Mexico (Telmex) to see how the real world behaves. Carlos Slim was more or less a born businessman. With the help of his family, he was able to make enough investments to have $400,000 by his mid-twenties. With this money, he began buying all kinds of companies during the "Mexican Miracle" era of prosperity. The more money he had, the more money he could invest, and over the decades he owned all kinds of businesses. And he made a brilliant business decision when he took advantage of the 1982 crisis and bought many businesses when people were pulling away from Mexico.
In the late 1980s, Mexico starts selling public businesses, with the telephone company being one of the most dramatic cases. Had the Mexican government been sincere in creating a competitive telephone market, they would have broken up the company. Instead, in what would become a pattern with Mexican privatizations, it was sold as a single entity. So the state monopoly became a private monopoly. And, as part of the deal, Telmex would have 7 years to enjoy total monopolic power.
Carlos Slim, well connected with the political elite, as anyone with enough money in Mexico would be, won the bid. Although favoritism can't be proven, personal connections in Mexico play a huge role. The number of times that people close to the political elite win privatization bids is frequent enough that Forbes said that Mexico had "crony-capitalism." And it is a great feedback system: the more money a person has, the more friendships with politicians, and these in turn bring greater opportunities to make more money.
So Carlos Slim bought a monopoly which was protected from any competition for 7 years. And of course Slim used the power that a monopoly offers. He kept the rates high. They were the highest in the world, in fact. And these rates were charged to a country which, at the time, the minimum wage was $5 a day.
Once the 7 years were over, he continued to use the power of his monopoly to keep away the competition by charging high line use rates to competitors. And he used the cash from Telmex to take a big market share of the cell phone sector. The cell phone company spun out from Telmex practically gave away handheld sets at lower prices to grab a greater share of the market. They are know the market leader.
Today Telmex controls 90% of the land line market. Mainly thanks to Telmex, Carlos Slim is the third richest man in the world, behind Bill Gates and Warren Buffet.
Carlos Slim is more or less an archetype of what has happened in Mexico for the last 20 years. Businessmen with connections with politicians running monopolies. There are other Mexicans in the Forbes lists as well. And like Slim, they have strong connections with people in power and take advantage of monopolistic power to extract high prices from the Mexican consumer.
There has been no trickle down of wealth. High prices for services means that most income keeps trickling up. During the last 20 years, salaries have frozen, more or less. Adjusted to inflation, most people are earning less money today than what they earned in 1990. And the little money that they have contributes to the wealth of the richest Mexicans.
The competition that free-market theories promised never arrived. The lower prices never arrived. The higher salaries never happened. Why? Because what we have been calling "free"-market is nothing more than pro-rich wealth protectionism. Not pro-business: A pro-business policy would encourage competition, which means that wealthy people today may risk losing their money if a competitor comes up with a more desirable, more efficient, or cheaper alternative. The free-market policies, instead, protect the richest companies, the companies with the greatest market shares and the personal wealths of the people owning these companies.
And this is too true in Mexico.
A profile of Carlos Slim, source of the figures quoted.
http://members.forbes.com/...
Free trade agreements spur immigration
http://onlinejournal.com/...
The failures of NAFTA in its conception. An interesting contrast between the EU and NAFTA when it comes to building infrastructure for the poorer countries.
http://www.progress.org/...
An almost score card on how millionaires did in Latin America last year. Overall, they did very well.
http://www.latinbusinesschronicle.co...
Latin American Billionaire list
http://www.forbes.com/...
Other News from Mexico
- Fixing Mexico's tax system Mexico's tax collection is a joke. And most people like it that way. The poor can't really pay any taxes since they are barely subsisting; the rich can afford it, but they also helped get Calderon in power. And the Mexican elite seem even more averse to taxes than Americans. According to this story, the main reason for this broken system is that oil has provided so much revenue for the Mexican government. But the end is near: the main oil production station is declining its output.
"The world’s 13th-largest economy raises tax revenue about as effectively as Sri Lanka and Kazakhstan as a percentage of its gross domestic product, World Bank data indicate. The rate of evasion by individuals and businesses is running at about 50 percent, according to some estimates. Mexico’s tax collectors are so ineffective that the government has resorted to gimmicks, including prize giveaways, to entice citizens to pay their share."
http://www.fortwayne.com/...
- Pemex in danger. This article outlines some of the problems that Petroleos Mexicanos, Pemex, faces in the near future, which are the threat of privatization, lower output from its oil wells, and the danger of a sudden fall of oil prices.
http://www.signonsandiego.com/...
http://www.bloomberg.com/...
- Private retirement accounts. Calderon is ready to create a pension system with private retirement accounts.
http://www.thestar.com/...
- Another piece legitimizing Calderon The San Francisco Chronicle ran a story last week on how well Calderon is doing. They praise is strong use of presidential powers and his flashy drug war campaign. Well, he deserves the praises after a great total of 3 months in office. I found the following nugget towards the end of the story. Another call for privatizing the Mexican state-run oil company.
"Another major test facing Calderon is pushing through an energy reform package to aid the world's fifth-largest oil producer -- Petroleos Mexicanos. Despite high oil prices and healthy exports, hefty taxes have kept the state-run company from investing in exploration, research and upgrades. Moreover, the oil company is constitutionally barred from joint ventures with foreign investors, leaving it starved for investment and know-how."
http://www.sfgate.com/...
- Calderon's illegal(?) immigrant relatives Calderon said that he may have illegal immigrant relatives in the U.S. What is Calderon trying to accomplish with this sob story? Is he trying to win over Bush through his heart? Obviously Calderon doesn't know that Bush was the man who made fun of a death row woman pleading for her life. If that didn't move him, Calderon's illegal alien relatives are not going to move him either. It also puts him in a bad negotiating position when dealing with immigration. Bad PR move in my book.
" Yes, I have relatives in the United States, and what I can say is that they are people who work and respect their country [the U.S.], residents who pay their taxes to their government, people who harvest the vegetables that you probably eat, people who serve food at restaurants, people who contribute to the prosperity of the United States, people who have children and who want to educate them to respect their new land and who fondly remember Mexico,"
http://www.dallasnews.com/...
- War on Drugs in Mexico seized $206 M. Calderon declares victory on his efforts after 100 days. Mission accomplished?
"Federal agents seized $206 million believed to be tied to the methamphetamine trade and detained seven people at a luxury home in one of Mexico City's most upscale neighborhoods, officials said yesterday."
http://www.concordmonitor.com/...
http://www.signonsandiego.com/...
* First gay marriage in Mexico City.
"Love now has one less obstacle," said Mexico City lawmaker Victor Hugo Cirigo, one of the biggest supporters of the new statute, which activists have been seeking for the past five years"
http://www.thestar.com/...
- And legalize abortion in the first trimester can be next?
"A bill that would allow abortions in the first three months of pregnancy is making its way through the capital city's assembly and supporters say they have well over the majority needed to pass it despite threats of protests by the Catholic Church. The measure is expected to pass within months and the first legal abortions could happen later this year."
http://www.reuters.com/...