The development of the Mexican economy during the last thirty years can be summarized in three charts. Figure 1 and Figure 2 show the evolution of GDP per capita from 1980 to 2014, both in absolute terms and in relationship with US GDP per capita. The last thirty years have been a conjunction of low and volatile growth for the Mexican economy. During that period the Mexican economy suffered from three major crises: the debt crisis of the eighties, the balance of payments and financial crisis in 1994 and the 2008 worldwide financial crisis. In the recent decades, low growth has been causing a widening of the gap between the US the Mexico, which implies a lack of convergence towards development countries.

The three critical junctures have implied important setbacks for the Mexican economy. While the debt crisis started in 1982, the Mexican economy recovered from it in terms of GDP per capita only in 1993. Indeed, during the eighties, multiple adjustment programs were applied in order to contain inflation and to repay public debt. These programs led to a major drop in real wages and to a contraction of the internal market, making Mexico more dependent on its exports and the worldwide economic context. The currency and financial crisis of 1994 implied the collapse of the banking sector, forcing the government to intervene in the financial entities. Although the economy recovered in terms of GDP per capita by 1997, the credit sector did not recover before mid-2000s. The collapse of global economy in 2008 implied a fall in terms of GDP (around 6%). Since then, economy has been less dynamic than before the crisis.

 

If we compare the last twenty years before the transition to democracy with the first twenty years under democracy, it is clear that, in terms of economic growth, there has not been too much of a difference between the two periods. During the period between 1980 and 2000, the average annual rate of growth (as GDP per capita) was 0.69 percent, while, between 2000 and 2014, the same indicator was 0.66 percent. And, although the first twenty years of democracy have brought a more stable economy than the one we had during the last 20 years of the authoritarian regime, stability has brought stagnation. Insufficient growth is one of the reasons behind the discontent with democracy registered in the opinion polls. This comes particularly evident if we look at the next graph.

As it was in 1992, in 2014, around half of the Mexican population lived under poverty of income, while around a fifth of the total population still lives in extreme poverty. The efforts to improve the living conditions of the poor have been thwarted by insufficient, which has been accompanied by stagnation of the real minimum wage, a slow growth of the mean wage, and a high degree of informality.

 

Why is the economic growth so slow?

 

There is not a unique answer to such a complicate question, and there are many hypothesis on what is curtailing growth in the Mexican economy. The hypothesis in which most part of government policy has been based is that the Mexican economy is plagued by inefficiencies in several key markets. Eliminating these microeconomic distortions through changes in regulation has been the course to go by the different Mexican governments from 1982 to the Peña Nieto Administration.

 

The first round of reforms focused on opening the Mexican markets to foreign products, while reducing the intervention of government in several markets. Starting with the entry of Mexico to the General Agreement on Trade and Tariff (GATT) in 1986 and continuing with the signing of the North America Free Trade Agreement, these reforms transformed radically the Mexican economy from one oriented towards the internal market to one focused on the exports. This implied a radical transformation, manufactures became the main Mexican product of export. In order to minimize state’s presence in the economy, reforms aimed at privatization – from TV stations to bicycle shops, and the banks. Moreover, a key strategy was to replace a net of general subsidies with targeted subsidies, which looked at the more vulnerable populations.

 

These reforms failed to galvanize economic growth. Poor implementation led to the creation of private monopolies, a fragile financial sector and an export structure, which is intrinsically dependent on imports. After these failures, the government enacted another round of reforms at the end of the nineties. The target was the pension system. The objective was to provide incentives for savings and investments by the private sector. Once again, a failure. Workers had too small income to save money. Voluntary savings never grew as expected. The pension system ended up to be underfunded.

 

The latest round of reforms looked at three key sectors: the labor market, the oil market and the education sector. Labor market reform aimed at reducing the cost for hiring new workers, incentives towards formality and the introduction of new figures in Mexican law. Like hourly wages. For the sake of strengthening production, the oil market reform has opened the sector to foreign firms. The reform of the education sector focused on the introduction of linked-to-contract evaluation mechanisms for the teachers. Despite proclaims, there is skepticism about the success of this program.

A different diagnostic emphasizes lack of investment as the fundamental cause of low growth in Mexico. Currently, investments represent around 20% of the GDP, which is far below the amount of investment of fast growing economies.

 

Why is investment so low?

 

For private investments, two factors limit its expansion: the high cost of credit and the overvaluation of the currency. The high cost of credit is in part caused by the structure of the Mexican banking sector and its regulation. Moreover, the government finds easier to fundraise in the small internal market. Currency overvaluation limits the profits of an high productive sector, such as the one of tradable goods. This disincentives investments, again. For public investment, the debt crisis drastically reduced its scope. For instance, deterioration and saturation have widened the infrastructure gap. Underinvestment in the poorest regions has widened the regional income gap and the reach of public service among the poorest ones.

As a result, since 2000, a formal political transition has not come together with a radical change in terms of economic outcomes. Once again, a substantial part of the Mexican population lives in poverty.