176
Managing Openness
country’s credit rating prevented a greater mobilization of this fiscal space. Monetary policy could also have been loosened earlier and more aggressively. The central bank’s target interest rate was increased by 75 basis points in the second and third quarters of 2008, at a time when developed economies were well into the process of aggressively cutting interest rates (see, in particular, the case of Australia, Canada, and the Republic of Korea, countries with inflation-targeting regimes similar to Mexico’s). Inflationary pressures, resulting largely from the increase in commodity prices in the first half of 2008, and fears that these pressures would lead to an upward revision of inflation expectations by economic agents were the main reason that the Banco de México increased the target interest rate (see Banco de México 2008a). Later, when in the first quarter of 2009 the central bank began reducing its target interest rate in the face of the sharp contraction of economic activity, it did so less aggressively than other developing countries with inflationtargeting regimes (such as Brazil, Colombia, and Peru). The successful attempt to reverse the depreciation of the peso, after the exchange rate reached a peak of about 15 pesos per dollar in early 2009, is also questionable. With fiscal policy subject to a balanced-budget rule and monetary policy focused exclusively on price stability, the exchange rate is practically the only automatic stabilizer that the economy has when confronted by external shocks to aggregate demand. A comparison between Canada and Mexico illustrates the overall role of the policy response in explaining the severity of the recession. As shown in table 14.4, both countries have nearly identical degrees of openness and concentration of their exports in the U.S. market. Yet, the recession was far more severe in Mexico than in Canada, where the fall of Table 14.4. A Comparison of Selected Economic Data on Canada and Mexico
Trade openness (%) U.S. share of total exports (%) 2009 change in GDP (%) Fiscal stimulus (% of GDP) Reduction in interest rate in 2008 and 2009 (basis points)
Canada
Mexico
67.8 77 –2.7 4.1
66.9 80 –6.5 1.3
450
300
Sources: Trade openness: Penn World table 6.3 (database), University of Pennsylvania, http://pwt.econ.upenn.edu; U.S. share of exports: Statistics Canada (database), Statistics Canada, http:// www.statcan.gc.ca; INEGI database, INEGI, http://www.inegi.org.mx; GDP growth: INEGI database, INEGI, http://www.inegi.org.mx; OECD Economic Outlook 86 database, OECD, http://www.oecd.org/document/18/0,3343,en_2649_34109 _20347538_1_1_1_1,00.html; fiscal stimulus: table 14.3; Interest rate reduction: Banco de México, http://www.banxico.org.mx, and Bank of Canada, http://www.bankofcanada.ca.
GDP (2.7 percent) was one of the mildest in the OECD area (where the overall decline in GDP was 3.5 percent). The difference probably has most to do with the more aggressive domestic policy response in Canada, where the fiscal stimulus package was far larger than in Mexico (4.1 versus 1.3 percent of GDP) and the reduction in the central bank’s target interest rate more pronounced (table 14.4). Looking Ahead: The Crisis, Macroeconomic Policy, and Development Strategy A vigorous recovery in the third and fourth quarters of 2009 followed the recession of 2008–09. The economy of Mexico, largely as a result of what has already happened, is expected to grow by about 4 percent in 2010. However, beyond the short-term recovery, Mexico faces the danger that without a number of policy reforms the economy could return to the lackluster growth performance that characterized the period 2000–2007, when GDP grew at 2.4 percent per year. In the current strategy to put the Mexican economy on a path of high and sustained growth, the emphasis has been on microeconomic reforms in the labor market, the energy sector, competition policy, and other areas (see SHCP 2010, 6 and 7, for the government’s reform agenda). In this strategy, macroeconomic policy reforms are hardly mentioned (with the exception of tax reform). It would appear that, according to this approach, all that macroeconomic policy can do to foster growth is to control inflation and thus that, even when inflation is low, inflation control must be its main, if not its only, objective. In effect, with macroeconomic stability (narrowly defined as low and stable inflation) having been achieved, macroeconomic policy can do little, if anything, to accelerate growth. While microeconomic reforms in a number of areas are desirable in their own right, the disappointing growth performance in recent decades is probably not due to the lack of these reforms as often asserted (for a discussion of this point, see Ros 2008 and Moreno-Brid and Ros 2009, ch. 10). Thus, the currently dominant view fails to recognize that the lackluster growth performance of Mexico in recent decades has macroeconomic roots and that greater emphasis should be put on the need to reform macroeconomic policies to provide a more growth-oriented macroeconomic framework.
Growth, Public Investment, Procyclical Fiscal Policy, and Exchange-Rate Appreciation A solid diagnostic of the lack of growth in the Mexican economy must start by recognizing that the slowdown in