The Economic Crisis of 2008–09 and Development Strategy: The Mexican Case
productivity growth that “explains,” in a growth accounting sense, the growth slowdown of the Mexican economy in recent decades is largely an endogenous phenomenon, determined by the lack of growth itself and the resulting expansion of employment in the low-productivity sectors of the economy (see Ros 2008 and Moreno-Brid and Ros 2009, ch. 10). Rather than a deceleration in exogenous productivity growth, the proximate determinant of slow growth is the low rate of physical capital formation, which fell from 7.3 percent per year in 1960–81 to 4.0 percent in 1990–2008 and was only 3.4 percent for the period 1981–2008 as a whole.10 The inability of capital formation to grow at a fast pace—after the years of decline during the debt crisis—has prevented the expansion of employment in high-productivity sectors and the modernization of productive capacity while at the same time constraining the growth of aggregate demand. In turn, the proximate determinant of the reduction in the investment rate has been the contraction of public investment. While total fixed investment fell by almost 5 percentage points of GDP between 1979–81 and 2004–07, public investment fell even more (collapsing by 6.6 percentage points). Whether there are crowding-out or crowding-in effects of public investment on private investment is subject to controversy (see, for opposite views, Lachler and Aschauer 1998, who find a partial crowdingout effect, and Ramirez 2004, who finds an important crowding-in effect). There is, however, consensus on the view that, even if crowding-out effects exist, they are at worst partial; that is, an increase in public investment increases total investment rather than displacing fully an equal amount of private investment. It follows that the decline in public investment is partly responsible for the fall in the overall investment rate and may even have had an adverse effect on private investment (if crowding-in effects predominate). The fall in public investment has partly to do with privatizations and partly also to do with the type of fiscal adjustment followed after the debt crisis. Mexico’s macroeconomic adjustment was successful in correcting fiscal imbalances, in the sense of eliminating high and unsustainable public deficits. However, it relied excessively on the contraction of public investment and failed dramatically in the task of strengthening non-oil tax revenues. As shown by Giugale, Lafourcade, and Nguyen (2001), since 1980 fiscal deficit reductions have correlated closely with the fall in public investment (the correlation coefficient between the two turning out to be 0.82 between 1980 and 1997). Infrastructure investment, which has the largest potential for affecting productivity growth and private investment, has suffered in this contraction. In the period
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2001–06, Mexico was last, among the large Latin American economies for which information is available, in infrastructure investment as a fraction of GDP, in both public and private investment (figure 14.4). During that period, Mexico invested in infrastructure four percentage points of GDP less than Chile, the only country in figure 14.4 with an increase in infrastructure investment between 1981–86 and 2001–06. With the exception of Brazil, Mexico also stands out for having the largest contraction in infrastructure investment (50 percent). The fall in infrastructure investment took place in road construction, water provision, and electricity. Only in the case of telecommunications was there a recovery of investment in the 1990s. Even in this case, however, Mexico is today lagging behind other Latin American countries such as Brazil and Chile, which were behind Mexico in 1980 (Calderón and Servén 2004). A second macroeconomic factor that constraints investment and growth is the tendency of fiscal policy to operate procyclically. This tendency has been amply illustrated by the available empirical studies. Pastor and Villagómez (2007) discuss the procyclical behavior of fiscal policy during the period 1990–2003, showing how the structural balance of the public sector increases in times of recession (1995, for example) and falls during expansions (1992–94 and 1999–2000). Other studies finding procyclical behavior in Mexico’s fiscal policy are Talvi and Végh (2000), World Bank (2001), and Kaminsky, Reinhart, and Végh (2004). The tendency of fiscal policy to be procyclical has its origin in the procyclical behavior of capital markets and in a very low tax burden, which implies that public finances continue to be very vulnerable to changes in volatile oil revenues. Moreover, the balanced-budget rule has further accentuated the procyclical character of fiscal policy. As is well known, maintaining a constant fiscal deficit through the business cycle exacerbates the economic cycle, because it ensures that the structural balance increases in recession years and falls during periods of expansion. Yet, this principle has inspired fiscal policy management during the past several administrations and was institutionalized in the legislation on fiscal responsibility approved in 2006. The procyclical behavior of fiscal policy exacerbates the negative effects of shocks to economic activity and has adverse consequences on long-run growth. Indeed, a greater volatility in economic activity, with the corresponding increase in uncertainty, reduces the rate of investment and modifies the composition of investment in favor of short-term investments (with negative effects on productivity growth), while deeper recessions can have irreversible adverse effects on “learning by doing” and on workers’ skills.