Mexico’s Debacle—A Teaching Moment

Mexico’s Debacle—A Teaching Moment 
October 28, 2009
Alvaro Vargas Llosa

WASHINGTON—Moises Naim, the editor of Foreign Policy magazine, recently wrote that what is said about Brazil today—that the country’s potential has finally been unlocked—was said of Mexico in the 1990s, a nation that now finds itself in the economic doldrums. Naim had also brought this up at a panel we shared at the U.S. Chamber of Commerce. I agree that the issue bears much discussion: Mexico’s reversal of fortunes contains lessons for other countries, if not for Mexico itself.

Mexico’s reforms stalled in part because of the dead weight of the long-ruling Institutional Revolutionary Party, or PRI, and of the antediluvian left, but also because the now-governing National Action Party, or PAN, has not shown the imagination and relentless zeal that other reformers have had in spearheading their country’s drive toward modernity. The consequence? Between 2000 and 2007, Brazil’s economy grew by 150 percent while Mexico’s expanded by three times less. Nothing speaks more poignantly to this sagging performance than the Mexican energy industry, shackled by nationalist constraints that have blocked capital investments and innovation: Oil output has dropped 30 percent in four years and current reserves will only last another nine. Finally, the country’s descent into drug war has replaced talk of Mexico becoming a 21st century powerhouse with speculation of its balkanization.

Observers who obsess with development issues think a lot about the countries that prospered. The United States in the 19th century is history’s most awesome case; China may be on the way to achieving something comparable this century. They also look, with much less intensity, at countries that achieved prosperity and then squandered it. Two fascinating cases are Argentina and Uruguay: Both reached “European” levels of development in the 19th century and went downhill after 1930. But scant attention is devoted to countries that at one point in time seemed on course to become “VIP” nations and stopped midway. Mexico is the most striking case this young century.

Looking at what happened is no academic exercise. Countries such as China, India, Brazil, Turkey and South Africa ought to be drawing conclusions from Mexico’s U-turn. A few come to mind.

First, never underestimate the cultural and institutional remnants of the old regime, and therefore its political ability to sap the new regime. Something similar—only much worse—happened in Russia, where the return of autocracy and state mercantilism has reversed many of the gains from the fall of the Soviet Union in 1991. Second, never sleep on your laurels. This is something that Chile, a successful country that has lately dropped several positions relating to economic efficiency in international rankings, should take to heart.

Third, never peg your destiny to one nation in particular. Mexico’s dependency on the United States has reduced its flexibility in the wider world. Australia, although a developed nation, should be wary of its increasing reliance on China. Half the customers of National Australia Bank, one of the financial giants down under, are dependent on the Chinese market. And we have also seen the catastrophe suffered by the Austrian banks that loaned the equivalent of 75 percent of that country’s GDP to businesses and individuals in Central European nations situated in Austria’s “backyard” who then defaulted.

Finally, pick your fights wisely. I have much sympathy for Mexican President Felipe Calderon. Yet he made what a large number of his Mexican supporters think was a colossal mistake in devoting to the drug war the energy and resources that he should have committed to completing the truncated reforms. The evidence indicates that the drug cartels are simply shifting some of their operations to Central America while continuing to corrupt the Mexican institutions and suck the blood out of an administration consumed by the struggle with the enemy it has picked.

None of this is fatal. Mexico can turn around once again. It will not be easy, of course—just in order to absorb the 1.2 million young Mexicans seeking employment every year, the economy needs to grow by 5.5 percent annually, a figure that has eluded Mexico in recent years and will not be attained in the next few. But the first condition is to recognize the gravity of the problem. Not many Mexican decision-makers seem to be doing so right now.

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Alvaro Vargas Llosa
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Alvaro Vargas Llosa is Senior Fellow of The Center on Global Prosperity at The Independent Institute. He is a native of Peru and received his B.S.C. in international history from the London School of Economics. His weekly column is syndicated worldwide by the Washington Post Writers Group, and his Independent Institute books include Lessons From the Poor: Triumph of the Entrepreneurial Spirit, The Che Guevara Myth and the Future of Liberty, and Liberty for Latin America. 

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