Mexico: Democracy Is Great, but What About Economic Reform?

BY ROBERT J. BARRO MEXICO: DEMOCRACY IS GREAT, BUT WHAT ABOUT ECONOMIC REFORM?

market, but he will have to rely on strong economic advisers who have yet to be announced to generate Probably no one in Mexico had more at a coherent economic program. Privatization in the electricity business is likely to be an initial priority. stake in Vicente Fox’s recent election as Even more significant would be privatization of the President than the outgoing President, petroleum sector, but progress here may be Ernesto Zedillo. With a clean and peaceful shift extremely difficult, and Fox has already indicated in power from the incumbent party, the PRI, to his intention to maintain government control. the National Action Party (PAN), Zedillo can Mexico, like Venezuela, seems to regard public claim a true two-party competitive democracy as ownership of oil as critical to national pride. his main legacy to Mexico. Although the au- UNFINISHED BUSINESS. Fox plans large public tonomous electoral oversight authority had been expenditures on elementary education and rural created by Zedillo’s predecessor, Carlos Salinas, infrastructure. These programs could be productive Zedillo gets credit for allowing the electoral au- but are likely to create serious fiscal pres- thority to actually function freely. Zedillo also sures. Ambitious spending plans therefore increase NEXT: enacted campaign-finance reform (at vast tax- the importance of improving revenue collection by payer expense), introduced an open presidential cutting tax evasion. Fox also has to deal with Vicente Fox primary within his party, and permitted an actual Zedillo’s unfinished business with regard to change of power through the voting process. corruption and crime. Now that the PRI,founded in 1929, has lost an Enhanced competition in Mexico’s big and ex- has already election, the world can regard Mexico as truly panding telecommunications sector is necessary. democratic. This is an area where Zedillo failed to make much done what The expansion of democratic rights by itself, progress. In the banking sector, Fox has to however, provides no reason to raise one’s as- encourage foreign investment and keep the gov- seemed sessment of Mexico’s long-term economic pros- ernment from bailing out weak and failing banks. pects. These prospects depend on economic and On the macroeconomic side, it is important that impossible legal reforms, which are areas in which Zedillo Mexico create a stable long-term approach to made little progress. Admittedly, Mexico has monetary policy. The central bank appears to want been growing fast since l996–-gross domestic to promote price stability while allowing the – he got product averaged 5% growth through 1999 and exchange rate to float. However, in practice, advanced to 8% in the first quarter of 2000. monetary policy seems to be driven by short-run elected. Why However, this pace of economic activity was concerns involving financial-sector liquidity rather driven mainly by export growth, which reflected than price stabilization, exchange-rate mainte- not privatize slashed tariffs under the North American Free nance, or targets for interest rates or money supply Trade Agreement and a strong U.S. economy. indicators. oil and It was Salinas and his Finance Minister, Pedro Mexico would benefit by replacing its current Aspe, who started opening Mexico in a serious monetary policy with a currency board linked to the dollarize the way. In addition to NAFTA, there was a series of U.S. dollar, along Argentinean lines. Even better privatizations and deregulations, progress in would be a full-scale dollarization, in which macroeconomic stabilization, improvements in Mexico adopted the U.S. dollar as its currency. country? fiscal management and discipline, and the intro- The large and growing integration of the Mexican duction of personal accounts for social insurance. and U.S. economies makes Mexico an excel- POLICY OF OMISSION. Zedillo’s record of eco- lent candidate for dollarization. The major im- nomic reform was comparatively weak. He ex- pediment is the national pride attached to the tended the push for free trade by concluding country’s issuance of its own money. agreements with the European Union and several In this respect, Mexico’s reluctance to give countries in Latin America. Otherwise, the up the peso is similar to its unwillingness to principal initiative was the introduction of abandon public ownership of oil. If Fox could private financial management for social- persuade Mexico to put aside its national pride to insurance accounts. In terms of omissions, give up both, he would be making a great con- Zedillo can be criticized for doing nothing for tribution to the future growth of the country’s privatization, especially in the energy sector; for economy. Odds are against it, of course. But after making no progress in reducing government all, a little while ago, a non-RRI President was corruption; for permitting crime to worsen, Robert J. Barro is a professor unthinkable, too. notably in Mexico City; and for letting the of economics at Harvard banking system become a burden on taxpayers University and a senior fellow and a nonparticipant in investment financing. of the Hoover Institution Fox looks attractive in the sense of being pro- ([email protected])

30 BUSINESS WEEK / JULY 31, 2000 photo by JAY REED