Claremont Colleges Scholarship @ Claremont CMC Senior Theses CMC Student Scholarship 2018 Why not Mexico? Policy Recommendations for a Globally-Oriented Economic Strategy Víctor Manuel Hernández-Rodríguez Claremont McKenna College Recommended Citation Hernández-Rodríguez, Víctor Manuel, "Why not Mexico? Policy Recommendations for a Globally-Oriented Economic Strategy" (2018). CMC Senior Theses. 1968. http://scholarship.claremont.edu/cmc_theses/1968 This Open Access Senior Thesis is brought to you by Scholarship@Claremont. It has been accepted for inclusion in this collection by an authorized administrator. For more information, please contact [email protected]. Claremont McKenna College Why not Mexico? Policy Recommendations for a Globally-Oriented Economic Strategy submitted to Professor Roderic Ai Camp by Víctor Manuel HernándezRodríguez for Senior esis Spring 2018 23 April 2018 Abstract Mexico, one of the world’s largest economies and an increasingly relevant actor in international affairs, is at a crucial point in defning its future policy course. Given the uncertainty surrounding the global economy, as well as the political situation in Mexico, it is important to have a clear vision for policy going forward. Tis thesis offers a foundation for a national economic strategy with a long-term vision, upon which future administrations can build as appropriate to maximize on the country’s economic potential. Te task is undertaken through a three-part approach. First, a thorough and analytical overview of the country’s economic history provides context and lessons from which to learn. Second, key economic issues to be addressed are identifed through an evaluation of the current context and economic outlook. Finally, an evaluation of successful policy implementation, domestically and abroad, provides a basis that can be adapted to address the issues identifed as they affect Mexico. Te result is a series of six policy recommendations along two axes aimed at tackling the aforementioned key issues. Tese recommendations are by no means exhaustive, nor are they meant to be. Te expectation is that they may serve to align national policy to global economic trends, underlying a plausible strategy to realize Mexico’s productive potential. Acknowledgements Words cannot express the gratitude I have to those who have supported and guided me in my academic journey, a journey which culminates with the thesis at hand. And the space here provided would not suffice to include everyone and anyone who, in any capacity, contributed to the completion of this work. However, I feel compelled to include the names of those individuals without whom none of my achievements, this thesis included, would have materialized. A mi madre. Desde que tengo uso de razón—y sin duda desde antes aún—has sido para mi impertérrita fortaleza. La vida te obligó a ser madre y padre, maestra, consejera y amiga, y como tal has logrado lo que muchas parejas no logran en toda una vida. Tu amor, tu incansable apoyo y tu sabiduría añejada por la experiencia me han dado la fuerza que sustenta mis logros, y me han convertido en la persona que soy. Más que el pináculo de mi trayecto académico, esta tesis es el producto y la prueba de tu inmaculada enseñanza. Y si bien siete renglones no bastan para expresarte mi agradecimiento, es preciso que sepas cuan valiosa ha sido y será siempre para mí tu presencia. To Professor Rod Camp—from the moment I first stepped foot at Claremont McKenna, you have been a tireless and supportive mentor. Looking back at the past four years, I consider myself the luckiest student at this school: I had the chance to study under and learn from the foremost academic in Mexican studies, and more importantly, I found the friendship of a wise and kind man. Your serenity, knowledge, and confdence in me inspired me to strive to do the best work that I can—the work before you is the product of that inspiration. ank you for absolutely everything. To Yaneli Ruiz—I would be lying if I said I always knew I could do it. And more than anyone, you were the force behind me, pushing me to achieve what even I was unsure I could achieve. And truly, I would not be standing where I stand today if it weren’t for you. So, thank you for being there every step of the way and encouraging me never to settle. To my brothers, my family, my closest of friends, and everyone who has put up with me and walked alongside me as I worked toward the culmination of my academic career: thank you! God only knows the difference your incessant support made in this task, and I’ll forever cherish everything each and every one of you has taught me along the way. Table of Contents I. Introduction ........................................................................................... 3 II. Review of relevant literature ................................................................. 7 Teories of economic development ................................................................................ 7 Perspectives on liberalism ............................................................................................ 10 Liberalism, bedrock of democracy ................................................................................ 12 Te importance of free trade ........................................................................................ 15 III. Economic history and policy antecedents ........................................... 18 Te run-up to a North American trade bloc ................................................................. 18 Bank nationalization and the Lost Decade ............................................................................. 18 Mexico’s economic aperture: De la Madrid and neoliberalism ................................................... 22 Crafting NAFTA ........................................................................................................ 23 Te Mexican Peso Crisis of 1994 ................................................................................. 26 Economic stabilization and growth .............................................................................. 31 Tequila on an empty stomach ............................................................................................... 31 Curbing monetary policy ...................................................................................................... 34 New rules for the fnancial sector ........................................................................................... 36 IV. Current policies and economic outlook .............................................. 40 Expectations for growth .............................................................................................. 40 Policy performance 2012 – 2018 .......................................................................................... 42 Insulating Mexico from the U.S. ........................................................................................... 46 Arrested productivity .................................................................................................. 50 Employment informality ...................................................................................................... 51 Foreign direct investment allocation ....................................................................................... 53 1 Wage stagnation .................................................................................................................. 56 Current economic outlook .......................................................................................... 58 V. Policy case assessment ........................................................................ 60 Diffusion theory ......................................................................................................... 60 Domestic policy cases .................................................................................................. 62 Financial re-regulation and related reforms ............................................................................ 62 A perfect foat ..................................................................................................................... 67 Foreign policy cases..................................................................................................... 72 Te ROK’s ROI .................................................................................................................. 74 Beating the West at its own game .......................................................................................... 78 VI. Policy recommendations .................................................................... 82 Generalizing productivity growth ................................................................................ 82 Progressive increments to the minimum wage .......................................................................... 83 Reallocation of FDI and public social spending ....................................................................... 89 Credit expansion ................................................................................................................. 96 Lowering barriers to formalization ...................................................................................... 102 Crafting a global strategic vision ................................................................................ 106 A Latin American Union? .................................................................................................