Mexico’s Fourth Transformation
A comprehensive fiscal reform is urgently needed

Over the past 35 years, I can only remember three important economic transformations:

  1. To analyze the first transformation, we have to consider the economic background of the decade of the ’70s in Mexico. In that decade, the federal government adopted an expansionist economic policy that resulted in higher than expected government spending, generating fiscal imbalances and obliging the State to borrow. This resulted in the nationalization of the Mexican banking system in the early 1980s and a decade dedicated to paying the excesses of government spending. The premise that led to this debt was self-sufficiency, a premise rejected since the eighteenth century.

    Then came the ’90s and the first economic transformation. The Central Bank was given complete autonomy in 1993, giving rise to a period of macroeconomic stability. This action had been preceded by the famous pact of solidarity through which the nation’s businessmen agreed not to raise prices and the unions not to demand wage increases. Thus, from double-digit inflation during the 1980s, we went to moderate inflation, and average inflation figures for the last six years will be the lowest in Mexican history.
  2. In the same decade of the ’90s, the signing of the North American Free Trade Agreement (NAFTA) brought the second economic transformation of the country. As a result, the national economy stopped relying on oil (volatile) and the spending of the government (the owner of Pemex, the national oil company) as the drivers of economic growth, and moved towards manufacturing and a free market. As a result, today, automobile exports exceed 30% of the total, while the export of crude oil is only 6% of total exports.

    At that time, individualized pension insurance was established, another reform aimed at alleviating the financial burden of the State. This was followed by periods of reorganizing the development bank and other measures with a smaller impact. However, an underlying problem since the beginning of the ’90s has been the lack of fully liberalizing the economy. That is, the state still controls monopolies and there are strong oligopolistic groups, violating the theory of economic liberalism. Much of the country’s slow economic growth can be attributed to this factor.

    Nevertheless, the common denominator since that decade has been macroeconomic stability and the operation of a market economy. Although things did not work out exactly as expected, Mexico has begun to stand out as a recipient of foreign investment, particularly foreign direct investment (FDI).
  3. The second decade of the new millennium brought the third economic transformation, characterized by important structural reforms aimed at enhancing the potential growth of the economy. Here I would like to make a parenthesis. The Mexican economy has experienced negative productivity levels during the last 30 years. For example, Mexican companies have paid an average of 70% more in energy costs than their U.S. counterparts. This can be explained by the inefficiency of state-owned companies, such as CFE (the national electricity company), with its high operating costs. The energy reform, as well as other reforms, was implemented to increase the productivity of the economy.

    Educational, labor, financial and telecommunications reforms (the latter having reduced telephone and mobile phone prices by nearly 40% in six years) were proposed to raise the country's productivity. The most relevant one, the energy reform, will take several years to have a significant impact (as happened with NAFTA).

    Now we have the fourth economic transformation. There is one reform mentioned above which I did not like: the tax reform. Why? Because today only 43% of the population is part of the formal economy, that is, less than half the population pays taxes. The fiscal reform of EPN (President Enrique Peña Nieto) did not attack this problem, although it increased tax collection from 9% of GDP to the current 13% (the OECD average is 35%).

    The fourth economic transformation of the country should be a comprehensive fiscal reform and provide a state of social welfare for the Mexican population. The new administration has proposed a considerable increase in public spending, highlighting economic support for “ninis” (young people who neither work, nor study), doubling pensions, raising the minimum wage, building a train in the southeast of the country and building at least one refinery. The problem lies in the fact that depending on income via taxes will not provide sufficient resources to cover this public spending.

    The new administration has the option, for the first time, to incorporate the entire population into the public treasury. It has control of the Congress and Senate, and can offer in return a complete welfare state: education, health, unemployment insurance, etc. With an increase in the taxpayer base, it will be possible to comply with all the social expenditure promised, and more. However, like NAFTA and the autonomy of the Bank of Mexico, the positive impact will be observed in the long term. We can only hope that the interests of the country are placed above political interests.