Economic freedom and economic growth in Mexico

Over the last 25 years, the wage gap between Mexico and the United States has grown progressively wider, making U.S. jobs increasingly attractive. This is a major reason for the increasing influx of immigrants from Mexico to the United States, says D. Sean Shurtleff, a student fellow with the National Center for Policy Analysis.

After adjusting for inflation:

America's real gross domestic product (GDP) per capita grew from roughly $21,700 in 1980 to $36,100 in 2004, while Mexico's rose only slightly from $7,200 to almost $8,200.

Wage rates closely track per capita GDP; this means that average pay in America rose from being 3.0 times higher than Mexico's in 1980 to nearly 4.5 times higher in 2004.

A number of studies have shown that an economy's growth rate is positively related to the degree of economic freedom in that country. Economic freedom, which is a prerequisite for economic growth, means institutions that are characterised by personal choice, voluntary exchange, freedom to compete and protection of person and property. It requires such public policies as open markets, limited government, stable monetary growth, free trade and a strong rule of law. For example, an NCPA study by economists James Gwartney and Robert Lawson found that:

From 1993 to 2002, the top fifth of countries (those with the most economic freedom) grew considerably faster than others, whereas the bottom fifth of countries (those with the least economic freedom) experienced negative growth.

Over the decade, the freest nations averaged annual economic growth of 2.4 per cent, while the economies of the least-free nations contracted by 0.5 per cent a year.

In Mexico, factors that have limited economic freedom for decades include unsound monetary policy, government corruption and insecure property rights. Improvement in these and other areas have increased economic freedom in recent years, reports Shurtleff.

Source: D. Sean Shurtleff, Economic Freedom and Economic Growth in Mexico, National Center for Policy Analysis, Brief Analysis No. 605, January 18, 2008.

For text: http://www.ncpa.org/pub/ba/ba605/

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 22 January 2008