How to break open the Mexican piñata

World Bank economists estimate that developing countries need annual growth rates of 5 to 6 per cent for at least a decade to begin to move people out of poverty, says the Wall Street Journal.

Mexico's gross domestic product (GDP) growth from 1997 to 2005 averaged just 3.5 per cent a year. Mexican bureaucrats like to blame this on "unfair" competition from China but the truth is that Mexico, sitting on the border of the world's largest economy, has been unable to exploit its own comparative advantage, explains the Journal:

A 21st-century economy is shackled by 20th-century monopolies, vestiges of the old Institutional Revolutionary Party (PRI). In some of the economy's most crucial sectors, single or dominant players control pricing in telecommunications, cement, transportation, electricity and oil.

On the export front, producers have little choice but to pass their high costs on to their customers, which means they become less competitive in world markets.

What is particularly discouraging is that it may have become cheaper than ever for domestic producers to buy political influence since the collapse of one-party rule under the PRI. With politicians weaker today than they used to be, they can be more dependent on special interests.

If policy makers don't get serious about creating the conditions for competition so that the economy begins to grow at meaningful rates, Mexico will remain precariously vulnerable to the socialist ideology of Venezuelan Hugo Chavez or his homegrown equivalent, says the Journal.

Source: Mary Anastasia O'Grady, How To Break Open the Mexican Piñata, Wall Street Journal, May 12, 2006.

For text (subscription required): http://online.wsj.com/article/SB114739937992050989.html

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FMF Policy Bulletin/ 23 May 2006