Our Model Neighbor, Mexico
by Barbara Kotschwar, Peterson Institute for International Economics
Op-ed in Slate
April 14, 2009
© Peterson Institute for International Economics
Illegals flowing across the border, warring drug cartels, corruption.... To read the headlines about Mexico, you'd think we Americans are unlucky to have Mexico as a neighbor. If not a failed state—and we needn't get into that debate here—press coverage about Mexico sure does make the place seem, well, broken. Why couldn't it be more like Canada?
That's a misinformed impression. By global standards, Mexico is a relatively successful nation, whose per capita income of more than $8,000 places it in the World Bank's upper-middle income category. What's more, Mexico has been well governed for the last decade and is a scrupulous acolyte of the "Washington consensus" that preached an adherence to free markets and prudent fiscal stewardship. Ever since the financial crises of the mid-1990s, Mexico has been practicing what the United States preaches. Today its economy is taking a beating, however, largely because the United States itself didn't practice what it preached.
None of this is to say that Mexico doesn't face a series of thorny problems, separate from the financial crisis, which, for once, has extended from north to south. Our southern neighbor is suffering great harm from drug violence. Large parts of the population, particularly in the south, remain poor and without adequate services or employment, and Mexico has not been able to adequately enhance its ability to compete effectively in the current international system and achieve robust income growth. However, it does not help to exaggerate these problems or to overlook the other Mexican reality: the fact that it has undergone a successful macroeconomic and political transformation over the last decade. Indeed, in the economic sphere, Mexico has been a constructive trading partner and a model participant in the international economic system.
Mexico has remained a steadfast free-trading nation since it entered the North American Free Trade Agreement (NAFTA) in 1992. The country has exhibited the opposite of protectionist behavior, even as tough times have tempted others to renege on their commitments to the outside world. In December 2008, with the financial crisis in full force, Mexico announced that it would lower tariffs on 97 percent of its manufactured goods, reducing its average most-favored-nation tariff (the tariff applied to all WTO members with whom Mexico does not have a free-trade agreement) from 10.4 percent to 4.3 percent. A recent paper published by the World Trade Organization, the governing body of the international trading system, lists protectionist measures taken by members since the beginning of the crisis. No "Buy Mexican" provisions are listed, nor are any subsidies to particular beleaguered Mexican industries that could discriminate against foreign providers.
In terms of overall economic policy, Mexico has come a long way since the default in the summer of 1982 that set off the Latin American debt crisis or the 1994 peso crisis that threatened to disrupt NAFTA. Since the early 1990s, Mexico has cut its external debt by more than half, has lowered inflation from triple to double to single digits, has adopted a flexible exchange rate that helps maintain price stability, and has nearly doubled its openness to trade. Mexico has accumulated sufficient foreign reserves and has kept the government fiscal position healthy enough to be able to provide a buffer during bad economic times and to stimulate its economy in the current downturn—at least for a time. Mexico's Oportunidades program, which provides cash transfers to poor families in exchange for a commitment to keep their kids in school, has been used as a model for other countries seeking to improve the lot of the poor by making it possible for the next generation of children to go to school. The assumption, with which most analysts agree, is that additional years of schooling will improve that generation's ability to get good jobs.
Mexico has achieved a remarkable if underappreciated record of progress in the political sphere as well. It has successfully transitioned from 70 years of single-party rule to multiparty elections and has generally opened up its political system. On the international front, Mexico has played a prominent role in various international organizations, become the first developing country to integrate the formerly "rich countries" club of the Organization for Economic Cooperation and Development. It has signed several free-trade agreements, with Japan and the European Union, among others—feats that the United States has not managed to achieve. In the area of climate change, even as richer countries balk at doing so, Mexico has made far-reaching commitments to halve its greenhouse gas emissions, even though developing countries are exempt from having to do so.
None of this context is appreciated in the United States when cross-border disagreements arise. Take, for example, recent claims that Mexico's retaliatory tariffs, applied last month after the United States reinstituted a ban on Mexican trucks, could mark the beginning of a new cycle of global protectionism. The threat of global protectionism should not be underplayed, but Mexico's actions did not rise to the level of dangerous protectionism.
The financial crisis triggered by the United States is now threatening the economic gains Mexico has achieved over the last decade. The accompanying protectionist sniping in Washington is not helpful and could worsen a potential anti-American backlash. Despite not having a subprime-mortgage lending industry, the Mexican stock market fell 35 percent over the last year, and the peso has depreciated by nearly 40 percent since March 2008. It is often said that when the United States sneezes, Mexico catches a cold. While its patience and restraint as a trading partner will not protect Mexico from the current US financial pneumonia, we can hope that its economic reforms will serve as a sufficient buffer to help it weather the effects of the current crisis, which—for once—it had no role in creating.
Originally posted at Slate.com.