Responding to the Challenges of Globalization:
An Economic Agenda for Mexico
Mexico Business Summit
Veracruz
October 24, 2005
Joseph E. Stiglitz
Columbia University
New York
The Big Question
 What does globalization mean for
Mexico?
 How can Mexico respond to the
challenges posed by globalization
–Including increased competition
from China
The Setting
 Mexico’s recent economic performance has not been stellar
• Low growth – since NAFTA (between 1994-2004) Mexico’s
real GDP per capita, in PPP terms, grew at an annual rate of
only 1.1%
• Growing gap between Mexico and the U.S. – in 1992,
Mexican GDP per capita was 27.5% of the U.S. per capita
GDP; By 2004, the ratio fell to 24.6% - 10.42% increase in
the gap
• Stagnant real wages – during the 1993-1999, real wage in
the manufacturing sector declined by more than 20% and
remained stagnant since then; the minimum wage lost 50%
of its purchasing power during the 1990s
• High inequality – According to the UNDP Human
Development Report 2004, Mexico’s HDI ranking was 53
among 177 countries but on income distribution (Gini
Coefficient) it ranked 162 (the 16th most income-unequal
country in the world)
• Loss of jobs in the Maquiladora
Real Growth in Mexico
Mexico: Growth in Real GDP Per Capita PPP by Half Decade
5.0%
Average Annual Growth Rate
4.0%
3.0%
2.0%
1.0%
0.0%
1950-54
1955-59
1960-64
1965-69
1970-74
1975-79
1980-84
1985-89
-1.0%
-2.0%
Source: Compiled from the Penn World Table 6.1 (1950-1974)World Bank Data (1975-2004;
GDP per capita, PPP (constant 2000 international $)
1990-94
1995-99
2000-04
Interpreting Failures
 Failures despite NAFTA, which
seemingly opened up large new
trading opportunities
 In a decade which saw sustained
growth and poverty reduction in
other developing countries
– Especially China
Two Responses
 “More of the Same”
– Decrease wages
– Increase taxes on consumption items that are
exempt
– Privatize oil and electricity
 A People Oriented Growth Strategy for
Mexico
–
–
–
–
Increase competition
Strengthen the public sector
“Putting people first” agenda
Enhancing the private sector
How Do We Judge Success?
 GDP is not a good measure
 An economy in which GDP is increasing, but in which most
people are becoming poorer (a rich country with increasing
number of poor people) is not a successful economy
– Trickle down economics does not work
 There is more to life than GDP
– Living standards, including health, education, public safety and
environment
– Costa Rica, Uruguay, Cuba has lower GDP-PPP per capita
income than Mexico’s but are ranked higher on human
development performance (UNDP’s HDI ranking)
 GDP does not reflect sustainability
– Argentina
– Living off depletable natural resources
Looking at History
 The southern United States was poorest,
least educated, least dynamic part of
country
–
–
–
–
Based on low wages
U.S. passed minimum wage law
Leading to major transformation of South
No longer competes with China, Mexico in
textiles
– But has dynamic growth centers in Atlanta,
Houston, Austin, Dallas etc
Successes in Asia
 Are based on heavy investments in education,
infrastructure, technology
 High savings rates
 With very little of the “more of the same” strategy
– In China, central role of TVEs, competition
– China’s success in textiles not based just on low wages
– Chinese apparel exporters have been able to reduce unit cost
by more than 40% between 2000 and 2004
– Although labor cost is higher in China than in Bangladesh,
Kenya, Cambodia or Madagascar, China is still the least cost
producer of clothing - cost saving mostly came from
automation of processes, especially from effective sourcing
and supply chain management
 Large public investments
– Malaysia—government run oil company yields high returns to
country
China’s Competitive Advantage: An Example
Cost of One Dozen Shirts As Percentage
of GDP Per Capita
Cost of One Dozen Men's Shirt: 2004
(U.S. Customs Value)
30.0%
90.00
80.00
25.0%
70.00
60.00
20.0%
50.00
15.0%
40.00
30.00
10.0%
20.00
5.0%
10.00
0.00
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Source: Compiled from U.S. Customs (ITC) Data
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And Even Europe
 Norwegian state oil company is
among the most efficient
 French government electricity
enterprise among the most efficient
in the world
– Privatization may well raise costs and
reduce reliability
– Privatization in U.S. has brought
problems in California of high prices; in
Northeast, of reliability
Elements of Consensus

Fiscal discipline
– But this means looking not just at liability side of balance
sheet, but at assets
– Net worth lower if oil is depleted, not replaced by increased
investment
– But investments in people are as important as investments in
machines

The market is at the center of success
– But markets alone are not enough
– Need balance between public and private sector
– Getting “right” regulations
• Strong anti-trust laws
• Regulating natural monopolies

Need to respond to globalization, not retreat from it
– Have to think strategically
– About dynamic comparative advantage

More transparency, less corruption
A People Oriented Growth Strategy for Mexico:
I. Enhancing Competition in the Private Sector
 Competition essential for low prices, efficiency, innovation
– Single most important ingredient for successful market
economy




Requires strong anti-trust laws, effectively enforced
Need to make private sector more competitive
Competition policy will lower prices of inputs
Regulation of natural monopolies required to bring prices
into line
– Important lesson: put into place effective regulatory system
before privatization
 Enhance supply of energy at competitive prices
– Focus should be on results
– May require opening up market
• But care must be exercised in how this is done
• To avoid higher prices
A People Oriented Growth Strategy for Mexico:
II. Strengthening the Public Sector
 Government needs more revenue
– Tax revenue as share of GDP low— much
lower than other comparable countries
(with oil revenue, roughly 15% of GDP)
– Insufficient to finance needed
investments in infrastructure, education,
technology, public safety, health
 Needs greater compliance
– With full compliance, at existing rates,
revenues would be much greater
– Problems not just “informal” sector
Reforming Taxes
 Taxing oligopoly profits could generate substantial
revenues with little distortion
– Far more equitable than proportional tax on consumption
– In New York, important exemptions to sales tax to make it
more equitable
• Should not make fetish about “comprehensiveness”,
especially when so much escapes taxation in any case
• Value added tax is not an efficient tax in developing countries
• Value added tax is not a tax structure that promotes
development
• And especially in developing countries where there is
inadequate enforcement of income taxes, a value added tax
contributes to a regressive overall tax structure
A People Oriented Growth Strategy for Mexico:
II. Strengthening the Public Sector
 Increased government transparency
– Important advances in recent years at the
federal level and some legislation in 28 states
– Mexico has taken a role in global leadership
– But principles of “right to know” “freedom of
information” need to be more effectively
implemented at the state and local levels and
extended to those states that don’t have it yet
 Benchmark efficiency of the public sector
– e.g. in oil and electricity
A People Oriented Growth Strategy for Mexico:
III. Putting People First
 Investments in education
 Investments in health
 Necessary for success in the global
economy
- Mexico does not rate high in HDI, 53 in
the world, with great disparities across
its regions
A People Oriented Growth Strategy for Mexico:
IV. Implementing Other Pro-Growth Policies
 Expanding credit
– Lack of availability of credit one of major problems
– Successive “reforms” in Mexico’s banking system one of
great failures
• High level of government indebtedness (over 40% GDP
including IPAB and PIDIREGAS)
• With few people greatly enriched at public expense
• And still banking system is not doing what it is supposed
to
• Can’t do anything about first problem, but can do
something about third
 Maintaining pro-growth macro-policy
– Focusing on the real-economy, not just inflation
– Recognizing impacts of exchange rates and interest
rates on growth
A People Oriented Growth Strategy for Mexico:
IV. Implementing Other Pro-Growth Policies
 Need for industrial policies at national and
state level
– Identifying dynamic comparative advantage
• e.g. location near U.S.
– Not question of picking winners, but looking
for externalities, coordinating needed
infrastructure investments
– Almost every successful country has had
industrial policy
• Though today, America’s is largely embedded in
defense department
Responding to the Challenge of
Globalization
 Mexico has a choice between two strategies
– One has not been working in Mexico, or elsewhere
• Failed in promoting growth
• Failed even more in promoting well-being of ordinary
citizens
– One has worked well in many countries
• Will need to be adapted to Mexico’s condition
• One size fits all policies do not work
 Ten/fifteen years ago there was considerable uncertainty
about the relative merits of alternative strategies
– Recognizing that all strategies are fraught with risk
– But evidence over last fifteen years—enormous
successes and enormous failures—have brought
increased clarity
– Though in many circles ideology/interests still prevail
Responding to the Challenge of
Globalization
 Hopefully, Mexico will choose the
strategy which is not only likely to
enhance economic growth,
- helping Mexico respond to the challenge
of globalization,
- but also will have the greater chance of
ensuring that the benefits of that
growth are shared widely among the
Mexican people