Structural Reform Key to Mexico Says El-Erian

Less than two years into Enrique Peña Nieto’s presidency, Mexico is implementing an ambitious structural-reform package designed to lift its economy out of a multidecade low-growth trap and create new opportunities for its citizens. The reforms involve restructuring economic sectors once deemed politically untouchable and are backed by constitutional amendments and a bold legislative agenda.

Indeed, thanks to the “pact for Mexico”, much of this agenda has the support not only of Peña Nieto’s government but also of the two main opposition parties. This unique arrangement will be tested soon as the reforms begin to bite, and the outcome could have important and lasting consequences for efforts to implement structural reforms elsewhere around the world.

Such reforms are never easy to initiate and are usually difficult to complete. Politicians advocate them when they are in opposition but rarely embrace and sustain them when in government. The reason is simple: front-loaded costs and back-loaded benefits make structural reforms politically perilous.

Governments that do embark on structural reform often find it frustrating to wait for that often-elusive “critical mass” of revitalised sectors to materialise; and economists find it very difficult to predict the timing and magnitude of the growth liftoff that should follow. Complicating matters further, the inevitability of unanticipated developments, whether homegrown or external in origin, means that course corrections often are needed.

As a result, there are only a few good historical examples – including China, Poland, and South Korea – of successful structural reforms. And many dismiss countries that succeed as special or unique – and thus of little value as a model for other countries to emulate. Against this background, it is fascinating to observe what is happening in Mexico. The why, how, and what of the country’s ambitious structural-reform efforts could – and should – have important signaling effects around the world.

Mexican officials are the first to point out their country’s relatively poor economic performance over the last 33 years. Average annual growth, at only 2.4%, is well below what is needed and possible for a country with such enormous human and natural endowments, a prime location on America’s doorstep and considerable catch-up potential. Moreover, Mexico’s growth record is far inferior to that of some other countries that started with a lot less and yet leapfrogged it (and other Latin American economies).

via The Guardian

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