A Promising Future (With Big Obstacles to Fruition)

Several factors that contributed to the success of the Asian tigers may not be possible to reproduce. For instance, the savings rates they achieved may not be attainable or even desirable for most emerging nations. Nevertheless, Mexico can learn from the experience of the Asian tigers. The Asian tigers provided several conditions conducive to the accumulation of physical resources. In most cases, they committed early on to monetary and fiscal discipline and provided predictable macroeconomic conditions for investors. They also provided fairly efficient, stable institutions, such as well-functioning legal systems. As for human capital, they made a major effort to supply basic education and health services during early stages of their catch-up period. Mexico has a long way to go in all of these areas.

Since its 1994 financial crisis, Mexico has made progress in macroeconomic discipline, bringing inflation down to its lowest level in 30 years and fiscal deficits to below 1 percent of GDP. But the government continues to depend on unpredictable oil sales for more than a third of its revenues. The government has been able to trim spending recently, but in the long run, a credible commitment to fiscal and monetary discipline demands that Mexico reduce its dependence on oil revenues. Although tax rates are not low by international standards, many individuals and corporations avoid income taxes altogether, making the tax base small. In Mexico, the informal sector accounts for an amazing 50 percent of employment. As a result, Mexico's tax-to-GDP ratio is markedly below China's and the United States'. In fact, it's low even by Latin American standards.

Ill-functioning institutions add to the unpredictability of Mexico's business environment. The biggest problem is that property rights are not effectively enforced because of an inefficient legal system. According to recent estimates, collecting on a bad check takes five times longer in Mexico than in the United States. Resolving more complicated contractual disputes can take several years.

This poor legal environment has many negative consequences. Maybe the most detrimental for growth, and a key reason investment has stagnated, is the impact on the financial sector. Mexican banks are very hesitant to lend in an environment where contracts are not properly enforced. Mexico's financial sector is very small and, if anything, getting smaller. In a World Bank survey, over half of Mexican firms described their access to financing as severely limited, compared with 15 percent of U.S. firms. In Singapore, only 10 percent of
firms reported that they face the same situation.

To make matters worse, even when they can secure financing, Mexican entrepreneurs face burdensome regulations and a notoriously inefficient bureaucracy. For example, it takes more than 65 days on average to register a firm in Mexico, compared with four days in the United States.

With regard to education, Mexico's poor performance is not due to low spending but rather its failure to emphasize basic education. South Korea made an early commitment to basic education, and in 1970, two-thirds of the country's educational spending was allocated to preprimary and primary education. As recently as 1992, only a third of Mexico's education budget was allocated to preprimary and primary education. This share has increased to one half in recent years, but it will take a generation for these efforts to begin paying off.
At the end of the day, Mexico’s progress in the past quarter century has certainly not lived up to expectations. Nonetheless, the example of the Asian tigers provides a clear path forward. Mexico needs to move past easy neo-liberal dogma toward a comprehensive concentration on developing its unique strengths. While there remains a great deal of work to be done, the potential payback is enormous.