Calderon’s Economic Legacy

Research fellow at INEGI and former chief economist for Latin America and Mexico at HSBC Mexico.

World Economic Forum, 2012, Davos. President Calderon meets top leaders from largest global companies.

Vicente Fox’s economic legacy as president of Mexico was extremely mediocre, despite having consolidated the macroeconomic stability he inherited from Ernesto Zedillo. The average annual 2.1 percent growth over his six-year administration (the worst in Mexican history, with the exception of Miguel de la Madrid’s presidency from 1983 to 1988), nearly cost the PAN the 2006 election. However, Felipe Calderon pledged to carry out the reforms that Fox was unable to implement, and Calderon said he would be the champion of employment if he won. There was renewed hope as the GDP grew 5.2 percent in 2006 and average inflation reached its lowest level in 37 years. However, the evidence suggests that the results of Calderon’s administration will not even match those of the previous one.
Average growth in the first five years of the Calderon government barely reached 1.5 percent. This means the GDP would have to grow 5.2 percent or more in 2012 to surpass Fox’s overall percentage. Given that the current forecasts fall far below 4 percent, it is almost certain that the economic performance of the past six years will be weaker than that of the previous administrations. If the forecasts for this year are accurate, Calderon will end up with an average growth rate of 1.8 percent.
Mexico has faced a crisis or recession in each of the past seven administrations. Although it is true that the Fox and Calderon recessions were derived from negative external factors and all the previous ones stemmed from internal political errors, the recent numbers are far worse than for any period before the 12 years Fox and Calderon were in office. Without a doubt, Calderon’s legacy was severely damaged by the scale of the great recession of 2008. However, average economic growth under his administration is the worst in Latin America, even if we don’t take this year into account.
The positive element has been the consolidation of macroeconomic stability, which is reflected in low inflation rates, external and fiscal balances, a greater accumulation of international reserves and a flexible exchange rate that has worked well to offset the external shocks. However, several worrying elements cannot be ignored, because they could be the source of future problems. In particular, the fiscal situation is less favorable than it appears at first glance.
In 2006, Vicente Fox’s final year, the federal budget and the fiscal-responsibility law were passed in order to obligate Mexico’s central government to present balanced budgets. Although that was a good first step toward fiscal responsibility, it had serious limitations that still allowed the government to maintain chronic deficits, in particular when it applied the concept of fiscal balance to the economic balance rather than to the total financial requirements of the public sector. Unfortunately, in 2008 the law was modified so investment from PEMEX was not included in the ba-lance in question.
At the same time, the Mexican government can now register a relatively large deficit (greater than 3 percent of the GDP) but can present it to the public as if it were balanced. This change allowed the government to register a primary deficit in its finances after registering surpluses for 20 years. The result is that Mexico’s public debt (as a percentage of GDP) no longer is declining and actually has demonstrated an increase for the past four years.
Calderon also won’t end his six-year term with very favorable numbers in terms of employment and unemployment. The nearly 1.7 million additional jobs registered in Mexico’s Social Security program in Calderon’s  first five years barely reversed a rising trend in the country’s unemployment rate after it reached historically low levels in 2000. The greatest number of generated jobs has been in the informal sector, and they are marked by very low income. Meanwhile, poverty levels have deteriorated, and income distribution has ground to a halt.
Such low economic growth numbers have lead many people to ask why Mexico cannot grow. One of the most common answers has been a lack of structural reforms — such as labor, energy, fiscal and political reform – even though they have been approved in nearly all areas during Calderon’s presidency. Upon examination, the majority of the approved initiatives has not have fallen short, and some have even represented steps backward.
What does Mexico need to return to the path of sustained growth, to generate more employment and to become more efficient and competitive? First of all, Mexico cannot allow itself the luxury of experiencing more crises or recessions, which impede progress. Second, the country needs a more functional political system – a system that allows it to approve reforms and advance along the correct path.
If Mexico continues to experience crises, and if dysfunctional democracy is maintained, we cannot expect better numbers.