19/06/12 Time to ditch the Mexican stereotypes - FT.com

1/2www.ft.com/intl/cms/s/0/198db6c4-a3f7-11e1-84b1-00144feabdc0.html#axzz1yIzlBts1

May 24, 2012 7:59 pm

Time to ditch the MexicanstereotypesBy Richard Fisher

For many Americans, Mexico is seen through the lens of immigration or drug trafficking.

This is a mistake: it is outperforming the US in many economic areas and provides several

important lessons for Washington policy makers that seem unable to make a start on ever

more urgent reforms. Mexico has a sound macroeconomic footing and is addressing the

microeconomic problems still holding it back. The same cannot be said for the US.

Mexico recovered rapidly from the global financial crisis. Real gross domestic product grew

5.5 per cent in 2010 and 3.9 per cent in 2011 after plummeting 6.2 per cent in 2009.

Economic output was back to its peak pre-recession level after 12 quarters, bettering the

US by nearly a year. Moreover, Mexico’s industrial production surpassed its pre-recession

high in early 2011. US industrial production remains 3.3 per cent below its December 2007

peak.

On the fiscal front, Mexico ran a budget deficit of 2.5 per

cent of gross domestic product in 2011, compared with 8.6

per cent for the US. National debt in Mexico is stable at 27 per cent of GDP, while in the

US it is 98 per cent and rising. There is a lesson for America here: Mexico passed a

balanced budget rule in 2006, which forced its government to hew to fiscal discipline.

Trade has boomed, too, affirming once again the importance of international agreements

on tariffs. Since joining the General Agreement on Tariffs and Trade in 1986, and ratifying

the North American Free Trade Agreement in 1994, average tariffs in Mexico fell from 27

per cent in 1982 to 1.3 per cent in 2001, and the volume and composition of trade changed

significantly. In 1980, trade as a percentage of GDP was only 17.5 per cent. Today exports

and imports represent 61 per cent of economic output. And about 80 per cent of Mexico’s

exports are now manufactured goods.

Certainly, Mexico still has many problems. Deregulation has met with mixed results.

Declining crude oil production threatens the government’s ability to fund itself. Low high-

school graduation rates contribute to low labour productivity and potentially greater social

instability. Continuing violence directly harms businesses and tests investor resolve,

resulting in a capital and brain drain.

19/06/12 Time to ditch the Mexican stereotypes - FT.com

2/2www.ft.com/intl/cms/s/0/198db6c4-a3f7-11e1-84b1-00144feabdc0.html#axzz1yIzlBts1

Printed from: http://www.ft.com/cms/s/0/198db6c4-a3f7-11e1-84b1-00144feabdc0.html

Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to others.

© THE FINANCIAL TIMES LTD 2012 FT and ‘Financial Times’ are trademarks of The Financial Times Ltd.

Still, we should discard old stereotypes of Mexico and give credit to the country’s fiscal and

monetary authorities. The economic performance during and after the global financial

crisis should allay the fears of those who doubted Mexico’s capability to reform. The

government has implemented greater fiscal discipline than the US, without hindering

economic recovery. By comparison, US policy makers appear incapable of fiscal reform.

They have not created a budget that restores confidence, and encourages investment, job

creation and risk-taking, while also controlling long-term deficits and unfunded liabilities.

The US can also learn from Mexico on monetary matters. By constitutional amendment,

Banco de Mexico became an independent central bank in 1993. In 2001, it formally

adopted inflation targeting, whereas the Federal Reserve did not announce an explicit

long-term inflation target until this year.

Monetary policy reforms have had a salutary effect on the Mexican economy. Before

central bank independence, Mexico’s annual inflation rate averaged 43 per cent. The rate

has now dropped to 4.4 per cent.

The peso is now a store of value and no longer shunned. The central bank’s commitment to

low inflation has led to a peso-denominated bond market and falling interest rates. Before

1995 the Mexican yield curve ran out to 27 days. In 1995 the Mexican government began

building a yield curve by issuing notes of up to one year in maturity. In 2000, five-year

notes were issued; in 2004, 20-year bonds; and in 2006, 30-year bonds. Interest rates

have fallen on each successive issue. Credit default swaps market spreads assess a greater

default possibility for French sovereign debt than for Mexico’s obligations.

Mexico’s macroeconomic recovery shows that gains from reform are worth the pain. For

both the US and Europe there are lessons to be learnt. Mexico’s achievements have come

through both fiscal and monetary reforms. For this, Mexicans can be proud. And other

nations should be inspired.

The writer is president and chief executive officer of the Federal Reserve Bank of Dallas

Strictly limited offer