Overpromise and Under-Deliver: Growth in Mexico

Over the past three decades, and despite great hopes to the contrary, Mexico’s economy has under-performed. In the early 1908s, Mexico introduced aggressive political and economic reforms in an attempt to gain footing among the world’s strongest economies. These reforms embraced global markets and decreased the state’s role in the economy. An independent central bank was introduced along with more developed financial markets, as the country faced a tough macroeconomic stabilization period. Additionally, the country liberalized foreign trade and investment by privatizing nearly 1,000 state-owned enterprises. By 1994, Mexico joined the OECD, a sign that the country was on the right track. Despite these efforts, Mexico has  seen capita income grow by an anemic 1.1%  per annum over the past 25 years. Compared to other countries with similar economies (see below), Mexico’s relative stagnation seems all the more acute..

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 In 2012, Enrique Peña Nieto took office as Mexico’s 57th President, eager to tackle the country’s growth challenge. So far, President Nieto seems to be heading in the right direction promoting an ambitious reform agenda that seeks to not spur economic growth, but also develop and enforce anti-monopoly regulation. The President’s agenda highlights two main reforms: energy and education. His education reforms target the quality of working educators by introducing a series of rigorous tests that may cost teachers their jobs if they fail. The energy reforms aim to reduce the market share of Pemex , which will go along way in strengthening the energy sector through increased competition.

President Peña Nieto intends to have all reforms approved by the end of 2014, but this is just half the battle. The most challenging part of these reforms will be enforcing all the regulations once implemented and winning over the general population.

Early last year, Elba Esther Gordillo, the powerful leader of Mexico’s teacher’s union, was arrested on massive charges of embezzlement of over 2 Billion Pesos (159 Million USD). The arrest came the day after President Nieto signed the education reforms into law. Shortly after, thousands of teachers stormed the streets to protest the education reform package. This forceful disapproval of the president’s reform agenda is a much-needed reminder that optimism for growth in Mexico is far from reality, and that Peña Nieto still has much to accomplish.

According to researchers at the Wilson Center’s Mexico Institute, the principal cause of Mexico’s stagnant growth is misguided education reform and dismal worker productivity. Worker productivity in Mexico has failed to increase over the past three decades despite the steady increase in school enrollment over the past five decades (see figure below). Educational facilities in Mexico focus on teaching cognitive skills rather than the technical skills that employers demand. The lack of technical skill-focused education in Mexico has lead to disappointing levels of worker productivity. This will continue unless the government seeks further reform focused on increasing the quality of educators and the type of education, not just the amount of people who receive an education.


In the past, the government’s answer to dismal growth has been disjointed. The Mexican Government has managed isolated efforts with no comprehensive strategy to patch up the economy. This erratic policymaking has led to many conflicting reforms, hindering growth in an economy that has been dreaming of development for decades. President Peña Nieto’s aggressive reform agenda brings newfound optimism for growth in Mexico. In his four remaining years in office, Peña Nieto is expected to accomplish what many have failed to do. Is it finally Mexico’s time to shine?





What Narendra Modi Can Do for Development


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Nearly one month after the landmark 2014 Lok Sabha election, India waits for newly-elected Prime Minister Narendra Modi to make good on his election promises. During his campaign, former Chief Minister Modi vowed to catalyze economic growth, curtail corruption, and defend the poor, a platform that surely helped him earn the largest margin of victory in the country’s history. Now, in the face of slowing economic growth and rising income inequality, Modi is expected to apply his development prowess for the rest of India.

But how?

The answer is simple: subsidy reform.

Since India’s independence from Britain, subsidies have had a major presence in India’s budget. India’s 2014-2015 interim budget estimated $21.2 billion in subsidies for food and petroleum alone. Until Modi’s election, this trend showed no sign of changing.

Next month, the Modi government is set to unveil its first budget, the first likely indicator of Modi’s fulfillment of campaign promises. Recently, Mr. Modi has hinted that his economic policies and corresponding budget will be unpopular with India, most likely due in part to the diminishing role of petroleum and agriculture subsidies.

India is host to a myriad of subsidies. From petroleum to education, India even subsidizes Muslim citizens to make the Haj. Of these, some of the most controversial are food subsidies. Within this broad scope, there are subsidies for fertilizer, irrigation, and electricity as well as in-kind food subsidies. The Government of India has barely reformed its food subsidy policy since the mid-1970s, with the exception of the 2013 National Food Security Act. The National Security Act provides food to two-thirds of India’s population, though only 22% live beneath the poverty line.

Designed with combating poverty in mind, subsidies are expected to boost production and increase efficiency while bolstering India’s recently declining growth rates. However, in reality, the inverse is true. Indian subsidies in agriculture are distributed unequally across the states. For example, the states of Assam and Madhya Pradesh, receive disproportionate agricultural subsidies, with the former receiving 600 rupees per agricultural person and the latter receiving 40 rupees per agricultural person. Both states, with active agricultural sectors, receive unequal subsidies for their efforts, leaving Madhya Pradesh to be one of the country’s more prosperous states and Assam one of the least developed.

Further, it is unlikely that in-kind food subsidies even reach India’s poorest. As early as 1985, the public distribution system was responsible for a mere 15% of the allocations meant for the poor, a track record that has worsened over time.

Though it may seem that business-centric Modi has neglected the poor in lieu of increasing foreign investment and freeing the labor markets, the new Prime Minister ’s policy reforms could be a key to reducing poverty. In a recent speech to Parliament, Modi alluded to administrative changes to increase the efficiency of the state-run Food Corporation of India. These reforms could come in the form of a nation-wide cash transfer system that could increase distribution efficiency and restore foodstuffs to market prices. With demonstrated effectiveness in neighboring Indonesia, cash transfers allow more targeted assistance and more effective poverty reduction. Though it is unlikely that Modi will eradicate subsidies altogether, it is clear that he is dedicated to their reform.

For better or for worse, Narendra Modi’s victory is a sign for changing times in Indian politics. The Modi government’s new budget is expected to be introduced in early July, but the transition from planning to implementation will be a challenge. Parliament must review and approve the budget, meaning that the Modi’s budget could be met with opposition before it even reaches the Rajya Sabha. Though scaling back subsidies and bolstering growth are ambitious, the greater obstacle could be a lack of political will.



April is the Cruelest Month: the Coming Austerity Measures and Elections in Ukraine

Photo Credit: REUTERS/Anatolii Stepanov
Photo Credit: REUTERS/Anatolii Stepanov

The International Monetary Fund has offered Ukraine a two-year bailout package of $18 billion in return for steep economic reforms. The long-term goal of the bailout package is to stabilize a Ukrainian economy that is running up expenses and moving toward a debt default. It is hoped that economic stability in Ukraine will lead to the political stability that can then ease Ukraine’s transition to democracy, and more importantly, away from Russia. By opening up to the IMF deal, Ukraine will signal to nations like the US and Japan that they are committed to restructuring their economy and are open to investment. For example, the United States Congress is working on a bill for $1 billion in aid to Ukraine as well as economic sanctions against Russia. The European Union has put $15 billion on the table. It total, Ukraine is in position to receive around $27 billion in aid.

The downside to these deals is that the enforced austerity measures will likely hurt the average Ukrainian citizen by increasing gas prices by 50% and inflating the currency, the hryvnia, by somewhere between 12% and 14%. Therefore, we may see the cost of living rise while the purchasing power of the hryvnia plummets. Ukraine’s interim Prime Minster Arseniy P. Yatsenyuk explained that there would be a minimum-wage freeze and an increase in taxes for Ukraine’s largest companies. All of this spells out hard times for Ukraine in the coming years. But consider the result if Ukraine were not to accept the austerity measures. As The New York Times reported, Yatsenyuk “told the Parliament on Thursday that the country was ‘on the brink of economic and financial bankruptcy’ and that gross domestic product could drop 10 percent this year unless urgent steps were taken in conjunction with the fund.” With such instability, Ukraine’s interim government would not have the time or the legitimacy to set up the proper institutions before the planned election in May.

Photo Credit: Genya Savilov/AFP/Getty Images
Photo Credit: Genya Savilov/AFP/Getty Images

The top candidates for the election include former Prime Minister Yulia V. Tymoshenko, billionaire businessman Petro Poroshenko, and Parliamentary leader as well as former professional boxer Vitali V. Klitscho. Tymoshenko, who was born in the industrial and Russian-leaning eastern Ukraine, has support from the western and central provinces. However, it is Poroshenko and Klitscho who lead in the polls. No matter the result in May, the next president of Ukraine is set to face a difficult transition in all aspects of society. Somehow, he or she must ease the pains of economic liberalization, consolidate political factions, and reign in nationalist as well as pro-Russian sentiments. International aid may help, but the real battle for Ukrainian independence must be fought from within. It is a fight to defeat the legacy of authoritarianism; a fight that Ukraine desperately needs to win.