Could the U.S. Learn a Thing or Two About Fiscal Responsibility From...Mexico? (No, seriously!)

The following commentary was provided by Richard Fisher, president of the Federal Reserve Bank of Dallas. For those of you who are not familiar with him, he's one of the few regional Fed presidents who doesn't support virtually unlimited QE, and has often voiced concerns about the difficulty of winding down the Federal Reserve's unprecedentedly aggressive monetary policy accommodation.


Published: 05 April 2013 10:07 PM

Mexico is in the headlines, and it’s a story of massive reforms. President Enrique Peña Nieto has logged one reform victory after another during his first 100 days in office. His striking record so far includes labor and education reforms, the latter requiring a constitutional amendment and arrest of “The Teacher,” Elba Esther Gordillo, the corrupt leader of the massive national teachers union.

Peña Nieto has not done it alone. Some credit goes to his predecessor, President Felipe Calderón, for paving the way, and the cooperation of the other political parties who signed up for change by joining with the PRI last summer in the Pact for Mexico. Next on the reform agenda: changing a judicial system that protects corrupt lawmakers and opening up the telecommunications industry.

Admittedly, structural reforms have been slow to follow the transformation of Mexican monetary policy, fiscal practice and opening up of trade during the last 20 years. But with the foundation now laid, the time is right to build. I have argued before — and will again — that Mexico has a healthier macro economy and far greater fiscal discipline than the U.S. Mexico’s 3.3 percent gross domestic product growth in 2012 compares with the United States’ 1.7 percent.

Mexico, home to 1980s hyperinflation and poster child of that decade’s Latin American debt crisis, has recorded a core consumer price index annual inflation rate below 3 percent for the last three months. Inflation has trended down for two decades after two important reforms: central bank independence in 1994 and adoption of inflation targeting in 2001. Prior to central bank independence, Mexico’s inflation averaged a 43 percent annual rate; post-independence, it fell to 11 percent. Since implementing inflation targeting, the average annual inflation rate has fallen further, to 4.3 percent per year.

Meanwhile, the peso, floating since late 1994, has held its own through two recessions and a global financial crisis. Year-to-date, the peso has gained 4.9 percent against the dollar. Low and stable inflation, together with a steady peso, has protected the purchasing power of the consumer and allowed nest eggs to grow.

Those nest eggs can now be safely deposited in banks. After a horrific banking crisis in 1994-95 and an ensuing decade of stagnant lending, Mexico’s banking industry is growing again, and financial access, while still limited, is expanding quickly. The number of Mexican banks increased 14.3 percent in 2012; in the U.S., the number fell 3.1 percent. Mexican banks are also better capitalized than U.S. banks.

On the fiscal front, Mexico’s 2012 budget deficit was a respectable 2.6 percent of GDP, which compares with 7 percent here. For all their differences, Mexican lawmakers, on the right and the left, have a commitment to fiscal discipline. They adopted a balanced budget rule in 2006 and have taken action to achieve it rather than adopt the “kick the can down the road” approach of the U.S. Congress. As a result, Mexico’s national debt is stable at 28 percent of GDP, while here it raced past $16 trillion in 2012, about 105 percent of GDP.

Mexico has also remained a staunch proponent of free trade. Exports and imports now make up 62 percent of economic output. In 1980, trade as a share of GDP was only 17.5 percent. The country has gone on to forge 12 trade pacts with 44 nations since Mexico joined the General Agreement on Tariffs and Trade in 1986 and ratified the North American Free Trade Agreement in 1994.

With all the progress in the macro economy, banking, finance and trade, structural reforms may well be what Mexico needs to catapult it to a prominent leadership role among emerging market economies. Of course, structural reforms can backfire. Privatization efforts in the early 1990s included auctioning off the state-owned telecom monopoly, which Carlos Slim bought and honed. Instead of opening up new markets, Slim quashed the competition, preserving and strengthening his market power. As a result, Mexican phone penetration is lower than in the rest of Latin America, and Mexicans pay among the highest rates.

With important reforms accomplished, and others in progress, Peña Nieto is poised to tackle energy and fiscal reforms that eluded his predecessors. Energy sector changes that open Mexico’s ample natural resources to foreign investment and dispatch new technologies can reverse declining oil production much as hydraulic fracturing has done in the U.S. Fiscal reforms that confront the woefully inadequate Mexican tax system can lay the groundwork for raising revenue more efficiently and equitably.

These changes, along with passage of the now-pending telecommunications reforms, will be cause for celebrating what would surely be Mexico’s ascendancy among emerging economies.

Richard Fisher is president and CEO of the Federal Reserve Bank of Dallas. He may be contacted at info@dallasfed.org.

URL @ http://www.dallasnews.com/opinion/sunday-commentary/20130405-richard-fisher-mexico-has-far-greater-fiscal-discipline-than-the-u.s..ece

When I sneak across the border to get me a job , I hope they treat me better than we've treated them!

When I sneak across the border to get me a job , I hope they treat me better than we've treated them! Originally Posted by WTF

No, they won't give your kids free education, they WILL deport you if you commit a crime, and they won't look the other way if you vote in their elections.

No, they won't give your kids free education, they WILL deport you if you commit a crime, and they won't look the other way if you vote in their elections. Originally Posted by ExNYer

Touche'

I just self moderated fuckers.

Captain, Richard Fisher could be given Bernankes job.

Sadly, when many people think of Mexico, what comes to mind is rampant crime and narcoterrorist activity. But the Mexican government is beginning to get a lot of things right, and I think that will be good for all of us in the long run.

And there are other nice things about Mexico. For instance, check out this sleek 5' 10" example of near-perfection: