Public Capital Formation and Labor Productivity Growth in Mexico
Ramirez, Miguel D., Atlantic Economic Journal
The demise of Import-Substitution Industrialization (151) in Latin America has led many countries of the region to adopt an outward-oriented, market-based strategy of economic growth and development. Chile was the first major country of the region to adopt an outward-oriented strategy under the regime of Augusto Pinochet during the decade of the seventies, and after the onset and aftermath of the debt crisis in the early eighties, other major countries of the region began to follow suit by dismantling their state-owned enterprises and deregulating their economies. (1) Mexico began this process of economic stabilization and structural reform in earnest following the country's entry into the GATT in 1986, and accelerated and intensified it under the administration of Carlos Salinas de Gortari (1988-94), culminating with the passage of the North American Free Trade Agreement in November of 1993. (2)
The stabilization of the Mexican economy and the withdrawal of the state from key sectors of its economy, such as airlines, banking, mining, steel, and telecommunications, has been welcomed by both domestic and foreign investors, as well as free trade advocates, economists, and government officials working for the multilateral agencies. In order to stabilize its economy during the transition period, the Mexican government, in the face of binding financial constraints, has had to meet the stringent performance requirements recommended by the multilateral institutions. This has often entailed the slashing of real government spending across the board to meet prescribed targets for the public sector deficit as a proportion of GDP, the removal of trade restrictions in the form of tariff and non-tariff barriers, the raising of real interest rates and the restriction of credit, and last but not least, the devaluation of the domestic currency in real terms.
Several prominent investigators have observed that the nature, timing, and sequencing of these expenditure-changing and expenditure-switching policies are critical in determining their short-term success. Lack of credibility and or inappropriate timing or sequencing can lead to unforeseen and unwelcome economic and political effects as evidenced in spectacular fashion by the Mexican peso crisis of 1994-95 (see Dornbusch and Werner ). Moreover, a number of regional economists have also begun to focus on the long-term economic (negative) effects associated with the severe stabilization and adjustment measures implemented by the Mexican government, as well as other countries in Latin America and the Caribbean (see Calva [1997a]; Pastor ; Sunkel ; Ramirez ; and Taylor ). Nowhere is this more evident than in the disappointing and erratic behavior of Mexican private capital formation during the past decade and a half. Table 1 below shows that in the case of Mexico, the share of investm ent has fallen relative to its 1980 level, and the country's 1994-95 economic crisis drove the proportion to a dismal level of 16.9 percent in 16.9 percent in 1996. (3)
What is particularly worrisome about these figures is that most Mexican (and regional) economists believe that it is absolutely essential for Mexico--and other countries of Latin America--to improve its investment performance if it is going to lay the groundwork for rapid and sustained economic growth, as well as create future employment opportunities for its rapidly expanding labor force (see Rosales  and Moguillansky ).
A number of investigators have cited the dramatic fall in public investment in economic and social infrastructure, brought about by the need to meet the stringent fiscal deficit targets of the stabilization program, as one possible factor in explaining the poor investment performance of Mexico and other Latin American countries. Table 1 shows that public investment spending as a proportion of GDP fell precipitously from 12. …