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«Juan Carlos Moreno-Brid This article explores the need for Mexican policymakers to add an active industrial policy as a key instrument to assist in ...»

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Industrial Policy: A Missing Link in

Mexico’s Quest for Export-led Growth

Juan Carlos Moreno-Brid

This article explores the need for Mexican policymakers to add an active industrial policy

as a key instrument to assist in the nation’s so far failed quest for high and sustained

economic growth. Mexico implemented drastic reforms in the mid-1980s to open its

markets to foreign competition and to reduce the state’s intervention in the economy, but

these reforms failed to ensure robust economic growth. The article explores myths and facts of the theory and practice of industrial policy. It identifies what type of industrial policy the new administration, which took office in December 2012, will apparently implement during 2013–2018 and how it may, or may not, help to put Mexico onto a path of high, sustained economic expansion.

Este artículo explora la necesidad para el gobierno de hacer de la política industrial un instrumento clave para ayudar a México en su búsqueda, hasta ahora, fallida de un crecimiento económico alto y sostenido. México aplicó reformas drásticas a mediados de la década de 1980 para abrir sus mercados a la competencia extranjera y reducir la intervención del estado la economía, pero estas medidas no lograron asegurar un crecimiento robusto. El artículo explora mitos y hechos de la teoría y práctica de la política industrial. Identifica qué tipo de política industrial la nueva administración, que inició en diciembre de 2012, parece implementará durante 2013–2018 y cómo esta ayudaría, o no, a que México entre en una senda de expansión económica alta y sostenida.

Key words: economic growth, industrial policy, development, Latin America Introduction: Is Industrial Policy Part of Mexico’s Toolkit for Development?

I n the mid-1980s, Mexico embarked on a series of radical macroeconomic reforms aimed at shifting away from its traditional development agenda based on state-led industrialization and import substitution. The rationale behind the reforms was that the elimination of trade protectionism, coupled with the acute reduction of state intervention in the economy would significantly encourage private investment and set the economy onto a path of high and sustained export-led expansion with macroeconomic stability. In a very short time, Mexico unilaterally opened its domestic markets to foreign competition and sharply reduced the scale and scope of public sector intervention in the economy. In this process, it also dismantled most of its industrial policies, cancelled many subsidies, and phased out the sectoral development programs.1 Latin American Policy—Volume 4, Number 2—Pages 216–237 © 2013 Policy Studies Organization. Published by Wiley Periodicals, Inc.

Industrial Policy in Mexico 217 After nearly three decades, the results of this strategic shift are mixed. On the one hand, the reforms succeeded in bringing down inflation, reducing the fiscal deficit, and expanding non-oil exports. On the other hand, the overall growth performance of the Mexican economy has been a major disappointment. Notwithstanding this about face in Mexico’s development agenda, the rate of growth of output—and of employment—has been very low compared to its historical trend and to the growth performance of many other emerging economies in Latin America and in other regions.

Mexico’s persistently sluggish economy was a key issue in the platforms of the candidates of the political parties that contented last July in Mexico’s Presidential election. Enrique Peña Nieto, the Partido Revolucionario Institucional (PRI) candidate and eventual winner, stressed in his campaign his commitment to launch a new wave of reforms—among them fiscal, labor, and of the energy sector— aimed at ensuring that Mexico’s Gross Domestic Product (GDP) would increase at annual rates of 5% or more on a sustained basis.

Details of the key reforms and of the economic strategy that the new government plans are not currently known, but statements by Peña Nieto and top members of his Cabinet during the electoral campaign indicate that his administration sees industrial policy as a legitimate, useful instrument to boost economic growth (Foro México, 2013). In a number of seminars organized by Fundación Colosio—the PRI’s think tank—during the 2012 campaign, industrial policy placed high on the agenda for dialogue with economic analysts, academics, and representatives of the private sector. The Fundación’s publication of the policy debates during the campaign—“Memoirs of the Encounters for the Future of Mexico”—has a section on the merits of a new industrial policy for Mexico’s development. It offers several recommendations. It points to an industrial policy aimed strictly at strengthening clusters and activities in which Mexico already has a comparative advantage, such as in the automotive, electronics, and aeronautical industries. Its conclusions also seem to favor an industrial policy oriented to transform the current productive structure by creating and discovering new activities with dynamic comparative advantage. As argued in the Memoirs, “The new industrial and technological policy must serve to reindustrialize Mexico; to continue strengthening our exports with more valued added but with much more inter-linkages via productive value chains to boost the internal market, to increase the local content of maquiladora exports, to develop new sectors and modernize and transform older industries like textiles and shoe manufacturing” (Fundación Colosio, 2013, p. 30).

In addition, in his first major speech after he took office in December 2012, the new president unveiled the Pacto por Mexico. This fundamental agreement signed by the heads of three main political parties identified a series of commitments and policy actions aimed at transforming Mexico’s economic, social, and political structure and setting as a priority the insertion of the economy onto a path of high growth. In more detail, the Pacto explicitly “aims at laying down the foundations of a new political agreement to boost economic growth and create the quality jobs that Mexicans demand” (Pacto por México, 2012, p. 2).

In its full text the Pacto does not mention industrial policy except in the context of creating industrial poles of development for the poorer region in the south of Mexico. The closest reference to industrial policy in the Pacto is a commitment to 218 Latin American Policy “boost innovation, science and technology to meet the goal that Mexico, besides being a major power in manufacturing, is transformed into a knowledge economy” (Pacto por México, 2012, p. 11). This is the only appearance of the word “manufacturing” in the Pacto. Its second chapter, “Economic growth, employment and competition,” has as leitmotiv the need to deepen and strengthen market competition as the main tool to build a dynamic economy. The text pays special attention to certain economic sectors, mining, telecommunications, oil and gas, rural activities, and financial services, with virtually no reference to manufacturing.

On January 7, 2013, President Peña Nieto’s inaugural speech at the Foro México 2013—an international forum organized by the Economic Commission for Latin America and the Caribbean (ECLAC), the Inter-American Development Bank, the Organisation for Economic Co-operation and Development, and the World Bank—stated, “We must be sure that the effort of the government through the implementation of an industrial policy will lead the Mexican economy to higher rates of expansion” (Peña Nieto, 2013).

The National Development Plan 2013–2018, which the government unveiled in June 2013, explicitly considers industrial policy as a tool for development.

The National Development Plan (2013) argues against the application of an industrial policy that relies on granting subsidies and on major interventions by the state in production or investment. The Plan states that such active policies tend to create unnecessary distortions in competitive markets. It advocates instead for the implementation of a set of policies in which the state’s role in promoting strategic sectors—among which it specifically includes the industrial one—is less intrusive and restricted to removing obstacles and correcting market failures, to orienting production to key sectors and markets, to deregulating, and to coordinating actions between the main actors of the private sector and the public sector’s relevant instances. In this new paradigm, as it is called in the National Development Plan, the government’s activity in the economy is limited to the provision of the whole gamut of public goods required to coordinate the productive sectors and align them in trajectories of strong expansion of productivity and output, but the Plan also stresses the urgent need to create stronger forward and backward linkages between exports and the rest of productive activities to boost Mexico’s economic growth and internal markets.

The Secretaría de Economía, the Ministry in charge of its operation at the federal level, gives perhaps the clearest definition of the new administration’s view on industrial policy. On its official Web site it states that Industrial policy is aimed at resolving market distortions [such as] monopolies or oligopolies, incomplete markets, asymmetric information and coordination of agents. [Its] actions are conducive to collaboration between the private sector and government to develop those sectors that have a greater impact on economic growth... [Its] objectives focus on providing information to economic agents;

implementing specific actions and instruments for the promotion of human capital and financing, coordinating, targeting and prioritizing joint actions between the private sector and different levels of government (Secretaría de Economía, 2013).

It also lists five guidelines for programs implemented by the Secretariat:

Industrial Policy in Mexico 219

1) To strengthen and develop the domestic market with the same robustness as the foreign market, 2) To strengthen nascent industries which have competitive advantages, 3) To enhance innovation, the promotion of human capital and technology exchange among industries, 4) To provide information to agents to resolve market distortions, particularly asymmetric information and coordination of agents, and

5) To coordinate, target and prioritize joint actions between the private sector and different levels of government (Secretaría de Economía, 2013).

This description of the aims of industrial policy is aligned with the view of strengthening Mexico’s current competitive advantages, but the second and third guidelines for the secretariat’s programs open the possibility of also using industrial policy instruments to go beyond consolidating static comparative advantages and move to creating or discovering new ones by fostering nascent industries and innovation. These two areas of action are fertile ground for the state to use industrial policy to collaborate with the private sector in creating dynamic competitive advantages. Such possibility may run against other declarations by the government in which it seems to be fully convinced to restrict its interventions to strengthen industries with already existing comparative advantages and not to create new ones. Recent administrations had a view of industrial policy that is not significantly different than in practice (see Chiquiar, Fragoso, & Ramos-Francia, 2007; Dussel, 2000, 2003; Hernández Laos, 2005).

This revival of industrial policy in the political discourse on economic policy in Mexico echoes the rehabilitation it has experienced in recent years worldwide. It also leads to important questions that this article aims to address. Is industrial policy a missing link in Mexico’s quest for an export-led expansion of real GDP at annual rates above 5%–6%? If so, should the country emphasize the performance of the manufacturing industry? What are the current options or types of industrial policy to promote growth in emerging markets most adequate for Mexico? What type of industrial policy will the current administration put into place in Mexico? What other key policies—besides an obviously necessary fiscal reform—must be implemented in Mexico to complement the industrial policy efforts to achieve high and sustained rates of economic expansion?

The current administration has integrated industrial policy in its discourse as a legitimate and relevant tool for development. It has also recognized the importance of building a domestic market as robust as the foreign one. These are welcome changes after years in which industrial policy was banned in theory from the development toolkit but was applied in a haphazard, “don’t ask don’t tell” way and neglecting the domestic market. The approach to industrial policy put forward by the new government puts emphasis on two elements. The first is the notion that industrial policy should aim at consolidating Mexico’s current competitive advantages in the context of an open economy. The second is the refusal to adopt an industrial policy that implies a significantly stronger state intervention in the market mechanisms that determine production and investment. This version of industrial policy is in line with a standard perspective of the state’s intervention in the economy strictly oriented to remove obstacles to the free interaction of market forces (see Esquivel, 2010; Moreno-Brid & Ros, 2009).

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