Dilemmas of short stature | Mario Luis Fuentes

Mario Luis Fuentes

Sustainable economic growth, but with environmental sustainability criteria, is an important goal for any developing country; This is a necessary condition for improving social welfare, reducing poverty and mitigating inequality. Indeed, the goal associated with achieving higher growth rates should focus on better distribution and creating virtuous cycles of growth and equitable redistribution of wealth.

However, Mexico has been unable to find a clear path to sustainable growth, facing a combination of structural factors that limit its ability to grow economically. Gross domestic product (GDP) growth forecasts for 2025, which range from 0.5% to 1.2%, reflect the fragility of the country’s economy and the persistence of these challenges.

Jamie Ross, one of the best economists our country has ever had, stated that our economy faces structural and historical challenges in three key areas through which we have sought to answer the elementary yet fundamental question: why we are not growing.

Given the above, the first thing to emphasize is that public investment has historically been a catalyst for economic development in both developing countries and developed countries; hence the ambitious $100 billion-plus investment plan that was attempted during the Biden administration in the US and is about to end.

Without strong public investment, it is impossible to build a new base for the physical and social infrastructure needed to launch the above-mentioned beneficial growth process. It is therefore concerning that in Mexico, public investment as a percentage of GDP has shown a downward trend over the past two decades, falling below 3% in recent years, significantly lower than the Latin American average.

This decline is due to several factors, such as the refocusing of government spending on social programs and debt repayment, as well as problems of corruption and mismanagement of public resources, which have led to ineffective or unfinished projects. Lack of investment in key infrastructure such as transport, energy, science and technology has limited the country’s ability to attract private capital and improve its competitiveness. Moreover, strategic sectors such as education and health are under-resourced, perpetuating social inequality and reducing available human capital.

On the other hand, domestic demand is another important component of economic growth. However, in Mexico, the purchasing power of a large part of the population remains low, limiting consumption and, as a result, companies’ ability to expand. From this perspective, despite the weight that social programs have in government spending, they have failed to stimulate aggregate demand as proposed.

By the same logic, raising the minimum wage has been insufficient to stimulate domestic consumption, and the high level of informality, which affects more than 55% of workers, is exacerbating the problem. In the informal economy, incomes are unstable and low, and there is a lack of economic and social benefits, limiting the ability to save and invest in the medium term. In addition, inflation, especially in food and energy, has further reduced the purchasing power of Mexican families, especially the poorest, despite the aforementioned increase in the country’s overall minimum wage.

Third, private investment accounts for more than 80% of total investment in Mexico, but has experienced alarming stagnation in recent years. Political and economic uncertainty, as well as structural problems such as insecurity and corruption, discourage domestic and foreign investors. Added to the above is now the uncertainty caused by judicial reform, as well as the likelihood that the rule of law and the ability to guarantee certainty over property and investment will be weakened.

The lack of comprehensive fiscal reform adds negative elements as, due to a lack of financial resources, the state continues to face severe budgetary constraints that prevent it from promoting public-private investment or, through the promotion of regional investment projects, from undermining investment. private initiative in key development sectors of Mexico’s states and regions.

Thus, the lack of an enabling environment for private investment is also reflected in the low productivity of small and medium-sized enterprises (SMEs), which make up more than 90% of Mexican businesses but face difficulties in accessing finance. as well as the conditions for its persistence and survival over time.

Addressing these structural problems requires a comprehensive approach that combines effective public policies based on comprehensive and progressive tax reform, accompanied by redistributive policies that ensure continued growth.

Mexico faces profound dilemmas in its quest for sustainable growth. Low levels of public and private investment, as well as restrictions on domestic demand, not only affect the current economy, but also jeopardize the future development of the country. Overcoming these challenges requires bold policy decisions, long-term vision and shared commitment from all sectors of society. Only by addressing these structural challenges can Mexico achieve strong, inclusive and sustainable economic growth.

Researcher at PUED-UNAM