

Department of Social Systems and Management
Discussion Paper Series

No.1318

THE REDEFINITION OF THE MEXICAN STATE: ESSENTIAL
PUBLIC POLICIES FOR THE DEVELOPMENT OF MEXICO
byIniguez-Montie ALBERTO JAVIER
April 2014

UNIVERSITY OF TSUKUBA
Tsukuba, Ibaraki 305-8573
JAPANTHE REDEFINITION OF THE MEXICAN STATE:ESSENTIAL PUBLIC POLICIES FOR THE DEVELOPMENT OF MEXICO

Alberto Javier Iniguez-Montiel
Department of Social Systems and Management
University of Tsukuba
Tsukuba, Ibaraki 305-8573, Japan.
E-mail: iniguez@sk.tsukuba.ac.jp
Tel.: +81-29-853-5175 / Fax: +81-29-853-5070

1

THE REDEFINITION OF THE MEXICAN STATE:ESSENTIAL PUBLIC POLICIES FOR THE DEVELOPMENT OF MEXICO

Abstract
This paper draws on Iniguez-Montiel (2010, 2011a, 2014), providing a summary of
the main research findings as well as making policy recommendations directly following
from

them.

Particularly,

the

study

discusses

theincome-distributionalandgrowth-enhancing policies that are required to create a virtuous cycle of inclusive
development in Mexico. Moreover, it is argued that, for the Mexican economy todevelop and grow at considerably higher (potential) rates and, eventually, succeed in
reducing and eradicating absolute poverty, the intervention of the state is indispensable.
However, based on the successful experiences of the East-Asian economies (World
Bank, 1993) and an overall assessment of more than three decades of development
outcomes for Mexico as an open-market economy, the paper suggests the urgent
redefinition of the Mexican state as an impartial referee that “leads the market” andlooks after the interests of the entire population, so that Mexico can grow at its fullpotential and a truly inclusive model could ever become part of the Mexican society.

Keywords: inclusive development, government intervention, pro-poor growth, public
policies, state redefinition, Mexico.

JEL Classification: H11, H50, O10, O21.

2

1. INTRODUCTION
Mexico underwent dramatic structural and economic changes in the 1980s and1990s, mainly related to the 1982 debt crisis and the insertion of the economy into theglobal market. Those changes represent the adoption of a radically different,
development strategy (from an import-substitution, state-led to an export-oriented,
market economy), which is associated to a process referred in the literature as
globalization. 1 However, despite the multiple efforts and reforms to revitalize andmodernize the economy as well as the geographic advantage of being located next tothe largest economy in the world, economic growth has been quite low among emerging
markets (OECD, 2009) 2 and much slower than the one achieved during theimport-substitution years (Chiquiar and Ramos-Francia (2009), Heston et al. (2011),
Rodriguez-Arana (2010)).3 Therefore, it has been argued that Mexico’s development

1

Globalization began in the 1980s and has largely been driven by multilateral and national
policy reforms. As a result, many developing countries have adopted policies of liberalizing
trade and capital account flows combined with domestic privatization and deregulation.
These reforms have been based on a fundamental shift in strategy from state-led importsubstitution philosophy to a market-oriented, export-led approach to development, often in
the context of stabilization and structural adjustment programs under the pressure of the
IMF and the World Bank (Kohl, 2003).
2
Mexico has made some progress in boosting growth but not enough for satisfactory
catch-up. Although Mexico’s GDP per capita growth in the last decade is around the OECDaverage, it is too low to allow rapid convergence to living standards in the higher-incomeOECD countries (OECD, 2009). Moreover, according to the Organisation for Economic
Cooperation and Development, Mexico exhibits a divergent, development path (OECD,2009).
3
According to the Penn World Table 7 (Heston et al., 2011), Mexico’s GDP per capita
growth (average) between 1980 and 2009 was only 0.658%, while that in 1951–1979 was
3.47%. Even if the years of the so called “lost decade” are subtracted from the post-1970s
3

model change is behind the country’s underdevelopment problems (Hernandez-Laos &Velazquez-Roa (2003), Bayon (2009), Rueda-Peiro (2009), Rodriguez-Arana (2010))
and has affected negatively several of its socio-economic outcomes in an importantmanner(Lustig(1992),

Szekely(1995,

1998,2005),

Hernandez-LaosandVelazquez-Roa (2003), Bayon (2009), Rueda-Peiro (2009), Arias et al. (2010)).

Some of Mexico’s development outcomes have been analyzed quite extensively inthe last decades. In the recent literature, however, relatively little attention has been
paid to poverty, inequality and government expenditure, and their relationship witheconomic growth. This study intends, therefore, to summarize the findings of threeauthored papers (Iniguez-Montiel 2010, 2011a, 2014), which focus on the rigorous andempirical examination of those variables as well as the interrelationship between someof them, and to provide policy recommendations directly following from them. We
believe that the analysis of the aforementioned variables is of the greatest importancefor the development of Mexico because, as suggested in the literature, they may be
responsible, in great part, for Mexico’s poor economic performance during the last three
decades (Aghion et al. (1999), Addison and Cornia (2001), World Bank (2001, 2007),

period, the average rate of growth of per capita GDP was 1.16% during 1990–2009 (Heston
et al., 2011).
4

Thorbecke and Charumilind (2002), Easterly (2007), Levy and Walton (2009), OECD
(2009), Rodriguez-Arana (2010), Hernandez-Licona (2010)). At the same time, thosevariables are, undoubtedly, the reflection of the great and resilient social
underachievements (gaps) along with the corresponding challenges that the Mexican
economy faces today as it has faced, most probably, for centuries (de Ferranti et al.
(2004), Scott (2009)).

This paper is organized in two sections as follows. The next section explains briefly
the objectives of each study, along with the applied methodologies, and summarizes
their main findings and conclusions. Finally, Section 3 provides an interpretation of therelation between all the research findings and, based on that interpretation and therelevant literature, policy recommendations are made with the intention to addresssome of Mexico’s most severe underdevelopment problems.

2. SUMMARY OF MAIN FINDINGS
Iniguez-Montiel (2014) examines the relationship between poverty, inequality, andeconomic growth in Mexico by trying to harness a variety of quantitative techniquesdeveloped to analyze the, sometimes, overlooked and underestimated impact of5

inequality on poverty. More specifically, the study analyzes whether Mexico’s growth
was pro-poor in 1992–2008 and determines its growth-inequality pattern at the national,
rural and urban levels, applying the Growth Incidence Curves (GICs) of Ravallion andChen (2003). Furthermore, by applying Ravallion and Huppi’s methodology (1991), thechanges in the overall poverty level are decomposed into the contribution of changes inpoverty in the rural and the urban sectors, plus the impact on poverty associated withthe effect of rural-urban migration. Finally, the contribution of changes in the distributionof income (inequality) and in the income per-capita level (growth) to the reduction(increase) in poverty is determined by making use of the decomposition methodology
proposed by Datt and Ravallion (1992).

As suggested in the literature (Dagdeviren et al. (2004), Lopez (2006), Oxfam(2000)), it was found that improvements along the distribution of income had an
important impact on the level of poverty as they were responsible for about 58 and 49%of the reduction in extreme and overall poverty in the long run (1992–2008) respectively.
Moreover, in 2000–2004, the poverty decline was primarily attributed to the equalizationof incomes in the country (lower inequality), while income growth played only a minor
but still positive role. Additionally, it was possible to identify that the poverty reduction in6

Mexico after 2000 was greatly attributed to the poverty decline in the rural sector and, toa lesser extent, to that in the urban sector, associated to a 4.2 and 1.7% pro-poor
growth rate, respectively, in 2000–2008. The reduction of poverty in the rural areas, aswell as its considerable rate of pro-poor growth, was mainly achieved by an impressive
decline of inequality in that sector, equivalent to nine-percentage points, between 2000
and 2004. As for the contribution of the population transfer from the traditional to themodern sector of the economy, this accounted for a nontrivial impact of between 14 and20%, which definitely puts a lot of pressure on the urban economy because its
population increases in size constantly and a huge and rising portion of its labor force(59% in 2010 (Murayama and Samaniego, 2011)) is employed in the informal sector.

Thus, it is concluded that growth with redistribution (lower income inequality) was
indeed the key to reducing poverty continuously and in an important manner during
2000–2006 even though the Mexican economy was in recession in 2001–2003.
However, after 2006, decreasing per-capita income, and the persistently high inequality(Gini of 52% in 2008), caused the reversal of the favorable trend observed since 1996,
raising poverty to pre-2002 levels. Consequently, it is argued that the implementation ofan active pro-poor growth policy, which spurs growth and reduces inequality, should be7strongly encouraged if a real dent in poverty is to be made in the foreseeable future.

Iniguez-Montiel (2011a) analyzes in detail the issue of the inequality in the
distribution of income in Mexico from 1989–2006. Given that the importance of
inequality to poverty reduction is indeed corroborated in Iniguez-Montiel (2014), thisstudy intends to identify the microeconomic factors, along with their specificcontributions, that determine the distribution of income in Mexico. In particular, thefactors that were responsible for the inequality decline in the 2000s are carefully
analyzed.

After applying a dynamic decomposition methodology proposed in Bouillon et al.
(2003), it was found that most of the forces behind the increase in the level of inequality
in Mexico in the years following 1984 are now working in the opposite direction(inequality-decreasing), and, consequently, contributing to the reduction of the highincome disparities that persist in the country. Among the determinants of the inequality
decline, it was possible to identify three important, equalizing factors: education,
financial assets, and the bettering of the returns to living in and to household
endowments in the rural areas and, particularly, in the South of Mexico. The results
show that educational-related changes, which were caused by the decline of8educational inequality as well as the narrowing skill-premium gap between low- andhigh-skilled workers, accounted for the bulk of the inequality decrease in the long run.
However, in the years following 2000, improvements in the distribution of and decreases
in the rates of return to financial assets contributed in an important manner (38%) to the
reduction of income inequality in Mexico, while education contributed to about 30% to
the equalization process. As financial-asset changes are associated to Mexico’s poor
economic performance in the 2000s, the 2001–2002 recession in the USA, and the
sharp decline of the national risk-free rate after 2000, it is argued that the declining trend
in the income inequality in Mexico may be reversed, in the same manner that occurredin the previous decades (Cortes, 2003, 2006), once the Mexican economy recovers andthe world exits the financial crisis, unless there are real, permanent changes in the
structure of the economy that make the distributional gains from growth more pro-poor.

On the other hand, as implied by the net unequalizing effect of unobservables foundthrough the decomposition exercise for the periods 1994–2000 and 2000–2006, there
were particular factors that negatively affected the distribution of income and impeded
its further improvement. For instance, one of the most important inequality-augmenting,unobserved factors in Mexico is its own economic and fiscal policy as suggested in the9literature(Szekely(1998),

World

Bank

(2001,

2007),

Hernandez-LaosandVelazquez-Roa (2003), Goni et al. (2008), Rueda-Peiro (2009), Iniguez-Montiel (2010)
among others) and the absolutely regressive distribution of public spending(1992–2008) found in Scott (2009). Moreover, the only factor that was continuously andhighly unequalizing during the three analyzed periods in between 1989–2006 was thereturns to demographic characteristics, which, in the case of adults, measure themarginal effect of adding a person with no education to the household. Based on theassumption that illiterate adults earn on average the minimum salary for their labor, theprevious finding suggests that the strong, inequality-increasing effect of the returns todemographics was in great part the result of the 70-percent depreciation of theminimum wage that occurred in Mexico from 1980 to 2006 (ILO, 2007).4 Based on the
results in Iniguez-Montiel (2011a) and the arguments of two of the most important
hypotheses in the development-economics field, concerning the relationships between
inequality and growth and inequality and poverty, the study is able to suggest policies
aiming at more drastic inequality and poverty reduction, as well as faster growth througha more equal distribution of income and assets in the country.

4This important finding is consistent with the results and conclusions of Bosch andManacorda (2010), who show that the decline in the real value of the minimum salary in
Mexico was able to explain most, if not all, of the rise in urban inequality at the bottom of theearnings distribution between the late 1980s and the late 1990s.
10Iniguez-Montiel (2010) is concerned with the long-run relationship between
government expenditure and national income in order to determine whether it is
Wagner’s law and/or Keynes’s hypothesis the valid proposition for Mexico. It should be
noted that the two hypotheses are exactly each other’s inverse, both in beliefs andcontents. Therefore, while Wagner’s law deals with the increase in the size of the public
sector as a consequence of the economic growth of a society, Keynes’s hypothesis isabout the growth of national income as a consequence of a rise in public-sector
expenditure.

In order to analyze the relationship and causality between the abovementioned
variables, a time-series analysis approach (including unit-root tests, cointegration
analysis, error-correction modelling and Granger causality tests) was used. Accordingly,
it was found that government-spending and national-income variables are nonstationary
and cointegrated, thus satisfying a long-run equilibrium condition. Moreover,uni-directional causality, running from GDP to government-expenditure variables, could
be established between the variables and, therefore, only Wagner’s law was found to bevalid in Mexico’s case for the period of study.

Given the unequivocal rejection of the Keynesian hypothesis, indicating that the11stabilization function of the Mexican government is not supported by the data, it waspossible to conclude that government expenditure was not a good policy instrument toencourage and lead growth in the Mexican economy during the last fifty years of thetwentieth century.

3.

CONCLUSIONS AND POLICY RECOMMENDATIONS

The results of the studies (Iniguez-Montiel, 2010, 2011a, 2014) summarized above
are clearly interconnected and indicate that there is a fundamental need for increased
and effective public-policy intervention to address the overriding issues that affect so
deeply the Mexican economy under its current development model and which themarket by itself has been unable (or unwilling) to solve during the past three decades.5
Existing studies point out that the government is failing to fulfill its stabilization function
properly in order to enhance (influence) economic growth (World Bank (2001),
Hernandez-Laos and Velazquez-Roa (2003), Chiquiar and Ramos-Francia (2009), Levy
and Walton (2009), OECD (2009), Arias et al. (2010), Iniguez-Montiel (2010)). Besides
the failure of the government’s stabilization function, our study also suggests that the5

An interesting hypothesis is proposed in Levy & Walton (2009), who suggest that the
problems of low growth and high inequality in Mexico are the result of a self-sustaining,
rent-sharing political equilibrium that, in a context of inherited high inequality, translates into
behaviors that are both efficiency reducing and wealth concentrating. According to theauthors, this equilibrium evolves and changes in form, but its inherent properties are
persistent and resilient (Levy & Walton, 2009).
12

redistribution function of the Mexican state has not been conducive to reducing the highinequalities that permeate across the country, so that an adequate floor is provided forthe low-income families (Musgrave and Musgrave, 1989) to allow them to satisfy theirbasic needs and engage in productive, potentially-profitable activities.6 Probably, themost recent proof of this important fact of the Mexican economy is found in
Iniguez-Montiel (2014), who, while confirming that extreme poverty is less prevalent in
Mexico in relative terms, confirms that the same statement does not apply to moderate
poverty or the absolute number of the poor regardless of the poverty line that is used,
estimating that more than 58 million people live in poverty in the country since 2008,
from which no less than 22 million lack the most basic necessities of food, health andeducation (Iniguez-Montiel, 2014).7 Additionally, it is also shown in the same paper thatmoderate poverty increased by 21%, from 29.5 to 35.6 million people in 1992–2008.
Therefore, the evidence clearly indicates that the government’s effort to combat poverty,
as well as putting the economy on track to narrow the huge gap in living standards with6

According to the literature, a high level of inequality constrains the poor, through capital
market imperfections, to undertake profitable, investment opportunities and acquire thenecessary level of human capital to compete in the market (Aghion et al. (1999), Bardhan &Udry (1999), Thorbecke & Charumilind (2002), Dagdeviren et al. (2004), Culpeper (2005)).
For instance, there is evidence of a low human-capital development trap in Mexico, which
forces a large part of the population (low-income families) to stay poor for generations(Mayer-Foulkes, 2008).
7
It should be noted that both the proportion and the number of the poor in Mexico rose evenmore after 2008 (CONEVAL, 2011) due to the negative impact of the world financial crisis,
the increase in food prices, and the continuous fall in per-capita incomes (CONEVAL, 2012).
13

respect to developed countries has been rather insufficient.8

These particular issues definitely signal important weaknesses on the part of thestate, which are impeding social and economic progress and, therefore, should betackled in order for Mexico to develop and grow at potentially higher and sustained rates
that could situate the country in a new and convergent development path, whileeliminating gradually the dual economy that exists in the country (Hernandez-Laos andVelazquez-Roa (2003), World Bank (2007)).

According to our study, among the most important distributional policies that could
yield a doubly-beneficial impact in terms of equity and efficiency are those concerned
with: 1) increasing the educational-attainment level of low- and middle-income
households so that the huge educational gap between those classes and the rich is
gradually eliminated and, consequently, the strong and positive correlation between
poverty and low-educational levels, documented in Iniguez-Montiel (2014) and
McKinley and Alarcon (1995), decreases over time as well. In this matter, it is also of
extreme importance that the new educational policy incorporates the quality of public
8

According to the OECD (2009), if Mexico continues growing at the same speed (1.91%
growth rate in real per capita GDP in 1997–2007), it will reach complete converge towards
living standards in the United States of America (USA) in 1,848 years. However, if Mexico’s
current speed of converge is increased by only 1%, then it will take 321 years to reachconverge with the USA (OECD, 2009).
14

education as one of its main pillars; 2) the further development of the financial system
so that the benefits provided by this important sector could be capitalized upon by all
people and firms in the country. Iniguez-Montiel (2011a) indicates that it is thehouseholds at the upper-tail of the income distribution (particularly those at the top
percentile) the ones who are mostly able to take advantage of the opportunities
available through the financial market, and this is also true in the case of the private
sector, where large firms and corporations are the main receivers of credit (Moreno-Bridet al., 2005); and 3) increasing the over 70% depreciated minimum wage, which
remains below subsistence levels and affects mostly individuals at the lower tail of theincome and educational distributions, therefore, contributing to the high levels of
inequality and poverty that are observed.9Moreover, although indirectly inferred fromour results, our study suggests that policies aimed at developing the human-capital of
low-income households, like the Oportunidades and Popular Health Insurance
programs, and increasing the purchasing power of the poor, including the elderly,
through direct monetary transfers contribute greatly to improve the distribution ofincome and assets in Mexico and, consequently, to reduce poverty. This type of polices,9

It should be noted that the sharp and continuous reduction in the minimum salary,occurring since 1978, is the policy that has been followed to control inflation and spur thecompetitiveness of the country through the abundance of cheap labor (Lustig (1992),
Hernandez-Laos and Velazquez-Roa (2003)).
15

therefore, should be strongly encouraged as well.10

On the other hand, while equity issues are indeed essential to overcome poverty inthe medium term in a more realistic and effective manner, Iniguez-Montiel (2014) alsosuggests that economic growth in Mexico is equally important to reduce poverty at alllevels. Therefore, the second set of policies that should be pursued is the one thatencourages a faster and sustained growth rate of the Mexican economy so that poverty
can be eliminated at a faster pace. This issue is particularly relevant for thedevelopment of Mexico because its economic performance has been sluggish since the1980’s despite the numerous reforms and structural changes to insert the economy into
the global market and increase its efficiency, its rather impressive record of fiscal
discipline since the late 1980’s, as well as the achievement of macroeconomic stability
since the late 1990’s. According to the literature, among the most important policies topromote higher growth rates in Mexico, it is possible to mention those that could: 1) turn10

There are two important issues to be considered when implementing this type of policies. First,
it is important that some resources are made available to expand the supply of the services and,at least, maintain the quality of them, so that overall quality is not sacrificed at the expense of thequantity provided. Second, even though these policies are greatly conditional on financial
constraints and political considerations, more effort should be made to increase the amount ofmoney that is transferred to low-income households so that the impact of the programs on
inequality and poverty is more significant. As a reference, it should be noted that Oportunidades,
the largest government cash-transfer program in Mexico to aid the poor, represented 0.3% of
GDP or 1.8% of total government expenditure in 2008 (Scott, 2009), benefiting 5 million
households or 26 million people. As documented in Scott (2009), the redistributive efficiency of
the Oportunidades program is remarkable. However, despite its expansion to benefit about 24%of the population since 2004 (Levy, 2006), the program still represents a relatively small drop in
the ocean of social spending (Scott, 2009).

16

the economy from a primarily monopolistic / oligopolistic one into a more competitivemarket overall but, especially, in relation to many of its non-tradable sectors (Chiquiar &Ramos-Francia, 2009); 2) boost the rather low development of its financial market(OECD, 2009); 3) improve human capital accumulation (World Bank (2007), OECD
(2009)); 4) increase infrastructure investment (OECD, 2009), which remained quite low
from the late 1980’s to the mid-2000’s (World Bank (2004, 2007), OECD (2009)); and 5)
increase the productivity of the labor force (OECD, 2012) by reducing its rather large
informal economy, which is a result of the heavy burden of regulation and monopoly inwhich the country operates (Arias et al., 2010). Furthermore, we identified two additional
types of policies, related to Mexico’s economic structure, which should be seriously
considered to accelerate its growth rate: 1) redesign and implementation of industrial
policies to promote the development of selected industrial sectors (Moreno-Brid et al.,2005). This is particularly important in order to effectively eliminate the country’s strong
dependence on imports and encourage the creation of good, quality jobs that could
match the large number of new entrants into the labor force each year, equivalent to 1.3
million people (Hernandez-Laos and Velazquez-Roa, 2003); and 2) policies thatsystematically encourage the urgent economic development of the rural sector and,especially, of the low-productivity, stagnant and greatly abandoned agricultural sector.

17

As pointed out in McKinley and Alarcon (1995), the revitalization of agriculture is key not
only to poverty reduction, but also to the development of Mexico as a whole.

It is important to mention that the two abovementioned types of policies, which innature pursue different objectives, seem to complement each other indeed and,
consequently, through their positive interaction, could speed up the rate at whichpoverty is reduced. For instance, the further development of the financial system, which
remains quite underdeveloped compared to emerging market peers (OECD, 2009),
could yield a doubly beneficial impact on growth and inequality by expanding theinvestment opportunities of the poor (Bardhan and Udry (1999), Ravallion (2005), Perryet al. (2006)) and of the vast majority of small and medium enterprises struggling tosurvive the intensified competition from their external competitors (Moreno-Brid et al.,2005). Likewise, the economic expansion of the rural sector, which has been ignored for
centuries but especially so after Mexico became an open-market economy, would
certainly bring about lower levels of inequality and higher per-capita growth rates for theentire economy, gradually eliminating, thus, the dual economy in the country (World
Bank, 2007). Therefore, as suggested in the literature, there is not necessarily atrade-off between equity and efficiency (Aghion et al. (1999), Thorbecke and18

Charumilind (2002), Dagdeviren et al. (2004), Culpeper (2005)). On the contrary, when
wealth or human capital endowments are heterogeneous across individuals and capital
markets are imperfect, as in the case of Mexico, greater inequality may have a direct
negative effect on growth by reducing investment opportunities for the poor, worsening
borrowers’ incentives, generating macroeconomic volatility (Aghion et al., 1999),
creating lower levels of productivity and efficiency, and causing more instability (Stiglitz,2012). All of these arguments certainly apply and are most relevant to Mexico.
Therefore, lower levels of inequality may be translated into higher rates of growth for the
economy, as well as faster poverty reduction via redistribution and growth as
corroborated in this study and others as well (Bourguignon (2004), Dagdeviren et al.
(2004), Iniguez-Montiel (2014, 2011b), Lopez (2006), Oxfam (2000)).11

Consequently, this study lends support to the view that for the Mexican economy todevelop and grow at considerably higher (potential) rates and, eventually, succeed in
reducing and eradicating absolute poverty, it is indispensable the intervention of thestate (Bayon (2009), Hernandez-Laos & Velazquez-Roa (2003), Iniguez-Montiel

11

The interactions between distribution and growth should be carefully considered in thedevelopment strategy (Bardhan and Udry (1999), Bourguignon (2004), Ravallion (2005), Perry etal. (2006)) if all members of a society, but particularly the poor, are to benefit from the economic
process and the objectives of rapid, equitable growth and lower inequality are to be met
simultaneously.

19

(2011b), Levy and Walton (2009), OECD (2009), Rueda-Peiro (2009), World Bank
(2001, 2004, 2007)). The required intervention should be pursued through the adoption
and implementation of sound and consistent policies to promote the necessary level of
economic activity in its hardly-depressed domestic market (especially that of the ruralsector) and act as a real stabilizer of the economy. Additionally, it is imperative that thestate fulfills its redistributive function (Musgrave and Musgrave, 1989) properly andeffectively, by redistributing income and assets in the same skillful and importantmanner accomplished in developed countries through their government budgets(Atkinson (2004), Goni et al. (2008)) and to the level that is required for attaining amoderate level of inequality in the country.

A short parenthesis is included here to emphasize that, as stated above, there areseveral, well-identified policies that can clearly contribute to the development of Mexico
by enhancing growth, producing a more equal distribution of wealth, and reducing
poverty on a constant basis. However, on the other hand, it should be noted that there
are other specific types of policies and economic reforms, like domestic privatizationand deregulation, which were undertaken in the past and did not yield the benefits thatwere promised for all people and which actually hurt broad segments of the population,

20

particularly the poor (Hernandez-Laos & Velazquez-Roa (2003), Lustig (1992),
Rueda-Peiro (2009)). It is therefore imperative that every major policy reform proposedby the state is well supported by a cost-benefit-analysis type of study, which proofs thatthe overall benefits evidently exceed the costs and that the economic/fiscal policies thatare proposed will benefit not only the economic/political elite or other groups outside of
the country, but especially the majority of Mexicans.

Having said this, our overall policy recommendation goes hand in hand with therecent literature on Mexico and the experiences of the high-performing Asian
economies in two important aspects. First, in order to induce faster growth and reduced
inequality in Mexico (and consequently lower poverty levels), the development strategy
should be comprised of polices for equitable or broad-based growth (World Bank, 2007)
so that all groups in the society can invariably benefit as the economy expands (World
Bank, 1993). Second, which actually complements the previous statement, the Mexican
state should intervene as many times as is required in order to redress the pervasive
market and government failures (so characteristic of Mexico’s imperfect markets), andwith the main purpose of combining rapid, sustained growth with a more equal
distribution of income (Chiquiar and Ramos-Francia (2009), Levy and Walton (2009),

21

OECD (2009), Arias et al. (2010)). In this sense, the state should be conceived as animpartial referee that “leads the market” in the domestic and international spheres andthat looks after the interests of the entire population, always guided by the principle of“shared growth” (World Bank, 1993) and the legitimate goal of increased opportunities
and better living standards for all.

Thus, from the perspective of this study, only when those two essential,
abovementioned ingredients are accepted as the rule (rather than being just mere,
demagogic expressions) and are consequently included in the country’s development
strategy by heart, Mexico will be able to raise its 51.6% of the population equivalent to
61 million people in 2012 (CONEVAL, 2013) out of poverty and create a virtuous cycleof “inclusive growth” or “growth with equity”, as those exemplified by the Nordic or
East-Asian economies (World Bank (1993), Scott (2009)), in this increasingly globalized
and competitive world. However, this could only be possible if the Mexican state had thefinancial resources as well as the political will to attain those overriding goals.
Unfortunately, for Mexico, and according to the literature, this is not the case (Levy and
Walton (2009), Scott (2009), Arias et al. (2010), Rodriguez-Arana (2010)). It is indeed
hoped that the Mexican government, including all political actors and state institutions,22redefines its economic and social role, which should be a fundamental and leading one,and improves upon the current development strategy accordingly, so that Mexico cangrow at its full potential and a truly inclusive-growth model could ever become part of
the Mexican society.

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