Fox Must Change Mexico, Not the World

In his recent trip to the United States, Mexico’s President-elect Vicente Fox naively made bold proposals that reveal flaws in his thinking about North American economic integration.

He wants an open U.S. border for Mexican workers, a multibillion-dollar development fund modeled along the European Union and a currency union for North America. Underlying these proposals is the mistaken belief that government and not the market is the best way to raise incomes in Mexico.

Mexican bankers and financial wizards hoping to make large sales abroad of Mexican securities as their values increase are the main proponents of a North American currency union. What they overlook is that such a union would pose enormous economic risks. For the smaller country, its interest rates--dictated by a supranational central bank--would be those that fit the needs of the larger country and not necessarily its own needs. One can immediately understand the quick negative reaction Canada demonstrated to this proposal.

But what Mexican proponents of a currency union really want is for Mexico to adopt U.S. currency--the dollar--as its own. If that happened, a rigid exchange rate would put Mexican producers out of business if Mexican costs rose at a faster pace than those of the U.S. The original intent of the North American Free Trade Agreement would be defeated and pressure from migrants wanting to go to the United States would grow.

Moreover, as Mexico would no longer issue its own currency, the U.S. would be responsible for safeguarding the Mexican financial system against bankruptcy. In the latest failure of a Mexican commercial bank, Bancrecer, a small bank had to receive $10 billion from the authorities. The implications for U.S. taxpayers and policy makers would be profound.

The idea of a regional fund by which the Canadian and U.S. governments help the Mexican government pay for its infrastructure is another idea transplanted from the European Union. But in North America, this idea runs counter to the belief that markets are the right tools for allocating investment; if Mexico wants foreign money in infrastructure, it should attract investment with a good business climate and less regulation.

To be sure, not all the Europeans are happy either with supranational funds and subsidies or with the distortions they create.

The logic of President-elect Fox is that if the U.S. needs more workers, Mexico can cure its unemployment by exporting labor. He forgets that in the spirit of NAFTA, increasing trade and investment are the best means to employment. Since 1996, manufacturing jobs in Mexico have grown at the highest rates in 20 years, mainly because of NAFTA. To increase wages, as Fox also wants to do, Mexico must improve the quality of education of these workers. But the main problem with this proposal is that if Mexico obtains from the U.S. government a quota for temporary workers, it would prompt a flood of Central American workers acquiring birth certificates with bribes as they hope to gain access to the U.S.

For all the initial attractiveness and boldness, the proposals made by Fox are not the best means for Mexico to make gains. Fox’s greatest asset is his business experience and this should lead him away from grandiose schemes dependent on other governments. The degree to which he is respected abroad will depend on the degree to which he changes Mexico and not the other way around.