Dynamist Blog


Francisco Gil Diaz, the finance minister of Mexico (and a former Friedman student), was the lunch speaker at the Fed conference today, and a very impressive one. Here are a few tidbits from his talk:

He told an interesting story about what happened to Mexico's refrigerator industry after his country unilaterally eliminated its trade barriers in 1985. Before that time, Mexican refrigerators were all made in a single factory, which was supplied by a single compressor monopoly, because the government had determined that "the industry of refrigerator compressors was saturated." Mexican refrigerators "worked exactly as John Kenneth Galbraith would predict." They had a "planned obsolescence" of about three months. So when protectionist barriers were lifted, everyone expected the industry to go under.

Exactly the opposite happened. The refrigerator maker thrived. Within less than a year, it had captured almost the entire U.S. market for small single-door refrigerators (think hotel honor bar). And its domestic refrigerators were now reliable. Turns out the company was very good at making refrigerators, and now it could import reliable compressors. Mexican refrigerator buyers benefited, but so did U.S. buyers and the Mexican manufacturer.

Oil used to be 90% of Mexico's exports, with all other goods a mere 10%. Now the numbers are reversed, even though the price of oil has gone up. Again, much of this progress happened before NAFTA, as a result of the flexibility and competition unleashed by Mexico's unilateral elimination of trade barriers.

Gil Diaz believes the PRI's legislative gains will actually help President Fox's programs, because now the PRI thinks it has a good chance to retake the presidency. As a result, legislators more willing to cooperate on reforms that improve the likelihood that PRI will inherit a sound economy.

Since NAFTA, the correlation between U.S. and Mexican industrial production has gone from 50% to 99%. As soon as the U.S. economy turns, the same thing happens in Mexico. That's been bad news the last couple of years but Mexico has been gaining industrial employment since September, when industrial production also turned up here. "We're more tightly linked to the U.S. economy than some U.S. states," he said, comparing the countries first to a married couple and then correcting himself to say, "We're more like Siamese twins than a married couple."

To reduce the corruption endemic in the customs process, Mexico is taking out the human element, "bringing automation to every part of the process." First, the customs service eliminated its in-house cashiers, allowing customs payments at banks. But that permitted graft at the banks, so now all payments must be made via the Internet. Customs offices have Internet access, but most people simply use Internet cafes or other sites.

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