How Mexico Can Modernize Its Industrial Policy

Investment and industrial policy are crucial for inclusive and sustainable development in Mexico, according to Juan Carlos Moreno-Brid, an economist and professor at the National Autonomous University of Mexico. In a recent interview, Moreno-Brid stated that Mexico's growth guided by an increase in the gross value of exports is insufficient to promote balanced development and generate decent jobs. He noted that to overcome lags and face the challenges of climate change and the digital revolution, a framework of policies -industrial, fiscal, and financing- is needed to channel sufficient public and private investments to strengthen productive and technological capacities.

Regarding the country's industry one year after the confinement decreed by health authorities, Moreno-Brid said that the outlook for the export industry is positive due to the countercyclical fiscal policies implemented in the United States. However, for the domestic market-oriented industry, the outlook looks bleak with no recovery in sight. Recent figures report declines in manufacturing production in 17 of the last 18 months. Without a change in the development agenda, industry and the Mexican economy as a whole will continue with export-led growth.

According to Moreno-Brid, the purchasing power of 80% of the Mexican population is very low, with great inequalities and worrying rates of working poverty. The pandemic and the recession aggravated the structural roots of labor precariousness, and the government has refused to face the serious situation with an expansive fiscal policy. The redoubled insistence on austerity, without recourse to tax reform or indebtedness, makes it one of the governments in the world that have channeled the least financial support to companies and families.

A major pending issue for the Mexican export model is to raise its levels of domestic content. Investment, strongly supported by development banks, is required. A virtuous productive transformation that diversifies the export basket and increases its domestic content, and promotes the competitiveness of companies oriented to the domestic market, requires large amounts of investment -public and private-led by an active industrial policy, and concerted with relevant economic, social, and political actors.

Mexico's industrial supply faces major failures, such as the shortage of vaccine vials, oxygen tanks, medical and protective equipment, and even the production of vaccines, resulting in a large number of premature deaths, infections, and diseases. One of the lessons of the pandemic is that there is an urgent need for an industrial policy that contributes to building solutions to the challenges facing public health.

Moreno-Brid suggests that promoting a clean industry committed to sustainability should be a priority. Everything that has to do with the green industry: renewable energy, and sustainable transportation, should be a priority. There is a great demand for green business and for accelerating the energy transition to renewable energy sources. Transportation is about to stop depending on hydrocarbons.

ECLAC estimates that the activities that can cement a new industrial development platform are: 1) those of "Keynesian efficiency", those with a high and growing demand in world markets; 2) those of "Schumpeterian efficiency", characterized by innovation and increasing returns to scale, and 3) those of "Hirschmann efficiency"; that is, with strong backward and forward linkages to combat the disconnection that characterizes the country's industrial fabric.

To invigorate the domestic market-oriented industry, the high concentration of income needs to be reduced soon and significantly. ECLAC recommends "grow to equalize and equalize to grow." Industrial development policy must be accompanied by income redistribution policies.

The COVID-19 pandemic has severely impacted the global economy, and Mexico is no exception. The country's industry has suffered, especially for those companies serving the domestic market. The pandemic has further aggravated the structural issues that have long afflicted the industry and the country as a whole. The Mexican economy has been mired in a slow-growth trap for decades, and without a change in the development agenda, this trend will continue. To overcome these challenges and build a sustainable and inclusive future, it is necessary to strengthen productive and technological capacities through the implementation of an active industrial policy.

Juan Carlos Moreno-Brid, a professor at the National Autonomous University of Mexico, suggests that the current administration needs to build a framework of policies, including industrial, fiscal, and financing policies, that channels sufficient public and private investments. This framework should increase the national content of exports, strengthen domestic production chains, and promote the creation of decent jobs and innovation. Moreno-Brid's insights and recommendations shed light on the importance of a national agenda that promotes robust and sustainable (industrial and economic) development.

Mexico's industry is characterized by its heterogeneity, with companies oriented towards both the domestic market and exports. While the export sector has rebounded significantly due to countercyclical fiscal policies implemented in the United States, the outlook looks bleak for the domestic market-oriented industry. The industry faces significant structural problems, and projections suggest that, without an industrial development policy, Mexico will continue to experience slow growth.

According to Moreno-Brid, investment is the key to a virtuous productive transformation that diversifies the export basket and increases its domestic content, promotes the competitiveness of companies oriented to the domestic market, and leads to a dynamic manufacturing sector. Development banks should play a crucial role in promoting investment, innovation, and productivity, especially in the absence of profound tax reform.

To increase the integration of domestic value in the export industry, it is necessary to prioritize innovation and income redistribution policies. ECLAC recommends "grow to equalize and equalize to grow." Industrial development policy must be accompanied by income redistribution policies.

Mexico has the potential to specialize in goods and services that contribute most to long-term economic growth and development. While there is no single recipe for increasing the integration of domestic value in the export industry, it is necessary to identify priority areas, challenges, or national problems whose solutions could contribute to the adequate development of the industrial and productive structure. For example, Mexico must promote a clean industry committed to sustainability. Green industries, such as renewable energy and sustainable transportation, should be a priority, as there is a great demand for green businesses and the acceleration of the energy transition to renewable energy sources.

The democratization of the digital leap of Mexican companies in the manufacturing sector is another significant challenge facing the country. Democratization is not only a matter of expanding access to technology but also of developing a strategy to absorb redundant workers. A policy of industrial digitization without a thorough review of social policy would be a disaster.

The proposed infrastructure initiative by President Biden indicates a change in the conventional view of industrial policy, as the public sector plays a more significant role in the economy. In this context, Mexico must implement an active industrial policy that promotes inclusive and sustainable development.

In conclusion, while the outlook for Mexico's industry is mixed, there is potential for a sustainable and inclusive future. Mexico needs to strengthen its productive and technological capacities through the implementation of an active industrial policy. This policy should promote investment, innovation, and productivity, increase the national content of exports, strengthen domestic production chains, and promote the creation of decent jobs and innovation. By doing so, Mexico can overcome the challenges posed by climate change and the digital revolution and achieve long-term sustainable growth.