TAKE the lift down from Luis Videgaray’s office in the National Palace and you enter a portrait gallery of past finance ministers stretching back to the 19th century. Mr Videgaray runs through the latest ones, pointing out, with a hint of rivalry, where they got their economics doctorates. Two of the most influential of the past 15 years went to the University of Chicago (one, Agustín Carstens, is now central-bank governor). They turned Mexico’s economy into a paragon of low inflation and stability–albeit one that has often struggled to grow fast (see chart).
Mr Videgaray is a Massachusetts Institute of Technology (MIT) man. “I didn’t apply to Chicago,” he says. He went to MIT, he points out, because he does not believe markets are perfect. “Mexico is a market economy, but we should have better markets. The government needs to work to improve how markets perform.” That belief is at the root of the series of economic reforms he orchestrated last year. It also informs his plans to rev up Mexico’s sluggish economy this year.
Although he became finance minister in December 2012, Mr Videgaray has only now started to divulge his economic philosophy. For much of last year, he hunkered down in an office close to President Enrique Peña Nieto, drawing up reforms in energy, education, telecommunications, banking and public finance. The two men have been almost inseparable since Mr Peña became a state governor in 2005 and made Mr Videgaray his finance chief. Admirers say the president’s political nous is complemented by his minister’s brain.
Mr Videgaray’s reclusiveness had costs. Although he gave time to congressmen whose support he needed to enact reforms, businessmen became frustrated trying to talk to him. It took 14 months as finance minister before he paid a visit to Wall Street. With his eye off the economic ball, growth slowed to a miserly 1.1% in 2013, a four-year low. Some wondered whether Mexico’s moment had already been and gone. Spirits lifted in December when Congress boldly voted to end a 75-year-old state oil monopoly; Moody’s, a ratings agency, awarded Mexico an “A” grade last month. But everyone is still waiting impatiently for clearer signs of an economic rebound.
Mr Videgaray explains how his MIT-honed belief in the imperfection of markets, especially in Mexico, helped shape the reforms. Thanks to the entry into force of the North American Free-Trade Agreement 20 years ago, the export sector has been knocked into shape by international competition. But the rest of the economy, sheltered from those same forces, has remained stagnant and unproductive. The reforms “start with the conviction that these markets will not open up by themselves,” he says.
His aim is not just to bust open monopolies and oligopolies and develop stronger energy, telecoms and banking industries. In an unusual focus on the millions of small firms that provide 75% of jobs in Mexico, he says he also wants to lower prices and raise the quality of inputs like gas and electricity, broadband and credit, which would make growth more sustainable. Bottlenecks that limit cheap imports from the United States mean that Mexican firms often pay several times more for natural gas than their American counterparts do, for example. Mr Videgaray calls this “the democratisation of productivity.”
The reforms also aim to put a much bigger onus on autonomous regulators, which he hopes will do a better job of trustbusting than politicians have. Mr Videgaray says one of the highlights of Mr Peña’s administration was when the president in February turned to the Supreme Court to stop a local judge blocking a decision made by the new telecoms regulator. “That sent a very strong signal of what this administration is about,” he says.
The reforms may take years to kick in fully. In the meantime, Mr Videgaray’s most pressing task is pepping up the economy. Although Mexico should benefit from recovery in the United States, Mr Videgaray thinks it needs a big dose of deficit spending to hit the government’s 3.9% growth target this year (many private forecasts are closer to 3%). Government spending grew by 20% year on year in January. He says this was necessary to boost demand, especially since the central bank’s room to cut rates is constrained by the prospect of tighter monetary policy north of the border.
In the process, the budget deficit is projected to rise to 1.5% of GDP this year and total public borrowing (which includes things like investment in Pemex, the state oil firm) could hit 4.1%, which is high for a non-crisis year. In a country with a chequered debt history, higher borrowing worries some: Héctor Aguilar Camín, a commentator, likens it to an alcoholic having his first drink after many years on the wagon. Mr Videgaray shrugs that off. He expects the energy reform eventually to lead to higher oil production, which would boost tax revenues. In the meantime, he says government income from Pemex is safeguarded–a factor that contributed to the Moody’s upgrade.
Just a tipple
Although businesses are desperate for more growth, this projected splurge has raised hackles. Many industrialists feel it is being paid for largely through a tax reform that fell heavily on them last year. There is also a growing concern that Mr Videgaray’s obsession with driving down prices may go too far–through price regulation or other measures that would end up discouraging investment.
He rejects the tax gripes (“taxes are never popular”) and says an antitrust bill in Congress aims to restrict the government’s power to control prices. “It’s very important that the government is close to the business community and that we understand their concerns,” he says. “But at some point the government needs to be a government.” Mr Videgaray may be more visible now, but he still keeps his distance.
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