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Commentary: Investment is Vital on the Long and Potholed Path to Prosperity

Author: Shannon K. O'Neil, Senior Fellow for Latin America Studies
June 27, 2013
Financial Times

Take a trip to see the famed monarch butterfly's winter grounds, one of Mexico's most prized tourist destinations and a Unesco world heritage site, and the desperate straits of Mexican infrastructure come into full view.

The first stretch of the trip from Mexico City to the western state of Michoacán begins smoothly enough. But once you turn off the main highway, the potholes multiply, slowing drivers to a crawl. On reaching the final road to the butterfly sanctuary, only the sturdiest of vehicles can pass, forcing visitors to hire local drivers for the four-mile, 45-minute drive along the narrow dirt road, steering hard lefts and rights to miss the huge potholes and other obstacles along the way. Though just 100 miles from Mexico's capital, it takes nearly four hours to reach the site.

This trip is not an anomaly. According to the World Bank, less than 40 per cent of Mexico's roads are paved, unchanged over the last decade.

Other infrastructure also suffers serious problems. Much of Mexico's 27,000km of rail were laid over a century ago. Ports, airports, and highways have not kept pace with the growing population and economy. As far as basic services are concerned, nearly a third of Mexicans lack adequate sanitation.

The investments necessary to overcome these deficits (an estimated $40bn) have not materialised.

The World Economic Forum's annual competitiveness reports reveal how much Mexico's infrastructure deficit holds the country back. Though ranked 53rd overall in terms of competitiveness, on infrastructure Mexico falls to 68th position. This is better than some peers – most notably Brazil – but lags behind other emerging markets such as China and South Africa.

The differences within Mexico illuminate the importance of quality infrastructure. The southern states of Oaxaca, Chiapas, and Guerrero are much poorer compared with their better connected (via roads, ports, and rails) northern neighbours.

One of the reasons behind the explosion in higher value added manufacturing (including aerospace, automotive and appliance industries) in the country's central states are their relatively robust infrastructure networks.

In the past few years, investment has picked up, reaching nearly 5 per cent of GDP according to the Mexican finance ministry. New and expanded roads, ports, airports, water systems, and electricity infrastructure have helped chip away at the backlog. But after years of under-investment, this is just a start.

Mexico should and could do more. Public debt is a low 35 per cent of GDP (compared with 73 per cent in the US or 88 per cent in the UK).

And Mexico is a darling of the global financial markets – with strong macroeconomic fundamentals, a solid banking system, and a liquid currency – enabling it to borrow at attractive long-term rates.

Mexico also passed its public-private partnership law a year ago that should make it easier for the government and the private sector to finance infrastructure projects together.

Finally, President Enrique Peña Nieto's history suggests a predilection towards infrastructure investment. As former governor of the state of Mexico, he inaugurated hundreds of public works projects over six years.

As president, Mr Peña Nieto has laid out an ambitious economic reform agenda, and made good on many campaign pledges during his first months in office.

Congress has passed reforms in labour, education and telecommunications. It is working on a financial reform. The president has said he will propose both energy and fiscal reforms by the year's end.

As the administration works to transform Mexico's economy, it has also signalled its global direction – hitching itself economically ever more closely to the US by seeking to deepen regional integration and transform North America into a more competitive manufacturing platform.

Infrastructure, as much as any domestic area set for reform, will make or break this vision.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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