Introduction
As the government becomes increasingly involved in more activities, absorbing a growing fraction of scarce economic resources without justification, individuals lose economic freedom, and the country experiences a reduction in its potential for economic growth. This article explores how excessive government involvement in private sector activities negatively impacts economic freedom and hinders overall economic growth.
Understanding Economic Freedom
Economic freedom refers to a state where private property rights are efficiently defined within the legal framework, guaranteed and protected by an independent and impartial judiciary. Individuals are free to decide how to use their resources, provided they do not infringe on others’ property rights. They can also engage in voluntary contracts transferring ownership of resources in competitive markets.
Government Overreach and Its Consequences
Over the past seven years, the government has increasingly involved itself in activities beyond its legitimate functions, neglecting essential responsibilities while modifying the institutional framework. This has increased uncertainty about the judicial guarantee of private property rights and reduced individual and corporate freedom of choice.
Government Participation in Private Sector Activities
The government’s growing involvement in private sector activities, particularly those that meet the criteria of exclusivity and rivalry in consumption (e.g., gasoline, electricity, gas LP, postal and telegraph services, air and rail passenger and freight transportation, aeroports, toll roads, hotels, coffee, chocolate, salt, and lithium), has led to several consequences.
- Lack of Efficiency: These government-owned enterprises, operating under the pretext of serving the “common good,” are not required to generate profits. Consequently, there is little incentive for efficient operation, especially when many are isolated from market rules and competition.
- Inefficient Resource Allocation: Due to inefficient operation, there is a socially inefficient allocation of resources, resulting in lower overall value added and reduced growth rates.
- Financial Burden: These enterprises operate at a loss, requiring public funds to cover deficits. This reduces the quality and quantity of public services like healthcare, education, security, and infrastructure maintenance.
- Limited Investment and Growth: If the public sector borrows to cover losses, it displaces private investment from the financial market, causing a decline in both private investment and economic growth.
Institutional Framework Modifications and Their Impact
Modifications to the institutional framework have resulted in less efficient rules of the game, reducing societal well-being and economic growth potential. Three key areas of concern are:
- Discretionary Regulations and Arbitrary Tariffs: The government’s discretionary use of regulations and imposition of tariffs without legislative changes reduces investment certainty for the private sector.
- Disappearance of Autonomous Institutions: The elimination of autonomous bodies (INAI, Cofece, IFT) allows the government to be more opaque in public resource use and hide potential corruption. It also enables discretionary management of market rules, further reducing investment certainty.
- Judicial Reform and Reduced Legal Security: The judicial reform that subordinated the judiciary to the executive and the recent amendments to the Amparo Law, which eliminates provisional suspension and drastically reduces the likelihood of winning an amparo, have eroded legal and juridical security for private property. This strongly discourages private investment.
Conclusion
It is unsurprising that GDP per capita has not grown during the previous administration and shows no signs of growth in the current one, given these factors.
Key Questions and Answers
- What is economic freedom? Economic freedom refers to a state where private property rights are efficiently defined within the legal framework, guaranteed and protected by an independent and impartial judiciary. Individuals are free to decide how to use their resources, provided they do not infringe on others’ property rights. They can also engage in voluntary contracts transferring ownership of resources in competitive markets.
- How does excessive government involvement in private sector activities affect economic growth? Excessive government involvement leads to inefficient resource allocation, reduced investment, and lower overall value added, all of which hinder economic growth.
- What are the consequences of modifications to the institutional framework? Modifications have resulted in less efficient rules of the game, reducing societal well-being and economic growth potential. Key concerns include discretionary regulations, the disappearance of autonomous institutions, and reduced legal security for private property.
