Introduction
During a banking convention, Mexico’s Secretary of Finance emphasized the importance of micro, small, and medium-sized enterprises (MSMEs) and their financing. He stated, “We need the PIB to be made in Mexico.” While this statement may sound appealing at first glance, it is fundamentally misguided. This article aims to clarify the concept of PIB and explain why import substitution is not a viable strategy for economic growth.
What is PIB and Why the Secretary’s Statement is Misleading
Definition of PIB:
The Gross Domestic Product (PIB) represents the total value of all final goods and services produced within a country’s borders during a specific period. By definition, the entire Mexican PIB is already “made in Mexico,” as it encompasses the contributions of domestic and imported factors of production.
Misinterpretation of PIB:
The Secretary’s assertion seems to suggest that increasing domestic production will directly boost the PIB. However, this is incorrect. Importing fewer consumer goods does not change the PIB since it only reflects the value of domestic and imported factors used in production. Similarly, consuming more or less imported goods does not alter the PIB, as it merely represents income distribution among factor owners (capital and labor) after taxes.
The Secretary’s Intent: Promoting Domestic Production
Assuming the Secretary’s statement was a misstatement, it appears he intended to advocate for substituting imports with domestic production in various sectors, such as textiles, footwear, furniture, steel, aluminum, semiconductors, solar panels, lithium batteries, pharmaceuticals, medical equipment, gasoline, natural gas, automobiles, and more. This strategy echoes the import substitution policies of the 1960s.
To achieve this, the Plan México proposes using various instruments like tariffs on countries without free trade agreements (e.g., China), tax and financial subsidies, and government acquisitions to stimulate production in targeted sectors. However, this approach may result in higher consumer costs and reduced welfare.
The Theory of Comparative Advantage and Importance of International Trade
The Secretary’s statement seems to disregard the theory of comparative advantage, which suggests that countries should specialize in producing goods and services where they have a relative efficiency edge. The primary goal of international trade is not to maximize exports but to import goods and services produced more efficiently abroad due to lower production costs.
Consider the example of consuming a Cuban-style cake (torta cubana). There are three options:
- Plan México (Import Substitution): Produce all ingredients from scratch, including wheat and rapeseed, mill the flour, mix it, bake the bread, provide water, grow trees for firewood, raise a calf for milk to make cheese and eventually slaughter it for ground beef, raise a pig to eventually sacrifice it for ham and sausages, keep laying hens for eggs and mayonnaise, plant avocado, lime, tomato, onion, chili, and sugarcane trees for vinagre and pickling. This option would cost around 100,000 pesos with substantial opportunity costs.
- Buying ingredients and preparing at home: Purchase ingredients from various stores and prepare the cake at home for approximately 1,000 pesos, including transportation costs and the opportunity cost of time spent traveling and cooking.
- International Trade: Buy the cake from a local bakery for 200 pesos, taking advantage of their comparative advantage in cake production.
Option 1 mirrors the import substitution strategy, while option 2 represents purchasing foreign inputs and utilizing domestic labor. Option 3 embodies the essence of international trade—acquiring goods at a lower cost than producing them domestically due to another country’s comparative advantage.
Challenges to Achieving Domestic Production
Despite the potential for foreign and domestic companies to invest in Mexico and replace some imports with local production under favorable conditions and incentives, such circumstances do not currently exist.
- Judicial uncertainty: The lack of a reliable judicial system undermines investor confidence.
- High crime rates: Extensive criminality, including extortion (paying “piso”), poses significant risks.
- Inefficient regulatory framework: The current regulatory environment imposes high barriers to entry.
- Insufficient and expensive electricity: Power shortages and high costs further discourage investment.
- Government’s broad discretionary powers: Excessive government control hinders market efficiency.
In conclusion, the Secretary’s call for increased domestic PIB production through import substitution overlooks fundamental economic principles. Without addressing the aforementioned challenges, expecting greater investment and growth remains an illusion.
