Beginning January 1st of this year, leftist populist Mexican president Andrés Manuel López Obrador (often referred to by his initials, AMLO) has instituted a zona libra (free zone) along the Mexican Border with the United States. The zona libra once existed in this area but was eliminated with the implementation of NAFTA in 1994. The zone is 25 kilometers (15.5 miles) wide and stretches the entire 3180 kilometers (almost 2000 miles) along the U.S. border, representing the largest free zone in the world. In this zone
- income taxes will be reduced from 30% to 20%.
- the Value Added Tax (VAT) for items coming into the country will be reduced from 16% to 8%.
- boost the minimum wage to 176 pesos per day (approximately $8.80/day)
- maintain fuel prices at the same cost as across the border in the U.S.
The intent is to spur economic investment in this area and create jobs with the hope that it will also help reduce the desire of those in Mexico wanting to come to the U.S. This story caught my attention simply from the standpoint of a leftist President seeing the way to increase economic growth and create jobs is through cutting taxes. Maybe this idea will spread to those on the left in the United States.
The last item on the list, to reduce the fuel prices to those across the border is also needed. Traditionally, gasoline prices are higher in Mexico than in the United States. Pemex is the Mexican state owned petroleum corporation in Mexico so the prices for fuels are set by the Mexican government.
You can see from the graph that most of the time, gasoline is more expensive in Mexico than in the United States. Much of this may be due to the fact that Pemex doesn't have a refinery, all their refined products must be purchased and imported. AMLO also has plans to build a refinery in Mexico to help correct this problem. I suspect if the petroleum industry were not socialized in Mexico this would have happened already.
The last part of this plan is really the only part I disagree with, raising the minimum wage. On the one hand AMLO wants to make businesses in the zona libra more competitive by reducing taxes utilizing free market principles to build the economy. Working against that is artificially setting a threshold companies must pay employees rather than letting the market dictate the salaries.
Although I disagree with raising the minimum wage, it's hard to disagree much since it doesn't have much impact. Market forces are already working to raise the salaries in Mexico. For most of Mexico the minimum wage was 88.36 pesos ($4.40) per day before being increased at the beginning of the year to 102.42 pesos ($5.10) per day. Actual average wages for low skilled workers in Mexico are approximately 350 pesos per day however, three and a half times the minimum wage.
This may not sound like a great deal of money, and it isn't. It's not appropriate to compare wages here in the States to those in Mexico because it is less expensive to live in Mexico. The living wage for a single person in Mexico is 4320 pesos per month and 7900 pesos per month for a family. It's much cheaper to live in Mexico than it is to live in the U.S.
If I could speak to AMLO, the one question I would have is that if these strategies would work for economic growth in the zona libra, why wouldn't they work for the rest of Mexico as well? There would probably be a shortfall in tax revenue initially but the economic growth would soon make up for that making Mexico a more prosperous country. The main criticism against the plan is the fear that many Mexican companies will relocate to the zona libra for the tax breaks. Why not expand the idea eliminating the problem of Mexican companies relocating and bring more foreign companies into Mexico with the economic growth it would spur?
Sources and further reading:
Mexican president proposes ‘free zone’ to attract investment, reduce migration to US
New president of Mexico creates 'free zone' along U.S. border in hopes of boosting economy, reducing migration
Mexico Minimum Daily Wage
The Strange Case of Mexico's High Gasoline Prices
Mexico doubles minimum wage in northern border zones
AMLO declara frontera norte de México como la zona libre más grande del mundo