Economy of Mexico

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Contents

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Overview

Mexico has a free market economy that recently entered the trillion dollar class. It contains a mixture of modern and outmoded industry and agriculture, increasingly dominated by the private sector. Recent administrations have expanded competition in sea ports, railroads, telecommunications, electricity generation, natural gas distribution, and airports. Mexico is the world's largest producer of silver and one of the five major producers of oil.

A strong export sector helped to cushion the economy's decline in 1995 and led the recovery in 1996-99. Private consumption became the leading driver of growth, accompanied by increased employment and higher wages. The present administration is cognizant of the need to upgrade infrastructure, modernize the tax system and labor laws, and allow private investment in the energy sector, but has been unable to win the support of the opposition-led Congress. Mexico still needs to overcome many structural problems as it strives to modernize its economy and raise living standards.

Trade with the US and Canada has nearly doubled since NAFTA was implemented in 1994. Mexico is pursuing additional trade agreements with most countries in Latin America and has signed a free trade deal with the European Union and Japan.

Since the 1994 devaluation Mexican governments have improved the country's macroeconomic fundamentals. It was not influenced by the recent South American crises, and has maintained positive, though small, rate growths after the brief stagnation of 2001. Moody's (in March 2000) and Fitch IBCA (in January 2002) have issued investment-grade ratings for Mexico's sovereign debt. The upgrade from Fitch IBCA was based in part on the determination that Mexico has not been significantly affected by "contagion" from Argentina's debt crisis. Interest rates achieved historic lows in 2001, and are still relatively low compared to last decade's rates. In the same way, inflation for 2005, around 3.3%, is the lowest in 30 years. Also, throughout the later quarter of the 20th century to the present Mexico's economy has grown to due to the contributions for immargrents in the United States. This factor is so important to Mexico's growth that apart from tourism, foreign investments and the narcotics trade it is one of the leading factors in Mexico's economic growth.

Corruption and crime continue to be serious and chronic problems; according to the World Bank together they may make up as much as 9% of Mexico's GDP [1]. To protect their interests, and to encourage people to move into legal taxpaying economic sectors, the resourceful business sector has begun to form self-help associations like the Alliance for a Legal Mexico.

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Gross Domestic Product

Mexico's economy ranked 10-14th (depending on the methodology used) measured in its Gross Domestic Product and Gross National Income. Income per capita, according to the World Bank is the highest in Latin America, and the country is now firmly established as a middle-income country. However, huge gaps and inequality still remain in the distribution of wealth, between the industrialized northern and the poor rural communities of the south-eastern states. In spite of the economic disparities, Mexico is the only Latin American nation that has been admitted into the Organisation for Economic Co-operation and Development, which is composed by developed countries and three newly industrialized nations: Mexico, Turkey and South Korea.

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Trade

Mexican trade policy is among the most open in the world, and has become an important exporting and importing power. Trade with the United States and Canada has triplified since NAFTA was ratified in 1994. In recent years almost 85% of Mexico's exports go to the United States, making the Mexican economic cycles very dependent on the American economic behavior. Mexico, however, has signed 12 trade agreements with 43 nations, putting 90% of its trade under free trade regulations.

Mexico joined GATT in 1986, and today is an an active and constructive participant of the World Trade Organization. Fox's administrations promotes the establishment of a Free Trade Area of the Americas; Puebla served as temporary headquarters for the negotiations, and several other cities are now candidates for its permanent headquarters if the agreement is reached and implemented.

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The 12 Free Trade Agreements

These are the 12 Free Trade Agreements that Mexico has signed:

Mexico has shown its interest in becoming and associate member of Mercosur and has initiated negotiations to sign Free Trade Agreements with Argentina and Brazil. The Mexican government has also stared negotiations with South Korea in order to establish a Free Trade Area by 2006.

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NAFTA

Main Aricle: North American Free Trade Agreement

NAFTA is by far the most important Trade Agreement Mexico has signed both in the magnitude of reciprocal trade with its parnerts as well as in its scope. Unlike the rest of the Free Trade Agreements that Mexico has signed, NAFTA is more comprehensive in its scope and was complemented by the North American Agreement for Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC).

The NAAEC agreement was a response to environmentalists' concerns that companies would relocate to Mexico or the United States would lower its standards if the three countries did not achieve a unanimous regulation on the environment. The NAAEC, in an aim to be more than a set of enviromental regulations, estalished the North American Commission for Environmental Cooperation (NACEC), a mechanism for addressing trade and environmental issues, the North American Development Bank (NADBank) for assisting and financing investments in pollution reduction and the Border Enviromental Cooperation Commission (BECC). The NADBank and the BECC have provided economic benefits to Mexico by financing 36 projects, mostly in the water sector. By complementing NAFTA with the NAAEC, it has been labeled the "greenest" trade agreement; though being a pioneer in this area, it was not hard for the agreement to be labeled "green".

The NAALC supplement to NAFTA aimed to create a foundation for cooepration among the thre members for the resolution of labor problems, as well as to promote greater cooperation among trade unions and social organizations in order to fight for the improvement of labor conditions. Though most economist agree that it is difficult to assess the direct impact of the NAALC, it is agreed that there has been a convergence of labor standards in North America. Given its limitations, however, NAALC has not produced (and in fact was not intended to achieve) convergence in employment, productivity and salary trend in North America.

The overall benefits of NAFTA have been quantified by several economist, whose findings have been reported in several publications like the World Bank's Lessons from NAFTA for LA and the Caribbean (Lederman et al., 2005), NAFTA's Impact on North America (Weintraus, ed. 2004), and NAFTA revisited (Hufbauer, 2005). Most agree that NAFTA has been positive for Mexico, whose poverty rates have fallen, and real income salaries have risen even after accounting for the 1994-1995 Economic Crisis. Nontheless, the majority agree that it has not been enough (or fast enough) to produce an economic convergence nor to reduce the poverty rates substantially. Some have suggested that in order to fully benefit from the agreement Mexico should invest in education and promote innovation as well as in infrastructure and agriculture.

Given the overall size of trade between Mexico and the United States, there are remarkably few trade disputes, involving relatively small dollar amounts. These disputes are generally settled in WTO or NAFTA panels or through negotiations between the two countries. The most significant areas of friction involve trucking, sugar, high fructose corn syrup, and a number of other agricultural products.

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Trade and maquiladoras

The maquiladora sector has become the landmark of trade in Mexico. Hufbauer's (2005) book shows that real income in the maquiladora sector has increased 15.5% since 1994. Nonetheless, trade from the non-maquiladora sector has grown much faster. As the book suggests, contrary to popular belief, this should be no surprise since maquiladora's products could enter the US duty free since the 1960's industry agreement. Other sectors now benefit from the free trade agreement, and the share of exports from non-border states has increased in the last 5 years while the share of exports from maquiladora-border states has deacreased. Amongst the most important industrial sectors in Mexico is the automotive industry, whose standards of quality are internationally recognized (having to comply to US, EU and Japan standards). Moreover in 2001, according to the World Bank, high-tech industrial production represented 21% of total exports, the highest in Latin America.

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Agriculture

Mexico's agrarian reform program began in 1917, when the government began distribution of land to farmers. Extended further in the 1930s, delivery of land to peasants continued into the 1960s and 1970s at varying rates. This cooperative agrarian reform, which guaranteed small farmers a means of subsistence livelihood, also caused land fragmentation and lack of capital investment, since commonly held land could not be used as collateral. Regionally poor soils, several recent years of low rainfall, and rural population growth have made it difficult to raise the productivity and living standards of Mexico's subsistence farmers.

There have been programs that provide money to pay off loans and help banks with their debt burdens. While high credit costs are still a major problem impeding agricultural development, the burden of debt has been reduced. High interest rates for loans have compounded the difficulty for producers, and the 1994 peso crisis exacerbated the decline in productivity. Agriculture accounted for 5.8% of GDP in 1999.

In an effort to raise rural productivity and living standards, Article 27 of the Mexican Constitution was amended in 1992 to allow for the transfer of communal land to the farmers cultivating it. They then could rent or sell it, opening the way for larger farms and economies of scale. By early 1996, however, only six farmers' cooperatives had voted to dissolve themselves, perhaps because the government provides subsidies for communal land seeded by farmers. The subsidy was 708 pesos per hectare in 1999-2000 and 829 pesos per hectare in 2000-01. Since communal land use is formally reviewed only every 2 years, privatization of these communal lands may continue to be very slow.

In the past, the government encouraged production of basic crops such as corn and beans by maintaining support prices. In order to stimulate its agricultural sector, Mexico is restructuring its support price scheme. The government in 1996 crafted federal-to-state agreements targeted at each states' most urgent needs, with the goal of increasing the use of modern equipment and technology in order to increase land productivity. In addition to this new initiative, the government is continuing PROCAMPO, the rural support program which provides the approximately 3.5 million farmers who produce basic commodities--about 64% of all farmers--with a fixed payment per unit area of cropland.

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Manufacturing and foreign investment

Manufacturing accounts for about 22% of GDP and grew by 9.4% in 2000. Manufacturing probably fell or was stagnant in 2001 because exports to the U.S. probably fell. Construction grew by almost 7% in 2000 but was probably stagnant in 2001.

Foreign Direct Investment (FDI) presents a bright picture in the Mexican economy. In 2000, Mexico was the largest recipient of FDI ($22.5 billion) in Latin America. Net U.S. FDI in Mexico in 2000 was $3.2 billion, and the 2000 U.S. stock of FDI in Mexico was $34.5 billion (U.S. BEA numbers). U.S. FDI is concentrated in the manufacturing (mostly maquiladora or in-bond plants) and financial sectors. Final numbers for 2001 have not been published; the largest U.S. investment in 2001 was Citigroup's $12.2 billion acquisition of Banamex. This investment was the main reason Mexico received more FDI than Brazil in 2001.

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Oil and gas

In 2003 Mexico was the world’s fifth-largest oil producer, its 9th- largest oil exporter, and the third-largest supplier of oil to the United States. Oil and gas revenues provide about one-third of all Mexican Government revenues

Mexico's state-owned oil company, Pemex, holds a constitutionally established monopoly for the exploration, production, transportation, and marketing of the nation's oil. Since 1995, private investment in natural gas transportation, distribution, and storage has been permitted, but Pemex remains in sole control of natural gas exploration and production.

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Poverty

After the 1994-1995 economic crisis, probably the most severe in the country's history, 50% of the population fell into poverty. A rapid growth in exports propitiated by NAFTA and other trade agreements, and the restructuring of the macroeconomic finances initiated during Zedillo's and continued during Fox's administration had impressive results in the reduction of the povery rate. According to the World Bank, extreme poverty was reduced to 17,6% in 2004. Most of this reduction was done in rural communities whose rate of poverty declined from 42% to 27,9% in the 2000-2004 period, although urban poverty stagnated at 11%. One of the main contributors to the reduction in rural poverty, according to the World Bank, was in part the Oportunidades government program. However the main contributor to this reduction were the remittances of Mexican workers in the United States. In fact, remittances have become the second largest source of capital in the country. In view of that, the government has also started a program through which part of the remittances can be voluntarily invested in the development of infraestructure in the communities of the families receiving them. As of 2005 300 rural communities were participating and the government intended to have more than 1000 communities participating by 2006.

Income distribution remains highly unequal, with the top 20% of income earners accounting for 55% of income. If municipalities of Mexico were classified as countries in the HDI World Ranking, Benito Juárez, one of the political districts in D.F., would have a similar development than that of Italy, whereas Metlatonoc, Guerrero, would have an HDI similar to that of Malawi. [2]

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References

  • Richard Boudreaux, "Deadly Journey of Hope," Los Angeles Times, Oct. 13, 2004, at A1.
  • Marla Dickerson, "Mexico Runs on Sidewalk Economy," Los Angeles Times, May 9, 2005, at A1.
  • Lederman D, W Maloney and L Servén (2005) Lessons from NAFTA for Latin America and the Caribbean": Standford University Press: Standford, USA
  • Weintraub S (2004), NAFTA's Impact on North America The First Decade, CSIS Press: Washington, USA
  • Deere C and D Esty (2002), Greening the America's: NAFTA's Lessons for Hemispheric Trade, MIT Press: Cambridge, Massachusetts, USA
  • Hufbauer GC and JJ Schott (2005), NAFTA revisited: Achievements and Challenges, Institute for International Economics: Washington, DC, USA
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See also

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External links



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