Mexico

Mexico

Being one of the largest countries in the world, Mexico boosts its territorial area amassing almost 2 million square kilometers of land. Apart from this, Mexico also has a diverse topography as manifested by its favorable climate. At any time of the year, it has been said that Mexico has a perfect climate especially in many parts of its central highlands and some of its coastal locations.

Although this has been the case, Mexico’s economy is said to be mostly driven by tourism, industrial production, oil and gas production, textiles and clothing, and agriculture. It has also been a worldwide fact that Americans visit Mexico more often than any other countries in the world because of its attractive and favorable tourist destinations. In addition, there has been numerous factories which have been built to take advantage of the lower labor costs of Mexico. Aside from the vast industrial milieu, Mexico also has been contributing almost 1/5 of the world’s oil reserves. Mexico’s seemingly progressive economic activity is mainly attributed to its wide production as well as exports on a wide selection of agricultural goods.

Meanwhile, it has long been said that the economy of Mexico is characterized by a free market. In recent times, its gross domestic product has surpassed almost a trillion dollars which makes it one of the largest economies in the world. It is also firmly established as an upper middle-income country with the highest income per capita in Latin America in market exchange rates. However, Mexico is the only Latin American country to be member of the Organization for Economic Cooperation and Development.

Since the 1994 crisis, subsequent administrations were said to have greatly influenced the improvement in the macroeconomic fundamentals of Mexico. After its slow growth in 2001, it eventually managed to maintain a small positive growth. Although Moody’s (in March 2000) and Fitch IBCA (in January 2002) have issued favorable investment-grade ratings for its sovereign debt, Mexico still needs to look for possible remedies to alleviate societal problems. Even if there has obtained a certain level of macroeconomic stability that has reduced inflation and interest rates to record lows and increased income per capita, there still exists problems regarding social inequities. These problems include the need to upgrade infrastructure, modernize the tax system and labor laws and reduce income inequality.

The economy of Mexico contains a mixture of modern and outmoded industry and agriculture. These economic segments of Mexico are said to be mostly dominated by the private sector. However, recent administrations have expanded competition in sea ports, railroads, telecommunications, electricity generation, natural gas distribution and airports with the aim of upgrading infrastructure. Meanwhile, about 90% of its trade — considering that Mexico is an export-oriented economy — is under free trade agreements (FTAs).

The Free trade agreement is composed and agreed upon by almost  40 countries including the European Union, Japan, Israel and many countries in Central and South America. However, the most influential among all free trade agreements is the NAFTA. NAFTA has said to have existed in 1994 and was signed in 1992 by the governments of the United States, Canada and Mexico. In 2006, trade with its northern partners accounted for close to 90% of Mexico’s exports and 55% of its imports, with the great help from the free trade agreements.

After five decades of political turbulence after independence in Mexico, the four consecutive administrations of President Porfirio Díaz was said to be the igniting factor for the economic progress of Mexico. During his term, the last quarter of the 19th century in Mexico has brought about economic growth as manifested with numerous foreign investments and by immigration. Also with his term, President Diaz was able to develop an efficient railroad system as well as the great use of natural resources.

It has also been said that during Diaz’ term, the gross domestic product of Mexico was also reaching those of Argentina and Uruguay during circa 1900 and it was almost three times more than the gross domestic product of Brazil and Venezuela. Its annual economic growth between 1876 and 1910 has also averaged by 3.3%. However, its inequitable land distribution system led to the Mexican Revolution in 1910-1917, which has transformed the important aspects of Mexican living. This armed conflict was said to be due to political repression and fraud as well as huge income inequalities. Then, large haciendas were mostly owned by a few but worked by millions of underpaid peasants living in precarious conditions.

Meanwhile, during 1930 to 1970 Mexico was dubbed by economic historians as the “Mexican Miracle”. This period is said to be characterized by economic growth as spurred by a model of import-substitution industrialization (ISI). This model has protected and promoted the development of national industries. Through the ISI model, the country experienced an economic boom through which industries rapidly expanded their production.

Important changes in the economic structure included the free land distribution to peasants under the concept of ejido, the nationalization of the oil and railroad companies, the introduction of social rights into the constitution, the birth of large and influential labor unions, and the upgrading of infrastructure. From 1940 to 1970 GDP increased six fold, whereas population doubled. The ISI model had reached its peaked in the late 1960s.

During the 1970s, the administrations of Echeverría and López Portillo tried to revive the economy and began to include social development in their policies, an effort that entailed more public spending. However, the government decided to borrow from international capital markets to invest in the state-owned oil company — which in turn seemed to provide a long-run income source to promote social welfare — in the advent of the discovery of huge oil fields during those times where oil prices were surging and international interest rates were low and even negative.

In fact, this method has produced a remarkable growth in public expenditure, and President López Portillo announced that the time had come to learn to “manage prosperity”. This period of prosperity, however, was accompanied by the mismanagement of resources and inflation.

In 1981-1982, the international panorama changed abruptly. This has been manifested by oil prices eventually plunging as well as the detrimental increase in  interest rates. In 1982, President López Portillo before ending his administration decided to suspend payments of foreign debt, devalued the peso and nationalized the banking system along with many other industries that were severely affected by the crisis.

While import substitution had produced an era of industrialization in previous decades, it was evident that that protracted protection had produced an uncompetitive industrial sector with low productivity gains. Meanwhile, President de la Madrid was the first in the series of presidents that began to implement neoliberal reforms.

After the crisis of 1982, lenders were unwilling to return to Mexico and in order to keep the current account in balance. With this, the government has decided to resort to currency devaluations which has produced an effect that sparked unprecedented inflation.  Its inflation rate has reached its historical high in 1987 at approximately 159.7%.

In order to stabilize all the untoward economic activities in Mexico, Mexico has decided to liberalize its trade policies. It has been said that the first step toward the liberalization of its trade was the incorporation of Mexico’s signature of GATT in 1986. During the Salinas administration in Mexico, state-owned companies were privatized with the notable exception of the oil industry and energy since these industries were primarily protected by their constitution. In addition, the North American Free Trade Agreement was signed in 1992 between the United States, Canada and Mexico.

Soon after, the signature of two additional supplements on environments and labor standards came into effect on January 1, 1994. Aside from these, the Salinas administration also introduced strict price controls and negotiated smaller minimum wage increments with labor unions with the aim of curbing inflation. While his strategy was successful in reducing inflation, economic growth pf Mexico has averaged only 2.8 percent a year. Although this has been the case, it barely shows that little by little Mexico is slowly recovering from the past mistakes of previous administrations. Also, the move to liberalize the trade policies would really help them ensure that there would exist positive economic growth for the people.

After several administrations trying to pose remedy on seemingly difficult-situated economy of Mexico, the Salinas government proved that Mexico can still be at par with the economic activities of other countries in the world. Meanwhile, the Mexican economy rather its official money gained strength by enforcing a fixed exchange rate. It has been said that the peso has become overvalued while the consumer spending increased. With this Mexico’s current account deficit to reach 7% of gross domestic product in 1994, which was primarily financed through public debt instruments called tesobonos.

This financing system has reassured Mexico’s payment in dollars. However, the momentary economic growth was again placed in a bad light after the Chiapas revolt and the assassinations of the most-likely to win presidential candidate as well as the nation’s prosecutor in 1994, which eventually sent an unfavorable message to investors, both existing and potential.

Meanwhile, public debt holders rapidly sold their tesobonos which depleted the Central Bank’s reserves. Portfolio investments, on the other hand, which had made up 90% of total investment flows, left the country as fast as they had come in. This unsustainable situation eventually forced the Zedillo administration to abandon the fixed exchange rate because this seemingly has not proved great worth to the Mexican economy.

During that time, the peso sharply devalued and the country entered into an economic crisis in 1995. The boom in exports as well as an international rescue package crafted by American president Bill Clinton in a certain way helped cushion the crisis. And after less than 18 months, the economy of Mexico was seen to be slowly recovering again. During that 18 months, the annual growth rate of Mexico was aid to have averaged for about 5.1 percent between 1995 and 2000.

President Zedillo and President Fox continued with trade liberalization. During their administrations, several free trade agreements were signed with Latin American and European countries as well as in Japan and Israel in order to maintain macroeconomic stability. With this, Mexico became one of the most open countries in the world to trade and its economy base shifted accordingly. The total trade of Mexico with the United States and Canada eventually tripled and its total exports and imports almost quadrupled between 1991 and 2003. Mexico’s economy is now characterized with a favorable rating as foreign investment was changed from portfolio to foreign-direct investment (FDI).

During the last quarter of 2000, it has been said that the Mexican economy grew at an annual rate of 5.1 percent which has marked its twentieth consecutive quarter of economic growth. For the entire year, the gross domestic product of Mexico then increased by 6.9 percent, the second highest growth rate in two decades. Indeed, the implementation of sound fiscal and monetary policies during 2000 enabled Mexico to achieve, and in most cases outperform, the main economic targets established at the beginning of the year.

In addition, Mexico’s gross domestic product (GDP) in 2000 grew by 6.9 percent in real terms, 2.4 percentage points higher than the original target of 4.5 percent. In current prices, its GDP amounted to 5,432.3 billion pesos (approximately US$574.8 billion). This increase was brought about by the 10 percent expansion in gross fixed capital formation which was supported by the increase in private investments, and by an 8.7 percent growth in private consumption. On the other hand, public spending was said to have registered only a moderate 3.5 percent increase during the year.

The most vigorous component of aggregate demand during that time was the export sector, which expanded at an annual growth rate of 16 percent. For 2000 as a whole, the value of exports totaled US$166.4 billion. In terms of sector performance, the primary sector which included the agriculture, livestock, fishing and forestry has expanded at a rate of 3.4 percent in 2000. Meanwhile, the industrial sector which included the mining, manufacturing, construction and electricity as well as the services sector, which included commerce, transportation, communication and financial services, grew only by 6.6 and 7.4 percent, respectively.

In an article written by Dickerson, however, Mexico’s economy slowed in the last three months of 2006. This was aid to have been brought about by the  consequences in the United States: Tough times in Mexico typically fuel immigration north of the border. In the same year, it has been said that Mexico’s gross domestic product only expanded 4.3% in the October-to-December period from the final quarter of 2005 based on the figures released by the finance ministry. It was said to be the third consecutive period of slower growth in the nation’s economic output as manifested with a sharp decline from the 5.5% expansion registered in the first quarter. The deceleration was blamed largely on a sluggish factory sector and a slowdown in exports to Mexico’s principal customer, the United States.

In 2006, Mexico only posted GDP growth of 4.8% which has been considered the strongest since 2000. High oil prices pumped record tax revenue into government coffers. The economy of the United States, Mexico’s biggest trading partner, is also weakening. Meanwhile, Mexico’s inflation has been rising, its oil production is slipping, and the nation’s bellwether auto sector has hit a speed bump. Its inflation has been greatly manifested by soaring unemployment as well as rising prices on basics including tortillas, milk and eggs have sparked street protests. The unemployment rate of most of its people was also affected with the slower rate of remittance by those working outside their country.

It has been said that most Mexican families only rely on the remittances sent home. Remittances have become the nation’s second-largest source of foreign exchange behind oil revenue. The slowdown in economic growth is attributed also to manufacturing. Mexico’s factory or manufacturing sector only expanded 3.1% in the final quarter of the year. In the first three months of the year, it grew by only about 7% which was driven by a rebound in producing automobiles.

The Mexican plants of Ford Motor Co., General Motors Corp. and DaimlerChrysler has only accounted for about 70% of the cars assembled in Mexico and most of which end up in American showrooms, not also in Mexico since customers as surely to swarm over luxury vehicles when it would be showcased in the United States. But, the U.S. sales slump has trimmed Mexican production of vehicles as well as its exports after it only acquired a 5% growth rate in December. The trend accelerated in January as exports tumbled to 88,915 vehicles, a 20.7% drop from January 2006.

In last year, Mexico’s overall export growth also slipped to 6% in November and 4% in December after an average increase of 19% over the first 10 months of the year. Its Industrial production barely grew a 1.6% rate in December, much lower than forecasts made by most economists. Meanwhile, consumer prices have also been predicted to be rising. Mexico ended 2006 with an inflation rate of 4.05%, up from 3.3% in 2005. This was said to be brought about mainly by skyrocketing prices for agricultural products which include tomatoes, tortillas and other basic foodstuffs. However, this phenomenon of skyrocketing agricultural prices could force Mexico’s central bank to raise interest rates, which could eventually help put a stop to inflation while become a burden to economic growth.

On the other hand, Mexico’s oil sector was said to have not contributed much to the economic growth of the country in 2007. This has been manifested by the continuing increase in petroleum prices although it has declined steeply since last summer’s record highs, meaning less oil revenue for Mexico’s treasury. Production also has fallen sharply at Cantarell, its largest oil field, a major worry in a nation that last year relied on petrodollars to fund nearly 40% of public spending.

As earlier stated, the remittances — which has also become part of the economic activity in Mexico — have shown signs of sluggish growth. Mexican workers last year only remitted almost $23 billion to their families. But the pace of growth decelerated markedly over the course of the year. In the first quarter of 2006, remittances grew 27.5% compared with the January-to-March period in 2005. In the final three months of last year, remittances were up just 5.5% over the same period the year before. However, November and December were seen to actually be stagnated in terms of growth.

It has also been said that the slower economic growth of Mexico could be a result of tighter U.S. border enforcement. To some, it is a sign of progress for border agents but a potential blow for Mexico, where remittances have become a pillar of the economy.

Agriculture, as a percentage of GDP, has been steadily declining. However, this has been also encountered ny most developing nations as it plays a smaller role in the economy. In 2006, the agriculture sector of Mexico has accounted for only 3.9% of GDP, down from 7% in 1980, and 25% in 1970. Nonetheless, given the historic structure of ejidos, it still employs a considerably high percentage of the work force: 18% in 2003 which are mostly of basic crops for subsistence as  compared to 2-5% in developed nations in which production is highly mechanized.

In spite of being a staple in Mexican diet, Mexico’s comparative advantage in agriculture is not in corn, but in horticulture, tropical fruits and vegetables. Negotiators of  free trade agreements are expected that through liberalization and mechanization of agriculture, two-thirds of Mexican corn-producers would naturally shift from corn production to horticultural and other labor-intensive crops such as fruits, nuts, vegetables, coffee and sugar cane. While horticultural trade has drastically increased due to these agreements, it has not absorbed displaced workers from corn production which has been estimated at around 600,000.

Moreover, corn production has remained stable as a result of income support to farmers or a reticence to abandon a millenarian tradition in Mexico: not only have peasants grown corn for millennia, corn originated in Mexico. Even today, Mexico is still the fourth largest corn producer in the world.

Meanwhile, the industrial sector as a whole have benefited from trade liberalization. In 2000,  it has been said to have accounted for almost 90% of all export earnings. As earlier stated, the most important industrial manufacturer in Mexico is the automotive industry This industry are internationally recognized for their standards of quality. Although this has been the case, the automobile sector in Mexico differs from that in other Latin American countries and developing nations in that it does not function as a mere assembly manufacturer.

The industry produces technologically complex components and engages in some research and development activities. The “Big Three” which includes General Motors, Ford and Chrysler have been operating in Mexico since the 1930s. Volkswagen and Nissan on the other hand had only built their plants in the 1960s. Now, even other car producers such as Honda, BMW, and Mercedes-Benz have joined in. Given the high requirements of North-American components in the industry, many European and Asian parts suppliers have also moved to Mexico for one reason alone, that is, because most labor oriented employment has been subjected to lower costs.

Meanwhile, some large industries of Mexico include Cemex– the third largest cement conglomerate in the world in term of  alcohol beverage industries — has represented a meager amount in the economic activity of the country. It has been said that high-tech industrial production represented 21% of total exports, the highest in Latin America. Apart from Cemex, the alcohol beverage industry includes world-renowned players like Grupo Modelo, or conglomerates like FEMSA, which apart from owning breweries and the OXXO convenience store chain, is also the second-largest Coca-Cola bottler in the world. It also include Gruma, the largest producer of corn flour and tortillas in the world, Bimbo, Telmex, Televisa, and many other high-tech industries, many of which are based in Monterrey.

Maquiladoras — or the Mexican factories which take in imported raw materials and produce goods for export —  have become the nucleus of trade in Mexico. This sector has benefited from the free trade agreements being pushed by several administrations in Mexico. The real income in the maquiladora sector has increased 15.5% since 1994, though from the non-maquiladora sector has grown much faster.

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 that 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 decreased.

Meanwhile, mineral resources are the “nation’s property” by constitution. As such, the energy sector is administered by the government with varying degrees of private investment. By fact, Mexico is the fifth-largest oil producer in the world with the capacity to produce about 3.8 million barrels per day.  The public company in charge of administering research, exploitation and sales of oil and is considered the largest oil  in Latin America is Pemex, which makes $86 billion in sales a year. Their sales constitutes a sum larger than the GDP of some of the region’s countries.

However, although it has been said that Pemex is the largest oil company, their growth is temporarily hampered with the imposition of high taxes, which eventually is a significant source of revenue for the government. Without enough money to continue investing in finding new sources or upgrading infrastructure and being protected constitutionally from private and foreign investment, some have predicted the company may face institutional collapse. While the oil industry is still relevant for the government’s budget, its importance in GDP and exports has steadily fallen since the 1980s. In 1980 oil exports accounted for 61.6% of total exports; by 2000 it was only 7.3%.

On the other hand, the service sector was estimated to account for 70.5% of the country’s GDP, and employs 58% of the active population. This section includes transportation, commerce, warehousing, restaurant and hotels, arts and entertainment, health, education, financial and banking services, telecommunications as well as public administration and defense. Mexico’s service sector has been strong, and in 2001 it replaced Brazil’s as the largest service sector in Latin America in dollar terms.

Moreover, the tourism industry is also one of the most important industries in Mexico. It is the fourth largest source of foreign exchange for the country. Mexico is the eight most visited countries in the world with over 20 million tourists a year.

Meanwhie, the financial and banking sector is increasingly dominated by foreign companies or mergers of foreign and Mexican companies with the notable exception of Banorte. The acquisition of Banamex, one of the oldest surviving financial institutions in Mexico, by Citigroup was the largest US-Mexico corporate merger at 12.5 billion USD. Banamex generates almost three times as much revenue than all 16 Citigroup’s subsidiaries in the rest of Latin America. In spite of that, the largest financial institution in Mexico is Bancomer associated to the Spanish BBVA.

The process of institution building in the financial sector in Mexico has evolved hand in hand with the efforts of financial liberalization and of inserting the economy more fully into world markets. The financial sector is becoming stable over the years with the  acquisitions of  foreign institutions such as US-based Citigroup, Spain’s BBVA and the UK’s HSBC. Their presence coupled with a better regulatory framework has allowed Mexico’s banking system to recover from their financial crisis manifested by the peso devaluation.

Pubic lending as well as in lending in the private sector is increasing and so is activity in the areas of insurance, leasing and mortgages. However, bank credit accounts for only 22% of GDP, which is significantly low compared to 70% in Chile. Although lending has been widely accepted now in mexico, credit in the agricultural sector has fallen 45.5% in six years from 2001 to 2007 and has now represented about 1% of total bank loans.

It has been described by critics that Mexico’s economy is like an airplane flying with only one engine, that engine-exports-is powerful enough to keep the country from crashing but not powerful enough to lift the whole country. Unless the motor of domestic demand turns over as well, Mexico’s economy will never really take off. Mexico’s current economic system fails to generate even a fraction of the one million new jobs that Mexicans seek each year, and it does not seem to promise rapid growth in the future. Indeed, one unstated but inescapable conclusion is that Mexico cannot hardly catch up to its free-trade partners in North America even at par with their respective living standards.

Mexico’s economy which ahs said to be undercapitalized, inefficient, mistrusted, and biased in favor of large enterprises have remained a stigma or a serious barrier to broad-based economic growth. A few thousand large agro industries like exporting fruits, vegetables, and some livestock have found considerable success. Meanwhile, a significant proportion of commercial producers are bankrupt.

The peasant maize economy is battered by free trade, but it will not disappear because there is a dearth of alternative employment. Good agricultural lands go uncultivated because farmers cannot compete with imports from the United States, while poor peasants deplete natural resources on lands poorly suited to agriculture.

A third problem that surface at some points is the collusive nature of business-government relations. Mexico often remains a country where profits are privatized and losses socialized.

Underlying many of Mexico’s problems is the need for more government revenue. Budget reductions have been responsible for rather striking cuts in government investment, which in turn, have dampened domestic demand and weakened certain sectors of the economy. Tax collection as a percentage of gross domestic products actually fell during the 1990s, a trend that underscores how inadequate has been the focus on the revenue side of Mexico’s budget. The problem is especially acute with regard to social spending. Mexico could potentially afford close-to-universal health care coverage and more extensive antipoverty programs; all it would really need to do is raise taxes by about 5 percent of GDP.

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