Transcript The Mexican Economy

NS4540
Winter Term 2017
The Mexican Economy
Overview I
• Mexico’s economy has fluctuated between 11th and 14th
largest in the world since the 1980s
• The ppp per-capita income is around US $16,000
• World Bank classifies the country as an upper-middle
income country
• Mexico only one of 15 countries with a GDP larger than
$1,000,000m
• Population 122m with one half under age 30
• Country has a significant potential to grow at high rates
(5% or more per year) over the next two or three decades
• Mexico has the largest number of free trade agreements
in the world – 44 including NAFTA
• Country also a member of the G20 and the OECD
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Overview II
• In spite of such a promising profile, Mexico’s growth and
development has disappointed since the 1980s.
• Structural conditions proved difficult to change
• Economic policies led to
• Inefficiency,
• High indebtedness,
• Corruption, and
• Recurrent financial crisis
• This took place in an increasingly competitive
international marketplace
• These all contributed to keep Mexico on a low-growth
trajectory during the last three decades
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Overview III
• Political and economic consequences of long-term
sluggish growth in context of a fiscally weak state
incapable of progressive redistribution included
• An intensified politicization of growing socioeconomic inequality
• Mexico ranked as one of the top 20 most unequal countries in
the 2000s
• Similarly, while successfully addressed by the country’s
conditional cash transfer program, poverty levels
• Oscillated owing to the significant percentage of households that
temporarily emerged above poverty line only to fall back under
due to financial shocks
• Arose again with 2008-09 global financial crisis which pushed
poverty rates up to 50% of the population
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Overview IV
• Phenomenon of great inequality and poverty historically
rooted in
• Race
• Ethnicity,
• Region,
• Urban-Rural differences and
• Critically -- connections (or their absence) with politically and/or
dominant individuals and groups
•
Economy remains dualistic with modern and traditional
sectors co-existing
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Overview V
• In sum, Mexican economy characterized by deep
contradictions
• Open to world competition
• But its main domestic sectors remain heavily concentrated in
monopolies or oligopolies
• This may change due to the structural reforms undertaken in
2013 and 2014
• Mexico is home to a sizeable number of highly educated
competent professionals
• But its governments and businesses are run through cronyism
rather than merit
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Overview VI
• Governments display the trappings of powerful authority
• But pubic finances are very weak and greatly dependent on oil
revenues
• All of the institutions, rules and human resources are in
place to enforce the rule of law
• But justice is politicized, property rights are vulnerable and the
criminal justice system is corrupt
• The formal economy includes global leaders in their
fields such as PEMEX (oil), Cemex (cement), and Grupo
Bimbo (baking)
• But an estimated 30% - 50% of total economic activity takes
place in informal sector (including highly profitable illegal
narcotics trade)
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Overview VII
• Concern is that the weak rule of law and cronyism that
have characterized political and economic life will enable
the powerful companies dominating the main sectors of
the economy to
• Not only remain in a very strong position in their traditional areas
of activity but also
• Expand to the newly opened sectors
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Early Economic History: I
• Modern Mexico starts with the dictatorship of Porfirio
Diaz (1876-1911)
• At the start of this period Mexico’s per capita income about 1/10
that of the US
• Still period saw fast sustained growth
• Gap with US stopped growing and industrialization began
• Key enabler of growth was the creation of a rail network –
joined markets and helped create a national economy
• Peace and growth under Diaz attracted large amounts of
foreign investment
• With Brazil and Argentina, Mexico became an early
industrializer with the development of smelters, steel,
textiles and manufacturing.
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Early Economic History: II
• Economic growth very unevenly distributed and growing
industrial production and capitalist agriculture came at
the price of very significant income and wealth
concentration.
• Election fraud in 1910 and growing discontent prompted
rebellion organized by a variety of:
• Worker groups,
• Peasants
• Middle Class and even
• Elite forces
• In end a revolution lasting from 1910 to 1920
• Disrupted population and economic growth
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Early Economic History: III
• New Constitution built on principles of
• State intervention for the promotion of social justice via:
• Public education
• Communal landowning and
• Robust labor rights
• After a turn towards capitalism in the 1920s country titled
towards socialism under President Lazaro Cardenas
(1934-40)
• Large scale land redistribution via communally held ejidos and
• Nationalized the oil industry, creating PEMEX
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Early Economic History: IV
• Political economy functioned under PRI, the dominant
political party that
• Supported popular progressive causes
• Was nationalistic and
• Relied on the state as the main propelling and steering force of
the country’s destiny
• However economy mainly relied on domestic and
international private investors
• PRI controlled
• organized workers,
• peasants and the
• middle classes connected with the public sector
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Early Economic History: V
• The PRI also crafted an informal agreement with
domestic and foreign investors to:
• promote capital accumulation and growth and
• Contain popular demands and dissidence by intellectuals and
radical political activists (in exchange for the gradual satisfaction
of social demands)
• Years from 1940 to 70 known as the “Mexican Miracle”
• Period of import substitution industrialization (ISI)
• Average annual rates of growth of 6-7% and
• Inflation below 5%
• significant modernization, urbanization, industrialization, higher
literacy rates and lower mortality rates
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Early Economic History: VI
• However the Mexican Model contained a number of
contradictions
• Based on
• state protection,
• subsidies and central planning
• Fostered
• favoritism,
• rent seeking,
• corruption and
• low-productivity growth
• Mexican economy in early 1970s was floundering at a
time when international economy suffering from its most
severe shocks since the Second World War
• Was actually importing oil and missed the boom.
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Late 60s to Early 80s I
• Economic and social modernization produced a
revolution in expectations among urban dwellers
• Demanded pluralism and placed increased pressure on the PRI
• Regime faced a crisis with the student massacres in 1968 and
1971
• Tried to regain the initiative through engaging in economic
populism
• Created an image of an overbearing, disorderly state that
crowded out private initiative through nationalization,
overspending and unsustainable economic policies
during administrations of
• Luis Echeverria (1970-76), and
• Jose Lopez Portillo (1976-82)
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Late 60s to Early 80s II
• During this period economic policy became a tool to
achieve political aims
• Means to foster higher growth were
• Foreign indebtedness
• US $3,200m in 1970 to $16,000m in 1976
• Fiscal deficits
• 2.5% of GDP in 1971 to 9.3% in 1975 and
• Higher inflation
• 5% in 1970 to 17% in 1976
• Trends culminated in Echeverria’s last year in office, 1976
with a
• balance of payments crisis,
• major devaluation of the peso, and
• Request for a credit line from the IMF in exchange for austerity
policies
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Late 60s to Early 80s III
• Lopez Portillo, abandoned the austerity program in
anticipation of more favorable circumstances
• Large scale development of Mexico’s oil infrastructure
• Availability of cheap international credit – petrodollars
• Led to expansionary economic policy that ended in
failure by 1982
• Acceleration in foreign indebtedness
• US $20,000m in 1972 to $80,000m in 1982
• Growing fiscal deficient
• 11% of GDP in 1975 to 18% in 1982
• Increasing inflation
• 17% in 1976 to 57% in 1982
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Late 60s to Early 80s IV
• Twin process of
• rising interest rates (increased risk as debt expanded) and
• declining oil prices
• Created a crisis
• Relations between the government and the private
business class declined dramatically as president
nationalized the banking industry due to massive capital
flight
• Magnitude of the crisis was such to lead to the “lost
decade” not only in Mexico but throughout Latin America
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Economic Busts, 1980s and 1990s I
• IMF, World Bank and Inter-American Development bank
made short term financial help conditional on strict
orthodox management
• Austerity induced policies and the regular payment of
interest and principle of foreign debts
• New President de la Madrid (1982-88) introduced
orthodox macroeconomic policies which have dominated
ever since
• Was talk of a international debtor’s club Mexico, Brazil
and Argentina to negotiate softer terms
• Carlos Salinas convinced de la Madrid
• to pay debts and improve credit standing, and
• Abandon opposition to free trade by joining GATT
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Economic Busts, 1980s and 1990s II
• New approach did not quickly translate into higher
growth and better living conditions for most Mexicans.
• Between 1982 and 1988 when de la Madrid stepped down total
GDP growth was 0.2%
• Average annual inflation was 87% and
• Real wages contracted by 40%
• Like his two predecessors de la Madrid’s last year in
office ended in crisis also related to
• Global stock market crash in October 1987 and
• Uncertainty about future economic management
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Economic Busts, 1980s and 1990s III
• However commitment to maintain neo-liberal approach
• Stringent fiscal and monetary policies
• Implementation of structural reforms, and
• Reorientation of economy in free market direction
• And objective of closer relationship with US, meant
Salinas supported by
• Conservative PAN party,
• U.S. government, U.S banks, and
• The international community
• Conversely significant opposition to the new
administration from left-wing PRD
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Economic Busts, 1980s and 1990s IV
• Mexico became a major recipient of fresh foreign capital
• US $3,500m in 1989 to $33,000 in 1993
• Mainly investors searching for high yields
• In 1990s, Mexico’s share of capital inflows into Latin America
was around 40%
• Mexico became first nation to undergo successful
sovereign debt restructuring via Brady bond scheme
• Assumed country insolvent – similar to corporate workout
• Bank creditors would grant debt relief in exchange for greater
assurance in the form of principal and interest collateral – Brady
bonds – usually 30 year securities
• Debt relief needed to be linked to some assurance of economic
reform
• Resulting debt more highly tradeable allowing creditors to
diversify risk
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Economic Busts, 1980s and 1990s V
• Salinas administration also moved ahead with
• Privatizations – banks back to private ownership
• Deregulation
• Capital account liberalization
• NAFTA
• Granting a great deal of autonomy to the central bank
• In addition he pegged the Mexican Peso to the U.S. dollar to
fight inflation and converged prices to U.S. levels
• However free capital movements led to
• currency appreciation – foreign investors thought a guarantee,
• growing current account deficits and eventually
• Disorderly devaluation like his three predecessors
• Actually Salinas refused to authorize devaluation so his
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predecessor was stuck with it.
Economic Busts, 1980s and 1990s VI
• Next president Ernesto Zedillo (1994-2000) also an
economist
• Quickly inherited another financial crisis requiring large
bailout (20 $billion US, $30 billion IMF)
• Like previous decade, living standards and well being
declined for majority of Mexicans in 1990s
• For a party whose main source of legitimancy had been
general economic improvement, relative social peace and
political stability the four end of presidency crisis
• 1976,
• 1982
• 1987-88 and
• 1994-95
• Brought an end to the PRI rule
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Economic Orthodoxy 2000-12 I
• Vicente Fox of the PAN first non-PRI president in 80 years
• Inherited monetary and fiscal policies with strong nonexpansionary bias
• Bank of Mexico (central bank) had adopted a policy of
inflation targeting (3% plus or minus 0.5% annual price
rise)
• Had brought down inflation but at cost of keeping credit
scarce and expensive
• On fiscal side, IMF mandated austerity measures after the
crisis resulted in reduced spending
• Fox also adopted a fiscal rule in 2006 that established A
zero target for the public sector balance
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Economic Orthodoxy 2000-12 II
• Mexico's macroeconomic performance in 2000s mixed
but perceived as mediocre by most observers
• Growth was 2.2% significantly lower than other large emerging
economies
• Very sluggish increases in formal employment
• Still
• First decade in which growth rates outpaced inflation rates
• Large increase in manufacturing exports to U.S. under NAFTA –
many higher value manufacturers
• Refined Zedillo’s cash transfer program to be a model for many
other countries in reducing poverty
• Poverty declined from around 69% in 1996 to 43% in 2006
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Economic Orthodoxy 2000-12 III
• Calderon (2006-12) next PAN government had to manage
the effects of the 2008-09 global financial crisis
• Slow-down in U.S. had a magnified effect on Mexico – GDP
declined by 8% in 2009
• Calderon’s controversial war on drugs in December 2006
led to period of violence and deaths with 70,000 deaths
and many disappeared
• Economic costs of wear hard to quantify, but no doubt significant
• Relying on Mexico’s historical strategy of unbalanced
growth apparently has hit financing constraints and/or
diminishing returns thus requiring a new strategy
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Return of the PRI I
• 2012 PRI came back to power with Enrique Pena Nieto.
• Economic factors – low growth, low inflation, the
continuation of widespread organized criminal violence,
and a wave of intense citizen expectations about the
need for change
• From economic perspective, Mexico’s economy was
recovering and its prospects were favorable – potential
as an Aztec Tiger.
• Mexico started to be compared favorably with Brazil
• Loss of Mexico’s market share given rapid growth of Chinese
exports to U.S. began to reverse
• So called demographic bonus whereby the country’s
dependency ratio would be lower in the 2030s was identified
• Solid monetary and fiscal policy had given country status in the
international financial community
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Return of the PRI II
• Consensus that Pena Nieto government has been the
boldest since Salinas in enacting structural reforms
• Pacto por Mexico under which PRI, PRD and Pan agreed
to cooperate in Congress in pursuit of reforms
• Principle changes have been in areas of labor, education,
telecommunications, fiscal, energy and financial sectors
• Labor reforms were adopted towards the end of
Calderon’s presidency due to PRI support
• Many articles in the Federal Labor Law which had given
workers strong rights were amended
• As with many other countries that had liberalized their
economies in 1980s, such strong worker protection laws
acted as a deterrent to investment because mobile capital
flows to the best opportunities
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Return of the PRI III
• Countries with strong labor rights found it hard to
generate formal employment,
• Young people forced to accept precarious short-term
positions with no benefits
• Phenomenon in both developed and developing
countries
• New labor reforms in Mexico were intended to increase
flexibility in Mexican labor market by
• Validating and regulating outsourcing by companies
• Establishing training and probationary, seasonal and part time
employment and
• Limiting unpaid wages to 12 months in case of unlawful
dismissal
• Hope was this flexibility would encourage firms to hire
individuals in formal employment
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Return of the PRI IV
• However reform has thus far not produced a turnaournd
in labor market conditions
• In fact consensus is developing about why Mexico’s
economy has grown at such mediocre rates and the labor
market is at the center of this interpretation.
• McKinsey – problem is there are “two Mexicos”
• One is made up of modern well-funded growth economy with
large corporations that are globally integrated.
• Other is a traditional credit-starved low productivity growth
economy encompassing SMEs and critically the huge informal
sector – may be ½ economically active population
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Reform Period I
• Shifting workers from the low to the high growth productivity
sector – aim of the reform has not taken place
• At least as of 2015, there were no significant change to the rate
of formal jobs created in the economy
• In fact halfway through his presidency Pena Nieto seemed
unable to change the
• low productivity,
• low growth, and
• low generation of the formal employment economy
• that has prevailed in Mexico since the 1980s
• Education reform was the first one passed after Pena Nieto
assumed the presidency in December 2012
• Primary and secondary education were traditionally under the
control of a powerful teachers union, the SNTE
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Reform Period II
• The SNTE used the educational system as a machine for
patronage and clientelistic practices to benefit the PRI
• until the early 2000s when its leader Elba Ester Gordillo left the
party to form her own political grouping
• Union’s control was such that government unaware how
many teachers were employed in Mexico
• Pena Nieto arrested Gordillo because of her resistance to
reform -- officially on corruption charges
• Intended changes would transfer many of the
prerogatives exercised by the union to the government
• The Professional Teaching Service was established to
promote a merit based system
• Main economic aim is to raise the level of human capital
since more than 40% of population are under 30.
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Reform Period III
• Mexico has traditionally performed poorly in standardized
tests for literately and math
• Levels of primary and secondary school graduation in
Mexico are high compared with other developing
countries, but quality is quite low.
• To move up value-added chain Mexico requires
technicians and professionals who remain in relatively
short supply
• However progress will be hard.
• Teachers unions still one of the strongest interest groups in
Mexico
• Have been able to block teacher evaluations
• Can still deliver votes in elections to whoever protects their
interests
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Reform Period IV
• Telecommunication and media reforms approved in June
2013
• Major public funded infrastructure project to created a
nationally integrated fiber optic network to be in
operation by 2018 opened up possibility for growth in
telecommunications and internet services
• In theory regulatory bodies were strengthened with the
creation of IFETEL (Instituto Federal
Telecomunicaciones) and state granted faculty to
dismantle monopolies.
• Critics claim that law does not include mechanisms to
hold IFETEL accountable
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Reform Period V
• Dangerous situation because sector is heavily
concentrated in hands of a few;
• Carlos Slim has a monopoly in telecommunications
through Telemex and America Movil while several others
control the visual media
• These tycoons are very influential and easy to see how
they could control the regulatory body
• While reform allowed unrestricted foreign investment in
telecommunication firms it established a upper limit of
49% foreign ownership in the media
• Apparently Pena Nieto has a close relationship with
Televisia
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Reform Period VI
• Pena Nieto Government’s most important structural
reforms have been those concerning fiscal policy and the
energy sector.
• The two are linked with the government budget’s chronic
dependence on oil revenue.
• During the last three decades PEMEX has contributed
some 30-40% annually to the budget
• End result has been a fiscally weak state and a giant oil
company that cannot reinvest to update technology,
prospect find or extract more fossil fuels.
• In contrast to average revenues to GDP of emerging
economies which is around 30% to 33%, Mexico’s is the
lowest between 13% to 17%
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Reform Period VII
• As a result Pena Nieto initiated an ambitious fiscal reform
during last quarter of 2013
• Strong pressure from well organized middle class groups
succeeded in weakening the reforms
• However some strong reforms survived
• Income tax more progressive
• Elimination of various tax deductions that used to favor the
wealthy
• Tax on junk food and sugary drinks
• Increase in value added tax in six states that share the
border with the U.S. – now in line with the rest of the
country
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Reform Period VIII
• On spending side
• Now a minimum universal pension for individuals 65 years, and
• unemployment insurance
• Still some doubts if budget will be balance because new
reforms may only contribute 1% to 2% in fiscal intake to
GDP
• Outlays for given a growing proportion of older individuals in the
future will increase
• Unemployment payments could go up rapidly with any number of
external shocks.
• Still as of mid 2015 the federal government’s annual nonoil based revenue had increased by 20% over 2014
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Reform Period V
• Too early to conclude on a positive note that the changes
in tax rates and taxable base may have laid a basis for
sustainable growth in public revenue.
• This is a precondition if the state is to develop a strong
capacity to regulate growing sectors of Mexico’s
economy.
• However as of 2015 the state remains mired in thousands
of documented instances of cronyism, corruption and
grand theft at the three levels of government, starting
with the President himself
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Reform Period VI
• Most significant reforms have concerned energy
• Until recently Mexico was the only country in the world
where private sector participation in the exploration and
production of oil was not permitted
• Industry nationalized in 1938
• Has been a symbol of Mexican pride and nationalism
• However liberalizing the sector was a decision forced on
the Mexican authorities rather than one chosen freely
• Having reached a peak in oil production of close to 3m barrels
per day in 2004 daily output has suffered a significant collapse
• Declined by more then 20% since exhaustion of largest
field
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Reform Period VII
• With PEMEX revenues plugging federal budget holes the
company underinvested in exploration and production
since the 1980s
• Pessimistic predictions by both domestic and foreign
analysts forecast that without new finds
• Mexico could drop out of the top 10 world exporters and
• Could become a net crude oil importer by the 2020s
• This news led the Calderon administration to propose to
enact moderate reforms of PEMEX in 2008
• Made Mexicans aware of the possibility of oil production
ceasing and the consequences for their energy bills.
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Reform Period VIII
• With PRI back in government Pena Nieto launched an
ambitious reform which opened up the sector
• Corrupt oil workers trade union was stripped of its seats
on PEMEX’s board
• Likewise the electricity state monopoly CFE was opened
up
• Now PEMEX and CFE are considered profit-making state
enterprises which if not meeting specific criteria can be
penalized
• Greatest controversy was in area of oil ownership
• Because this issue remains socially and politically
sensitive, reform states that hydrocarbons under the
ground will remain property of the Mexican nation.
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Reform Period IX
• However once extraction has occurred, their ownership
can be asssigned according to a variety of options
• In effect the reform established a menue of contract
options measured through risk, technological, human
and capital needs.
• Easy projects that PEMEX can continue to operate will
remain as they are
• PEMEX can continue to use service contracts to pay fees
to private companies that participate in such projects or
• New profit sharing contracts
• When more complex projects are considered production
sharing contracts of licesnes will be used to entice
private sector participation.
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Reform Period X
• With a potential of 60,000m barrels of oil and significant
quantities of shale gas, Mexico could remain a major
actor in international energy.
• Lastly Pena Nieto also promised financial reform in
January 2014 to release credit for investment and
consumption as well as to strengthen state development
banks
• Financial sector had imploded during the 1994-95 crisis
and most went bust
• Mexican government aided by US-led bailout saved the
banks and after 1997 sold them
• Main buyers were large multinational banks such as
Citibank, HSBC, Santander
• Today 90% of banking assets are controlled by foreign
banks.
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Reform Period XI
• System is an oligopoly where
• Competition is low
• Credit provision is scarce and
• Fees for basic services are high.
• Private credit at around 25% of GDP places Mexico
among lowest of emerging economies
• Brazil 55%
• Chile close to 80% and
• South Korea at 100%
• Banks in Mexico have colluded to engage in credit under
provision and expansive services
• As a result micro, small and medium enterprises,
agricultural innovation infrastructure and housing have
not had access to credit
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Reform Period XII
• The competition regulator will assess and demand
greater competition among banks
• Borrowers will be able to switch banks to those that offer
the best deals
• Bank of Mexico will regulate lendidng rates and the fees
and commissions banks charge for serivices
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Reform Period XIII
• Pena Nieto Government cannot be accused of shyness
regarding constitutional changes -- however
• Gains could be set back without proper regulation
implementation and evaluation of the social and economic of the
reforms.
• Government also needs to focus on addressing insecurity and
violence
• Also required is
• Reforming the criminal just system
• Establishing professional, non-corrupt law enforcement services
• All will be needed if the country is to reach its economic
potential
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Reform Period XIV
• In contrast,
• Poor governance
• Violence and insecurity
• Microeconomic environments that produce high costs
• Scarce and expensive credit and
• Insecure property rights
• May prevent the country from realizing this high growth
even with some of the reforms going to completion
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