Why is the Mexican economy doing so well? Here are 7 reasons
The Mexican economy is experiencing an industrial boom but the new government has some work to do to keep the economy humming.
The poor economy is supposedly one of the reasons that Mexico’s Partido Nacional de Acción (PAN) lost the presidency this past weekend, however, while some Latin economies like Brazil and Argentina have slowed to a halt the Mexican economy seems to be heating up.
It’s true that the PAN’s economic record was pretty weak. Average GDP growth under outgoing President Calderon was just 2.4% per year—compared to around 3.4% in Latin America. But the economy has rebounded strongly since 2009 and Mexico currently has one of the fastest growth rates in the region.
Here are seven reasons why things are going so well.
Mexico is in the midst of an industrial boom.
Mexican industry is on a hot streak with auto manufacturers leading the way. Since opening to trade in the 1990s Mexico has developed a strong export-driven manufacturing sector. Global competition has spurred Mexican industry to become more efficient and produce higher-value products like cars, computers, cell phones and electrical components. Mexico not only puts things together it also designs them. For example, Mexican workers not only assemble the Volkswagen Jetta they also design around 70% of its parts. This provides better jobs and keeps more value in Mexico.
Mexico has the largest trade agreement network in the world.
Mexico has free trade agreements with more than 40 countries across three continents and has benefited from the rebound in global trade since the global financial crisis. The Mexican economy is still very tied to US demand but it is now better prepared to take advantage of growth in Asia and South America.
Mexico’s extensive network of free trade agreements (Source: The Ministry of the Economy)
The Mexican peso has weakened during the past year.
This is one of the biggest factors supporting Mexican industry. The Mexican peso is weaker than a year ago, meaning that you can now get more pesos for each U.S. dollar. If it costs GM 100,000 pesos to make a car in Mexico, the cost per car would have fallen from $8,570 last June to $7,494 currently. The weaker peso means that U.S. and Japanese auto manufacturers can now build more cars more cheaply in Mexico than other places.
Mexico is becoming a majority middle class nation.
Annual per capita income is around $13,000 compared to just $10,000 in Brazil and $9,000 in Colombia. This is still well behind developed countries but it is growing. Higher income has helped to boost domestic consumption which has traditionally been hindered by inefficiencies related to monopolies. Unemployment is low at 5% and the rise of Mexican industry is creating better, higher paying jobs.
Agustin Carstens, aka ‘El Elefantito’:
As the current head of the Banco de Mexico, Mexico’s central bank, and finance minister between 2006 and 2009, Carstens has been the driver behind Mexico’s solid macroeconomic policies that have attracted investment and encouraged domestic consumption. As finance minister, El Elefantito [as he is nicknamed in Mexico] has helped reduce government debt and increase savings. His oversight of monetary policy at the Banco de Mexico has kept inflation low and maintained a steady and competitive peso.
Agustin Carstens, a big factor in Mexico’s recent economic success (Source: Wikipedia)
All of the positives mentioned above have helped attract record amounts of foreign investment to Mexico, particularly in 2004-08. This investment has been going toward manufacturing projects, financial services and real estate and is now paying off by helping to create both profits and new jobs. After a dip in 2009, foreign investment has rebounded and is expected to be around $20 billion this year.
(Source: The World Bank)
Finally, the economic contraction in 2009 was particularly strong.
The Mexican economy contracted by 6.2% in 2009 compared to a 1.8% contraction in Latin America as a region. The swine flu pandemic in 2009, which basically shut down Mexico City for a few weeks, further worsened Mexico’s recession meaning that Mexico’s recovery (2010-12) started from a lower base than its neighbors. This is reflected in faster GDP growth. While the Mexican economy is expected to continue to perform relatively well in the short term, it is unlikely that we will see annual growth rise much beyond 4%.
(Source: The World Bank)
The Mexican economy still has pockets of inefficiency and areas that need severe improvement. Inequality is high, violence related to organized crime hurts the economy and worries investors, banks don’t lend much money to consumers or small businesses, the labor market encourages informality and the energy sector needs major reform.
These deficiencies remind us that there is still room for Mexico to grow. Mexico’s economic potential is high but there is a lot of hard work to be done by the new government. If the new President, Enrique Peña Nieto, and his team are able to work with the other parties in Congress to make progress improving education, infrastructure, labor and the energy sector they will surely have a better economic record than the PAN. If not, we can expect this current growth spurt to fade and Mexican voters to find a new party in 2018.