World Savvy Monitor

Relative to its size and assets, Mexico’s economy underperforms in the flat world.  The country enjoys numerous advantages: among them, a 2000 mile land border with world’s largest and most powerful economy and significant oil resources.  However, Mexico is being overtaken by China in low-cost manufactured goods, and by India in services.  

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• Lack of Economic Institutions and Infrastructure
• Politics
• Cronyism
• Dependence on National Resource Wealth
• Lack of Investment in Human Resources
• Migration
• Ambivalence

Lack of Economic Institutions and Infrastructure

Several experts, including Thomas Friedman in his seminal work The World Is Flat, have noted that Mexico’s economic transformation to free market principles stalled before critical phases were implemented:

• Mexico did complete most macroeconomic or structural adjustment reforms.  Under pressure from US and the IMF, the government overhauled fiscal and monetary policy to move the country toward an export orientation.  It rolled back government spending, lowered or eliminated protectionist trade barriers, attracted foreign direct investment (FDI), and privatized state assets.  It thereby established most of the conditions necessary for the free market to function.

• It did not, however, complete the next phase: microeconomic reforms necessary to make the free market work.  This critical phase includes building institutions to facilitate the activities of the free market – banks, economic regulations, contract laws, training and technology, education, mechanisms that allow for collaboration and efficiencies, coherent tax policies, etc.  As a result, Mexican companies have been unable to take advantage of the leveled playing field.  Entrepreneurs were not supported, the work force lost ground to better educated workers in other countries, and monopolies discouraged the growth of new businesses.

Put simply, Mexico failed to develop the necessary institutions and infrastructure to promote its own competitiveness in the free market it had joined.  Mexico’s weak laws and culture of corruption, from its judicial to electoral systems, limited its attractiveness to investors and entrepreneurs who require that the state honor contracts, punish lawbreakers, and create an atmosphere of trust and stability.  The result is that Mexico can be a difficult place to do business, severely hampering its economic growth. 

Consider the findings of the World Bank and its Doing Business 2009 report.  Each year the International Finance Corporation compiles a ranking of 181 of the world’s countries on several measures of business-friendliness.  Countries whose institutions encourage and support entrepreneurs are compared, with a lower number indicating a higher ranking.

• Mexico ranks better than the average for Latin America and Caribbean countries, but far behind those in the OECD. 

• Mexico also ranks worse than some Asian, Middle Eastern, Eastern European, and African countries.  Although it ranks 56th out of 181 on “ease of doing business,” it ranks as number 115 for “ease of starting a business,” requiring 28 days to negotiate necessary hurdles.  

• By contrast, the US ranks third on “ease of doing business,” and sixth for “ease of starting a business,” requiring only six days.  Furthermore, Mexico’s rankings across the board have worsened over the last year, especially with respect to ease of starting a business.  

See the Doing Business reports for Mexico and the United States. 

Politics

When other countries were lined up at the starting line as globalization took off, Mexico was distracted politically.  Ironically, the political reforms that were occurring around this  time were mostly positive and badly needed.  The authoritarian system of the PRI was coming undone – first at the local and municipal level and finally at the federal level in 2000 when PAN candidate Vicente Fox was elected President.  But economically, this was not a great time for the messiness and diffused responsibility of a young democracy.  Mexico was trying to build new political institutions at the same time it needed to build new economic institutions.

• In the absence of steady, incremental reforms, economic policies have swung, as they have throughout Mexico’s past, from Left to Right, from pro-labor to pro-business, and from social spending to austerity.  

• The country’s lack of stability has discouraged foreign investors.  

• Desperate for direct revenue, the government has held onto key industries such as state-owned oil giant Pemex, instead of ushering in competition and innovation.  It has been unable to raise money to improve capacity needed for all kinds of commerce; it has been unable to maintain sound economic policies.  

Cronyism

Oligarchs took advantage of the uncertainty to consolidate their wealth by buying up state-owned industries as they were privatized, and foreign concessions as investors fled. 

• Mexico ended up with monopolies controlling everything from telecommunications to electricity to water to steel, television, and radio.  

• People like Carlos Slim used their connections to amass large market shares for their new monopolies and to disadvantage competitors.  This bred inefficiencies and ultimately higher prices.

• New job creation lagged.  Wages dropped as unions remained co-opted by powerful state and private interests. 

This has resulted in an increase in economic inequality which has fueled migration and organized crime and has discouraged foreign direct investment.

Mexico’s form of crony capitalism also cripples bodies that should act as checks on government and private industry.  Unions have failed to develop as true arbiters of fair labor practices; the press is muted; the development of NGOs has been slow.  Cronyism infects the system and perpetuates the status quo.

Dependence on Natural Resource Wealth

Mexico is also impacted by what experts have called the Resource Curse, affecting developing countries with significant natural resource reserves that can be sold as commodities on the global market (oil, natural gas, gold, diamonds, etc.).  See the Global Poverty and International Development edition of the World Savvy Monitor.

Countries that possess natural resources benefit from resource wealth in the short term, but long-term economic development often suffers.  Mexico’s oil is no exception.  The government is highly dependent on oil income, which comprises up to 40% of all government revenues. 

• As with other petrostates such as Iran and Saudi Arabia, Mexico has required significant foreign investment in order to develop its reserves.  When it nationalized its oil concessions in the 1930s, it then had to take on foreign debt to continue extraction.  Like Iran, Mexico lacks the technology and resources to refine its own petroleum; it must export crude oil and then re-import it as gasoline from other countries.

• Nationalized oil companies lead to a lack of accountability; oil revenues are state income with no strings attached, as opposed to tax revenues, which are paid by the populace who demands accountability as to how their money is spent.

• Oil wealth discourages economic diversification.  As long as prices and demand are high, there is no incentive to develop other sectors of the economy.

• Oil wealth is not forever.  Oil is a finite commodity, and reserves are being depleted.

Lack of Investment in Human Resources 

Mexico’s education system is lacking.  See Education section for more information, but note here that its importance for economic growth is crucial.

• Mexico’s workers are under-skilled, compared to those in China and India.  Technology and job training are in short supply.   

• Those who cannot find jobs often join the informal sector of the economy, doing dangerous, unregulated, and often illegal work that yields little tax revenue. 

Migration

Related to lack of investment in human resources is migration. 

• Lacking access to education and training, many of Mexico’s unskilled workers migrate.  The departure of these migrants, usually among the hardest working and most motivated, hurts Mexico’s economic prospects.

• Skilled laborers leave the country in search of better opportunities in more diversified economies.  

• Even those who are educated and able to find lucrative jobs in the country are often discouraged from staying in Mexico because of increasing violence associated with drugs and organized crime, and the failure of the government to provide adequate security and justice.

By virtue of the many citizens living outside its borders, Mexico has become highly dependent on remittances, or money sent home by expatriates.  However, remittances from migrant workers ebb and flow with the economic situation in the host countries.  The deepening US recession has already cut remittances by hundreds of millions of dollars, and this is expected to increase.  In addition, as migrants become more assimilated into their host societies, remittances usually decrease.

Ambivalence About Foreign Involvement in the Economy

Ambivalence about the presence of outsiders runs through Mexican culture and law.  Many post-colonial societies share this ambivalence, having endured exploitation at the hands of foreign powers.  For Mexico, this baggage relates to both former European empires and the United States.  Anti-American rhetoric in Mexico has been known to veer into extreme nationalism and even xenophobia.  Election campaigns are often run on “tough talk” toward the US.

As of yet, outside investors have not been irreversibly deterred – they generally have kept coming back even after periods of nationalization and economic crisis.  But such anti-foreign sentiment contributes to Mexico’s difficulty establishing a pro-business and investment atmosphere.  Moreover, the Asian alternative looms large – India and China are open for business. 

Next:  Inside Mexico:  Economy:  Prospects fro the Future