Mexico’s 2012 GDP growth rate was 4%, faster than either the U.S. (2.2%) or Canada (1.9%). Mexico's standard of living, measured by GDP per capita, was $15,300, less than half that of its other NAFTA partners. (Source: CIA Factbook)
Mexico's Economy Depends on Exports to the U.S.:
Oil Production Drives Mexico's Economy:
The country's oil monopoly, Pemex, is state-owned, which means all its revenues go directly to the federal government. As a result, about one-third of the government’s income is dependent on oil. Instead of investing in developing new fields, the government treats Pemex like a cash cow, and tries to maximize short-term profit. As a result, production is slipping and operations are becoming less safe.
There is a lot of oil that could be extracted, but it would be expensive to explore it. Privatizing the oil industry would help attract the foreign direct investment needed. However, this is unlikely to happen since the government would have to find a way to replace the revenue from Pemex. This would mean either increasing the tax rate or expanding the tax base to include many large non-taxed businesses. Neither would be politically popular.
Mexico has recently built up its infrastructure to enhance trade. In 2012, Mexican telecommunications czar Carlos Helu was the world's richest man. However, his company is nearly a monopoly, controlling nearly 70% of mobile phones, 80% of home phone lines, and 70% of broadband. Some are concerned that this lack of competition is hampering growth. Mobile-phone penetration in Mexico is only 85%, about the same as Iraq, and a fast broadband connection costs double the same as in Chile. Other near-monopolies include Bimbo (bread), Cemex (cement) and Televisa(television).
Mexico Is Changing:
- Upholding legal institutions.
- Insuring public security, such as military sweeps to crack down on organized crime and corrupt local police.
- Improving the country’s economic competitiveness.
- Providing better healthcare.
- Protecting the environment.
Calderon had reason to be concerned. Many of Colombia's cocaine operations simply moved to their operations to Mexico when the Caribbean route was shut down. He was concerned they cartels would simply take over the government.
President Pena thinks that the police force wasn't strong enough. To get rid of the cartels, he wants to increase security spending from 1.5% of GDP to 5% -- the level that worked for Colombia. He would draft 40,000 soldiers into the police departments themselves. (The Economist, A Glimmer of Hope, November 24, 2012)
Challenges to Mexico's Economy:
- Privatize the oil industry. This must happen before foreign investors will help extract more oil.However, it will deprive the Mexican government of much of its revenue.
- Upgrade schools, roads and health care services.
- Modernize the tax system and labor laws.