Mexico is quickly becoming an emerging market heavy-weight. Its economic output, as measured by Gross Domestic Product (GDP) was $1.761 trillion in 2012. This was much less than its primary trading partner, the U.S. ($15.94 trillion) but larger than its other NAFTA partner, Canada ($1.513 trillion). Mexico's geographic size is equivalent to Saudi Arabia, but supports five times as many people while exporting 1/4 of the oil.
Mexico’s 2012 GDP growth rate was 3.9%%, faster than either the U.S. (2.2%) or Canada (1.8%). Mexico's standard of living, measured by GDP per capita, was $15,600, less than half that of its other NAFTA partners. (Source: CIA Factbook)
Mexico's Economy Depends on Exports to the U.S.:
Mexico is the 16th largest exporter in the world, and 82% of these exports go to the U.S. Trade with the U.S. and Canada has tripled since the implementation of the North American Free Trade Agreement (NAFTA) in 1994. More than 90% of Mexico's trade is under 12 free trade agreements with over 40 countries including China, Guatemala, Honduras, El Salvador, the European Free Trade Area, and Japan. These trade agreements are one reason for Mexico's success.
Mexico manufactures and exports the same amount of goods as the rest of Latin America combined. In fact, foreign trade is a larger percentage of Mexico's economy than any other large country. Mexico's #1 export is manufactured products. (Source: The Economist, Senores, Start Your Engines, November 24, 2012; CIA World Factbook, Mexico's Economy)
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 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. A fast broadband connection costs double, the same as in Chile. Other near-monopolies include Bimbo (bread), Cemex (cement) and Televisa (television).
Oil Production Drives Mexico's Economy:
Mexico is the world's ninth largest producer of oil, exporting nearly three million barrels per day. This is less than Iran, China and Canada, but more than the Kuwait, Nigeria and Venezuela.
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 has been treating Pemex like a cash cow, trying only to maximize short-term profit. As a result, production has fallen 25% in the last ten years.
In August 2013, President Enrique Pena Nieto proposed a bill to partly privatize Mexico's oil industry to attract the foreign direct investment needed. Foreign oil companies could share in any profits from oil recovered from new wells. .If the terms are right, this would allow exploration of Mexico's off-shore oil fields and natural gas reserves. President Nieto is also looking to privatize electricity generation, lowering its price. (Source: WSJ, Mexico Vows to Overhaul Oil and Gas Industries, August 13, 2013)
Mexico Is Changing:
Mexico's economy and culture are changing. For years, Mexico's economy under-performed Brazil's, but last year it grew faster. It has become a major manufacturing center for electronics, including most of the flat-screen TVs sold in the U.S., medical devices and aerospace parts. (Source: NYT, Mexico, the New China, January 26, 2013)
Many Americans are worried about illegal immigration from Mexico, but the country is actually gaining immigrants itself. The legal foreign-born population doubled from 2000 - 2010, to one million total. Of these, 750,000 are Americans. As a result, more Americans have immigrated to Mexico over the past few years than vice-versa. (Source: NYT, For Migrants, New Land of Opportunity Is Mexico, September 21, 2013)
Furthermore, the country's birth rate is trending down and may soon be below the U.S. The violence associated with drug cartels continues, as Mexico is a major underground trade route to U.S. addicts. However, the country's murder rate is slowly falling for the first time in five years. (Source: The Economist, After Darkness, Dawn, November 24, 2012)
Part of the change includes a new President, Enrique Peña Nieto. He replaced President Felipe Calderón-Hinojosa, who focused on five priorities for his six-year term:
- 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.
- Upholding legal institutions.
- Protecting the environment.
Of these, his crack-down on the drug cartels was the most controversial. It amounted to an all-out war, increasing violence including retaliation to civilians by the cartels. Many Mexicans blamed Calderon for upsetting the cartels and increasing violence.
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:
The economy faces several challenges, including the need to:
- 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.