Mexico's Economy

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. ($15.66 trillion) but larger than its other NAFTA partner, Canada ($1.446 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 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 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. The 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. (Source: The Economist, Senores, Start Your Engines, November 24, 2012)

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 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's economy and culture are changing. For years, Mexico's economy under-performed Brazil's, but last year it grew faster. Many Americans are worried about immigration, but Mexico is actually gaining immigrants itself, and its 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 replaces President Felipe Calderón-Hinojosa, who focused on making Mexico a business-friendly country. He had outlined five priorities for his six-year term:

• 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.

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)

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.

Article updated April 4, 2013