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Mexico's Problem: Political Risk In A Context Of Concentrated Wealth

During a speech at the regal Palacio Nacional in Mexico City’s historic center Mexico’s President Enrique Peña Nieto tacitly acknowledged his administration’s struggles to improve public security and kick-start meaningful economic growth. Peña Nieto, after all, had seen his approval rating plummet as scandal after scandal, including the abduction of 43 student teachers, the cancelation of a major public works contract, and the escape of cartel boss Joaquin “El Chapo” Guzman tarnished the country’s image. “Our country was deeply hurt by a series of cases and terrible events…[that] have damaged the mood of Mexicans as well as their confidence in government institutions,” Peña Nieto explained in his speech.

Peña Nieto also warned about the dangers of turning towards populism and demagoguery during the crisis. After all, although many Mexicans adore folksy heroes such as Pancho Villa and Emiliano Zapata, and revere Lazaro Cardenas, the populist president who served in office from 1934 to 1940, and nationalized Mexico’s oil sector and invested heavily in rural education, it is Cardenas' successor, Miguel Aleman, who is credited with helping to forge the country’s modern growth trajectory by investing heavily in infrastructure and industry. In his book Distant Neighbors, Alan Riding argues that Aleman “firmly believed that wealth must be formed before it can be distributed…growth first and justice later.” Mexico’s economy surged at an average pace of 5.5% between 1940 and 1980 but was ultimately brought down by irresponsible fiscal policy and the inefficiencies of corrupt and heavily protected state-owned enterprises. During the administrations of presidents Miguel de la Madrid and Carlos Salinas during the 1980s, a new generation of Mexican technocrats radically transformed the economy and built up a more solid foundation. With the signing of NAFTA, Mexico cemented its new strategy in place, opening to global commerce, and catalyzing a promising a new era of (potential) prosperity.

Over the last 20 years, however, while billionaire Carlos Slim and Mexico’s other oligarchs have seen their incomes soar and well-educated professionals have found new jobs in the financial, automotive, aerospace, and IT outsourcing sectors, many Mexicans have seen their incomes stagnate. According to some estimates, the richest 0.12% of Mexico’s population now controls almost half of the country’s wealth. At the same time, the chunk of Mexico’s population that lives in poverty rose from 45.5% to 46.2% between 2012 and 2014. Nearly six out every ten of the country’s workers is employed in the informal sector, washing windows, selling snacks in the street, or working in domestic service. In southern Mexico in states such as Chiapas and Guerrero poverty and informality rates are even higher.

During a recent conversation, Ricardo Aceves, a Barcelona-based economist at FocusEconomics, told me “In general terms the [Mexican] economy is growing at below it’s potential. It’s been this way since the start of the Peña Nieto administration. The economy has been underperforming. Growth isn’t taking off and now little by little it’s been slowing because of external shocks.”

While Mexico’s economy faces serious challenges, the country also benefits from a number of unique characteristics. Mexico’s relationship with its northern neighbor differentiates it from the rest of Latin America. While currency depreciation makes it more expensive for Mexican manufacturing companies to import equipment and industrial inputs, the weak peso also makes Mexican exports more competitive.

In absolute terms, Mexico, more than any other country in Latin America, benefits from the strong dollar, through the remittances sent home by migrants living in the U.S. In July for instance, Mexican migrants forwarded a record-breaking $2.2 billion in cash transfers. During the first seven months of 2015 these remittances totaled $24.3 billion, up 6.2% from the same period last year. (To put this in perspective, Peru, whose recent growth has been driven by the commodities boom, exported less than $20 billion worth of minerals during the entire year of 2014.)

Furthermore, while Mexico’s remittance transfers provide an additional source of dollar income, they are dwarfed by the size of Mexico’s receipts for manufactured goods exports. Unlike Brazil, Colombia, Argentina, Peru, and Colombia, countries that are heavily dependent on natural resource exports and have been gut-punched by the economic turmoil in China and the fall in commodity prices, Mexico has a strong manufacturing sector and has been able to keep its economy chugging along during a difficult economic environment. Within Mexico there may be growing frustration over Peña Nieto’s struggles to deliver brisk economic growth, but in from a regional perspective, Mexico is doing quite well. In 2016 Brazil is expected to limp out of 2015’s recession and tally an anemic 0.3% growth rate. Mexico, by contrast, should see its economy expand by 3.2% in 2016.

Although Mexico’s leftist critics may be loath to admit it, the economic transformation that has taken place over the last three decades is paying off, albeit in the form of economic stability rather than in short-term returns and robust growth. Unlike during previous periods of global economic instability such as in the early 1980s and early 1990s, Mexico has avoided a major economic crisis. While Brazil is dipping into a recession, Mexican businesses are exporting more than a billion dollars of manufactured goods every day. In June year-on-year business investment actually increased by 8.6%, the highest rate since 2012. Mexico is on track to export a record-breaking 2.9 million automobiles in 2015. Ford is currently spending $2.5 billion to build new production facilities in Mexico. Boeing, Audi, and GM are all making significant investments. In early 2015 IBM announced a plan to open a cloud-computing center in Mexico, part of a $1.2 billion investment plan. Wal-Mart de Mexico reported sales of $6.7 billion in the second quarter of 2015, a 9.9% increase over figures from 2014.

Mexico’s economy is projected to grow at between 1.9 to 2.3 percent in 2018, a figure that doesn’t rival growth reported in the fastest growing emerging market nations over the last decade, but will meet or exceed the expected average growth rate for Latin America as a whole for the year.

In recent years Mexico has actually performing quite well in comparison to regional rivals Brazil, Venezuela, and Chile. After all Mexico’s economy benefits from its foundation on industrial manufacturing in comparison Argentina, Colombia, Brazil, and Chile which are still heavily dependent on commodity exports.

Like Miguel Aleman, Peña Nieto has pursued a growth first, social justice later development plan. Although the discipline to avoid borrowing heavily and splurging on deficit spending during the peak of the hype about the “Mexican Moment” at the start of Peña Nieto’s term in 2012 has provided Mexico with the solid footing to weather the turbulence of 2015, Mexico’s responsible macroeconomic management also translates directly into popular frustrations about the absence of tangible, short-term benefits from the government’s internationally lauded reform agenda. Although Mexico has seen brisk growth in luxury goods sales in recent years, overall the country remains faced with serious challenges moving forward. In order to compete on a cost basis with manufacturers in China and Vietnam, Mexican companies need to control expenses on wages. But, if Mexico aims grow it’s middle class and expand its internal market it will need to find a way to increase productivity.

The solution, of course, is to follow the example set by Lazaro Cardenas and invest heavily in education and infrastructure to help make Mexican companies more competitive. More investment in educational programs would help Mexican manufactures become more adept at higher-value added design and innovation-focused industrial processes. The problem is that in a global environment characterized by low oil prices, Mexico’s government won’t have an overflow of cash to spend on roads and schools. Early on, foreign interest in Mexico’s newly opened oil fields has been lackluster. Although foreign money may flow in over the medium term oil investments aren’t likely to provide much of a boost for Peña Nieto’s domestic spending agenda over the next three years.

Absent a sudden boom in oil investment or a change of course towards a heavy program of counter-cyclical spending, Mexico is unlikely to be able to deliver game-changing levels of economic growth this year. Between 1994 and 2014 Mexico reported average growth of 2.8 percent. But, in the longer run with macroeconomic stability and robust manufacturing sectors, the country seems poised to benefit as the global economy evolves. Mexican academic Jorge Castañeda has argued that Mexico’s curse is that it always seems poised to deliver booming economic growth mañana rather than today. In his September 2 speech Peña Nieto promised to focus on economic development programs, particularly in Mexico’s impoverished south, saying “We will support productive activities in the most marginalized rural areas.”

The challenge for Peña Nieto (and whoever replaces him as president) will be to deliver tangible benefits in the short term and to stop asking investors and ordinary citizens to wait for growth to be delivered down the line.

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