Economy

Mexico has a free-market economy with a mixture of modern and outmoded industry and agriculture, increasingly dominated by the private sector. The country is rich in industrial resources. After World War II, its economy changed from a primarily agricultural one to one based on services and manufacturing. In the 1970s, debt slowed the country’s growth rates, and in the early 1980s, Mexico’s oil revenues plummeted. This led to a large foreign debt, and Mexico began to fall behind on its loan payments. The country soon faced a severe economic recession, forcing the government to renegotiate the nation’s foreign debt and begin instituting budget cuts and austerity programs. The Mexican government resorted to imposing high tariffs on imported goods and privatizing many government-owned and -operated industries. The North American Free Trade Agreement, or NAFTA, which went into effect in 1994, allowed Mexico to integrate into a larger, much more competitive global economy. NAFTA is a trade pact between Canada, Mexico and the United States that aims to foster free trade and eliminate tariffs among the three nations.

An aggressive fiscal policy helped Mexico increase its economic growth. However, this growth was short-lived. In the early 1990s, the government devalued its peso, which prompted investors to withdraw millions of dollars from the country. This caused an economic crisis in Mexico that led to a serious decline in the standard of living for most Mexicans as well as an increase in extreme poverty. A strong export sector helped to cushion the economy’s decline in 1995 and led to an economic recovery after 1996-1997. In 1998, private consumption became the leading driver of growth, which was accompanied by increased employment and higher wages.

Mexico still needs to overcome many structural problems as it strives to modernize its economy and raise living standards. Income distribution is very unequal, with the top 20 percent of income earners accounting for 55 percent of income.

Trade with the United States and Canada has nearly doubled since NAFTA was implemented in 1994. Mexico executed a trade agreement with the European Union in November 1999 and is pursuing additional agreements with most countries in Latin America to lessen its dependence on the United States.

Vicente Fox, who was sworn in as president Dec. 1, 2000, could hardly inherit a more robust economy from his predecessor, Ernesto Zedillo. Fox took charge at a time when the economy was up on all fronts. Exports continue to profit from burgeoning U.S. demand, which fueled investment activities, and consumption continues to grow amid record low unemployment and rising real wages.

Written by CountryWatch.com. Sources: Economic Commission of Latin America and the Caribbean, the World Bank. For additional sources, please see Appendix B of this review.

The year 2000 saw the Mexican economy grow by seven percent, according to information from the Central Bank of Mexico. This has been the highest growth rate since 1981. Services expanded by 6.2 percent, leading other sectors, driven by strong growth in commercial activities and the hotel industry. Manufacturing grew at a rate of 4.6 percent. Agriculture experienced a contraction of one percent, following a steep decline in vegetable and fruit production.

The increase in consumer prices - 8.9 percent - was lower than the official target of 10 percent. Higher prices for international hydrocarbons did not carry over to the domestic gasoline prices. The price of natural gas nearly doubled, thereby impacting a number of industries.

High oil prices generated a surplus that bolstered the economy and paved the way to achieve the target figure for the fiscal deficit: one percent of GDP. The economic policy focused on reducing inflation and keeping the external sector balanced; this orientation took the form of tight monetary policy and fiscal policy measures. The net external public debt shrank by nearly $US10 billion, falling to $US73.4 billion, or 12.5 percent of GDP in the case of the private sector debt. The number of persons employed in the formal sector exceeded 15 million, which was 6 percent more than in 1999. The public domestic debt rose to 11 percent of GDP.

Evidence of a slowdown in economic activity can be seen from "leading economic indicators" introduced by the National Statistical Institute of Mexico. In October 2000, the leading indicator, which aggregates information from industrial production, construction, stock markets, oil prices and hours worked in the manufacturing sector, registered a decline of 0.7 percentage points over September 2000.

The economy seems to have slowed in 2001 with a decrease in industrial production. The growth rate was 1.8 percent in March 2001, compared to the same month in 2000. The rise was due to a slight 0.3 percent increase in agriculture, and the livestock sector spurred by increased fruit and vegetable production. The industrial sector fell 1.9 percent due to decreases in manufacturing and construction. The services sector grew 3.7 percent, resulting from growth in communications, entertainment and national trade.

For the first quarter of 2001, the GDP grew 1.9 percent compared to the same period the previous year. During January and March 2001, the most dynamic sector was the services arena, with a 3.9 percent growth rate, while the industrial sector dropped 1.3 percent. Increased demand and reduced government spending, along with a good monetary policy, have managed to keep inflation rates under control.

Tax reforms such as the proposed 15 percent value-added tax on food and medicine would allow the government to accomplish its goals. The authorities decided to cut government expenditure by $US365 million.

Until July 1, 2001, the interest rates were lowered from 18.5 percent to 8 percent. The inflation rate increased by 1.7 percent.

Written by CountryWatch.com. Sources: Economic Commission of Latin America and the Caribbean, the World Bank. For additional sources, please see Appendix B of this review.

The peso appreciated in real terms as oil sales and abundant inflows of foreign direct investment generated abundant foreign exchange and helped boost international reserves. The balance of payments current account ran a deficit of nearly $US19 billion. The merchandise trade deficit was about $US8.2 billion. The non-oil trade deficit was estimated about $US20 billion.

Exports and imports grew nearly at the same rate: 24 percent. Oil sales, at 62 percent, were almost doubled due to the increase in prices. Exports of manufacturers climbed 20 percent. The expansion of domestic demand contributed to a 40 percent increase in imports of consumer goods. Foreign investment shrank from $US22.75 billion to less than $US20 billion. The free trade agreement with the European Union was in full force, and similar accords were signed with the northern triangle countries of El Salvador, Guatemala and Honduras and with the European Free Trade Association, whose pact was to take effect in 2001.

The international reserves increased from $US4,0233.9 million in the first quarter to $US4,0758.7 million in the second quarter. The exports in the first quarter of 2001 totaled 1,674 billion pesos and increased by 7.15 percent from the same quarter last year. On the other hand, the imports increased by 10.16 percent in the first quarter from the same last year. Imports were at 5,701.64 billions pesos.

Written by CountryWatch.com. Sources: Economic Commission of Latin America and the Caribbean, the World Bank. For additional sources, please see Appendix B of this review.

Mexico’s economy would not be helped by the ongoing slowdown of world economies. It has engaged other Central American countries to implement a regional socio-economic integration project geared toward eliminating poverty and realizing common development.

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