The Mexico Miracle

Industry By Professor V. Shivkumar

The Mexican government remains committed to fiscal consolidation, reducing the fiscal deficit gradually to 2.5 percent of GDP by 2018

Mexico has undergone significant political and economic transitions. The country is now a democracy. Its economy, once largely closed and dominated by oil, has become one of the world's most open, and is increasingly a global manufacturing powerhouse. Finally, years of economic change and macroeconomic stability have enabled a growing middle class.

By mid-2008 successive Mexican governments had made progress in reforming the economy and reducing poverty. Despite many odds, Mexico has made tremendous progress over the last decade in terms of improving the quality of life of its citizens, especially in the areas of education, health and jobs. Notwithstanding, Mexico performs well in only a few measures of well-being relative to most other countries in the Better Life Index.

A result of globalisation, foreign trade has created a series of trade agreements and treaties on free movement of goods, regional integration and economic integration processes between countries. This phenomenon has increased in most countries and Mexico is no exception. Mexico has experienced a steady increase in the internationalisation of Mexican companies. This increase is largely due to the transparent trade policy adopted by the country. Following the entry of Mexico to the General Agreement on Tariffs Trade (GATT) in 1986 and to adopt business trends on multilateralism and regionalism, it has led to an increase in the internationalisation of Mexican companies.

In light of the foregoing, from the late 90's, Mexico has experienced an increase in investment abroad of large Mexican companies, which have managed to cope with changes in international markets and structural adjustment policies.

The North American Free Trade Agreement, or NAFTA, is a three-country accord negotiated by the governments of Canada, Mexico, and the United States that entered into force in January 1994. NAFTA’s terms, which were implemented gradually through January 2008, provided for the elimination of most tariffs on products traded among the three countries. Liberalisation of trade in agriculture, textiles, and automobile manufacturing was a major focus.

The first FTA after having signed membership to the General Agreement on Tariffs Trade (GATT), now the World Trade Organization (WTO) was the NAFTA (1994); from there, Mexico, began a race to sign trade agreements and treaties with over 45 countries, continuing until today the country with the larger network of the world trade agreements (Secretaría de Economía, 2015). Mexico began to hold practically a trade treaty by b year: Costa Rica (1995); the Group of Three (1995); Bolivia (1995); European Union (1997); Nicaragua (1998); Chile (1999); Israel (2000); Northern Triangle (2001); EFTA (2001); Uruguay (2004);and Japan (2005). During the second half of the last decade there was a small decrease in the commercial policy of Mexico, to resume the conclusion of treaties and retaking with the signing of the FTAs with Colombia (2011), Central America (2012), Peru (2015) and Panama (2015).

NAFTA gave a major boost to Mexican farm exports to the United States, which has tripled since NAFTA's implementation. Hundreds of thousands of auto manufacturing jobs have also been created in the country, and most studies have found that the pact had a positive impact on Mexican productivity and consumer prices. There are however certain unresolved issues and heart burns on both sides.

Since the early years of the maquiladora concept, a cross-border manufacturing government programme, the Mexican manufacturing sector has evolved significantly. Today, the well-established and globalised Mexican industrial sector is a much more specialised and nuanced market, with a stronger regulatory framework. Meanwhile contributing around 5 percent to the country’s total GDP in 2013, Mexico’s mining sector is among the top 10 world producers for at least 16 minerals. Though challenges remain, including stagnant local consumption, with a stronger regulatory framework the country is set to strengthen its position as a global player in the manufacturing cluster, ranging from the well-established automotive industry to the rapidly developing aerospace manufacturing sectors.

After decades of booms and busts, Mexico is now known for its strong macroeconomic and fiscal fundamentals, its independent central bank, and its stable privately managed banking system. The country's public sector is smaller than that of Brazil or the United States. Oil, once the major source of trade revenue, makes up less than 20 percent of total exports (though roughly a third of the federal budget). The manufacturing sector accounts for some 80 percent of exports and 20 percent of the overall economy, spurred on by deep North American supply chains.

Near shoring production is taking off in Mexico and the sky isn't even the limit. The Stratford global intelligence organisation described how Mexico's consumer electronic, medical supply and automotive manufacturing industries continue to thrive.

Aerospace manufacturing is one field where innovation continuously leads the charge. In fact, according to Aviation Week, the first two companies to open production facilities in Mexico were Westinghouse and Honeywell. Since then, Mexican manufacturing has exploded. Starting in 2004, aerospace production’s become a significant market for Mexican manufacturing.

At the beginning of 2016, there were 270 aerospace companies in Mexico. Of them, 80 percent focused on manufacturing, 10 percent performed repairs, and the remaining 10 percent developed new ideas. Production plants for these aerospace companies continue to use the latest technology. From 3D printing and mobile data collection, to the design of aerospace materials that are both strong and light, innovation is present in all aspects of Mexican aerospace manufacturing. With the integration of these technologies, sensitive equipment can match specifications to the smallest degree, thus producing high quality products that produce no waste during their creation.

Aviation Week said the Mexican Federation of Aerospace Industries had goals of its own. The organization wants to see Mexico climb from the 15th global supplier of aerospace industries – the title it currently holds – to ranking in the top 10 by 2020. In 2016, the country has already exported $4.5 billion worth of products and employed 34,000 workers. Those numbers are expected to almost triple in the next four years.

Mexico’s economy has performed well relative to other major Latin American economies in recent years, largely because of its thriving manufacturing sector. Unlike Brazil and Argentina, Mexico has continued to see solid growth because on its integration with and dependence on the US market. Although low global oil prices will put pressure on Mexico’s economy, the performance of the manufacturing sector — especially in high-end manufacturing — will be a key driver of Mexico’s economic growth this year and beyond.

According to World Economic Forum on Latin America 2015, Mexico has a $1.26 trillion economy, making it the 15th largest economy in the world, and the 11th taking into account power purchasing parity. This makes Mexico a so-called ‘middle power’: falling just short of being a G7 economy, it is nevertheless an economic power to be reckoned with.

With its 122 million inhabitants, GDP per capita currently stands at about $15,563, placing it firmly in the ‘upper middle income’ countries. Adjusted for purchasing power, the GDP per capita is about 60 percent higher, at roughly $16,000. That puts it in the same league with countries such as Turkey, Romania, and Brazil, but still far below countries like the US ($55,000) or Switzerland ($58,000).

In terms of health, life expectancy at birth in Mexico is almost 75 years. Life expectancy for women is 77 years, compared with 72 for men.

The Rising Middle Class

Over the last fifteen years, macroeconomic stability, real wage improvements, and targeted social spending have helped to reduce poverty and inequality and to foster a rising middle class in Mexico. Programs such as Oportunidades (begun as Progresa) give monthly stipends to low-income households that keep their children healthy and in school. From three hundred thousand recipients in 1997, the program now reaches nearly six million families, about a quarter of the population. In 2002, the government started Seguro Popular, a national health insurance program designed to reach informal and unemployed workers. Citizens who enjoy these benefits tend to reward the politicians who provide them, suggesting evidence of an important democratic feedback loop.

The Mexican government remains committed to fiscal consolidation, reducing the fiscal deficit gradually to 2.5 percent of GDP by 2018.The Central Bank of Mexico is however optimistic that the growth rate will hover around 2.9 percent to 3.9 percent in 2016 with good economic prospects. This should be an encouraging aspect for Indian exporters and businessman.

The World Bank has a broad engagement with Mexico on education and labour market issues, one example being the support of an early education program in rural areas, implemented by the National Council for the Promotion of Education, CONAFE.

The Efficient Lighting and Appliances Project sought to promote Mexico’s efficient use of energy and to mitigate climate change by increasing the use of energy-efficient technologies at the residential level. By the closing date of the project (FY14), 45.8 million of incandescent bulbs (IBs) had been replaced with compact fluorescent lamps (CFLs), and 5.074 million tons of CO2 emissions were avoided.

The Coastal Watersheds Conservation Program aims to promote integrated environmental management of selected coastal watersheds as a means to conserve biodiversity, contribute to climate change mitigation, and enhance sustainable land use. The project currently supports the implementation of 28 Sustainable Forest Management sub-projects in the Gulf of Mexico region and 3 sub-projects in the Gulf of California region.

Mexico’s Ministry of Finance holds its estimate that the economy will grow by between 3.2 and 4.2 percent when world economy faces recession!

During the second quarter of 2015, the economy remained on a slow and slightly mixed improvement path. Industrial production was weak in the first quarter, and mining contracted, described by Neil Shearing, Chief Emerging Markets Economist, Capital Economics, as giving an overall impression “of an economy that is not yet firing on all cylinders”.

The expansionary trajectory forecast for the country comes at a time when a number of major Latin American economies (such as Brazil, Argentina and Venezuela) are expected to be in recession. As a result, Mexico is highly likely to grow faster than the Latin American average over the next couple of years and beyond, reversing the trend of the last two decades. Despite a number of uncertainties this looks set to stand out as an important achievement.

The Enrique Peña Nieto Government set out to boost Mexico’s competitiveness with a package of structural reforms affecting a number of sectors, including energy, telecommunications, tax, labour and education. The package’s most eye-catching component was a constitutional reform designed to end state monopoly in the oil and gas sector and attract investment from major international oil companies. Though low oil prices and a degree of nervousness over the potential effects of monetary tightening in the US have dampened initial investor and market enthusiasm over the reforms, the outlook for the Mexican economy remains stable, with demand from the US expected to support Mexican activity.

The objectives of the National Development Plan (2013-2018) are about five strategic areas: Mexico in Peace; Inclusive Mexico; Mexico with Education of Quality; Prosperous Mexico; and Mexico with Global Reasonability. Every one of them is not mere vision but very implementable that makes Mexican policy dependable.

I had been to several parts of Mexico both rural and urban. What struck me was the infrastructural development taking place at a fast pace without hindering the environment. While many writers in India do say that American companies go to Mexico because their environmental laws are lax, I do not share that view. Yes, education and healthcare are wonderful at certain places and woeful in others. This also happens in every country even in Switzerland where I normally reside you find best and not so best places. I strongly recommend Indian businessmen and policy makers should look to Mexico and Latin America as a destination of great opportunities along with other known destinations. India and Mexico share similar views on International law and International relations; these are strong points for us to come closer.

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