Before diving into Mexico’s internal struggles, we thought it would be useful to highlight some important data points on the country:/>
- Mexico has a population of 127.5 million people
- The country’s life expectancy is 76.9 years with an HDI score of .76
- The contribution to GDP are broken up as follows: 63.2% services, 33.1% industry, 3.7% agriculture
- Mexico exports 81.24% of its goods to the US
- Mexico had a GINI Index rating at .459 in 2015, which ranked as highest in the world followed by Chile (OECD)
Mexican GDP Statistics (LCU = Local Currency Unit)
Source: World Bank
In Mexico, we see large inequalities in the country, largely separate by geography. Data shows that since 1985, the weight of the Northern states, as a percentage of national GDP, went up from 23% to 28%, while Southern states’ share decreased from 20% to 16% (SEDATU 2014). Experts mark this change over the last 2 decades as a result of Mexico’s economic regime shift from an “import substitution” strategy towards a free-trade approach with the arrival of the NAFTA agreement. Regions along the coasts also are able to support the Travel and Tourism industry, which represented 16% of the country’s total GDP in 2016 (WTTC). In the southernmost regions of the country, we see large indigenous populations, and low GDP per capita relative to the rest of Mexico. According to an Oxfam report, 1% of the Mexican population owns 43% of its wealth.
Aside from inequality, Mexico has a multitude of other economic woes. The four issues we chose to examine are corruption, reliance on exports, high inflation/weak peso, and a heavy reliance of the US. Each of these play a role in exacerbating Mexico’s economic problems, and raise uncertainty for the future.
Corruption has always been prevalent in Mexico. The large presence of the drug trade has created an environment where politicians and lawmakers are often coerced by criminals. Cartels can often take over areas or local governments. Corrupt politicians often act in the their own best interest, which leaves the common people of Mexico behind. This environment does not breed productive legislation. Also, numerous economic studies point to corruption having a negative effect on economic growth (Latin American Journal of Economics).
Mexico is an extremely export driven economy. Exports, while being helpful to growth, can also pose an issue in times of crisis. Countries across the globe reduce consumption, thus hitting exporters very hard. Also, the vast majority of their products are traded in the US (81%), and with the the current administration expressing desires to alter/leave NAFTA, Mexico could face dire consequences. As shown above, Mexico experienced -4.7% GDP growth in 2009. This figure represents the sensitivity of Mexico’s export driven economy to global financial shocks.
Despite recovering, 2017 has been a tumultuous year for the peso. With the election of Trump, the peso dropped due to speculation and uncertainty regarding the currency. With threats to drop out of NAFTA, build a border wall and cut ties with businesses that export production to Mexico, the peso could be subject to additional future devaluation. Persisting inflation could be agitated by a weakened peso, which then could force the central bank to raise interest rates. Raising interest rates decreases overall export levels, which could also prove detrimental to their economy.
While many problems in the Mexican economy are caused internally, there are also external variables that influence the country’s development. Mexico has developed a strong economic relationship with its northern neighbor over the years. This reliance has made its economy susceptible to change whenever the US does, as we all saw in the 2008 financial crisis. In the past 2 decades, the US share of Mexican imports has dropped from 83% to 47%. While Mexico is able to leverage a relationship with a powerful, large economy, it also is vulnerable to competition from the rising economies of the world.
Questions to consider:
How does Mexico’s reliance on the US play a role in its growth and development?What are some strategies the country can undertake to deal with regional disparities in wealth, if any?Sources:
Burke Plater and Will Nuti