Mexico’s Rise and US-Latin American Relations: A New Paradigm?

From the end of the Cold War to the beginning of the 21st Century, US hegemony in Latin America reached unparalleled heights. As a result, the implantation of neoliberalism occurred in a region that needed a new economic remedy after the failure of state intervention[1].

However, neoliberalism did not have the expected results in Latin America. Starting with Mexico’s economic implosion in 1982 due to an unsustainable foreign debt burden, the region experienced a series of foreign debt defaults and subsequent economic contractions and rampant inflation. The 1980s in Latin America came to be known as the “lost decade”.[2]

As Europe and the US currently face critical challenges to fix their economy, many Latin American countries are even less willing to imitate the US economic model. Moreover, they are increasingly inclined to create their own policies to cope with global economic slowdown.

As a result, American influence in the region has progressively deteriorated over the turn of the century. The 2012 Summit of the Americas in Cartagena, Colombia offered a vivid picture of the state of inter-American relations. The hemisphere’s heads of state underscored the weakening ties between the US and Latin America[3]. It also revealed the limited vision of both Washington to enhance a defined strategy toward the region.

However, while most countries in the region are following independent economic paths, US-Mexico economic cooperation is likely to grow. Indeed, Mexico’s prospect of economic growth is different than the rest of Latin America, and so is its economic relation with its northern neighbor.

No country is more integrated, economically and demographically, with the US, than Mexico. It accounts for two-thirds of US trade with Latin America and half of its energy imports from the region. The implementation of NAFTA strengthened the economic relations with the US since 1994, to which Mexico sends 80 percent of its exports, and from which receives the main source of FDI.

As stated above, current economic and geopolitical dynamics are likely to bring this relationship closer. Given the current high-energy costs and Chinese wage inflation, Mexico’s advantageous geographic proximity to the U.S. is helping boost exports. HSBC reckons that by 2018 Mexico will overtake Canada and China to become America’s main source of imports[4].

It has also been overwhelmingly the largest source of immigrants to the US, both legal and illegal. Nevertheless, this trend is also beginning to change. As a result of the country’s manufacturing boom, Mexicans are no longer massively working on US construction sites or agricultural fields. Contrary to what the 2012 US presidential election debate implied, illegal immigration to the US has been in reverse for several years[5].

More importantly, Mexicans are also crossing the border to invest in the US. Companies such as Cemex, which is the largest cement maker in the US, and Grupo Bimbo, which recently acquired Sara Lee for almost $1bn, are leading the way. Univision, which is now partly owned by Televisa, the Mexican broadcaster, is now the fifth-largest television network in the US[6].

A stronger economic partnership seems to be beneficial for both countries. Mexico’s new administration has expressed its intention to privilege the economic relation with its northern neighbor beyond migration and security issues. President Enrique Peña Nieto has affirmed that the most important part of the US-Mexico relationship is the economy, which is why he wants to concentrate on strengthening economic ties between the two nations[7].

Despite controversies surrounding the immigration reform and the construction of a wall in part of the US-Mexico border, both presidents have signaled that their administration would seek to focus the bilateral relation on the economy. Staff members of the Mexico Institute at the Wilson Center in Washington, DC have suggested that Peña Nieto wants to change the relationship from one where the focus is on Mexico as a source of drugs and people—a problem—to one where Mexico’s economy is a source of opportunity for the U.S. to create jobs[8].

On the other hand, economic concerns are at the top of Obama’s second term, a situation that could also prompt Washington to explore a stronger economic cooperation with its southern neighbor. The financial crisis and a decline in world power will continue to prevent Washington from formulating a strategy towards Latin America. However, the bilateral relation with Mexico can reach new heights as long as it focuses on common ground.

Mexico’s economic view and its geographical position have the potential to serve not only as a strategic partner for the US, but also as a pivot state to influence the region from an economic perspective. As Washington seeks solutions for its problems and as the economy continues to stagnate in Europe and to slow down in Asia, America will have to look down for its historical backyard. This time, however, Latin America has become more independent and less willing to find common ground with Washington.

Raising concerns on the ability of Washington to deter the influence of China –not only in Asia but also in Latin America–, will take the form of currency and trade battles. While Latin American countries will try to continue to diversify their trade partnerships and develop a stronger domestic market, Mexico will remain economically open, thus providing a growing market to fuel the American economy.

Ultimately, if Mexico manages to adopt these investor-friendly policies and achieves to formulate a more intelligent and pragmatic foreign policy, a new era in the bilateral relation would emerge, as both presidents are beginning new terms. Eventually, a more proactive US-Mexico relationship and lasting economic growth would help usher new possibilities to cooperate with the rest of Latin America, and Mexico could eventually set an example to other commodity-driven economies.


[1] Eric Hershberg and Fred Rosen, Latin America After Neoliberalism. Turning the Tide in the 21st Century? (The New Press, New York, 2006), p. 26

[2] Russell C. Crandall, The United States and Latin America After the Cold War (Cambridge University Press, 2008), p. 55

[3] “The Incredibly Shrinking Vision: US Policy in Latin America”, Peter Hakim, Inter-American Dialogue, July 5, 2012.

[4] “Special report: Manufacturing Magnet Lures FDI”, HSBC Mexico, March 27, 2012.

[5] “Special Report on Mexico – Migration: The ebbing Mexican wave”, The Economist, November 22, 2012

[6] “Mexico is forgotten story of US election”, Financial Times, October 14, 2012.

[7] CNN interview with Emilio Lozoya Austin, September 17, 2012

[8] “Mexico’s New Leader Tries to Shift Dynamic”, The Wall Street Journal, November 27, 2012.

Advertisements

Mexico and Brazil: Two distinct economic views

Latin America’s broad social advances, a rapidly expanding middle class, and the stability of democratic politics have been accomplished amid different and sometimes opposite economic models. These distinct views can well be represented by the two largest economies in the region: Mexico and Brazil.

Politics in the region has been characterized by a spread of populism, and the economy has largely relied on commodity exports. While many countries have differed in their statist approach, it has all been variations of the same policy framework with a much-needed emphasis on social services and income distribution, sometimes coupled with a more closed economy. This has been especially true in Brazil.

In turn, Mexico’s economic policy has been characterized by a neo-liberal approach and by pro-market liberalization, which makes it one of the most open economies with more trade agreements than any other Latin American country. In contrast, Brazil’s economic policy is rather heterodox and combines a capitalist view with a higher participation of the state.

Despite ambitious reforms in the late 1980s, Mexico’s economy performed poorly during the last two sexenios, lagging Brazil and most of its Latin American peers. However, this neo-liberal economic model seems to be finally paying off. The country is becoming more competitive with China, among others, due to improvements in productivity, cheaper labor costs, and its proximity to the US market. This situation is making its manufacturing sector more competitive, and is attracting back some business into the country, and boosting its exports.

As a result, the economy grew by 4.0 percent in 2011, and, according to the IMF, it’s expected to grow by 3.6 percent in 2012 and by 3.5 percent in 2013, while Brazil’s economic outlook presents corresponding rates of 2.7 percent and 3.0 percent[1].

There are reasons to be skeptical about the ability of the Mexican government to achieve enduring economic growth, however. Trends of economic expansion have been abruptly interrupted in recent decades: in the early 1980s, when the oil boom burst, and in the mid-1990s, when the peso crisis plunged the economy into a deep recession and financial crisis[2].

This time, as opposed to previous periods of economic expansion, there are some relevant indicators that could allow us to infer that growth has the potential to become sustainable. The ratio of bank debt to GDP in Mexico is barely a third what it is in Brazil and the US. Five to six consecutive years of loan growth, coupled with macroeconomic stability, would increase Mexico’s annual growth rate by half a percentage point, the central bank, Banxico, estimates[3].

International reserves now stand at record highs of US$161bn compared with less than half that three years ago, while total public debt is equivalent to about 38 percent of GDP, a small number compared with that of industrialized nations. An analysis of the deterioration of the balance of payments as an obstacle to Latin America’s long-term economic growth contained in Raul Prebisch’s seminal work indicates that to be in a long-term growth path, the economy must ensure that it is not accumulating external debt at an unsustainable pace[4]. This gives Mexico a powerful opportunity to grow and to develop consumer demand without creating risky imbalances.

In terms of demography, Mexico is about to begin a couple of decades where the ratio of workers to dependents is especially favorable. Despite a fall in the fertility rate, the country is maintaining fairly strong population growth. The UN expects Mexico’s population in 2050 to be 65% of Brazil’s, up from 57% in 2000[5]. This would also make the economy bigger. Granted, this demographic advantage has to be capitalized through improvements in human capital and education[6].

Unemployment rate fell in September to its lowest level in almost four years. The seasonally adjusted jobless rate last month fell to just 4.7 percent of the working population, which is below the number for August and below most analysts’ forecasts.

As explained above, the manufacturing sector continues to grow and play a key role in Mexico’s economy. As opposed to the services sector and commodities –which represents a higher percentage f GDP in Brazil– this industry is capital intensive and requires labor productivity and significant investment in technology

All of the above is creating a renewed enthusiasm for the Mexican economy. Nomura Equity Research, a financial services firm, predicted that Mexico would overtake Brazil as Latin America’s largest economy within the next decade[7], despite the fact that Brazil’s economy is currently twice as large. Meanwhile, in a report on investing in Mexico, the Financial Times asserted that its macroeconomic fundamentals are “virtually bulletproof”[8], and in a special report on Mexico, The Economist assured that after years of underachievement and rising violence, Mexico is at last beginning to realize its potential[9].

However, when comparing longer periods of economic expansion since the late 19th century, Brazil has achieved sustained periods of economic growth, while Mexico’s cycles of expansion have abruptly been stopped by financial crises, especially over the last decades.

These crises coincide with a period of economic liberalization in Mexico, a situation that has led many analysts to conclude the reforms undertaken by the government since the 1980s, the so called “neo-liberalism”, has produced economic and social deterioration rather than growth. Meanwhile, Brazil also carried out important economic reforms before the end of the 20th century, but with a more positive impact on development thanks to social spending

Indeed, social policy in Brazil has seen far-reaching advances. Cardoso made important gains in education, health, and social security that served as a basis for Lula’s initiatives. His social programs, especially the Bolsa Familia, contributed to the reduction in inequality. The Gini index steadily fell from 0.602 in 1997 to 0.572 in 2004[10]. As a result, Brazil’s conditional cash transfer program became an international model that other developing countries imitate.

The negative side of the greater role of the State in Brazil, however, is that as public expenditure has increased –partly due to greater amounts of the elderly incorporated in the social security net­– larger deficits are emerging. Future projections suggest this imbalance will only get worse over the next generation[11].

Further, the investment rate over the last decade has been mediocre at between 18 and 20 percent of GDP, compared to rates of 30 percent in many Asian countries. The biggest investment lag was in the infrastructure sector, where the lack of adequate roads and the low rate of investment in power generation and distribution is threatening future growth.[12]

Brazil has largely relied on exports of commodities such as soy and iron ore to fuel economic growth, which peaked at 7.5 percent in 2010. However, this growth has started to slow down, revealing an industry environment that has become globally uncompetitive despite a series of stimulus measures. As a result, policy makers are now debating on whether to further embrace a state-led economic model.

Indeed, the next few years will be critical for the direction of the world economy as each of the BRIC nations – Brazil, Russia, India and China – is tempted to revert to statist habits to protect jobs and markets. In light of the decline of the European economies, the average Brazilian is still more likely to opt for a state-led model, such as China, than pure US-style, free-market capitalism, such as Mexico.

Investors aren’t taking any fresh positions in the Brazilian currency, the real, on concerns about rising inflation and central bank intervention. This will exacerbate if Brazil fails to undertake key structural reforms to improve its productivity and infrastructure.

The extent to which Mexico’s current economic growth will not be followed by a significant downturn or a crisis, will depend on the lasting impact of structural changes, coupled with a more stable balance of payments and available funds, both domestic and international, to invest. As Moreno-Brid and Ros pointed out in their historical assessment of the Mexican economy, the explanation for the country’s failure to achieve sustained growth lies in the fact that an overall upturn in investment simply did not accompany the liberalizing reforms and the new macroeconomic environment.

Mexican Congress already approved the labor, education, and telecommunications reform, while the financial one is under discussion. Moreover, Peña Nieto’s administration is expected to announce ambitious energy and fiscal reforms later this year. Indeed, the government pledges to increase investment in key areas, especially in infrastructure, to lift the economy to its full potential[13].

Further, thanks to the creation of democratic institutions since the late 1990s and a more solid middle-class, Mexico has relatively more policy and political stability than previous years. As seen above, the new administration seems willing and able to generate cooperation with the main actors in society.


[1] “2012 Annual Report”, International Monetary Fund, October 4, 2012.

[2] Juan Carlos Moreno-Brid and Jaime Ros, Development and Growth in the Mexican Economy (Oxford University Press, 2009), p. 253

[3] “The Mexican economy in difficult times”, Manuel Sanchez, Member of the Governing Board of the Bank of Mexico, at the JP Morgan 7th Annual Mexico CEO Conference, Mexico City, July 31, 2012.

[4] Raul Prebisch, The Economic Development of Latin America and Its Principal Problems (New York: United Nations, 1950)

[5] United Nations Population Division projection (Website): http://www.un.org/esa/population/

[6] “Special Report on Mexico – Demography: The Gain Before the Pain”, The Economist, November 22, 2012

[7] “Mexico: the Undiscovered Country”, Nomura Holdings, September 13, 2012

[8] “Investing in Mexico 2011”, Financial Times, June 23, 2011

[9] “A Special Report on Mexico: Going Up in the World”, The Economist, November 22, 2012.

[10] IpeaData, February 15, 2006.

[11] Albert Fishlow, Starting Over. Brazil Since 1985 (Brookings Institution Press, 2011), p. 190

[12] Werner Baer, The Brazilian Economy. Growth and Development (Lynne Rienner Publishers, 2008), p. 402

[13] “Presidential decisions announced on December 1”, Office of the President of Mexico, December 1, (Website in Spanish): http://www.presidencia.gob.mx/decisiones-presidenciales-anunciadas-el-1o-de-diciembre/

Política Económica en México: La Otra Historia de América Latina

Introducción

Durante la década pasada, los exportadores de materias primas se beneficiaron del aumento en la demanda de algunos mercados emergentes y, en consecuencia, del alza de precios. Sin embargo, la crisis financiera global ha desatado una serie de cuestionamientos sobre la fortaleza de su estructura económica. Países latinoamericanos como Brasil, Argentina, Ecuador y Venezuela, tenderán a ser más vulnerables ante la desaceleración de la economía mundial a raíz de sus problemas estructurales.

Por lo tanto, los gobiernos de la región estarán bajo presión para impulsar las reformas necesarias ante una economía con menor vigor y ante el surgimiento de una nueva estructura social. El tipo de ajuste que lleven a cabo dependerá de factores geopolíticos y domésticos, como la posición geográfica, el capital político de la clase gobernante y la estructura económica.

Gran parte de las economías emergentes mudarán a otros modelos económicos conforme los países industrializados  sean incapaces de proveer proyectos viables de desarrollo. América Latina, una región históricamente bajo la esfera de influencia de Estados Unidos, probablemente continuará adoptando –en su mayoría– un modelo económico caracterizado por una fuerte presencia del Estado, así como un proteccionismo comercial dirigido a cuidar intereses domésticos.

Mientras otros países de la región optan por una economía cada vez más controlada por el Estado, México continuará desarrollando una respuesta diferente frente a la desaceleración mundial, especialmente en una época en la que su economía de mercado comienza a pagar dividendos. La economía de México se encuentra de nuevo en una fase distinta del ciclo económico y está creciendo más que otros países latinoamericanos, a pesar de la crisis en países industrializados.

La posibilidad de mantener esta tendencia dependerá de la capacidad y la voluntad de los actores políticos para concretar reformas estructurales pendientes y de la recuperación económica en Estados Unidos. Un crecimiento sostenido será determinante para implantar un nuevo paradigma en el hemisferio y para convertirse en un socio estratégico de los Estados Unidos, un país que podría encontrar soluciones a sus problemas de deuda y estancamiento económico a través de una relación más proactiva con América Latina.

Mexico’s Economic Policy: Latin America’s Other Story

A brief introduction

 

Commodity exporters had profited from the price boom that occurred over the last decade, but the recent fall in demand amid the global financial crisis hit their economies and unleashed a series of concerns. That is particularly the case in some countries in Latin America, such as Brazil, Argentina, Ecuador, and Venezuela, where deep structural problems will make them more vulnerable amid a weak global environment.

As a result, policymakers in the hemisphere are urged to carry out much-needed reforms, as they will face slowing growth and increasing demands from new constituents. The type of adjustment they embrace will be a result of geopolitical and domestic factors, such as the geographical position, the political capital of incumbents, and the economic structure.

Most emerging economies will transition to different economic models, as the developed world fails to provide a consistent path towards growth. Latin America, a region historically under the influence of the US, would probably continue to embrace a state-led economy, and seek protectionism to defend domestic interests.

Highly misread by many analysts, Mexico will adopt a different response to global economic slowdown, especially at a time when its pro-market economic model and location is starting to pay off. The economy of Mexico is again in a different phase of the business cycle relative to other countries in Latin America, and is growing stronger despite the crisis in the developed world.

The extent to which Mexico is capable to maintain this trend will depend on the new government’s ability and willingness to advanced long-postponed reforms and on the economic recovery of its northern neighbor. It will be critical to determine whether the country is ready to lead a new trend in the Americas and become a relevant strategic partner to the US, a country that could find solutions to its domestic economic problems by formulating a more proactive relation with Latin America. 

Income Inequality in the US

“In policy, as well as in morality, the grand secret is not to constrain the actions, but to awaken the inclinations of mankind”

Economics is mostly about expectations. The more confidence people have in the potential of the country’s performance, the more the entrepreneurial spirit will be incentivized.

Governments have lost credibility. Fiscal deficits and financial crises share the same cause as that of income inequality. The economic system favors those at the top, creating a winner-takes-all-society. The system lacks the controls to level the playing field. The rules of the game are unfair.

Income inequality in the United States has progressively grown over the past three decades. According to data from the Congressional Budget Office (CBO), after-tax income for the highest-income households grew more than it did for any other group. The CBO found that, between 1979 and 2007, income grew 275 percent for the top 1 percent of households, 65 percent for the next 19 percent, just under 40 percent for the next 60 percent, and 18 percent for the bottom 20 percent.

Income inequality is threatening the very national character of this country and jeopardizing America’s hegemony and status in the world. In order to solve it, the government must build a new social contract where people actually have equal opportunities to succeed, and the only way to do it is by recovering the confidence of the people.

I believe greed is part of the very human nature. The second law of thermodynamics, entropy, tells us how natural systems in the universe, tend to disorder and chaos. Social systems follow the same pattern. Therefore, we need the incentives and the rules to maintain an equilibrium or to redirect the natural inclinations of human beings. As the economist John Baptiste Say stated in late 1800’s, “In policy, as well as in morality, the grand secret is not to constrain the actions, but to awaken the inclinations of mankind”.

That’s why I disagree with most of the IMF’s recommendations. They suggest to cut spending and consumption in order to reduce the budget deficit, but they have no problem in transferring billions of dollars to banks, who were the main responsible of the crisis, not only in America, but also in Greece and other countries of the EU.

A new economic model would need to create the right incentives that reduce the vulnerability of the economic system. It would take into account the new economic challenges we’re facing and the new realities in a globalized world, such as income inequality and the importance of the middle class. The recommendations contained here are mostly formulated taking into consideration a demand approach, in an attempt to protect consumers as opposed to the measures taken recently by the government to bailout banks:

First, the government should accompany this process proactively, and not only as an observer of a free market economy. Capitalism should continue to exist, but more regulation will be needed to ensure a better distribution of income. Regulation, for example, in the financial industry.

Second, social programs, such as social security and unemployment insurance, are desirable and necessary to create a safety net for lower-income households, mostly when the country is starting to recover from a deep crisis.

Third, government revenues will have to come in the form of taxes. There is no other way. A modern society cannot function without significant taxes. Politicians who consistently say they will cut taxes, they’re lying. When you cut taxes today, you have to increase it tomorrow. People know it and that’s why they smooth consumption through time and spend less today. Remember, is all about expectations. On the other hand, taxes should be progressive and increase as household’s income increases.

Fourth, government revenues should be used partly to ensure the continuity of social programs and partly to reduce the fiscal deficit. This will also contribute to recover the confidence of the citizens on the economy. Government spending should also be aimed at funding education to lower-income individuals through scholarships. Better educated people will boost the emergence of a wave of entrepreneurs.

Fifth, in the long run, resources should be applied to improve the education system and to increase research on science and technology. Innovation is key to adapt to new global challenges we’re facing and the US has historically proved to be at the top of innovation.

In conclusion, an old view of the economy in the United States has failed to explain current economic realities and, more importantly, few people and interest groups have taken advantage of this scenario. The deterioration in such economic indicators –inequality and the middle class to population ratio– has undesirable social consequences. The widening in the income gap and the shrinkage of the middle class in the US is causing a poor economic performance and may eventually spur social instability.

Why should Carstens lead the IMF?

I’d like to tell you briefly why I think Agustin Carstens, a Mexican economist, should lead the IMF.

First, his carrer speak for itself. As a former Secretary of the Treasury and current Mexico´s Central Bank Governor, he has been a key actor in stabilizing and recovering the Mexican economy after 2009 financial turmoil. He has managed to keep interest rates and inflation low, exchange rate stable, international reserves reached a record high, unemployment has been reduced and the country’s economy is expected to grow by 5% this year.

Second, a non-european head would be best. It appears more logical to me that the next boss come from outside Europe to avoid conflict of interest. Moreover, the balance of power has changed and emerging markets are increasingly becoming lenders instead of borrowers. Countries like China, India, Russia and Brazil are contributing to shape a new financial order and international organizations such as the IMF should reflect this reality. A post World War thinking won´t work in the 21st century.  To learn more visit http://www.economist.com/economics/by-invitation/questions/who_should_lead_imf

Third, having worked for years in a relevant position in the IMF, makes him a strong candidate. The Fund´s agenda is already too busy and the next Managing Director should be able to work efficiently from day one without training. On the other hand, although it seems like he doesn´t really have support from the latin american peers, he does have the backing of Mexico´s President Felipe Calderón, whose international image may be an asset. Moreover, Carstens keeps a good relationship with US Secretary of the Treasury Timothy Geithner and could well be White House´s favourite candidate. See http://blogs.ft.com/beyond-brics/2011/05/24/imf-carstens-who/