(gentle music)
- [Instructor] This is Mexico.
The Mexican economy is the second largest in Latin America
and ranks amongst the top 15 worldwide by sheer size alone.
For more than four decades
it's been considered a leading emerging market
a future economy to watch.
Yet at the same time Mexico appears to be stuck
in the dreaded middle income trap.
Growth between 1990 and 2019, average 2.4% per year
half the standard emerging market rate.
Raising the question, why, why has Mexico failed
to jump from middle to high-income?
Why did Mexico's economy contract more than most in 2020,
what does it have going for it,
and how can it overcome its economic challenges?
To answer all of this,
we first need to start with its history.
How did Mexico's history shape if it's economy?
A good place to start is the post-war period.
Whilst many countries during this time
follow the policy of import substitution.
Few did it with such zeal
and far-reaching effect as Mexico debt.
Import substitution or Mexicanization
would come to be the cornerstone
of the nation's economic development.
In short, the plan was to facilitate
domestic industrialization creating a stable economy
with the help of a fixed pay so to dollar exchange rate,
and for awhile this simple but effective strategy
actually worked.
Mexico's economic growth ran wild
averaging 6.5% a year between 1950 and 1973.
In fact, no other country in Latin America, besides Brazil
which also followed an import substitution regime
experienced higher rates of growth.
Yet there was a fundamental flow in this strategy,
namely, the way this growth was being generated
and distributed across the nation.
The trouble was that import substitution of capsuling goods,
benefited business owners and investors
far more than your average worker.
By 1960 the top 10% of households
had incomes seven times that of the bottom 40%.
With greater concentrations of wealth
domestic demand began to stagnate.
To address this, income distribution
became increasingly important.
The governments solution was to increase spending
so much so that the public deficit rose from 2% in 1970
to 9% in 1975, an unsustainable position
with the spending spree being halted
by deteriorating trade position.
Yet the discovery of substantial lower reserves
in the late 70's enabled the country
to postpone deep structural reforms
something Mexico bet big on.
With public finances
relying on future oil price rises to support the economy.
However, spending and lopsided growth drivers
created conditions for rising rates of inflation
and an overvalued exchange rate
resulting in capital flight.
In turn this forced greater levels of public borrowing,
debts which was primarily tied to US interest rates
and the London interbank credit rating.
Something which made the debt very exposed
to international credit.
Unfortunately for Mexico, when the US entered a recession
and oil prices crashed in the early 80's
so did Mexico's economy.
By 1982, debt servicing alone was equivalent to 24% of GDP
a truly unsustainable level, forcing an IMF bailout
deep spending cards
and rounds of exchange rate devaluations.
The 80's would see extreme macro economic instability
as inflation picked at more than 130% in just one year
and the economy stagnated making it Mexico's last decade.
Now, one silver lining relevant to today
is that the economic turmoil prompted the country
to dramatically reduce tariffs and trade barriers
on a whole range of goods,
facilitating greater access to international markets.
The best example of this trade liberalization
is the North American Free Trade Agreement or NAFTA
that Mexico signed with the US and Canada in the early 90's.
Though it's fair to note,
that Mexico had already massively reduced tariffs
before NAFTA came into effect.
Meaning it's more important role
what's the lock-in all the work done
to open trade in the years beforehand.
Despite these policies Mexico was about to face arguably
its biggest challenge year.
In the 1995 Tequila Crisis.
Sadly, this wasn't as fun as it sounds
as the crisis focused on short term borrowing and default.
To fund its needs, the government had to issue
a growing amount of short-term debt.
Unfortunately, a wave of social unrest
and the assassination of a presidential candidate
had led to capital flights.
This outflow of money
had investors scrambling to trade in their pesos
for dollars, threatening the currencies fixed peg.
To address this little conundrum,
the Central Bank issued more dollar denominated debt
to buy pesos, depleting its dollar reserves in the process.
A strategy which can only last
as long as you have dollars to sell.
Sensing an overvaluation,
money started to flow out of the country
and with limited reserves the peso was forced to free-flow.
The resulting large drop in the currency's value
made all the short-term dollar denominated debt
a lot harder to repay, ending in another IMF bailout.
Though to be fair to Mexico,
this crisis wasn't due to massive deficits,
as the country actually had a budget surplus in 1994.
This was the liquidity crisis,
as the large amount of short-term debt
couldn't quickly be refinanced or repaid.
Now, since the 90's Mexico's economy
has avoided economic default,
though what does this emerging market
actually have going for it
besides a large population, fantastic food, and tourism.
What are Mexico's economic strengths?
Well, a big one out over 3000 kilometers
is the border it shares with the United States.
Cross-border trade is big business for both economies,
worth nearly $700 billion a year which to put it in context
is equivalent to more than half of Mexico's GDP.
Running a trade surplus,
of approximately a hundred billion a year with the US alone.
A trade relationship secured by the replacement of NAFTA
with the USMCA trade deal.
At the center of this relationship is the Auto Industry.
And make no mistake, Mexico is a huge player
in the global car market.
The countries Northern industrialized States
make it the sixth biggest car producer in the world
heavily driven by supply chain integration
with the US and cheaper labor.
In addition to goods, Remittances from north of the border
are a massive source of foreign currency,
accounting for nearly 4% of Mexico's GDP.
The nation ranked second amongst ex-pats
for the best place to live overall
just behind Taiwan fun fact.
Driven by how easy ex-pats find it to settle in
and the culture intangible, but attractive traits.
Yet all of these stats and figures are the product
of a widest strength.
The profound transformation of Mexico since the 80's
to a more market orientated one.
We've large efforts to move towards privatization,
deregulation, better public finances,
and just a more open economy.
There is no better example of this
than the nation's net inflows of foreign direct investment.
Experiencing a sharp uptick since the early 90's.
And whilst Mexico has its fair share of challenges
as we'll find out shortly, the average citizen
is considerably better off today
than they were just 30 years ago.
The human development index
has increased by 18 points since 1990
and is currently above the average for Latin America
and the Caribbean,
in fairness a commonly cited difficulty with the index
is that it's an average measure
and as such hides inequality.
Accounting for inequality decreases HDI by 21 points
with some 40% of the population
living below the poverty line,
raising an important question.
What are Mexico's main challenges?
Poverty and inequality are key issues.
Both across the economy and between regions.
Which goes a long way
to explain the challenges the country is faced
with one particular and somewhat infamous activity,
creating a great deal of chaos and instability.
Alongside a high level of corruption
with the nation ranking 124th in the world
on the global corruption index.
Though sticking with the more formal economy,
regional variations in development and growth
are a huge headache.
Areas closer to the US border
have benefited enormously from industrialization
and closer integration with North American supply chains.
Receiving the majority of FDI.
Whereas those further away haven't experienced
anywhere near this level of development.
This really underlines the challenge
in backlinking industrialization to the wider economy.
Not something unique to Mexico
but definitely at points which has held it back.
This only even development
goes a long way to explaining why the country
an emerging market has grown at just over 2.4%
over the last few decades,
half the rate of other emerging markets
unwell below the 4% growth target
the current government has set.
In fact, even before the events of 2020,
Mexico was already in recession,
a worrying trend, but why?
A big reason for this lackluster growth
comes down to the country's
incredibly low productivity levels.
Its citizens work more hours on average
than any of the other 36 of OECD Nations,
but at the same time they are the least productive.
Analyst put this paradox down
to the misallocation of productive resources,
principally capital and labor.
Six out of 10 workers are employed in the informal sector
such a large volume of unskilled labor
provides way less incentive to innovate.
After all, why go to the trouble and risk
of investing in new technology
when there is a steady source of cheap labor available?
Something also revealed by the low percentage of GDP
the country spends on research and development.
To be fair though,
this doesn't mean that all sectors of the economy
language at the bottom of the productivity table.
A 2015 study by the economist
found that Northern States on the US border
had productivity levels equivalent to South Korea.
The problem however,
it's the regional disparity we mentioned earlier,
particularly agriculturally focused states
where small holdings in the informal sector are common.
Across the wider economy,
low productivity sectors like tourism,
retail and agriculture make up half of the labor force.
Whereas the most productive sectors
account with just over a quarter of labor.
Putting labor aside,
the other part of the equation is capital.
Money often struggles to reach businesses.
Mexico still suffers
from a legacy of an underdeveloped banking sector
with high barriers to entry.
A reflection of Mexico's institutions,
which despite coming a long way since the 90's
still have a fair way to go,
leading us nicely onto the next section.
What could the future hold for Mexico's economy?
At present Mexico is experiencing a bounce back from 2020
but not necessarily a full recovery.
Notably the country experienced
the largest decline of economic activity,
not only in North America but of any large emerging market,
a key reason being how it's approached the crisis.
The government avoided a large fiscal stimulus plan
spending just a quarter of the average
of other Latin American Nations.
Something partially explained by its pro-market government
and an aversion to debt given its history.
A consequence of this more fiscally cautious
approach though, is when it's expected to fully recover.
According to the IMF, this could take until 2026
a full half decade after the onset of the crisis.
Yeah, how this pans out for Mexico's economy
over the next couple of years remains to be seen.
So overall we've seen that Mexico
has made incredible progress
in terms of macro economic stability from the 80's and 90's.
It's trade liberalization
has led to large gains in certain sectors and regions.
Though this growth has been largely skew
and imbalance which helps explain its lackluster performance
experiencing half the growth rates
of all the large emerging markets.
We can't help, but think
that Mexico is underwhelming performance
is rooted in his productivity issues,
which rely upon increasing its formal economy,
moving away from certain infamous activities
and managing to link the success
of the industrialized border regions to the wider economy.
The real question
is whether they are likely to be solved anytime soon.
And now it's over to you.
Do you think Mexico's productivity issues
are the key to unlocking its potential
or do you think it should focus its efforts elsewhere,
what do you think lies in Mexico's future?
Let us know what you think in the comments below.
Also do checkout or discord server,
the link to which is in the description
as a place to chat with the community.
Lastly, thanks for watching
and as always see you in the next video.
(gentle music)