World Market

MEXICO AND THE WORLD MARKET
by Bob Brooke

Mexico has gone from an economy dominated by state-owned companies to one increasingly dominated by private enterprise. The number of state-owned companies in Mexico has fallen from more than 1,000 in 1982 to fewer than 200 in 2000. With a mixture of modern and agrarian industry, Mexico’s free market economy has begun to prosper since the inception of the North American Free Trade Agreement (NAFTA) in 1994.

The previous administration of President Ernesto Zedillo began privatizing and expanding competition in sea ports, railroads, telecommunications, electricity, natural gas distribution, and airports. The Mexican economy is still recovering from dramatic recession of 1995, touched off by one of the worst financial crisis in recent years. After declining 6.2 percent in 1995, Mexico’s real Gross National Product (GDP) grew from 5.1 percent in 1995 steadily until leveling off in 1997. If it weren’t for the country’s strong export market which helped cushion the economy's decline in 1995, leading to the recovery in 1996 and 1997, Mexico would have been in big trouble. According to the latest statistics, Mexico’s GDP for 2000 was 5 percent, which translates to a little less than $8,000US per capita.

However, at the end of the first second quarter of 2001, the growth of the GDP had dropped to zero, according the Mexican Ministry of Finance and Public Credit. At the end of the Zedillo administration, Mexico had registered five years of steady growth at an annual average rate of no less than 5 percent, the highest rate for a similar period in the past 20 years. So far, President Vincente Fox’s administration hasn’t been able to keep up with that level of growth.

According with the IMSS (Mexican Institute of Social Security) data, more than 3 million new jobs have been created, of which 2.3 million are permanent, during the last five years, dropping the unemployment rate to 2.44 percent (July, 2001), its lowest level since 1985. But Mexico’s exploding population generates a need for some 800,000 new jobs a year, so it’s a constant battle.

The 1994 devaluation triggered a high rate of inflation in 1995 up to a yearly rate of 51.97 percent. In contrast, at the end of 1999, the rate of inflation was 12.32 percent, below the goal of 13 percent set in the 1999 Economic Policy Guidelines. At the end of 2000, the annual inflation rate dipped below 10 percent. And by the middle of 2001, it had dropped to 5.61 percent. Interest rates have been reduced considerably and the foreign exchange rate has been relatively stable, after adopting a floating exchange rate.

By 1998, consumer spending rose by 4 percent bolstered by increased employment and rising real wages. And Mexico’s troubled banks increased lending for the first time in three years.

The long-term economic outlook for Mexico remains positive. However the projected growth of 4 to 5 percent predicted by government and private sector economists has failed to materialize. By the end of June of this year, the Mexican growth of the economy had come to almost a complete standstill.

But 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 wage earners accounting for 55 percent of income. The inefficient agricultural sector employs 20 percent to 25 percent of the labor force but produces only 8 percent of the GDP.

Trade with the United States and Canada has nearly doubled since NAFTA. Mexico is pursuing additional trade agreements with most countries in Latin America and with the European Union to lessen its dependence on the United States, which accounts for 80 percent of Mexico's total trade.

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