The article was originally published on IIM Shillong’s Consulting blog. A special thanks to Prof. IC (Indranil Chakravarthy), whose course on Firms, Markets and Global Dynamics, instilled in me the desire to read up on emerging economies and equipped me with the skills to interpret facts correctly and read between the lines of articles from business magazines.
Mexico has shown great resilience despite being badly hit by the financial crisis of 2008 (its economy shrank by 6.1% during this period), last year its economy grew by 5.4%. While Brazil has overtaken Mexico in terms of GDP in Latin America, Mexico is soon catching up. Mexico is currently the third highest exporter ($400 billion in 2010) to America, the World Bank also ranks Mexico as the easiest place in Latin America to do business. Mexico also has the highest per capita income amongst the BRIC nations (excluding Russia). Also the low cost advantage of China is rapidly dwindling and industries which once shifted to China from Mexico are moving back to Mexico. One major advantage that Mexico has is its proximity to America, which gives it a transportation cost benefit compared to other emerging economies like China and India. Also a recent NAFTA ruling in favour of Mexico, which America had been violating since 1994, will cut Mexican exporters’ shipping costs by 15%, further helping the Mexican economy. The rise of first generation Mexican entrepreneurs like Carlos Slim, who is now the richest person in the World, makes one look optimistically towards the future.
However on the gloomier side – the unemployment rate is unlikely to reach the pre-recession mark of 4.1% before 2018 and as of now 46.2% of Mexico’s population lies below the poverty line. The continuous news stories of drug mafia and reports of violence and crime are also responsible for a lower than expected growth of Mexico. Also with 1/3rd of its GDP coming from exports – mainly to America, Mexico is highly dependent on a single country and is looking to increase its exports to other emerging economies, in order to diversify its export risk. Also the highly monopolistic nature of its industries (like telecommunications) has caused higher prices, leading to poorer people in the economy not having access to these services. Banking, medicine, transport are the other necessary service industries that have high costs due to the highly uncompetitive nature of these industries. Economic and policy reforms are needed in these industries, if a brighter future for Mexico is to be envisaged.
Here we need to observe that, countries which continue to compete on their low cost advantage – do not have a sustainable growth strategy. This can be seen with countries like China, which once attracted industries with their low cost advantage are now seeing departure of these industries. This is because with passage of time, increase in the wage and operational cost in China, is no longer making it an attractive destination for investment. Mexico has been criticised for not opening its doors to foreign players, but I believe that this is actually one of Mexico’s strength. The country is trying to build its internal industries, so that when it becomes a totally open economy, its local industries will have the potential and financial strength to compete with global players. This is something that other emerging economies have failed to do – they have opened up their markets without first strengthening the foundations of their own markets. However there are some problems in Mexico’s economy too –
- Mexico has not fostered and created enough number of domestic players within every industry. Thus this has led to monopolistic nature of the markets. The lack of sufficient players means growing cartelisation and lesser competition for existing players – which has resulted in these players not innovating to a large extent.
- The limited choice, due to lack of players also means exploitation of the masses by the monopolist companies.
With a presidential election in 2012, political parties are looking at creating competitive policies and economic reforms which are necessary to deliver any real improvement in the quality of life for the average Mexican: job creation, middle class expansion, expanded social services, poverty reduction and reduced inequality. This if done, will help drive internal competition in the market and benefit Mexico as a whole. Read the rest of this entry »
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