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.
I would also like to throw light on America’s outward behaviour of signing treaties but not respecting them. The North American Free-Trade Agreement (NAFTA), introduced in 1994, promised Mexican and American lorry-drivers the right to roam freely in the other’s border states by 1995 and nationwide by 2000. But this has not been respected by America, and Mexican lorries are not allowed to drive into America. This, coupled with high oil prices has hurt Mexico’s export industry as transportation costs have increased. Till 2009, the deal remained on paper, maybe because the United States had organised a bail-out worth $50 billion following Mexico’s 1994 currency crunch, and Mexico did not want to spoil relationships with its neighbour. But in 2009, Mexico finally retaliated and complained to NAFTA, the NAFTA ruling which went in favour of Mexico, will be seen as an example and Mexico is likely to continue to retaliate in case America continues to break the rules.
The drug and arms violence which is causing the Mexican economy to grow more slowly than desired is financed greatly by the Americans. This hints at the covert actions by the developed nations to prevent charging of developing economies. Ernesto Cordero, the finance minister, has estimated that the violence knocks about a percentage point off Mexico’s annual growth rate.
There is also a feeling that Mexico is gradually looking at opening up its economy with entry of players like Walmart being a starting point. This might well be due to pressure put by the developed nations. However total opening up of the economy, especially during the current times when a recession seems to be looming, will not be a good move by the Mexican Government.
Let me conclude by stating some steps which if taken, might make Mexico move towards a charged economy –
- Focus on innovation leadership, rather than on low cost leadership. As seen in the case of China, low cost is not a sustainable growth strategy.
- Continue diversifying its exports and concentrate on increasing exports to other emerging economies and reducing its dependency on America as a major export hub.
- Reduce the crime rates and drug cartels – by enforcing stricter laws. This will help further increase foreign investments in the nation. However this is something that the Government alone cannot do and it needs to gather public support as well for this to happen.
- Economic reforms and policies are needed to increase internal competition and break the current monopolistic nature of its industries. This is necessary to drive innovation by market players and also in order to make services available to the public at a lower cost. Thus leading to a more equitable economy.
- While there would undoubtedly be pressures from the developed nations for Mexico to open up its economy, the Mexico Government, should not completely open up its economy until the above 4 steps have been incorporated.
The next few years are critical, as depending on what measures the Mexico Government and industry players take, will determine whether the Mexican Desert will Bloom.
Signing off, with a hope for a brighter and happier future.
References
http://www.economist.com/node/21526899
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=64307579&site=bsi-live
