The Keys to Mexico’s Economic Ascent

The Keys to Mexico’s Economic Ascent

“Mexico ¿cómo vamos?” is a new website meant to track Mexico’s economic rise. Feel free to take a gander at http://www.mexicocomovamos.mx. 

The site is a creation of two of Mexico’s leading think tanks, and it draws on insights from 60 leading economists and policymakers, including the likes of Dr. Guillermo Ortiz, Dr. Luis de la Calle, and Dr. Jonathan Heath. A medley of interactive graphs and polls attend op-ed articles, making the site a wonk’s delight. (The question of the day: Can Mexico create one million formal sector jobs this year? ‘Unsure’ is just nudging out ‘agree’ as the most frequent choice among respondents.) The major drawback: so far it’s in Spanish only. 

This is just one more vignette in what has become a perceptible, though hardly dominant, trend in the world of global economic analysis in 2012: Mexico has an awfully bright future. Perhaps the most bullish prediction came from Nomura Securities earlier this year, when it forecast that Mexico’s economy would be larger than Brazil’s by 2022. A more conservative IMF forecast has Mexico’s economy eclipsing Brazil’s in 2028 or 2029. 

President Felipe Calderon, who will leave office on December 1, recently spoke to an audience at the Council on Foreign Relations in Washington, D.C., about Mexico’s underlying economic strengths. He went on to tick off infrastructure gains, including new roads and universities, and Mexico’s doubling down on free trade, as evidenced by its recent entrance into negotiations on the Trans-Pacific Partnership. Among the many factoids and macroeconomic indicators, this fact stood out to me: Mexico exports more manufactured goods than the rest of Latin America, including Brazil, combined. 

Still, something doesn’t add up. If Mexico’s economy is so impressive, why has its overall growth lagged the rest of Latin America in general, and Brazil in particular? 

The answer is that the Mexican economy is at tipping point. Until recently, the Mexican economy relied largely on two factors: NAFTA, the free trade zone that it shares with the United States and Canada, and oil. So, while the last decade was generally a good one if you were selling oil, it was not so good for you if your economy was geared toward making stuff for U.S. consumers. And, billions of dollars in export revenue aside, selling oil didn’t work out so well for Mexico either. The oil industry employs relatively few people, and given the inefficiency of Pemex, the country’s state-run oil company, Mexico found itself in the increasingly awkward position of exporting crude to the United States and, in turn, importing refined oil from up north.  

But going forward the drivers of the Mexican economy will be significantly different. The most obvious difference may be the pace of growth that Mexico is set to experience. Whereas average growth from 2005-2010 was a measly 1 percent, the medium-term forecasts for Mexico are now on the order of 4-5 percent. Enrique Pena Nieto, Mexico’s incoming president, has even said that Mexico’s future growth will be in the range of 6 percent.

Animating this growth will be a powerful middle class. While the average Mexican made almost $14,000 in 2010, the more important indicator may be the sense of identity. Roughly 65 percent of Mexicans now identify themselves as middle class.  As a recent Washington Post article pointed out, Costco is currently implementing a major expansion in Mexico. 

Add to this the fact that companies are now fleeing China because wages there are increasing at an astonishing pace, rising 20 percent annually in some coastal cities. Factory wages in Mexico are now roughly comparable to those in China, but Mexico does not have a wage inflation problem. By 2014, wages in China are likely to be higher than those in Mexico.

As a result, Mexico is once again the most popular spot for manufacturing geared toward the North American market. 

Third, Mexico is leading the charge toward a major free trade zone within Latin America. Building onto a new free trade agreement with Peru, soon Mexico will likely help forge a trade bloc that also includes Colombia and Chile. International trade, of course, tends to spill over into politics, and Mexico’s influence in Latin America is likely to increase as a result of this development. As noted by Peru’s president last year, Mexico’s “presence in the South American region is likely to have revitalizing effects.” 

Revitalizing effects, indeed.