Can Mexico reclaim its title as Latin America’s economic powerhouse?

Can Mexico reclaim its title as Latin America’s economic powerhouse?

With Mexico outperforming Latin America’s other major economies, the continent’s second-largest economy looks set to take a leading role once again.

Latin America has seen brighter days. The latest figures released by the International Monetary Fund (IMF) show that the region’s economy contracted by 0.3 percent in 2015, making it the worst performing region in the world. This has come on the back of a severe recession in Brazil, Latin America’s largest economy, which, together with Venezuela and Argentina, has suffered badly from failed policies and economic mismanagement.

In contrast, Mexico’s economy has weathered global headwinds, registering 2.5 percent growth. So, is this Mexico’s long awaited moment? And can Mexico, the region’s second-largest economy, lead South America once more?

Mexico: From sick man to economic star?

It was not long ago that Mexico was the sick man among Latin America’s major economies, with Brazil, Argentina and Peru enjoying a decade of impressive growth amidst an unprecedented commodity boom.

In fact, in the decade to 2012, the region as a whole averaged growth of 4.1 percent, while Mexico’s economy grew at a rate of 3.3 percent. During this boom, Latin America experienced an economic transformation with laudable achievements: More than 70 million were lifted out of poverty while the middle class expanded by more than 50 percent.

Yet these developments were not echoed in Mexico, where the poverty rate stagnated. Even today, over 46 percent of the population live in poverty, with a third of Latin America’s extreme poor in Mexico.

But there are reason to believe an economic turnaround is taking hold in Mexico. Last year economic growth was 2.5 per cent. Such growth, moreover, comes at a time of plunging oil prices, typically the largest source of revenue for the Mexican government. This sudden collapse in oil prices should have brought Mexican economic growth to a standstill. And yet it hasn’t.

To be sure, the fact the Mexican economy has maintained positive growth rates in times of low oil prices is largely a result of a diversification push undertaken over the last two decades. This has seen the Mexican economy become more resilient and less beholden to oil prices generally.

Mexico’s manufacturing base and value added industries also place it in an advantageous position vis-à-vis other Latin American nations in times of low prices for commodities. Figures by the World Trade Organization (WTO), for instance, show that Mexico’s exports grew by 7 percent year-on-year in 2014, compared to a 1.5 percent contraction for the rest of Latin America. This has meant that Mexico is the world’s 15th largest exporter, with the value of its exports exceeding those of all other Latin American countries combined.

Certain industries such as sophisticated electronics manufacturing, automobile and aerospace have moved from traditional bases such as South Korea or China to Mexico. The inclusion of Mexico in the Trans-Pacific Partnership, moreover, will increase the country’s participation in global supply chains, as unit labor costs in Mexico are more competitive than in other countries along the Pacific Rim. All this bodes well for future exports.

In addition, responsible macroeconomic management over the past two decades has consolidated Mexico’s reputation among international lenders, investors and institutions. Following recurring crises during the 70s and 80s, Mexico reformed its fiscal policy and now boasts sound macroeconomic indicators. Public debt stands at a relatively low 47 percent of GDP, compared to Brazil’s rate of 66 percent, while the public deficit is expected to reach 2.5 percent of GDP in 2016, down from 3 percent in 2015.

Mexico also sits on a stock of over US$162 billion in international reserves which can be used in times of economic hardship. These indicators have led to a stable outlook by the major credit rating agencies, with Chile the only country boasting a higher credit rating within Latin America.

Protracted risks

Despite these achievements, Mexico faces serious and persistent challenges that undermine the country’s economic potential.

Mexico’s rule of law record stands as one of the country’s most pressing issues. Impunity is widespread, according to the National Statistics Institute (INEGI), with over 92 percent of crimes either not reported or not investigated. A recent study revealed that when unreported crimes are incorporated, the impunity rate nationwide stands at 99 percent.

This impunity feeds violence and corruption, with massive economic consequences. A survey by INEGI showed that the total costs of crime and insecurity for Mexican households represented 1.27 percent of GDP in 2015, while the Global Peace Index estimated that the cost of containing violence amounted to US$221 billion in 2014, roughly 22 percent of Mexico’s GDP. Widespread violence throughout the country continues to inhibit businesses while deterring foreign investment and job creation.

Similarly, corruption in Mexico remains rampant, posing a major obstacle to growth. Figures by watchdog Transparency International show that corruption costs ascended to roughly 9 percent of the country’s GDP. Mexico has been unable to tackle its deep-rooted corruption problem and now ranks below Latin American countries like Colombia, Peru, Brazil or Cuba.

Added to these economic adversities is Mexico’s uneven growth for its population. Inequality in the country remains a pressing issue given wage stagnation for the poor. Strengthening the domestic market by reducing poverty levels and increasing wages is imperative if Mexico is to achieve long-term growth.

Mexico will be Latin America’s growth engine in years to come

Mexico has many advantages compared to its Latin American peers in a time of economic uncertainty, low commodities prices and a slowdown in China. Optimism around the Mexican economy has increased over the past two years as economic power in the region seems to be shifting.

Though countries like Peru, Colombia, Bolivia and Paraguay are expected to post higher growth rates this year, these countries have a lower base, with their economies too small to lead the region as a whole. This means that Mexico, rather than Brazil or Argentina, is likely to be Latin America’s growth engine for the coming years.

In fact, given its current trajectory, Mexico could well regain the title of Latin America’s powerhouse, especially as Brazil endures a protracted recession. In the longer term, Mexico may even focus on securing a place amongst the most dynamic emerging nations. This would prove a much tougher and worthy test.

Categories: Economics, Latin America

About Author

Eduardo Arcos

Eduardo Arcos is a policy analyst and freelance journalist. He holds an M.Sc. in Security Studies from University College London and a B.A. in International Relations from the Monterrey Institute of Technology and Higher Education (ITESM). His research focuses on international political economy, peace and security and Latin American affairs.