Lecture 1
Overview of the Mexican Economy
Econ 162: The Economics of Mexico
Spring 2017
Instructor: Deborah Watkins
● In today's lecture we will discuss some basic
statistics and trends which will provide an
overview of the Mexican economy
● Don't be concerned if you don't know what a
particular economic term means. As the course
progresses we will cover everything in detail
Data Sources
● The data sources used for this overview are
● OECD Economic Survey of Mexico, January 2015
● Federal Reserve Bank of St. Louis (FRED)
● World Bank Development Indicators
● The Economist Intelligence Unit
● “Señores Start Your Engines”, The Economist, 2012
● “Two Mexicos”, The Economist, 2015
● “Mexico 101: The 2016 Country Handbook” J.P. Morgan
Quick Facts
●
Mexico is geographically the 14th largest country in the
world (772,000 square miles)
● Population of about 120 million people
● Nominal GDP was $2.3 Trillion (ppp) in 2015
– 2nd largest economy in Latin America
– 12th largest economy in the world
● The capital, Mexico City:
– 8% of Mexico's population
– 17% of Mexico's GDP
– 90% of Mexico's office space
Quick Facts
● It is an upper middle income country
– GDP per capita (PPP) is approximately $18,000
– Comparable to Turkey, Romania and Brazil
– The U.S. Has GDP per capita $55,000
● The Mexican economy is very dependent on U.S.
business cycles
– 80% of Mexico's exports go to the U.S.
– 50% of Mexico's imports come from the U.S.
Quick Facts
● Between 1929-2000 Mexico was governed by the PRI
– Nationalist & Interventionist origins
● In 2000 it was displaced by the PAN a centrist-right party
● Crime & disappointing growth contributed to the PRI
returning to power in December 2012
● Current President Enrique Peña Nieto pushed through a
comprehensive set of reforms `Pacto por Mexico'
Quick Facts
● The Mexican Economy is dominated by the services
sector. The breakdown for 2015
– Services Sector – 62% of GDP
● Real Estate is key at 12% of GDP
– Industrial Sector – 33% of GDP
● Manufacturing is the most important at 16% of GDP
● Oil & Gas is also very important at 6.1% of GDP
– Primary Sector – 5% of GDP
● This includes agriculture at 3% of GDP
● Remittances represent 2% of GDP
– But they are very important for low income families
Quick Facts
● Mexican economy is a commodities and
manufactured goods powerhouse
– Commodities represent 18% of total exports
● Particularly silver and oil
– Manufactured goods represent ~ 80% of exports
● Electrical Goods and Cars & Auto Parts
● Exports as a % of GDP are very high
– 33% on average between 2010-2015
● A drastic increase from 11% in 1991
– This number is substantially higher than the Latin
American average of 17.9% of GDP
Source: Mexico 101, The 2016 Country Handbook
Crude Oil
● Although Mexican exports are not oil intensive, public
finances rely heavily on oil revenues
● Oil accounts for
– 20% of Fiscal revenues
– 6% of GDP
– 5% of Exports
●
Mexico has the 10th largest oil reserves in the world
●
Mexico is the 11th largest oil producer in the world
●
PEMEX is the world's 9th largest oil company by
production
– $130 Billion in revenues
Source: Mexico 101, The 2016 Country Handbook
Mixed Messages on Mexican
Economy
– On the one hand
● Disappointing growth
● Low productivity, high poverty, inequality and
informality
● Widespread corruption
● Violent crime
– On the other hand
● Sound macroeconomic policies
● An important exporter of manufactured goods
Mexico's Identity Crisis
● It is often noted that there are two Mexicos
– The duality of modernity and poverty
“...Mexico, a country that has parlayed its considerable advantages into
patches of modernity but has singularly failed to eradicate poverty
nationwide” - The Economist
● What is the right comparison group for Mexico?
● Latin America, the OECD, other BRIC countries
● Is this related to Mexico's pace of transition?
● Something to keep in mind throughout the course
Figures for 2016 (estimates)
Mexico Rank
GDP (ppp), 2015 USD $2.3 trillion 12
Exports $359.3 billion 13
Imports $372.8 billion 13
Stock of FDI in Mexico $384.3 billion 19
GDP pc, (ppp) 18,900 91
2015 USD
PopulaJon below the poverty 47% -
line
Gini index 48.3 (2008) 25
Taxes & Other Revenues/GDP 21.1% 145
Source: CIA World Factbook
Overview of Accomplishments
1) Sophisticated industrial base resulting from
open trade policies
● In 23 years since NAFTA Mexican economy has
been increasingly oriented toward manufacturing
● Today major manufacturing exporter
●
9th largest exporter of manufactured goods
2) Macroeconomic management “impeccably
orthodox” for over 20 years
3) Growing middle class
4) A stable democratized political system
Overview of Challenges
1) Income per capita has grown at an annual average of
1% between 1994-2014
2) Extremely low productivity growth
3) Approximately 50% of the population in poverty
4) Shallow credit markets & concentrated banking sector
5) Small firms operating in the informal sector constitute
the majority of the labor force
6) Low quality of education and health system
7) Corruption & weak rule of law => limits investment
Achievements
Macroeconomic Stability
● Despite having a history of very volatile
exchange rates
● Exchange rate relatively stable 2000-2014
– However, since January 2015 the drop in oil prices
has contributed to a strong devaluation of the peso
Macroeconomic Stability
● A major achievement for Mexico has been
reducing inflation
● It has been well under control for over 15 years
– This was the case even in the 2008 recession and
in with the recent peso devaluation
– Particularly meaningful because major inflation
surges were common in Mexico prior to 2000
Trade Openness
● Since the 1990s Mexico's trade policy is among
the most open in the world
– Mexico has 12 trade agreements with 44 countries
– These FTAs cover 60% of the world GDP
● The following graph shows trade openness at
constant prices
– (imports + exports/GDP)*100
● Exports rose faster than imports
– 1994-2011 exports to all countries increased 475%
– Imports increased 342% during the same period
Mexican Exports
● The U.S. is by far the primary destination for
Mexican exports
– 80% of all Mexican exports were shipped to the
U.S. in 2015
● The peak was in the late 1990s at over 90%
– The remaining 20% of Mexico's exports are well
diversified
● Rest of Latin America (9%)
● Europe (6%)
● Asia (4.5%)
Source: Mexico 101, The 2016 Country Handbook
Mexican Exports
● Manufactured goods represent comprise 80% of all
Mexican exports
– This is up from 37% in the 1980s
– Mexico's yearly exports of manufactured goods is
the same as the rest of Latin America put together
● Mexico is slowly transitioning to higher tech and higher
value-added manufacturing industries
– Such as the aerospace and medical devices
– However, the transition has been slow
Mexican Exports
● Mexico's top exports in 2015 were
● Cars, & Auto Parts (~30%)
● Computers (~5.5%)
● Crude Petrol (~5.0%)
● Telephones (~4.0%)
● Video Displays (~3.9%)
● Fruits, Vegetables & Coffee (~3%)
● Medical Devices (~2.1% of GDP)
● Note that Electrical Goods as and aggregated
category represents 36% of total exports
Mexican Imports
● Since 1994, imports as a share of GDP have
increased sharply
– 1994: 14% of GDP
– 2000: 32% of GDP
● This is mostly explained by imports from the U.S.
– 50% of Mexican imports come from the U.S.
● Imports from China have increasing drastically
– 2000: 2% of imports came from China
– 2015: 15% of imports came from China
Mexican Imports
● Mexico's Main imports are
– Electrical Machinery – 22%
– Miscellaneous Manufactures – 12%
– Transport Equipment – 9%
● 75% of all imports are intermediate goods used
for manufacturing
Challenges/Room for Improvement
Growth Has Been Disappointing
● Despite Mexico's openness growth since 1994
has been disappointing
– 1994-2016 the GDP per capita grew 1.2% per year
● In the 2009 recession Mexico suffered more
than any other country
– Overall GDP shrank by 6.6% in 2009
– High exposure to US economic downturns
Growth Has Been Disappointing
Growth Has Been Disappointing
● China joined the WTO in 2000
– Undercut prices, diverted business from Mexico
– In 2000 manufacturing wages
● $0.32 an hour in China, $1.52 an hour in Mexico
– Today this trend may be reversing with companies
returning to Mexico as China is relatively less
competitive
Low & Unequal Productivity
● Productivity in Mexico is low and very uneven
– Productivity is relatively strong in manufacturing
– Weak in other sectors, particularly agriculture
● There is also a disparity in terms of size of the firm
– Productivity of the largest companies has grown
5.8% a year for 2000-2015
– Productivity of the smallest companies has
DECREASED by 6.5% per year for 2000-2015
Total Factor Productivity (TFP)
Low & Unequal Productivity
● Low Productivity is in part due to low innovation
– R&D is less than 0.5%
– Ranked 63 out of 142 in the Global Innovation Index
– The R&D that does occur is in medium and low tech
sectors
– There are some high tech clusters such as
aerospace in Queretaro
Poverty
● Poverty in Mexico remains very high
– Approximately 50% of Mexicans live below the
poverty line
● Mexico's minimum wage is among the lowest in
Latin America:
– 73 pesos – less than $4 USD per day
– Less than a living wage as calculated by the
Mexican government
Source: Mexico 101, The 2016 Country Handbook
Hourly Minimum Wage
Nominal (US$) PPP
Mexico 0.65 0.94
Brazil 2.12 2.67
China 0.8 1.3
Ghana 0.3 0.83
United States 7.25 7.25
Shallow Credit Markets
“Second largest banking sector in Latin America
yet in credit penetration it is the lowest”
● High cost of credit resulting from lack of
competition in the banking sector
● Lending is equivalent to ~30% of GDP in Mex
– 70% in Brazil
– 80% in Chile
– >100% in US
● According to the OECD, private equity and
venture capital represent only 0.2% of GDP
Health & Education
● Mexico has universal coverage yet there are
large disparities in the quality of health care
● Mexico has seen large improvements in
– Educational spending
– Enrollment rates
● Yet educational quality remains low
– Low test scores
– One of the highest dropout rates in Latin America
– Les than 50% of adults have a high school
education
Competition
● Despite being a very open economy a number
of key sectors => high market concentration
● Examples of Industries with restricted
competition
● Telecom
● Electricity
● TV broadcasting
● Petroleum
● Cement
Competition
● According to the Economist (2012)
“Nearly a third of household spending goes on products
with monopoly or tight-oligopoly suppliers”
● Leads to high prices and low investment in
technology and innovation
● Although this has been an issue for decades
the new reforms have already made progress
● Autonomous competition agency COFECE
● IFT will govern broadcasting and Telecom
Corruption & Weak Rule of Law
● Mexico's public sector is generally perceived as
corrupt
● Judicial system prosecutes few crime
● Perceived rampant corruption among police
● Poor enforcement of the law
– Discourages investment
Pacto Por Mexico
● In 2012 the current President Enrique Peña
Nieto worked with the PAN (right) and the PRD
(left) to push through serious and promising
structural reforms
● Reforms address many of the challenges we
discussed today including
– Education
– Lack of Competition
– Corruption
– Energy
– Others
