Thread: Mexico recession shows downside of close U.S. links

Mexico recession shows downside of close U.S. links
Tue Aug 4, 2009 11:45am EDT

By Pedro Nicolaci da Costa -Analysis

MEXICO CITY (Reuters) - Mexico's economic slump, one of the worst in its history, has exposed the perils of a one-sided development strategy that ties the country's fate to the whims of U.S. consumers.

When the going was good, Mexico's closeness to the United States had its benefits, even if it never yielded the blockbuster growth promised by proponents of open trade.

Yet the U.S. recession has left Mexico in a state of disarray. The Mexican economy is set to shrink at least 6.5 percent this year, its most severe contraction since the Great Depression and one of the deepest in all of Latin America.

The weakness can be traced not only to Mexico's dependence on its northern neighbor, but also on a failure to make the sort of investments in education and infrastructure required for broad-based economic progress.

"Having the U.S. as a single market was a mistake," said Rogelio Ramirez de la O, economist and head of the Mexico-based research firm Ecanal. "But even worse was not properly pursuing an industrial strategy."

That, de la O said, would have meant taking a more cautious approach to trade agreements, such as the North American Free Trade Agreement, or NAFTA, and channeling more resources into value-added manufacturing, which would in turn might have nurtured a greater emphasis on high-skilled labor.

This could still be accomplished, he argued, by seizing the opportunity afforded by the crisis to renegotiate some of NAFTA's terms, particularly with regards to agriculture.

"That would give us a great deal of relief," said de la O.

In addition, the Organization for Economic Cooperation and Development recommends that the government move away from what OECD calls "regressive" stimulus policies and use its fiscal powers to directly create jobs.

"Shifting more of the stimulus to support employment and incomes would enhance its impact on demand and protect workers from falling into poverty," argues OECD economist Piritta Sorsa.

Analysts note an emphasis on education and jobs have brought great benefits to large Asian economies like Korea, China and India, whose growth rates have far surpassed those seen in Latin America.

"If everything was going right Mexico should be growing huge amounts, but that never happened," said Peter Hakim, president of the Inter-American Dialogue in Washington. "In the worst of times, Mexico really did get knocked off its perch."

ELUSIVE PERKS

Mexico's U.S.-centric economic strategy was cemented in 1994, when NAFTA came into effect. Yet while the commercial agreement created a number of factory jobs across the north of the country, it failed to bring the sort of expansionary burst commensurate with an emerging powerhouse.

Indeed, explosive growth has eluded Mexico despite NAFTA, even as Chile and Brazil, which are less dependent on exports to the United States, have expanded rapidly. Mexico's output growth over the last 10 years failed to surpass even the United States' own subdued 1.8 percent rate. Continued...

But overall, Mexicans felt as if they had hitched their comet to a rising star. Until, of course, that star began to plummet in 2007, as house price declines accelerated and triggered the worst financial crisis of the modern era.

The loud thud of the falling star was heard all over Mexico.

"When the economy shrinks by 6 or 7 percent, the tectonic plates start to rumble," said John Bailey, professor of government at Georgetown University and an expert on Mexico.

In a February poll conducted by Parametria, nearly half of Mexicans said the crisis was America's fault.

"We are tied at the hip," said Pompeyo Salmoran, a lawyer in Mexico City. "It would be better if we had alternative destinations for our exports."

Instead, the fate of Mexico's growth outlook rests squarely on the ability of U.S. consumers to buy products manufactured in Mexico, like cars and televisions.

That possibility looks at best shaky. The Federal Reserve, the U.S. central bank, conceded in the minutes of its last policy meeting that the U.S. economy would not return to its "potential" rate of growth for another five to six years.

Data on the U.S. gross domestic product, released on Friday, showed that the pace of contraction had abated significantly, but also pointed to renewed deterioration in consumer appetite.

FAULT LINES

This is not to say that Mexico can pin all of its woes on the misfortunes of its primary trading partner. Many analysts are quick to note that the country's political class has missed many a chance to reform a wasteful energy sector and to revamp a shoddy taxation system that yields a pitiful 10 percent of gross domestic product in public revenues.

These gaps, in turn, have left the government without the cash flow needed to address grueling gaps in income and educational achievement -- including the 20 percent of the population that struggles to buy enough food.

"We could do more in order to strengthen our economy in order to make it more ready for shocks but that does not mean we should be walking away," said Jaime Zabludovsky, executive president of the Mexican Council for the Consumer Products Industry and a chief NAFTA negotiator for Mexico.

"You cannot fight geography," Zabludovsky said.

That may be true in the short run. But as this historic external shock to the country's economic system attests, sustainable progress will one day require that Mexico stand on its own two feet.

(Editing by Leslie Adler)

http://www.reuters.com/article/domestic ... dChannel=0[/b]

Mexico's U.S.-centric economic strategy was cemented in 1994, when NAFTA came into effect. Yet while the commercial agreement created a number of factory jobs across the north of the country, it failed to bring the sort of expansionary burst commensurate with an emerging powerhouse.

Indeed, explosive growth has eluded Mexico despite NAFTA, even as Chile and Brazil, which are less dependent on exports to the United States, have expanded rapidly. Mexico's output growth over the last 10 years failed to surpass even the United States' own subdued 1.8 percent rate. Continued...

Well DUH. considering mexico's #1 export is their own people, what did they expect?

Instead of working to make mexico a better country/economy, it was easier to encourage illegal immigration. Send their poor to the US to suck up as many free benefits as they could steal and send money home. What did the people back home do with the money? That's the trillion $$$ question.

Mexico must be forced to stand on its own feet and we must ensure that all their citizens squatting here illegally be returned to build up mexico's economy by "working hard" in their own country!

Wonder if China is also feeling a little queasy, since we have stopped buying their poisoned products, and since we really have stopped buying things we do not absolutely need.

Originally Posted by vortex

Wonder if China is also feeling a little queasy, since we have stopped buying their poisoned products, and since we really have stopped buying things we do not absolutely need.

I am sure they are feeling the pinch. Time to be self reliant!