Opinion Archive

Agustin Barrios Gomez, president of SolutionsAbroad.com, has been commissioned by the newly-relaunched English-language daily The News (www.thenews.com.mx) to produce a weekly opinion column on Mexican current affairs. The column is published every Wednesday in the paper and also here online. Our president is a member of the Mexican Council on Foreign Affairs and is an analyst of politics in North America with a degree in Foreign Service from Georgetown University.

What to Make of Mexico in 2008

January 2, 2008

This series began two months ago with a brief overview of Mexico’s situation in 2007. Today we can look forward to a 2008 which promises to be very similar to 2007 and which will present opportunities and challenges similar to what we have seen this year…only more so.

Best of Times, Worst of Times

The international context is mixed. The enthusiasm that had Mexico included in an expanded definition of emerging BRIC nations, (called BRICSAM, Brazil, Russia, India, China, South Africa and Mexico) has been tempered by the country’s constantly slow growth. Nevertheless, despite the fact that Mexico is not China, its “country risk” rating has remained at historically low levels, allowing for more and more people to enjoy the trappings of credit. Commodity price inflation is both boon and bane for Mexico, given the fact that the country is a net food importer and that its oil production is falling due to the exhaustion of the Cantarell megafield.

Sub-prime and All That

Perhaps the most significant danger to the Mexican economy in 2008 is the slowdown in the US economy. Fortunately, there are no sub-prime loans in Mexico because lending standards were never relaxed to the point of giving NINJA (“no income no job no assets”) loans. Specifically, Mexico’s housing boom has occurred as a result of conditions that have arisen because of Mexico’s financial stability, not because of a speculatory bubble.

Of course, Mexico is a big country, with a variety of different local situations that color the relatively stable whole. A cursory glance at the different markets shows continuing growth in Cancún/Riviera Maya, Puerto Vallarta/Nayarit, Los Cabos, San Miguel de Allende/Bajío, Guadalajara/Chapala. Stable in most major cities in the North and center (including Mexico City) and problems in places like Puerto Peñasco (“Rocky Point”) and Ensenada/Rosarito which are related to automotive tourism near the bubble markets of California and Arizona.

Second home-buying Americans often financed their purchases with their US mortgages, so there is a red flag in this segment of the market. Nevertheless, the unrelenting push of Baby Boomer retirement, as well as the devaluation of the dollar, which makes peso properties cheaper to Europeans and Canadians, should keep foreign purchases, as a whole, alive.

The property market relates to one of the major reasons that investors have been sanguine regarding the credit crunch and its effects on Mexico: the growth in internal demand and the rise of the Mexican middle class. According to figures quoted by Jorge Castañeda in his most recent editorial in Reforma, over the past 10 years the middle class (defined as having income between US$8,000 dollars and US$16,000 per year) has doubled to more than 10 million households (out of a total of about 25 million). Of all of the economic news that flows from the media, this is perhaps the most important for stability. Further, this expansion of the middle class has also seen Mexico’s Gini coefficient (the most widely-used measure of income disparity) go from 0.50 to 0.47 (worst than the .40 for the US, but much better than Brazil’s .58); a small, but important improvement.

Adapting vs. Reacting

However, Mexico gets into trouble when it comes to long-term trends. Rather than adapt (or even innovate), Mexico reacts - often too late. It stayed with the “import substitution industrialization” (protectionist) model well after the Asian “tigers” had shifted successfully to export-led growth. It has proved incapable of overcoming many of the ghosts of its statist past, including monopolies (both public and private) that are a massive drag on the economy. Thanks to another totem, ejido land distribution, the countryside is still woefully inefficient: about ¼ of the country’s people produce 1/10th of the national product. But perhaps most telling is Mexico’s spending on research and development; the lowest (as a proportion of GDP) of any OECD economy. That shows how Mexicans are resigned to follow, not lead, in the world economy, which is fine, but it does not a developed country make.

Politics vs. Economics

Manuel Gómez Morín, one of the founders of the PAN, once noted that Mexico’s problems were not economic, but rather political. This is not to say, as is so often the scapegoat, that economic problems are the “fault” of the politicians: Mexican politicians are very much a representative cross-section of the society they govern.

Rather, there is a lack of consensus for making the sacrifices necessary for rapid growth, which is reflected in Mexico’s politics. Worst, the system lacks the political will to purge itself of endemic corruption and radically reform its criminal justice system. 

At the end of the day, for Mexico the difference between 3.5% growth and sustained 8%+ growth lies not in details, like the privatization of PEMEX, but in the big questions regarding the Rule of Law. We are unlikely to tackle that problem this year, so happy 2008…like 2007.

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