An Analysis of Economic Development in

Mexico

Violeta Hernández Espinosa

Economic Development and World Resources

Fall 2006

Outline*Background:

– Physical Environment

– Sociological Environment

– Political Environment

– Economic Environment

* Other Factors Influencing Development:

– Stagnant and fluctuating GDP growth rate

– Concentration of Exports and Export Market

– FDI, China, and Loss of Competitiveness

– Weak public financing and dependence on PEMEX

– Corruption and Mistrust in Government

* Strategies, Programs, and Policies

* Future Policy Direction

*Top Three Development Challenges:

–Poverty

–Income Inequality

–Employment

Physical Environment

Location and area:

Physical Environment

•Varied Physical Environment = Varied Climate

•Cultivatable Land Area: 13%-Geographic norm: 7.13%-Income norm: 8.71%

•Desertification: -60% degraded -70% vulnerable to desertification

•Rich in natural resources:-petroleum-silver

Sociological Environment

• Population:

– Approx. 106 million

– Growth rate: 1.46% • Geography- 1.44%

• Income-.57%

• High Income-.70%

– Birth rate: 18.8 per 1,000

– Death rate: 4.73 per 1,000

– Dependency Burden: 58%• Increase, as population

doubles

Sociological Environment

• Highly Urban Society-76%

•Ethnic Composition-Mestizo 60%

-Amerindian 30%

-European 9%

• 18% dedicated to Agriculture-27.9% in 1999

Health and Education

• HDI Index: .821 ~high– Ranked 53/177

• Life Expectancy: 75.09 years

• Infant Mortality:– 22.60/1000 (04), 36.2 (90)

– Great improvement, not enough: High income 6.12

• Literacy Rate Total: 90.95%– 7% indigenous

• Primary School Enrollment– 109.21%

• Higher education-greatest number of higher education institutions-22.40% enrollment

• Secondary School Enrollment–78.83%

Political Environment

• Independence from Spain 1824

• Revolution 1910-1920

• 1910-2000 Rule of PRI party– Vote purchasing

– “Rigged” elections

• 2000 National Action party (PAN) victory~Fox– PRI ruling Congress

Federal Republic– 3 branches: executive,

legislative, and judicial

2006 Elections: • PAN won 2006 by tight margin

of .58% ~Felipe Calderón-Obrador~ impugned elections

• PAN Congress Majority~1st time in history, PRD second

Economic Environment

• Economic Freedom: 2.82

(1-5, 1most free)

• GDP: 676.5 Billion– Growing at 3%, highly volatile

• GDP per Capita, PPP: $9009 – Highest in the Region

– 30% of high income nations

0.00

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Cu

rre

nt

U.S

. $

Mexico’s GDP per Capita, PPP, 1994-2004

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

An

nu

al %

Mexico’s Annual GDP growth (%), 1994-2004

• Unemployment: 4%• Inflation controlled~

-- 4% in 2005

Economic Environment

• BOP stands at –7.4 B (1.09% of GDP)

• Current Account Balance at $ –14.6 B,

Year 1999 2000 2001 2002 2003 2004

BOP % of GDP -2.89 -3.20 -2.84 -2.08 -1.35 -1.09

US $ -13,904,617,472 -18,598,021,120 -17,641,938,944 -13,498,450,944 -8,603,650,048 -7,354,372,096

• National Debt

- 65% of GDP in 1983 20.5% in (04)-Debt to Export Ratio: 68.66% (04) -1982 crisis, dependence on oil-Major setback in 1994, led to massive devaluation

Mexico’s Balance of Payments, 1999-2004

Top Three Development Challenges

• Poverty

• Inequality

• Unemployment, Underemployment, and the Informal Sector.

Poverty

• 2005: 50% living at $2/Day PPP

– Estimates as high as 80%

• 20-24% in extreme poverty

• 4/5 of rural population

• Indigenous hardest hit

– 69% extreme poverty

• 5.1 million people undernourished, 7% under 5-years-old

Poverty ~ making it worse

• 1987-2002, 2,955% increase in basic basket.

• Minimum daily wage rose 651%

• Minimum wage about $4.20, not applying to the whole informal sector

Income Inequality

• Gini Coefficient: 49.54– 38.5 norm income– 40.8 U.S.A.

• Lowest 20% - 4.31%• Highest 20% - 55.07• Top 10% -39.39%

• Poverty vs. 10 billionaires

Income Inequality ~ The Dilemma

• Growth with inequality vs. Equality with Stagnation?

• Before Liberalization (import-substitution) = decreasing inequality

• Mexico has entered the

upward-sloping tail of the Kuznets Curve

 

Mexico’s Gini Coefficient, 1963-2003

“Augmented” Kuznets Curve

Unemployment, Underemployment, Informal Sector

• Holding desired 3.5-4% unemployment rate.

– Better than late U.S. record

• What’s the problem?

– No safety net or unemployment programs

– Underemployment est. at 25%

• 44% of urban jobs and 57% of non-farm jobs are in informal sector.

Mexico’s Unemployment Rates, 1995-2006

• Unemployment in agricultural sector highest in 15 years (05)

Migration

• 1994-2004, migration to USA has increased by 350%

• 1st place in world remittances, $20 billion

• Surpassed FDI

by 13%

Urban and Rural Population Growth in Mexico, 1790-1995

Other Factors Influencing Development

• Stagnant and fluctuating GDP rate of growth

• Concentration of Exports and Export Market

• FDI, China, and Loss of Competitiveness

• Weak public financing and dependence on PEMEX

• Corruption and Mistrust in Government

Stagnant and fluctuating GDP rate of growth

• Has been under the desirable over 5% for developing nations

• Highly volatile

• Volatility = Inability to plan, effect on FDI

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

YearA

nnua

l %

Concentration of Exports and Export Market

• Exports = 30% of GDP

• Commodity Concentration Ratio: 71%

• Manufacturing exports: 81.7% of total exports

• Dependant on U.S. growth and market– Reserves, debt

Mexico’s Major Export Markets, 2001 

Destination of Mexican Exports, by value, 2003 (millions of dollars)

Central AmericaALADI

Various South American Countries & Cuba

USA Japan EU

1,504

2,394

146,803 606 5,592

Remember the oil crisis?

“Any excess can hurt you”

FDI, China, and Loss of Competitiveness

• Losing out even with geographic advantage and NAFTA

• All time high, in 2001, $26.8 billion– 2003, $10.8 Billion (lowest since 1996)

• From the end of 2000 to April 2004: - 1 in 4 maquila enterprises left Mexico.

- 1 in 3 reportedly relocated to China.

“Mexico was the last nation to agree to allow China into the WTO”

• From 3rd to 22nd most attractive investment destination (04)

• Mexico replaced by China as number one provider of imports, USA

• 10-11% tax Revenue

– 25% U.S. and Japan

– 40% European average

• System that tends to be more regressive than progressive

– Wealthy able to buy-off officials

• Little or no business taxes

– To increase Investment

– “even after arrival of maquiladoras

20 years ago, Mexico remains largely

impoverished.”

Weak public financing and dependence on PEMEX

                                                                                  

•Pemex:–20 to 50% of annual government revenues

–Imposed through various taxes

*Over 90% of profits, accounting

Corruption and Mistrust in Government

• Corruption index: 3.5 – 1-10 scale

• National survey (2001):– No.1 one reason for lack of

development in Mexico and its future

– 214 million acts of corruption in use of public services

– $2.1 billion of “Mordidas” annually (2.1 billion)

“All of Mexico’s problems have beenbecause of corruption; if those in thegovernment wouldn't just take a post to make themselves rich, Mexico could be very different. All our money is in foreign banks and our ex presidents and their families are enjoying it…while I had to leave my country in order for us [our family] to survive. We are all tired; the only way to change things will be another revolution, unless people stop stealing and start doing their job.” …Alfonso Hdez

Strategies, Programs, and Policies

• Liberalization and Privatization– Since 1982 crisis, No. 1 way to improving development– Only Pemex and a part of energy sector state-owned– Over 90% of Mexico’s trade is under free-trade agreements

• Exports increased 15% since 1994

– Success is mixed

• Oportunidades (Progresa, before 2002) – Links education, nutrition, and health– Cash grants– Success:

• Increased schooling and healthcare– Tension on supply side

• Empowering women, as large number of participants• Covers 4/5 families living in extreme poverty, 2.6 million families, 14% of Mexico’s population• The cost may be high and tends not to reach the remotest areas

Strategies, Programs, and Policies

• Food programs– DIF

• School Breakfasts

• Community Kitchens

• Monthly in-kind supports for pregnant women to under 5

•PROCEDE

–Revision in Mexican constitution,

1992

•Land titling program

•Goals discussed in class

Strategies, Programs, and Policies

• IMSS-Solidaridad

– Coverage for those unable to pay into the IMSS

– Highly dependent on local participation

– Success depends on community

• Mexico 2030 ~ Calderon

– Goals:

• $30,000 per capita income

• Abolish extreme poverty

• 1 of 5 largest emerging economies

– Sound familiar?

– Waited until after election = serious?

Success of development~ Economic stats

– Stagnant, volatile GDP growth

– Growing GDP per Capita• Highest in LA

– Low inflation– Improving debt and BOP– Increased trade– Losing out in FDI and

losing competitiveness– Highly privatized, greater

efficiency and competitiveness

Success of development~ Social stats

– Education: • Increasing enrollment in all levels

– Health:• Infant, Child, and Maternal

mortality greatly decreased.

• Life expectancy improved

• Malaria risk reduced, yet tuberculosis still a major problem

– High inequality that threatens to keep rising

– Great unemployment figures, but also great underemployment

– A mix of 3 factors has led to alarming emigration

– Environmental degradation continues at increasing rates– Poverty growing and affecting

over 50% of population

Future Policy Direction• Competitiveness:

– Mexico must continue to move to more complex industrial production activities and services to offset lost manufacturing that is flowing to China and Central America.

– Find new markets, especially those of emerging markets, less dependence on U.S. – Mexico needs tax, energy, and labor reforms that will add attractiveness to Mexico, in order to

increase the now stagnant GDP growth.

• Tax system:– Modify system to undercut its current regressive nature, improving inequality– PEMEX must be held accountable, increase efficiency, and government must lessen reliance on it.

• Human Capital– Focus has been on targeted policies, such as the transfers and direct help we saw. – Mexico will need to move to broader policy education, health, social security, job training and

opportunity– Clarify strategy and plan for those emigrating the country and remesas.

• How can we use this inflow of money to an advantage for the long run

Future Policy Direction

• Corruption, corruption, corruption– New laws must be put in place and enforced– Unless corruption decreases, little progress is likely. – Greater penalties

• Mexico’s 2030– Raise GDP, but how will ensure equal distribution of gains?

– Future Policy must include processes and means of getting people out of poverty, distributing the wealth equally, and focusing on what people really need– a job.

– Greater opportunity for Mexico’s young and college graduates

– Take the increasing population seriously

• If the U.S. wants to stop immigration, then this might be an opportunity for them to help Mexico with the pressing issues.

If not… like many people are saying in Mexico, people are desperate and hungry;

a REVOLUTION might become the answer, even if not the most affective. What

do Mexicans have to lose at the point of starvation?

QUESTIONS …