Mexico Economy

March 24, 2010Mexicoby EW World Economy Team

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Mexico has the 15th largest economy in the world by nominal gross domestic product (GDP) and the 66th largest in GDP per capita based on purchasing power parity (PPP). However, Mexico is a country of urban and rural populations, northern and southern parts of the country, and rich and poor members of society. Mexico has some rapidly developing and modern industrial and service sector enterprises, but this growth is not evenly distributed across the entire country.

Mexico has an export-oriented economy, with more than 90 percent of its trade coming from free trade agreements with more than 40 countries: including the United States, the European Union, Japan, Israel, and more. Trade with the US and Canada accounts for almost 90 percent of Mexico's exports and about 55 percent of its imports.

Of the Forbes Global 2000 list of the world's largest companies in 2008, Mexico had 16. However, Mexico was heavily affected by the 2008 Global Recession, experiencing contraction of more than six percent.

While Mexico has experienced strong growth over several decades, it still needs to upgrade its infrastructure and address the modernization of its tax and labor laws. Income inequality, both regionally and across the whole of the nation, is another major problem.

Mexico has a labor force 78 million strong that both the Organization of Economic Co-operation and Development (OECD) and the World Trade Organization (WTO) have ranked, as determined by annual hours worked, as the hardest working in the world. However, profitability per man-hour lags far behind.

Economic History

Several advanced civilizations inhabited Mexico long before European settlers arrived in the 15th and 16th centuries. These cultures were predominantly agrarian, but appear to have also had fairly sophisticated systems of trade in original products and finished goods.

Upon the arrival of Spanish settlers, the indigenous population was harshly subjugated. Spaniards dispossessed the native population of their properties, toppled their empires, and frequently either enslaved the populations or so grossly marginalized them that they had no choice but to cooperate with and support the Spanish settlers.

The Spanish quickly set to exploiting the natural resources of this area, using it for mineral deposits and fertile farmlands. While Spanish funds did flow into the colony to support its interest, far more wealth flowed out of the country.

Spain's hold over its colonies began to ebb throughout much of the 18th century as it Spain faced its own struggles with neighboring countries. By the 19th century, Mexico and many other Spanish holdings in the New World were able to slip the bonds of Spanish servitude as Spain and the rest of Europe dealt with the French under Napoleon Bonaparte.

In the latter half of the 19th century, Mexico ushered in an era of unprecedented economic growth for the fledgling independent nation. Investing in railroads and using the nation's natural resources helped propel this growth, while immigration from Europe helped to swell the ranks of the labor force. These policies, among others, helped user in a period of annual economic growth that averaged 3.3 percent between 1876 and 1910.

However, this growth soon led to corruption, income inequality, and civil unrest. The Mexican Revolution took place between 1910 and 1917. The protracted conflict deeply cut into the Mexican economy and drove away or killed much of the population. It would take decades for Mexico to recover.

From 1930 to 1970, Mexico experienced a period of economic growth sometimes referred to as the "Mexican Miracle." Using a model of import substitution industrialization (ISI), the Mexican government protected and promoted the development of national industries, leading to an economic boom and rapid industrialization.

The government also nationalized several important industries, including oil and the railroads, which helped support other industries and assisted with Mexico's infrastructural upgrades. GDP sextupled over a 30-year period, while the population doubled. The government also introduced civil rights in its constitution and allowed the formation of labor unions.

Unfortunately, when the oil industry crashed in the 1970s, Mexico's heavy investments in its nationalized oil industry led to an enormous downturn of the economy. The government attempted a number of measures to stimulate recovery, but most was largely ineffectual.

In the 1980s, it became apparent that the ISI model of protected industry had led to a highly inefficient and uncompetitive industrial sector. Attempts to end this program came too late, and international lenders were unwilling to contribute to Mexico's recovery efforts due to its choice to suspend repayments on national loans in the early 1980s.

Mexico entered into the General Agreement on Tariffs and Trade (GATT) in 1986 and the North American Free Trade Agreement (NAFTA) in 1992. Both of these agreements helped stimulate economic growth through trade with Mexico's northern neighbors.

However, social unrest mitigated much of the growth that Mexico might have experienced from these agreements. The Chiapas uprising and the assassinations of several key political figures happened in 1994. These events unnerved investors, who quickly withdrew their investments from Mexico and depleted the Central Bank's Reserves.

However, a bailout by the US in 1995 helped to offset these losses and put Mexico back on a path to growth that lasted from 1995 until 2000. The economy again dipped into recession in 2001, largely due to a similar downturn in the US market following the terrorist attacks of September 11th. Mexico’s economy began to recover along with the American economy.

Following a contentious presidential election in 2006, civil unrest again sparked up across Mexico. Drug gangs gained significant power and began murdering thousands of people—possibly upwards of 70,000 —often videotaping or otherwise broadcasting their atrocities. This, again, caused many foreign investors to lose faith in the Mexican government and to begin withdrawing investments. It also harmed Mexico's tourism industry.

Current Economic Situation

Mexico suffered from the Global Recession, largely because of the downturn in the economy of its largest trading partner, the United States. Mexico emerged from the recession in 2013, but only experienced modest recovery of about 1.4 to 2.1 percent.

In the post-recession economy, growth has come in large part from double-digit increases in the automobile manufacturing sector. Although domestic demand has remained low, both for automobiles and other domestic products, exports have improved, as have foreign investments.

Income disparity remains a persistent problem, and a possible driver for the continued violence from drug gangs. As many as 52 million people are estimated to live at or below the poverty line in Mexico. This has also led to a cultural phenomenon known as remittances, in which Mexicans are living abroad in nations with higher wages (often the United States) send money back to their families and friends still living in Mexico. This contributed an estimated $22.4 billion to the Mexican economy in 2012.

Agriculture currently makes up just 3.3 percent of the Mexican GDP, but employs as much as 13 percent of the Mexican workforce. Industry, on the other hand, comprises about half of Mexico's annual exports. Virtually every major carmaker from around the world has a plant in Mexico, contributing heavily to these output numbers. Mexico also contributes heavily to the world's processed food supply chains. Electronics manufacturing has also swelled significantly, becoming the sixth largest electronics manufacturing company in the world as of 2011. Energy and oil also play an important role in the modern Mexican economy but are not as significant in many other industrialized nations. Services, on the other hand, account for approximately 59.8 percent of GDP while employing 61.8 percent of the population, making it the largest sector of the Mexican economy by far.

Economic Forecast

Improved exports, thanks to the recovery of global markets, have stimulated increased confidence in the Mexican economy, both domestically and abroad. The OECD projects that the recovery should gain momentum through the rest of 2015 and into 2016. Mexican fiscal policies will probably tighten over the next few years to combat inflation.

This has led to a modest economic outlook for Mexico's future. While American economic recovery should stimulate exports, lower oil prices will cause a drag on growth. Development is projected to reach 2.8 percent by the end of 2015, but to really pick up in 2016, reaching as high as 3.4 percent.