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Mexican peso currency
Image: imago/Xinhua

Between crisis and reform

Andreas Knobloch / sgb
June 10, 2014

Mexico's economy is stuck in a rut that it won't be able to climb out of easily. Growth forecasts have again been revised downwards - but the government says the economy will boom once reforms are implemented.

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Mexican Finance Secretary Luis Videgaray Caso looked a bit tense during his appearance before the executives at BBVA Bancomer, one of the country's main banks. He had intended to radiate optimism. But Mexico's economy simply doesn't seem to be able to get back on track, and all the world wants to know: What's going on?

Last week, the government of President Enrique Peña Nieto revised its growth forecasts downward, from 3.9 to 2.7 percent. Earlier, the central bank had released figures that predicted lower economic growth than had been expected.

Although the Mexican economy actually grew last year - even if by just 1.1 percent - the numbers for the current year are disappointing compared to those of other Latin American countries such as Peru and Colombia.

The government's structural reforms - opening up the energy sector to private capital, liberalization of the telecommunications industry, finance and tax reform - earned praise from the conservative business press, which said they promised a substantial improvement in economic performance.

At the beginning of the year Moody's and other rating agencies upgraded Mexico based on its improved outlook. But in many cases, only a rough reform framework is in place, while the subordinate laws that provide the details are yet to be approved by parliament.

Christine Lagarde and Luis Videgaray Caso
Luis Videgaray Caso has made Mexico's case with the IMF's Christine LagardeImage: SAUL LOEB/AFP/Getty Images

After getting off to a roaring start, the government of Peña Nieto has faltered. It has faced chronic difficulties in kickstarting the economy of the world's most populous Spanish-speaking country.

BBVA Bancomer head Vicente Rodero said that the much-touted "Mexican moment" had been frittered away in 2013 and 2014. The macroeconomic conditions had been in place, but corruption and organized crime prevented higher growth.

"No recession, no crisis"

But Videgaray tried to paint a positive picture. Mexico's economy was in neither a recession nor a crisis, he said, adding that three problems - two temporary and one structural - were responsible for the forecast being corrected downward.

First, the US, by far Mexico's largest trading partner, reported less growth than expected. This in turn had a negative impact on Mexican exports - a temporary problem, Videgaray explained. And then there was the effect new tax policies had had on private households' consumption, he said.

The government's new measures include higher taxes on sugary soft drinks and fast food, and among other things, the prices for gasoline and diesel have gone up. In addition, oil production fell in the first quarter by 1.2 percent.

But Videgaray described this drop as a structural factor that in the medium term would be overcome by implementing energy reforms and opening up state-owned Pemex to foreign capital investments.

In contrast, direct investment from abroad had risen by 17 percent in the first four months compared to last year, the minister said, describing this as foreign investors' vote of confidence in Mexico's economy.

High unemployment

But Videgaray also expressed his concern at Mexico's low competitiveness, which he blamed on its huge informal sector. "One of the major obstacles to productivity has to do with this informality. What is clear is that if we can tackle this problem using the same instruments and the same strategies, we can expect no other results."

More than 60 percent of Mexican workers are employed in the shadow economy, meaning they are without social security or pension rights.

Mexican job exchange
More than half of Mexicans work in the grey economy - and lack social protectionsImage: imago/Xinhua

Since the year began, more than 300,000 formal jobs have been created, but given the sluggish economy there will be no more than 670,000 new jobs by the end of the year - far below the real need. Experts say Mexico must generate between 1.2 and 1.5 million new formal jobs to cut unemployment and bring school leavers into the labor market.

Diverging interpretations

Although Videgaray says present growth of 2.7 percent is insufficient, it's still above Mexico's 2.3 percent average over the past 13 years. And it's a step up from the first two years of the Peña Nieto administration, when it was 1.9 percent.

When the reforms finally make their way into comprehensive legislation and their effects are felt, Videgaray believes average economic growth of 5 percent per year will be possible.

Similarly, Peña Nieto said: "Be assured that with the reforms Mexico will be able to move from initial weak growth to accelerated growth in the coming years."

Videgaray expects a significant upturn in the second half of 2014. He has called for short-term counter-cyclical spending with more government money for infrastructure and social programs.

Enrique Peña Nieto
President Enrique Peña Nieto sees "accelerated growth" aheadImage: picture-alliance/dpa

Just recently, Peña Nieto introduced a national infrastructure plan for the next four years that provides for investments of approximately 500 million euros - twice as much as between 2007 and 2012. It's supposed to spur economic growth of up to 2 percent annually. More than half of the funds will come from public sources.

That sounds more like Keynes than the free-market model that Mexico has tried to follow (unsuccessfully) for more than 20 years. Could it perhaps even signal a paradigm shift?

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