Increase your revenue in Mexico with airSlate SignNow

How to create outlook signature

this is mexico the mexican economy is the second largest in latin america and ranks amongst the top 15 worldwide by sheer size alone for more than four decades it's been considered a leading emerging market a future economy to watch yet at the same time mexico appears to be stuck in the dreaded middle income trap growth between 1990 and 2019 averaged 2.4 percent per year half the standard emerging market rate raising the question why why has mexico failed to jump from middle to high income why did mexico's economy contract more than most in 2020 what does it have going for it and how can it overcome its economic challenges to answer all of this we first need to start with its history how did mexico's history shape its economy a good place to start is the post-war period whilst many countries during this time followed a policy of import substitution few did it with such zeal and far-reaching effect as mexico did import substitution or mexicanization would come to be the cornerstone of the nation's economic development in short the plan was to facilitate domestic industrialization creating a stable economy with the help of a fixed peso to dollar exchange rate and for a while this simple but effective strategy actually worked mexico's economic growth ran wild averaging six and a half percent a year between 1950 and 1973. in fact no other country in latin america besides brazil which also followed an import substitution regime experienced higher rates of growth yet there was a fundamental flaw in this strategy namely the way this growth was being generated and distributed across the nation the trouble was that import substitution of capital and goods benefited business owners and investors far more than your average worker by 1960 the top 10 percent of households had incomes seven times that of the bottom 40 with greater concentrations of wealth domestic demand began to stagnate to address this income distribution became increasingly important the government's solution was to increase spending so much so that the public deficit rose from 2 in 1970 to 9 in 1975 an unsustainable position with this spending spree being halted by a deteriorating trade position yet the discovery of substantial oil reserves in the late 70s enabled the country to postpone deep structural reforms something mexico bet big on with public finances relying on future oil price rises to support the economy however spending and lopsided growth drivers created conditions for rising rates of inflation and an overvalued exchange rate resulting in capital flight in turn this forced greater levels of public borrowing debt which was primarily tied to u.s interest rates and the london interbank credit rate something which made the debt very exposed to international credit unfortunately for mexico when the u.s entered a recession and oil prices crashed in the early 80s so did mexico's economy by 1982 debt servicing alone was equivalent to 24 percent of gdp a truly unsustainable level forcing an imf bailout deep spending cuts and rounds of exchange rate devaluations the 80s would see extreme macroeconomic instability as inflation peaked at more than 130 percent in just one year and the economy stagnated making it mexico's lost decade now one silver lining relevant to today is that the economic turmoil prompted the country to dramatically reduce tariffs and trade barriers on a whole range of goods facilitating greater access to international markets the best example of this trade liberalization is the north american free trade agreement or nafta that mexico signed with the u.s and canada in the early 90s though it's fair to note that mexico had already massively reduced tariffs before nafta came into effect meaning its more important role was to lock in all the work done to open trade in the years beforehand despite these policies mexico was about to face arguably its biggest challenge yet the 1995 tequila crisis sadly this wasn't as fun as it sounds as the crisis focused on short-term borrowing and default to fund its needs the government had to issue a growing amount of short-term debt unfortunately a wave of social unrest and the assassination of a presidential candidate had led to capital flight this outflow of money had investors scrambling to trade in their pesos for dollars threatening the currency's fixed peg to address this little conundrum the central bank issued more dollar denominated debt to buy pesos depleting its dollar reserves in the process a strategy which can only last as long as you have dollars to sell sensing an overvaluation money started to flow out of the country and with limited reserves the peso was forced to free float the resulting large drop in the currency's value made all the short-term dollar denominated debt a lot harder to repay ending in another imf bailout though to be fair to mexico this crisis wasn't due to massive deficits as the country actually had a budget surplus in 1994 this was a liquidity crisis as the large amount of short-term debt couldn't quickly be refinanced or repaid now since the 90s mexico's economy has avoided economic default though what does this emerging market actually have going for it besides a large population fantastic food and tourism what are mexico's economic strengths well a big one at over 3000 kilometers is the border it shares with the united states cross-border trade is big business for both economies worth nearly 700 billion dollars a year which to put it in context is equivalent to more than half of mexico's gdp running a trade surplus of approximately 100 billion a year with the us alone a trade relationship secured by the replacement of nafta with the usmc trade deal at the center of this relationship is the auto industry and make no mistake mexico is a huge player in the global car market the country's northern industrialized states make it the sixth biggest car producer in the world heavily driven by supply chain integration with the us and cheaper labor in addition to goods remittances from north of the border are a massive source of foreign currency accounting for nearly four percent of mexico's gdp the nation ranks second amongst expats for the best place to live overall just behind taiwan fun fact driven by how easy expats find it to settle in and the culture intangible but attractive traits yet all of these stats and figures are the product of a wider strength the profound transformation of mexico since the 80s to a more market-orientated one with large efforts to move towards privatization deregulation better public finances and just a more open economy there is no better example of this than the nation's net inflows of foreign direct investment experiencing a sharp uptick since the early 90s and whilst mexico has its fair share of challenges as we'll find out shortly the average citizen is considerably better off today than they were just 30 years ago the human development index has increased by 18 points since 1990 and is currently above the average for latin america and the caribbean in fairness a commonly cited difficulty with the index is that it's an average measure and as such hides inequality accounting for inequality decreases hdi by 21 points with some 40 percent of the population living below the poverty line raising an important question what are mexico's main challenges poverty and inequality are key issues both across the economy and between regions which goes a long way to explain the challenges the country has faced with one particular and somewhat infamous activity creating a great deal of chaos and instability alongside a high level of corruption with the nation ranking 124th in the world on the global corruption index though sticking with the more formal economy regional variations in development and growth are a huge headache areas closer to the us border have benefited enormously from industrialization and closer integration with north american supply chains receiving the majority of fdi whereas those further away haven't experienced anywhere near this level of development this really underlines the challenge in backlinking industrialization to the wider economy not something unique to mexico but definitely a point which has held it back this uneven development goes a long way to explaining why the country an emerging market has grown at just over 2.4 percent over the last few decades half the rate of other emerging markets and well below the four percent growth target the current government has set in fact even before the events of 2020 mexico was already in recession a worrying trend but why a big reason for this lackluster growth comes down to the country's incredibly low productivity levels its citizens work more hours on average than any of the other 36 oecd nations but at the same time they are the least productive analysts put this paradox down to the misallocation of productive resources principally capital and labor six out of ten workers are employed in the informal sector such a large volume of unskilled labor provides way less incentive to innovate after all why go to the trouble and risk of investing in new technology when there is a steady source of cheap labor available something also revealed by the low percentage of gdp the country spends on research and development to be fair though this doesn't mean that all sectors of the economy languish at the bottom of the productivity table a 2015 study by the economist found that northern states on the u.s border had productivity levels equivalent to south korea the problem however is the regional disparity we mentioned earlier particularly agriculturally focused states where small holdings and the informal sector are common across the wider economy low productivity sectors like tourism retail and agriculture make up half of the labor force whereas the most productive sectors account for just over a quarter of labor putting labour aside the other part of the equation is capital money often struggles to reach businesses mexico still suffers from a legacy of an underdeveloped banking sector with high barriers to entry a reflection of mexico's institutions which despite coming a long way since the 90s still have a fair way to go leading us nicely onto the next section what could the future hold for mexico's economy at present mexico is experiencing a bounce back from 2020 but not necessarily a full recovery notably the country experienced the largest decline in economic activity not only in north america but of any large emerging market a key reason being how it approached the crisis the government avoided a large fiscal stimulus plan spending just a quarter of the average of other latin american nations something partially explained by its pro-market government and an aversion to debt given its history a consequence of this more fiscally cautious approach though is when it's expected to fully recover ing to the imf this could take until 2026 a full half decade after the onset of the crisis yet how this pans out for mexico's economy over the next couple of years remains to be seen so overall we've seen that mexico has made incredible progress in terms of macroeconomic stability from the 80s and 90s its trade liberalization has led to large gains in certain sectors and regions though this growth has been largely skewed an imbalance which helps explain its lackluster performance experiencing half the growth rate of other large emerging markets we can't help but think that mexico's underwhelming performance is rooted in its productivity issues which rely upon increasing its formal economy moving away from certain infamous activities and managing to link the success of the industrialized border regions to the wider economy the real question is whether they are likely to be solved anytime soon and now it's over to you do you think mexico's productivity issues are the key to unlocking its potential or do you think it should focus its efforts elsewhere what do you think lies in mexico's future let us know what you think in the comments below also do check out our discord server the link to which is in the description as a place to chat with the community lastly thanks for watching and as always see you in the next video