Interesting Facts about Mexico - Research Paper Example

Interesting Facts about Mexico Introduction Mexico is an open market economy and ranks in the trillion dollar class. It contains a mixture of modern industries and agriculture, and the economy is highly dominated by the private sector. Recently, there have been expansions in ventures in seaports, telecommunication, electricity production, gas distribution and airports. The income per head (Per Capita) is roughly a third that of the U.S.A but income is not equally distributed (CIA 1). This paper looks at the statistical, global and social factors of Mexico’s economy. History of Mexico Economy A series of measures were put in place in the late 1980s and early 1990s by the Mexican administration geared towards market liberation. Initially, Mexico had adopted protectionist market policies in order to boost industrial growth and home economy; however, these policies did not achieve the expected results. In the 1980s, Mexico faced inflation and there was a decline in the living standards. The country experienced a number of economic challenges in the 1982 debt crisis in which it was unable to meet its foreign debt payment obligations. The government addressed these challenges by privatizing government owned industries and the journey to liberalization began (CRS 12). The country liberalized foreign market and investment by signing the General Agreement on Tariffs and Trade and the (NAFTA) North American Free Trade Agreement which saw the privatization of nearly 1000 state enterprises, including the banking sector which had been state owned since the crisis of 1982 (Hanson 2). These reforms in the initial stages attracted a substantial amount of foreign private investments until 1993 when the foreign capital inflow started to go down. By the close of the year 1994, Mexico had currency crisis leaving the government with no option, but to ditch the fixed exchange rate and replace it with a floating exchange rate policy. The result of this was that Mexico’s currency went down by about 50% within a period of six months, leading the country to deep recession. The currency (Peso) was floated because there was overspending in the economy which generated a substantial currency deficit, the government had no sufficient reserves yet it had accumulated high levels of debt, and the banking system was over exposed. After 1994 devaluation, President Ernesto Zedillo of Mexico took several measures to restructure the economy and reduce the effects of the currency crisis on the disadvantaged sectors of the economy. The main aim here was to create conditions for economic growth and adjust the economy within a short span of time. The IMF and the United States came to the aid of the government pooling together a financial support of 50 billion dollars. The Zedillo Administration adopted tighter monetary and fiscal policies to counter inflation and cushion some costs of the crisis in the banking sector. The plan entailed an increase in VAT, cutting down budgets, increase in the price of gasoline and electricity and decrease in government subsidies. The peso depreciation through the end of the 1990s led to increase in exports and was of benefit to the export sector. However, the devaluation on the other hand reduced the real income hurting the poor and the emerging middle class. Signing of the NAFTA and shift of the Mexican economy to export based aided to neutralize the impacts of the Peso devaluation. President Ernesto Zedillo administration and that of his successor, President Vicente Fox, carried on with market liberalization, privatization of government enterprises, and economy deregulation. Through these tighter monetary and fiscal measures, these administrations were able to lower down fiscal deficit, bring inflation under control, and spur economic growth. Current Economic Situation The Mexican economic growth was 3.9% in the year 2011 and is projected to grow by 3.7% in the year 2012 and 3.8% in the year 2013. The Mexican economy has substantially recovered from the sharp economic recession of the year 2009 (Sanchez 12). This was caused by global financial crisis and the following slow down of the U.S economy. During that period the Mexican economy was estimated to have contracted by 6.6% and its currency depreciated by 25% against the dollar. In the whole of the Latin America region, it is Mexico that experienced the deepest recession during this crisis. This is due to the fact that Mexico is dependant, to a large extent, on manufacturing exports to United States. Mexico outsmarted Brazil in terms of economic growth in 2011 (3.9% compared to 2.7%) and is projected to outperform it again in the year 2012. Mexico has sound macroeconomic fundamentals, stable banking sector, and competitive exporting sector that aid its economy and enable it withstand external market conditions. However, Mexico’s economic growth potential has been reduced by lack of sufficient structural reforms in the labor, education, energy, and fiscal sectors of the economy (CRS 13). President Calderón put up measures to assist protect the economy from the effects of global financial crisis. These policies coupled with Mexico’s previous economic performance aided the economy to recover and led to improvement of the exchange rate. The country’s central bank made significant interventions to bring the foreign exchange market to stability and it has secured credit from the U.S Federal reserve swap line and the International monitory fund to stabilize the economy. The IMF through its program of assisting countries deal with global recession gave a credit of 48 billion dollars to Mexico and was granted the same amount in 2010. In early 2011, Mexico was granted a new flexible credit from the IMF of $72 billion, the largest credit amount extended by IMF to this country to cushion it from the effects of external shocks. Mexico has shown that it has no intention of drawing on its resources, but seeks the renewal that restores investor confidence and stabilizes financial markets in case of global conditions deterioration. Informal Sector, Unemployment, and Poverty Mexico’s informal sector is estimated to account to approximately one-quarter to one-third of total employment. Formal or salaried employment accounts for approximately 57%. According to the CIA report, the unemployment rate was 5.2% in the year 2011 compared to 5.4 % in the year 2010. However, underemployment is estimated to be as high as 25%. The population living below the poverty line was recorded as 51.3% in 2011 up from 47% in the 2010. Sanchez (2) says that the youth accounts for 64% of the total working class and the average schooling age is 8.6 years. The dependency ratio is said to be 0.55, which tends to boost savings and encourage investment. Workers in the informal sector suffer from poverty due to low incomes; this has been Mexico’s pressing economic distress for long. The government has attempted to lower poverty rates through various programs. The program named Oportunidades program (formerly known as Progresa) seeks to alleviate the effects of poverty and break the vicious cycle of poverty by improving health standards and educational attainment among poor families. This program provides funds to poor families who regularly attend medical services and their children are attending school. Informal sector is often singled out as a hindrance to Mexico’s economic growth by experts. Conclusion Mexico has a large and diversified economy, with young workers, high educational potential, and a friendly business environment. The Mexican stability should be a continuous task and rests upon sound public finance policies, low inflation and solid banking sector. Despite Mexico’s portrayal of strong economic recovery, there is need for some efforts to overcome informality and hindrances to competition in order to sustain growth potential. Works Cited CIA. “World Fact Book: Mexico, Economy.” CIA Maps and Publications, 2012. Web. 27 Nov. 2012. < https://www.cia.gov/library/publications/the-world-factbook/geos/mx.html> CRS. “U.S.-Mexico Economic Relations: Trends, Issues, and Implications.” Congressional Research Service, 2012. Web. 27 Nov. 2012. Hanson, Gordon. Understanding Mexico’s Economic Underperformance. San Diego: Migration Policy Institute, 2012. Print Sanchez, Manuel. “The Mexican Economy: Now and in the Future.” Banco De Mexico, 2012. Web. 27 Nov. 2012. Read More