Economics Of Mexico Essay

A federal constitutional republic located in North America, Mexico is surrounded by Belize, Guatemala and the United States. This Latin nation has about 11 million people in population. In nominal terms, Mexico’s economy stands as the 13th largest in the whole word according to the World Bank. It stands as the 11th largest economy in terms of purchasing power parity. Mexico is considered to be an upper middle income economy based from its region and income as classified by the World Bank. Mexico practices a free market economy system and they rely mostly on their export sector as it has provided the country great economic success over the years. Mexico is extremely dependent on the exports to the U. S. hence its economy is strongly connected to the business cycle of the United States. As the economy of the U. S suffers, Mexico also endures the economic crisis that the U. S economy bears. Mexico’s services also contribute a bigger share in the country’s total gross domestic product. In 2006, the country’s real gross domestic product grew by 5. 1%. In 2007 and 2008, it raised to about 3. 3% and 1. 3% respectively (Diaz 245). Mexican government officials are expecting a 4%-5% growth in the economy for this year (2010). The trade regime of Mexico is among the most open internationally. They have free trade agreements with about 44 countries including Canada, the European Union, and the United States. The Mexican administrations following the 1994 crisis have provided improvements for the nation’s macroeconomic essentials. The economy of Mexico comprises fast developing modern service as well as industrial sectors, with rising private ownerships. The current administration of Mexico has extended and expanded competition in telecommunications, ports, electricity generation, railroads, airports, and natural gas distribution, as it aims to upgrade the infrastructure of the country. Macroeconomic, financial and welfare indicators Mexico suffered the gravest economic crisis in the years 1994-1995. 50% of the country’s total population fell into poverty during those times. Poverty was alleviated during Zedillo’s and Fox’s administration because of NAFTA and other trade agreements that were initiated during those terms. The macroeconomic finances of Mexico were also restructured resulting to decline of the poverty rate of the country. According to the World Bank, the poverty rate of Mexico was reduced from about 24. 2% in the year 2000 to only 17. 6% four years after (2004). Most of this decline came from the rural districts of Mexico whose poverty rate was reduced from 42% down to 27. 9% in a span of four years (Lustig 175). Urban poverty on the other hand was idled at 12% from the years 2000-2004. The World Bank also declared that 17. 6% of Mexico’s total population in 2004 lived in severe poverty, while 21% lived in average poverty. The CIA Factbook also had their own figures, as it reported that 13. 8% of Mexico’s population during that year was living under the poverty line, making this judgment based from the food-based poverty. In 2006, the Gross Domestic Product of Mexico in purchasing power parity was approximately at US $1. 353 trillion (Lustig 212). The World Bank declared that in 2007, the country had the second highest Gross National Income in terms of market exchange rates in Latin America next to Brazil. Mexico is considered to be an upper middle-income nation because of its GDP. According to World Bank, Mexico’s population (2008) is at 106,350,434. Their GDP (PPP) in 2009 was at an estimate of $1. 459 trillion. Remittances are huge contributors to the growing Mexican economy. These are the contributions sent by Mexicans who live in other countries, generally in the United States, to their relatives and families back in Mexico. These contributions are substantial and in 2005, these remittances reached about $18 million. In the year 2004, Mexico was the tenth biggest source of remittances after their other sources of income such as manufactured goods, oil, electronics, industrial exports, automobiles, food, construction, heavy industry, financial services and banking. Remittances were even bigger than tourism expenditures and it stood for 2. 1% of Mexico’s GDP. The increase in foreign income has been outstanding. Income inequality as well as regional differences has been a constant dilemma in Mexico. Quintana Roo is one of the states with the highest GDP growth rates at 9. 04% followed by Baja California with 8. 89%, and San Luis Potosi with 8. 18% (Moreno-Brid & Ros 194). Mexico’s economy has been less centralized ever since the 1980s era. Amongst the federal units in Mexico, the Federal District had the highest GDP per capita in 2000, with US $17,696. However, the annual rate of Gross Domestic Product in the Federal District has been the smallest amongst all federal entities during 2003-2004 at only 0. 23%. Radical decrease has been observed in the industrial and agricultural sectors. Nonetheless, the Federal District of the nation still contributes for the 21. 8% total GDP of the country (Walton 166). Industry One major breakthrough in the industry sector of Mexico came from the trade liberalization that the country has undertaken. Almost 90% of all export earnings in 2000 came from this undertaking. The current major industries include automobile and aircraft industry, cement & construction industry, food and beverages, petrochemicals mining, tourism and consumer durables. The automobile industry is by far the most successful and most important industry in Mexico. Since the 1930’s, General Motors, Ford and Chrysler (The Big Three), have started creating plants in Mexico. The 1960’s and 1970’s came and other internationally renowned automobile manufacturers like Volkswagen, Nissan, Toyota, BMW, Mercedes-Benz, and Honda, operated inside Mexico. The success of the Mexican automobile industry can be attributed to its difference with other Latin American countries. Mexico is not a mere assembly manufacturer; in fact, the industry produces advance and complex technological components for automobiles and engages in some research and development pursuits. Besides, because of the high requirements of North American components in the industry, even European and Asian parts suppliers have extended into Mexico. However, the local manufacturers are actually relatively small in size compared to the international brands. The local manufacturers only account for a fraction of the massive industry that is the automobile industry. Some of the mainstays of local automobile manufacturers include DINA Camiones S. A. de C. V. , a truck and busses company operating for almost 50 years now; Vehizero and Mastretta, which builds hybrid trucks and evolving sports cars respectively. Furthermore, new car manufacturers keep on joining the tight competition in the Mexican automobile industry (Lustig 246). Mexico has other large industries that includes Cemex, which is the third largest cement corporation in the world; companies like FEMSA which other than owning breweries and OXXO convenience store chains, is also the second-largest Coca-Cola bottler in the world; alcohol beverage companies that include world-renowned companies like GrupoModelo; Gruma which accounts for the biggest supplier of corn flour and tortillas in the world; and other high-tech industrial producers which according to the World Bank account for almost 1/5 of the country’s total exports (Moreno-Brid & Ros 278). Mexico is also focusing in the development of an aerospace industry and a jet aircraft and helicopter jet fuselage assembly. With the arrival of foreign companies like Bell, Bombardier, Cessna and MD Helicopters, the aircraft and regional jet fuselages industry in Mexico has been in high hopes. Likewise, local companies emerged such as Aeromarmi and Hydra Technologies which builds light propeller airplanes and Unmanned Aerial Vehicles (UAV’s) respectively. Furthermore, companies like KuoAerospace that builds parts for aircraft landing gears and Frisa Aerospace that builds jet engine parts for the new Mitsubishi Regional jet are also emerging players in the growing industry of aerospace. Another thriving industry in Mexico is the Maquiladoras. Maquiladoras are Mexican factories that import raw materials and produce goods for export. They have been a Mexican landmark trade. Free trade also boosted this industry that since NAFTA, real income from the maquiladora sectors has increased by 15. 5% since 1994. The non-maquiladora industries in Mexico were actually left by the maquiladora sector for it has been since the 1960’s that their products can enter the U. S. duty free as part of the 1960s industry agreement (Lustig 289). Finally, other industries in Mexico includes the food manufacturing industry, that by international companies have strived while local companies have failed to develop; a developing computer industry led by LANIX that now has two manufacturing plants in Mexico and Chile; a new industry that is Robotics, where Mexico’s robots are being developed for future years for advanced commercial applications. Illegal immigrants immigrating to the USA For so many years now, Mexicans have illegally immigrated into the United States. One notable reason is the close proximity between the two nations and the apparent difference in the quality of living between the two countries (Borjas 64). Many Mexicans come from the destitute towns of Mexico are dreaming the â€Å"American dream† hence the strong desire to cross borders. For most people, having a low-paying job in the United States is still much better than a stable job in their home land. In the 1980s period, the United States witness a considerable rise in the number of illegal immigrants coming from Mexico (Hellman 89). This immigration influx did not come from just a specific region from Mexico but from all the communities all over the nation. Mexicans have an average wag of about $4. 15 per hour and those individuals working in the agricultural sector receive even less (Borjas 101). People in Mexico who are working may survive with such pay alone, however those with families especially those with more kids find it difficult to survive with the average pay that the Mexican government provides. The unemployment rate of Mexico is about 5. 6% (2009) but about 25% of the working Mexicans are considered underemployed (Diaz 145). As the government continuously provide and create jobs, these are still not enough to meet the rising demand of the Mexicans. The low pay that the Mexicans get, stop them from having even the most essential and basic necessities. Hence, a lot of Mexicans regardless whether they’re from the small or big cities, see the United States to be extremely desirable. Even though there have been treaties like the NAFTA or North American Free Trade Agreement that allowed American companies in the country, jobs are still not enough and several wages are still comparatively low. Illegal immigrants are most likely individuals with lower skill levels meaning that they end up having jobs in construction, landscaping, agriculture, household services, restaurants, and low-end manufacturing in the United States. The United States Department of Homeland Security together with certain advocacy groups have been condemning a program of Yucatan, a state in Mexico, and a federal Mexican agency which allows Mexicans to directly migrate and reside in the U. S. According to the Homeland Security and advocates, the assistance that the Mexican program provide includes recommendations and suggestions on how to get across the United States border unlawfully, where to enroll their children, and find proper healthcare (Borjas 188). Accordingly, identity cards are also given out by the Mexican federal government to the Mexicans who live abroad. The giving out of Matricula Consular or Consular Registration are strictly opposed by advocate groups. These identifications card given by the Mexican government via its consulate offices reveal that the holder is of Mexican nationality but is living outside the country. Through this identification card, illegal immigrants can open bank accounts in the United States as it is accepted in many financial establishments. Most Mexican immigrants still choose to work in the United States and other countries in order to improve their way of life. Illegal immigration in the United States has becoming to be more and more difficult due to advanced infrastructure, technology, and enforcement. In the past year (2009), the number of immigrants has declined due to the economic slowdown of the United States. Nevertheless, thousands of immigrants are still yearning to cross borders and get a job. Immigrants sometimes pay smugglers or â€Å"coyotes† in order to help the cross borders. When a Mexican has successfully immigrated to the United States, he aims to work hard in order to send money back home in Mexico. A part of an immigrant’s desire is to bring more of his family members to the U. S. This is why remittances in Mexico stands at a great value since immigrants are increasing in number. Most of these illegal immigrants live a better life away from their home country. Mexican immigrants benefit from the high value of living in the United States, and in a way the United States economy also benefit from these illegal aliens. These immigrants are willing to take any job in the United States even the more dangerous ones. Aside from the, American employers are also able to get workers at lower costs since Mexican immigrants are also open to low-paying jobs since what’s important to them is to be on the U. S. territory. The United States economy also benefits as these immigrants pay for Social Security. No matter what jobs or little benefits these immigrants may get, they are still grateful for the opportunities that await them in the United States. Little by little, and over time, these Mexican immigrants are able to save more than enough in order to alleviate their living conditions. Some immigrants eventually gain permanent residency (through green card) and possible citizenship status. Mexican immigrants have a particular belief that coming to the United States can be the solution to their search for a much better life. Comparing the Gini Coefficient and Lorenz Curve with USA and other Latin American countries (2) As the way of living between Mexico and the United States can be observed, statistical data establish these observations. The Gini coefficient measures the inequality of a distribution in different disciplines such as health science, chemistry, ecology, and economics. It is usually used in measuring inequality of wealth or income. Canada and European countries have Gini indices of around 24 and 36 between them. Mexico and United States on the other hand have Gini indices that are both over 40, signifying that the inequality between Mexico and United States is very great. In 2002, Mexico ranked as the 15th country with the greatest inequality with a Gini index of 53. 1 (Walton 122). The Lorenz Curve is also used in establishing the proportionality of a distribution. It is usually associated with income distribution computations and often used in analyzing inequality. Using the Lorenz Curve, Mexico’s average income in their rural area was at 1,221. 9 pesos in 2005 while the urban side was at 3,002. 7 pesos (Diaz 191). The inequality of income distribution in Mexico is so great that finding establish that even if Mexico is a relatively rich nation compared to the other developing countries, severe poverty is felt in the rural area. The social stratification dilemma of Mexico still haunts the nation to the present day. Over the years, the lower class has always been the ones who cultivate the lands that are owned by those belonging in the upper class. At present, land ownership is still the grounds for wealth amongst the Mexicans. Though, the industrial transformation in Mexico’s economy has also brought in wealth amongst the citizens. Sadly, only 10% of Mexico’s population is wealthy. The 30% belongs to the middle class while the whole 60% of Mexico’s population are poor. These Mexicans are usually those industrial workers or peasant sector (Moreno-Brid & Ros 214). The income distribution of Mexico is very unevenly distributed with the wealthy 10% owning 38% of the nation’s income (2000). The middle 30% owns the 36% of income while the poorest 60% shares 26% of the country’s total income. The distribution of consumption or income by percentage (survey year 1995) is as follows: Lowest 10% – 1. 4 Lowest 20% – 3. 6 Second 20% – 7. 2 Third 20% – 11. 8 Fourth 20% – 19. 2 Highest 20% – 58. 2 Highest 10% – 42. 8 This data was from the 2000 World Development Indicators [CD-ROM] and it refers to income shares by percentiles of the Mexican population and is ranked according to per capita income. It doesn’t take an expert to figure out the huge disparities between the poor and wealthy in Mexico. No need to check the indexes of housing, education, and health, to understand the uneven distribution of income. In recent years, relentless poverty remains to be one of the enduring problems of Mexico’s economy. Unemployment rate increases and the poor do not get any kind of welfare compensation. The economic policies of Mexico have worsened the situation like inflation has battered the real wages of those poor people. Every time a new administration begins in Mexico, different programs have been proposed to address the basic needs of the poor. Oftentimes these programs have worked for the time being and at times, they failed. With the inequality of income distribution and other social issues haunting the Mexican economy, it seems that the situation of the country is worsening. Agriculture The Mexican agricultural sector is one of the biggest in the world and it has become a very significant factor in the whole economy of the country. In the beginning the agriculture of Mexico was not very flourishing but as soon as the Mexico Revolution was over a restructuring and improvement in the agricultural sector was made. This reformation took place after the 27th edition of the Mexican Constitution was released. Before the 1990s, the Mexican government focused and encouraged their agricultural sector into planting crops such as beans and corn only. After 1990, they have restricted the import of such crops from other countries through the implementation of particular acts and policies. Following that change in the agricultural sector, Mexico’s agriculture has increased but their percentage of Gross Domestic Product had declined (Lustig 123-124). Mexico is the number one country in producing avocados, lemons, chayote, limes, onions, as well as the seed of Safflower. The country is ranked second for their production of dry fruits, peppers and chilies, and Papaya. Their production of chicken meat, whole beans, asparagus, mangoes, and oranges, ranked them at third worldwide. Mexico is known for the variety of fruits that they are capable of producing. The country experiences one of the best weathers of all time hence they are able to produce such various types of fruits. Their fruit production has given a huge impact on their economy for years. Various organizations are also present in Mexico in order to help the farmers in whatever they may need during their agricultural productions. NAFTA is a type of organization that has help Mexican farmers and the Mexican agriculture prosper. Trade and trade agreements Mexico in general is an export oriented nation. Its economy heavily relies on trade. Mexico was the 15th largest merchandise exporter in the world in 2005, and 12th biggest merchandise importer. The trade activities of Mexico increased five times from 1991 to 2005. Mexico is the biggest importer as well as exporter in the whole Latin America. Mexico exported about US $213. 7 billion in 2005 alone; approximately just equal to the sum of all Argentina’s, Brazil’s, Uruguay, Venezuela’s, and Paraguay’s total exports for that year. The trades of Mexico however are closely tied to its North American neighbors (Lustig 184). About 50% of their imports and 90% of their exports are traded with Canada and the United States. NAFTA or the North American Free Trade Agreement has not produced a change in the trading of Mexico. The trade between Mexico and the United States from 1993-2002 increased for about 183% and in Canada with 165%. However, the other trade agreements that Mexico has shown even more remarkable outcomes. Their trade with Chile increased at about 285%, with Honduras at 420% and in Costa Rica at 528%. With the same time phase of 1993-2002, Mexico’s trade with European Union rose 105% (Walton 210). In 1986, Mexico became part of GATT or the General Agreement on Tariffs and Trade. At present the country is an active and productive member of the World Trade Organization. Mexico has about 12 free trade agreements with 44 nations. Some of their most notable trade agreements are as follows: Nicaragua in 1998, Chile in 1999, Israel and the European Union in 2000, Uruguay in 2004, and in 2005 with Japan. One of their most known trade agreement is the NAFTA with Canada and the United States in 1994 and the Group of the three or Grupo de los tres with Venezuela and Colombia in 1995. Venezuela however terminated their agreement by the year 2006. Mexico has publicized their desire of being an associate constituent of Mercosur. Mexico has also begun to form deals and negotiations with Peru, Singapore, South Korea, and Australia. NAFTA The NAFTA or North American Free Trade Agreement is an arrangement signed by the administrations/governments of the United States, Canada, and Mexico. The agreement was launched on January 1, 1994 and it outdated the Canada-United States Free Trade Agreement that Canada and the U. S had. The trade block between these 3 countries had the largest combined PPP (purchasing power parity) GDP in the entire world, and ranked 2nd largest in terms of nominal GDP (Cameron 86). The aim of this agreement was to get rid of the barriers of investment and trade between Canada, USA, and Mexico. The implementation of the agreement on the 1st of January in 1994 immediately had its effect as tariffs were eliminated on more than one half of the imports coming from Mexico and over one third of the US exports that were going to Mexico. This agreement also aims to abolish non-tariff trade barriers. By far, the NAFTA is the most significant trade agreement that the Mexican government has signed. NAFTA is more inclusive than the other trade agreements that Mexico is involved with. NAFTA has two supplements which are the NAALC or North American Agreement on Labor Cooperation and NAAEC or North American Agreement on Environmental Cooperation. The NAAEC supplement of the agreement was an answer to the environmentalists’ interests and worries that companies would move and transfer to Mexico or that the United States would drop its standards if the three nations did not attain an agreed and undisputed guideline or parameter on the environment. Its goal is to be more than just a series of environmental rules, but also address environmental and trade concerns through the establishment of NACEC or North American Commission for Environmental Cooperation. The NADBank or North American Development Bank was also formed to assist and finance ventures that concern the reduction of pollution. All these have provided great economic advantages and benefits to Mexico. The NAALC supplement’s goal was to form a foundation for mutual aid between the three countries in resolving labor problems and promoting greater support among social groups and trade organizations. The huge amount of trades between the United States and Mexico had led to a few trade disputes concerning comparatively small amounts. These disagreements were in general settled by NAFTA panels or WTO or by way of negotiations among the two nations. The total benefits of NAFTA have been measured and reported by numerous publications. They have evaluated the positive effects that NAFTA has provided Mexico. Poverty rates in Mexico have declined and the real income wages have increased even after the economic crisis in 1994-1995 (Cameron 134). However, NAFTA has not been enough to create an economic union nor to lessen the poverty rates significantly or to further increased rates of growth. The fall in real wages and absence of secured, well-paid jobs are serious difficulties that the Mexico’s workforce has been facing. While NAFTA has been beneficial to some sectors of Mexico’s economy particularly the maquiladora industries, NAFTA has also in a way increased inequality and decreased the job quality and incomes for the great majority of Mexican workers (Cameron 197). In more ways than one, NAFTA has stopped the progress of development. An example would be the stagnation of the industrialized share of employment that led to the regression of some sectors. NAFTA has provided several of the most vital challenges for the development of Mexico for the 21st century. The question is whether or not Mexico, under this agreement, can revive the slowed down development of its economy and find a means to restructure and redistribute the benefits of the consequential growth. Future of Mexico’s Economy The Real GDP of Mexico has fallen last year (2009) to 6. 6% because of the collective effects of the global financial crisis that have severely affected the US imports and manufacturing. Nonetheless, significant growth in non-oil exports and manufacturing is expected in 2010, as prompted by the rising US manufacturing and trade. The GDP of the country is expected to demonstrate a solid growth in the near future, suggesting in part how essential activity dropped in 2009. Continuous strong links with the economy of the United States will drive Mexico’s economic stance for the near future. US manufacturing and imports are expected to bounce back from the horrible fall down as witnessed in 2009. Mexico must be more competitive in order to increase and improve the market share of their exports to the United States and to better influence and control its liberal net of free trade agreements. Works Cited Borjas, George. Mexican Immigration to the United States (National Bureau of Economic Research Conference Report). Illinois: University Of Chicago Press, 2007. Print. Cameron, Maxwell. The Making of NAFTA: How the deal was done. New York: Cornell University Press, 2002. Print. Diaz, Araceli. Economic Growth and Income Inequality in Mexico: A Panel Data Approach. Germany: VDM Publishing, 2010. Print. Hellman, Judith. The World of Mexican Migrants: The Rock and the Hard Place. A New Press, 2009. Print. Lustig, Nora. Mexico: The Remaking of an Economy. Washington, DC: Brookings Institution Press, 1998. Print. Moreno-Brid, Juan Carlos, & Ros, Jaime. Development and Growth in the Mexican Economy: A Historical Perspective. New York: Oxford University Press, 2009. Print. Walton, Michael. No Growth without Equity: Inequality, Interests, and Competition in Mexico. World Bank Publications, 2009. Print.