Mexico - Economy





Traditionally, Mexico's economy has been predominantly agricultural, but by 2000 the primary sector contributed only 5% of the GDP and employed less than a fifth of the labor force while the secondary sector—industry—contributed 26% of GDP and employed about 25% of the labor force. Services is the largest sector, accounting for nealy 70% of GDP and employing over half of the work force. Mexico both exports a substantial amount of agricultural products (10% of exports) and imports substantial amounts (10% of imports) Mexico is self-sufficient in most fruits and vegetables and in beans, rice, and sugar, and it is approaching self-sufficiency in meat and dairy products. Marginal subsistence, however, is still the lot of much of Mexico's rural population. In 2001, the CIA estimated that 40% of the population were living below the poverty line, an improvement on over 50% in the early 1980s, but because of population growth this constitutes an increase in absolute numbers. Further, the government of Mexico's estimate for 2002 is that 54% of the population is lacking security in basic necessities. On the other had, in 2002 it was estimated that about half of the country's wealth has become concentrated in the top 10% of population.

A great mining nation, Mexico is the world's leading producer of silver and is well endowed with sulfur, copper, manganese, iron ore, lead, and zinc. Since the 1920s, Mexico has been one of world's leading oil producers. From 1973 to 1982 (i.e., from the first oil shock to the Mexican default marking the on-set of the Third World debt crisis) oil production increased at 50% a year and accounted for about 75% of exports. By 2002, manufacturers had long ago overtaken oil as the main economic driver: oil made up only about 10% of exports, while 80% were manufactured products, half from the maquiladora sector of assembly plants. The maquilas (plants which import semi-finished goods from the United States taking advantage both of low Mexican wages and of laws that allow the goods to be imported, processed and re-exported free of tariff charges) were also in decline by 2002, however, due to competition from lower-wage countries and the progressive lowering of all Mexico's tariffs under the NAFTA agreement.

Led by the oil boom, from 1978 to 1981 the Mexican GDP increased by an annual rate of 8% and the government embarked on an ambitious public spending program, financed to a great extent by external borrowing in the petro-dollar market. The ambitions slammed up against a wall of falling oil prices, worldwide recession and increasingly tight money in 1981, and by August 1982 Mexico found itself unable to service its spiraling exernal debt. The annual inflation rate, which had hovered around 30% during 1979–81, reached almost 100% in 1982.

In December 1987, the Pact for Stability and Economic Growth (PECE), a series of price and wage restraint agreements, was implemented. The agreements between government, labor, and the private sector combined austere fiscal and monetary restraints with price/wage controls and freer trade possibilities. The PECE helped curb inflation to 51.6% in 1988 without incurring a recession. Gradual recovery saw the inflation rate fall to 20% in 1991, 11.9% in 1992, and to around 10% in 1993. As the price of debt rescheduling and the maintenance of international credit worthiness, the government was brought to adopt a program of economic liberalization and privatization, culminating in the North American Free Trade Agreement (NAFTA), which opened the domestic market to foreign trade by a phased elimination of trade barriers between Mexico, the US, and Canada over the next 15 years. NAFTA went into effect as of 1 January 1994 and not coincidentally the Chiapas uprising, led by the Zapatista National Liberation Army (ZNLA), began the same day. Before 1994 was out, the PRI candidate in the presidential race had been assassinated by old economic nationalists within the party, and a speculative boom in lending by US banks and businesses seeking new markets in Mexico generated an unsustainable run-up of external short-term debt, which the Zedillo government sought to lance with a devaluation of the peso in December. The even more rapid withdrawal of foreign capital following the devaluation threatened not only to sink the peso through the floor, but to spread throughout Latin America and beyond. In January 1995 the Clinton administration organized an international assistance package which provided $50 billion in loans (including $20 billion in loan guarantees from the US). As a measure of its sincerity, the Mexican government put up its oil revenues as collateral for the the loans. Also with an eye to restoring its international creditworthiness, the government only used about half of the credits made available, and paid back those it did use ahead of schedule. The Mexican GDP contracted 6.9% in 1995, but by 1996 growth returned, with an expansion of GDP of 4.2%. By 1997, growth had increased to 6.8%. Ironically, the depreciation of the peso aided recovery by making Mexican goods less expensive and thus more competitive on world markets, and the net effect of NAFTA has been a trade deficit with Mexico, reaching 29 billion in 2001, up $5.3 billion from 2000. Nevertheless, the promise of the Mexican market has been kept. US exports to Mexico grew from $46 billion in 1995 to $112 billion in 2000, more than double the value of US exports to the EU, and making Mexico the second largest trading partner of the United States (after Canada).

Inflation and external debt remained serious problems for the economy threatening stability. In 1997 the government adopted the The National Program for Development Finance (PRONAFIDE) which outlined the government's economic policy framework for the period 1997 to 2000. It supported further privatization and deregulation of the economy. Inflation, at 20.6% in 1997, decreased steadily to 5% (est.) in 2002. External debt as a percent of GDP fell from 37% in 1997 to 24.9% in 2002, and the external debt to exports ratio fell from 113.6% to 85.9% during the same period. However, GDP growth also moderated, to 4.9% in 1998 and 3.7% in 1999, due mainly to the spreading effects of the Asian financial crisis of 1997, the Russian debt default of 1998, and the Brazilian currency crisis of 1999. In 2000, however, as Vincente Fox was elected as the first non-PRI president in 71 years, the GDP rose a sharp 6.6%. Recovery was cut short in 2001, however, as Mexico imported the US recession and slowdown, which carried over into 2002. The economy contracted 0.3% in 2001, and grew at only an estimated 0.9% in 2002. In 2001, free trade agreements were in place with the EU and a number of Central American neighbors, bringing over 90% of Mexico's trade under free trade agreements.

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