Mexico’s Trade Diversification
Mexico is a party to 12 different free trade agreements with 46 countries, in addition to numerous other economic and financial arrangements. The country’s increased global trade activity has not yet reduced its reliance on the US.
The country is an active member of the Asia-Pacific Economic Cooperation (APEC), for example, in addition to the Latin American Integration Association (ALADI), the Pacific Alliance, the Trans-Pacific Partnership (TPP), and the World Trade Organization. In late 2018, US President Donald Trump, former Mexican President Enrique Peña Nieto, and Canadian Prime Minister Justin Trudeau signed the United States-Mexico-Canada Agreement (USMCA), a replacement for NAFTA, though it must be ratified by all three governments before it can be implemented.
The USMCA includes changes for automakers (like new wage requirements) and intellectual property (including increased copyright protections), more provisions aimed at environmental protection, and some digital trade provisions.
Mexico ranked 36th out of 140 countries in terms of trade openness in the WEF’s Global Competitiveness Index 2018; however, it ranked 65th specifically in terms of trade-weighted average tariff rate. The country’s regulatory environment for foreign investment is relatively favorable, as is the ease with which companies can hire foreign workers (though the cost for companies to comply with export procedures remains high).
The country’s infrastructure, particularly in terms of access to ports and airports, rates relatively highly, and there are other hopeful signs; Mexico has been deeply involved in the development of the Pacific Alliance, for example, which is an initiative involving Chile, Colombia and Peru to facilitate increased trade with the Asia-Pacific region.
The initiative also promotes a regional system for innovation and entrepreneurship, with support from international organizations such as the Inter-American Development Bank (its goals include having a social impact and alleviating poverty). Still, it is necessary for Mexico to further democratize trade by expanding the number of participants, ideally with a particular emphasis on the small- and medium-sized firms that represent the country’s largest source of employment.
All told, its various trade deals give Mexico access to more than one billion consumers and nearly 60% of the world’s economic activity. Still, Mexico has struggled to diversify its trade away from the US, the destination for more than 81% of its exports, according to the National Institute of Statistics and Geography.
Low Productivity in Mexico
The country’s grey economy is hindering productivity, as is meagre investment in training and R&D.
Mexico’s rate of labor productivity has been 60% below the average for Organization for Economic Co-operation and Development countries, and 70% below that of the US in particular, according to a 2015 OECD report (the report cited such a broad dispersion of industrial activity across both high- and low-productivity sectors that it has lessened overall productivity, and undermined income equality).
The country’s rampant informal, grey economy has persistently weighted on official productivity rates, according to an OECD forecast published in late 2018. The Mexican government created a National Productivity Committee in order to better coordinate policies and increase access to (and the quality of) education, while increasing legitimate, regulated job opportunities and bolstering investment in research & development. According to a 2016 Inter-American Development Bank (IDB) working paper, in order to increase its income per capita Mexico should prioritize productivity policies that zero in on infrastructure, the rule of law, and financing for both private enterprise and public health.
According to the OECD, the gap between average OECD member productivity levels and those in Mexico is particularly significant for small- and medium-sized enterprises. In addition to hindering productivity, informality also impedes the broader collection of tax revenue; according to the country’s Secretariat of Finance and Public Credit, total tax revenue in Mexico was equal to 13% of GDP in 2017, compared with the OECD country average of 34.3%.
Other factors impeding productivity include unfair or inadequate regulation, and the manipulation of public policy.
While a shift to more legitimate economic activity could drive productivity and growth, more than half of employees and self-employed workers in Mexico remain informally employed, according to an outlook for the country published by the OECD in 2018 (the outlook suggested that Mexico introduce unemployment insurance - which could in turn make formal employment more attractive).
The OECD has suggested that in addition to introducing unemployment insurance Mexico could improve productivity by increasing the consistency with which regulations are applied, lifting restrictions on foreign investment in sectors like transportation and banking, and easing licensing requirements in the retail trade.
Mexico's economy is the second biggest in Latin America and among the largest in the world, but oil price uncertainty and government spending cuts have weighed on its economic health. GDP is expected to grow by as little as 0.8% in 2020.
Government reforms appear to be making headway, though economic and social disparities persist among the country’s 32 states - as trade openness and the NAFTA agreement (now known as “USMCA”) have mainly created opportunities only in regions with geographic or logistical advantages.
Mexico forms part of the global efforts to achieve the SDGs, and the United Nations System (UN) has accompanied this process.
The UN Sustainable Development Cooperation Framework of Mexico 2020-2025 (UNSDCF) is the first joint planning process in the country to be fully aligned with the 2030 Agenda, the National Development Plan and the National strategy for the 2030 Agenda. The Mexico Partnership Landscape Assessment outlines more of this.
It identifies four thematic areas:
Equality and inclusion, Prosperity and innovation, Green economy and climate change, Peace, justice and rule of law; and two cross-cutting areas: gender equality and women and girl’s empowerment, as well as migrants and refugees.
The effective implementation of the UNSDCF requires the strengthening and scaling up of multi-
stakeholder and multi-sectoral partnerships. To facilitate this process, the UN Department of
Economic and Social Affairs (UNDESA), the 2030 Agenda Partnership Accelerator and the UN
Resident Coordination Office (RCO) in Mexico have led the development of the present Mexico
Partnership Landscape Assessment
The government must address gaps that exist between the country’s modern productivity and its traditional, unregulated economy, while also tackling corruption, the impunity of unscrupulous officials, and organized crime.
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Energy Reform in Mexico
Mexico’s oil production has declined sharply in recent years; as of early 2019, production was expected to fall to an average of 1.78 million barrels per day that year, from 3.26 million barrels per day in 2006. Greater investment is required in order to boost production and modernize the state oil company, Petróleos Mexicanos (Pemex). The country is trying to modernize its energy sector through increased foreign investment.
As of 2017, Pemex was still providing 16.7% of the country’s federal budget, though that was a sharp decline from 37% in 2005, according to the National Institute of Statistics and Geography.
According to a World Energy Council report published in 2016, Mexico had the world’s fourth-largest capacity for geothermal electricity production, and according to a World Economic Forum report published in 2017 it has generally improved its development of sustainable, accessible, and secure energy systems - due in part to the phasing out of fuel subsidies.
Also by 2017, private firms were participating in Mexican oil and gas production, and government reforms were focused on renewable energy as a means to increase access to electricity. A 2018 Climatescope study ranked Mexico 8th in the world in terms of clean energy investment opportunities, and within Latin America it ranked 3rd (behind Chile and Brazil).
Mexico’s government energy reforms present an opportunity to boost investment in hydrocarbon production and electricity generation capacity, and to reduce costs in order to improve competitiveness. However, the reform effort has been undermined by excessive bureaucracy, a lack of a healthy corporate culture in the energy sector, and political obstacles.
The government’s introduction of a steep, 20% hike in gas prices in January 2017 was an effort to deal with a dramatic imbalance between its tax revenue and its debt obligations - which in turn had been a result of economic shocks including a severely weakened peso, declining domestic oil production, and a rise in energy imports. The gas price increase (and the government’s broader move towards full energy price liberalization) was met with public outrage and violent protests. This unrest was a reflection of the government’s inability to publicly articulate the need for reforms likely to cause discomfort.
While the sort of energy subsidies that kept gas prices low for Mexicans can provide short-term economic benefits by improving energy access, numerous studies suggest that they actually have significant downsides - because they serve as a regressive tax on the poor, while disproportionately benefiting higher-income groups.
Security and Violence in Mexico
Since the beginning of the Mexican government’s so-called war on drugs in 2006, the country has experienced a severe uptick in violence and suffered from a wide-ranging security crisis, according to a report published by the Inter-American Commission on Human Rights. High crime rates and rampant illicit behavior are limiting growth in the country.
This increased violence has spawned human rights violations such as denying the accused access to justice, forced disappearances, and threats made against both human rights defenders and journalists. Mexico ranked 147th out of 180 countries in the 2018 World Press Freedom Index.
The proximity and size of the consumer market in the US - the main destination for narcotics in the region - has made Mexico both a place of origin and a transit route. This has triggered widespread violence, particularly in cities along Mexico’s northern border. As a consequence of the violence, the military has played a prominent role in seeking to maintain public security and confront organized crime - undercutting an already fragile institutional framework for combating illicit activity by spreading further violence (in 2018, homicides in the country rose by more than 15% compared with the prior year, to a record 33,341, according to the country’s Secretariat of Security and Citizen Protection).
In 2018, the overall economic impact of violence in the country rose by 10% compared with the prior year, to the equivalent of about $268 billion, according to a report published in 2019 by the Institute for Economics and Peace. That was equal to 24% of Mexico’s GDP, according to the report, and on a per person basis amounted to roughly 41,000 pesos - or more than five times the average monthly salary of a Mexican worker.
Drug-related violence has had a direct effect on Mexico’s economy. A 2013 Inter-American Development Bank working paper on the economic consequences of drug violence in Mexico noted that between 2002 and 2010, an increase of 10 homicides per 100,000 inhabitants led to a two-percentage-point reduction in employment over the same period at the municipal level. It also led to a 1.5% increase in unemployment, a nearly 0.4% decline in business ownership, and a 1.2% decline in wages. The government now faces the daunting task of breaking the cycle of official and criminal impunity, by effectively investigating, processing, and sanctioning those responsible for human rights violations and organized crime.
Mexico’s Infrastructure Needs
According to the Inter-American Development Bank’s 2016 report Saving for Development, countries in Latin America and the Caribbean need to invest the equivalent of at least 5% of their annual GDP in infrastructure, for a prolonged period, in order to spur economic growth. However, the study noted that infrastructure investment in Mexico averaged just 1.8% of GDP between 2008 and 2013, and that the average for Latin America during that same period was 3.8% of GDP.
The country is in need of industrial policies that better share prosperity and close infrastructure gaps. Like other places in Latin America, Mexico has faced difficulties when it comes to financing public works - and relying on the private sector to bridge the gap has not met the country’s needs.
The Mexican government has pushed for structural reforms aimed at strengthening the legal framework for public-private partnerships, and for drawing more institutional investors to a pipeline of well-structured, bankable infrastructure projects.In terms of the quality of overall infrastructure, Mexico ranked 49th out of 140 countries in the WEF’s Global Competitiveness Index for 2018, slipping 13 places compared with the previous year’s report (the country ranked 15th specifically in terms of airport connectivity in the 2018 index, however).
New technologies and skilled workers have generally not reached the country’s southern and southeast regions, affecting their ability to compete both nationally and globally. Regional disparities are also evident when it comes to labor productivity, the prevalence of unregulated, “informal” economies, and household income; the North enjoys an income per capita that is 44% higher than in the South, for example, while the poverty rate in the North is just roughly 28% compared with about 80% in the South.
The benefits of Mexico’s economic growth have not been widely shared across the country, resulting in economic and social inequality among its 32 states. The benefits of the country’s most successful economic policy direction to date, namely trade openness and the fashioning of the North American Free Trade Agreement (NAFTA), have mostly been limited to the North and the central corridor - regions that enjoy natural geographic or logistical advantages.
Industrial and development policies are required that better share prosperity countrywide, and help close infrastructure gaps that are particularly glaring in southern states.
Persistent Inequality in Mexico
A report published by Oxfam in 2018 noted that more than 60% of the population favored raising taxes on the wealthiest 1% as a means to reduce deficits, rather than cutting public services. One means to tackle persistent inequality is through education. As of 2017, based on the results of the country’s National Plan to Evaluate Learning (Plan Nacional de Evaluación de los Aprendizajes), only 8.3% of Mexican students possessed "outstanding" language and communication skills, and just 5.1% had obtained "outstanding" math skills. Absolute annual spending per student in Mexico is the lowest among Organisation for Economic Co-operation and Development countries, based on a 2018 OECD report (about $3,000, compared with an average of $10,500 in OECD countries).
A shortage of skilled workers is hindering the country’s transition to higher-quality employment. According to the report published by Oxfam in 2015, 1% of Mexico’s population was in possession of 43% of the country’s wealth. By 2016, Mexico’s Gini coefficient, a measure where 1.0 equals complete inequality, reached 0.43, according to the World Bank, compared with 0.40 for US. Some of the reforms meant to address this situation, enacted in 2013, include mandatory tests aimed at standardizing primary and secondary school teacher performance.
A fairer tax regime could help reduce inequality in Mexico, by increasing government revenue needed to fund health care services, education, and infrastructure building (while programs that deliver cash to the needy in have been effective at alleviating poverty, their long-term impact on overall inequality and social inclusion is debatable).
According to a 2016 report published by the Inter-American Development Bank, between 2002 and 2014 only 40% of Mexico’s labor force was formally employed.
Ageing is another serious related issue; based on a 2017 United Nations report, the elderly population in Mexico (60 and over) is expected to increase from 10% of the total in 2017 to 25% by 2050. However, only about 25% of Mexican retirees have a pension, according to a separate UN report.
More broadly, inequality is being perpetuated by a skills shortage; a 2015 OECD report suggested that a gap between the skills workers have developed and those that companies actually need is one of the biggest recruiting challenges for Mexican companies. Meanwhile Mexican firms’ investment in training ranks among the lowest in the OECD, resulting in a lack of opportunity that is only exacerbated by the prevalence of low-skilled jobs available in the unregulated, informal economy.
Mexico’s Systematized Corruption
Mexico ranked 105th out of 140 countries in terms of the strength of its institutions in the WEF’s Global Competitiveness Index 2018 - which cited corruption, organized crime, and homicide rate as particular impediments to doing business in the country.
Corruption is undermining social cohesion and political stability in the country. Meanwhile Transparency International’s Corruption Perceptions Index 2018 noted that Mexico was among a few countries in the region with scores that have declined sharply since 2012; basic rights including press freedom have been curtailed, and without a free media to oversee the country’s government the ability to prevent and denounce corruption is limited, according to the report.
According to a study published by the Mexican Institute for Competitiveness, as much as 95% of corruption-related crime goes unpunished, and about 14% of average annual household income in the country is used to pay bribes. According to Transparency International’s 2017 Global Corruption Barometer, slightly more than half of all Mexicans have paid a bribe to access public services. Amid growing social unrest related to this situation, in 2016 the General Law on the National Anti-Corruption System was approved, focused on three areas: oversight (or accountability), administrative responsibility, and criminal responsibility.
A 2017 report published by the WEF’s Partnering Against Corruption Initiative found that trust had decreased among all stakeholders in Mexico, compared with levels enjoyed just five to 10 years earlier. The same report identified a particularly severe lack of trust in the judicial system. For Mexico, combatting corruption is key for improving stability, bolstering economic growth and competitiveness, attracting foreign investment, and increasing both equality and security.
The Mexican government has taken steps in the past to become more open. In 2014, the country became the first in Latin America to chair the Open Government Partnership, which seeks commitments on transparency. Mexico has also launched an official government open-data website, and has promoted open public procurement and a national digital strategy to promote transparency. These moves have demonstrated some political will to tackle unethical behavior, and restore trust in businesses and institutions. This is important not least because important social services and programs cannot succeed amid widespread corruption and low levels of trust.