Modernization Hub

Modernization and Improvement
Economy of Mexico

Economy of Mexico

The economy of Mexico is the 15th
largest in the world in nominal terms and the 11th largest by purchasing power
parity, according to the International Monetary Fund. Since the 1994 crisis,
administrations have improved the country’s macroeconomic fundamentals.
Mexico was not significantly influenced by the recent 2002 South American
crisis, and maintained positive, although low, rates of growth after a
brief period of stagnation in 2001. Mexico was one of the Latin American
nations most affected by the 2008 recession with its Gross Domestic
Product contracting by more than 6%. In spite of the Mexican economy’s
unprecedented macroeconomic stability, which has reduced inflation and interest
rates to record lows and has increased per capita income, enormous gaps remain
between the urban and the rural population, the northern and southern
states, and the rich and the poor. Some of the government’s challenges include
the upgrade of infrastructure, the modernization of the tax system and
labor laws, and the reduction of income inequality. The tax revenues, all
together 19.6 percent of GDP in 2013, are the lowest among the 34 OECD
countries. The economy contains rapidly developing
modern industrial and service sectors, with increasing private ownership.
Recent administrations have expanded competition in ports, railroads,
telecommunications, electricity generation, natural gas distribution and
airports, with the aim of upgrading infrastructure. As an export-oriented
economy, more than 90% of Mexican trade is under free trade agreements with more
than 40 countries, including the European Union, Japan, Israel, and much
of Central and South America. The most influential FTA is the North American
Free Trade Agreement, which came into effect in 1994, and was signed in 1992
by the governments of the United States, Canada and Mexico. In 2006, trade with
Mexico’s two northern partners accounted for almost 90% of its exports and 55% of
its imports. Recently, the Congress of the Union approved important tax,
pension and judicial reforms, and reform to the oil industry is currently being
debated. Mexico had 16 companies in the Forbes Global 2000 list of the world’s
largest companies in 2008. Mexico’s labor force is 78 million. The
OECD and WTO both rank Mexican workers as the hardest-working in the world in
terms of the amount of hours worked yearly, although profitability per
man-hour remains low. History
Mexican president Porfirio Díaz brought unprecedented economic growth during the
last quarter of the nineteenth century. This growth was accompanied by foreign
investment and European immigration, the development of an efficient railroad
network and the exploitation of the country’s natural resources. Annual
economic growth between 1876 and 1910 averaged 3.3%.
Political repression and fraud, as well as huge income inequalities exacerbated
by the land distribution system based on latifundios, in which large haciendas
were owned by a few but worked by millions of underpaid peasants living in
precarious conditions, led to the Mexican Revolution, an armed conflict
that drastically transformed Mexico’s political, social, cultural, and
economical structure during the twentieth century under a premise of
social democracy. The war itself left a harsh toll on the economy and
population, which decreased over the 11-year period between 1910 and 1921.
The reconstruction of the country was to take place in the following decades.
The period from 1930 to 1970 was dubbed by economic historians as the Mexican
Miracle, a period of economic growth that followed the end of the Mexican
Revolution and the resumption of capital accumulation during peacetime. During
this period the nation adopted the economic model of import substitution
industrialization which protected and promoted the development of national
industries. Mexico experienced an economic boom through which industries
rapidly expanded their production. Important changes in the economic
structure included free land distribution to peasants under the
concept of ejido, the nationalization of the oil and railroad companies, the
introduction of social rights into the constitution, the birth of large and
influential labor unions, and the upgrading of infrastructure. While
population doubled from 1940 to 1970, GDP increased sixfold during the same
period. Growth while under the ISI model had
reached its peak in the late 1960s. During the 1970s, the presidential
administrations of Echeverría and López Portillo, tried to include social
development in their policies, an effort that entailed more public spending. With
the discovery of vast oil fields in a time in which oil prices were surging
and international interest rates were low -and even negative- the government
decided to borrow from international capital markets to invest in the
state-owned oil company, which in turn seemed to provide a long-run income
source to promote social welfare. This method produced a remarkable growth in
public expenditure, and president López Portillo announced that the time had
come to “manage prosperity” as Mexico multiplied its oil production to become
the world’s fourth largest exporter. In the period of 1981–1982 the
international panorama changed abruptly: oil prices plunged and interest rates
rose. In 1982, President López Portillo, just before ending his administration,
suspended payments of foreign debt, devalued the peso and nationalized the
banking system, along with many other industries that were severely affected
by the crisis, among them the steel industry. While import substitution had
been in use during an era of industrialization, by the 1980s it was
evident that the protracted protection had produced an uncompetitive industrial
sector with low productivity gains. President de la Madrid was the first of
a series of presidents that began to implement neoliberal reforms. After the
crisis of 1982, lenders were unwilling to return to Mexico and, in order to
keep the current account in balance, the government resorted to currency
devaluations, which in turn sparked unprecedented inflation, which reached a
historic high in 1987 at 139.7%. The first step toward the liberalization
of trade was Mexico’s signature of the General Agreement on Tariffs and Trade
in 1986 under President de la Madrid. During the Salinas administration many
state-owned companies were privatized. The telephone company Telmex, a
government monopoly, became a private monopoly, sold to Carlos Slim. Also not
opened to private investors were the government oil company Pemex or the
energy sector. Furthermore, the banking system that had been nationalized in the
waning hours of the López Portillo administration in 1982 were privatized,
but with the exclusion of foreign banks. Salinas pushed for Mexico’s inclusion in
the North American Free Trade Agreement, expanding it from a U.S.-Canada
agreement. The expanded NAFTA was signed in 1992, after the signature of two
additional supplements on environments and labor standards, it came into effect
on January 1, 1994. Salinas also introduced strict price
controls and negotiated smaller minimum wage increments with the labor union
movement under the aging Fidel Velázquez with the aim of curbing inflation. While
his strategy was successful in reducing inflation, growth averaged only 2.8
percent a year. By fixing the exchange rate, the peso became rapidly overvalued
while consumer spending increased, causing the current account deficit to
reach 7% of GDP in 1994. The deficit was financed through tesobonos a type of
public debt instrument that reassured payment in dollars.
The January 1994 Chiapas uprising, and the assassinations of the ruling party’s
presidential candidate in March 1994, Luis Donaldo Colosio and the
Secretary-General of the party and brother of the Assistant-Attorney
General José Francisco Ruiz Massieu in 1994, sent a disquieting message to
investors. Public debt holders rapidly sold their tesobonos, depleting the
Central Bank’s reserves, while portfolio investments, which had made up 90% of
total investment flows, left the country as fast as they had come in.
This unsustainable situation eventually forced the entrant Zedillo
administration to abandon the fixed exchange rate. The peso sharply devalued
and the country entered into an economic crisis in December 1994. The boom in
exports, as well as an international rescue package crafted by U.S. president
Bill Clinton, helped cushion the crisis. In less than 18 months, the economy was
growing again, and annual rate growth averaged 5.1 percent between 1995 and
2000. President Zedillo and President Fox, of
the National Action Party, the first opposition party candidate to win a
presidential election since the founding of the precursor of the Institutional
Revolutionary Party in 1929, continued with trade liberalization. During Fox’s
administrations several FTAs were signed with Latin American and European
countries, Japan and Israel, and both strove to maintain macroeconomic
stability. Thus, Mexico became one of the most open countries in the world to
trade, and the economy base shifted accordingly. Total trade with the United
States and Canada tripled, and total exports and imports almost quadrupled
between 1991 and 2003. The nature of foreign investment also changed with a
greater share of foreign-direct investment over portfolio investment.
Macroeconomic, financial and welfare indicators
=Main indicators=Mexico’s Gross Domestic Product in
purchasing power parity was estimated at US $2,143,499 billion in 2014, and
$1,261,642 billion in nominal exchange rates. It is the fifth largest of
emerging markets, behind China, Brazil, Russia, and India, and is the leader of
the MIKT group. As such, its standard of living, as measured in GDP in PPP per
capita was US $15,782.897. The World Bank reported in 2009 that Mexico’s
Gross National Income in market exchange rates was the second highest in Latin
America, after Brazil at US $1,830.392 billion, which lead to the highest
income per capita in the region at $14,400. As such, Mexico is now firmly
established as an upper middle-income country. After the slowdown of 2001 the
country has recovered and has grown 4.2, 3.0 and 4.8 percent in 2004, 2005 and
2006, even though it is considered to be well below Mexico’s potential growth.
The Mexican peso is the currency. One peso is divided into 100 centavos. MXN
replaced MXP in 1993 at a rate of 1000 MXP per 1 MXN. The exchanged rate has
remained stable since 1998, oscillating between 10.20 and 11=3.50 MXN per US$.
Interest rates in 2007 were situated at around 7 percent, having reached a
historic low in 2002 below 5 percent. Inflation rates are also at historic
lows; the inflation rate in Mexico in 2006 was 4.1 percent, and 3 percent by
the end of 2007. Unemployment rates are the lowest of all OECD member countries
at 3.2 percent. However, underemployment is estimated at 25 percent. Mexico’s
Human development index was reported at 0.829,, ranking 52 in the world within
the group of high-development.=Poverty=
Poverty and income disparity has been a persistent problem in Mexico. While the
recent exponential growth of the economy has caused an overall fall in the
percentage of the population living in conditions of poverty, this fall has not
been proportional to the general growth. 17% of the population lives below
Mexico’s own poverty line, making Mexico rank behind Kazakhstan, Bulgaria and
Thailand. The overall poverty rate however is 44.2%, while a full 70% lack
one of the 8 economic indicators used to define poverty by the Mexican
government. From the late 1990s, the majority of the
population has been part of the growing middle class. From 2004 to 2008 the
portion of the population who received less than half of the median income has
risen from 17% to 21% and the absolute levels of poverty have risen
considerably from 2006 to 2010, with a rise in persons living in extreme or
moderate poverty rising from 35 to 46%. This is also reflected by the fact that
infant mortality in Mexico is three times higher than the OECD average, and
literacy levels are in the median range of OECD nations.
Income inequality A single person in Mexico has a net
worth equal to eight percent of GDP: Carlos Slim. Additionally, only ten
percent of Mexicans represent 25% of Mexican GDP. A smaller group, 3.5%,
represent 12.5% of Mexican GDP. According to the OECD, Mexico is the
country with the second highest degree of economic disparity between the
extremely poor and extremely rich, after Chile – although this gap has been
diminishing over the last decade. The bottom ten percent on the income rung
disposes of 1.36% of the country’s resources, whereas the upper 10% dispose
of almost 36%. OECD also notes that Mexico’s budgeted expenses for poverty
alleviation and social development is only about a third of the OECD average –
both in absolute and relative numbers. According to the World Bank, in 2004,
17.6% of Mexico’s population lived in extreme poverty, while 21% lived in
moderated poverty.=Remittances=
Remittances, or contributions sent by Mexicans living abroad, mostly in the
United States, to their families at home in Mexico, are a substantial and growing
part of the Mexican economy; they comprised $22.4 billion in 2012. In
2004, they became the tenth largest source of foreign income after oil,
industrial exports, manufactured goods, electronics, heavy industry,
automobiles, construction, food, and banking & financial services.
Remittances are a larger part of the Mexican economy than tourism
expenditures and represented 2.1 percent of the nation’s Gross Domestic Product.
The growth of remittances have more than doubled since 1997, although they have
since decreased somewhat. Recorded remittance transactions exceeded 41
million in 2003, of which 86 percent were made by electronic transfer.
The Mexican government, cognizant of the economic viability of immigrant workers,
began issuing an upgraded version of the Matrícula Consular de Alta Seguridad, an
identity document issued at Mexican consulates abroad. This document is now
accepted as a valid identity card in 32 US states, as well as thousands of
police agencies, hundreds of cities and counties, as well as banking
institutions. The main states receiving remittances in
2014 were Michoacán, Guanajuato, Jalisco, Mexico and Puebla, which
jointly captured 45% of total remittances in that year. Several state
governments, with the support of the federal government, have implemented
programs to use part of the remittances to finance public works. This program,
called Dos por Uno is designed in a way that for each peso contributed by
migrants from their remittances, the state and the federal governments will
invest two pesos in building infrastructure at their home
communities.=Regional economies=
Regional disparities and income inequality are a feature of the Mexican
economy. While all constituent states of the federation have a Human Development
Index higher than 0.70, the northern and central states have higher levels of HDI
than the southern states. Nuevo León, Campeche and the Federal District have
HDI levels similar to European countries, whereas that of Oaxaca and
Chiapas is similar to that of China or Vietnam.
At the municipal level, economic disparities are even greater: Delegacion
Benito Juarez in Mexico City has an HDI similar to that of Germany or New
Zealand, whereas, Metlatonoc in Guerrero, would have an HDI similar to
that of Malawi. The majority of the federal entities with high development
are located in the northern region. The less developed states are located along
the southern Pacific coast. In terms of share of the GDP by economic
sector, the largest contributors in agriculture are Jalisco, Sinaloa and
Veracruz; the greatest contributors in industrial production are the Federal
District, State of México and Nuevo León; the greatest contributors in the
service sector are also the Federal District, State of México and Nuevo
León. Since the 1980s, the economy has slowly
become less centralized; the annual rate of GDP growth of the Federal District
from 2003 to 2004 was the smallest of all federal entities at a mere 0.23%,
with drastic drops in the agriculture and industrial sectors. Nonetheless, it
still accounts for 21.8% of the nation’s GDP. The states with the highest GDP
growth rates are Quintana Roo, Baja California, and San Luis Potosí. In
2000, the federal entities with the highest GDP per capita in Mexico were
the Federal District, Campeche and Nuevo León; the states with the lowest GDP per
capita were Chiapas, Oaxaca and Guerrero.
Components of the economy Gross Domestic Product in purchasing
power parity in 2006 was estimated at US $1.134 trillion, and GDP per capita in
PPP at US $10,600. The service sector is the largest component of GDP at 70.5%,
followed by the industrial sector at 25.7%. Agriculture represents only 3.9%
of GDP. Mexican labor force is estimated at 38 million of which 18% is occupied
in agriculture, 24% in the industry sector and 58% in the service sector.
After the Mexican Revolution Mexico began an agrarian reform, based on the
27th article of the Mexican Constitution than included transfer of land and/or
free land distribution to peasants and small farmers under the concept of the
ejido. This program was further extended during President Cárdenas’
administration during the 1930s and continued into the 1960s at varying
rates. The cooperative agrarian reform, which guaranteed small farmers a means
of subsistence livelihood, also caused land fragmentation and lack of capital
investment, since commonly held land could not be used as collateral. In an
effort to raise rural productivity and living standards, this constitutional
article was amended in 1992 to allow for the transfer of property rights of the
communal lands to farmers cultivating it. With the ability to rent or sell it,
a way was open for the creation of larger farms and the advantages of
economies of scale. Large mechanized farms are now operating in some
northwestern states. However, privatization of ejidos continues to be
very slow in the central and southern states where the great majority of
peasants produce only for subsistence. Up until the 1980s, the government
encouraged the production of basic crops by maintaining support prices and
controlling imports through the National Company for Popular Subsistence. With
trade liberalization, however, CONASUPO was to be gradually dismantled and two
new mechanisms were implemented: Alianza and Procampo. Alianza provides income
payments and incentives for mechanization and advanced irrigation
systems. Procampo is an income transfer subsidy to farmers. This support program
provides 3.5 million farmers who produce basic commodities, and which represent
64% of all farmers, with a fixed income transfer payment per unit of area of
cropland. This subsidy increased substantially during president Fox’s
administration, mainly to white corn producers in order to reduce the amount
of imports from the United States. This program has been successful, and in
2004, roughly only 15% of corn imports are white corn –the one used for human
consumption and the type that is mostly grown in Mexico– as opposed to 85% of
yellow and crashed corn –the one use for feeding livestock, and which is barely
produced in Mexico. Importance of agriculture to Mexico’s
economy Agriculture as a percentage of total GDP
has been steadily declining, and now resembles that of developed nations in
that it plays a smaller role in the economy. In 2006, agriculture accounted
for 3.9% of GDP, down from 7% in 1990, and 25% in 1970. Given the historic
structure of ejidos, it employs a considerably high percentage of the work
force: 18% in 2003, mostly of which grows basic crops for subsistence,
compared to 2–5% in developed nations in which production is highly mechanized.
Crops In spite of being a staple in the
Mexican diet, Mexico’s comparative advantage in agriculture is not in corn,
but in horticulture, tropical fruits, and vegetables. Negotiators of NAFTA
expected that through liberalization and mechanization of agriculture two-thirds
of Mexican corn producers would naturally shift from corn production to
horticultural and other labor-intensive crops such as fruits, nuts, vegetables,
coffee and sugar cane. While horticultural trade has drastically
increased due to NAFTA, it has not absorbed displaced workers from corn
production. Corn production has remained stable, arguably, as a result of income
support to farmers, or a reluctance to abandon a millenarian tradition in
Mexico: not only have peasants grown corn for millennia, corn originated in
Mexico. Mexico is the seventh largest corn producer in the world.
=Potatoes=The area dedicated to potatoes has
changed little since 1980 and average yields have almost tripled since 1961.
Production reached a record 1.7 million tonnes in 2003. Per capita consumption
of potato in Mexico stands at 17 kg a year, very low compared to its maize
intake of 400 kg. On average, potato farms in Mexico are larger than those
devoted to more basic food crops. Potato production in Mexico is mostly for
commercial purposes; the production for household consumption is very small.
=Sugar cane=Approximately 160,000 medium-sized
farmers grow sugar cane in 15 Mexican states; currently there are 54 sugar
mills around the country that produced 4.96 million tons of sugar in the 2010
crop, compared to 5.8 million tons in 2001. Mexico’s sugar industry is
characterized by high production costs and lack of investment. Mexico produces
more sugar than it consumes. Sugar cane is grown on 700,000 farms in Mexico with
a yield of 72 metric tons per farm. Industry
The industrial sector as a whole has benefited from trade liberalization; in
2000 it accounted for almost 50% of all export earnings.
Among the most important industrial manufacturers in Mexico is the
automotive industry, whose standards of quality are internationally recognized.
The automobile sector in Mexico differs from that in other Latin American
countries and developing nations in that it does not function as a mere assembly
manufacturer. The industry produces technologically complex components and
engages in some research and development activities, an example of that is the
new Volkswagen Jetta model with up to 70% of parts designed in Mexico.
The “Big Three” have been operating in Mexico since the 1930s, while Volkswagen
and Nissan built their plants in the 1960s. Later, Toyota, Honda, BMW, and
Mercedes-Benz joined in. Given the high requirements of North American
components in the industry, many European and Asian parts suppliers have
also moved to Mexico: in Puebla alone, 70 industrial part-makers cluster around
Volkswagen. The relatively small domestic car
industry is represented by DINA Camiones S.A. de C.V., a manufacturer of trucks,
busses and military vehicles, which through domestic production and
purchases of foreign bus manufacturers has become the largest bus manufacturer
in the world; Vehizero that builds hybrid trucks and the new car companies
Mastretta design that builds the Mastretta MXT sports car and Autobuses
King that plans to build 10000 microbuses by 2015, nevertheless new car
companies are emerging among them CIMEX that has developed a sport utility
truck, the Conin, and it is to be released in September 2010 in Mexico’s
national auto show, And the new electric car maker Grupo Electrico Motorizado.
Some large industries of Mexico include Cemex, the world’s largest construction
company and the third largest cement producer the alcohol beverage
industries, including world-renowned players like Grupo Modelo; conglomerates
like FEMSA, which apart from being the largest single producer of alcoholic
beverages and owning multiple commercial interests such OXXO convenience store
chain, is also the second-largest Coca-Cola bottler in the world; Gruma,
the largest producer of corn flour and tortillas in the world; and Grupo Bimbo,
Telmex, Televisa, among many others. In 2005, according to the World Bank,
high-tech industrial production represented 19.6% of total exports.
Maquiladoras have become the landmark of trade in Mexico. This sector has
benefited from NAFTA, in that real income in the maquiladora sector has
increased 15.5% since 1994, though from the non-maquiladora sector has grown
much faster. Contrary to popular belief, this should be no surprise since
maquiladora’s products could enter the US duty-free since the 1960s industry
agreement. Other sectors now benefit from the free trade agreement, and the
share of exports from non-border states has increased in the last 5 years while
the share of exports from maquiladora-border states has decreased.
Currently Mexico is focusing in developing an aerospace industry and the
assembly of helicopter and regional jet aircraft fuselages is taking place.
Foreign firms such as MD Helicopters, Bell, Cessna and Bombardier build
helicopter, aircraft and regional jets fuselages in Mexico. Although the
Mexican aircraft industry is mostly foreign, as is its car industry, Mexican
firms have been founded such as Aeromarmi, which builds light propeller
airplanes, and Hydra Technologies, which builds Unmanned Aerial Vehicles such as
the S4 Ehécatl, other important companies are Frisa Aerospace that
manufactures jet engine parts for the new Mitsubishi Regional jet and supplies
Prat&whittney and rolls Royce jet engine manufacturers of casings for jet engines
and Kuo Aerospace that builds parts for aircraft landing gear and Supplies
bombardier plant in Querétaro As compared with the United States or
countries in Western Europe a larger sector of Mexico’s industrial economy is
food manufacturing which includes several world class companies but the
regional industry is undeveloped. There are national brands that have become
international and local Mom and Pop producers but little manufacturing in
The electronics industry of Mexico has grown enormously within the last decade.
Mexico has the sixth largest electronics industry in the world after China,
United States, Japan, South Korea, and Taiwan. Mexico is the second largest
exporter of electronics to the United States where it exported $71.4 billion
worth of electronics in 2011. The Mexican electronics industry is
dominated by the manufacture and OEM design of televisions, displays,
computers, mobile phones, circuit boards, semiconductors, electronic
appliances, communications equipment and LCD modules. The Mexican electronics
industry grew 20% between 2010 and 2011, up from its constant growth rate of 17%
between 2003 and 2009. Currently electronics represent 30% of Mexico’s
exports. Televisions
The design and manufacture of flat panel plasma, LCD and LED televisions is the
single largest sector of the Mexican electronics industry, representing 25%
of Mexico’s electronics export revenue. In 2009 Mexico surpassed South Korea and
China as the largest manufacturer of televisions, with Sony, Toshiba,
Samsung, Sharp, ZenithLG, Lanix, TCL, RCA, Phillips, Elcoteq, Tatung,
Panasonic, and Vizio manufacturing CRT, LCD, LED and Plasma televisions in
Mexico. Due to Mexico’s position as the largest manufacturer of television it is
known as the television capital of the world in the electronics industry.
Computers Mexico is the third largest manufacturer
of computers in the world with both domestic companies such as Lanix, Texa,
Meebox, Spaceit, Kyoto and foreign companies such as Dell, Sony, HP, Acer
Compaq, Samsung and Lenovo manufacturing various types of computers across the
country. Most of the computers manufactured in Mexico are from foreign
companies. Mexico is Latin America’s largest producer of electronics and
appliances made by domestic companies. OEM and ODM manufacturing
Mexico is also home to a large number of OEM and ODM manufactures both foreign
and domestic. Among them include Foxconn, Celestica, Sanmina-SCI, Jabil,
Elcoteq, Falco, Kimball International, Compal, Benchmark Electronics, Plexus,
Lanix and Flextronics. These companies assemble finished electronics or design
and manufacture electronic components on behalf of larger companies such as Sony
or Microsoft using locally sourced components, for example the ODM,
Flextronics manufactures Xbox video games systems in Guadalajara, Mexico for
Microsoft using components such as power systems and printed circuit boards from
a local company, Falco Electronics which acts as the OEM.
Engineering and Design The success and rapid growth of the
Mexican electronics sector is driven primarily by the relatively low cost of
manufacturing and design in Mexico; its strategic position as a major consumer
electronics market coupled with its proximity to both the large North
American and South American markets whom Mexico shares free trade agreements
with; government support in the form of low business taxes, simplified access to
loans and capital for both foreign multinational and domestic startup
tech-based firms; and a very large pool of highly skilled, educated labor across
all sectors of the tech industry. For example, German multinational
engineering and electronics conglomerate Siemens has a significant Mexican base,
which also serves as its business and strategy hub for Central American
countries and the Caribbean region. There are almost half a million students
enrolled in electronics engineering programs with an additional 114,000
electronics engineers entering the Mexican workforce each year and Mexico
had over half a million certified electronic engineering professionals
employed in 2007. From the late 1990s, the Mexican electronics industry began
to shift away from simple line assembly to more advanced work such as research,
design, and the manufacture of advanced electronics systems such as LCD panels,
semiconductors, printed circuit boards, microelectronics, microprocessors,
chipsets and heavy electronic industrial equipment and in 2006 the number of
certified engineers being graduated annually in Mexico surpassed that of the
United States. Many Korean, Japanese and American appliances sold in the US are
actually of Mexican design and origin but sold under the OEM’s client names.
In 2008 one out of every four consumer appliances sold in the United States was
of Mexican design. Joint Production
While many foreign companies like Phillips, Vizio and LG simply install
wholly owned factories in Mexico a number of foreign companies have set up
semi-independent joint venture companies with Mexican businesses to manufacture
and design components in Mexico. These companies are independently operated
from their foreign parent companies and are registered in Mexico. These local
companies function under Mexican law and retain a sizable portion of the revenue.
These companies typically function dually as in-company OEM development and
design facilities and manufacturing centers and usually produce most
components needed to manufacture the finished products. An example would by
Sharp which has formed Semex. Semex was founded as a joint venture
between Sharp and Mexican investors which acts as an autonomous independent
company which Sharp only maintains partial control over. The company
manufactures whole products such televisions and designs individual
components on behalf of Sharp such as LCD modules and in return Semex is
granted access to Sharp capital, technology, research capacity and
branding. Notable foreign companies which have set up joint venture entities
in Mexico include Samsung which formed Samex, a local designer and manufacturer
of finished televisions, white goods and individual electronic components like
printed circuit boards, LCD panels and semiconductors, Toshiba, who formed
Toshiba de México, S.A. de C.V., an administratively autonomous subsidiary
which produces electronics parts, televisions and heavy industrial
equipment. Some of these subsidiaries have grown to
expand into multiple branches effectively becoming autonomous
conglomerates within their own parent companies. Sony for example started
operations in Mexico in 1976 with a group of Mexican investors, and founded
the joint venture, Sony de Mexico which produces LED panels, LCD modules,
automotive electronics, appliances and printed circuit boards amongst other
products for its Japanese parent company, Sony KG. Sony de Mexico has
research facilities in Monterrey and Mexico City, designs many of the Sony
products manufactured in Mexico and has now expanded to create its own finance,
music and entertainment subsidiaries which are Mexican registered and
independent of their Japanese parent corporation.
Domestic Industry Although much of Mexico’s electronics
industry is driven by foreign companies, Mexico also has a sizeable domestic
electronics industry and a number of electronics companies including Mabe, a
major appliance manufacturer and OEM which has been functioning since the
nineteen fifties and has expanded into the global market, Meebox, a designer
and manufacturer desktop and tablet computers, solar power panels and
electronics components, Texa, which manufactures computers laptops and
servers, Falco, a major international manufacturer of electronic components
such as printed circuitboards, power systems, semiconductors, gate drives and
which has production facilities in Mexico, India and China, and Lanix,
Mexico’s largest electronics company which manufactures products such as
computers, laptops, smartphones, LED and LCD displays, flash memory, tablets,
servers, hard drives, RAM, optical disk drives, and printed circuitboards and
employs over 11,000 people in Mexico and Chile and distributes its products
throughout Latin America. Another area being currently developed in Mexico is
Robotics, Mexico’s new Mexone robot has been designed with the idea that in
future years develop a commercial application for such advanced robots
=Oil=Mineral resources are the “nation’s
property” by constitution. As such, the energy sector is administered by the
government with varying degrees of private investment. Mexico is the
sixth-largest oil producer in the world, with 3,700,000 barrels per day. Pemex,
the public company in charge of administering research, exploration and
sales of oil, is the largest company in Mexico, and the second largest in Latin
America after Brazil’s Petrobras. Pemex is heavily taxed of almost 62 per cent
of the company’s sales, a significant source of revenue for the government.
Without enough money to continue investing in finding new sources or
upgrading infrastructure, and being protected constitutionally from private
and foreign investment, some have predicted the company may face
institutional collapse. While the oil industry is still relevant for the
government’s budget, its importance in GDP and exports has steadily fallen
since the 1980s. In 1980 oil exports accounted for 61.6% of total exports; by
2000 it was only 7.3%.=Energy=
Mexico’s installed electricity capacity in 2008 was 58 GW. Of the installed
capacity, 75.3% is thermal, 19% hydro, 2.4% nuclear and 3.3% renewable other
than hydro. The general trend in thermal generation is a decline in
petroleum-based fuels and a growth in natural gas and coal. Since Mexico is a
net importer of natural gas, higher levels of natural gas consumption will
likely depend upon higher imports from either the United States or via
liquefied natural gas.=Manufacturing=
Automobiles The automotive sector accounts for 17.6%
of Mexico’s manufacturing sector. General Motors, Chrysler, Ford Motor
Company, Nissan, Fiat, Renault, Honda, Toyota, and Volkswagen produce 2.8
million vehicles annually at 20 plants across the country, mostly in Puebla.
Mexico manufactures more automobiles of any North American nation. The industry
produces technologically complex components and engages in research and
development. The “Big Three” have been operating in
Mexico since the 1930s, while Volkswagen and Nissan built their plants in the
1960s. In Puebla 70 industrial part-makers cluster around Volkswagen.
In the 2010s expansion of the sector was surging. In 2014 more than $10 billion
in investment was committed in the first few months of the year. Kia Motors in
August 2014 announced plans for a $1 billion factory in Nuevo León. At the
time Mercedes-Benz and Nissan were already building a $1.4 billion plant
near Puebla, while BMW was planning a $1-billion assembly plant in San Luis
Potosí. Additionally, Audi began building a $1.3 billion factory near
Puebla in 2013. Services
In 2013 the tertiary sector was estimated to account for 59.8% of
Mexico’s GDP. In 2011 services employed 61.9% of the working population. This
section includes transportation, commerce, warehousing, restaurant and
hotels, arts and entertainment, health, education, financial and banking
services, telecommunications as well as public administration and defense.
Mexico’s service sector is strong, and in 2001 replaced Brazil’s as the largest
service sector in Latin America in dollar terms.
=Tourism=Tourism is one of the most important
industries in Mexico. It is the fourth largest source of foreign exchange for
the country. Mexico is the eighth most visited country in the world.
=Finance=Banking system
According to the IMF the Mexican banking system is strong, in which private banks
are profitable and well-capitalized. The financial and banking sector is
increasingly dominated by foreign companies or mergers of foreign and
Mexican companies with the notable exception of Banorte. The acquisition of
Banamex, one of the oldest surviving financial institutions in Mexico, by
Citigroup was the largest US-Mexico corporate merger, at US $12.5 billion.
In spite of that, the largest financial institution in Mexico is Bancomer
associated to the Spanish BBVA. The process of institution building in
the financial sector in Mexico has evolved hand in hand with the efforts of
financial liberalization and of inserting the economy more fully into
world markets. Over the recent years, there has been a wave of acquisitions by
foreign institutions such as US-based Citigroup, Spain’s BBVA and the UK’s
HSBC. Their presence, along with a better regulatory framework, has allowed
Mexico’s banking system to recover from the 1994–95 peso devaluation. Lending to
the public and private sector is increasing and so is activity in the
areas of insurance, leasing and mortgages. However, bank credit accounts
for only 22% of GDP, which is significantly low compared to 70% in
Chile. Credit to the Agricultural sector has fallen 45.5% in six years, and now
represents about 1% of total bank loans. Other important institutions include
savings and loans, credit unions, government development banks, “non-bank
banks”, bonded warehouses, bonding companies and foreign-exchange firms.
A wave of acquisitions has left Mexico’s financial sector in foreign hands. Their
foreign-run affiliates compete with independent financial firms operating as
commercial banks, brokerage and securities houses, insurance companies,
retirement-fund administrators, mutual funds, and leasing companies.
Securities market Mexico has a single securities market,
the Mexican Stock Exchange. The market has grown steadily, with its main
indices increasing by more than 600% in the last decade. It is Latin America’s
second largest exchange, after Brazil’s. The total value of the domestic market
capitalization of the BMV was calculated at US$409 billion at the end of 2011,
and raised to US$451 billion by the end of February this year.
The Indice de Precios y Cotizaciones is the benchmark stock index on the Bolsa.
In 2005 the IPC surged 37.8%, to 17,802.71 from 12,917.88, backed by a
stronger Mexican economy and lower interest rates. It continued its steep
rise through the beginning of 2006, reaching 19,272.63 points at end-March
2006. The stockmarket also posted a record low vacancy rate, according to
the central bank. Local stockmarket capitalisation totalled US$236bn at
end-2005, up from US$170bn at end-2004. As of March 2006 there were 135 listed
companies, down from 153 a year earlier. Only a handful of the listed companies
are foreign. Most are from Mexico City or Monterrey; companies from these two
cities compose 67% of the total listed companies.
The IPC consists of a sample of 35 shares weighted according to their
market capitalisation. Heavy hitters are America Telecom, the holding company
that manages Latin America’s largest mobile company, América Móvil; Telefonos
de Mexico, Mexico’s largest telephone company; Grupo Bimbo, world’s biggest
baker; and Wal-Mart de México, a subsidiary of the US retail giant. The
makeup of the IPC is adjusted every six months, with selection aimed at
including the most liquid shares in terms of value, volume and number of
trades. Mexico’s stockmarket is closely linked
to developments in the US. Thus, volatility in the New York and Nasdaq
stock exchanges, as well as interest-rate changes and economic
expectations in the US, can steer the performance of Mexican equities. This is
both because of Mexico’s economic dependence on the US and the high volume
of trading in Mexican equities through American Depositary Receipts. Currently,
the decline in the value of the dollar is making non-US markets, including
Mexico’s, more attractive. Despite the recent gains, investors
remain wary of making placements in second-tier initial public offerings.
Purchasers of new issues were disappointed after prices fell in
numerous medium-sized companies that made offerings in 1996 and 1997. IPO
activity in Mexico remains tepid and the market for second-tier IPOs is barely
visible. There were three IPOs in 2005. Government
=Monetary and financial system and regulation=
Banco de México Banco de México is Mexico’s central
bank, an internally autonomous public institution whose governor is appointed
by the president and approved by the legislature to which it is fully
responsible. Banco de México’s functions are outlined in the 28th article of the
constitution and further expanded in the Monetary Law of the United Mexican
States. Banco de México’s main objective is to achieve stability in the
purchasing power of the national currency. It is also the lender of last
resort. Currency policy
Mexico has a floating exchange rate regime.
The floating exchange originated with reforms initiated after the December
1994 peso crash which had followed an unsustainable adherence to a short band.
Under the new system, Banco de México now makes no commitment to the level of
the peso exchange rate, although it does employ an automatic mechanism to
accumulate foreign reserves. It also possesses tools aimed at smoothing out
volatility. The Exchange Rate Commission sets policy; it is made up of six
members—three each from the Ministry of Finance and Public Credit and the
central bank, with the SHCP holding the deciding vote.
In August 1996, Banco de México initiated a mechanism to acquire foreign
reserves when the peso is strong, without giving the market signals about
a target range for the exchange rate. The resulting high levels of reserves,
mostly from petroleum revenues, have helped to improve the terms and
conditions on debt Mexico places on foreign markets. However, there is
concern that the government relies too heavily on oil income in order to build
a healthy base of reserves. According to the central bank, international reserves
stood at US $75.8 billion in 2007. In May 2003, Banco de México launched a
program that sells U.S. dollars via a monthly auction, with the goal of
maintaining a stable, but moderate, level of reserves.
From April 1, 1998, through April 1, 2008, the Peso traded around a range
varying from $8.46 MXN per US$1.00 on April 21, 1998, to $11.69 MXN per
US$1.00 on May 11, 2004, a 10-year peak depreciation of 38.18% between the two
reference date extremes before recovering.
After the onset of the US credit crisis that accelerated in October 2008, the
Peso had an exchange rate during October 1, 2008, through April 1, 2009
fluctuating from lowest to highest between $10.96 MXN per US$1.00 on
October 1, 2008, to $15.42 MXN per US$1.00 on March 9, 2009, a peak
depreciation ytd of 28.92% during those six months between the two reference
date extremes before recovering. From the $11.69 rate during 2004’s low
to the $15.42 rate during 2009’s low, the peso depreciated 31.91% in that span
covering the US recession coinciding Iraq War of 2003 and 2004 to the US &
Global Credit Crisis of 2008. Some experts including analysts at
Goldman Sachs who coined the term BRIC in reference to the growing economies of
Brazil, Russia, India, and China for marketing purposes believe that Mexico
is going to be the 5th or 6th biggest economy in the world by the year 2050,
behind China, United States, India, Brazil, and possibly Russia.
Monetary system Mexico’s monetary policy was revised
following the 1994–95 financial crisis, when officials decided that maintaining
general price stability was the best way to contribute to the sustained growth of
employment and economic activity. As a result, Banco de México has as its
primary objective maintaining stability in the purchasing power of the peso. It
sets an inflation target, which requires it to establish corresponding
quantitative targets for the growth of the monetary base and for the expansion
of net domestic credit. The central bank also monitors the
evolution of several economic indicators, such as the exchange rate,
differences between observed and projected inflation, the results of
surveys on the public and specialists’ inflation expectations, revisions on
collective employment contracts, producer prices, and the balances of the
current and capital accounts. A debate continues over whether Mexico
should switch to a US-style interest rate-targeting system. Government
officials in favor of a change say that the new system would give them more
control over interest rates, which are becoming more important as consumer
credit levels rise. Until 2008(???), Mexico used a unique
system, amongst the OECD countries, to control inflation in a mechanism known
as the corto a mechanism that allowed the central bank to influence market
interest rates by leaving the banking system short of its daily demand for
money by a predetermined amount. If the central bank wanted to push interest
rates higher, it increased the corto. If it wished to lower interest rates, it
decreased the corto. Source: BANXICO: in April 2004, the Central Bank began
setting a referential overnight interest rate as its monetary policy.
=Business regulation=Corruption
Petty corruption based on exercise of administrative discretion in matters of
zoning and business permits is endemic in Mexico adding about 10% to the cost
of consumer goods and services. An April 2012 article in The New York Times
reporting payment of bribes to officials throughout Mexico in order to obtain
construction permits, information, and other favors resulted in investigations
in both the United States and Mexico. Using relatively recent night light data
and electricity consumption in comparison with Gross County Product,
the informal sector of the local economy in Veracruz state is shown to have grown
during the period of the Fox Administration though the regional
government remained PRI. The assumption that the informal economy of Mexico is a
constant 30% of total economic activity is not supported at the local level. The
small amount of local spatial autocorrelation that was found suggests
a few clusters of high and low literacy rates amongst municipios in Veracruz but
not enough to warrant including an I-statistic as a regressor. Global
spatial autocorrelation is found especially literacy at the
macro-regional level which is an area for further research beyond this study.
Improved literacy bolsters both the informal and formal economies in
Veracruz indicating policies designed to further literacy are vital for growing
the regional economy. While indigenous people are relatively poor, little
evidence was found that the informal economy is a higher percentage of total
economic activity in a muncipio with a high share of indigenous people. While
the formal economy might have been expanding relative to the informal
economy in 2000, by 2006 this process had been reversed with growing
informality. While rural municipios have smaller economies, they are not
different than urban municipios in the share of the economy that is informal.
Programs in the past that might move economic activity from the informal to
the formal sector have not succeeded, suggesting public finance issues such as
tax evasion will continue to plague the state with low government revenues.
Trade Mexico is an export-oriented economy. It
is an important trade power as measured by the value of merchandise traded, and
the country with the greatest number of free trade agreements. In 2005, Mexico
was the world’s fifteenth largest merchandise exporter and twelfth largest
merchandise importer with a 12% annual percentage increase in overall trade.
From 1991 to 2005 Mexican trade increased fivefold. Mexico is the
biggest exporter and importer in Latin America; in 2005, Mexico alone exported
US $213.7 billion, roughly equivalent to the sum of the exports of Brazil,
Argentina, Venezuela, Uruguay, and Paraguay.
By 2009 Mexico ranked once again number 15 on World’s leading exporters with US
$230 billion. Mexican trade is fully integrated with that of its North
American partners: close to 90% of Mexican exports and 50% of its imports
are traded with the United States and Canada. Nonetheless, NAFTA has not
produced trade diversion. While trade with the United States increased 183%
from 1993 to 2002, and that with Canada 165%, other trade agreements have shown
even more impressive results: trade with Chile increased 285%, with Costa Rica
528% and Honduras 420%. Trade with the European Union increased 105% over the
same time period.=Free trade agreements=
Mexico joined the General Agreement on Tariffs and Trade in 1986, and today is
an active and constructive participant of the World Trade Organization. Fox’s
administration promoted the establishment of a Free Trade Area of
the Americas; Puebla served as temporary headquarters for the negotiations, and
several other cities are now candidates for its permanent headquarters if the
agreement is reached and implemented. Mexico has signed 12 free trade
agreements with 44 countries: the North American Free Trade Agreement
with the United States and Canada; Grupo de los tres, Group of the three
[countries], or G-3 with Colombia and Venezuela; the latter decided to
terminate the agreement in 2006; Mexico announced its intention to invite
Ecuador, Peru or Panama as a replacement;
Free Trade Agreement with Costa Rica; Free Trade Agreement with Bolivia;
Free Trade Agreement with Nicaragua; Free Trade Agreement with Chile;
Free Trade Agreement with the European Union;
Free Trade Agreement with Israel; TN Free Trade Agreement, with Guatemala,
El Salvador and Honduras; Free Trade Agreement with the European
Free Trade Association, integrated by Iceland, Norway, Liechtenstein and
Switzerland; Free Trade Agreement with Uruguay; and
Free Trade Agreement with Japan Mexico has shown interest in becoming an
associate member of Mercosur. The Mexican government has also started
negotiations with South Korea, Singapore and Peru, and also wishes to start
negotiations with Australia for a trade agreement between the two countries.
NAFTA The North American Trade Agreement is by
far the most important Trade Agreement Mexico has signed both in the magnitude
of reciprocal trade with its partners as well as in its scope. Unlike the rest of
the Free Trade Agreements that Mexico has signed, NAFTA is more comprehensive
in its scope and was complemented by the North American Agreement for
Environmental Cooperation and the North American Agreement on Labor Cooperation.
The NAAEC agreement was a response to environmentalists’ concerns that
companies would relocate to Mexico or the United States would lower its
standards if the three countries did not achieve a unanimous regulation on the
environment. The NAAEC, in an aim to be more than a set of environmental
regulations, established the North American Commission for Environmental
Cooperation, a mechanism for addressing trade and environmental issues, the
North American Development Bank for assisting and financing investments in
pollution reduction and the Border Environmental Cooperation Commission.
The NADBank and the BECC have provided economic benefits to Mexico by financing
36 projects, mostly in the water sector. By complementing NAFTA with the NAAEC,
it has been labeled the “greenest” trade agreement.
The NAALC supplement to NAFTA aimed to create a foundation for cooperation
among the three members for the resolution of labor problems, as well as
to promote greater cooperation among trade unions and social organizations in
all three countries, in order to fight for the improvement of labor conditions.
Though most economists agree that it is difficult to assess the direct impact of
the NAALC, it is agreed that there has been a convergence of labor standards in
North America. Given its limitations, however, NAALC has not produced
convergence in employment, productivity and salary trend in North America.
The agreement fell short in liberalizing movement of people across the three
countries. In a limited way, however, immigration of skilled Mexican and
Canadian workers to the United States was permitted under the TN status. NAFTA
allows for a wide list of professions, most of which require at least a
bachelor’s degree, for which a Mexican or a Canadian citizen can request TN
status and temporarily immigrate to the United States. Unlike the visas
available to other countries, TN status requires no sponsorship, but simply a
job offer letter. The overall benefits of NAFTA have been
quantified by several economists, whose findings have been reported in several
publications like the World Bank’s Lessons from NAFTA for LA and the
Caribbean, NAFTA’s Impact on North America, and NAFTA revisited by the
Institute for International Economics. They assess that NAFTA has been positive
for Mexico, whose poverty rates have fallen, and real income salaries have
risen even after accounting for the 1994–1995 Economic Crisis. Nonetheless,
they also state that it has not been enough, or fast enough, to produce an
economic convergence nor to reduce the poverty rates substantially or to
promote higher rates of growth. Beside this the textile industry gain hype with
this agreement and the textile industry in Mexico gained open access to the
American market, promoting exports to the United States. The value of Mexican
cotton and apparel exports to the U.S. grew from $3 billion in 1995 to $8.4
billion in 2002, a record high of $9.4 billion in 2000. At the same time, the
share of Mexico’s cotton textile market the U.S. has increased from 8 percent in
1995 to 13 percent in 2002. Some have suggested that in order to fully benefit
from the agreement Mexico should invest in education and promote innovation as
well as in infrastructure and agriculture.
Contrary to popular belief, the maquiladora program was in place far
before NAFTA, in some sense dating all the way back to 1965. A maquiladora
manufacturer operates by importing raw materials into Mexico either tariff free
or at a reduced rate on a temporary basis and then using Mexico’s relatively
less expensive labor costs to produce finished goods for export. Prior to
NAFTA maquiladora companies importing raw materials from anywhere in the world
were given preferential tariff rates by the Mexican government so long as the
finished good was for export. The US, prior to NAFTA, allowed Maquiladora
manufactured goods to be imported into the US with the tariff rate only being
applied to the value of non US raw materials used to produce the good, thus
reducing the tariff relative to other countries. NAFTA has eliminated all
tariffs on goods between the two countries, but for the maquiladora
industry significantly increased the tariff rates for goods sourced outside
of NAFTA. Given the overall size of trade between
Mexico and the United States, there are remarkably few trade disputes, involving
relatively small dollar amounts. These disputes are generally settled in WTO or
NAFTA panels or through negotiations between the two countries. The most
significant areas of friction involve trucking, sugar, high fructose corn
syrup, and a number of other agricultural products.
=Mexican trade facilitation and competitiveness=
A research brief published by the World Bank as part of its Trade Costs and
Facilitation Project suggests that Mexico has the potential to
substantially increase trade flows and economic growth through trade
facilitation reform. The study examines the potential impacts of trade
facilitation reforms in four areas: port efficiency, customs administration,
information technology, and regulatory environment.
The study projects overall increments from domestic reforms to be on the order
of $31.8 billion, equivalent to 22.4 percent of total Mexican manufacturing
exports for 2000–03. On the imports side, the corresponding figures are
$17.1 billion and 11.2 percent, respectively. Increases in exports,
including textiles, would result primarily from improvements in port
efficiency and the regulatory environment. Exports of transport
equipment would be expected to increase by the greatest increment from
improvements in port efficiency, whereas exports of food and machinery would
largely be the result of improvements in the regulatory environment. On the
imports side, Mexican improvements in port efficiency would appear to be the
most important factor, although for imports of transport equipment,
improvements in service sector infrastructure would also be of relative
importance. See also
Small and medium enterprises in Mexico List of companies of Mexico
List of hotels in Mexico List of Mexican brands
References External links
(Spanish) Mexican Council for Economic and Social Development
(Spanish) Mexico Development Gateway Mexican Economy and the U.S. from the
Dean Peter Krogh Foreign Affairs Digital Archives
Mexico’s Economy: Current Prospects and History lecture by Professor Robin
Grier, March 2013 OECD’s Mexico country Web site and OECD
Economic Survey of Mexico The Mexican Economy and the 2012
Elections from the Center for Economic and Policy Research, June 2012
Comprehensive current and historical economic data
Information about banks in Mexico World Bank Mexico 2012 Trade Summary
Statistics Tariffs applied by Mexico as provided by
ITC’s Market Access Map, an online database of customs tariffs and market

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