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Mexico Economy

Remittances from Mexicans living legally and illegally in the United States account for that country’s second source of income behind oil production. the North American Free Trade Agreement (NAFTA), which lowered Mexican tarrifs on agricultural imports, led to a flood of cheap US corn and other basic food staples into the Mexican economy that forced millions of small Mexican farmers out of the market.

Poverty and inequality remains, with poverty affecting more than 40 percent of Mexico’s population. Inequality, measured by the Gini coefficient (a Gini of 0 represents perfect equality), remains close to 0.5, against 0.3 on average in the OECD member countries. Poverty and access to public services or economic activity are distributed unequally among territories, which adds a persistent territorial equality to the already complex social inequality that harms Mexican society, of the relatively bad situation in which poor rural areas compared with others in urban areas.

Straggler territories usually have some things in common: they're smaller in terms of population, more rural and have a greater proportion of native people or people of African descent. Located far from the benefits of cities, they usually have less access to education and job opportunities. In the Benito Juarez delegation in Mexico City, one of its most wealthy, the illiteracy rate is less then 1 percent. Meanwhile in Cochoapa El Grande, one of the poorest municipalities in Guerreros' La Montaña region, more than 56 percent of people over the age of 14 years can't read or write.

Mexico implemented sweeping structural reforms during the mid-1990s following a series of economic and financial crises. The reforms succeeded in achieving macroeconomic stability, opened the economy up to trade and foreign investment, and boosted educational attainment. Against this backdrop, Mexico’s low average per capita growth rate over the following two decades and in particular its negative productivity growth remain a source of political strain.

A potentially important driver of resource misallocation in Mexico is corruption. Strengthening the rule of law and fighting corruption should be a priority for Mexico. Combating corruption would increase productivity by fostering investment in the most productive firms and reducing rent-seeking behavior. Swift implementation of all elements of national and state level anti-corruption plans are therefore critical to lifting potential growth.

Mexico should strengthen its tax collection: it stands out among its peers in Latin America and the Organization for Economic Co-operation and Development (OECD) with its low share of tax revenues, which constrains public spending. The country could invest more in public infrastructure—an area that has been neglected—if it improved its tax collection, closed tax avoidance loopholes, and made spending more efficient.

Informality is high, and access to services such as electricity and financial products remains uneven. Doubling down on the Pacto por Mexico (a reform agreement endorsed by the major Mexican political parties in 2012) would especially benefit southern states, and help boost productivity.

The government cut back a 3.9 percent growth forecast for 2014 to 2.7 percent in May after a harsh winter in the United States crimped demand for Mexican exports and new taxes weighed on domestic consumption and investment. By the end of the year analysts expected growth of about 2.3 percent for the year.

As is well known, the Mexican economy declined dramatically in the early 1980s. Sociologists delayed little in examining the impact of the severe recession on the organization of industry and small workshops, the political system, and the quality of life of the poor and working class. By almost unanimous consensus, commnetators blamed the crisis on the globalization of the economy and capitalism. Public corruption and inefficiency are seldom mentioned as contributing causes, even though, as indicated, this is a topic of frequent analysis among rural and political sociologists.

The Mexican economy had undergone profound structural change since 1980. Direct government intervention and participation in the productive economy substantially diminished, notably through a vast privatisation program. In the 1980s and early 1990s, market-oriented structural reforms transformed Mexico's economy from a highly protectionist, public-sector-dominated system to a generally open, deregulated "emerging market" with extensive ties to the United States, Asia, and Europe.

Mexico is a middle-income country with a developing market economy that is closely linked to the much larger economy of the United States. Mexico's economy ranks as "moderately free" in the 2008 Index of Economic Freedom (a joint publication of the Wall Street Journal and the Heritage Foundation). From the 1940s through the late 1960s, successive governments followed an economic strategy of import substitution and fiscal and monetary restraint intended to promote growth while holding inflation in check. During the 1970s, populist governments abandoned fiscal discipline and oversaw a massive expansion of consumer subsidies and state ownership of productive sectors. Unsustainable public-sector spending backed by over-reliance on oil export revenues and abundant international credit contributed to chronically high inflation and wild fluctuations in economic performance. As a result, the economy experienced spurts of rapid growth followed by sharp recessions in 1976 and 1982. The mid- to late 1980s were years of economic austerity and stagnant growth during which Mexico was able to balance its national accounts while combating high inflation. Gross domestic product (GDP) grew at an average rate of just 0.1 percent per year between 1983 and 1988. During these years, monetary policy was severely restricted and public-sector spending sharply curtailed.

The late 1980s and early 1990s saw far-reaching market-oriented structural reforms, including privatization of hundreds of state-owned enterprises, liberalization of foreign investment laws, deregulation of the financial services sector, and across-the-board reductions in tariffs and nontariff trade barriers. These reforms, which culminated in the ratification of the North American Free Trade Agreement (NAFTA) in 1994, attracted an influx of US$148 billion in foreign direct investment (FDI) during the next decade. From 1988 to 1994, GDP growth averaged 2.6 percent annually, sustained by exports and an influx of foreign capital.

However, the collapse of the peso in December 1994 and the ensuing economic crisis erased most of the real wage gains from the previous years. In response to the 1994 crisis, Mexico passed legislation granting greater independence to its central bank. Growth resumed in the late 1990s, but the recovery was cut short by the spillover effects of the 2001 recession in the United States. Since 2002, a worldwide commodity price boom, a U.S. economic recovery, and sound macroeconomic policies have helped boost economic growth while allowing inflation to remain in the single digits.

The economy is hampered by structural weaknesses that limit Mexico's potential for future growth and job creation. Mexico's workers are generally low skilled and have less schooling than workers in advanced industrial economies. This deficit in human capital manifests itself in stagnant labor productivity and real wages, as well through the existence of a large "informal" labor sector that deprives the education, health care, and social security systems of crucial tax revenues. Income distribution remains highly unequal; about half of Mexico's population lives in poverty.

Despite recent reforms, some public policies continue to hold back the economy's competitiveness and growth potential: rigid labor and commercial codes discourage hiring and inhibit informal workers from transitioning into the formal economy; the important energy sector, which remains state-owned, suffers from numerous inefficiencies and undercapitalization; and the federal government relies heavily on the oil industry for revenues, which consequently renders public budgets vulnerable to cyclical fluctuations in hydrocarbon prices. Whereas the liberalizing reforms associated with NAFTA have been a boon to northern and central Mexico's manufacturing centers, few new jobs have materialized for the predominantly agricultural states in the south and southwest. This uneven development pattern has failed to slow large-scale wage migration to the United States. As global competition for capital investment has increased- particularly from low-cost manufacturing in Asia-Mexico's status as a premier export hub for the North American market has eroded.

Nominal Gross Domestic Product (GDP) stood at US$879.2 billion dollars in 2007 (US$1.23 trillion in terms of purchasing power parity, or PPP), representing a per capita GDP of approximately US$8,088 (US$11,337 in terms of PPP)-the highest in Latin America. In 2008 Mexico was entering its fifth consecutive year of economic expansion. Annualized real GDP growth slowed from of a peak rate of 4.8 percent in 2006 to 3 percent in 2007, partly as a result of a slowdown in the U.S. economy. Economic output in 2007 was divided among the sectors as follows: services, 70 percent; industry, 26 percent; and agriculture, 4 percent.

During 2007, Mexico's public-sector budget was balanced, with expenditures matching revenues of US$209 billion (equivalent to 24 percent of gross domestic product). The public sector typically relies on profits from the state-owned hydrocarbons sector for a quarter of its revenues. Federal tax revenue is derived from several sources: corporate and individual income taxes, a nationwide value-added tax, and excise taxes on the mining industry. State and local governments rely heavily on federal government revenue transfers for their budgets. Inflation has trended generally downward since the late 1980s (when it exceeded 150 percent), thanks to a commitment by successive governments and the independent central bank to anti-inflationary fiscal and monetary policies. During 2007, annual inflation was approximately 4 percent.

Mexico's currency is the peso (MXN). In early July 2008, the exchange rate was approximately US$1=MXN10. The Fiscal Year is the Calendar year.

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Page last modified: 02-07-2018 17:33:02 ZULU