Somebody once said: “Poor Mexico, so far from God, so close to the United States.” But few can dispute the fact that Mexico’s unique relationship with the US is the primary reason for its stable economic performance in recent years.
Mexico and Chile, which both have free trade agreements with the US, have escaped the economic crises that engulfed Argentina and Venezuela last year and sent jitters through the Brazilian economy.
Despite this, much criticism surrounds the North American Free Trade Agreement (Nafta) and Mexico’s liberal economic policies.
With a population of 100-million, Mexico’s is the largest economy in Latin America and the 10th-largest economy in the world, with a gross domestic product (GDP) of roughly $640-billion. It is by far the largest trading nation in the region, with trade accounting for 60% of its GDP.
Mexico also captured about $15-billion worth of foreign direct investment (FDI) last year, 30% of Latin America’s total. It is widely regarded as a pioneer of free-market reforms among its peers in the region and the developing world.
By virtue of the Nafta agreement, the US accounts for about 80% of FDI in Mexico and more than 90% of Mexican exports. This has assisted industrial diversification, with far more emphasis placed on manufacturing exports as opposed to traditional oil sales abroad.
In the early 1980s oil represented 70% of Mexico’s exports. Today, oil exports are 7% of the total, with industries such as electronics and automotives assuming a more dominant role.
Nafta, which came into force in 1994, has also added substantially to Mexico’s credibility. Following the “tequila” financial crisis in 1995, Mexico recovered at an astonishing rate and has become a primary investment destination among emerging markets. It also has more trade and investment agreements than any country in the world — largely because of its access to the US market.
However, critics argue that much of the trade and investment associated with Nafta is superficial. They say that investments are aimed exclusively at US multinationals or maquiladores. This results in little vertical investment that would filter down to smaller Mexican-owned businesses.
It is also suggested that such investments are unsustainable, as they add little substance to socio-economic development, and are only committed to Mexico as long as its wages are lower compared to other countries.
Mexico’s key problems are unequal income distribution and unemployment. While official unemployment hovers between 2% and 3%, the reality is very different. This is especially true of Mexico City. Most of the workforce is either unemployed or works sporadically in the informal sector. If this “unoccupied” majority were included, the rate of unemployment would be about 35%.
Despite a moderate annual average economic growth of more than 3% since the start of Nafta, Mexican society has become increasingly polarised. Income distribution has worsened and per capita income has stagnated or even decreased.
These inequalities are blamed on the nature of Nafta and liberal economic ideals in general. However, such criticism is simplistic.
A number of factors have adversely affected these areas of socio-economic development in Mexico. These include the population explosion during the early 1980s, which is now having repercussions on real economic growth; the poor global economic performance and US contagion; and, domestically, political fragmentation between the president’s office and Congress. Deteriorating support for the Fox administration has hindered the implementation of policies required to complete the economic reform process.
While Mexico seems to have sound macroeconomic fundamentals — moderate growth, a stable exchange rate and controlled inflation — and has liberalised its economy, there are a number of problems simmering below the surface.
Issues such as wealth disparity and provision of resources such as education, infrastructure and health services that will assist in generating personal income, urgently need to be addressed. The southern, less developed parts of Mexico need to be integrated into the broader economy and institutional building needs to take place to maintain such initiatives.
In essence, the reforms implemented in the 1990s, which led to market liberalisation, need to be enhanced to ensure that society benefits from the opportunities made available through Mexico’s many trade and investment strategies.
One cannot help but draw parallels between Mexico and South Africa. Like Mexico, South Africa is a regional leader and interacts effectively with both the developed North and developing South.
Both countries play an important role in bridging the divide between North and South through multilateral organisations and free-trade accords. South Africa’s trade strategy of negotiating bilateral agreements with countries is similar to that undertaken by Mexico.
An agreement with the US, currently a priority, would give South Africa an important opportunity to gain preferential access to the largest market in the world.
However, Mexico’s experience certainly does provide lessons worth considering. These should be analysed carefully in light of the free market route South Africa has pursued since 1994, and which Mexico adopted years before.
There may be a way of getting close to the US while simultaneously avoiding being distanced from God.
Lyal White, senior researcher at the South African Institute of International Affairs, was recently in Mexico for research purposes.