Despite perceptions, Mexico has been laying the groundwork for becoming an economic powerhouse

May 11, 2009

Economy poised for greatness; New leadership and business reforms help improve outlook
By Patrick McGee
Fort Worth Star-Telegram
Tuesday, March 13, 2007

When Mexican President Felipe Calderón meets with President Bush today, he is expected to discuss his plans to improve prospects for Mexican workers so fewer of them will try to come to the United States.

Experts say Calderón and his generation of leaders are working to turn Mexico into an economic heavyweight over the next few decades, rather than a poor country sending illegal immigrants across the border.

But challenges remain. About 40 percent of the nation’s population lives in poverty, and monopolies dominate major industries.

But despite the challenges, Mexico’s new finance minister, Agustín Carstens, is so optimistic that he told the Financial Times last month that Mexico’s economy could become fully developed in 20 years, as in Ireland and Spain.

Last year, the World Bank named Mexico one of the world’s top 10 reformers in making the country a better place to do business.

A December 2005 Goldman Sachs report forecasts that Mexico will be the sixth-largest economy in the world by 2050, saying “only Mexico and perhaps Korea have the potential to rival” the emerging economies of China, India, Russia and Brazil.

In 2004, Mexico issued 20-year bonds for the first time, indicating an improvement in investor confidence. During the tough economy of the mid-1990s, Mexico could not issue bonds longer than six months.

“This brings a lot more stability, and it’s a sign that the Mexican financial markets are maturing,” said Michael Brandl, a finance lecturer at the University of Texas at Austin.

Experts say Mexico has positioned itself for economic success with:

-A more democratic and politically stable government. Mexico’s democratic institutions passed a severe test last year with a close presidential election. There were acrimony and protests but no upheavals or bloodshed.

-Banking reforms. In 1998, Mexico allowed full foreign ownership of banks, which opened the country to more investment. Loans are made based on credit scores, putting the country’s loans on much firmer ground. Loans were previously made based on personal or family relationships, or information loosely shared among banks, said William Gruben, director for the Center for Latin American Economics at the Federal Reserve Bank of Dallas.

-Business reforms. A new law better protects investors and cuts government red tape, reducing the number of days from 58 to 27 to start a business in Mexico City, according to the World Bank.

-A more disciplined monetary policy. Mexico’s central bank carefully controlled interest rates to help beat back inflation.

And signs of prosperity have begun to emerge. Incomes in Mexico are up, the high birth rate is slowing and the inflation rate has dropped dramatically since the 1994 peso devaluation, when the economy went into recession.

As Bush tours the region, the White House has talked about increased economic development with Latin America. Mexico is America’s third-largest trading partner, and more immigrants come to the U.S. from Mexico than any other country.

If the Mexican economy gains momentum, the United States could eventually see fewer Mexican immigrants, said Eric Farnsworth, vice president of the Council of the Americas, a New York-based group that promotes free trade throughout the hemisphere.

“It’s pretty certain that good jobs will encourage people to stay home,” he said, noting that many immigrants said in polls that they would rather stay. “Some folks will say, ‘My life here is not so bad, and my family is here.’”

But Michael Teitelbaum, a demographer with the New York-based Alfred P. Sloan Foundation, said there might be an uptick in immigration before it slows.

He noted that advocates for the North American Free Trade Agreement argued that immigration would drop when Mexico’s economy grew.

The economy grew — but so did immigration, Teitelbaum said.

He said growing incomes fueled illegal immigration partly because people had enough money to pay smugglers to get them across the border.

Teitelbaum said it will take decades of economic growth for wages to rise enough for a significant number of Mexicans to stay.

‘A booming economy’

Texas and major Fort Worth companies have been part of the Mexican success story. Texas sent 40 percent of its exports to Mexico last year, more than to any other country, according to the Federal Reserve Bank of Dallas.

RadioShack operates 129 stores in Mexico in a joint venture with Grupo Gigante, a Mexican company. A Pier 1 joint venture with Sears of Mexico has 29 stores in Mexico. Kalen Ruiz, Pier 1’s senior manager of international merchandizing, said the company opens three or four stores in Mexico every year.

“Retail is just growing down there. Shopping malls are being built left and right,” she said. “It’s a booming economy. Wal-Mart is down there now. There are lots of U.S. retailers that are going down there.”

José Natera said he and three partners have seen sales quadruple since they set up Continental Trade Group in April 2004. The Fort Worth-based import/export company deals solely with trade between Mexico and the United States.

Natera, who is originally from Guanajuato, Mexico, said his company’s imports to the U.S., such as lettuce and honey, are larger in volume, but the margarine he exports to Mexico makes up the faster-growing part of his business.

“Mexico, to me, represents a great market for American companies,” Natera said. “As the Mexican economy grows, people can afford to buy more things.”

General Motors has three plants in Mexico, and one of them builds only vehicles for sale in Mexico, company spokesman Dan Flores said. He said a fourth plant under construction will also be for sales within Mexico.

Obstacles to growth

Some serious obstacles still exist, however, on Mexico’s path to prosperity. About 40 percent of its 107 million people live below the poverty line, according to the CIA World Factbook.

Experts said Mexico is being held back by government corruption and badly needed improvements to its schools and infrastructure including highways, bridges and ports. Only a third of Mexico’s roads were paved in 2003, according to the World Bank.

Mexico is also choking on big companies that dominate their industries by wielding political influence rather than through good business practices, said George W. Grayson, a government professor at the College of William & Mary in Virginia.

Farnsworth said Mexico also needs to do a better job educating its people.

Figures from the United Nations Educational, Scientific and Cultural Organization show that compared with China, a greater percentage of Mexico’s young people are in school, but experts worry that the education Mexicans receive is not good.

“Years of education is not necessarily a good predictor of how skilled one is, because the Mexican public schools are lousy,” Grayson said, noting that huge numbers of middle-class Mexicans send their children to private schools. “China is eating Mexico’s lunch, and unless Mexico undertakes some of these structural reforms, China is going to eat Mexico’s breakfast and dinner, too.”

Brandl said that despite all the attention to China, Mexico has created a much stronger banking system than the Asian powerhouse.

Farnsworth said he also holds out hope for Mexico because the leadership seems to understand the global economy.

“I’m optimistic, because I think the government and the people of Mexico understand where they are in relations to other countries in the world,” he said. “They understand where the challenges are, and they’re moving to address them.”