Economic and Political Situation in Mexico Term Paper

  • Length: 8 pages
  • Subject: Economics
  • Type: Term Paper
  • Paper: #60897699

Excerpt from Term Paper :


Economic and Political Situation in Mexico

In recent years, the economic and political situation in Mexico has fallen under international scrutiny, and as a result, critics have analyzed the country's policies toward exchange rates, foreign trade, domestic monetary systems and foreign policy. Mexico currently operates under a free market economy that contains a mixture of modern and outmoded industry and agriculture, increasingly dominated by the private sector. Recent administrations have expanded competition in seaports, railroads, telecommunications, electricity generation, and airports (CIA, 2005). Trade with the United States and Canada has increased in the past decade, however, Mexico has many transnational problems that other countries do not face, such as those involving enormous population growth, outmoded infrastructure, prolonged drought, and the illicit cultivation and distribution of narcotics. All of these issues have been greatly affected by the past and current economic and political situation in Mexico. This paper will take a detailed look at Mexico, applying international principles in perspective.

Mexico's Political and Economic Situation

Mexico's economic situation is most widely discussed in the context of the devaluation of the peso in 1994. This event led to the worst economic recession in the country in over half a century, which has been blamed on Mexican economic authorities. After concluding that the peso was overvalued, economists predicted that if the peso value remained uncorrected, international reserves held at the Bank of Mexico could be attacked. These economists argued that a solution for this speculative attack could be a negotiated devaluation between labor and business leaders. According to these economists, if business and labor were convinced to increase prices with moderation following the devaluation, the inflationary pressures would be kept in check (Lustig, 1995). Eventually, the markets did not believe that the peso parity was sustainable, and reserves fell until the government had no choice but to devalue (Lustig, 1995). Unfortunately, the exchange rate policy was modified after the reserves had fallen too low, and the government lost control.

Despite attempts to recover from the devaluation of the peso, Mexico's attributable ongoing economic and social concerns include low real wages, underemployment for a large sector of the population, inequitable income distribution, and few advancement opportunities for a large segment of the population in the impoverished southern states (CIA, 2005). However, from an international perspective, the devaluation of the peso has drastic effects. The devaluation resulted in financial crisis with significant spillover effects on other countries, in particular, Latin America (Lustig, 1995). As a result, the flight of capital from Mexico and other emerging markets in Latin America and other countries took governments and international financial institutions by surprise (Lustig, 1995). The risk that Mexico took in its' economic strategy had widespread and lasting effects, both on a domestic and an international level, some which are still being currently felt.

After this financial crisis, the Mexican government was challenged by its citizens and foreign countries to restore its credibility. For this it was necessary to put into place a program with realistic goals, and to specify clear monetary, fiscal and exchange rate policies (Lustig, 1995). The Mexican market appeared to improve, and the fact that United States interest rates did not rise also assisted in Mexico's turnaround. In 1999, the Mexican economy grew 3.6%, and both domestic and international demand for goods and services increased. During the first 11 months of 1999, the total number of workers registered by the Mexican Social Security Institute increased by more than 870,000, and the open unemployment rate fell to its lowest level since 1985 (Gurria, 2000).

Under former Mexican president Ernesto Zedillo, macroeconomic stability and domestic savings increased. Zedillo's public debt-management policy continued to be consistent with the strengthening of the economy, and market amortizations of the public sector's external debt for the last quarter of 1999 and the year 2000 as a whole amount to $2.3 billion (Gurria, 2000). After the financial crisis caused by the devaluation of the peso, inflation had been reduced. For example, the consumer price index increased 12.32% in 1999, below the 13% target established at the beginning of the year. From an international perspective, non-oil exports grew 15.0% in 1999, and the trade balance reflected the increase in international oil prices.

The years 1999 and 2000 appear to mark a turning point in Mexico's economic and political situation. For example, in 2000 and in the past few years, the Mexican economy has expanded while inflation has been simultaneously reduced. Additionally, in 2000, the account deficit remained moderate, at 3% GDP, as opposed to 7% GDP in 1994. In 2000, Mexico's international reserves stood at more than $30 billion, as compared to the 1994 figure of only $6 billion. Furthermore, domestic savings increased to 21.7% of GDP in 2000 from 14.7% of GDP in 1994 (Gurria, 2000). To ensure a smooth transition at the end of the Zedillo administration, the Financial Strengthening Program was announced in 1999, which consisted of loans to finance imports of goods and services to the United States. During the same time period, the North American Framework Agreement with Canada and the United States was also renewed. This agreement provided a much-needed credit line totaling $6.8 billion until the end of the fiscal year 2000.

Although the economic situation in Mexico has improved in the past few years, the per capita income remains low, and the country's income distribution remains highly unequal. In 2003, the labor force was comprised of the following: 18% agriculture, 24% industry, and 58% services. In 2004, the unemployment rate was estimated to be about 3.2%, with a rate of underemployment of around 25%. While the unemployment rate appears low in comparison to other countries, the rate of underemployment is extremely high, with about 1/4 of the population under-employed. Mexico also carries a significantly higher public debt, of around 23.5% GDP. According to the CIA (2005), the Mexican government is cognizant of its' urgent need to upgrade its' infrastructure, modernize the tax system and labor laws, however the progress in this area appears to be moving at a very slow pace.

Mexico's export system appears to be strong from an international perspective; the country carries a $182.4 billion export estimate for commodities such as manufactured goods, oil and oil products, silver, fruits, vegetables, coffee and cotton for 2004 alone. Additionally, Mexico has internationally strong export partners, such as the United States, Canada and Spain. Mexico's import partners are the United States, China and Japan, with an estimated $190 billion in 2004 for goods such as metalworking machines, agricultural machinery, repair parts for motor vehicles, and aircraft parts. Mexico currently has $60.67 billion in reserves of foreign exchange and gold, and the Mexican peso continues to devaluate. According to the CIA (2005), the Mexican peso per United States dollar was 11.286 in 2004, 10.789 in 2003, 9.656 in 2002, and 9.342 in 2001.

In recent years, the Mexican government has implemented a series of economic reforms to strengthen the country's overall progress. Mexico's current president, Vincente Fox Quesada, is both the chief of state and head of government, and was sworn in at the beginning of December, 2000 as the first chief executive elected in free and fair elections. As a result of the new president, Mexico has been able to implement reforms that have focused on economic and financial liberation. This has enabled the economy to take full advantage of the benefits of globalization while minimizing risks inherent in this process (Gurria, 2000). The reforms implemented have included trade and capital account liberation, increased private sector participation in key sectors of the economy, tax reforms, changes in the labor market structure, and pension system reforms (Gurria, 2000). However, there is still much that needs to be amended in Mexico.

Mexico's International Situation

Mexico has been involved in many transnational disputes; for example, Mexico's prolonged drought, population growth, and outmoded infrastructure in the border region have strained water-sharing arrangements with the United States (CIA, 2005). Another issue that Mexico has with the United States is the illegal immigration problem, and as a result, the United States has increased its' efforts to prevent and catch Mexican nationals and others from illegally crossing their border with Mexico. This immigration problem has caused disputes between the United States and Mexico, leading to disputes with other countries as well. From an international perspective, the Mexican government would be well-advised to implement stronger measures of its' own to combat the problem of illegal immigration.

One of the most widely cited issues regarding Mexico is the country's illicit cultivation and distribution of narcotics. According to the CIA's World Factbook (2005), the country's heroin production was 7 metric tons and 4,100 hectares of cannabis cultivation in 2001 alone. Mexico has been hailed as a major supplier of heroin and the largest foreign supplier of marijuana and methanphetamine to the United States market. Additionally, Mexico continues to be the primary transshipment country for United States-bound cocaine from South Africa, accounting for an estimated 70% of the annual cocaine movement to the United…

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