Economy of Mexico

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Economy of Mexico
Santa Fe Business district
Currency	Mexican peso (MXN, $)
Fiscal year	Calendar year
Central Bank	Banco de México
Trade organisations	NAFTA, WTO, and OECD
Stock Market	Bolsa Mexicana de Valores

Mexico has a free market and export-oriented economy. Measured in purchasing power parity, its Gross Domestic Product recently surpassed a trillion dollars, making it the thirteenth largest economy in the world.^[1] Mexico is also firmly established as an upper middle-income country with the highest income per capita in Latin America,^[2] in market exchange rates. Mexico is the only Latin American country to be member of the Organisation for Economic Co-operation and Development.

Since the 1994 crisis subsequent administrations have improved the country's macroeconomic fundamentals. It was not influenced by the recent South American crises, and has maintained positive, though small, rate growths after the brief stagnation of 2001. Moody's (in March 2000) and Fitch IBCA (in January 2002) have issued investment-grade ratings for Mexico's sovereign debt. In spite of its unprecedented macroeconomic stability that has reduced inflation and interest rates to record lows and increased income per capita, huge gaps still remain between the urban and the rural population, the northern and the southern states, and the rich and the poor.^[2] Some of the governments challenges include the need to upgrade infrastructure, modernize the tax system and labor laws and reduce income inequality.

The economy contains a mixture of modern and outmoded industry and agriculture, both of which are increasingly dominated by the private sector. Recent administrations have expanded competition in sea ports, railroads, telecommunications, electricity generation, natural gas distribution and airports with the aim of upgrading infrastructure. Being an export-oriented economy, more 90% of its trade is under free trade agreements (FTAs), with over 40 countries including the European Union, Japan, Israel and many countries in Central and South America. The most influential FTA, however, is NAFTA, 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 its northern partners accounted for close to 90% of Mexico's exports and 55% of its imports.^[1]

[edit] History

Main article: Economic history of Mexico

After five decades of political turbulence after independence, the four consecutive administrations of president Porfirio Díaz, during the last quarter of the nineteenth century brought unprecedented economic growth accompanied by foreign investment and immigration, the development of an efficient railroad network and the exploitation of the country's natural resources. GDP per capita levels circa 1900 were on par with Argentina and Uruguay, almost three times that of Brazil and Venezuela.^[5] Annual economic growth between 1876 and 1910 averaged 3.3%.^[6] Political repression and fraud, as well as huge income inequalities exacerbated by the land distribution system in which large haciendas were owned by a few but worked by millions of underpayed peasants living in precarious conditions led to the Mexican Revolution (1910-1917) 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 period from 1930 to 1970 was dubbed by economic historians as the "Mexican Miracle", a period of economic growth spurred by a model of import-substitution industrialization (ISI) which protected and promoted the development of national industries. Through the ISI model, the country experienced an economic boom through which industries rapidly expanded their production.^[4] Important changes in the economic structure included the 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. From 1940 to 1970 GDP increased sixfold, whereas population doubled.^[7]

The ISI model had reached its peaked in the late 1960s. During the 1970s, the administrations of Echeverría and López Portillo, tried to revive the economy and began 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. In fact, this method produced a remarkable growth in public expenditure,^[4] and president López Portillo announced that the time had come to learn to "manage prosperity".^[8] This period of prosperity, however, was accompanied by the mismanagement of resources and inflation.

In 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, amongst them the steel industry. While import substitution had produced an era of industrialization in previous decades, by the 1980s it was evident that that protracted protection had produced an uncompetitive industrial sector with low productivity gains.^[4]

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,^[4] which reached a historic high in 1987 at 159.7%.^[9]

The first step toward the liberalization of trade was Mexico's signature of GATT in 1986. During the Salinas administration state-owned companies were privatized with the notable exception of the oil industry and energy (protected constitutionally). In 1992, the North American Free Trade Agreement was signed between the United States, Canada and Mexico, and 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 labor unions with the aim of curbing inflation. While his strategy was successful in reducing inflation, growth averaged only 2.8 percent a year.^[4] Moreover, 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, which was financed through public debt instruments called tesobonos that reassured payment in dollars.^[10] The Chiapas uprising, and the assassinations of the most-likely to win presidential candidate and the nation's prosecutor in 1994, send a disquieting message to investors. Public debt holders rapidly sold their tesobonos, depleting the Central Bank's reserves,^[10] while portfolio investments, which had made up 90% of total investment flows, left the country as fast as they had come in.^[4] 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 1995. The boom in exports, as well as an international rescue package crafted by American 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.^[4] Nonetheless, the drastic effects of the crisis lasted for many more years.

President Zedillo and president Fox continued with trade liberalization, and during his administrations, several FTAs were signed with Latin American and European countries, Japan and Israel, and both strove to maintain macroeconomic stability. Mexico, thus, 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.^[11] The nature of foreign investment also changed from portfolio to foreign-direct investment (FDI).

[edit] Macroeconomic, financial and welfare indicators

Macroeconomic indicators
Mexican notes and coins
GDP (PPP)	1.134 trillion USD (2006)
GDP growth	4.8% (2006)
GDP per capita	10,600 USD (2006)
GNI per capita	7,310 USD (2005)
Inflation (CPI)	3.4% (2006)
Gini index	49.5
Unemployment	3.2 % (2006)
HDI	0.821
Labour force	38.09 million

[edit] Main indicators

Mexico's Gross Domestic Product (GDP) in purchasing power parity (PPP) was estimated at 1.134 trillion USD in 2006, and 741.5 billion in nominal exchange rates.^[1] As such, its standard of living, as measured in GDP in PPP per capita was of 10,600 USD. The World Bank reported that the country's Gross National Income and income per capita in nominal market exchange rates were the highest in Latin America, at 753.394 billion USD,^[12] and 7,310 USD^[13] respectively, and 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,^[14] even though it is considered to be well below Mexico's potential growth.^[10]

The Mexican currency is the peso (ISO 4217: MXN; symbol: $). One peso is divided into 100 centavos (cents). MXN replaced MXP in 1993 at a rate of 1000 MXP per 1 MXN. The exchanged rate has remained stable since 1998, oscillating between 9.20 and 11.50 MXP per USD. Interest rates in 2007 were situated at around 7 percent,^[15] having reached a historic low 2002 below 5 percent. Inflation rates are also at historic lows; inflation rate in Mexico in 2006 was 3.4 percent Unemployment rates are the lowest of OECD countries at 3.2 percent. However, underemployment is estimated at 25 percent.^[1] Mexico's Human development index was reported at 0.821,^[16] (comprised by a life expectancy index of 0.84, an education index of 0.86 and a GDP index of 0.77), ranking 53 in the world within the group of high-development.

[edit] Poverty

After the 1994-1995 economic crisis, probably the most severe in the country's history, 50% of the population fell into poverty. A rapid growth in exports propitiated by NAFTA and other trade agreements, and the restructuring of the macroeconomic finances initiated during Zedillo's and continued during Fox's administration had impressive results in the reduction of the poverty rate. According to the World Bank, extreme poverty was reduced to 17.6% in 2004. Most of this reduction was done in rural communities whose rate of poverty declined from 42% to 27.9% in the 2000-2004 period, although urban poverty stagnated at 11%.^[17]

[edit] 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 $18 billion in 2005.^[18] In 2004 they became the second largest source of foreign income after crude oil exports, roughly equivalent to foreign direct investment (FDI) and larger than tourism expenditures; and represented 2.5 percent of the nation's Gross Domestic Product.^[19] The growth of remittances has been remarkable: they have more than doubled since 1997. Recorded remittance transactions exceeded 41 million in 2003, of which 86 percent were made by electronic transfer.^[20]

It is estimated that half or more of Mexican immigrants to the United States are legal, and have access to formal transfer channels usually blocked to illegals simply due to the lack of accepted identification documents. The Mexican government, cognizant of the economic viability of immigrant workers, began issuing an upgraded version of the Matrícula Consular de Alta Seguridad (MACS, High Security Consular Identification), 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.^[20]

The main receptors of remittances in 2004 were the states of Michoacán, Guanajuato, Jalisco, Mexico and Puebla, which jointly captured 45% of total remittances in that year.^[19] 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 (Two for every one) 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.^[21]

[edit] Regional economies

Map of Mexican states indicating HDI (2004)       0.80 and higher       0.750–0.749       0.70–0.759

Nonetheless, regional disparities and income inequality continue to be a problem in Mexico. While all constituent states of the federation have a Human Development Index (HDI) superior to 0.70 (medium to high development), northern and central states have higher levels of HDI than the southern states. Nuevo León and the Federal District have HDI levels similar to European countries, whereas that of Oaxaca and Chiapas is similar to that of Syria or Egypt.^[22] At the municipal level, disparities are even greater: Garza García in Nuevo León has an HDI similar to that of Italy, whereas, Metlatonoc in Guerrero, would have an HDI similar to that of Malawi. As it can be seen from the map, the majority of the federal entities with high development (superior to 0.80) are located in the northern region (with the exception of Jalisco, Aguascalientes, the Federal District, Querétaro, as well as the southeastern states of Quintana Roo and Campeche). The less developed states (with medium development in terms of HDI, superior to 0.70) are located at the southern Pacific coast (with the exception of Veracruz).

In terms of share in GDP per sector (in 2004), the largest contributors in agriculture are Jalisco (9.7%), Sinaloa (7.7%) and Veracruz (7.6%); the greatest contributors in industrial production are the Federal District (15.8%), Mexico (11.8%) and Nuevo León (7.9%); the greatest contributors in the service sector are also the Federal District (25.3%), Mexico (8.9%) and Nuevo León (7.5%).^[23] Since the 1980s the economy has slowly become less centralized; the annual rate of GDP growth of the Federal District from 2003-2004 was the smallest of all federal entities at a mere 0.23%, with drastic drops in the agriculture and industrial sectors; in spite of that, it stills accounts for 21.8% of the nation's GDP. The states with the highest GDP growth rates are Quintana Roo (9.04%), Baja California (8.89%), and San Luis Potosí (8.18%).^[24] In 2000 the federal entities with the highest GDP per capita in Mexico were the Federal District (17,696 USD), Campeche (13,153 USD) and Nuevo León (13,033 USD); the states with the lowest GDP per capita were Chiapas (3,302 USD), Oaxaca (3,489 USD) and Guerrero (4,112 USD).^[25]

[edit] Components of the economy

Gross Domestic Product (GDP) in purchasing power parity (PPP) in 2006 was estimated at 1,134 trillion USD, and GDP per capita in PPP at 10,600 USD.^[1] The service sector is the largest component of GDP at 70.5%, followed by the industrial sector at 25.7% (2006 est.). Agriculture represents only 3.9% of GDP (2006 est.). 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 (est. 2003).

[edit] Agriculture and food production

Food and agriculture
Farmers in Puebla
Product	Quantity (Tm)	Rank1
Avocados	1,040,390	1
Onions and chayote	1,130,660	1
Limes and lemons	1,824,890	1
Safflower seed	212,765	1
Dry fruits	95,150	2
Papaya	955,694	2
Chillies and peppers	1,853,610	2
Whole beans	93 000	3
Oranges	3,969,810	3
Anise, badian, fennel	32 500	3
Chicken meat	2,245,000	3
Asparagus	67,247	4
Mangoes	1.503.010	4
Corn	20,000,000	4
1World Ranking
Source: FAO (2004) [4]

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. This 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 northeastern states (mainly in Sinaloa), however, privatization of ejidos continues to be very slow in the central and southern states.

Up until the 1990s, the government encouraged the production of basic crops, mainly corn and beans by maintaining support prices and controlling imports through the National Company for Popular Subsistence (CONASUPO). 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 (mostly corn), 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 administration, mainly to white corn producers 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).^[26]

Agriculture, as a percentage of 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 only 3.9% of GDP,^[1] down from 7% in 1980,^[27] and 25% in 1970.^[28] Nonetheless, given the historic structure of ejidos, it still employs a considerably high percentage of the work force: 18% in 2003,^[1] mostly of which grows basic crops for subsistence, compared to 2-5% in developed nations in which production is highly mechanized.

In spite of being a staple in 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.^[29] While horticultural trade has drastically increased due to NAFTA, it has not absorbed displaced workers from corn production (estimated at around 600,000^[26]). Moreover, corn production has remained stable (at 20 million Tm), arguably, as a result of income support to farmers, or a reticence to abandon a millenarian tradition in Mexico: not only have peasants grown corn for millennia, corn originated in Mexico. Even today, Mexico is still the fourth largest corn producer in the world (see Table).

[edit] Industry

Industrial production
Fundidora Park in Monterrey
Main industries	Automobile industry, petrochemicals, cement and construction, textiles, food and beverages, mining, consumer durables, tourism
Industrial growth rate	3.6% (2006)
Labor force	24% of total labor force
GDP of sector	25.7% of total GDP

The industrial sector as a whole have benefited from trade liberalization; in 2000 it accounted for almost 90% of all export earnings.^[11] Amongst the most important industrial manufacturer 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.^[11] The "Big Three" (General Motors, Ford and Chrysler have been operating in Mexico since the 1930s, while Volkswagen and Nissan built their plants in the 1960s.^[10] Now, 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,^[11] the only producer of New Beetles and Jettas in the world.

Some large industries of Mexico include Cemex, the third largest cement conglomerate in the world, the alcohol beverage industries, including world-renowned players like Grupo Modelo, or conglomerates like FEMSA, which apart from owning breweries and the 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, Bimbo, Telmex, Televisa, and many other high-tech industries, many of which are based in Monterrey. In 2001, according to the World Bank, high-tech industrial production represented 21% of total exports, the highest in Latin America.

Maquiladoras (Mexican factories which take in imported raw materials and produce goods for export) 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.^[10] Contrary to popular belief, this should be no surprise since maquiladora's products could enter the US duty free since the 1960's 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.

[edit] Energy and mineral resources

Mineral resources are the "nation's property" (i.e. public property) by constitution. As such, the energy sector is administered by the government with varying degrees of private investment. Mexico is the fifth-largest oil producer in the world, with 3.8 million barrels per day.^[30] Pemex, the public company in charge of administering research, exploitation and sales of oil, is the largest company (oil or otherwise) in Latin America, making 86 billion USD in sales a year,^[31] a sum larger than the GDP of some of the region's countries. Nonetheless, the company is heavily taxed (a significant source of revenue for the government, of almost 62 per cent of the company's sales).^[4] 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.^[4] 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%.^[11]

[edit] Services

The service sector was estimated to account for 70.5% of the country's GDP, and employs 58% of the active population.^[1] 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 has been strong, and in 2001 it replaced Brazil's as the largest service sector in Latin America in dollar terms.^[32]

Tourism is one of the most important industries in Mexico.. It is the fourth largest source of foreign exchange for the country.^[20] Mexico is the eight most visited country in the world (with over 20 million tourist a year).^[33]

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 12.5 billion USD. Banamex generates almost three times as much revenues than all 16 Citigroup's subsidiaries in the rest of Latin America.^[34] In spite of that, the largest financial institution in Mexico is Bancomer associated to the Spanish BBVA.^[35]

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.^[36] The financial sector is stable, thanks to a wave of acquisitions in recent years 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.^[37] However, bank credit accounts for only 22% of GDP, which is significantly low compared to 70% in Chile.^[38] Credit to the Agricultural sector has fallen 45.5% in six years (2001 to 2007), and now represents about 1% of total bank loans.^[39]

[edit] Financial sector

[edit] Banking System

According to the IMF the Mexican banking system is strong, in which private banks are profitable and well-capitalized.^[40] The banking industry has experienced a series of changes since the system was nationalized by presidential decree during the foreign-debt crisis of 1982. Banks remained in government hands for a decade, until they were re-privatised in 1991-92. The period of state ownership weakened the system, because the government failed to build a firm regulatory and supervisory structure. It also discouraged lending and drove away most professional bankers. By the time of their re-privatization, most banks were undercapitalized.

The first years of privatization led to reckless—and sometimes fraudulent—lending as a result of poor supervision and lax regulations. Poor credit analysis procedures and weak internal controls characterised the sector during this time. Banks put themselves in a precarious position as their lending outpaced deposits, and they funded the shortfall through interbank borrowing—mainly from foreign banks. After the crisis of 1994, interest rates rose, at times, to over 100%, making the payment of loans impossible to make by many borrowers.

The financial system was only rescued from subsequent collapse by a massive government-led bailout, which mostly focused on commercial banks. The then-existing deposit-insurance fund carried out the rescue plan. Initial programmes in the months following devaluation had a twofold aim: to help banks pay foreign obligations and to temporarily capitalise the system. The government took on assets and risky loans made by banks or simply swapped bank loans for promissory notes. A number of debtor programmes were launched, with the last one ending in 2000.

The rescue was led by the Fobaproa, a fund that was controversial, and is now frequently denounced politically by detractors who claim the rescue of the financial system was used to commit fraud and corruption. No bank experienced a run on deposits, despite the severity of the crisis. Essentially, the government provided coverage of all bank liabilities except subordinated debt. The costly rescue—about 20% of GDP—continues to be managed by officials who must still sell off assets. In all, the government only recouped about 20% of book value on absorbed assets. Banks have a 25% loss-sharing agreement with the government on the loans.

Mexican financial and banking regulations were overhauled in 1990s, partly in response to the crisis. In key areas, such as bank accounting and lending practices, the new rules follow US standards.

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. Other important institutions include savings and loans, credit unions, government development banks, “non-bank banks”, bonded warehouses, bonding companies and foreign-exchange firms.^[41] Insertformulahere

[edit] Securities Market

Mexico has a single securities market, the Mexican Stock Exchange (Bolsa Mexicana de Valores, known as the Bolsa). The market has grown steadily, with its main indices increasing by more than 150% in 2003-05. It is Latin America's second largest exchange, after Brazil's. Still, the Bolsa remains relatively small when compared to other North American exchanges. The New York Stock Exchange is about 100 times larger; the Toronto Stock Exchange is six times larger.

The Indice de Precios y Cotizaciones (IPC, the general equities index) 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, Mexico and Latin America’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 (ADRs). 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 (IPOs). 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.^[42]

[edit] Government policies and the Central Bank

Financial indicators
Banco de México headquarters
Currency exchange rate	11.02 MXN per 1 USD (end of 2006)
Reserves including gold	85.01 billion USD (2006)
Government budget	196.5 billion USD (revenues)
Public debt	20.7% of GDP (2006)
External debt	178.3 billion USD (2006)
Bank funding rate	7% (2/2007)

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.^[43] 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.

[edit] Currency Policy

Mexico has had a floating exchange-rate regime since the December 1994 peso devaluation. Under this system, Banco de México 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 (Secretaría de Hacienda y Crédito Publico—SHCP) 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$66.1bn on March 31st 2006.

In May 2003 Banco de México launched a program that sells USD via a monthly auction, with the goal of maintaining a stable, but moderate, level of reserves. Information regarding the auction schedule and the total amount of dollars to be sold during a quarter can be found on the central bank’s website.^[44]

[edit] 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’s 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. The change would imply eliminating the corto (lit. "shortage") a mechanism that allows 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 wants to push interest rates higher, it increases the corto. If it wishes to lower interest rates, it decreases the corto. The corto is criticised for its lack of transparency and its tenuous hold overrates. Currently, Mexico is the only country in the OECD that tries to influence interest rates in such a way.^[45]

[edit] Trade

International trade
World Trade Center in Mexico City
Exports	248.8 billion USD f.o.b. (2006)
Imports	253.1 billion f.o.b. USD (2006)
Current account	-400.1 million USD (2006)
Export partners	US 85.7%, Canada 2%, Spain 1.4% (2005)
Import partners	US 53.4%, China 8%, Japan 5.9% (2005)

Mexico is an export oriented economy. It is one of the most open countries in the world and an important trade power as measured by the value of merchandise traded, and the country with the greatest number of free trade agreements.^[46] 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.^[47] In fact from 1991 to 2005 Mexican trade has increased fivefold.^[48] Mexico is the biggest exporter and importer in Latin America; in 2005, Mexico alone exported 213.7 billion USD, roughly equivalent to the sum of the exports of Brasil, Argentina, Venezuela, Uruguay, and Paraguay.^[47] However, Mexican trade is fully integrated with that of his North American partners: close to 90% of Mexican exports and 50% of its imports are traded with the United States and Canada. In spite of this, NAFTA has not produced trade diversion.^[10] While trade with the United States increased 183% from 1993-2002, 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%.^[11] Trade with the European Union increased 105% over the same time period.^[11]

[edit] Free trade agreements

Mexico joined GATT 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 43 countries:

• NAFTA (1994) with the United States and Canada;
• Grupo de los tres, Group of the three [countries], or G-3 (1995) 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 (1995);
• Free Trade Agreement with Bolivia (1995);
• Free Trade Agreement with Nicaragua (1998);

Countries with which Mexico has signed an FTA

• Free Trade Agreement with Chile (1999);
• Free Trade Agreement with the European Union (2000);
• Free Trade Agreement with Israel (2000);
• TN Free Trade Agreement (2001), with Guatemala, El Salvador and Honduras;
• AELC, Asociación Europea de Libre Comercio, European Association of Free Trade (2001) with Iceland, Norway, Liechtenstein and Switzerland;
• Free Trade Agreement with Uruguay (2004); and
• Free Trade Agreement with Japan (2005)

Mexico has shown its interest in becoming an associate member of Mercosur and has initiated negotiations to sign Free Trade Agreements with Argentina and Brazil. The Mexican government has also started negotiations with South Korea.

[edit] NAFTA

Main article: North American Free Trade Agreement

NAFTA 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 (NAAEC) and the North American Agreement on Labor Cooperation (NAALC).

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 (NACEC), a mechanism for addressing trade and environmental issues, the North American Development Bank (NADBank) for assisting and financing investments in pollution reduction and the Border Environmental Cooperation Commission (BECC). 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; though being a pioneer in this area, it was not hard for the agreement to be labeled "green".

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 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 (and in fact was not intended to achieve) convergence in employment, productivity and salary trend in North America.

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,^[49] NAFTA's Impact on North America,^[50] and NAFTA revisited by the Institute for International Economics.^[10] 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. 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.

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.

[edit] References

[edit] See also

• Economic history of Mexico
• 1994 economic crisis in Mexico
• Bolsa Mexicana de Valores
• Ejido
• GDP of Mexico
• Mexico
• Banco de Mexico
• List of Mexican companies
• Next Eleven

[edit] External links

• (Spanish) Mexican Council for Economic and Social Development
• (Spanish) Mexico Development Gateway
• (English) OECD's Mexico country Web site and OECD Economic Survey of Mexico

v • d • e

Caribbean Community (CARICOM)

Antigua and Barbuda • Bahamas¹ • Barbados • Belize • Dominica • Grenada • Guyana • Haiti¹ • Jamaica • Montserrat² • Saint Kitts and Nevis • Saint Lucia • Saint Vincent and the Grenadines • Suriname • Trinidad and Tobago

Associate members: Anguilla • Bermuda • Cayman Islands • British Virgin Islands • Turks and Caicos Islands

Observer status: Aruba • Colombia • Dominican Republic • Mexico • Netherlands Antilles • Puerto Rico • Venezuela

¹ member of the community but not the CARICOM (Caribbean) Single Market and Economy
² territory of the United Kingdom awaiting British instruments of entrustment to join the CSME

v • d • e

World Trade Organization (WTO)

Albania • Angola • Antigua and Barbuda • Argentina • Armenia • Australia • Bahrain, Kingdom of • Bangladesh • Barbados • Belize • Benin • Bolivia • Botswana • Brazil • Brunei Darussalam • Burkina Faso • Burundi • Cambodia • Cameroon • Canada • Central African Republic • Chad • Chile • China • Colombia • Congo • Costa Rica • Cote d'Ivoire • Croatia • Cuba • Democratic Republic of the Congo • Djibouti • Dominica • Dominican Republic • Ecuador • Egypt • El Salvador • European Communities¹ • Fiji • Former Yugoslav Republic of Macedonia (FYROM) • Gabon • The Gambia • Georgia • Ghana • Grenada • Guatemala • Guinea • Guinea Bissau • Guyana • Haiti • Honduras • Hong Kong, China • Iceland • India • Indonesia • Israel • Jamaica • Japan • Jordan • Kenya • Korea, Republic of • Kuwait • Kyrgyz Republic • Lesotho • Liechtenstein • Macao, China • Madagascar • Malawi • Malaysia • Maldives • Mali • Mauritania • Mauritius • Mexico • Moldova • Mongolia • Morocco • Mozambique • Myanmar • Namibia • Nepal • New Zealand • Nicaragua • Niger • Nigeria • Norway • Oman • Pakistan • Panama • Papua New Guinea • Paraguay • Peru • Philippines • Qatar • Rwanda • Saint Kitts and Nevis • Saint Lucia • Saint Vincent & the Grenadines • Saudi Arabia • Senegal • Sierra Leone • Singapore • Solomon Islands • South Africa • Sri Lanka • Suriname • Swaziland • Switzerland • Separate Customs Territory of Taiwan, Penghu, Kinmen, and Matsu • Tanzania • Thailand • Togo • Trinidad and Tobago • Tunisia • Turkey • Uganda • United Arab Emirates • United States of America • Uruguay • Venezuela (Bolivarian Republic of) • Vietnam • Zambia • Zimbabwe

¹ All twenty-seven member states of the European Union are also members of the WTO in their own right:
Austria • Belgium • Bulgaria • Cyprus • Czech Republic • Denmark • Estonia • Finland • France • Germany • Greece • Hungary • Ireland • Italy • Latvia • Lithuania • Luxembourg • Malta • Netherlands (— For the Kingdom in Europe and for the Netherlands Antilles) • Poland • Portugal • Romania • Slovakia • Slovenia • Spain • Sweden • United Kingdom