How serious are Mexico’s economic problems?


Mexico faces an uncertain economic future. Mexico’s economy contracted by 8.3% in 2020 and even though the country’s GDP is on track to rebound and grow by 6% in 2021, public policy analysts, economists and investors remain skeptical about President Andres Manuel Lopez Obrador’s policies and plans for Mexico. After all, Mexico’s GDP contracted by 0.2% in the third quarter of 2021. On a recent episode of my podcast, I spoke to Shannon O’Neil, a Mexican expert with the Council on Foreign Relations. She gives Mexico an overall “C” grade for macroeconomic health, but told me she gives Lopez Obrador an “F” for economic management.

“Just to look at the macroeconomics…I’d give them a C. They’re not thriving. They don’t fail.” she explained.

During the pandemic, Mexican exports have held up. Mexico’s exports totaled $418 billion in 2020. In other words, Mexico exported more than $1 billion worth of goods and services every day in 2020. That’s a big improvement from 1994. , when Mexico exported just $61 million worth of goods for the whole year.

“The downside, why it’s not an A and it’s a C, is that there are huge debt levels for public companies in the energy sector. These are right now [moving] in an unsustainable direction. We are not going to see energy production increase. Many movements of this [Lopez Obrador] administration… hamper domestic and foreign direct investment. We haven’t seen basic investments that would allow the economy to grow and develop,” she added.

Mexico has established a reputation for stable macroeconomic management during the 21st century and President Lopez Obrador has not broken with this tradition. But, when it comes to rating Lopez Obrador’s economic policies, O’Neil is far less optimistic.

“I’m less impressed than overall macroeconomics, it’s not a C, it’s closer to failure. Let me explain why the rating is so bad. What has allowed Mexico to develop is… the growth and expansion of the private sector. The political choices of this government limit that today, but also in the future. This is particularly visible in the energy sector. You see the state intervening more and more. This, I think, is detrimental to the expansion of [economic] activities and jobs,” she said.

O’Neil is frustrated with Lopez Obrador’s focus on dirty energy production and his lack of interest in the country’s modern manufacturing sector.

“They invest in refineries. They do not invest in roads, railways and ports that those [companies] who could come to Mexico are looking for. Many [foreign investors] are looking elsewhere in the world,” O’Neil explained.

While bond investors might be happy to continue betting on more than two decades of stable macroeconomic management in Mexico, private sector leaders are more wary of Lopez Obrador’s politicized strategy for managing economic development policy. Shannon says the number one question for foreign executives considering Mexico is, “Can I run a business?” Can I run it profitably with stable and regular rules? »

“A lot of decisions that the government makes with this politicization [are causing] different calculations for people who are going to be investing for the long term,” O’Neil added.

“Just looking at the economy, [Mexico] was one of the only countries that didn’t intervene, that didn’t have a recovery plan, that didn’t try to save businesses. Mexico has spent less than 1% of its GDP on direct stimulus measures when most countries have spent far more than that,” she told me.

She gives Lopez Obrador an “F” for her Covid-19 Economic Recovery Response.

“You have seen hundreds of thousands of small and medium businesses fail [and] many people pushed into the informal sector. The only thing that really saved Mexico was that it got the US stimulus package,” she said.

O’Neil explained that Lopez Obrador “gets a failing grade on how he handled the economic aftereffects of the pandemic crisis, but the US stimulus has really helped Mexico.”

Overall, she remains very skeptical of Lopez Obrador’s economic vision. Mexico “is going in the opposite direction [of the rest of the industrial world]. It doubles fossil fuels and move away from renewable energy“, O’Neil said.

More than anything, O’Neil thinks Lopez Obrador is not taking advantage of the opportunities currently available in Mexico. “There are big global changes happening today that will affect Mexico down the road and I don’t think [Lopez Obrador’s] the government is preparing for it,” she said.

“We see global supply chains shifting. Mexico isn’t taking advantage of the fact that so many companies are in play. That’s something I think they’re missing out on,” O’Neil added.

In the manufacturing sector, “we are witnessing an automation [and] artificial intelligence. This will mean a real change in the way business is conducted. I don’t see Mexico acknowledging these changes let alone preparing. The world is changing and Mexico does not recognize that the economy in ten years will be very different from today,” O’Neil explained.

Big changes are happening in global supply chains and Lopez Obrador is not taking full advantage of them.

“Now is the time. Many companies are rethinking where they will do their [products.] This is what is happening right now. Today it will more likely be Vietnam, Malaysia, Thailand and India than Mexico,” O’Neil said.

Overall, O’Neil is worried about the direction Mexico is heading under Lopez Obrador. “I haven’t given up on Mexico. I’m optimistic. There is so much potential but I am worried,” she explained.

I asked him to choose three words to sum up Lopez Obrador’s economic strategy for Mexico.

She chose “anachronistic”, “clientalistic” and “impoverishing”.

Check out the full conversation with Shannon O’Neil:


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