MEXICO CITY – This year has already brought a wave of bad news for Mexico. We recently learned that our economy did not grow at all in 2019. In fact, GDP actually declined by 0.5% on an annual basis in the last quarter of the year. Meanwhile, economists are racing to calculate the economic impact of the Covid-19 outbreak, which is spreading globally and produced its first confirmed cases on Mexican soil last week.
But there are reasons to be even more worried about Mexico in the longer term: our “potential GDP” – a term used by economists to calculate how fast an economy can grow over time without producing unhealthy distortions – also seems to drop. This is very disconcerting in an economy that is already known for its slow growth over the past 20 plus years.
The boring short-term outlook for Mexico is nearly unanimous among forecasters. The OECD has just presented its forecasts, bringing the world growth expectation down from 2.9% to 2.4% and that of Mexico from 1.2% to 0.7% for this year and to 1.4% for 2021, against a previous estimate of 1.6%. These would obviously be huge disappointments for President Andrés Manuel López Obrador, who, before taking office, predicted that Mexico would experience an average growth of 4% under his tenure.
The OECD defines potential GDP as the level of output an economy can produce at a constant rate of inflation. It depends on a number of factors, including a country’s capital stock, workforce and the efficiency of the latter, which we can call human capital. The difference between potential output and observed GDP is called the output gap. A country’s economy may temporarily grow at a rate faster than its potential, but this usually causes the economy to “overheat” with symptoms such as high inflation and other distortions. An example of this was Brazil ten years ago, which briefly grew at an annual rate of 7% but suffered from problems for years afterwards.
It is true that potential GDP is a theoretical figure, but it is carefully calculated using statistical models. In Mexico, the Ministry of Finance calculates potential GDP using two main sources: i) the compound annual rate of observed real GDP growth for at least the previous 10 years and (ii) the compound annual rate of estimated real GDP growth for a maximum 5 years in the future. I underline in italics “at least” and “maximumbecause the Ministry of Finance sometimes changes the sample. In the economic criteria used for the 2019 budget, it considered 19 years, from 2003 to 2022. For the 2020 budget, the Ministry of Finance expanded the sample it considered to a 28-year window from 1996 to 2024. No one is quite certain Why.
In any case, after doing the respective calculations, the Ministry of Finance concluded that the potential GDP growth for 2019 was 2.4%, and it was exactly the same for 2020. Other institutions have their own numbers. For example, the OECD estimates Mexico’s potential GDP at 2.08% for 2020 and 2.05% for 2021.
Over the past 25 years, Mexico’s average annual growth rate has been 2.3%. If we consider an average population growth rate of 1.2%, per capita growth was around 1.1%, which is clearly insufficient for an “emerging” economy. Using average numbers, Mexico has essentially grown at or near its growth potential – meaning a drop in the latter figure would be particularly concerning.
This brings us to the current Mexico conundrum. Yes, the lack of growth in 2019 – despite a potential GDP of around 2% – is worrying. But from my perspective, we are seeing more than a short-term shock or even a cyclical downturn. The reasons for this decline are worrying. The current administration has taken several decisions that jeopardize the construction of a more dynamic economy, thus damaging Mexico’s growth prospects – its potential GDP.
At the end of 2018, the construction of a new airport in Mexico City was canceled – depriving not only the capital, but the whole country, of precisely the type of major infrastructure project that could improve productivity (and therefore potential GDP) over time. time. (The government’s alternative plan to handle increased air traffic is unlikely to solve the bottlenecks.) The 2013 energy reform has all but stalled, meaning this crucial sector is likely to continue to struggle with low production. For reasons of budgetary austerity, thousands of people were made redundant from public administration and those who remained faced significant salary cuts. This resulted in a loss of human capital that compromised the government’s ability to perform basic functions.
In addition, the government attempted to change the terms of some contracts with the private sector. This happened with contracts involving the construction of gas pipelines in mid-2019, which further deteriorated the general investment climate. Fixed investment fell by 5.1% in 2019 and capital imports contracted by 8.9%.
Public investment is also declining. It’s not just the amount that is important, you also have to consider the projects that are in development. For different reasons, neither the Maya train nor the Dos Bocas refinery – two of the current administration’s three major infrastructure projects – will change the country’s economic capacity. They can be considered more of an expense than an investment. And we don’t even consider the education system, which not only does not evolve to adapt to a more globalized and tech-savvy world, but is moving backwards.
Finally, Mexico is about to lose the so-called demographic bonus that we have enjoyed for some years. The population over 65 currently represents 7% of the total, but by 2050 this percentage will have risen to 20%. We are witnessing a decline in fertility and before long the “young” population (those under 15) will stabilize at around 30% of the total. This will increase the pressure on the workforce. According to economist Isaac Katz, the demographic bonus will only last eight years.
My concern is that some of us will continue to discuss 2019’s negative GDP rate – a snapshot of the recent past, rather than a glimpse into the future – while others will continue to focus on press conferences President’s Daily Morning Briefings. And as this continues, our country’s ability to grow in the future is being destroyed, bit by bit, mostly unnoticed. There is an urgent need to change course and lay the foundations that Mexico needs to grow.
Moy is a professor of economics and director of the political think tank México, ¿cómo vamos? She is also a member of the editorial board of AQ.
Keywords: AMLO, economy, Mexico
The opinions expressed in this article do not necessarily reflect those of Americas Quarterly or its editors.