Mexico: Calderon looks back, and ahead

By Antonio Sampaio, Research Assistant, Survival and the Armed Conflict Database

Mexico is trying to overcome its structural problems, expanding its trade focus to Asia and courting more foreign investment – and its strategic shift may be paying off. At the IISS’s Fullerton Lecture in Singapore, Mexican President Felipe Calderón spoke about Mexico’s plans, challenges and successes, and his own legacy.

The GDP race

The two largest economies in Latin America, Brazil and Mexico, are often compared in an attempt to predict which of the two will shine in the future. Both countries, however, face deep structural challenges. Brazil’s business environment is marred by high taxes and poorly qualified workers, and Mexico has inefficient labour regulation and oligopolies that curb economic growth. Although Brazil has outperformed Mexico in terms of gross domestic product (GDP) growth since 2005, the tide is gradually turning. The GDP race is very likely to be won by Mexico this year, with the central bank expecting something around 4%, whereas Brazilian economists are already counting on less than 2% growth.

But most important for the long term is that Mexico is looking abroad, more precisely to the east, in search of a more diversified foreign trade portfolio. It is integrating itself with dynamic and promising new trade blocs, whereas Brazil struggles to deal with protectionist pressures inside the Mercosur trade bloc (which also included Argentina, Uruguay and now Venezuela, as well as temporarily suspended Paraguay).

Looking east

In his lecture ‘A Mexican Perspective on the Global Economy,’ Calderón described his country’s strategic shift from an overreliance on the American market. While admitting that the reliance on the US market is still high, with 67% of Mexican exports going to its northern neighbour, Calderón asserted that Mexico’s focus is now on the Pacific region:

‘Economic growth will be here in the Pacific zone at least in this decade and probably in the next,’ he said. He highlighted the fact that the Pacific Alliance, created this year by Mexico, Colombia, Peru and Chile, accounts for more exports and overall trade than Mercosur. The new bloc represents 40% of Latin America’s GDP, yet accounts for 55% of its exports. Even more importantly, it has lofty ambitions for a high-speed advance in trade, without the protectionist barriers that cripple Mercosur. He also highlighted Mexico’s integration into the negotiations for the Trans-Pacific Partnership (TPP), a far more ambitious trade venture integrating major economies of the Pacific, including the United States.

Calderón has also courted foreign companies – even those who have settled for the lower labour costs of China – with a series of structural reforms. He said his government has built 20,000 kilometres of highways to relieve the infrastructure bottlenecks that add to business costs in Mexico. The president added that investments in human capital have made Mexico more attractive in recent years. As an example, he cited the 130,000 new engineers and technicians released into the job market every year from the country’s universities.

Labour reform

Attempts to increase foreign trade and investment, key points of Calderón’s strategy, risk falling prey to an old enemy of the Mexican economy: restrictive labour laws. He reserved labour-market reform, one of his most ambitious economic proposals, for the last few months of his mandate. The proposal sent to Congress aims to liberalise laws in order to reduce costs and hurdles faced by companies when they want to hire workers. These obstacles are a key reason that 13.7 million Mexicans make a living in the informal sector, reducing the government’s potential tax revenue. They are also responsible for the staggering rate of youth unemployment, 9.6%, almost double the country’s overall rate, according to a report released last May by the Mexican Youth Institute (Imjuve). ‘Mexico, in order to complete its transformation into a more competitive economy, needs to provide flexibility to labour markets,’ said Calderón. ‘We have probably more than one million people arriving each year to labour age.’ Many Mexican observers attribute the governing National Action Party (PAN)’s third place in July’s presidential election to the overall dissatisfaction with employment opportunities for young people.

Legacy

When asked what he thought his administration’s legacy would be, Calderón cited first and foremost the transformation of law-enforcement institutions. He admitted that recent crime dynamics have made it difficult to accomplish his security objectives: drug groups, he said, ‘have started a new way of criminal activity’. Instead of merely looking for transit points to ship the drugs into the United States, criminals ‘started to control territories and cities’, he added. He pointed to recent reforms in the police force and the attorney general’s office that were made to try and recover lost territory.

‘The intervention of the government is [in order] to recover the authority of the state over those territories. In that sense, violence is not generated by the actions of the government. Violence generated the intervention of the government.’

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