Mexico, Superstar Player of the Emerging Economies
Mexico's emerging economy makes it a major player in the emerging markets race
JULY, 2010
By Tessa Albrecht
Mexico: Latin America’s newest investment beacon and slightly less-publicised regional superstar. With the highest level of FDI in the region and a more stable political environment than ever before, Mexico is an investment destination prime for the picking and one that is giving its key industrial competitor, China, a run for its money.
It is Latin America’s second largest market after Brazil and is tipped to become one of the largest world economies by 2050. So, what about Mexico’s economic model makes it so alluring to international investment? And what sets it apart from China, a fellow emerging economy and previously recognised as the world’s cost-effective manufacturing hub of choice?
Recipe for success
Mexico certainly has the right ingredients to wet the appetite of multinationals and investors alike.
Perhaps most alluring is the country’s geographic proximity to key trading partners. In a world where time is money, Mexico has a competitive advantage on account of its nearness to its largest customer and neighbour to the North, the United States (US). Mexico receives approximately 75% of its FDI from the US and sends 85% of exports back. Whilst a hike in the cost of oil causes shipping prices to soar and reduces China’s labour-cost advantage, Mexico’s location remains attractive. It offers its target market a shorter logistics network, perfectly suited to products requiring quick time to market.
Similarly, the positive dollar-peso relationship has a role to play in this story. The Calderon Administration’s tightening of fiscal and monetary policy over the past three years has seen the peso become less susceptible to global fluctuations and remain at a low enough level to be advantageous to trade relations. In comparison, China continues to receive scorn from the US for maintaining its currency at ‘artificially’ low levels. Naturally, the strained dollar-Yuan relationship heightens the attractiveness of the peso as the currency of choice.
Mexico’s strength is also attributable to its implementation of numerous Free Trade Agreements (FTAs). The North American Free Trade Agreement (NAFTA) certainly speaks loudly: there are certainly advantages associated with being part of the largest trading bloc in the world. According to the Embassy of the United States in Mexico, US goods imports have grown 223% since NAFTA’s implementation, and Mexican exports to the US have increased by 396%. More than 90% of Mexican trade is under FTAs with more than 40 countries (although interestingly enough, not with China).
Powerful political allies also enhance beneficial terms of trade. The political relationship between Mexico and the US is positively blooming, with Obama and Calderon recently re-affirming their strategic partnership through a Joint Statement in May. Both are members of key international bodies and identify on account of shared values of democracy, self-determination and human rights.
If you can’t beat ‘em, join ‘em
Mexico’s popularity is such that it is even attracting the business of its biggest rival. China is Mexico’s second largest trading partner and accounts for just under 10% of Mexico’s exports and imports. China’s co-operation across the southern hemisphere is multi-faceted; it has recently sought donor membership in the Inter-American Development Bank, and it released its first official policy paper on China and Latin America.
Perhaps most poignant in China’s dealings with Mexico is its engagement of local staff. China has eagerly affianced Mexican workers for training and development purposes. Evidently, the creation of a skill-based economy is in Mexico’s long-term interest and will assist it in progressing to the next stage of economic development. Take, for example, Mexico’s strong automotive industry: local workers are engaged to produce technologically complex components and engage in Research and Development activities far beyond simply assembling a car.
Forward Thinking
What is unique about Mexico’s economic approach is that it’s confident of its future direction and appears to be wise beyond its ‘emerging market’ label. Mexico’s economic potential extends far beyond the short-term gains associated with the typical ‘manufacturing prowess’ of a developing country. Highly self-aware, Mexico’s growth strategy is strategic and purposeful: while its strongest industries are manufacturing, auto-processing and energy, the country is focused on developing sectors typically reserved for more mature economies, such as financial services, medicine and pharmaceuticals.
Government policy has been instrumental in opening up these industries to foreign investors. Through the Foreign Investment Law of 1993 and also on account of NAFTA, foreign investors can now participate in financial services. International investment banks have poached the Mexican market heavily in the past few years, creating a strong increase in product offerings for locals.
Still, the energy sector remains slightly teasing. The potential for oil and mineral exploration continues to whet the appetite of investors, who can likely taste the ROI potential just beyond the ultimate barrier to entry: state ownership.
But where there is a will, there’s a way. In recent years varying degrees of international investment into government owned sectors has been made possible through the ability to participate via "neutral investment" structures as approved by the National Foreign Investment Commissions. Mexico’s natural resources are certainly one of its more attractive features; and as long as nations like the US and China are addicted to the black gold, Mexico’s prospects are almost limitless. Mexico could also provide the US with a nice opportunity to reduce its oil dependency on the Middle East.
The transport sector also has potential, although Mexico’s promotion of this sector for investment has been rather lacklustre. The country’s diverse terrain coupled with previous economic shortfalls means that it lacks an integrated transportation network that can meet the needs of a large, mobility-seeking population or the requirement for speedy transport of freight. Mexico’s close proximity to key trading partners suggests that improvements to its Just-in-Time (JIT) competitive advantage may be further realised through expediting domestic travel times. The main railway network, The National Railway of Mexico, was privatized in 1997 and should provide a starting point for investors.
Rough Seas Ahead?
Mexico is well positioned for success but that doesn’t mean it will all be smooth sailing. Like China, Mexico is a newly industrialised nation that is experiencing many of the common ‘teething’ problems and growing pains associated with economic development. In order to reach its true potential, Mexico must overcome some rather large challenges.
Mexico suffers from a commercial overdependence on the US. Mexico has sought deeper ties with Europe; however relevant FTAs have so far failed to reduce economic reliance on its northern neighbour.
The high level of violence and organised crime in Mexico also threaten to undermine investor confidence. Despite Calderon’s crackdown on drug-trafficking, cartel battles have increased and drug-related deaths doubled to more than 6,000 between 2008 and 2009. It is a sure-fire investor-repellent – the country’s Finance Ministry estimates that violence reduces growth by 1 percent per year – and as such, the eradication of such activity should be a key policy objective. Yet crime also presents an opportunity for those in the private security industry. Where there is a lack of confidence in local authorities, alliances between the private and public sectors may be a country’s best bet to reduce violence in the short term.
A cheap Peso may be beneficial to trade in the short-term; however Mexico needs to ensure that its high level of emigration to the US (and a better salary) doesn’t reduce the benefit. Labour market reform has been called out as a key issue for years. In 2005, around 400,000 Mexicans moved north over the border. Comparatively, while China seems to experience rapid population movement within its borders and from rural areas to cities, its emigration across the border is not as extreme as Mexico’s. The government will need to place more emphasis on education, training, and wage reform to avoid high levels of emigration and the accompanying ‘brain drain’ and capital flight. Labour market reform may also better shape the development of a middle class and encourage local buying power.
A star in the making
Mexico is certainly a star in the making and correctly poised to become a top economy by 2050. It is slipping confidently across what China previously thought was its world stage, and it certainly knows how to use its strategic advantages to attract even its largest competitor. Mexico is making a number of in-roads across a range of economic sectors, showing potential for long-term success. With careful management of the key challenges mentioned, Mexico’s transition from promising emerging economy to fully-fledged economic superstar is certainly possible.
Author BIography
Tessa Albrecht is a Sydney-based Risk Analyst at a leading Australian bank. Tessa holds a degree in International Relations from Bond University, with majors in Spanish and International Business, and previously held the position of Business Development and Marketing Manager at the Spanish Official Chamber of Commerce. Fluent in Spanish, Tessa has a keen interest in Latin America, emerging markets and alternative investment
