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 Business News | June 2006 
No Free Hand for Mexican Economy
 Robert Plummer - BBC News
| | Mexico is one of the world's five biggest oil producers. |
Mexico's economy has proved to be a key battleground in the final stages of the country's bitterly-fought presidential election campaign.
Voters will have to decide which of the frontrunners, Andres Manuel Lopez Obrador or Felipe Calderon, is better placed to promote growth and generate jobs.
But whoever gains the upper hand in voting on 2 July, Mexico is now so economically intertwined with the US that its scope for unilateral action is severely limited.
During the 12 years since Mexico joined the US and Canada in founding the North American Free Trade Agreement (Nafta), Mexico's trade with its northern neighbours has shown a threefold increase.
Nearly 85% of Mexican exports now go to the US.
Mexico also thrives on remittances from workers who have left the country to find jobs in the US. Last year, Mexican migrants sent home a record $20bn, according to the central bank, giving the nation its biggest source of foreign income after oil exports.
That degree of economic integration protected Mexico from contagion in 2002, when fallout from Argentina's collapse spread rapidly to other Latin American markets.
But it also means that when Wall Street sneezes, Mexican businesses can find themselves in intensive care.
Tariff tussle
When people in the US think of trade with Mexico, they tend to focus on the "maquiladoras" - about 3,000 factories concentrated in northern Mexico, close to the US border, which specialise in manufacturing or assembling finished goods for export.
Some of these factories have come under fire from human rights activists for paying "sweatshop" wages. But some surveys suggest that Nafta has helped to improve pay and conditions in the maquiladoras.
At the same time, their share as a proportion of Mexican exports has decreased, while carmaking and hi-tech industry have become more important.
In recent days, Mr Lopez Obrador, of the left-wing Party of the Democratic Revolution (PRD), has been portrayed as shaking Mexico's free-trade pact with the US to its very foundations.
While on the campaign trail, he repeatedly said that if elected, he would not allow US corn and beans to enter Mexico duty-free from 2008, despite a Nafta commitment to eliminate all agricultural tariffs by then.
He said scrapping trade barriers on imports of Mexico's staple foods would constitute "unfair competition" for three million struggling local peasant farmers.
He also spoke of setting guaranteed minimum prices for Mexican farmers' goods, which could also breach Nafta rules.
His comments were seized on by the media in the US, fearful that Latin America's current leftward trend could sour relations with its closest ally in the region.
But in an interview with Argentina's Clarin newspaper, Mr Lopez Obrador sounded a more cautious note.
"Unlike Argentina, Brazil, Venezuela and Bolivia, we have a 3,000km border with the United States," he said. "We must have a relationship of mutual respect."
Mr Lopez Obrador said he wanted a "prudent policy" towards the US, because "we also have 20 million Mexicans in the United States and an economic and commercial relationship that we want to maintain".
Oil dependency
Before running for the presidency, Mr Lopez Obrador was mayor of Mexico City. He became known for his honesty, but also for borrowing money to spend on lavish welfare programmes for the poor and disadvantaged.
Small wonder, then, that fiscal conservatives prefer Mr Calderon, who is the candidate of current President Vicente Fox's National Action Party (PAN).
Mr Calderon, a former energy minister, could be relied upon to provide continuity with President Fox's administration and press on with free-market policies.
However, there is no guarantee that he would succeed where Mr Fox failed in implementing structural reforms and reducing the government's dependency on oil revenues, which currently provide one-third of its income.
Mr Fox once proposed privatising the state-owned Pemex oil giant, which has a constitutional monopoly on oil exploration and production.
But after an outcry from economic nationalists who saw the firm as a symbol of Mexican sovereignty, he dropped the idea - and no-one is likely to revive it any time soon.
At the moment, the Mexican Congress is divided between the PAN, the PRD and the party that dominated Mexican politics for 71 years until Mr Fox's election in 2000 - the Institutional Revolutionary Party (PRI).
Even after the 2 July general election, no party is expected to have a controlling majority, making it hard for radical economic reforms to succeed.
Stability praised
Viewed from the US, the fundamentals of the Mexican economy are sound, according to the Federal Reserve Bank of Dallas, which keeps a close watch on Latin America.
In a new study, the Dallas Fed says Mexico is "stronger financially than it has been in a long time" and should avoid a repeat of the financial crises that coincided with its presidential elections in 1982 and 1994.
The Dallas Fed also praises the newly-independent central bank for curbing inflation, which slowed to about 3.3% last year - the lowest level for three decades.
But the study also highlights problems including high levels of tax evasion and inefficient energy markets.
And of course, macro-economic stability does not necessarily translate into higher living standards for ordinary Mexicans.
Otherwise, why would so many of them head northwards to find work, swelling the ranks of up to a million immigrants who enter the US illegally each year in search of a better life?
Not that all the news is bleak for Mexico on the jobs front. Earlier this month, Mr Fox announced that the country had created 450,000 new jobs in the first five months of 2006.
For his part, Mr Calderon has called on the US and Canada to invest in the Mexican economy, in the same way that the EU has funded development in the Irish Republic and Spain, so that more workers can be persuaded to stay in Mexico.
"It's very obvious that building one kilometre of highway here is better than 10km of wall along the border," he said. |
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