Mexico Poised for Growth - April 10, 2002
by Stephen S. Poloz, Vice-President and Chief Economist
Canadians and Mexicans have a lot in common. Both eagerly wait for the U.S. rebound to trickle down to them. Both are preoccupied with their exchange rate against the U.S. dollar. And both have waiters that are reluctant to recommend the local wines, which are surprisingly good.
In Mexico, there is widespread agreement that tremendous progress has been made in structural reform, but disagreement on the outlook. The optimists see an economy whose increased openness, strengthened financial system and credible policies have increased Mexico’s resilience and will lead to an immediate recovery in the wake of the U.S. upturn. The pessimists see an overvalued currency and a litany of structural impediments to economic growth – including weak infrastructure, cautious banks and rigid labour markets.
Mexico’s broad policy parameters are almost ideal. The central bank is following an inflation target of 4.5% this year, 3% next year, and convergence with U.S. inflation after that. They have a floating exchange rate, which is crucial for achieving the inflation goal. Meanwhile, the fiscal authorities are demonstrating a level of commitment to deficit control that borders on religion.
Increased policy credibility has produced an investment grade rating, boosting foreign investment and the value of the peso. The strong peso is fuelling concerns that Mexican competitiveness will erode and nip the upturn in the bud. But a strong currency has always been a symptom of economic success – foreign investment will give Mexico the capital it needs to keep increasing output, productivity, wages and exports all while moving to a higher-value economic mix. If a strong currency was the death knell for manufacturing companies, U.S. manufacturers would have disappeared long ago, and Canada’s manufacturers would have taken over the world.
Mexico is headed for 2-2½% growth this year, and could double that next year. But the pessimists have a point – there are some headwinds to growth that need to be addressed to pave the way.
Mexico needs a lot of infrastructure investment – roads, airports, energy capacity, electricity grids – to support its future growth process. More gas-fired power plants are planned, but much of the new gas will need to be imported until the energy sector is reformed. The legal system remains a big question mark for lenders, making banks reluctant to support small companies. Indeed, much of the growth in credit is coming from suppliers and retailers. And, Mexico’s labour market remains among the most rigid in the world. These are tough issues, resolution of which may have to wait until after next year’s congressional elections, because the main political parties are finding it difficult to develop a consensus on the needed reforms.
The bottom line? Like all economies, Mexico’s shortcomings appear more compelling the closer one looks. But, from a global perspective, Mexico’s strengths clearly outweigh its weaknesses. Mexico will become a much bigger trading partner for Canada over the next couple of years.
Stephen S. Poloz
Vice-President and Chief Economist
Export Development Canada
spoloz@edc.ca
The views expressed here are those of the author,
and not necessarily of the Export Development Canada. |
