Calderon’s rough ride and what still lies ahead.
Macroeconomic stability has become Mexico’s calling card in business circles.
MEXICO CITY – Jose Avalos grows gourmet lettuce hydroponically in greenhouses covering 12.5 acres near Leon in Mexico’s west-central state of Guanajuato, near the presidential library opened by former leader Vicente Fox, who ended 71 years of Institutional Revolutionary Party rule in 2000.
The latter part of PRI rule was marked by self-inflicted economic injuries: recurring peso crises, soaring inflation and sky-high interest rates, to name three. But during the Fox administration, from 2000 to 2006, and the subsequent first five years of President Felipe Calderon’s term, Mexico has become a model of good economic management, with a stable business environment and, in recent years, a boom in manufacturing products for export.
For a businessman such as Avalos – whose company, Next Vegetales, grows, markets and exports high-end lettuce varieties under the EVA brand – the change has been welcome.
“From a macroeconomic point of view, it couldn’t have been better,” Avalos says. “The finances of the country are outstanding.”
Macroeconomic stability has become Mexico’s calling card in business circles – even if media outlets have focused on the Calderon administration’s ongoing crackdown on drug cartels and organized crime, which has claimed more than 47,000 lives over the past five years. Inflation and interest rates have been low in Mexico, and foreign reserves reached a record $134 bi-llion in early 2012
“We have been most impressed with President Calderon and his team,” Leonardo A. Rodriguez, president of Latin American operations for Emerson and Emerson Process Management, tells Latin Trade.
U.S.-based Emerson, a diversified global technology company, is one of the largest private multinational investors and employers in Mexico, with 17,000 employees and 37 plants that provide high-technology products and solutions to the world. Rodriguez has met Calderon several times.
“President Calderon and his Economy and Finance team have always come fully prepared to our meetings,” Rodriguez says. “Always. They have been proactive in their listening to our suggestions and recommendations. Additionally, there has been superior follow-up to outstanding items, with a strong bias for action.”
Rodriguez adds that Calderon’s cabinet and administrative team have understood that companies such as Emerson have many options of where to invest their assets. “They are ‘business-friendly,’ ” he says. “Thus the reason why we, as Emerson, continue and will continue to invest in Mexico.”
Improvements in the business climate have not gone unnoticed. Mexico has climbed steadily in the World Bank’s “Doing Business” surveys, ranking No. 53 in the most recent edition –up 20 places from 2006 – in part because of simplifications in the way taxes are paid and the removal of governmental red tape.
“There’s no doubt that the business climate in Mexico conti-nues being attractive,” says Johannes Hauser, managing director of the German-Mexican Chamber of Commerce, which has 530 members. “The proof of this is the foreign companies that continue investing in the country.”
One thing has been lacking, however: robust economic growth, leaving many people discontented as Mexico prepares for elections. This has put the PRI in a position to take back the presidency by positioning itself as a party that presided over past periods of security and prosperity – however fleeting they were.
Other shortcomings of the past six years include an inability to pass key structural reforms as opposition parties in the lower house of Congress – mainly the PRI – have refused to address the topic over the latter half of the Calderon administration. Reforms to Mexico’s inflexible labor markets are still pending, and fiscal and energy reforms approved in 2007 need to be expanded upon and deepened, according to proponents such as Gerardo Gutierrez Candiani, president of the business group Coparmex, the Mexican business owners’ confederation. Coparmex has 36,000 members throughout the country, represented by companies of all sizes.
Still, growth has been respectable in recent years, reaching 5.5 percent in 2010 and nearly 4 percent in 2011. The Finance Ministry projects growth of 3.5 percent in 2012, a solid figure given the world economic situation. Analysts attribute the Mexican situation to solid governance from the Finance Ministry and Central Bank.
“There’s been a great deal of continuity,” says Deborah Rinner, chief economist for the American Chamber of Commerce of Mexico. “What we’ve seen is a lot of consistency on what should be government macroeconomic policy.”
Members of the U.S. chamber are responsible for 70 percent of the direct investment that flows from the United States to Mexico.
In another change from past years, Rinner says, the economic shocks rocking the Mexican economy have come from abroad: the 2008 world economic crisis and the H1N1 influenza outbreak, which caused Mexico’s GDP to contract nearly 7 percent in 2009.
The manufacturing-for-export sector showed its sensitivity to external factors in 2008, when activity from the “maquiladoras” along Mexico’s northern border slowed production and triggered employee layoffs because of the U.S. slowdown and the global crisis. But activity bounced back nicely in places such as Ciudad Juarez – where, despite the worst of the cartel violence, cross-border trade between the city and neighboring El Paso, Texas, increased 47 percent in 2010, to $71 billion. That rate increased further by 13 percent over the first 10 months of 2011, Bob Cook, director of the El Paso Regional Economic Development Corporation, tells Latin Trade.
Places such as Ciudad Juarez demonstrate the ongoing cha-llenges for Mexico and its economy. The city has suffered the closures of small businesses because of crime and extortion while nationwide internal demand has lagged, with a rebound starting only in 2010. Large, export-oriented businesses have thrived, however.
“We have to differentiate between businesses attending to exports and businesses attending to the internal markets,” says Adolfo Albo, chief economist at BBVA Bancomer, Mexico’s largest bank by assets.
Successful sectors in recent years, Albo says, include automobile and auto-parts manufacturing: Mexico produced a record 2.56 million vehicles in 2011, and exports increased 15 percent as the country gained market share in other Latin American countries. Notwithstanding, 2.14 million cars were exported in 2011, mainly to the United States. High-end consumer electro-nics and appliance manufacturing also increased, and an aerospace industry has been fomented. Activity also moved back from China because of rising wages overseas, currency issues and transportation costs, Albo says, allowing some Mexican products to gain market share in the United States.
“The breach has been practically closed between (the cost) of qualified manufacturing in the south of China and Mexico,” Albo tells Latin Trade.
Challenges remain in Mexico, however, and the Calderon administration has faced difficult security and political situations from the outset.
Calderon began his administration by winning reforms to the state workers’ pensions and the judicial and tax systems, along with a limited opening of the petroleum sector to increased private investment. But deeper reforms have been elusive. These include changing labor laws to make the hiring and firing of employees more flexible, increasing tax collection to allow the government to depend less on revenues from Pemex (another institution requiring reforms to offset dwindling reserves), and overhauling an education system in which students perform poorly on standardized tests and the country’s powerful teachers’ union wields enormous control.
Albo cited another area in which Mexico has fallen short in recent years: improving the rule of law. Courts remain slow, and judicial certainty can be lacking. Corruption remains proble-matic, too. The 2011 Corruption Perceptions Index by Transpa-rency International ranked Mexico at No. 100, below Colombia, Peru and Brazil.
Then there is insecurity: BBVA Bancomer estimates that insecurity holds back economic growth by about 1 percent.
Still, the business sentiment remains strong in Mexico. The German-Mexico Chamber of Commerce reports that 70 percent of its members have investment plans for Mexico in 2012. Avalos, who boasts that his lettuce now sells in supermarkets in California’s Salinas Valley – known as “The Salad Bowl of the World” – has complaints about some water, power and agricultural issues, but he still feels bullish about Mexico’s economic future – especially considering where it has come from.
“This was unimaginable” a generation ago, Avalos says.
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