special report on Mexico
From darkness, dawn
After years of underachievement and rising violence, Mexico is at last beginning
to realise its potential, says Tom Wainwright
THE APOCALYPSE WAS on its way, and it would begin
in Mexico. Where else? When archaeologists dug up Mayan calendars that
ominously seemed to run out in the final days of 2012, some doomsayers
predicted the end of the world. To many Mexicans it seemed like just another
example of their country’s unending run of bad luck. The steepest recession on
the American mainland, a plague of H1N1 swine flu and a deepening war against
organised crime had made the preceding few years fairly grim. In 2009 the
Pentagon had given warning that Mexico could become a “failed state”.
Armageddon would be the icing on the cake.
But it turns out that the Mayan glyphs were
misunderstood. The men with magnifying glasses now say that the world is not
about to end—in fact, it seems that the Mayans were predicting something more
like a renewal or a fresh start. Could the same be true of Mexico?
This special report will argue that there is a
good chance of it. Some awful years are giving way to what, if managed
properly, could be a prosperous period for Latin America’s second-largest
economy. Big, irreversible trends, from a falling birth rate at home to rising
wages in China, are starting to move in Mexico’s favour. At the same time the
country’s leaders are at last starting to tackle some of the home-grown
problems that have held it back.
Many of the things that the world thinks it knows
about Mexico are no longer true. A serially underachieving economy, repeatedly
trumped by dynamic Brazil? Mexico outpaced Brazil last year and will grow
twice as fast this year. Out-of-control population growth and an endless
exodus to the north? Net emigration is down to zero, if not negative, and the
fertility rate will soon be lower than that of the United States. Grinding
poverty? Yes, but alleviated by services such as universal free health care. A
raging drug war? The failure of rich countries’ anti-drugs policies means that
organised crime will not go away. But Mexico’s murder rate is now falling,
albeit slowly, for the first time in five years.
A vast country with deeply ingrained problems and
unreformed corners, Mexico could yet squander the opportunities that are
coming its way. But there are signs that it is beginning to realise its
potential. With luck, the dire predictions made by the Pentagon and others may
turn out to be as reliable as a misread Mayan calendar.
Preparing to lead Mexico into this brightening
future is the party most associated with its past. The Institutional
Revolutionary Party (PRI) ran Mexico without interruption for most of the 20th
century, silencing opposition through a mixture of co-option, corruption and
occasional violence. Only in 2000 did it give up its grip on power to the
conservative National Action Party (PAN), which fielded two presidents in
succession: Vicente Fox, a former executive at Coca-Cola, and Felipe Calderón,
a lawyer whose father was a founding member of the party. On December 1st Mr
Calderón will hand over the presidency to the PRI’s Enrique Peña Nieto, who
won a clear election victory on July 1st. A handsome 46-year-old with a gift
for communication, Mr Peña claims to be the opposite of the crooked party men
who ran the country in its pre-democratic days. But will the change be more
Mr Peña says his priority is to make the economy
grow faster in order to reduce poverty. Nearly half the population are poor,
many of them in the south (see map). To achieve more rapid growth he will need
to introduce a series of big economic reforms, some of which Mr Calderón
attempted during his presidency, only to see them get stuck in Mexico’s
cantankerous Congress. The PRI had hoped to win a majority in the summer’s
elections, but it fell short by 11 in the 500-member Chamber of Deputies and
by four in the 128-member Senate. In any case, some of the most important
reforms will need changes to the constitution, which require a two-thirds
majority in Congress.
However, Mr Peña has reason to be optimistic. The
opposition PAN shares much of Mr Peña’s agenda, and together the two parties
have a two-thirds majority in both houses of Congress. A new power to
fast-track two bills per congressional session will help. A lot will depend on
who ends up leading the PAN, which is restive and rudderless after finishing
third in the presidential election. The handover period between July’s
election and December’s inauguration has been a model of presidential
co-operation. Mr Calderón’s crackdown on Mexico’s vindictive criminals has
given him a personal reason to stay on good terms with the new government, to
make sure of the protection he and his family will need when he leaves office.
Fighting on two fronts
Mr Peña’s main problem in Congress may well be
his own party. As this special report went to press Congress was about to pass
a labour-law reform, which among other things would make hiring and firing
easier. But linked measures to make Mexico’s over-mighty unions more
transparent and democratic were voted down by congressmen from Mr Peña’s own
PRI, which has strong ties to unions. If the unions cannot be tamed, Mr Peña’s
other reforms—to open up the monopolised energy sector and overhaul the tax
system—may be similarly diluted.
The runner-up in the election was the left-winger
Andrés Manuel López Obrador, known as AMLO, who came a very close second to Mr
Calderón in 2006 but lost to Mr Peña by 6.8%. After both defeats he claimed
fraud. The evidence is thin. The left has about a quarter of the seats in
Congress, but many of its congressmen have little patience with AMLO, whose
magnetic personality repels as many voters as it attracts.
The government may also face opposition outside
Congress. Though a majority of the political class now seems to be convinced
of the need for economic reforms along the lines that Mr Peña proposes, the
same may not yet be true on the street, in the public universities or in much
of the press. “Mexico is a country where doctrine and principle matter more
than practical considerations and results,” says Enrique Krauze, a historian.
The state-run oil monopoly is the sort of sacred cow that could emit a
deafening, destabilising moo if Mr Peña tried to tether it. Mexico City
already sees an average of 14 protests a day.
The internet is making politics more
unpredictable. During the election campaign Mr Peña paid a disastrous visit to
a university and fled after being heckled. This gave rise to an anti-Peña
student movement calling itself YoSoy132, or “I am the 132nd” (the initial
protest was led by 131 students). It is now capable of summoning large crowds
via Twitter and Facebook to march against Mr Peña (and often, it seems, for
AMLO). During Mexico’s independence celebrations on September 16th anonymous
hackers took down several government websites.
So it will not be an easy ride. Mr Krauze
remembers that the optimism when the North American Free-Trade Agreement
(NAFTA) came into force in 1994 was quickly punctured by the Zapatista
uprising in Mexico’s south on New Year’s Day. “We thought we were there in the
first world, on the final lap of our historic marathon. Then on January 1st we
woke up to the astonishing news of a rebellion in Chiapas,” he says.
the murder rate and body count of each Mexican state against entire
countries with our interactive
Mexico has form in turning triumph to disaster,
and could yet do so again. Its economy remains dependent on the fortunes of
the United States, and financial crises in Europe make investors jittery.
Promised reforms will depend on persuading entrenched interests to accept
them. Corruption and bad government, especially at the local level, may cause
good initiatives to fall at the last hurdle. And the drug war is by no means
over. But Mexico deserves a fresh look—not least because its economy is
revving up, as the next
CUERNAVACA, A ONCE pretty, now sprawling city
with volcano views just south of the capital, is a typical Mexican town.
Hernán Cortés stopped off there after toppling the Aztec emperor Moctezuma in
1520; the conquistador’s stables have since been converted into a smart hotel.
Yet on the outskirts of the city, in an enormous industrial park, a visitor
could forget he was in Latin America. Nissan, a Japanese car giant, has
created a factory the size of a village where from next year it will begin
turning out thousands of yellow and chessboard-chequered New York City taxis.
Once shuttered off by tariffs and trade controls,
Mexico has opened up to become a place where the world does business. The
North American Free-Trade Agreement (NAFTA), which in 1994 eliminated most
tariffs between Mexico, the United States and Canada, was only the beginning:
Mexico now boasts free-trade deals with 44 countries, more than any other
nation. In northern and central Mexico German companies turn out electrical
components for Europe, Canadian firms assemble aircraft parts and factory
after factory makes televisions, fridge-freezers and much else. Each year
Mexico exports manufactured goods to about the same value as the rest of Latin
America put together. Trade makes up a bigger chunk of its GDP than of any
other large country’s.
Normally that would be a good thing, but after
the 2007-08 financial crisis it meant that Mexico got a terrible walloping.
Thanks to its wide-open economy and high exposure to the United States it
suffered the steepest recession on the American mainland: in 2009 its economy
shrank by 6%. The country had already had a rocky decade. When China joined
the World Trade Organisation in 2001, it started undercutting Mexico’s export
industry. In the ten years to 2010 Mexico’s economy grew by an average of just
1.6% a year, less than half the rate of Brazil, which flourished in part by
exporting commodities to China.
But now changes are under way, in Mexico’s
factories, its financial sector and even its oil and gas fields, that augur
well for a very different decade. Latin America’s perennial underachiever grew
faster than Brazil last year and will repeat the trick this year, with a rate
of about 4% against less than 2% in Brazil. Mr Peña is aiming to get annual
growth up to 6% before his six-year presidency is over. By the end of this
decade Mexico will probably be among the world’s ten biggest economies; a few
bullish forecasters think it might even become the largest in Latin America.
How did Mexico achieve such a turnround?
China’s cut-price export machine sucked billions
of dollars of business out of Mexico. But now Asian wages and transport costs
are rising and companies are going west. “The China factor is changing
big-time,” says Jim O’Neill, the Goldman Sachs economist who in 2001 coined
the “BRICs” acronym—Brazil, Russia, India and China—much to Mexico’s
irritation. China is no longer as cheap as it used to be. According to HSBC, a
bank, in 2000 it cost just $0.32 an hour to employ a Chinese manufacturing
worker, against $1.51 for a Mexican one. By last year Chinese wages had
quintupled to $1.63, whereas Mexican ones had risen only to $2.10 (see chart
1). The minimum wage in Shanghai and Qingdao is now higher than in Mexico City
and Monterrey, not least because of the rocketing renminbi.
Right next door
Hauling goods from Asia to America is costlier
too. The price of oil has trebled since the start of the century, making it
more attractive to manufacture close to markets. A container can take three
months to travel from China to the United States, whereas products trucked in
from Mexico can take just a couple of days. AlixPartners, a consultancy, said
last year that the joint effect of pay, logistics and currency fluctuations
had made Mexico the world’s cheapest place to manufacture goods destined for
the United States, undercutting China as well as countries such as India and
Companies have noticed. “When you wipe away the
PR and look at the real numbers, Mexico is startlingly good,” says Louise
Goeser, the regional head of Siemens, a German multinational. Siemens employs
6,000 people at 13 factories and three research centres around Mexico. From
its recently enlarged facility in Querétaro, in central Mexico,
surge-arrestors and transformers trundle up to warehouses in the central
United States in two days. Ms Goeser says that Mexican workers are well
qualified as well as cheap: more engineers graduate in Mexico each year than
in Germany, she points out.
In Aguascalientes, not far away, Nissan is
building a $2 billion factory. Together with an existing facility it will turn
out a car nearly every 30 seconds. About 80% of the parts in each car are made
in Mexico. By using local suppliers, the company is “armoured” against
currency fluctuations, says José Luis Valls, head of Nissan Mexico. “If you
are localised, you can navigate through floods and storms. If you depend on
imports of components, you are very fragile.” In nearby Guanajuato Mazda and
Honda are building factories; Audi is constructing a $1.3 billion plant in
Puebla. This year Mexico will turn out roughly 3m vehicles, making it the
world’s fourth-biggest auto exporter. When the new factories are up and
running, capacity will be 4m.
According to projections by HSBC, in six years’
time the United States will be more dependent on imports from Mexico than from
any other country (see chart 2). Soon “Hecho en México” will become more
familiar to Americans than “Made in China”.
On the opposite side of Cuernavaca from Nissan’s
gigantic factory, Antonio Sánchez plays a smaller role in Mexico’s motor
business. At his carwash customers queue to pay 46 pesos ($3.60) for their
cars to gleam in the ever-present sun. Mr Sánchez seems to have enough
business to open another branch, but credit is scarce and expensive. He
explains that banks tend to charge interest rates of 25% or more and demand
collateral worth three times the value of the loan. “It’s complicated,
expensive and the risk is too much,” he says.
Mexican businesses have been fighting with one
hand tied behind their backs, thanks to a chronic credit drought. Lending is
equivalent to 26% of GDP, compared with 61% in Brazil and 71% in Chile. The
drought started with the “tequila crisis” of 1994, when a currency devaluation
triggered the collapse of the country’s loosely regulated banking system.
Banks spent the best part of a decade dealing with their dodgy legacy assets
and were nervous about making new loans.
But things are looking up. Inflation, now running
at 4.6%, has been well under control for ten years. The conservatively run
Mexican subsidiaries of foreign banks such as BBVA, Citigroup and Santander
are all rated higher than their American or European parent companies. Now
they are starting to turn on the credit tap. Loans to companies are growing at
12% a year and to individuals at 23%. Given that many enterprises are
informal, many of these “personal” loans probably go to businesses, according
to David Olivares of Moody’s, a ratings agency. “There are many financing
opportunities in Mexico that are not tapped,” says Agustín Carstens, the
governor of the central bank. This gives Mexico an advantage over other Latin
American countries that are deep in debt. Five to six consecutive years of
loan growth, coupled with macroeconomic stability, would increase Mexico’s
annual growth rate by half a percentage point, the central bank estimates.
As credit starts flowing, so could oil. Since
striking black gold in the 1970s, Mexico has been one of the world’s ten
biggest oil producers. The revenues of Pemex, the state-run oil and gas
monopoly, provide about a third of the government’s income. But that is part
of the problem. The company is “horribly run”, says Juan José Suárez Coppel,
its director. He complains that successive governments have milked Pemex
rather than let it invest in exploration and technology. It takes between six
and eight years from discovering oil to pumping it, so “no president who
invests is going to see the barrels,” Mr Suárez points out. Each time a new
field is discovered the company allows others to go into decline (see chart
3). Production has slipped from 3.4m barrels a day to 2.5m, and safety is
wobbly: in September 30 people died in a gas explosion in Reynosa, near the
Ten years ago a change in budgeting rules allowed
more investment in exploration, and reserves have risen. This year production
is expected to increase for the first time in eight years, but far more lies
unexploited. Pemex reckons that there could be nearly 30 billion barrels under
the Gulf of Mexico, more than half of the country’s prospective reserves. But
starved of money, the company has been slow off the mark to exploit it.
Between 2006 and 2011 it drilled 18 wells in deep waters; Petrobras, its
opposite number in Brazil, drilled 101. Shale oil and gas, and “tight” oil,
are further opportunities waiting to be exploited.
Plenty of foreign companies are keen to start
drilling in Mexico, but since the nationalisation of the oil industry in 1938
Mexico has been wary of dealing with gringos. That might now change. Mr Peña
has promised an energy reform early in 2013. Many would like Pemex to do as
Brazil did and allow competition. Petrobras lost its monopoly in 1997 and made
the world’s biggest share offering in 2010. Will Pemex follow suit? “I don’t
see it in the immediate future,” says Luis Videgaray, Mr Peña’s closest aide.
However, Pemex “has to take steps in that direction,” beginning with improving
its corporate governance, he says.
There are some less radical options. Since 2008
Pemex has offered incentive-based contracts under which private firms are paid
according to how much oil they extract. The next step would be contracts in
which companies share the risk—and potential reward—of drilling in uncertain
areas. “Incentive-based contracts have big limitations…We want a reform that
allows the private sector to share more risk with Pemex in order to attract
more capital and more technology,” says Mr Videgaray. Such a reform would
probably mean changing the constitution, which defines oil as the property of
the nation. It would be “a signal that echoed around the world: a
before-and-after in the history of Mexico,” says Héctor Aguilar Camín, a
What could stop Mexico on its march to growth?
One risk is a protracted slowdown in the United States, the destination of
four-fifths of Mexico’s exports. Mr O’Neill points out that consumption in the
United States amounts to about 70% of GDP; in the long run it will probably
fall to around 65%. “That’s not good if you’re setting yourself up as an
exporter next door,” he says.
Slimming the monopolies
But Mexico has created a few obstacles of its own
which it urgently needs to remove. Goldman Sachs’s “growth environment score”,
which measures the likelihood of sustainable growth, ranks Mexico below
Brazil, partly because it scores badly on technology. Mobile-phone penetration
is 85%, about the same as in Iraq. A fast broadband connection in Mexico costs
nearly twice as much as in Chile. It does not help that telecommunications are
a near-monopoly. Carlos Slim, the world’s richest man, controls companies that
account for about 80% of fixed phone lines, 75% of broadband connections and
70% of mobiles.
Excessive concentration afflicts many other
sectors, sometimes as a hangover from the pre-democratic days when political
support was bought by granting informal monopolies. Nearly all of Mexico’s
bread comes from Bimbo, cement from Cemex and television from Televisa. Nearly
a third of household spending goes on products with monopoly or
The competition authorities have recently been
given teeth, with bigger fines and even prison sentences for offenders. Mr
Slim’s phone companies are being forced to compete with Televisa’s television
empire as technology joins up the two markets. Mr Peña has promised special
courts to settle competition disputes. He may also remove the ban on foreign
ownership of companies in some industries. “It’s a good moment to review
whether Mexico needs these sorts of restrictions,” says Mr Videgaray, pointing
to fixed-line telephones and airlines as examples. If Mr Peña can dynamite a
few monopoly bottlenecks, there will be a better chance of the 6% growth he
A BUDDHIST MONK, some neatly dressed Mormon
missionaries and a young Guatemalan reading Nietzsche are among those waiting
in the offices of the National Institute of Migration for their visas to be
issued. Clerks tell visitors to take a seat—a mischievous joke, since there
are vastly more people than chairs in the cramped waiting room. The air is
thick with boredom and barely stifled rage.
Doing business in Mexico can be a frustrating
experience, thanks to the country’s affection for trámites,
or red tape. Woe betide anyone who seeks a permit without the requisite number
of photocopies or a notary’s stamp. Until recently foreigners of both sexes
who wanted to live in Mexico had to fill in a form that included questions on
their style of moustache (thin, trimmed or bushy?).
As well as raising the national blood pressure, trámites open
the door to corruption. If you don’t want to spend all day in the police
station to pay a speeding fine, you can settle in cash by the roadside. An
under-the-counter express service at the local council will quickly get you a
permit for your restaurant to put tables on the pavement, for a small fee.
Even Walmart, a multinational retailer, has been accused of paying backhanders
to speed up the opening of new stores in Mexico.
Ending corruption will require cleaner public
servants and a more indignant public. But the risk of graft can be lowered by
removing the obstacles that tempt people to use illegal shortcuts. Registering
a property in Mexico calls for seven separate trámites over
ten weeks, whereas in America it involves four steps and takes a fortnight.
The queues are already shortening and the
paperwork is thinning. Companies can file taxes online, which has cut the time
it should take to about 340 hours a year. That sounds a lot, but in Brazil it
takes 2,600 hours. Getting a construction permit in Mexico takes an annoying
two-and-a-half months; in Argentina it takes a year. The World Bank ranks
Mexico as one of the most straightforward places in Latin America to do
Petty corruption remains a gigantic problem.
Transparency International, a graft watchdog, reckons that Mexican households
spend about 32 billion pesos ($2.5 billion) a year on bribes, often to do
things that ought to be free, such as having their rubbish collected or even
sending their children to school. Worse, the burden falls disproportionately
on the poor. The bonfire of the trámites must