So far, so good. The Mexican Policy Makers now need to get back to The Drawing Board if they want to Convert The Recent Rebound in Economic Activity into a long-term Sustainable Recovery.
For once, it seems that the most populous Hispanophone nation on Earth (and of course the 11th largest economy in the world with GDP worth $1.7 trillion in 2009 at PPP basis) is coming over its bloody gang wars (which have killed 22,700 people since President Felipe Calderón took office in 2006) and an economic curse called drug trafficking (creating black money worth over $40 billion annually). After all, Mexico’s GDP has just reported a stunning growth of 7.6% in Q2 2010 (4.3% in Q1 2010) overcoming the worst GDP contraction (-6.5% in 2009) in the Latin American region since the global financial crisis began in 2008.
Even at the sectoral level, production has advanced in both industry and services. While industry has expanded by 7.8% (manufacturing reported growth of 13.4%, electricity 2.9%, and mining 4.1%), services have grown by 7.4% (commerce 18.9%, transportation 10.9%, financial 5.7%). Agriculture too has reported a growth of 4.8%. Sounds astonishing for a nation whose drug gangs now boast of numbers (an estimated 100,000 armed gang members) at par with its military.
But then, there is more than what meets the eye! Though the Latin America’s second-biggest economy (after Brazil) is recovering from its worst contraction since 1932 (and one of the few that was at least not triggered by the country’s bad economic policies) as a surge in demand for Mexican exports in the US, this so-called great performance looks more like a rebound than a sustainable recovery. Reason: The economy lacks one of the most important components of all if growth is expected to be sustainable – the gross fixed investment, which grew by a meagre 0.7% during H1 2010 after falling 10.1% during 2009 (see chart). This is way below the 16.6% growth that gross fixed investments had reported in 1996 (21% in 1997 & 10.2% in 1998) even after witnessing a deep fall of 29% during the devastating Mexican peso crisis in 1995 (famously known as the Tequila Crisis) when the economy went into a tailspin due to unsustainable economic policies.
In fact, if we compare the Mexican economy’s rebound to the Brazilian recovery after last year’s recession, the current state of the 5th largest nation in the Americas (by area) looks frightening and the future bleak. As against Mexican economy’s frustrating performance on the fixed investments front, Brazil’s gross fixed investment surged 40.2% during the H1 2010 after plunging 20.5% during the whole of 2009. This indicates that the Mexican economy is certainly losing its charm among investors, which in turn questions the long-term sustainability of this so-called economic surge. What’s more? While total foreign investment in Latin America in 2009 was about $126 billion, only $12.2 billion were invested in Mexico witnessing a pathetic fall of 42.5%, from $24.3 billion in 2008. Interestingly, the number is even way below $17.2 billion, the estimated value of black money generated through cocaine, marijuana and other drugs that cross the Mexican border into just US annually (US Department of Justice).
Even the existing firms in Mexico are not increasing their capacities to produce higher output in the years to come and are just utilising the spare capacity (thanks to the recent recession) to fuel the current rebound. This, in fact, is the most concerning characteristic of this presumed recovery. Alfredo Coutino, the US based Director at Moody’s Analytics agrees as he tells B&E, “Though GDP will report growth close to 5% this year, it will decelerate to 3.5% next year. The economy’s performance will be limited by its low production capacity in coming years.”
Even at the sectoral level, production has advanced in both industry and services. While industry has expanded by 7.8% (manufacturing reported growth of 13.4%, electricity 2.9%, and mining 4.1%), services have grown by 7.4% (commerce 18.9%, transportation 10.9%, financial 5.7%). Agriculture too has reported a growth of 4.8%. Sounds astonishing for a nation whose drug gangs now boast of numbers (an estimated 100,000 armed gang members) at par with its military.
But then, there is more than what meets the eye! Though the Latin America’s second-biggest economy (after Brazil) is recovering from its worst contraction since 1932 (and one of the few that was at least not triggered by the country’s bad economic policies) as a surge in demand for Mexican exports in the US, this so-called great performance looks more like a rebound than a sustainable recovery. Reason: The economy lacks one of the most important components of all if growth is expected to be sustainable – the gross fixed investment, which grew by a meagre 0.7% during H1 2010 after falling 10.1% during 2009 (see chart). This is way below the 16.6% growth that gross fixed investments had reported in 1996 (21% in 1997 & 10.2% in 1998) even after witnessing a deep fall of 29% during the devastating Mexican peso crisis in 1995 (famously known as the Tequila Crisis) when the economy went into a tailspin due to unsustainable economic policies.
In fact, if we compare the Mexican economy’s rebound to the Brazilian recovery after last year’s recession, the current state of the 5th largest nation in the Americas (by area) looks frightening and the future bleak. As against Mexican economy’s frustrating performance on the fixed investments front, Brazil’s gross fixed investment surged 40.2% during the H1 2010 after plunging 20.5% during the whole of 2009. This indicates that the Mexican economy is certainly losing its charm among investors, which in turn questions the long-term sustainability of this so-called economic surge. What’s more? While total foreign investment in Latin America in 2009 was about $126 billion, only $12.2 billion were invested in Mexico witnessing a pathetic fall of 42.5%, from $24.3 billion in 2008. Interestingly, the number is even way below $17.2 billion, the estimated value of black money generated through cocaine, marijuana and other drugs that cross the Mexican border into just US annually (US Department of Justice).
Even the existing firms in Mexico are not increasing their capacities to produce higher output in the years to come and are just utilising the spare capacity (thanks to the recent recession) to fuel the current rebound. This, in fact, is the most concerning characteristic of this presumed recovery. Alfredo Coutino, the US based Director at Moody’s Analytics agrees as he tells B&E, “Though GDP will report growth close to 5% this year, it will decelerate to 3.5% next year. The economy’s performance will be limited by its low production capacity in coming years.”
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
