Mexico: Crisis and Competitiveness

Present Situation in Mexico:

GDP declined about 7% Economy had grown only at 1.4% annually Comparative advantages disappeared Sharp Drop in oil production

Past Performance:

Year Event1821 Achieved independence from Spain1910-17 Revolution against dictatorship, New constitution formulated1945-70 Steady Economic growth1970-76 Foreign exchange reserve depleted, currency devalued, IMF bailed out1980-90 Budget deficit reached 17% of GDP1987 Economy recovered1994 Tequila CrisisPost 1994 NAFTA helped in economy growth2000-06 Good growth and low inflation2008-09 US crisis exposed Mexico’s vulnerability

Problems Identified:

S.No

Problems: Impact:

1 Pemex is not managing petroleum industry properly; over exporting to US

Not achieving self sufficiency!

2 NAFTA: No regulations on Maquilas Leading to sudden attrition3 Mexican income was dependant on Emigrant remittances Leading to debts/deficits4 Tourism affected by HIN1 virus Affects revenue income5 Drugs and Organized crime on the rise Environment not conducive for

investors6 Under utilization of labor intensive people Loss on boosting up the economy7 Lack of Trade diversification Making the economy vulnerable8 Letting Monopolists/oligarchs prevail in key sectors such

as telecom, oil and electricityGovernment losing on revenues, not conducive to investors

9 Regulation of entry is slow and discouraging Streamlining of operations, lesser procedures for investors

10 Poor infrastructure Lesser investors11 Education levels are low Less no of skilled workers12 Politics: One term for representatives Makes officials to be self centered

Vijay Krishnan ADM14257 Page 1

Mexico: Crisis and Competitiveness

Solutions offered: (In addition to 10 reforms proposed)

Should bring in competitiveness in sectors like electricity, telecom so that monopolists don’t exploit the conditions

Making regulation of entry an easier ordeal to face Sound fiscal policy changes, managing oil sector in a better manner Lesser VAT on items (to increase the volume of trade, thereby achieving the target) Look beyond USA and Canada (Can concentrate on central American countries) Need for strong banking institution Better force to tackle Organized crime The geographical divide between north, central and south Mexico must be bridged. This will

depreciate the Gini Coefficient.

Vijay Krishnan ADM14257 Page 2