Mexico’s Economic Collapse

The year 2009 was arguably the worst year of economic downturn in Mexico since the onset of the Great Depression of the 1930s. The downturn came with great forewarning, had anyone in the political and economic elite been willing to take a serious look. As the core of Mexico’s economy was collapsing at a frightening pace in late 2008, Secretary of the Treasury Agustín Carstens, Mexico’s top economic policy maker at the time, tried to laugh it off, unforgettably terming the downturn a “little cough.” Then in January 2009 came the illustrious World Economic Forum in Davos, Switzerland, where President Felipe Calderón assured one and all that Mexico had “one of the best teams of economic advisers in the world.”

All this was occurring at the very moment when the most trite cliché about Mexico and the United States had never been more true: When Uncle Sam sneezes, Mexico gets pneumonia. In this case, however, it appeared that Tío Sam had a very serious disease and that Mexico was sliding toward its deathbed. In the end, U.S. GDP slumped in 2009 by 2.4% (on an annual average basis), while Mexico’s fell by an estimated 6.5% (in inflation-adjusted terms).¹ When Calderón asserts, as he often does, that the crisis was caused by “external” forces and factors, he is dead wrong: As the great recession of 2009 showed so clearly, Mexico has become an appendage of the U.S. economy.

This state of profound economic dependency was consciously constructed by the Mexican business elite, which—through the workings of the powerful Business Coordinating Council (CCE)—orchestrated the details of Mexico’s asymmetrical economic integration with U.S. capital through the NAFTA negotiations of the early 1990s. The old idea of the “external” and the “internal” makes no sense when we analyze the new relation of dependency that Mexico chose because of its faith in neoliberal salvation by way of a so-called free trade agreement. In reality the mumbo jumbo about increasing trade was really a smokescreen to open up Mexico as completely as possible to U.S. foreign investment.

The pillar of this neoliberal model of economic development is the export-oriented, cheap-labor assembly operations run primarily by U.S.-owned transnational corporations. In 2009, 81% of Mexico’s exports went to the United States. U.S. demand has for decades been crucial to Mexico’s economy, since the U.S. manufacturing sector has been hollowed out and now relies on imports for crucial parts and components. Mexico is the number one foreign supplier of auto parts to the United States. Even more important than the shipping of parts and components to U.S.-based factories (that will then incorporate them into U.S.-sited assembly plants) is the export of finished consumer goods—the mainstay of Mexico’s export-led economy.

As long as the U.S. housing market was hot, foreign-owned factories located in Mexico could ship a large variety of construction-dependent durable consumer goods—like washers, dryers, and refrigerators—to the U.S. market. Ridiculously easy credit pumped-up the housing market, but it did far more than that. U.S. homeowners who had already locked themselves into 30-year mortgages before the housing boom began experiencing what economists call the wealth effect, which traces the relationship between the increased value of assets (like houses) to consumer spending. In this case, high asset values led U.S. homeowners to consume at an unprecedented and frenetic pace.

Mexico rode the impact of the U.S. wealth effect throughout the first decade of the 21st century, but this never translated into meaningful wage increases for most Mexican workers. Had it not been for monumental migration, which significantly reduced the rate of population growth and led to a surge in migrant remittances, boosting Mexico’s income, average per capita income growth would have been nil in the last decade. When the housing bubble burst, and all that U.S. wealth went up in smoke—there were almost 3 million home foreclosures in 2009—Mexico’s manufacturing exports collapsed. Overall, Mexico’s exports declined 21% in 2009. Vehicle and auto parts exports dropped by 33% in the first 10 months of the same year, as the U.S. auto industry contracted. Average wages also fell significantly—perhaps to half of the 1982 level, as was the case in 1998. According to the Economic Commission for Latin America and the Caribbean, the regional UN research center, more than 3.6 million more Mexicans tumbled into poverty.

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Faced with the recession, the Mexican government was determined not to counteract it with a stimulus program. This amounted to a tacit acknowledgement of the profound dependency of Mexico’s economy upon that of the United States: All hopes for Mexico rested on President Obama and his neoliberal economic advisory team. While the United States lowered interest rates, following a drastic, unprecedented strategy of expanding the money supply to rescue failing investment banks and insurance companies, Mexico’s monetary policy has been flaccid at best, and restrictive at worst.

That is, from October 2007—when it was clear that the U.S. economy was headed into a serious tailspin—until August 2008, Mexico’s central bank raised interest rates. Only in January did the central bank lower the loan rates, leaving them at 4.5%, even as U.S. rates rested essentially at zero. This impressively high rate is apparently designed to attract “hot money” to finance Mexico’s bond and credit markets, and to keep capital flight under control. But with excess industrial capacity alarmingly high and unemployment and poverty levels soaring, it made no sense whatsoever to maintain such a high interest rate. For the elite, though, this policy of attracting foreign speculators paid off in March, when the Mexican stock market reached an all-time high.

Furthermore, although Mexico was perhaps the country most strongly affected by the Great Recession in 2009, it was also most likely the only nation in the world to have voluntarily reacted by increasing taxes. Of note was the decision to raise the value-added tax, known as the IVA, from 15% to 16% to help ensure that the federal government would not run a significant deficit. With no great margin of victory, the Calderón administration was argued down from spreading the IVA to necessities like medicine and food. Still, the rise in the IVA was a cruel blow to add on top of the average per capita drop in income of nearly 8% in 2009.

The IVA adds 16% to the cost of most everything that poor, working-, and middle-class Mexicans buy in the formal economy. It also, perversely from the standpoint of policy makers, pushes even more of Mexico’s economic activity into the gigantic untaxed underground, or informal, economy. (For every 100 legally contracted workers in the formal economy, there are 88 operating in the shadowy informal sector, according to an official government labor market survey released in May.) The idea that—in the midst of the worst economic crisis since the Great Depression—the best Mexico’s policy makers could manage was to slap a regressive tax increase on Mexico’s impoverished masses is a telling sign of nation suffering from a profound level of moral and intellectual bankruptcy.

Beyond such quixotic measures, Calderón has also spoken in vague terms of boosting Mexico’s oil production by as much as a million barrels a day. Deepwater Caribbean reserves could make this a possibility, but only by way of a further incremental privatization of the state oil company PEMEX, which would open the floodgates even wider to transnational oil giants. This will be no magic bullet: For every dollar of oil exports, Mexico imports 67 cents’ worth of petroleum products. In 2009 the net oil trade surplus was only 14% of Mexico’s overall trade surplus with the United States.

In early 2010 announcements of economic recovery were widespread, yet—as even the CCE acknowledged—the fragile “recovery” was limited to the export market. Wages for average Mexicans continued to drop, the internal market continued to shrink, and the CCE anticipated that more than 500,000 of the new entrants into the labor market in 2010 would fail to find formal employment. Tamping down the pathological social impacts of the export model has even inconvenienced the elite: More than 7% of their business costs go toward private security, an estimate that excludes an army of guards for their palatial homes and family members. Indicators of rising social instability abound: In May, an armored-car maker attempted to boost sales by petitioning the government to offer financial credits to Mexico’s miniscule middle class to enable them to purchase armored vehicles, arguing that security is no longer a luxury item.

Still, for Mexico’s elite the question seems to be, “What crisis?” Last year they happily bought more than 2,700 residential properties in the swankiest areas of the greater San Diego region—such as Rancho Santa Fe and La Jolla. In this exquisite area, real estate sales to wealthy Mexicans leaped by 30% in 2009. Enjoying a record stock market and the multiple benefits of cheap labor, Mexico’s political and economic elite seemed as disconnected from the sad plight of the majority as at any time in Mexico’s long history.

James Martín Cypher is Profesor Titular, Programa del Doctorado en Estudios del Desarrollo, Universidad Autónoma de Zacatecas, Mexico. His latest book is Mexico’s Economic Dilemma: The Developmental Failure of Neoliberalism (Rowman & Littlefield Publishers, 2010).

1. This article is based on data from numerous official sources and daily press reporting from El Financiero and La Jornada, as well as from Cámara Nacional de la Industria de Transformación (Canacintra), Monitor de la Manufacturera Mexicana (various issues); James Martín Cypher, “La economía de Estados Unidos: ¿Hacia el precipicio o en caída libre? Ola Financiera no. 3 (May–August 2009): 41–49; Enrique Dussel Peters, “El aparato productivo mexicano,” Nueva Sociedad no. 220 (March/April 2009); and Norma Samaniégo, “La crisis, el empleo y los salarios en México,” Economía UNAM 6, no. 16 (September 2009).