IN India, people ask you about China, and, in China, people ask you about India: Which country will become the more dominant economic power in the 21st century? I now have the answer: Mexico.
Impossible, you say? Well, yes, Mexico with only about 110 million people could never rival China or India in total economic clout. But here’s what I’ve learned from this visit to Mexico’s industrial/innovation center in Monterrey. Everything you’ve read about Mexico is true: drug cartels, crime syndicates, government corruption and weak rule of law hobble the nation. But that’s half the story. The reality is that Mexico today is more like a crazy blend of the movies “No Country for Old Men” and “The Social Network.”
Something happened here. It’s as if Mexicans subconsciously decided that their drug-related violence is a condition to be lived with and combated but not something to define them any longer. Mexico has signed 44 free trade agreements — more than any country in the world — which, according to The Financial Times, is more than twice as many as China and four times more than Brazil. Mexico has also greatly increased the number of engineers and skilled laborers graduating from its schools. Put all that together with massive cheap natural gas finds, and rising wage and transportation costs in China, and it is no surprise that Mexico now is taking manufacturing market share back from Asia and attracting more global investment than ever in autos, aerospace and household goods.
“Today, Mexico exports more manufactured products than the rest of Latin America put together,” The Financial Times reported on Sept. 19, 2012. “Chrysler, for example, is using Mexico as a base to supply some of its Fiat 500s to the Chinese market.” What struck me most here in Monterrey, though, is the number of tech start-ups that are emerging from Mexico’s young population — 50 percent of the country is under 29 — thanks to cheap, open source innovation tools and cloud computing.
“Mexico did not waste its crisis,” remarked Patrick Kane Zambrano, director of the Center for Citizen Integration, referring to the fact that when Mexican companies lost out to China in the 1990s, they had no choice but to get more productive. Zambrano’s Web site embodies the youthful zest here for using technology to both innovate and stimulate social activism. The center aggregates Twitter messages from citizens about everything from broken streetlights to “situations of risk” and plots them in real-time on a phone app map of Monterrey that warns residents what streets to avoid, alerts the police to shootings and counts in days or hours how quickly public officials fix the problems.
“It sets pressure points to force change,” the center’s president, Bernardo Bichara, told me. “Once a citizen feels he is not powerless, he can aspire for more change. … First, the Web democratized commerce, and then it democratized media, and now it is democratizing democracy.”
If Secretary of State John Kerry is looking for a new agenda, he might want to focus on forging closer integration with Mexico rather than beating his head against the rocks of Israel, Palestine, Afghanistan or Syria. Better integration of Mexico’s manufacturing and innovation prowess into America’s is a win-win. It makes U.S. companies more profitable and competitive, so they can expand at home and abroad, and it gives Mexicans a reason to stay home and reduces violence. We do $1.5 billion a day in trade with Mexico, and have been spending $300 million a day in Afghanistan. Not smart.
We need a more nuanced view of Mexico. While touring the Center for Agrobiotechnology at Monterrey Tech, Mexico’s M.I.T., its director, Guy Cardineau, an American scientist from Arizona, remarked to me that, in 2011, “my son-in-law returned from a tour of duty in Afghanistan and we talked about having him come down and visit for Christmas. But he told me the U.S. military said he couldn’t come because of the [State Department] travel advisory here. I thought that was very ironic.”
Especially when U.S. companies are expanding here, which is one reason Mexico grew last year at 3.9 percent, and foreign direct investment in Monterrey hit record highs.
“Twenty years ago, most Mexican companies were not global,” explained Blanca Treviño, the president and founder of Softtek, one of Mexico’s leading I.T. service providers. They focused on the domestic market and cheap labor for the U.S. “Today, we understand that we have to compete globally” and that means “becoming efficient. We have a [software] development center in Wuxi, China. But we are more efficient now in doing the same business from our center in Aguascalientes, [Mexico], than we are from our center in Wuxi.”
Mexico still has huge governance problems to fix, but what’s interesting is that, after 15 years of political paralysis, Mexico’s three major political parties have just signed “a grand bargain,” a k a “Pact for Mexico,” under the new president, Enrique Peña Nieto, to work together to fight the big energy, telecom and teacher monopolies that have held Mexico back. If they succeed, maybe Mexico will teach us something about democracy. Mexicans have started to wonder about America lately, said Bichara from the Center for Citizen Integration. “We always thought we should have our parties behave like the United States’ — no longer. We always thought we should have the government work like the United States’ — no longer.”
For the last few years, the people of Juarez lived in a warlike collective trauma that reached its peak in January-February, 2011 when, on average, almost ten lives were taken per day in the belligerent streets of the battered border city. In retrospect, the reality of a leading community the size of Juarez stroked simultaneously by the great economic recession and the security crisis seems implausible even for a movie script.
The toll has been high and widespread. A drought of new manufacturing projects, the emigration of talent, the closing of businesses, the constant mantra claiming for peace and the shroud of fear, all tested the resilience of Juarez. The only consolation is thinking that it could have been a lot worse. And yes, it is important to mention “The elephant in the room” because the violence was real and because if we don’t remember the past we might be condemned to repeat it. Fortunately, the elephant is on its way out of the room. The “Murder capital of the world”- no more.
According to data from the trustworthy source Ciudad Juarez “Mesa de Seguridad” (Security council), a group that includes the three levels of government (Federal, State, City) and private citizens (persons without public or government positions) from the local academic, business and social institutions, the incidence of crime and homicides in Juarez has declined significantly. The graph in the Exhibit shows the number of homicides in Juarez per 100,000 inhabitants for the last three years. Note that since the peak in early 2011 when murders/100k were at a mindboggling 240, they have had a constant decline.
The lowest figure of 24/100k was recorded in November 2012, an arithmetical drop of 900%…! The 12-month average of homicides/100k for 2012 was 57, and the last 6-month’s average was 31. Statistically, the data series for the three years in record can be regarded as a significant trend. But other important indicators are also receding as explained in The Mesa de Seguridad’s report which may be found at www.mesadeseguridad.org
For example, auto thefts with violence have gone from over 500 per month in the first quarter of 2011 to about 65 per month in Q4-2012, presenting a much safer panorama in the streets. For the general public, businesspersons and tourists driving, this is probably the most important security indicator of all.
The report also shows large and important drops in auto theft without violence, convenience stores assaults, kidnappings and extortions. Where do we want to be to be able to say that Ciudad Juarez is safe? According to the Mesa de Seguridad objectives for 2013, the target for homicides/100k per month is 15, kidnappings and extortions should be at zero. The report doesn’t show an objective for auto theft with violence, but reaching a level of 30 or under per month seems reasonable.
Now, border regions and ports everywhere in the world are by nature less safe than most interior cities, so it is hard for Juarez to aspire to be level with the likes of Seville, Little Rock or San Jose, Costa Rica. But as shown in the graph, Juarez is becoming a lot safer, and if measured by the homicides/100k yardstick, it is safer than other cities in the U.S. and abroad. But by that token, any city is dangerous if you are with the wrong company, at the wrong place and time. The most important things for the inhabitants of a city and visitors to remain safe are to be careful, avoid risk and keep your eyes and ears open.
The task in Juarez for now is to finish getting rid of the elephant and making sure that it doesn’t come back.
by Shannon K. O’Neil
December 4, 2012
To commemorate Enrique Peña Nieto’s inauguration, the Americas Society/Council of the Americas asked many avid Mexico watchers what should be the top priority for U.S.-Mexico relations going forward. Here was my response:
Mexico and the United States should focus on deepening economic ties. Commercial interdependence is already substantial, with nearly a half trillion dollars’ worth of goods crossing the border each year. Some 80 percent of Mexico’s exports go north, and for nearly half of U.S. states, Mexico is the number one or two destination for exports— supporting an estimated 6 million American jobs today.
These exports are more often than not pieces and parts—not finished goods—evidence of the regional supply chains developing in North America. In fact, 40 percent (on average) of every product imported from Mexico is really “made in America.” This compares to just 4 percent in goods from China.
Facilitating and expanding these production links will require making cross-border trade more efficient through investments in border infrastructure, standardized regulations (so that countries do not need fulfill similar requirements in both countries), and common customs forms, among other efforts. But they will also enable companies to become more globally competitive, benefiting businesses, workers, and ultimately the economies of both nations.
Mexico and the United States
Nov 24th 2012
NEXT week the leaders of North America’s two most populous countries are due to meet for a neighbourly chat in Washington, DC. The re-elected Barack Obama and Mexico’s president-elect, Enrique Peña Nieto, have plenty to talk about: Mexico is changing in ways that will profoundly affect its big northern neighbour, and unless America rethinks its outdated picture of life across the border, both countries risk forgoing the benefits promised by Mexico’s rise.
The White House does not spend much time looking south. During six hours of televised campaign debates this year, neither Mr Obama nor his vice-president mentioned Mexico directly. That is extraordinary. One in ten Mexican citizens lives in the United States. Include their American-born descendants and you have about 33m people (or around a tenth of America’s population). And Mexico itself is more than the bloody appendix of American imaginations. In terms of GDP it ranks just ahead of South Korea. In 2011 the Mexican economy grew faster than Brazil’s—and will do so again in 2012.
Yet Americans are gloomy about Mexico, and so is their government: three years ago Pentagon analysts warned that Mexico risked becoming a “failed state”. As our special report in this issue explains, that is wildly wrong. In fact, Mexico’s economy and society are doing pretty well. Even the violence, concentrated in a few areas, looks as if it is starting to abate.
Mañana in Mexico
The first place where Americans will notice these changes is in their shopping malls. China (with more than 60 mentions in the presidential debates) is by far the biggest source of America’s imports. But wages in Chinese factories have quintupled in the past ten years and the oil price has trebled, inducing manufacturers focused on the American market to set up closer to home. Mexico is already the world’s biggest exporter of flat-screen televisions, BlackBerrys and fridge-freezers, and is climbing up the rankings in cars, aerospace and more. On present trends, by 2018 America will import more from Mexico than from any other country. “Made in China” is giving way to “Hecho en México”.
The doorway for those imports is a 2,000-mile border, the world’s busiest. Yet some American politicians are doing their best to block it, out of fear of being swamped by immigrants. They could hardly be more wrong. Fewer Mexicans now move to the United States than come back south. America’s fragile economy (with an unemployment rate nearly twice as high as Mexico’s) has dampened arrivals and hastened departures. Meanwhile, the make-up of Mexican migration is changing. North of the border, legal Mexican residents probably now outnumber undocumented ones. The human tide may turn along with the American economy, but the supply of potential border-hoppers has plunged: whereas in the 1960s the average Mexican woman had seven children, she now has two. Within a decade Mexico’s fertility rate will fall below America’s.
Undervaluing trade and overestimating immigration has led to bad policies. Since September 11th 2001, crossing the border has taken hours where it once took minutes, raising costs for Mexican manufacturers (and thus for American consumers). Daytrips have fallen by almost half. More crossing-points and fewer onerous checks would speed things up on the American side; pre-clearance of containers and passengers could be improved if Mexico were less touchy about having American officers on its soil (something which Canada does not mind). After an election in which 70% of Latinos voted for Mr Obama, even America’s “wetback”-bashing Republicans should now see the need for immigration-law reform.
No time for a siesta
The least certain part of Mexico’s brighter mañana concerns security. This year has seen a small drop in murders. Some hotspots, such as Ciudad Juárez, have improved dramatically. A third of Mexico has a lower murder rate than Louisiana, America’s most murderous state. Nevertheless, the “cartels” will remain strong while two conditions hold. The first is that America imports drugs—on which its citizens spend billions—which it insists must remain illegal, while continuing to allow the traffickers to buy assault weapons freely. American politicians should heed the words of Felipe Calderón, Mexico’s outgoing president, who after six years and 60,000 deaths says it is “impossible” to stop the drug trade.
The second black spot is that Mexican policing remains weak. If Mr Peña is to keep his promise to halve the murder rate, he must be more effective than his predecessor in expanding the federal police and improving their counterparts at state level. That is just one of several issues that will test Mr Peña. He cannot achieve his ambition to raise Mexico’s annual growth rate to 6% by relying solely on export manufacturing. Upping the tempo requires liberalising or scrapping state-run energy monopolies, which fail to exploit potentially vast oil and gas reserves. Boosting Mexico’s poor productivity means forcing competition on a cosy bunch of private near-monopolies—starting with telecoms, television, cement and food and drink. That means upsetting the tycoons who backed his campaign.
This newspaper gave Mr Peña a lukewarm endorsement before July’s election, praising his economic plans but warning that his Institutional Revolutionary Party (PRI), which ran Mexico in an authoritarian and sometimes corrupt manner for most of the 20th century, has not changed much. Facing down interests within his own party may be Mr Peña’s hardest task. The head of the oil workers’ union is a PRI senator. The teachers’ union, which is friendly with the party, is blocking progress in education. A new labour reform has been diluted by PRI congressmen with union links.
Mr Peña, a good performer on the stump, should appeal beyond the PRI to a broad consensus for change among Mexicans. Time will tell if he measures up to the task. But the changes in Mexico go beyond the new occupant of Los Pinos. The country is poised to become America’s new workshop. If the neighbours want to make the most of that, it is time for them to take another look over the border.
By George Friedman
A few years ago, I wrote about Mexico possibly becoming a failed state because of the effect of the cartels on the country. Mexico may have come close to that, but it stabilized itself and took a different course instead — one of impressive economic growth in the face of instability.
Discussion of national strategy normally begins with the question of national security. But a discussion of Mexico’s strategy must begin with economics. This is because Mexico’s neighbor is the United States, whose military power in North America denies Mexico military options that other nations might have. But proximity to the United States does not deny Mexico economic options. Indeed, while the United States overwhelms Mexico from a national security standpoint, it offers possibilities for economic growth.
Mexico is now the world’s 14th-largest economy, just above South Korea and just below Australia. Its gross domestic product was $1.16 trillion in 2011. It grew by 3.8 percent in 2011 and 5.5 percent in 2010. Before a major contraction of 6.9 percent in 2009 following the 2008 crisis, Mexico’s GDP grew by an average of 3.3 percent in the five years between 2004 and 2008. When looked at in terms of purchasing power parity, a measure of GDP in terms of actual purchasing power, Mexico is the 11th-largest economy in the world, just behind France and Italy. It is also forecast to grow at just below 4 percent again this year, despite slowing global economic trends, thanks in part to rising U.S. consumption.
Total economic size and growth is extremely important to total national power. But Mexico has a single profound economic problem: According to the Organization for Economic Co-operation and Development, Mexico has the second-highest level of inequality among member nations. More than 50 percent of Mexico’s population lives in poverty, and some 14.9 percent of its people live in intense poverty, meaning they have difficulty securing the necessities of life. At the same time, Mexico is home to the richest man in the world, telecommunications mogul Carlos Slim.
Mexico ranked only 62nd in per capita GDP in 2011; China, on the other hand, ranked 91st. No one would dispute that China is a significant national power. Few would dispute that China suffers from social instability. This means that in terms of evaluating Mexico’s role in the international system, we must look at the aggregate numbers. Given those numbers, Mexico has entered the ranks of the leading economic powers and is growing more quickly than nations ahead of it. When we look at the distribution of wealth, the internal reality is that, like China, Mexico has deep weaknesses.
The primary strategic problem for Mexico is the potential for internal instability driven by inequality. Northern and central Mexico have the highest human development index, nearly on the European level, while the mountainous, southernmost states are well below that level. Mexican inequality is geographically defined, though even the wealthiest regions have significant pockets of inequality. We must remember that this is not Western-style gradient inequality, but cliff inequality where the poor live utterly different lives from even the middle class.
Mexico is using classic tools for managing this problem. Since poverty imposes limits to domestic consumption, Mexico is an exporter. It exported $349.6 billion in 2011, which means it derives just under 30 percent of its GDP from exports. This is just above the Chinese level and creates a serious vulnerability in Mexico’s economy, since it becomes dependent on other countries’ appetite for Mexican goods.
This is compounded by the fact that 78.5 percent of Mexico’s exports go to the United States. That means that 23.8 percent of Mexico’s export revenue depends on the appetite of the American markets. On the flip side, 48.8 percent of its imports come from the United States, making it an asymmetric relationship. Although both sides need the exports, Mexico must have them. The United States benefits from them but not on the same order.
Relations With the United States
This leads to Mexico’s second strategic problem: its relationship with the United States. When we look back to the early 19th century, it was not clear that the United States would be the dominant power in North America. The United States was a small, poorly integrated country hugging the East Coast. Mexico was much more developed, with a more substantial military and economy. At first glance, Mexico ought to have been the dominant power in North America.
But Mexico had two problems. The first was internal instability caused by the social factors that remain in place, namely Mexico’s massive, regionally focused inequality. The second was that the lands north of the Rio Grande line (referred to as Rio Bravo del Norte by the Mexicans) were sparsely settled and difficult to defend. The terrain between the Mexican heartland and the northern territories from Texas to California were difficult to reach from the south. The cost of maintaining a military force able to protect this area was prohibitive.
From the American point of view, Mexico — and particularly the Mexican presence in Texas — represented a strategic threat to American interests. The development of the Louisiana Purchase into the breadbasket of the United States depended on the Ohio-Mississippi-Missouri river system, which was navigable and the primary mode of export. Mexico, with its border on the Sabine River separating it from Louisiana, was positioned to cut the Mississippi. The strategic need to secure sea approaches through the Caribbean to the vulnerable Mexican east coast put Mexico in direct conflict with U.S. interests.
The decision by U.S. President Andrew Jackson to send Sam Houston on a covert mission into Texas to foment a rising of American settlers there was based in part on his obsession with New Orleans and the Mississippi River, which Jackson had fought for in 1815. The Texas rising was countered by a Mexican army moving north into Texas. Its problem was that the Mexican army, drawn to a great extent from the poorest elements of Mexican society in that country’s south, had to pass through the desert and mountains of the region and suffered from extremely cold and snowy weather. The Mexican soldiers arrived at San Antonio exhausted, and while they defeated the garrison there, they were not able to defeat the force at San Jacinto (near present-day Houston) and were themselves defeated.
The region that separated the heart of Texas from the heart of Mexico was a barrier for military movement that undermined Mexico’s ability to hold its northern territory. The geographic weakness of Mexico — this hostile region coupled with long and difficult-to-defend coastlines and no navy — extended west to the Pacific. It created a borderland that had two characteristics. It was of little economic value, and it was inherently difficult to police due to the terrain. It separated the two countries, but it became a low-level friction point throughout history, with smuggling and banditry on both sides at various times. It was a perfect border in the sense that it created a buffer, but it was an ongoing problem because it could not be easily controlled.
The defeat in Texas and during the Mexican-American War cost Mexico its northern territories. It created a permanent political issue between the two countries, one that Mexico could not effectively remedy. The defeat in the wars continued to destabilize Mexico. Although the northern territories were not central to Mexico’s national interest, their loss created a crisis of confidence in successive regimes that further irritated the core social problem of massive inequality. For the past century and a half, Mexico has lived with an ongoing inferiority complex toward and resentment of the United States.
The war created another reality between the two countries: a borderland that was a unique entity, part of both countries and part of neither country. The borderland’s geography had defeated the Mexican army. It now became a frontier that neither side could control. During the ongoing unrest surrounding the Mexican Revolution, it became a refuge for figures such as Pancho Villa, pursued by U.S. Gen. John J. Pershing after Villa raided American towns. It would not be fair to call it a no-man’s-land. It was an every-man’s-land, with its own rules, frequently violent, never suppressed.
The drug trade has replaced the cattle rustling of the 19th century, but the essential principle remains the same. Cocaine, marijuana and a number of other drugs are being shipped to the United States. All are imported or produced in Mexico at a low cost and then re-exported or exported into the United States. The price in the United States, where the products are illegal and in great demand, is substantially higher than in Mexico. That means that the price differential between drugs in Mexico and drugs in the United States creates an attractive market. This typically happens when one country prohibits a widely desired product readily available in a neighboring country.
This creates a substantial inflow of wealth into Mexico, though the precise size of this inflow is difficult to gauge. The precise amount of cross-border trade is uncertain, but one number frequently used is $40 billion a year. This would mean narcotic sales represent an 11.4 percent addition to total exports. But this underestimates the importance of narcotics, because profit margins would tend to be much higher on drugs than on industrial products. Assuming that the profit margin on legal exports is 10 percent (a very high estimate), legal exports would generate about $35 billion a year in profits. Assuming the margin on drugs is 80 percent, then the profit on them is $32 billion a year, almost matching profits on legal exports.
These numbers are all guesses, of course. The amount of money returned to Mexico as opposed to kept in U.S. or other banks is unknown. The precise amount of the trade is uncertain and profit margins are difficult to calculate. What can be known is that the trade is likely an off-the-books stimulant to the Mexican economy, generated by the price differential created by drug prohibition.
The advantage to Mexico also creates a strategic problem for Mexico. Given the money at stake and that the legal system is unable to suppress or regulate the trade, the borderland has again become — perhaps now more than ever — a region of ongoing warfare between groups competing to control the movement of narcotics into the United States. To a great extent, the Mexicans have lost control of this borderland.
From the Mexican point of view, this is a manageable situation. The borderland is distinct from the Mexican heartland. So long as the violence does not overwhelm the heartland, it is tolerable. The inflow of money does not offend the Mexican government. More precisely, the Mexican government has limited resources to suppress the trade and violence, and there are financial benefits to its existence. The Mexican strategy is to try to block the spread of lawlessness into Mexico proper but to accept the lawlessness in a region that historically has been lawless.
The American position is to demand that the Mexicans deploy forces to suppress the trade. But neither side has sufficient force to control the border, and the demand is more one of gestures than significant actions or threats. The Mexicans have already weakened their military by trying to come to grips with the problem, but they are not going to break their military by trying to control a region that broke them in the past. The United States is not going to provide a force sufficient to control the border, since the cost would be staggering. Each will thus live with the violence. The Mexicans argue the problem is that the United States can’t suppress demand and is unwilling to destroy incentives by lowering prices through legalization. The Americans say the Mexicans must root out the corruption among Mexican officials and law enforcement. Both have interesting arguments, but neither argument has anything to do with reality. Controlling that terrain is impossible with reasonable effort, and no one is prepared to make an unreasonable effort.
Another aspect is the movement of migrants. For Mexicans, the movement of migrants has been part of their social policy: It shifts the poor out of Mexico and generates remittances. For the United States, this has provided a consistent source of low-cost labor. The borderland has been the uncontrollable venue through which the migrants pass. The Mexicans don’t want to stop it, and neither, in the end, do the Americans.
Dueling rhetoric between the United States and Mexico hides the underlying facts. Mexico is now one of the largest economies in the world and a major economic partner with the United States. The inequality in the relationship comes from military inequality. The U.S. military dominates North America, and the Mexicans are in no position to challenge this. The borderland poses problems and some benefits for each, but neither is in a position to control the region regardless of rhetoric.
Mexico still has to deal with its core issue, which is maintaining its internal social stability. It is, however, beginning to develop foreign policy issues beyond the United States. In particular, it is developing an interest in managing Central America, possibly in collaboration with Colombia. Its purpose, ironically, is the control of illegal immigrants and drug smuggling. These are not trivial moves. Were it not for the United States, Mexico would be a great regional power. Given the United States, it must manage that relationship before any other.
Given Mexico’s dramatic economic growth and given time, this equation will change. Over time, we expect there will be two significant powers in North America. But in the short run, the traditional strategic problems of Mexico remain: how to deal with the United States, how to contain the northern borderland and how to maintain national unity in the face of potential social unrest.
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 challenges 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 electronics 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 Transparency 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.
|Shannon K. O’Neil: Latin America’s Moment|
|Posted on August 16, 2011 10:00 am
by Shannon K. O’Neil
Mexico’s stock exchange employees work at their desks in Mexico City (Henry Romero/Courtesy Reuters).
It is becoming increasingly possible that 2011 will be the year that Mexico truly began opening its closed economy. Though political reform seems to have failed and efforts to centralize Mexico’s many police forces stalled, the political system has taken important steps in the last several months that could establish a more open and level economic playing field. What is most interesting, and perhaps hopeful, about these developments is that all three branches of government are throwing their weight behind freer markets.
First, in mid-April, the executive branch through the regulatory Federal Competition Commission, or CFC issued the largest fine for monopolistic behavior in Mexico’s history. As I discussed in an earlier post, Telcel was slapped with a $1 billion penalty for inordinately high interconnection fees. What’s more, the fine marked the second sanction against the telecommunication giant – one more strike, and the government is legally allowed to break up Telcel for good.
The legislature was the next to flex its muscles against domestic conglomerates. Following on the heels of the Telcel ruling, both houses of the senate unanimously approved a number of changes to anti-trust laws designed to foster competition. The reform put in place harsher punishments for those found guilty of monopolistic practices, who can now be fined up to 10 percent of their profits and in the most serious cases (price fixing falls under this umbrella) face 10 years in jail. They also awarded more power to the CFC, including the right to conduct unannounced raids of companies under investigation.
Now the judiciary is jumping into the fray. Pushed by business groups, the public prosecutor’s office launched last month a criminal investigation into Héctor Osuna, former vice-president of the telecom regulator COFETEL, and his colleagues. Investigators suspect that COFETEL executives engaged in back door legal maneuvering to grant Telmex (owned by Carlos Slim) access to the television market on unfair grounds. Specifically, they believe that Osuna intentionally delayed ruling on Telmex’s request for a television concession past the specified deadline – despite his own admission that “for us there was never evidence that [Telmex] had complied with its requirements” — which technically counted as a tacit approval of the request. The result of the investigation is not just vital for Telmex, which would gain substantially by entering the television market, but also for the judicial branch, whose scorecard against national giants hangs in the balance (though the courts have defended more open markets before, notably in 2007 when the Supreme Court struck down a media law that stifled competition).
To be sure, these recent actions are mostly directed at the business interests of just one individual — Carlos Slim. On the other hand, if used more broadly, the new legislation and legal precedents could be real game changers for the Mexican economy. Either way, this is the first time we have seen such a serious full court press for more open markets and sectors in Mexico — and all three branches of government deserve credit for that.
By Andres Oppenheimer
Granted, most international economists are stressing that the U.S. economic slowdown will mean fewer U.S. imports, smaller family remittances, and fewer tourists, all of which will hurt Mexico and Central America harder than the rest of Latin America.
The International Monetary Fund said in a recent report that a protracted U.S. economic slowdown will have a substantial negative impact on Mexico’s economy. And left-of-center Nobel prize winning economist Joseph Stiglitz reminded me in an interview that “when the United States sneezes, Mexico gets a cold.”
To make things worse, Mexico’s bloody drug wars, which have cost more than 40,000 lives over the past five years, are contributing to the idea that Mexico, as well as its violence-ridden southern neighbors, are doomed for the foreseeable future.
But there is another school of thought, one which says that the impact of rising wages in China will largely offset the latest wave of bad economic news for Mexico.
According to a recent study by J.P. Morgan, while wages in China’s manufacturing sector were 237 percent cheaper than in Mexico’s 10 years ago, they are only 14 percent cheaper today — virtually nothing if you take into account the fact that transporting goods from China to the United States is much more expensive than doing it from Mexico.
Mexico’s share of U.S. manufacturing imports grew from 11.3 percent in 2005 to 14 percent last year, the study says.
“The salary gap between China and Mexico has shrunk dramatically,” Gabriel Casillas, J.P. Morgan’s chief economist in Mexico, told me this week. “We are seeing a major relocation of companies from China to Mexico.”
The auto industry has taken the lead. Ford, Volkswagen, Toyota and Mazda have announced that they will set up new manufacturing plants or expand existing ones in Mexico. And the aerospace industry is following suit, with Airbus, Eurocopter and Bombardier expanding operations in the country, according to press reports.
Won’t this trend be affected by the wave of violence? I asked Casillas.
“Surely, violence is a factor, and minimizing it would be irresponsible,” he responded. “But violence has been mostly limited to northern Mexico, Guerrero and Michoacán, while most of the new investments are taking place in the center of the country.”
Other upbeat economists tell me that the recent downgrading of the U.S. credit rating by Standard and Poor’s and its economic aftershocks is likely to result in a further appreciation of the Chinese currency.
Faced with a weaker U.S. demand for its goods, China will accelerate its shift from an export-led economy to a domestic consumption-led one, and that will require a stronger currency and higher wages, they say.
Rogelio Ramirez de la O, head of Mexico’s Ecanal economic forecasting firm, told me that is somewhere in the middle between optimists and pessimists.
“Higher wages in China will mitigate the impact of the U.S. economic impact, but will not offset it,” he says. He foresees Mexico’s economy growing by 3.8 percent this year, a little less than previously expected.
My opinion: China’s rising salaries are a blessing for Mexico, and could be a big boon for Central America. It could be Mexico’s biggest opportunity in recent years to come back from economic stagnation and join Brazil, India, South Africa and other booming emerging powers.
But to take full advantage of it, Mexico will have to reduce its violence levels and pass long-delayed labor, fiscal and energy reforms after the 2012 presidential elections. It’s a golden opportunity. We shall soon know whether its politicians have the guts to grab it.
(AFP) – 16 hours ago
CIUDAD JUAREZ, Mexico — While local businesses have been devastated by high murder rates and criminal gangs in Mexico’s most deadly city of Ciudad Juarez, multinational industry is booming.
Many small shops lie empty on the desolate streets of the border city across from El Paso, Texas, while foreign manufacturers are setting up more plants known as “maquiladoras”, which import and assemble duty-free components for export.
Once a hive of activity, Rafael Garcia’s restaurant is now shuttered, another victim of a vicious shakedown campaign by local drug cartels.
Gang thugs were after their “cuota”, a monthly tax they charge to thousands of local businesses.
“The threats came every few days, every few weeks, until after about a year of holding on without being able to come to the restaurant, I decided to close,” Garcia told AFP.
Violent killings have exploded in Ciudad Juarez since 2008, with more than 3,100 deaths attributed to drug violence last year alone.
As tougher border control measures make it harder to move drugs into the United States, organized crime networks are branching out into other revenue streams, including extortion.
But crime bosses rarely target the area’s most profitable businesses — the factories set up by companies from the United States to Asia, drawn by close proximity to the US market and Mexico’s low wages.
Nearly 10,000 new jobs were created just this year at factories by companies such as MFI International manufacturing.
“The security situation in Mexico and Ciudad Juarez has not affected the maquiladora industry at this point,” director of operations Lawrence Wollschlager told AFP.
Some companies have increased their security costs in northern border cities such as Ciudad Juarez but officials say maquiladoras are not threatened because they lack what gangs want most.
“The big corporations manage everything in checks and international transfers, they don’t work with cash,” said Juan Benavente, deputy secretary of the economy for northern Chihuahua state.
“Here the local businesses manage everything in cash, depositing in banks here in the city, so they’re more vulnerable,” Benavente added.
The factory workers enjoy some social benefits from the foreign companies but are also vulnerable to the city’s violence — last October gunmen fired on a bus carrying maquiladora workers near Ciudad Juarez, killing four people.
Some 390 maquiladoras employing almost 180,000 people operate in the city of 1.3 million, according to city authorities.
Some have gained from plant closures in the United States, and Mexico picked up faster than its close business partner to the north after the economic crisis, with its economy expanding 5.5 percent last year.
Foreign direct investment in Ciudad Juarez reached 1.4 million dollars last year, compared with one million in 2009, according to city authorities.
But Benavente admitted the government still has much work to do to improve the situation for local businesses.
They created a small “green zone” guarded by federal police a couple of months ago in an attempt to keep extortionists at bay.
But until real progress is made, people like Rafael continue to suffer, forced to choose between payoffs or closing their doors.
Case against Azusa company may set precedent.
By Alfred Lee
Monday, April 4, 2011
Business groups and legal observers nationwide are closely monitoring a small family-owned Azusa company caught up in a foreign bribery trial that could be lethal for it and precedent-setting for others.
Executives at Lindsey Manufacturing Co. have been charged by U.S. prosecutors with paying off officials at a state-run electric utility in Mexico in order to win sales for their products.
Such cases historically were seldom brought against such small companies. And most end up being settled, but Lindsey has decided to fight and have its case heard by a jury. It is the first of about a half-dozen cases expected to reach trial this year since the government stepped up enforcement of the Foreign Corrupt Practices Act, which regulates U.S. companies overseas.
Analysts say if Lindsey executives are convicted in the trial, which has opening arguments set for Tuesday in Los Angeles federal court, it would put even the smallest companies on notice that they must keep close tabs on overseas operations.
“It’s being watched by folks all across the country,” said Bethany Hengsbach, a partner at downtown law firm Sheppard Mullin Richter & Hampton LLP specializing in FCPA-related matters; she is not involved in the Lindsey case. “I think the outcome is going to be important to determine whether it’s possible to succeed against the government in an FCPA case.”
The company’s president, Keith Lindsey, and chief financial officer, Steve Lee, face felony charges for allegedly authorizing sales reps to buy a Ferrari and a $1.8 million yacht for Nestor Moreno, director of operations for Mexico’s state-run electric utility, a client of Lindsey.
Lindsey’s attorney Jan Handzlik, of Greenberg Traurig LLP, said company executives admit paying their sales reps substantial money, but they deny having any knowledge in how it was used. Lindsey sales reps in Mexico also have been charged, and one is being tried here on felony charges with separate representation.
The main issue centers on the difference between a government official and a private-sector executive. In other countries, the two often blend because many companies are owned by the state.
Among the interested observers is the U.S. Chamber of Commerce, which is arguing that the government is too broadly interpreting what’s defined as a “foreign official.” That’s a point of contention in the Lindsey case since it involves a utility executive at a government-owned company. The chamber is complaining that the new aggressive prosecution is hurting competitiveness of U.S. companies doing business overseas.
“We are certainly familiar with that case and looking at some of the briefs submitted,” said Harold Kim, senior vice president at the chamber’s Institute for Legal Reform. “There’s been significant concern in the business community over how current interpretations of the FCPA statute are creating uncertainty and ambiguity in the law.”
Kim is working with a team of all-star lobbyists, including recently hired former U.S. Attorney General Michael Mukasey, a President George W. Bush appointee, to push Congress to adopt amendments that would limit the scope of the FCPA.
In fact, Lindsey’s defense attorneys have asked U.S. District Court Judge A. Howard Matz to dismiss the case, arguing Moreno doesn’t qualify as a foreign official. Matz has yet to issuee a ruling on the request.
Another reason the case is important: Should either side appeal the jury’s outcome to the Ninth Circuit Court of Appeals, precedent could be set on the issue.
Handzlik said that more than half of all prosecutions related to the FCPA, which has been on the books since 1977, involve state-run companies, but the issue has never been resolved.
“This is something that’s gone unchallenged for 33 years,” he said.
Whatever the outcome, analysts say the Lindsey case is a red flag for small companies operating overseas.
“Any company that’s doing business in a foreign country, that’s touching a foreign government, should take note of the FCPA,” said Mary Carter Andrues, a former federal prosecutor and an attorney in the downtown L.A. office of Arent Fox LLP; she is not involved in the Lindsey case.
Founded in 1947 by L.E. Lindsey, the father of current President Keith Lindsey, the company has 110 employees, more than 90 percent of whom work in assembly. The company sells transmission towers that can be erected quickly to help restore electricity in emergencies along with related equipment and services. It has sold to utility companies in more than 30 countries.
Handzlik said the company’s recent legal troubles have nearly put it out of business. Since the October indictment of its executives, the company’s lenders are withholding credit, suppliers are withholding materials, and potential customers are backing off.
“If this drags on for much longer there won’t be a Lindsey Manufacturing,” he said.
The type of prosecution Lindsey is entangled in has been a priority for the U.S. Department of Justice and the Securities and Exchange Commission in recent years. The two agencies combined for 74 enforcement actions last year, up from 40 in 2009 and just five in 2003, according to a report by law firm Gibson Dunn & Crutcher LLP. In the 12 months ended November 2010, the Department of Justice levied more than $1 billion in foreign corruption fines, an all-time high.
“As our track record over the last year makes clear, we are in a new era of FCPA enforcement; and we are here to stay,” Assistant Attorney General Lanny Breuer said at a conference in November.
Each Lindsey executive faces six counts of FCPA-related violations. Each count carries a maximum prison term of five years and a six-figure fine.
An SEC spokesperson declined to comment on the agency’s enforcement of the law. But last year it formed a nationwide FCPA enforcement division, including a new unit in its San Francisco office.
In response, the U.S. chamber released a paper arguing that the law’s vagueness and prosecutors’ aggressiveness have left U.S. businesses unsure how to operate overseas. The paper called for specific reforms, including a narrower definition of a foreign official, limiting a company’s liability for the actions of a subsidiary, and allowing a compliance defense for companies with strong anticorruption programs.
“I think the basic premise of the FCPA that corrupt business transactions are unethical and undermine the free market system remains as true today,” the chamber’s Kim said. “But the statute is long overdue for reform. We’re in a very different global economy and there are significant changes in our global marketplace compared to what it was back in 1977.”
In his November speech, Breuer responded to criticism that stepped-up enforcement is bad for business, saying bribery in international business transactions weakens economic development, undermines confidence in the marketplace and distorts competition.
What’s more, analysts see even more enforcement actions in the near future. Last year’s Dodd-Frank financial reform law includes a provision that provides financial rewards to FCPA whistleblowers.
Among those hardest hit could be small and midsize companies, which might be less attuned to regulations dealing not only with bribery but also accounting transparency.
“It’s going to be a continued upward trajectory,” said Hengsbach, the Sheppard Mullin partner.