A teacher of Oaxaca waves a flag during clash with the Federal Police in the outskirts of Oaxaca, … [+]
AFP via Getty Images
Mexico faces an uncertain economic future. Mexico’s economy contracted by 8.3% in 2020 and even though the country’s GDP is on pace to bounce back and grow at 6% in 2021, public policy analysts, economists, and investors remain skeptical about President Andres Manuel Lopez Obrador’s policies and plans for Mexico. After all, Mexico’s GDP contracted by 0.2% in the third quarter of 2021. On a recent episode of my podcast, I spoke to Shannon O’Neil a Mexico expert from the Council on Foreign Relations. She gives Mexico a “C” grade overall for its macroeconomic health, but told me that she gives Lopez Obrador an “F” for his economic stewardship.
“Just to look at the macroeconomics…I would give them a C. They are not thriving. They are not failing,” she explained.
During the pandemic, Mexico’s exports have held up. Mexico’s exports tallied $418 billion in 2020. In other words, Mexico exported more than a billion dollars of goods and services every day in 2020. That’s a big improvement from 1994 when Mexico exported just $61 million dollars worth of goods for the entire year.
“On the downside, why it’s not an A and it’s a C, is there’s huge debt levels the state-owned enterprises in the energy sector. Those are right now [moving] in an unsustainable direction. We are not going to see energy production grow. Many of the moves of this [Lopez Obrador] administration…are hindering domestic and foreign direct investment. We haven’t seen basic investments that would allow the economy to grow and expand,” she added.
Mexico has earned a reputation for stable macro-economic management during the 21st century and President Lopez Obrador hasn’t broken with that tradition. But, when it comes to grading Lopez Obrador’s economic policies, O’Neil is far less sanguine.
“I’m less impressed than with the overall macroeconomics, it’s not a C it’s closer to failing. Let me lay me lay out why the grade is so bad. What has allowed Mexico to grow has been…growth and expansion of the private sector. The policy choices of this government are limiting that today but also into the future. This is most visible in the energy sector. You see the state stepping in more and more. That I think is detrimental to seeing expansion of [economic] activities and jobs,” she said.
O’Neil is frustrated at Lopez Obrador’s focus on dirty energy production and his lack of interest in the country’s modern manufacturing sector.
“They are investing in refineries. They are not investing in roads and rails and ports that those [companies] that might come to Mexico are searching for. Many [foreign investors] are looking in other places around the world,” O’Neil explained.
While bond investors might be happy to continue to bet on Mexico’s twenty plus years of stable macroeconomic management, private sector executives are warier of Lopez Obrador’s politicized strategy for managing economic development policy. Shannon says that the number one question for foreign executives looking at Mexico is “Can I run a business? Can I run it profitably with stable and steady rules?”
“Many of the decisions the government is making with this politicization [are causing] different calculations for people who are going to invest for the long term,” O’Neil added.
“Just looking at the economy, [Mexico] was one of the only countries that didn’t step in, that didn’t have a stimulus package, that didn’t try to save businesses. Mexico spent less than 1% of its GDP on direct stimulus when most countries spent far more than that,” she told me.
Mexico’s recession in 2020 was worse than Colombia’s, Chile’s, Canada’s, or the U.S.’s.
Data and graphic from FocusEconomics
She gives Lopez Obrador an “F” for his Covid-19 economic stimulus response.
“You have seen hundreds of thousands small and medium size enterprises fail [and] many people pushed out.. into the informal sector. The one thing that really saved Mexico is that they benefited from the U.S. stimulus package,” she said.
O’Neil explained that Lopez Obrador “gets a failing grade on how he dealt with the economic side effects of the pandemic crisis but the U.S. stimulus really helped Mexico.”
Overall, she remains very skeptical about Lopez Obrador’s economic vision. Mexico “is moving in the opposite direction [of the rest of the industrial world]. It doubling down on fossil fuels and moving away from renewables,” O’Neil said.
More than anything O’Neil thinks that Lopez Obrador is failing to take advantage of the opportunities that are open to Mexico right now. “There are big global shifts happening today that will affect Mexico down the road and I don’t think [Lopez Obrador’s] government is preparing for those,” she said.
“We are seeing global supply chains move around. Mexico is not taking advantage of the fact that so many companies are in play. That is something I think they are missing out on,” O’Neil added.
In the manufacturing sector, “we are seeing automation [and] artificial intelligence. That will mean a real change in the way business is done. I don’t see Mexico recognizing those changes much less preparing. The world is changing and Mexico is not recognizing that the economy ten years from now will be very different from the one today,” O’Neil explained.
There are big shifts happening in global supply chains and Lopez Obrador is failing to fully take advantage.
“Now is the moment. Lots of companies are re-thinking where they are going to make their [products.] That is happening right now. Today that’s more likely going to be in Vietnam, Malaysia, Thailand, and India than Mexico,” O’Neil said.
Overall, O’Neil is worried about the direction Mexico is going in under Lopez Obrador’s leadership. “I haven’t given up on Mexico. I am optimistic. There is so much potential but I am worried,” she explained.
I asked her to pick three words to summarize Lopez Obrador’s economic strategy for Mexico.
She picked “anachronistic,” “clientalistic” and “impoverishing.”
