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Is Mexico's economy more a fiesta or a siesta?

A new year and a new government, and already the way the world views the Mexican economy has improved. But there are two sides to the coin when it comes to the country's promise.

By Correspondent / April 24, 2013

A man carries a product on his shoulders in front of a store selling handbags in downtown Mexico City in February.

Edgard Garrido/Reuters

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MEXICO CITY

China, India, and Brazil are out. Mexico is in – at least according to international observers who have been cooing over Mexico's rise in recent months. 

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With a new year and a new government,  the way the world views Mexico has already changed dramatically. Mexico has enviable economic stability and a forecast for growth, improved social mobility, and an emerging middle class. It is competing with Brazil to become the economic darling of Latin America and is challenging China in manufacturing prowess. The drug war rages on in many regions, but optimism for Mexico’s future is trumping the dark prognoses of the recent past. 

But is all the optimism for Mexico’s future warranted?

There are two sides to the coin when comes to Mexico's future as a global economic force. The new government inherited an economy rebounding from the impact of the economic crisis, but how the administration approaches deep-rooted challenges like poverty and inequality will determine whether the current optimism gains momentum or peters out.

Mexico’s potential remains enigmatic. There is no doubting the country’s macroeconomic successes, economists say. A stable currency over nearly 20 years, steady (if sometimes slow) economic growth; and fiscal discipline have combined to keep Mexico sailing in smooth waters. Mexico has signed a dozen trade pacts, which have opened it to the world. That’s the bird’s eye view. 

But zoom in and Mexico’s troubles come into focus.

Despite a more open economy and a growing middle class, nearly half the population remains poor, living on as little as $80 per month or less. The widely industrialized north and central regions contrast with the poverty entrenched across much of the south. Nationwide, between 50 and 62 percent of workers toil in the informal economy, according to the World Bank – an uncharted area in which workers frequently don’t pay taxes and lack the safety nets of health insurance or employment contracts.

“We need to ensure that the benefits of this intelligent global integration reach all the economic players at a national level – small and medium-sized businesses, and all regions of the country,” said Economy Secretary Ildefonso Guajardo at a recent conference. “It’s unsustainable to continue having two Mexicos.” 

'A more inclusive Mexico'

Donning a flower necklace and traditional embroidered serape over his white button-down, President Enrique Peña Nieto recently traveled to Mexico’s southern Chiapas state to promote a crusade against hunger. The nearly six-month-old administration has promised to reduce the country’s glaring inequalities, starting with malnutrition.

In eradicating hunger, he told a group of supporters in Zinacantán, the government “wants to achieve a more inclusive Mexico,” one of “opportunities for all Mexicans.” 

In addition to social programs like the anti-hunger campaign, President Peña Nieto’s administration is pushing an ambitious reform agenda to deliver on the promise of greater equality and economic opportunity.

An overhaul of the education system aims to improve the quality of teaching and raise Mexico’s dismal rankings in student performance. A plan to reform the telecommunications industry would strike at the dominance of billionaire Carlos Slim’s companies in telephone, cellular, and Internet service – with the intent of boosting competition, lowering prices and narrowing the country’s abysmal digital divide. Both reforms are making their way through Congress.

Also on the table, in draft or discussion stages, are reforms of Mexico’s banking industry, which has one of the lowest commercial lending rates in Latin America, stunting growth; of the tax code, with the goal of increasing Mexico’s low levels of tax collection; and of energy, with the aim of sparking investment in a stagnated industry controlled by the national oil monopoly.

The idea driving all these reforms is competition, says Eduardo Perez Motta, president of the Federal Competition Commission.

“By strengthening the regulatory body” – part of the telecommunications reform – “you increase the possibility of being able to punish abuses,” he says.

Dominant companies and influential unions in Mexico have long enjoyed immunity from sanctions, even when their practices hurt consumers. Analysts say the government’s ability to rein in powerful interests could determine whether the country delivers on its potential.

But a “Pact for Mexico,” led by Peña Nieto and uniting Mexico’s three biggest political parties behind the reforms, has teetered in recent days due to accusations by the opposition that the president’s party is using the hunger crusade as a platform to campaign for upcoming local elections.

'Mexico's moment?' 

Beyond the prospect of reform, there are other bright spots, like the increasing number of students attending college and the growth of Mexico’s automotive and aerospace industries. Mexico’s information technology sector, too, is increasingly delivering to US companies the back office outsourcing services that made India a brand name.

Low wages – compared to China’s rising labor costs – plus proximity to the US market has made Mexico a much more attractive manufacturing and service outsourcing partner for many North American companies.

“We believe that Mexico has the conditions to generate [economic] dynamism,” said Gerardo Gutierrez, head of the Business Coordinating Committee, a trade organization, at a recent conference. “Mexico’s moment is here." 

Yet it’s also because wages have remained stagnant and job growth has been slow for a decade that many Mexicans continue to work outside the formal economy, selling goods from makeshift street stalls or services from the back of a truck.

Federico Fernandez sells chicle gum, candy, and earrings from a table outside a busy Mexico City metro station, a prime location for which he says he pays the city government a bribe. He is pessimistic about Mexico’s prospects.

“Every government promises many things during the campaign,” he says, “but once they’re in they forget about us. I don’t see the improvement. I work just to get by.”

Mr. Fernandez says he makes enough to pay for food, rent, and transportation and – perhaps a sign of hope for the future – to help with expenses for his daughter, the first in the family to attend college.

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