Mexico is a mixed economy: its GDP ranks among the 20 largest countries in the world, some industrial branches have a global presence, and its workforce is internationally competitive; however, its performance in recent decades has been negligible to the point that, after the fall of 2020, it was one of the Latin American countries with the slowest economic recovery. What is the reality facing the Mexican economy?
GDP growth in Mexico was 1.8% per year from 2009 to 2021, lower performance than Chile, Colombia and Peru, with annual growth rates of 3.1%, 3.3% and 3.8%, respectively. INEGI data show that investment has been the worst performing expenditure component of the economy, with an average increase of 0.5 per cent per year, falling from 21 per cent of GDP in 2010 to 18 per cent in 2020. Private investment is growing slowly, but public investment has declined by 5% per year over the last decade. Chronic underinvestment is one of the main problems.
As a result, Total Factor Productivity (INEGI) has dropped by an average of -0.63% since 2009. It reflects the lack of efficiency of the labour force, the use of capital, materials and energy, and witnesses the lack of technical change. The problem is even more significant given that 20% of the economy is in the informal sector, which has even lower productivity. According to the OECD, Mexico's labour productivity was half that of the United States in the 1990s; its stagnation has widened the gap to a third by 2020, surpassing Chile's dynamism, as shown in the graph below.
The most dynamic sphere of the economy is the external sector. According to INEGI data, exports and imports grew at a rate of 5.4% and 4.4% respectively since 2009, reaching a positive balance in 2019 regarding final goods and services. More detail, the balance of payments shows that manufactured goods went from a deficit to a surplus in 2020. One of the causes of this surplus was the increase in the export of automotive products.
The Mexican Automotive Industry Association (AMIA) points out that Mexico is the world's 5th largest exporter of light vehicles, the 4th largest exporter of auto parts and the 7th largest vehicle manufacturer. According to Banxico data, the automotive industry accounted for 32% of total manufactured exports in 2019 and is Mexico's most dynamic industry, growing by an average of 10% per year from 2009 to 2019 and rising from 10% to 20% of national manufacturing.
The automotive industry's performance would seem to give Mexico a strong position in the global industry. However, wages in real terms have declined over the last decade. They represent a smaller share of gross value added, despite absolute increases in the automotive industry's value-added and the number of employees. The situation is similar for manufacturing as a whole. While output is rising, real wages are falling in some industries and stagnating at best in others. It reflects that much of Mexican manufacturing specialises in cheap labour-intensive activities with low value added.
The US market is the leading destination for Mexican exports, accounting for 80 per cent of the total. The northern neighbour drags the country due to the terms from the T-MEC. On the other hand, China pulls South American countries with increased relations with her.
Zero growth in real wages also means lower household income. According to ENIGH, the average household income decreased from 15,000 to 14,000 from 2016 to 2020 and has been downward since 2008. Meanwhile, the Gini coefficient, a measure of income inequality where 1 is perfect inequality, has oscillated between 0.43 and 0.47 since 2008, values higher than in Chile and Peru, according to the World Bank.
It affects the well-being of the population. According to the Comisión Nacional de Evaluación (CONEVAL), the population living in extreme poverty increased by more than 3 million during the last decade. The population living in income poverty has risen by 7 million people (table 1), concentrated in the south-southeastern states.
|Box 1. Income poverty in Mexico
|Population with income below the poverty line
|Population in poverty %
|Population with income below the extreme poverty line
|Population in extreme poverty %
|Source: Coneval 2020
The private sector does not seem to be able to correct the economy's problems, and the government has opted to maintain a balanced budget since the 1980s. The economic reality is that GDP, investment and productivity have stagnated for over a decade. At the same time, the dynamism of the external sector, the result of the export promotion policy, is insufficient to trigger growth. Bela Balassa’s 1978 paper is wrong because the backward linkages are external and not domestic.
Finally, the minimum wage in Mexico is 150 dollars per month, equivalent to 1.8 days in the US. The wage disparity for unqualified labour pulls it out of Mexico and into the US informal market, generating an unwanted migratory problem and at the same leaving the Mexican countryside abandoned. This is the reality facing Mexico.