Pessimism Pervades Mexico as Economic Promises Fall Short
Source Louis Proyect
Date 15/09/03/21:16
Pessimism Pervades Mexico as Economic Promises Fall Short

MEXICO CITY — Jesús Rascón embodies the sort of success story that was
supposed to epitomize “Mexico’s moment.”

The plastics company he founded 13 years ago now employs 350 people in
two factories. He sells parts to global companies like Volkswagen and
Whirlpool. Even the slide in the value of the Mexican peso this year
works in his favor because it makes his products cheaper overseas.

Then why is he feeling so glum about Mexico’s economy?

In a word: poverty. “Unfortunately the problem in Mexico is the wage
rate, which is enough only to survive,” said Mr. Rascón, 48. Unless
people have money to spend, he added, the companies that sell to them
will never be able to expand the way his has.

Such economic pessimism is pervasive across much of the country as
President Enrique Peña Nieto prepares to reboot his presidency midway
through his six-year term.

Over the past year, as his administration’s credibility has tumbled in
the face of corruption scandals and skepticism over its handling of the
drug war, the president could still point to the package of economic
changes that were sold as “Mexico’s moment” and promise that better
times were around the corner.

In the days leading up to his state of the nation speech on Wednesday,
his administration has blitzed news media outlets with ads extolling the
changes, which include rules to rein in powerful private
telecommunications companies and an end to state control of the energy
industry. The campaign repeats the pledge that investment and jobs are

But that story is beginning to look thin.

Growth has been slower under Mr. Peña Nieto’s presidency than the annual
2.3 percent average in the two decades before he took office. In the
last couple of weeks, both the central bank and the Finance Ministry
have reduced their forecasts, suggesting that growth in 2015 may not
reach that figure either.

Salaries are stagnant, while recent studies show that inequality and
poverty have increased over the past few years.

Now, just when Mexico might have begun to see the first concrete
benefits of the economic revisions, the economy is being pummeled by
forces beyond the government’s control as global financial uncertainty

The peak of the wave of constitutional changes that Mr. Peña Nieto
maneuvered through a divided Congress in his first three years was
opening the oil, gas and electricity industry to private investment,
reversing the nationalization of the country’s oil industry 75 years ago.

The timing could not have been worse. The collapse in oil prices all but
halted the predicted rush by international oil companies into Mexico and
will force the government, which relies on oil revenue to fund at least
a third of its spending, to make significant cuts in social and
infrastructure programs next year.

The first auction for offshore oil exploration blocks in July drew so
few bids that only two of the 14 on offer were awarded. Regulators have
relaxed the conditions for coming bids, but the billions in investment
that the government promised seem even further off.

“Energy reforms are going to kick in some time in the future,” said
Gabriel Casillas, chief economist at Banorte Financial Group, a large
Mexican bank. “It’s going to take longer, 15 years, not by 2017 or 2018
as we thought.”

In addition, the peso’s slide over the past year — along with the fall
of currencies in other emerging markets — has raised the price of
imports from the United States about 30 percent. That upends business
investment plans and makes consumers nervous about big purchases.

There are bright spots. Prudent economic management over the years has
kept inflation under control and debt in check. About $20 billion in
foreign investment has poured into the Mexican auto industry over the
past six years to take advantage of Mexico’s proximity to the United
States, its trade agreements and its skilled labor force.

The results, though, are pockets of success in the highly efficient
export sector that have failed to reach those on lower rungs of the
economic ladder.

“These policies have delivered stability, they haven’t delivered
growth,” said Joydeep Mukherji, a managing director at Standard & Poor’s
who follows Mexico closely.

“There is a general negativeness in the air for many, many reasons,” Mr.
Mukherji added. “That’s the hardest thing to turn around because you
have to boost the confidence of investors and consumers. It requires
political leadership and a different set of skills than passing a law.”

There are other problems that weigh on the economy. Citing measurements
from Mexico’s national statistics institute, Alonso Cervera, the chief
Latin America economist at Credit Suisse, estimated that crime cuts a
full percentage point off Mexican growth.

“The economic reforms were very powerful and very forceful,” Mr. Cervera
said. “I would have liked to see the same forcefulness on judicial
reform. Crime and corruption have to be punished.”

Business leaders argue that preaching patience is no longer enough.

Along with opening up the energy sector, the economic changes closed tax
loopholes, gave new powers to antitrust regulators, set up special rules
to weaken telecommunications monopolies, encouraged banks to lend to
small businesses, and gave employers new flexibility to hire and fire
workers. But businesses argue that the economy now needs incentives for
investment and job creation.

Analysts argue that Mr. Peña Nieto’s government failed to invest during
his first two years in office — when high oil prices gave finance
officials much more room to maneuver than they have now — and lost a
valuable opportunity.

“Instead of building a bridge, they put money in accounts,” said Mr.
Casillas of Banorte. “They earmarked money, but it was never used.”

Others say the main diagnosis of Mexico’s ailment was wrong.

“The reforms were oversold,” said Gerardo Esquivel, an economist at the
Colegio de México and the author of a recent study for Oxfam that found
that the country’s already vast inequality was growing.

The government thought “that the energy issue was the solution to the
country’s problems,” he said. “All sectors need to grow. It won’t drag
up the rest of the economy.”

The government points to an increase of 1.4 million workers during the
last two years who are affiliated with Mexico’s Social Security
Institute, a measure of formal employment and an indicator of success.
But 60 percent of the population still works in the informal sector in
jobs such as taxi drivers or street vendors, most of them barely
scraping by. Almost 42 percent of workers cannot afford to meet their
basic needs with their salary alone, according to one think tank, Mexico
Como Vamos, a figure that is about the same as it was when Mr. Peña
Nieto took office.

“Low salaries are a fundamental part of the economy,” Mr. Esquivel said.
“A good part of the economy has no purchasing power.”

Luis Foncerrada, the director of the Center for Economic Studies of the
Private Sector, a think tank affiliated with Mexico’s main business
alliance, argues that overall salaries have been depressed because 21
percent of the work force is either unemployed or working just a few
hours a week.

“It’s naïve to sit here with our arms crossed waiting for the reforms to
have results,” he said. “It’s like telling somebody who is sick to wait
five years for the cure to appear.”

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