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Mexico, Economy

Mexican economy, high tariffs, trade pact, industrial resources, emergency loan

Mexico—like Argentina, Brazil, and Chile—is a semi-industrialized country. The country is rich in industrial resources, including petroleum and several metals. Mexico’s manufacturing output includes many basic goods, such as steel, machinery, and petrochemicals, as well as a wide range of consumer goods. Agriculture still provides more jobs than industry, however. Many farm families earn barely enough to survive, and many city dwellers are unable to find jobs.

After World War II (1939-1945), Mexico became known for its continuously growing economy. During that time, Mexico’s economy changed from a primarily agricultural one to an economy based on services and manufacturing. Beginning in the 1970s, however, the country’s economy began to stagnate as Mexico fell deeply into debt. In the late 1970s Mexico borrowed billions of dollars at extremely high interest rates in anticipation of increased oil revenues. When the oil prices dropped sharply in the early 1980s, Mexico’s oil revenues plummeted as well. This led to a large foreign debt and the nation began to fall behind on its loan payments. Mexico soon faced a severe economic recession, forcing the government to renegotiate the nation’s foreign debt and begin instituting budget cuts and austerity programs.

The economic recession led the government to reexamine Mexico’s national economic policy, which had protected the nation’s young industries by imposing high tariffs on imported goods. These tariffs raised the price of goods imported from the United States, for example, and encouraged Mexicans to buy less expensive goods produced in Mexico. On the other hand, this policy reduced competition in the Mexican economy and induced many state-owned industries and private companies to become less efficient. The Mexican government began to replace this official protection of domestic industries with an aggressive policy of privatization, selling back government-operated and owned industries—including banks, utilities, airlines, and manufacturing companies—to the private sector. Privatization aimed to make Mexican companies and industries more efficient and competitive by allowing private owners, rather than government officials, to make decisions that would affect an industry’s profitability.

Mexico also began working to integrate its economy into the larger and much more competitive global economy. These efforts culminated in Mexico’s signing of the North American Free Trade Agreement (NAFTA), which went into effect in 1994. NAFTA is a trade pact between Canada, Mexico, and the United States that aims to foster free trade and eliminate tariffs among the three nations.

These free-trade policies were pursued aggressively in the late 1980s and early 1990s, resulting in moderate economic growth. But this growth was built upon an increasingly shaky economic foundation. Mexico allowed the peso to become overvalued in relation to the dollar in the early 1990s. This meant that the government’s official exchange rate did not accurately reflect the value of the peso. When the government devalued the peso in December 1994 to more realistically reflect its worth, the value of the peso declined excessively. This prompted foreign and domestic investors to withdraw millions of dollars from the country, and Mexico’s economy went into a tailspin.

To support the peso and prevent a total economic collapse, the United States government, in conjunction with the World Bank, provided an emergency loan to Mexico in January 1995. However, the economic crisis was the worst in Mexico since the global economic depression of the 1930s, and resulted in negative economic growth in the country in 1995 and 1996. The economic crisis led to a serious decline in the standard of living for most Mexicans, as well as an increase in extreme poverty. The nation’s gross domestic product (GDP), the value of all goods and services produced domestically by a country, declined 6.2 percent from 1994 to 1995. Since then the economy has been recovering. In 2000 the GDP was $574.5 billion.

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