Guest Column
Countering the effects of a U.S. slowdown
- Countering the effects of a U.S. slowdown
- By Kenneth Emmond
- The Herlad Mexico/El Universal
- December 11, 2006
One of the nagging worries to greet President Felipe Calderon’s economic team is the fate of Mexico’s economy if the ever-more-apparent slowdown in the United States economy becomes a reality.
An expected decline in petroleum prices — last week’s budget decreased projected oil prices by about $14 dollars a barrel, or about 25 percent — adds to the pressure.
Mexico leans heavily on the U.S.’s prosperity for its well-being. That’s the price it pays for depending on exports to generate economic growth, as opposed to aggressively adopting policies aimed at stimulating internal growth through local consumption.
Ever since the inception of the North American Free Trade Association (NAFTA) in 1994 a large proportion of Mexico’s growth has come from increasing U.S. exports.
Like the policy of using non-renewable oil revenues for current expenditures instead of coming down hard on tax evaders, putting the main focus on exports was a short-sighted if expedient strategy.
Since northern Mexico captured the lion’s share of the benefits from NAFTA while farmers further south were the main losers, NAFTA was an important contributor to the north-south, right-left division that became apparent in the July federal election.
Near-full employment in the United States over a decade of prosperity created demand for labor that allowed millions of unemployed or underemployed Mexican nationals to find work there, with or without the formality of legal documents.
This took some of the pressure off job creation in Mexico, though it means only that the dismal local job situation would be much worse if no one went north. Migration also provides billions of dollars in foreign exchange from workers in the U.S. who regularly send part of their salaries to their families in Mexico.
If the U.S.’s fat years were to end, or even if its economy were to decelerate severely, it would add significantly to the new president’s inbox of problems.
The most obvious change would be a drop in Mexican exports — and export-oriented Mexican jobs — as U.S. consumers end their buying spree and focus on paying down their household debts.
Depending on the severity of the downturn and which sectors are most affected, it could mean fewer jobs being available for Mexican immigrants. This in turn would slow the pace of remissions.
Fortunately, some things can be done at home to ameliorate the effect of this scenario. Economy Secretary Eduardo Sojo has already said he plans to focus more on internal growth.
Even before taking office, Sojo announced measures to encourage home ownership and the construction industry in general by making more credit available for home mortgages and spending more on Mexico’s infrastructure.
So far, he has said nothing about the minimum wage. Businessmen blanch at the prospect of paying their workers a decent wage. Even in operations where labor is a minor input, they respond in knee-jerk fashion, saying that large wage increases will encourage inflation and cause an epidemic of bankruptcies.
That is at best an exaggeration and at worst piffle. If anything, it should have the opposite effect, since more people will have more money with which to buy more goods in the vast home market.
A sizable minimum wage hike is unlikely to show up directly as political support from the left in Congress, given the extreme polarization among the parties, but it would be a sure-fire winner with the millions of people who receive raises.
Higher wages would also be a noteworthy step toward social justice. Underpaid workers have been a mainstay supporting Mexico’s recovery and growth ever since the 1995 crisis. It´s past time for this ongoing injustice to end.
There is talk of limiting the monopoly power of business in Mexico. That is easier said than done, but if the Calderón administration can pull it off, it would free consumer income for buying things other than overpriced telephone services and high bank charges.
If — and this is a big "if" — the government were to succeed in controlling corruption, it will have more to spend on achieving its objectives. The 2007 budget announced last week calls for a 12.4 percent increase in funding for crime fighting.
To the extent that the government succeeds in curbing small-scale corruption it would benefit households directly. Surveys show that the average family spends six to eight percent of its income on bribes, money that should be spent more productively.
The U.S. slowdown might result in a lower peso. Since an overvalued peso has long been an impediment to export growth, a decline would boost the competitive position of exports while discouraging consumer imports.
The Bank of Mexico, Mexico’s central bank, is independent of the administration and outside of its control, but it can play a role too. If it were to lower interest rates, it would stimulate both internal investment and consumption.
Slower growth in the U.S. or even a mild recession won’t necessarily endanger Mexico’s economic health. Measures are available to soften the blow. Best of all, it could be a catalyst to spur changes that Mexico’s economic managers should have adopted a long time ago.
- Kenneth Emmond is a freelance journalist and economist who has lived in Mexico since 1995. Kemmond00@yahoo.com
- Article at: http://www.mexiconews.com.mx/22326.html
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