The Economy
Mexico’s US$2.3 trillion economy is the 11th largest in the world. It has become increasingly oriented toward manufacturing since NAFTA was signed in 1994. Per capita income is roughly one-third that of the United States. Income distribution is highly unequal. The country is now the United States’ second-largest export market and third-largest source of imports. Mexico has free trade agreements with 44 countries, and 90 percent of its trade is regulated by these agreements. The country is the 13th largest exporter in the world. In 2017, 81 percent of Mexican exports went to the US market. GDP size has quadrupled since NAFTA was signed in 1994. Mexico manufactures and exports the same amount of goods as the rest of Latin America together (Heritage Foundation 2018).
Mexico’s economy has grown slower than most Latin American countries for more than a decade. Obstacles to economic growth include violence from drug cartels, major tax evasion, and trade disputes with the United States and other partners. Mexico suffered its worth slump since 1932 during the financial crisis of 2009.
The economy’s recovery was supported by both external and domestic demand. Mexican manufacturers managed to increase their market share in the United States and Canada. A continued inflow of foreign direct investment into manufacturing, especially in the automotive sector, was very important. The gap between Mexican wages and those of rivals such as China has also narrowed, boosting Mexico’s competitiveness (BMI Research 2018).
Growth of real GDP slowed in 2013 after debt defaults by the nation’s largest homebuilders (Homex & GEO), a drop in public spending, and a slump in exports. Mexico also suffered two hurricanes causing an estimated US$6 billion in damage. Driven mainly by the service sector, the economy improved modestly in 2014 to 2016. Mexico’s tax rate is one of the lowest among Organisation for Economic Co-operation and Development (OECD) countries. There are too many tax exemptions, and the tax revenue base is small. A tax reform was enacted in 2014; it substantially raised nonoil revenue and started to cut expenditures. Disparities between a highly productive modern economy in the North and in the Center and a lower productive traditional economy in the South have widened.
Public and private monopolies still dominate a large part of the economy. Former President Felipe Calderon used to say that Mexicans pay on average 50 percent more than US citizens for their daily goods and services. Fortunately, new antitrust regulations have been enacted in the past three years. The recent telecommunications regulation overhaul has led to a substantial fall in prices (up to 75 percent) and a sharp increase in users. The energy reform has significantly increased private investment. These reforms could add as much as an extra one percentage point to the country’s annual growth rate. As a result of the energy reform, private oil companies have been allowed to invest in the industry for the first time since 1938. The government expects a decade of annual auctions. By the end of 2019, Mexico plans to have auctioned more than a third of the country’s prospective resources.
Overall, Mexico has embraced economic orthodoxy: sound monetary and fiscal policy, open trade, investment in education, and, more recently, improved competition policy. Between 1995 and 2015, real GDP per person increased by an annual average of 1.2 percent, less than in any Latin American country except Venezuela. If we consider workers coming into the labor force, Mexico does worse: GDP per worker expanded by just 0.4 percent a year (The Economist 2018).
Institutions
In order to provide an overview of Mexican institutions, we use the Worldwide governance indicators (Kauffman, Kray, and Mastruzzi’s 2010) based on World Bank data from 2016. Thus, from a total sample of 214 countries we find that Mexico ranks as:
- •94/214 on voice and accountability. This indicator reflects the ability of citizens to participate in selecting their government. It also measures the extent of freedom of association, expression, and media.
- •43/214 on political stability and absence of violence. This measures perception of the probability that the government will be destabilized or overthrown by unconstitutional or violent means, including domestic violence. A high incidence of drug-related violence is a likely cause for the low score in this indicator.
- •128/214 on government effectiveness. This measures public and civil services quality, the extent of governmental independence from political pressure, quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies.
- •138/214 on regulatory quality. Regulatory quality measures government’s ability to formulate and implement policies and regulations that promote development of the private sector.
- •71/214 on rule of law. This indicator measures confidence in following societal rules, the quality of contract enforcement by police and courts, and the likelihood of crime and violence.
- •49/214 on corruption. This measures the extent to which public power is applied for private benefit. The perception includes the handling of minor and major corruption cases. Corruption is perceived as a major problem; its costs are estimated to be 9 percent of GDP. More than 40 percent of Mexican businesses admit to paying a bribe. Another related problem is the size of the informal sector; although its size has declined recently, more than half of the workforce is still informal.
In terms of business regulations, the World Bank’s doing business report for 2018 finds that Mexico:
- •Ranks 49/190 countries sampled. Thus, the country ranks in the first quartile of countries in terms of friendliness for conducting business
- •Takes 8 days to start a business and 7.8 associated procedures
- •Total tax rate as a percentage of profit is 52.1 percent
- •Ranks 62/190 in terms of protection of minority investors
- •Takes 341 days to enforce a contract with a 33 percent cost of the associated claim
From the institutional indicators we can conclude that Mexico is not the country that the media often portrays as violent and dangerous. It is true that insecurity and corruption are both key challenges but, according to the indicators presented, the country appears to be doing relatively well when compared to large country samples. For those afraid to visit the country, we can say that according to the UN World Tourism Organization, in 2017 Mexico ranked as the sixth country with the most international visitors (39.3 million). Business indicators represent a less optimistic picture: the country ranks in the 2nd quartile for most measures but is clearly in a context where minority shareholder expropriation (principal–principal problems) can take place given the minority investors’ protection ranking (62/190).
According to the taxonomy of institutional systems (Fainshmidt et al. 2018) compiled with data from 68 economies, Mexico belongs to the “family-led” configuration where wealthy and dominant families take a central role in ownership, resource allocation, and management. As such, they constitute the central ordering agents of economic life in their countries. Family-led market economies tend to be latecomers to economic development, and their ventures are often protected by the state (Aguilera and Judge 2014). Family-led capitalism is associated with weak institutional environments where investor protection is low, labor market is inefficient, and financial markets are underdeveloped. That is why “when formal legal and regulatory institutions are dysfunctional, founding families must run their firms directly” (Peng and Jiang 2010).
Please refer to Table 2.1 for a detailed description of the country classification of institutional systems.
Table 2.1 Country classification
Demographics
Mexico’s population has been growing steadily. It reached 124 million in 2017. In 2000 it was 103 million. Growth has decreased; the fertility rate fell by more than 50 percent in 1980 to 2016 and now stands at 2.2 births. It is expected to be 2.1 births by 2030. The decline began with the introduction of family planning in the 1980s, but a change in family values is another probable reason according to demographers.
Mexico is set to benefit from favorable demographics: a larger labor force will probably bolster manufacturing consumption. While the country will eventually have to face the problems of an aging population, it is entering a demographic sweet spot where the dependency ratio (the proportion of children and retirees compared to the working age population) has fallen to a record low and will probably continue declining over the next decade. This is due to: i) the sharp drop in Mexico’s birth rate in recent decades and ii) fewer workers emigrating to the United States. According to the US Census Bureau, Mexicans account for around one-third of the foreign-born population in the United States, although the immigration wave to the United States has reversed in recent years. The economy then should benefit from a larger workforce and the lower pressure on fiscal expenditures due to a smaller dependent population.
Although Mexican society is still young, it is undergoing an aging process. The median age stood at 29.2 years in 2017—6.1 years more than the figure for 2000. The number of those over 65 years jumped from 5.1 million in 2000 to 8.8 million in 2017 and it will reach 15.0 million by 2030 (BMI Research 2018).
Education
Education in Mexico faces several challenges; attendance at higher levels of schooling remains poor, with a large portion of the population not benefiting from a full education. Education quality lags behind most other OECD countries. Thus, even if children are attending school, they may not be gaining the necessary skills for long-term employment. Powerful unions of teachers have been blocking reforms and calling strikes, and this seriously disrupts students’ learning. Having said this, the country enjoys a good level of primary school enrollment and a strong tertiary education sector that produces high numbers of graduates with technical skills.
The OECD better life index of 2016 mentions that poor education attainment within the Mexican labor force is limiting productivity. Mexico has the third-largest proportion of NEETs (individuals who are neither employed nor in education or training) in the 15 to 29 age bracket of OECD countries, which means that a large section of the youth labor force lacks education and vocational skills. This makes a workforce less employable and increases labor costs for businesses employing Mexican workers. On the other hand, tertiary education in Mexico is one of the best in Latin America; the country produces a large number of graduates in engineering and the sciences, which leads to a large pool of workers available for technical positions such as those found in the country’s key industries like electronics, auto parts, aerospace, and oil and gas. The main risk for the tertiary sector is the low enrollment rate that is slowly increasing (from 23.3 percent to 29.9 percent in 2014). Out of 588,000 graduates in 2014, 23 percent graduated from engineering, manufacturing, or construction, with an additional 5 percent in mathematics, science, or information systems. Graduates in these fields are highly sought after by foreign investors for technical positions. Mexico currently has two universities listed in the Times Higher Education World University Rankings, the Universidad Nacional Autónoma de México (UNAM) and Tecnológico de Monterrey (ITESM), which are ranked in the 401 to 500 and 501 to 600 ranges, respectively, out of 800 institutions sampled.
Even though the country has challenges in terms of primary and secondary education, it seems to fare well in the tertiary sector from where most firms recruit talent. Hence, these figures could provide a clearer picture for a firm that is considering investing/expanding their business investments in the country. After NAFTA, Mexico has managed to transform itself from a commodity to a manufacturing-based economy, and the quality of undergraduate education seems to have been a part of this virtuous cycle.
Culture
Power distance in Mexico is high. This means that power in society is accepted to be distributed unequally and, because of this, the country exhibits a relatively nonegalitarian executive compensation system where CEOs on average make 45 times the average worker’s salary compared to Europe’s 26 times (Gomez-Mejia, Berrone, and Franco-Santos 2010). Variable compensation has grown in importance but it still comprises less than half of total compensation of CEOs and top management teams (TMTs). Equity incentives are used by a small but growing portion of firms.
The country ranks low in individualism, which means that Mexicans prefer to be part of a group. They also prefer to follow traditional gender roles when social duties are distributed. There is also a low tolerance for uncertainty and unpredictability.
In terms of expected leadership qualities, a Mexican leader should be charismatic; one of his/her main challenges is to inspire and motivate others to accomplish group goals. A leader is also expected to involve others when important decisions need to be made. Finally, teamwork for Mexicans does not represent an obstacle; it is a fairly developed philosophy.